Pegasus Aviation I, Inc., et al., Appellants,v.Varig Logistica S.A., Defendant, MatlinPatterson Global Advisers, LLC, et al., Respondents.

Brief

N.Y.October 13, 2015

To be Argued by: RICHARD R. PATCH, ESQ. (Of the Bar of the State of California) By Permission of the Court (Time Requested: 30 Minutes) APL 2014-00294 New York County Clerk’s Index No. 603076/08 Court of Appeals of the State of New York PEGASUS AVIATION I, INC., PEGASUS AVIATION IV, INC. and PEGASUS AVIATION V, INC., Plaintiffs-Appellants, – against – VARIG LOGISTICA S.A., Defendant, (For Continuation of Caption See Inside Cover) REPLY BRIEF FOR PLAINTIFFS-APPELLANTS RICHARD R. PATCH ANN E. JOHNSTON COBLENTZ PATCH DUFFY & BASS LLP One Ferry Building, Suite 200 San Francisco, California 94111 Tel.: (415) 391-4800 Fax: (415) 989-1663 ALLISON L. EHLERT EHLERT APPEALS P.O. Box 1024 El Cerrito, CA 94530 Tel.: (415) 828-5350 Fax: (415) 692-8237 JAMES T. SANDNES ARON M. ZIMMERMAN SKARZYNSKI BLACK LLC One Battery Park Plaza, 32nd Floor New York, New York 10004 Tel.: (212) 820-7700 Fax: (212) 820-7740 Attorneys for Plaintiffs-Appellants March 31, 2015 – and – MATLINPATTERSON GLOBAL ADVISERS, LLC, MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS II LP, MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS (CAYMAN) II LP, OSKARS INVESTMENTS LTD., VOLO LOGISTICS LLC and VOLO DO BRASIL, S.A., Defendants-Respondents. TABLE OF CONTENTS INTRODUCTION ..................................................................................................... 1 ARGUMENT ............................................................................................................ 6 A. Matlin Presents a Distorted and Inaccurate Picture of Its Relationship With VarigLog ................................................................. 6 1. The Evidence Shows That Matlin Was No Mere Disinterested Parent Company, but Instead Sought, Secured, and Exercised a Tight Grip on All of VarigLog's Operations ............................................................... 7 2. Matlin's Assertion That It Had No Reason to Be Engaged With Document-Preservation Issues at VarigLog Does Not Hold Water ........................................................................ 10 3. Matlin Could Not Possibly Have Been Unaware of VarigLog's Computer Crashes and Its Failure to Direct VarigLog to Keep the "Crashed" Hardware and Software for Pegasus's Inspection Is a Further Indictment of Its Conduct. .................................................................................... 13 4. Matlin's Minimization of Its Role Relative to the Fiscais and VarigLog's Board Is Belied by the Facts .......................... 14 5. Pegasus's Sanctions Motion Was Not Limited to the Loss of Va rig Log's ESI .................................................................... 16 B. This Court's Review Is De Novo, Not for Abuse of Discretion ......... 17 C. None of Matlin's Arguments Validates the Appellate Division's Incorrect Legal Conclusion That Matlin's Complete Abdication of Its Preservation Duty Was Merely Negligent and Not Grossly Negligent. .............................................................................. 20 1. The Fact That Matlin's Duty to Preserve Was Triggered After VarigLog's Does Not Lessen Matlin's Culpability, Especially Considering All the Preservation Alarm Bells That Matlin Inexplicably Ignored ............................................. 25 1 2. Matlin's Preservation of Its "Own" Documents Makes Its Failure to Preserve VarigLog's Documents All the More Suspect. ..................................................................................... 27 3. Matlin Had Its Own, Independent Duty to Preserve Documents That Did Not Depend on What VarigLog Was or Was Not Doing ............................................................ 29 4. Pegasus's Separate Interaction With Matlin and VarigLog During Discovery Is Completely Immaterial. ......... 30 5. Supreme Court and the Appellate Division Did Not Apply a "Low Threshold" of Control in Determining That Matlin Had Control of Va rig Log's Documents and a Duty to Preserve Them ............................................................. 31 D. This Court Should Not Reverse the Longstanding Law of This State Providing That Negligence (Gross and Simple) Can Support the Imposition of an Adverse Inference ................................ 36 1. By Failing to Raise It in Any of the Proceedings Below, Matlin Has Waived Its Argument That Adverse Inferences Should Be Foreclosed in Cases Involving a Spoliator's Negligence ............................................................. 36 2. There Is No "Consensus" Against the Imposition of Adverse Inferences in Cases of Negligence ............................. 37 3. New York Has Long Supported Adverse Inferences in Cases of Negligent Spoliation .................................................. 42 E. Pegasus Has Satisfied Any Burden It Bears to Show That the Spoliated Documents Existed, That They Would Have Been Helpful to Pegasus's Claims, and That It Has Been Prejudiced by Their Permanent Destruction ......................................................... 45 1. Pegasus Has Not Waived Its Relevance Argument. ................ 45 2. Matlin Fails to Rebut Pegasus's Argument That the Appellate Division Applied the Wrong Legal Standard in Determining Whether the Relevance of the Destroyed Documents Had Been Sufficiently Established ....................... 49 11 3. Matlin Misconstrues Supreme Court's Holding That the Destroyed Documents Were Indeed Relevant. ........................ 52 4. There Is No Merit to Matlin's Assertion That the Destroyed Documents Never Existed in the First Place .......... 53 5. Matlin Has Not Rebutted Pegasus's Showing That the Destroyed Documents Would Have Supported Pegasus's Alter-Ego and Conversion Claims ........................................... 56 CONCLUSION ....................................................................................................... 59 111 TABLE OF AUTHORITIES Page(s) Cases Ahroner v. Israel Disc. Bank of N. Y., 79 A.D.3d 481 (lst Dep't 2010) ......................................................................... 45 Alleva v. UPS, 112 A.D.3d 543 (lst Dep't 2013) ................................................................. 50,51 Aramburu v. Boeing Co., 112 F.3d 1398 (lOth Cir. 1997) .......................................................................... 40 Auqui v. Seven Thirty One Ltd. P'ship, 20 N.Y.3d 1035 (2013) ...................................................................................... 18 Bass-Davis v. Davis, 134 P.3d 103 (Nev. 2006) ............................................................................ 39,42 Beaven v. u.s. Dept. of Justice, 622 F.3d 540 (6th Cir. 2010) .............................................................................. 38 Biniachvili v. Yeshivat Shaare Torah, Inc., 120 A.D.3d 605 (2d Dep't 2014) ....................................................................... 42 Byrnie v. Town of Cromwell, 243 F.3d 93 (2d Cir. 2001) ................................................................................. 40 West ex rei. Carver v. McKennan Hosp., 619 N.W.2d 682 (S.D. 2000) ............................................................................. 39 Cheng v. Lakeforest Assocs., LLC, No. CBD-13-1365, 2014 U.S. Dist. LEXIS 88421 (D. Md. June 30, 2014) ...................................................................................... 32 In re City of New York, 522 F.3d 279 (2d Cir. 2008) ............................................................................... 18 Coral Group, Inc. v. Shell Oil Co., 286 F.R.D. 426 (W.D. Mo. 2012) ...................................................................... 32 IV DiDomenico v. C&S Aeromatik Supplies, Inc., 252 A.D.2d 41 (2d Dep't 1998) ......................................................................... 42 Dorchester Fin. Holdings Corp. v. Banco BRJ S.A., No. 11-1529,2014 U.S. Dist. LEXIS 172958 (S.D.N.Y. Dec. 15, 2014) ....................................................................... 13,21,44 Enstrom v. Garden Place Hotel, 27 A.D.3d 1084 (4th Dep't 2006) ...................................................................... 42 Food Pageant, Inc. v. Consolidated Edison Co., Inc., 429 N.E.2d 738 (N.Y. 1981) .............................................................................. 23 GenOn Mid-Atlantic LLC v. Stone & Webster, Inc., 282 F.R.D. 346 (S.D.N.Y 2012) ............................................................ 30, 33, 35 Glenbriar Co. v. Lipsman, 5 N.Y.3d 388 (2005) .......................................................................................... 18 Glover v. BIC Corp., 6 F.3d 1318 (9th Cir. 1993) ................................................................................ 38 Goldstein v. Carnell Assocs., 74 A.D.3d 745 (2d Dep't 2010) ......................................................................... 23 Gordon Partners v. Blumenthal (In re NTL Inc. Sec. Litig.), 244 F.R.D. 179 (S.D.N.Y. 2007) ....................................................................... 32 Grace v. Sterling, Grace & Co., 30 A.D.2d 61 (1st Dep't 1968) ........................................................................... 18 Hartford Ins. Co. v. Holmes Protection Group, 250 A.D.2d 526 (1st Dep't 1998) ....................................................................... 22 Haskins v. First Am. Title Ins. Co., No. 10-5044,2012 U.S. Dist. LEXIS 14997 (D. N.J. Oct. 18, 2012) ................................................................................................................... 32 Hawley v. Mphasis Corp., 302 F.R.D. 37 (S.D.N.Y. 2014) ................................................................... 21,44 Kurczy v. St. Joseph Veterans Ass 'n, 820 A.2d 929 (R.I. 2003) ................................................................................... 38 v Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Bros. Co., 23 N.Y.3d 129 (2014) ........................................................................................ 17 Morris v. New York State Dep 't of Taxation & Fin., 82 N.Y.2d 135 (1993) ........................................................................................ 16 Mudge, Rose, Guthrie, Alexander & Ferdon v. Penguin Air Conditioning Corp., 221 A.D.2d 243 (1st Dep't 1995) ....................................................................... 43 New York City Hous. Auth. v. Pro Quest Sec., Inc., 108 A.D.3d 471 (1st Dep't 2013) ................................................................. 50,51 P.A. Bldg. Co. v. City of New York, 10 N.Y.3d 430 (2008) ........................................................................................ 37 Pegasus Aviation L Inc. v. Varig Logistica, S.A., 118 A.D.3d 428 (1st Dep't 2014) ................................................. ............... passim Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Secs., 685 F. Supp.2d 456 (S.D.N.Y. 2010) ................................................. ......... passim People v. Oden, 36 N.Y.2d 382 (1975) ........................................................................................ 18 Pfantz v. Kmart Corp., 85 P.3d 564 (Colo. App. 2003) .......................................................................... 39 Reilly v. Natwest Markets Group, 181 F.3d 253 (2d Cir. 1999) ......................................................................... 38,42 Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002) ............................................................... 37,40,42,50 Riley v. Marriott Int 'I, Inc., No. 12-CV-6242P, 2014 U.S. Dist. LEXIS 135728 (W.D.N.Y. Sept. 25, 2014) ........................................................................... 21,44 Rogers v. T.J. Samson Community Hosp., 276 F.3d 228 (9th Cir. 2002) .............................................................................. 38 VI Sage Realty Corp. v. Proskauer Rose LLP, 275 A.D.2d 11 (1st Dep't 2000) ................................................................... 50,51 Santana v. Castillo, 114 A.D.3d 621 (1st Dep't 2014) ....................................................................... 50 Scribner v. Summers, 84 F.3d 554 (2d Cir. 1996) ................................................................................. 18 Matter of Seitelman v. Lavine, 36 N.Y.2d 165 (1975) ........................................................................................ 46 Sekisui Am. Corp. v. Hart, 945 F. Supp.2d 494 (S.D.N.Y. 2013) ................................................................. 21 Squitieri v. City of New York, 248 A.D.2d 201 (1st Dep't 1998) ....................................................................... 43 Matter of State of New York v. Rashid, 16 N.Y.3d 1 (2010) ............................................................................................ 45 Strong v. City of New York, 112 A.D.3d 15 (1st Dep't 2013) ....................................................... 42,49, 50, 51 Tancrelle v. Friendly Ice Cream Corp., 756 A.2d 744 (R.I. 2000) ................................................................................... 39 In re Terrorist Attacks on Sept. 11, 2001, No. 03-1570, 2013 U.S. Dist. LEXIS 155085 (S.D.N.Y. Oct. 28, 2013) .................................................................................... 52 Thomas v. Isle of Capri Casino, 781 So.2d 125 (Miss. 2001) ............................................................................... 39 Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68 (S.D.N.Y. 1991) ......................................................................... 42 Vick v. Texas Employment Com 'n, 514 F.2d 734 (5th Cir. 1975) .............................................................................. 40 In re Vivendi Universal, S.A. Sec. Litig., No. 02-CIV-5571, 2009 WL 8588405 (S.D.N.Y. July 10,2009) ................ 33,34 VB Voom HD Holdings LLC v. EehoStar Satellite LLC, 93 A.D.3d 33 (1st Dep't 2012) ................................................. ................... passim Waehovia Sees. LLC v. Loop Corp., No. 05-C-3788, 2008 U.S. Dist. LEXIS 49251 (N.D. Ill. June 27, 2008) ..................................................................................... 32 Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004) ....................................................................... 20 Other Authorities 9 Moore's Federal Practice § 52.33(2)(a) (3d ed.2007) .......................................... 18 CPLR § 3126 ........................................................................................................... 43 FRCP 37 ................................................................................................ 36,41,43,44 Judicial Conf. Me., Rules Appendix B-17 available at http://www . uscourts.gov /uscourts/RulesAndPolicies/rules/Reports/ ST09-2014-add.pdf ............................................................................................ 41 Summary of the Report of the Judicial Conference Committee on Rules of Practice and Procedure September 2014, at 14, available at www.uscourts/ gOY /uscourts/RulesandPolicies/rules/Reports/ST09- 2014.pdf .............................................................................................................. 43 Vlll INTRODUCTION Matlin seeks to frame the central issue on appeal as whether it should be sanctioned for VarigLog's failure to preserve any of its documents for use in this litigation against VarigLog. But that is not the issue. The issue is whether Matlin should be sanctioned for Matlin's admitted failure to do anything at all to discharge Matlin's independent legal duty to preserve documents that were under Matlin's control for use in this litigation against Matlin. Pegasus's claims against VarigLog for breach of the Pegasus aircraft leases have never been much of an issue in this litigation because VarigLog has never seriously disputed its non-payment of rent. Instead, the discovery that Pegasus spent years fighting to obtain (and which it has been deprived of due to Matlin's spoliation) was about Matlin's liability as VarigLog's alter ego and Matlin's conversion of the Pegasus planes. All six justices who have presided over this case (the Supreme Court justice and the five justices of the First Department) have unanimously agreed that Matlin had control of Va rig Log's documents. Matlin does not seriously challenge that conclusion before this Court. It nonetheless insists that it should suffer no consequences for failing to institute any preservation measures on the grounds that its failure was merely negligent, and that Pegasus has not shown that the now- destroyed documents would have supported its alter-ego and conversion claims. Matlin thus contends that the Appellate Division's culpability and relevance holdings were correct. But affirming the Appellate Division will require this Court to apply faulty legal standards and to accept Matlin's fanciful version of the facts. The correct legal standards and a rational view of the facts require this Court to uphold Supreme Court's sanctions order. The Appellate Division's analysis started out exactly right. Its conclusion that Matlin had control of Va rig Log's documents was premised on an accurate reading of the evidence concerning Matlin's "administration and management" of VarigLog, which gave Matlin ready access to VarigLog's documents. And the Appellate Division's holding that Matlin's control imposed upon it a legal duty to preserve VarigLog's documents recognized preservation as the first and indispensable step in the discovery process, and hewed carefully to applicable case law. When it came to assessing Matlin's degree of culpability, however, the Appellate Division veered off track. It first applied an erroneous definition of "gross negligence" from unrelated case law that treats this standard as barely distinguishable from intentional wrongdoing. What it should have done instead is apply the traditional "failure to exercise even that care which a careless person would use" standard from on-point spoliation case law. Pension Comm. of the Univ. of Montreal Pension Plan v. Bane of Am. Sees., 685 F. Supp.2d 456, 464 2 (S.D.N.Y. 2010). The Appellate Division then compounded this error by treating Matlin's duty to preserve as derivative of Va rig Log's, when in fact Matlin had an independent duty that was in no way affected by the fact that VarigLog had its own duty, or what VarigLog was or was not doing. Matlin advances several defenses of the Appellate Division's "negligence- only" ruling, but none has merit. It does not matter, for instance, that VarigLog's duty to preserve arose before Matlin's. Once Matlin's duty arose in April 2008, it was obligated to immediately take action. If VarigLog had been doing anything at all on the preservation front, Matlin's role-once its independent duty had been triggered-would have entailed making any necessary adjustments to what VarigLog was already doing to ensure the proper discharge of Matlin's duty. But since VarigLog was actually doing precisely nothing, the proper discharge of Matlin's duty was to implement a preservation program in the first instance. Second, it is not factually true that Matlin preserved its "own" documents. Matlin was required to preserve all of the documents under its control, which included the documents in VarigLog's possession. Finally, Matlin's destruction of all the evidence of Va rig Log's purported computer crashes-the crashed hardware and software-is by itself sufficient to support a gross negligence finding. Allowing this evidence to be destroyed completely deprived Pegasus of the ability to 3 investigate for itself whether any such crashes actually occurred and whether the lost data could be recovered. Matlin also urges this Court to affirm the Appellate Division's reversal of the adverse-inference instruction on the basis of a brand new argument it did not see fit to make below. It asserts that there is now a "trend" among the federal courts to reserve adverse-inference charges only for cases involving intentional or bad-faith spoliation and it cites recent proposed, but as yet unenacted, amendments to the Federal Rules of Civil Procedure. This amounts to little more than an irrelevant attempt to obscure the question of whether Supreme Court properly applied existing law when it granted the adverse inference. Even if this Court were to address Matlin's waived contention on the merits (waived because at no point did Matlin argue it below), it still should be rejected. This case is not being litigated in federal court and New York law has long permitted the imposition of adverse inferences where spoliators behave negligently. There is no reason for this Court to upset that settled law: (I) where Matlin does not point to a single New York case questioning or criticizing the use of adverse inferences to remedy negligent spoliation, (2) where Matlin has not cited any efforts by the Legislature to amend the CPLR to change this principle, and (3) where the proposed federal rule change is not presently the law, even in 4 federal court, nor was it the law at the time Supreme Court issued the adverse inference in this case. The Appellate Division also took a wrong tum in concluding that Pegasus had not shown the relevance of the destroyed documents (VarigLog's internal communications, its communications with the fiscais, and its bank records), that is, whether these documents would have been favorable to Pegasus's claims. Oddly, the Appellate Division concluded that Pegasus had not even attempted to establish relevance, but had simply relied on the presumption of relevance that applies if Matlin is deemed to have behaved in a grossly negligent way. The record plainly shows that in each of the many briefs Pegasus has now filed, it has consistently described how and why the destroyed documents would have helped prove its claims and would have likewise rebutted Matlin's defenses. At no point has Pegasus relied exclusively on the presumption of relevance. The Appellate Division's indefensible conclusion to the contrary warrants reversal no matter what conclusion this Court reaches on the culpability question. As to the merits of the relevance issue, Matlin tries, but fails, to convincingly dispute that the Appellate Division applied the wrong legal standard-one that subjects Pegasus to an impossible burden-and it fails to refute Pegasus's use of the existing evidence showing how the destroyed evidence would 5 have helped it. Matlin's contentions to the contrary are based on no more than the very "speculation" it (wrongly) accuses Pegasus of indulging in. In sum, if the duty to preserve means anything, it means that Matlin must be held accountable. After having spent four years presiding over the discovery disputes in this case, Supreme Court was in the best position to ferret out Matlin's self-serving depiction of the facts and see the situation for what it was: Matlin had control of Va rig Log's documents, had a legal duty to preserve them, but despite multiple ongoing opportunities to implement even the most basic preservation measures, Matlin did absolutely nothing. This complete and total failure was at least grossly negligent and Pegasus has been irreparably prejudiced. The only way to restore a measure of equilibrium between the parties is to reinstate Supreme Court's adverse-inference instruction. l ARGUMENT A. Matlin Presents a Distorted and Inaccurate Picture of Its Relationship With VarigLog. Throughout its Opposition brief, Matlin views key facts through a grossly distorted lens, entirely omits some key facts and attempts to spin others in a way that is illogical and/or flatly contradicted by the evidence. The net result is that 1 Of course, the adverse-inference instruction can, and should, be tailored to ensure that it does not in any way suggest that the alter-ego question has been decided. As explained in Pegasus's Opening Brief, the "control" at issue in this spoliation appeal is very different from the "control" that Pegasus will need to prove to prevail on the merits of its alter-ego claim. Just because Matlin had control of VarigLog's documents does not mean it dominated and controlled VarigLog's relationship with Pegasus. 6 Matlin paints a false picture of its involvement with VarigLog, arguing that it did not have any duty to preserve records relevant to this litigation that it controlled (but that were physically located in VarigLog's files), and that its failure to do anything-anything at all-to preserve those records does not warrant the imposition of sanctions against it. Matlin could not be more wrong. 1. The Evidence Shows That Matlin Was No Mere Disinterested Parent Company, but Instead Sought, Secured, and Exercised a Tight Grip on All of VarigLog 's Operations. This is not a run-of-the-mill case involving a corporate parent and its subsidiary. As an initial matter, Matlin's suggestion that VarigLog's three individual shareholders were largely responsible for running the company before their falling out with Matlin is a wild distortion of reality. When Matlin acquired VarigLog in 2006, it intended and expected that VarigLog would operate as Matlin envisioned, consistent with Matlin's plans. To a less determined buyer, Brazil's legal restrictions on foreign ownership of airlines might have been viewed as a serious impediment to Matlin's plan to bend VarigLog to its will, but Matlin quickly overcame that problem. It recruited three Brazilians to act as its investment "partners" and arranged for them to acquire their stakes in VarigLog through letters of credit backed by Matlin guarantees. The Brazilians were required to sell their interests to Matlin on demand. (R. 694; 723-24; 903.) It was implicitly understood by all that if VarigLog refused to conform to Matlin's wishes, the 7 Brazilians would lose their stock, and VarigLog would not receive vital injections of capital that only Matlin could provide. When the three Brazilians had the audacity to deviate from Matlin's will by resisting Matlin's demand that VarigLog repay certain Matlin-originated loans, Matlin retaliated by filing suit demanding control of VarigLog, and by withholding additional funds required for VarigLog's operations. (R. 149; 637-39; 904.) From approximately September 2007, through the end of March 2008, Matlin and its erstwhile partners litigated with one another in Brazil, each seeking to oust the other from VarigLog. (R. 149; 903-04.) In Matlin's own words, it was "frozen out" of VarigLog, because it was not able to direct and control what would happen at the company, as it had through its "puppet" shareholders. (Id.) In choosing the phrase "frozen out" to describe its lack of influence during the shareholder dispute, Matlin ironically highlights the influence it had demanded and wielded beforehand. Matlin had no intention of bowing to the wishes of its Brazilian "partners." It therefore urged the Brazilian court to vest it with the complete authority to "administer and manage" VarigLog and the court granted Matlin's request on April 1, 2008. (Id.) Matlin regarded this order as restoring its "control" over VarigLog and immediately upon receiving it, Matlin's New York- and Sao Paulo-based employees and consultants swooped into VarigLog and took charge of its essential operations. (R. 465-66; 1130-65; 1167-70.) Matlin dismissed VarigLog's Board of 8 Directors and relieved the company's CEO. (R. 966-67; 1176.) It then handpicked their replacements, ultimately installing one of its own principals (Peter Miller) on the Board, together with Lup Chan Ohira, the sister of Lap Chan, i.e., the Matlin partner responsible for Matlin's investment in VarigLog. Matlin also appointed Ohira as CEO, despite her total lack of experience in the aviation and cargo industries. (R. 963-64; 1170; 1179-89; 1191.) In spite of this, Matlin depicts its relationship with VarigLog as that of a passive parent and its independent subsidiary. But it does not, because it cannot, dispute the evidence showing that it made the core decisions about VarigLog's operations that subsidiaries ordinarily make for themselves. Matlin set VarigLog's overall business strategy and budget; Matlin downsized VarigLog's international operations; Matlin selected the planes and routes the company would fly; Matlin studied which business opportunities VarigLog should pursue; Matlin decided which of Va rig Log's creditors to pay; Matlin negotiated directly with Pegasus over the terms upon which Matlin would return Pegasus's planes (ultimately refusing to return the planes); and Matlin made the call to put VarigLog into bankruptcy. (R. 1131-65; 1173-74; 1199; 1203; 1211-12; 1214-15.) In other words, Matlin was anything but a bystander parent company. Every justice that has considered this case has concluded that Matlin had control of VarigLog's documents (a finding that Matlin does not seriously challenge), which 9 was inevitably facilitated by its position as VarigLog's administrator and manager, and the intrusive ways in which it exercised that power. Matlin's control over VarigLog's documents meant that it had the duty and the ability to implement a document-preservation plan and ensure VarigLog's compliance. And the facts concerning the nature and extent of Matlin's involvement leave no doubt that it actually possessed the ability to make that happen? The Appellate Division's holdings in favor of Pegasus on these issues are thus amply supported. 2. Matlin's Assertion That It Had No Reason to Be Engaged With Document-Preservation Issues at VarigLog Does Not Hold Water. Matlin claims that it had no reason to know that VarigLog was not preserving documents because that issue was up to VarigLog' s lawyers to figure out and manage, not Matlin. That argument is unavailing as both a factual and a legal matter. As described in more detail below, whatever VarigLog was or was not doing is legally irrelevant because Matlin had its own independent duty to preserve the documents in its control, which included VarigLog's documents. It could not rely on VarigLog to do the job for it. 2 The testimony of Matlin partner Santiago Born (who served as the court-appointed administrator and manager of Va rig Log) that he could obtain any VarigLog documents he wanted merely by asking for them is sufficient to sustain the finding that Matlin had control of VarigLog's documents. (R. 435.) The facts revealing Matlin's all-encompassing management of VarigLog further heighten the inference that it did indeed have both access to the documents at VarigLog and the capacity to institute a document-preservation program, despite its protests to the contrary. 10 Factually speaking, the notion that Matlin sat on the periphery of Va rig Log's legal affairs is belied by the record. At the time Matlin regained control of VarigLog on April 1,2008, Pegasus's Florida lawsuit against VarigLog had been pending for almost two months. Matlin not only knew about that litigation, it took a direct hand in managing it by replacing VarigLog's counsel with its own outside lawyers, by spearheading direct settlement negotiations with Pegasus, and by communicating with Pegasus's Brazilian counsel about those negotiations. CR. 142-43; 467; 493-94; 1173-74; 1211-12.) Moreover, Pegasus's lawsuit implicated tens of millions of dollars in VarigLog liabilities. As the sole investor in VarigLog, those high stakes necessarily meant that Matlin had to keep a watchful eye on the litigation, and the ways in which Matlin deliberately chose to involve itself in the Florida case make it unlikely in the extreme that it innocently failed to pay attention to the preservation issue.3 Relatedly, the Appellate Division held that Matlin did not dispute that as of April 2008, it should have anticipated that it too could be sued by Pegasus. Pegasus Aviation L Inc. v. Varig Logistica, S.A., 118 A.D.3d 428, 432 n.5 (1st Dep't 2014). Matlin does not contest that finding on appeal, nor could it since its representations to Pegasus that it controlled VarigLog and it was the entity with 3 As Matlin acknowledges, by virtue of the April 1, 2008 Brazilian court order, it was prohibited from "waiv[ing] or relinquish[ing] any right [ofVarigLog's] in any proceedings underway, either in Brazil or abroad." (R. 903.) This is further proofthat Matlin had no choice but to stay abreast of litigation to which VarigLog was a party. 11 whom Pegasus would have to negotiate to get the planes back made Matlin a potential defendant. CR. 467; 1173-74; 1211-12.) Put simply, as of April 2008, Matlin's practical access to VarigLog's documents by virtue of its "administration and management" of the company, coupled with the reasonable anticipation of litigation, meant that Matlin needed to implement a preservation program to comply with its own obligations as a possible litigant, regardless of any preservation obligations VarigLog had. But Matlin did nothing. It did nothing in April 2008, when it took over the administration and management of VarigLog. It did nothing throughout the next several months when it was in the thick of directing VarigLog's daily operations, including negotiating with Pegasus over whether it would return Pegasus's captive planes and pay the overdue rent. It still did nothing in October 2008, when Pegasus finally sued it in this case. Matlin had literally months of opportunities to comply with its duty to preserve the documents it indisputably controlled, but at no point did it trouble itself to do the right thing, indeed the lawful thing.4 Adding insult to injury, Matlin stood silently by while Pegasus spent years in one discovery hearing and conference after another with the Supreme Court justice and discovery referee, trying to obtain the documents it was entitled to from 4 Of course, if Matlin believed that VarigLog possessed documents that would have negated Pegasus's alter-ego and conversion claims, it stands to reason that it would have vigorously jumped on the preservation issue. The fact that it did not do so serves as a strong inference that Matlin knew VarigLog's documents would not be helpful to it. 12 VarigLog. Matlin could have saved everyone a lot of time and trouble by revealing the truth-that the documents Pegasus sought no longer existed because they were never preserved-but it did not. 3. Matlin Could Not Possibly Have Been Unaware of VarigLog 's Computer Crashes and Its Failure to Direct VarigLog to Keep the "Crashed" Hardware and Software for Pegasus's Inspection Is a Further Indictment of Its Conduct. Matlin wisely does not contend that VarigLog's computer crashes relieved it of the responsibility to institute a preservation program. Astonishingly, however, Matlin says that there is no evidence that it even knew about VarigLog's computer crashes. (Matlin Br. at 30 n.16.) That simply cannot be. It is undisputed that Matlin was running VarigLog in February and March 2009, when the alleged crashes supposedly occurred, and that it was doing so at that point in time without any monitoring by the Brazilian court. IfVarigLog's claims ofa complete crash of its computer systems and the resulting loss of all its ESI are true, it defies common sense to think that Matlin could have been ignorant of such a calamity. While Matlin may not have deliberately caused the crashes, it bears responsibility for the failure to take appropriate action before the crashes occurred and for the subsequent disposal of all evidence of the crashes, including the allegedly defective hardware and software. Proper litigation-hold techniques should have mandated preservation of that "crashed" hardware and software so that Pegasus could ascertain whether the lost data could be recovered. Dorchester Fin. Holdings 13 Corp. v. Banco BRJ S.A., No. 11-1529,2014 U.S. Dist. LEXIS 172958, at *11-13 (S.D.N.Y. Dec. 15,2014). Matlin does not dispute (and implicitly concedes) as much.5 4. Matlin's Minimization of Its Role Relative to the Fiscais and VarigLog's Board Is Belied by the Facts. Matlin attempts to paint the Brazilian court and its assigned "fiscais" as the true power at VarigLog, despite the Appellate Division's conclusion that there was no evidence "supporting an inference that the judicial oversight committee [i.e., the fiscais] would have objected to VarigLog's implementation of standard ESI preservation measures." Pegasus Aviation L Inc., 118 A.D.3d at 432 nA. In trying to revive its "fiscais defense," Matlin ignores the testimony of its own witness, Peter Miller, that the fiscais did not get in the way of Matlin's management of VarigLog. (R. 1171-72.) Matlin also fails to acknowledge how its own malfeasant conduct directly triggered whatever limited oversight the fiscais exercised. Contrary to Matlin's assertion, the April 1, 2008 court order vesting Matlin with the administration and management of Va rig Log did not "maintain[] control over VarigLog's financial resources." (Matlin Br. at 13.) Rather, it was only after the court determined that 5 In addition, while Matlin mistakenly criticizes the competence of Pegasus's attorney affinnation explaining that Matlin kept quiet about the computer crashes for months on end while Pegasus struggled to extract discovery from VarigLog, it points to nothing-because there is nothing-showing that it ever disclosed the truth, a truth it simply could not have been in the dark about. 14 Matlin engaged in what the court viewed as nefarious, and possibly criminal, conduct (surreptitiously attempting to transfer the balance of Va rig Log's Swiss bank account to a Matlin-controlled account in New York) that the Brazilian court required Matlin to obtain the fiscais' approval before making withdrawals out of the Swiss account. (R. 922-24; 1193-95.) And even then the fiscais did not "control [] VarigLog's financial resources," as Matlin says, because there is no indication that they prevented Matlin from allocating VarigLog's resources as Matlin saw fit (that is, Matlin decided which suppliers and creditors would get paid, and which would not). (R. 1199; 1203.) Nor is there any evidence suggesting that the approval of the fiscais was sought or required for the use of funds contained in any other VarigLog account.6 Besides pointing the finger at the Brazilian court, Matlin also touts VarigLog's corporate separateness and its supposedly independent Board (notwithstanding the fact that all of its members were hand-picked by Matlin) and separate "staff, offices, operations, and computer systems" as a bulwark against the 6 Matlin notes that a Judicial Oversight Committee ran VarigLog before the Brazilian court issued the April 1, 2008 order giving Matlin the reigns. Matlin then says that "[t]he April 1st Order did not divest the Judicial Oversight Committee [i.e., the fiscais] of its supervisory authority over VarigLog," but that "it remained in place to supervise the management of VarigLog from April 1,2008, until December 9,2008, the date ofthe Brazilian Court's final order and judgment." (Matlin Br. at to.) That description substantially overstates the role of the fiscais. The April 1 order explicitly closed the proceedings for ''judicial administration" and opened new proceedings for "judicial oversight," a necessarily lesser form of "supervision." (R. 903-04.) In addition, as noted above, the April 1 order did not describe in any way what kind of supervision the fiscais were to exercise, and the only time the Brazilian court ever did so was in response to Matlin's attempt to transfer the money in VarigLog's Swiss bank account to itself. 15 imposition of sanctions. (Matlin Br. at 13 [quoting Pegasus Aviation I, 118 A.D.3d at 432 n.3].) This argument is a red herring. Pegasus has never argued that Matlin and VarigLog merged into one, nor is that what Pegasus must prove to prevail. Instead, Pegasus has argued, consistent with spoliation standards, that Matlin had the kind and extent of control over VarigLog's documents that triggered a duty to ensure that those same documents were preserved for use in this litigation. The fact that Matlin operated VarigLog as an identifiable separate business does not mean that Matlin lacked the duty or the ability-given its overwhelmingly dominant role at VarigLog-to institute document preservation procedures.7 Similarly, VarigLog's separate legal identity does not justify, excuse, or minimize Matlin's total failure to take any steps whatsoever to preserve the documents under its control albeit located at VarigLog. 5. Pegasus's Sanctions Motion Was Not Limited to the Loss of VarigLog's ESI. Matlin proceeds as if the only destroyed information at issue here is ESI, when in fact, Pegasus's sanctions motion was predicated on the loss of Va rig Log's ESI and its paper documents. The destruction of Va rig Log's ESI through the lack 7 Pegasus also does not have to show common "staff, offices, operations, and computer systems" to prevail on the ultimate merits issue of whether Matlin was VarigLog's alter ego. Pegasus only needs to prove that Matlin dominated and controlled the "transaction attacked," in this case, Matlin's refusal to return Pegasus's planes or pay the rent arrearages, and that Matlin used that domination to commit a fraud or wrong against Pegasus. Morris v. New York State Dep't of Taxation & Fin., 82 N.Y.2d 135, 141 (1993). 16 of preservation measures and the subsequent computer crashes should have galvanized Matlin to pay special attention to safeguarding VarigLog's paper documents, but it did not. What's more, Matlin entirely fails to address the schism apparent in New York law concerning the standard for obtaining spoliation sanctions in cases involving ESI versus cases involving non-ESI. If two distinct tests apply, then at a minimum, this matter must be remanded so that the lower courts can apply the non-ESI test to the destruction of Va rig Log's paper documents, which they did not do. And if only one test exists, as Pegasus urges, then this Court should make clear that the burden to prove the relevance of ESI is no more exacting than the burden to prove the relevance of other types of destroyed evidence. B. This Court's Review Is De Novo, Not for Abuse of Discretion. Matlin argues that this Court reviews the Appellate Division's reversal of the adverse-inference order for an abuse of discretion, but concedes that insofar as the Appellate Division's decision is "premised on errors of law, this Court does not defer to it." (Matlin's Br. at 23 [quoting Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Bros. Co., 23 N.Y.3d 129, 137 (2014)].) Pegasus contends that the Appellate Division applied the wrong legal standards in: (1) assessing the degree of Matlin's culpability, and (2) determining 17 the relevance of the destroyed documents. Those are pure questions of law reviewed de novo. Glenbriar Co. v. Lipsman, 5 N.Y.3d 388, 392 (2005). The Appellate Division applied a gross negligence standard borrowed from inapposite case law that is akin to intentional wrongdoing, rather than the standard articulated in spoliation case law ("failure to exercise even that care which a careless person would use"). Pension Comm., 685 F. Supp.2d at 464. Further, whether a party has behaved in a grossly negligent way is a mixed question of law and fact, subject to de novo review. See, e.g., Grace v. Sterling, Grace & Co., 30 A.D.2d 61,69 (1st Dep't 1968) ("Whether a party was negligent ... is generally viewed as presenting a mixed question of law and fact."). See also In re City of New York, 522 F.3d 279, 282-83 (2d Cir. 2008) ("The ultimate determination of negligence is a question that contains both factual and legal aspects.") (citation omitted); 9 Moore's Federal Practice § 52.33(2)(a) (3d ed.2007) (citing Scribner v. Summers, 84 F.3d 554,557 (2d Cir. 1996)); Auqui v. Seven Thirty One Ltd. P'ship, 20 N.Y.3d 1035, 1039 (2013) (vacated on other grounds) (Piggot, J., dissenting) ("[W]e have defined a mixed question as one in which both a question of fact and a question of law are found, 'the truth and existence of the facts and circumstances bearing on the issue being a question of fact, and the determination of whether the facts and circumstances found to exist and to be true constitute [a particular legal concept] being a question of law."') (quoting People v. aden, 36 N.Y.2d 382,384 18 (1975)). The facts underlying Supreme Court's finding of gross negligence- Matlin's control over VarigLog's documents and its failure to institute any preservation measures whatsoever-are not in question. Since the facts are settled, all that is left to decide is whether the legal definition of "gross negligence" is satisfied by those facts. And the holding on that legal issue is subject to de novo reVIew. As to relevance, the Appellate Division demanded that Pegasus satisfy a stringent standard for showing that the destroyed documents would have been helpful to it, rather than the much more relaxed standard dictated by applicable case law. The correct standard for ascertaining whether the relevance element of the spoliation test has been satisfied is also a question of law subject to de novo reVIew. F or these reasons, this Court should undertake a fresh review based on the correct legal standards. 8 8 In addition, the Appellate Division made clear in its order granting Pegasus leave to appeal that its decision was rendered "as a matter of law and not in the exercise of discretion." (R. 1236.) The Appellate Division's characterization of its decision in that order should be deemed controlling, rather than its perfunctory statement in its decision reversing the adverse inference that it did so "on the law and the facts." But even ifthis Court were to ignore the Appellate Division's statement that its decision was made "as a matter oflaw," Pegasus's contention that the Appellate Division applied the wrong legal standards triggers this Court's de novo review. 19 C. None of Matlin's Arguments Validates the Appellate Division's Incorrect Legal Conclusion That Matlin's Complete Abdication of Its Preservation Duty Was Merely Negligent and Not Grossly Negligent. It is undisputed that Matlin did absolutely nothing to preserve VarigLog's documents. Matlin did not issue a written litigation hold. Matlin did not verbally convey to VarigLog's employees the importance of preserving their electronic and paper records relevant to this case. Matlin did not investigate who at VarigLog might have relevant documents or where they stored them. Matlin did not take any steps to tum off any automatic overwriting of Va rig Log's data. And Matlin did not image or archive documents marked for preservation. Yet as a matter of law, these are standard measures that must be taken in every case to ensure that documents a litigant controls will be preserved. Zubulake v. UBS Warburg LLC, 229 F.R.D. 422,432 (S.D.N.Y. 2004); Pension Comm., 685 F. Supp.2d at 473; Voom HD Holdings LLC v. EchoStar Satellite LLC, 93 A.D.3d 33, 41 (1st Dep't 2012). Despite its obvious awareness of the importance of preservation and its knowledge of what to do (discussed below), Matlin argues that its total failure to do anything to preserve VarigLog's documents (documents in its control) was at most negligent, not grossly negligent. This position is untenable. Any reasonable litigant in Matlin's shoes-one with control over its subsidiary's documents and directly involved in managing that subsidiary-would have implemented the conventional precautions enumerated above, and even a careless litigant would 20 have done something. The choice to do nothing at all is the very definition of gross negligence. Pension Comm., 685 F. Supp.2d at 464 (explaining that "[g]ross negligence has been described as a failure to exercise even that care which a careless person would use") (internal quotation marks and citation omitted). In fact, courts regularly declare spoliating defendants to be grossly negligent when they undertake preservation efforts but do so incompletely. See, e.g., Hawley v. Mphasis Corp., 302 F.R.D. 37, 50-51 (S.D.N.Y. 2014) (finding the defendant grossly negligent even where it issued a litigation hold because it delayed in doing so); Sekisui Am. Corp. v. Hart, 945 F. Supp.2d 494,507 (S.D.N.Y. 2013) (same); Riley v. Marriott Int'l, Inc., No. 12-CV-6242P, 2014 U.S. Dist. LEXIS 135728, at *3-4, 12 (W.D.N.Y. Sept. 25, 2014) (concluding that although the defendant preserved seven minutes of surveillance footage showing the plaintiff s slip and fall, the defendant was nonetheless grossly negligent for failing to preserve more of the footage before and after the fall). To say that Matlin was only negligent when it did not even do as much as the grossly negligent spoliating parties in Hawley, Sekisui, and Riley makes little sense. On top of that, Matlin's failure to preserve VarigLog's allegedly "crashed" hardware and software is by itself reason enough to deem Matlin grossly negligent. See Dorchester Fin. Holdings Corp., 2014 U.S. Dist. LEXIS 172958, at *14-15 (holding that the spoliating party was grossly negligent because it "inexplicably 21 chose to destroy [a crashed] computer, foreclosing any future attempt-including by [the innocent party] or the Court-to retrieve data"). As described in the Opening Brief, the erroneous way the Appellate Division defined "gross negligence" infected its consideration of the facts and what they revealed about the extent of Matlin's culpability. The Appellate Division lifted its definition of "gross negligence" from unrelated contract case law, which defined the concept as "conduct that evinces a reckless disregard for the rights of others or smacks of intentional wrongdoing." Pegasus Aviation I, 118 A.D.3d at 433 (citing Hartford Ins. Co. v. Holmes Protection Group, 250 A.D.2d 526, 527 (1st Dep't 1998)). Instead, the Appellate Division should have applied the definition found in spoliation case law, like Pension Committee, to the effect that gross negligence means "failure to exercise even that care which a careless person would use." By its plain language, the standard the Appellate Division applied was much closer to reckless and intentional conduct ("conduct that evinces a reckless disregard for the rights of others or smacks of intentional wrongdoing") than it was even to negligent conduct. Had the Appellate Division applied the correct legal standard and considered the facts in the light of whether Matlin had failed to exercise "that care which a careless person would use," it is doubtful that it would have concluded that Matlin was not grossly negligent. It very likely would have-and certainly should have-reached the opposite conclusion. 22 Matlin does not offer any response to Pegasus's argument that the Appellate Division analyzed the facts bearing on Matlin's culpability using the wrong yardstick. Significantly, however, it favorably cites Pension Committee, and other cases that define gross negligence as it ought to be defined in the spoliation context. (Matlin Br. at 27 n.14 [citing Food Pageant, Inc. v. Consolidated Edison Co., Inc., 429 N.E.2d 738, 740 (N.Y. 1981) ("[G]ross negligence had been termed as the failure to exercise even 'slight care."'); Goldstein v. Carnell Assocs., 74 A.D.3d 745, 746-47 (2d Dep't 2010) ("[A] party is grossly negligent when it fails to 'exercise even slight care' or 'slight diligence."')]') Matlin's decision not to challenge Pegasus's argument and to in fact agree with the Pension Committee definition of "gross negligence" should be interpreted as a concession that the Appellate Division applied the wrong legal standard. Matlin's only real discussion of the applicable standard centers on its mistaken assertion that Pegasus is advocating an "inflexible," ''per se" rule that every failure to safeguard documents against destruction automatically rises to the level of gross negligence. That is not Pegasus's argument. Nor does Pegasus disagree with a "nuanced, fact-specific" inquiry into a spoliator's degree of culpability. Where Pegasus does part ways with Matlin and the Appellate Division is in the conclusion that on this record, Matlin was not grossly negligent as a matter of law. 23 The unique circumstances of this case more than justify and support the conclusion reached by both Supreme Court and the dissenting Appellate Division justice that Matlin's failure to do anything at all to preserve VarigLog's documents was grossly negligent. It must be remembered that Matlin demanded, petitioned for, and won the right to directly "administer and manage" VarigLog, a power it equated with a "takeover" of Va rig Log and exercising "control" over VarigLog. (R.465; 1130-65.) Matlin has no answer to the substantial evidence Pegasus has marshaled showing that Matlin's "team" of partners, employees, and consultants were the true decisionmakers at VarigLog who set its overall business strategy and steered its daily operations. That far-reaching authority gave Matlin the ability to access VarigLog's documents and the ability to arrange for their preservation. And even ifit might be thought that Matlin's sweeping management of its subsidiary did not extend to the latter's legal affairs, that notion is dispelled by the fact that Matlin did indeed take an active role in the Pegasus litigation. After all, Matlin replaced VarigLog's Florida counsel with Matlin's own outside lawyers, initiated and led months of direct negotiations with Pegasus to settle the suit, and apparently "documented" all its efforts with VarigLog's Brazilian counsel should the settlement track fail, as it did. (R. 142-43; 467; 493-94; 1173-74; 1211-12.) Engaging in the very "nuanced, fact-specific" inquiry that Matlin urges leads inexorably to the conclusion that Matlin was-at a minimum-grossly negligent. 24 In light of everything Matlin was doing at VarigLog, it simply defies reason to say that it could completely disregard its duty to preserve VarigLog's documents with impunity. This is particularly true given the fact that the destroyed records go directly to Pegasus's alter-ego and conversion claims against Matlin. Matlin advances a host of reasons why its dereliction is not tantamount to gross negligence, but none is persuasive. 1. The Fact That Matlin's Duty to Preserve Was Triggered After VarigLog's Does Not Lessen Matlin's Culpability, Especially Considering All the Preservation Alarm Bells That Matlin Inexplicably Ignored. Matlin makes much of the fact that it was "frozen out" of VarigLog when the latter's duty to preserve documents first arose. Pegasus does not dispute that Matlin had been largely excluded from VarigLog's operations for six or seven months between approximately September 2007, and March 2008, when its fight over control of Va rig Log with the Brazilian shareholders reached a crescendo. Nor does Pegasus dispute that VarigLog's duty to preserve documents arose no later than February 2008, when Pegasus first sued VarigLog in Florida state court, before Matlin's duty to preserve arose. But the fact that VarigLog' s duty to preserve predated Matlin's duty does not relieve Matlin of culpability for its own failure to act based on its own control, beginning in April 2008, over VarigLog's documents. It is thus completely immaterial that Matlin did not have the ability to implement document preservation measures prior to April I, 2008. Once Matlin 25 resumed control of VarigLog on that date, however, it had a legal duty to investigate VarigLog's preservation efforts and adjust them as necessary, or in this case, actually implement them, since VarigLog had done nothing. The depth of Matlin's failure is underscored by the multiple events that would have alerted even a less than careful litigant to the need to issue a litigation hold over VarigLog's documents. First, of course, was Matlin's "takeover" in April 2008, following the "administration and management" order of the Brazilian court. A sophisticated litigant like Matlin (more on that below) should have known then and there that its practical control over its subsidiary's documents meant that it needed to ensure that standard preservation measures were in place. Second, even if the preservation issue failed to make it onto Matlin's radar in April 2008, it certainly should have been there by July 2008, when the negotiations between Pegasus and Matlin over the return of Pegasus's planes cratered and Matlin expressly acknowledged that litigation was imminent. When the negotiations failed, Matlin partner Lap Chan emailed Matlin's consultant in charge of negotiating with VarigLog's creditors, Mario Abad, saying, "[l]et's get 26 our litigators ready," to which Abad responded that they were "ready with [their Brazilian attorney and] all is documented from the first day.,,9 (R. 493.) Finally, this lawsuit expressly naming Matlin as a defendant was filed in October 2008. At none of these three junctures-April 2008 when Matlin took control of VarigLog and interjected itself directly into Pegasus's then-pending Florida litigation, July 2008 when it anticipated more litigation, or October 2008 when this lawsuit was filed against it-did Matlin honor its responsibility to shield VarigLog's documents-documents it had control of-from destruction. A merely negligent litigant might have missed one of these opportunities, but it takes a grossly negligent (or reckless) litigant to miss all three. 2. Matlin's Preservation olIts "Own" Documents Makes Its Failure to Preserve VarigLog's Documents All the More Suspect. Matlin next contends that the Appellate Division properly viewed preservation of its separate paper documents and ESI as a factor weighing against a gross negligence finding. As explained in Pegasus's Opening Brief, however, this argument depends on a false distinction: Matlin had control of Va rig Log's 9 The July email exchanges between Chan and Abad are confirmation of Matlin's understanding that it too could be a target of litigation. As the Appellate Division noted, Matlin had not "denied that it was reasonably foreseeable as of April 1, 2008, that plaintiffs would ultimately sue [it] in connection with plaintiffs' disputes with VarigLog." Pegasus Aviation I, 118 A.D.3d at 432 n.5. 27 documents and thus a duty to preserve them no less than it had a duty to preserve the documents stored in its separate computers and files. What's more, this argument cuts against Matlin at least as much as it supports Matlin because in showing that it knew full well what needed to be done on the preservation front, Matlin's omission as to VarigLog's documents is all the more incriminating. It asks the Court to believe that although it was "intimately" managing V arigLog' s business; although it had access to any VarigLog documents it wanted; although it had taken a hand in the Pegasus Florida litigation by replacing VarigLog's U.S. counsel, initiating and leading settlement negotiations with Pegasus, and communicating with VarigLog's Brazilian counsel; and although it was scrupulously going about the task of preserving its "own" documents, Matlin somehow reasonably did absolutely nothing with respect to VarigLog's documents, thereby allowing those documents to be destroyed. That simply is not a plausible interpretation of Matlin's conduct. Far more credible is the inference that Matlin deliberately ignored its preservation duty as to VarigLog because it correctly surmised that VarigLog's documents would be harmful to it. Even putting Matlin's potentially deliberate conduct aside, its "do nothing" approach rises at least to the level of gross negligence. 28 3. Matlin Had Its Own, Independent Duty to Preserve Documents That Did Not Depend on What VarigLog Was or Was Not Doing. The Appellate Division concluded that the record discloses no reason suggesting that Matlin should have known that VarigLog's counsel had failed to properly advise and guide VarigLog through the preservation process. Pegasus Aviation I, 118 A.D.3d at 432. The Appellate Division's reasoning is flawed. Matlin's duty was not derivative of Va rig Log's, but independent of Va rig Log's by virtue of Matlin's separate control over VarigLog's documents. Because Matlin had its own separate duty to see to it that the documents in VarigLog' s possession were preserved, it never had a right to abandon the matter exclusively to VarigLog's counsel. Matlin's counsel should have been every bit as involved. Put another way, one party to litigation never has a right to rely on another party's counsel to ensure that documents both parties may control are properly preserved. At a minimum, Matlin should have at least inquired about what VarigLog was doing to preserve documents, and when the answer came back, "nothing," it should have rectified the situation to properly discharge its own preservation duty, notwithstanding VarigLog's duty. But Matlin never took even that rudimentary step. A negligent litigant would have at least posed the question. Only a grossly negligent litigant would choose to remain entirely ignorant on the subject, silently 29 assuming that lawyers who did not represent it would nonetheless discharge its duties. 10 4. Pegasus's Separate Interaction With Matlin and VarigLog During Discovery Is Completely Immaterial. Finally, Matlin contends that a gross negligence finding is inappropriate because Pegasus dealt with it and VarigLog separately in discovery, and did not demand that Matlin produce documents from VarigLog's files. But, of course, it was only by building a record, step-by-step, of Va rig Log's discovery violations and carefully reviewing the documents produced by Matlin and deposing its witnesses that Pegasus learned the truth: Matlin, no less than VarigLog, had control over VarigLog's documents and had never directed their preservation. Two key pieces of evidence that were not available until late 2011 and early 2012, finally brought into plain sight Matlin's failure. The first was the deposition testimony of Va rig Log's CEO, Lup Ohira, who revealed that neither Matlin nor 10 Matlin says that GenOn Mid-Atlantic LLC v. Stone & Webster, Inc., 282 F.R.D. 346 (S.D.N.Y 2012) supports the Appellate Division's conclusion that Matlin was only negligent in failing to preserve VarigLog's documents. Granted, the GenOn court concluded that it would have been reasonable for GenOn to expect that its third-party consultant would have preserved the documents in its files that GenOn controlled. 282 F.R.D. at 357. But the court's reasoning on this point was based on the fact that the third-party consultant was "a firm with litigation consulting expertise," so that it was reasonable for GenOn to expect that it "would be aware of the rules governing a party's discovery conduct and take steps to ensure that it did not cause GenOn to run afoul of them." Id. The same is plainly not true here. VarigLog was not a litigation consulting firm with special "expertise" concerning document preservation. This factual distinction sets GenOn apart, but insofar as the court there failed to recognize that GenOn had its own independent legal duty to ensure that all documents in its control were preserved, notwithstanding whatever its third-party consultant was or was not doing, its reasoning is legally flawed and should be rejected. 30 anyone else had instituted a litigation hold at VarigLog. (R. 385-87; 391-93.) The second was the testimony of Santiago Born, the Matlin partner appointed as VarigLog's administrator, who acknowledged that he could obtain any VarigLog documents he wanted simply by asking for them. (R. 435.) This evidence, along with everything Pegasus had learned about Matlin's sweeping management of VarigLog, enabled Pegasus to move for sanctions against Matlin, which Pegasus promptly did. 11 5. Supreme Court and the Appellate Division Did Not Apply a "Low Threshold" of Control in Determining That Matlin Had Control of VarigLog's Documents and a Duty to Preserve Them. Matlin does not challenge the Appellate Division's (and Supreme Court's) unanimous holding that it had control of Va rig Log's documents. Matlin nonetheless impugns the standard of control applied in the courts below- "practical ability to access" VarigLog's documents-as a "low threshold" of control, arguing that while it may be an appropriate standard for imposing a duty to produce certain documents, it is an inappropriate standard for imposing a duty to preserve those same documents. According to Matlin, this is another reason for this Court to affirm the Appellate Division's conclusion that Matlin was not grossly negligent. Of course, this is a non-sequitur. Whether Matlin had a duty to preserve the documents in VarigLog's files (the first element of the spoliation test) 11 Pegasus filed its sanctions motion on March 2,2012. Born's deposition, the last piece of the puzzle, was taken on January 26,2012. 31 is a separate question from the degree of Matlin's culpability in failing to discharge that duty (the second element of the spoliation test). It's anomalous to argue, as Matlin does, that what it perceives as the Appellate Division's erroneous ruling on the first element of the test somehow bolsters the Appellate Division's ruling on the second element. But even more importantly, Matlin's argument misses the mark on the merits. If control over discoverable documents is sufficient to warrant their production, as numerous cases have held, then control is necessarily sufficient to require their preservation. Gordon Partners v. Blumenthal (In re NTL Inc. Sec. Litig.), 244 F.R.D. 179, 195 (S.D.N.Y. 2007); Wachovia Secs. LLC v. Loop Corp., No. 05-C-3788, 2008 U.S. Dist. LEXIS 49251, at *3 (N.D. Ill. June 27,2008); Haskins v. First Am. Title Ins. Co., No. 10-5044,2012 U.S. Dist. LEXIS 14997, at *3-4 (D. N.J. Oct. 18,2012); Coral Group, Inc. v. Shell Oil Co., 286 F.R.D. 426, 441 (W.D. Mo. 2012); Cheng v. Lake/orest Assocs., LLC, No. CBD-13-l365, 2014 U.S. Dist. LEXIS 88421, at *12-14 (D. Md. June 30, 2014). This must be true for the simple reason that a party cannot produce what it has failed to preserve. Preservation is naturally more extensive than production precisely because a party must capture all potentially discoverable documents and then cull from that universe those that must be produced. 32 Matlin does not offer any reasoned support or case law for its novel and impractical contention that control over documents sufficient to give rise to a duty to produce may not be sufficient to trigger a duty to preserve. As alluded to above, two different standards-with one prescribing a higher degree of control for preservation than for production-would risk eliminating litigants' obligation to preserve documents that they would ordinarily need to produce. Discovery obligations would be turned on their head. The First Department cited GenOn, 282 F.R.D. at 346, in support of its conclusion that Matlin had control of Va rig Log's documents and thus a duty to preserve them. Matlin attempts to distinguish GenOn by pointing out that the relationship there was one of a litigant and its independent consultant, not one of parent and subsidiary. But contrary to Matlin's argument, a parent's duty to preserve documents it controls-albeit located in its subsidiary's files-should be deemed greater than the analogous situation involving two separate and independent entities. Even in the ordinary parent-subsidiary relationship (plainly not what existed here), a parent company almost certainly possesses a greater capacity to ensure that its subsidiary preserves documents than does a company over an independent, unaffiliated peer. Matlin relies on In re Vivendi Universal, S.A. Sec. Litig., No. 02-CIV-557 I , 2009 WL 8588405 (S.D.N.Y. July 10,2009), for the proposition that the Appellate 33 Division adopted a lower standard of control for the preservation of documents than courts have applied to the production of documents. Vivendi, however, is easily distinguishable. The plaintiffs there served a subpoena on a parent company seeking documents in the files of its Luxembourg subsidiary. Id. at * 1. The parent company submitted declaration testimony from its General Counsel specifically disclaiming any ability to access the documents sought, owing to Luxembourg's bank secrecy laws. Id. at *2. Here, in contrast, Santiago Born (the Matlin partner appointed by the Brazilian court to serve as the Matlin administrator of VarigLog) testified that he could obtain any VarigLog documents he wanted simply by asking for them. (R. 435.) Moreover, while the Vivendi court found that the facts adduced by the plaintiffs merely established "the existence of a parent-subsidiary relationship," Pegasus has shown that Matlin was VarigLog's administrator and manager. Finally, there is no merit to Matlin's contention that it lacked "the sort of intimate, day-to-day control over VarigLog's IT infrastructure, personnel and finances that would [have given it] the practical ability to preserve VarigLog's ESI." (Matlin Br. at 54.) Once again, all six justices who have presided over this case have agreed that Matlin did indeed possess the necessary control to institute document preservation procedures and direct VarigLog to adhere to them. The Appellate Division used the very word-"intimate"-that Matlin spurns. It held 34 that Matlin's conduct reflected "intimate involvement in directing VarigLog's business," as follows: In essence, even if it is true that VarigLog was legally and organizationally distinct from the MP defendants, in view of the latter's status as sole shareholder, determination of the membership of Va rig Log's board and intimate involvement in directing VarigLog's business, 'there seems to be little doubt that VarigLog would have complied with a timely request by the MP defendants to preserve its ESI,' from which we conclude that VarigLog's ESI was sufficiently under the MP defendants" practical control 'to trigger' a duty on their part to ensure that those materials were adequately preserved. ' Pegasus Aviation L Inc., 118 A.D.3d at 431 (quoting GenOn, 282 F.R.D. at 355). The evidence recounted here and in the Opening Brief highlighting the myriad ways in which Matlin was in charge of V arigLog' s affairs is more than sufficient to affirm the Appellate Division's ruling that Matlin had both control of VarigLog's documents and a duty to preserve them. 12 12 Matlin takes issue with the evidence showing that its consultant, Roula Zaarour, led the effort to "re-design[]" VarigLog's IT systems. (R. 1216.) Matlin maintains that Zaarour's role in putting together a comprehensive IT plan for VarigLog does not show that it had the ability to institute ESI preservation procedures. But Zaarour's emails are far more probative than Matlin admits. She describes her plan to cut costs in VarigLog's IT department, identifies which employees should occupy the key positions and how much they should be paid, and discusses the need to "re-design[] the whole network infrastructure to make it simpler and less expensive" after undertaking "[a] review and evaluation of the applications ... to decide what is best for us moving forward." (R. 1216-19.) Zaarour's work with VarigLog's IT systems is persuasive proof of Matlin's ability to implement ESI preservation measures, particularly when coupled with all the other evidence in the record. See also R. 1026-27 (Lup Ohira, VarigLog's CEO, testifying that Zaarour was a Matlin "IT specialist with a gear towards aviation" that assisted with VarigLog's IT functions). 35 D. This Court Should Not Reverse the Longstanding Law of This State Providing That Negligence (Gross and Simple) Can Support the Imposition of an Adverse Inference. Matlin urges the Court to hold that a party's negligent destruction of documents-whether gross or simple-can never give rise to the imposition of an adverse inference. It cites federal and state cases that have denied adverse inferences where the spoliator behaved negligently, as well as proposed amendments to the spoliation standards in Federal Rule of Civil Procedure 37(e) that are not yet (and may never be) the law. There are a number of reasons to reject Matlin's argument, not least of which is that no matter what the federal judiciary may be contemplating today, the operative question on this appeal is whether Supreme Court properly applied existing New York law when it imposed the adverse inference in this case. In addition, the "trend" Matlin purports to identify in favor of an intent finding as a prerequisite to awarding an adverse inference is far more muddled than Matlin admits, and following this supposed "trend" would require the Court to reverse decades of settled law that has worked just fine in practice. 1. By Failing to Raise It in Any of the Proceedings Below, Matlin Has Waived Its Argument That Adverse Inferences Should Be Foreclosed in Cases Involving a Spoliator's Negligence. As a threshold matter, however, Matlin never argued in any of the proceedings below that an adverse inference should be categorically unavailable if 36 the spoliator's culpability is deemed something less than willful. Other than the proposed amendments to the Federal Rules, which were not approved by the United States Judicial Conference until September 2014, the vast majority of the federal and state cases Matlin cites had been issued well before it filed its briefing in Supreme Court and the Appellate Division. Matlin thus could have chosen to argue this point but it strategically chose not to do so. Matlin has therefore waived this argument and the Court should decline to consider it. See P.A. Bldg. Co. v. City of New York, 10 N.Y.3d 430,441 (2008) (stating that arguments not raised before the trial court are "unpreserved" for purposes of this Court's review). 2. There Is No "Consensus" Against the Imposition of Adverse Inferences in Cases of Negligence. Next, Matlin argues that this Court should reject Voom and instead follow what Matlin inaccurately characterizes as a "growing consensus against adverse inference instructions in cases of negligence." (Matlin Br. at 45-51.) Far from any "growing consensus," the federal and state courts are split on the question whether an adverse inference may be drawn to remedy the negligent destruction of evidence. For example, the Second, Sixth and Ninth Circuits have held that negligent conduct resulting in the spoliation of evidence may give rise to an adverse inference. Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2d Cir. 2002) (stating that "[t]he sanction of an adverse inference may be 37 appropriate in some cases involving the negligent destruction of evidence"); Reilly v. Natwest Markets Group, 181 F.3d 253,267-68 (2d Cir. 1999) (rejecting notion that adverse inference was available only where the spoliator acted in bad faith); Beaven v. u.s. Dept. of Justice, 622 F.3d 540 (6th Cir. 2010) (holding that the culpable state of mind required to support an adverse inference "is satisfied by a showing that the evidence was destroyed knowingly, even if without intent to breach a duty to preserve it, or negligently") (internal quotation omitted; emphasis in original); Rogers v. T.J. Samson Community Hosp., 276 F.3d 228,232 (9th Cir. 2002) ("When ... a plaintiff is unable to prove an essential element of her case due to the negligent loss or destruction of evidence by an opposing party, ... it is proper for the trial court to create a rebuttable presumption that establishes the missing elements of the plaintiff s case that could only have been proved by the availability of the missing evidence."); Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993) (holding that a finding of bad faith is not required before a jury may draw an adverse inference from the destruction or spoliation of evidence, and that "simple notice of 'potential relevance to the litigation'" will suffice). A number of state courts also permit an adverse inference where the spoliator has negligently destroyed evidence. See, e.g., Kurczy v. St. Joseph Veterans Ass 'n, 820 A.2d 929, 946 (R.!. 2003) ("[D]eliberate or negligent destruction of relevant evidence by a party to litigation may give rise to an 38 inference that the destroyed evidence was unfavorable to that party ... a showing of bad faith [] is not required before the fact finder will be permitted to draw this inference."); Tancrelle v. Friendly Ice Cream Corp., 756 A.2d 744, 748-51 (R.!. 2000) (same); Bass-Davis v. Davis, 134 P.3d 103, 107-10 (Nev. 2006) (stating that an adverse inference is available for "evidence lost or destroyed through negligence"); West ex rei. Carver v. McKennan Hosp., 619 N.W.2d 682,687 (S.D. 2000) ("[I]f the trial court concludes the spoliator maliciously destroyed the document, it is unavailable because of negligence, or for some other reason evidencing a lack of good faith, the jury should be given an adverse inference instruction" (emphasis added)); Thomas v. Isle of Capri Casino, 781 So.2d 125, 133-34 (Miss. 2001) (requiring fraudulent intent on the part of the spoliator would "plac[e] too onerous a burden on the aggrieved party," and "encourage parties with weak cases to 'inadvertently' lose particularly damning evidence"); Pfantz v. Kmart Corp., 85 P.3d 564, 569 (Colo. App. 2003) (holding that negligent and intentional conduct resulting in spoliation of evidence may warrant an adverse inference) . The split between the authorities cited by Matlin and those cited above derives from courts' differing interpretations of the rationale supporting the adverse inference. Those that limit the adverse inference to cases involving bad faith have done so primarily upon the assumption that bad-faith spoliation supports 39 an inference that the destroyed information would have been unfavorable to the spoliator, while negligent spoliation would not support such an inference. See, e.g., Aramburu v. Boeing Co., 112 F.3d 1398,1407 (lOth Cir. 1997); Vickv. Texas Employment Com 'n, 514 F.2d 734, 737 (5th Cir. 1975). That assumption, however, conflates the "culpable state of mind" and relevancy elements of the spoliation test, and ignores that parties can and do demonstrate the relevance of spoliated evidence by circumstantial means other than the offending party's state of mind. See, e.g., Byrnie v. Town o/Cromwell, 243 F.3d 93 108-10 (2d Cir. 2001) (party seeking adverse inference established relevancy through deposition testimony regarding the missing documents); see also Residential Funding, 306 F.3d at 109 ("[a] party seeking an adverse inference instruction need not, however, rely on the same 40 evidence to establish that the missing evidence is 'relevant' as it uses to establish the opponent's 'culpable state ofmind",).!3 Conversely those courts that permit an adverse inference arising from negligent spoliation generally do so upon allocation of risk principles: The sanction of an adverse inference should be available even for the negligent destruction of documents if that is necessary to further the remedial purpose of the inference. It makes little difference to the party victimized by the destruction of evidence whether that act was done willfully or negligently. The adverse inference provides the necessary mechanism for restoring the evidentiary balance. The inference is adverse to the destroyer not because of any finding of moral culpability, but because the risk that the evidence would have been 13 Matlin also quotes certain of the policy rationales cited by the Judicial Conference in recommending its amendments to Rule 37(e)(2) ofthe Federal Rules of Civil Procedure, namely: [First], in a world where ESI is more easily lost than tangible evidence, particularly by unsophisticated parties, the sanction of an adverse inference instruction imposes a heavy penalty for losses that are likely to become increasingly frequent as ESI multiplies. [Second], permitting an adverse inference for negligence creates powerful incentives to over-preserve, often at great cost. [Third], the ubiquitous nature of ESI and the fact that it often may be found in many locations presents less risk of severe prejudice from negligent loss than may be present due to the loss of tangible things or hard-copy documents. (Matlin Br. at 46 (quoting Judicial Conf. Me., Rules Appendix B-17, available at http://www . uscourts.gov/uscourts/RulesAndPolicies/rules/Reports/ST09-20 14-add. pdf).) But none ofthose stated rationales requires a bright-line rule precluding an adverse inference where the spoliator has acted with gross negligence or even negligence. The first stated concern offers no reason to insulate highly sophisticated corporate litigants, such as Matlin, from the consequences of their (in)action. The second stated concern is more aptly dealt with by clear articulations of the duty to preserve, not by excusing failures to meet that duty, and by early and active discussion of those duties at the initial pretrial conference of counsel (if not sooner). And the third runs to the resulting prejudice to the innocent party: If alternative sources of information are, in fact, available, the resulting prejudice, and hence the required sanction, are lessened. 41 detrimental rather than favorable should fall on the party responsible for its loss. Residential Funding, 306 F.3d at 108 (quoting Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 75 (S.D.N.Y. 1991) (internal alterations omitted; emphasis added)); see also Bass-Davis, 134 P.3d at 107-110 (same); Reilly, 181 F.3d at 267- 68 ("[I]t makes little sense to confine promotion of [the adverse inference's] remedial purpose to cases involving only outrageous culpability, where the party victimized by the spoliation is prejudiced irrespective of whether the spoliator acted with intent or gross negligence."). Contrary to the bright-line rule adopted by other courts and urged by Matlin, this more flexible approach permits courts to fashion the remedy that most appropriately levels the evidentiary playing field, while allocating any residual evidentiary risk to the spoliator who created it. 3. New York Has Long Supported Adverse Inferences in Cases of Negligent Spoliation. Next, the notion that a spoliator's negligence is sufficient to trigger an adverse inference is not a foreign concept to the law of New York or one imported from federal spoliation standards. Voom did not introduce it. Rather, it has existed for decades in New York's common law spoliation doctrine. See, e.g., Biniachvili v. Yeshivat Shaare Torah, Inc., 120 A.D. 3d 605,606 (2d Dep't 2014); Strong v. City of New York, 112 A.D.3d 15,21-22 (1st Dep't 2013); Enstrom v. Garden Place Hotel, 27 A.D.3d 1084, 1086 (4th Dep't 2006); DiDomenico v. C&S 42 Aeromatik Supplies, Inc., 252 A.D.2d 41,53-54 (2d Dep't 1998); Squitieri v. City o/New York, 248 A.D.2d 201,203 (lst Dep't 1998); Mudge, Rose, Guthrie, Alexander & Ferdon v. Penguin Air Conditioning Corp., 221 A.D.2d 243 (lst Dep't 1995). If this Court were to accept Matlin's invitation to reject negligence as a sufficiently culpable mental state for imposing an adverse inference, it would be overturning a long and well-established legal rule. And it would be doing so without the benefit of the lower courts' views on the subject, since Matlin did not litigate this issue below, nor does it point to a single New York case criticizing the negligent destruction of evidence as a basis for awarding an adverse-inference sanction. Further, the as-yet unenacted amendments to Federal Rule of Civil Procedure 37(e) were/our years in the making and are the product of input and drafts from multiple constituencies. 14 New York's analogue to Rule 37, CPLR section 3126, has undergone no similar extensive process, nor is there any evidence that the Legislature has been urged to amend section 3126 to make adverse inferences available only in cases of deliberate and bad-faith destruction. 14 The Committee on Rules of Practice and Procedure of the Judicial Conference of the United States reports that discussion about the current set of Rule changes began in May 2010, at a conference at Duke University Law School, and that during the amendment process, the Committee received thousands of public comments and held at least four public hearings. See Addendum to Matlin Br. (Memorandum of the U.S. Judicial Conference); Summary of the Report of the Judicial Conference Committee on Rules of Practice and Procedure, dated September 2014, at 14, available at www.uscourts/gov/uscourtslRulesandPolicies/ruleslReports/ST09-2014.pdf. 43 To be sure, New York courts have looked to some decisions of the federal courts in refining New York spoliation standards, particularly spoliation of ESI, but that is not because federal law is controlling or New York need be in lockstep. Rather, it is because that case law-allowing an adverse inference in these circumstances- has been found persuasive by the New York judiciary. Had it not been, the courts of this State would have cut their own path. In any event, the proposed amendments to the Federal Rules are not yet the law, assuming they ultimately will be, and have not been tested through litigation. 15 There is no reason for this Court to jump the gun by borrowing an as-yet-to-be- implemented federal standard without any empirical evidence showing how that standard is working in practice (or that New York's existing standard is not). In sum, it would be a dramatic break from settled law for this Court to hold that adverse inferences are categorically unavailable to innocent parties when the spoliating party has behaved negligently, grossly or otherwise. And this case presents a poor vehicle for upending that law given that the lower courts in this case never considered the question, and given further that there is no evidence of a 15 Indeed, even since the proposed amendments to FRCP 37 were announced last June 2014, there has been no judicial rush in those jurisdictions like the Second Circuit that permit the imposition of adverse inferences based on negligent spoliation to reject this principle in anticipation ofthe amendments one day becoming law. See, e.g., Dorchester Fin. Holdings Corp., 2014 U.S. Dist. LEXIS 172958, at *14-15 (imposing an adverse inference on the basis of the spoliator's grossly negligent destruction ofa corrupted computer); Riley, 2014 U.S. Dist. LEXIS 135728, at *12 (awarding an adverse inference for the grossly negligent destruction of a portion of surveillance footage and maintenance logs); Hawley, 302 F.R.D. at 50-51 (imposing an adverse inference for the destruction of certain computer files). 44 split in authority among the Appellate Divisions, or even Appellate Division criticism of the rule. If the change in law that Matlin seeks is going to come about, it should come from the Legislature through an amendment to the CPLR, not through a ruling by this Court in this case. E. Pegasus Has Satisfied Any Burden It Bears to Show That the Spoliated Documents Existed, That They Would Have Been Helpful to Pegasus's Claims, and That It Has Been Prejudiced by Their Permanent Destruction.16 1. Pegasus Has Not Waived Its Relevance Argument. Matlin claims that Pegasus relied exclusively on the presumption of relevance triggered by a gross negligence finding. As described below, that is simply not true, but even if it were, that would in no way bar this Court from considering whether Pegasus has affirmatively demonstrated the relevance of the destroyed documents, nor does Matlin contend that any waiver has occurred. It does not because it cannot: Irrespective of whether Pegasus argued the relevance issue in the Appellate Division (and it did), there can be no dispute that it did so in Supreme Court, and that is all it had to do to preserve the issue for review in this Court. See Matter o/State o/New York v. Rashid, 16 N.Y.3d 1, 10 (2010) (holding 16 If the Court concludes that Matlin was at least grossly negligent, its analysis may end there. The Court need not consider the relevance of the destroyed documents because their relevance would be presumed based on Matlin's grossly negligent conduct. Voom, 93 A.D.3d at 46 (holding that when the spoliating party has behaved in at least a grossly negligent way, "the relevance of the evidence is presumed and need not [be] demonstrated by [the innocent party]"); Ahroner v. Israel Disc. Bank of NY., 79 A.D.3d 481,482 (1st Dep't 2010) (explaining that because a hard drive "was destroyed either intentionally or as the result of gross negligence, the court properly drew an inference as to the relevance ofthe e-mails stored on the drive"). 45 that an argument was preserved for review even though it had not been raised in the Appellate Division because it had been argued in Supreme Court); Matter of Seitelman v. Lavine, 36 N.Y.2d 165, 170 n.2 (1975) ("This court will consider a question that has been raised in the tribunal of original jurisdiction even though it may not have been argued in the Appellate Division.,,).l7 Throughout these proceedings, Pegasus has consistently argued that even if the presumption does not apply, it has satisfied any modest burden it might have to show that the three critical categories of documents that have been destroyed- VarigLog's internal communications, its communications with the fiscais, and its bank records-all would have been favorable to Pegasus's alter-ego and conversion claims. In Supreme Court, Pegasus naturally claimed the benefit of the presumption of relevance, but it did not stop there, explaining: The failure of VarigLog and Matlin to institute any litigation hold means that Pegasus is not required to prove the relevance of the lost or missing documents, and that their relevance must be presumed. Nonetheless, the import of those documents to the claims and defenses in this case merit a brief discussion to show the full extent 17 The Appellate Division's holding is not quite as clear as Matlin says. Granted, on the one hand, the Appellate Division commented in a footnote that Pegasus did "not even claim to have made such a showing [i.e., of relevance], and instead rel[ies] on the presumption arising from the gross negligence finding." Pegasus Aviation I, 118 A.D.3d at 434, n.7. On the other hand, the Appellate Division held that Pegasus's showing fell short because it was predicated on "speculat[ion]" as to whether the destroyed documents would have supported Pegasus's claims. Id. at 433-34. The Appellate Division's holding is thus internally inconsistent. 46 of the prejudice Pegasus will suffer in the absence of appropriate sanctions. (See excerpts from Pegasus Spoliation Motion, annexed as an Addendum hereto, at 33-34 [emphasis added].) And in its Supreme Court reply brief, Pegasus likewise argued that "[e]ven though [it] is not required to do so, it can easily show both relevance and prejudice here," and supported that contention with a three-page discussion showing how and why the destroyed documents are indeed relevant, irrespective of the presumption. (See excerpts from Pegasus Spoliation Reply, annexed as an Addendum hereto, at 12-15.) Having emphasized the relevance of the missing documents separate and independent of the presumption in Supreme Court, it would have made no sense for Pegasus to abandon that argument in the Appellate Division, and indeed, it did not do so. Pegasus explained in its Appellate Division brief that Supreme Court had found that the lost documents were indeed relevant, notwithstanding the presumption, and that its conclusion in that regard was amply supported: The Trial Court did not stop there, however [i.e., with the presumption of relevance arising from its gross negligence finding]. It also found that the evidence established that the lost documents ... were relevant to the claims and defenses in the case. (See excerpts from Pegasus App. Div. Br., annexed as an Addendum hereto, at 62- 63.) Pegasus then comprehensively described how each of the three categories of missing documents would have supported its claims, and it substantiated that 47 contention by pointing to the available evidence and what that evidence showed as a fair proxy of what the missing evidence would have shown. Finally, concerned that the Appellate Division had inadvertently overlooked Pegasus's relevance argument in reversing Supreme Court's order, Pegasus moved for reargument on this basis: [T]he Court determined that Pegasus did not even attempt to establish the relevance of the documents that Matlin failed to preserve, but simply relied on the presumption of relevance that applies when a spoliating party has behaved in a grossly negligent manner. This is factually incorrect and in so holding, the Court appears to have overlooked pages 64 through 69 of Pegasus's brief in which it described, category by category, why the destroyed documents would have supported its claim that Matlin was VarigLog's alter ego, and discredited Matlin's defenses. (See excerpts from Pegasus Motion for Reargument and/or Leave to Appeal, annexed as an Addendum hereto, at 8.)18 The Appellate Division denied reargument, but granted leave to appeal. 18 In its reply brief in further support of its motion for reargument/leave to appeal, Pegasus continued to press its view that the Appellate Division did not account for its relevance argument. Pegasus argued that: At pages 64-69 of [its] appellate brief, it described in detail why VarigLog's destroyed internal communications, communications with the fiscais, and other documents would have supported its claims and discredited Matlin's defense," and that Pegasus's showing in this regard "relied on no fewer than twenty-four pieces of evidence, including Brazilian court orders, VarigLog Board meeting minutes, emails, deposition testimony, and the like .... " (See excerpts from Reply in Support of Pegasus Motion for Reargument and/or Leave to Appeal, annexed as an Addendum hereto, at 16-18.) 48 Thus, at every step of the way Pegasus did not merely rely on the presumption of relevance but repeatedly showed that the destroyed documents would indeed have bolstered its claims and belied Matlin's defenses. And no matter how Pegasus's arguments to the Appellate Division are construed, that is beside the point in terms of the scope of this Court's review: Pegasus plainly made an affirmative showing of relevance in Supreme Court and thereby preserved its right to review by this Court. Matlin does not say otherwise. 19 2. Matlin Fails to Rebut Pegasus's Argument That the Appellate Division Applied the Wrong Legal Standard in Determining Whether the Relevance of the Destroyed Documents Had Been Sufficiently Established. As Pegasus explained in its Opening Brief, New York law is far from uniform concerning when an innocent party must prove relevance, and assuming it must do so, how stringent of a burden it will be held to. In Strong, 112 A.D.3d at 19 Matlin chooses not to discuss what Pegasus argued in Supreme Court as to relevance, presumably because it recognizes that Pegasus's arguments there were more than sufficient to avoid any waiver in this Court. Although Matlin claims that Pegasus "improperly attempt [ s] to argue the fact-intensive issue of relevance to this Court in the first instance," that statement appears to refer to Pegasus's alleged failure to argue relevance (other than the presumption) in the Appellate Division. (Matlin Br. at 60.) In any event, Pegasus is not arguing relevance to this Court "in the first instance" because it already argued it to Supreme Court (and the Appellate Division, despite that court's confused view on the subject). Insofar as Matlin impliedly suggests that this Court should not determine whether Pegasus has affirmatively carried its relevance burden (assuming that the presumption does not apply), but should instead remand the case to Supreme Court for that purpose, Matlin is wrong. There is no reason for this Court to do so because both Supreme Court and the Appellate Division had the opportunity to rule on the issue and both in fact ruled upon it. Supreme Court concluded that the destroyed documents were relevant notwithstanding the presumption and the Appellate Division (erroneously) concluded that Pegasus's showing was inadequate. 49 24, for instance, the Appellate Division held that the spoliating party was only negligent but it did not require the movant to prove relevance. Here, in contrast, the Appellate Division likewise deemed Matlin only negligent, but it still required Pegasus to affirmatively prove the relevance of the destroyed documents. And in doing so, it demanded that Pegasus clear a high hurdle, a holding that is directly at odds with both New York and federal cases ruling that innocent parties should not be subjected to a strict relevance showing lest the risk of the spoliator's wrongdoing be shifted to them. See, e.g., Santana v. Castillo, 114 A.D.3d 621,621 (lst Dep't 2014); Alleva v. UPS, 112 A.D.3d 543,544 (lst Dep't 2013); Sage Realty Corp. v. Proskauer Rose LLP, 275 A.D.2d 11 (lst Dep't 2000); Residential Funding, 306 F.3d at 109; Pension Comm., 685 F. Supp.2d at 478-79. Matlin dismisses Pegasus's argument in a footnote, saying that the cases Pegasus cites all implicated "a clear record of relevance." (Matlin Br. at 63 n.32 [citing Strong, 112 A.D.3d at 24, New York City Hous. Auth. v. Pro Quest Sec., Inc., 108 A.D.3d 471,473-74 (lst Dep't 2013), Alleva, 112 A.D.3d at 544, and Sage Realty Corp., 275 A.D.2d at 16].) That is not true. None of those cases required the innocent parties to prove that the destroyed evidence of which they had been deprived would have favored their claims or defenses. See, e.g., Strong, 112 A.D.3d at 24 ("Plaintiffs' inability to establish whether the missing evidence would have been helpful to them [i.e., whether it was relevant] cannot serve to 50 support the City's opposition to sanctions, since that inability is the City's fault, not plaintiffs. "'); Alleva, 112 A.D.3d at 544 ("Plaintiff cannot be faulted for his inability to establish that the missing records contained critical evidence."). Moreover, there was nothing about the facts of those cases that made it a foregone conclusion that the destroyed evidence would have been helpful to the aggrieved party. In Alleva, for example, the plaintiff sued UPS for injuries he suffered when a UPS employee assaulted him. Id. The court imposed an adverse inference against UPS for spoliating its employment file on the plaintiff s assailant, but it was not at all obvious that the employment file would have bolstered the plaintiff s claims by showing that the assailant had a disciplinary history or penchant for violence. Id. Similarly, in Pro Quest, the plaintiff edited a surveillance video, deleting portions that it did not deem relevant to how a fire started. 108 A.D.3d at 472. The court concluded that those deleted camera angles would not have in fact revealed how the fire started but it still imposed an evidence-preclusion order (a heftier sanction than an adverse inference), prohibiting the plaintiff from introducing into evidence either the redacted video or witness testimony about its contents. Id. at 473-74. The court reasoned that the "[d]efendants should not have to rely on [the plaintiffs] statement that the deleted views are irrelevant, but should have been given an opportunity to view those images for themselves." Id. at 474. Strong and Sage are 51 to the same effect: There was no evidence cited in either case suggesting that the destroyed audio tapes would have supported the innocent party's claims. Thus, these cases all applied a lower standard of relevance referring to the ordinary discoverability of the destroyed evidence, not the higher standard-and the one the Appellate Division here applied-of whether that evidence would have supported the innocent party. For these reasons, what an innocent party must prove to satisfy the relevance requirement needs clarification from this Court. Even if the innocent party bears some burden in this regard, it should be a "limited" one that is met so long as the movant comes forward with "some evidence" suggesting that the destroyed evidence would have supported its claims or defenses. Pegasus has done that-and more-here. Pension Comm., 685 F. Supp.2d at 478-79; In re Terrorist Attacks on Sept. 11, 2001, No. 03-1570,2013 U.S. Dist. LEXIS 155085, at *1001 (S.D.N.Y. Oct. 28, 2013). 3. Matlin Misconstrues Supreme Court's Holding That the Destroyed Documents Were Indeed Relevant. Matlin dismisses Supreme Court's conclusion that the spoliated documents "clearly would be very relevant and important for the plaintiff to prove their case," on the grounds that this statement applied to Pegasus's claims against VarigLog, not Matlin. Matlin thus contends that Supreme Court's relevance determination did not apply to the documents spoliated by Matlin. That is an anomalous reading of 52 Supreme Court's holding, however, because the documents that VarigLog failed to preserve and spoliated were the same documents that Matlin failed to preserve and spoliated. It's not as though the sanctions imposed against both defendants were predicated on different destroyed documents. Supreme Court's finding that the destroyed documents "clearly would be very relevant and important for the plaintiff to prove their case" therefore applies to Matlin, no less than VarigLog.20 4. There Is No Merit to Matlin's Assertion That the Destroyed Documents Never Existed in the First Place. ·Matlin claims that there is no evidence that two of the categories of destroyed documents-VarigLog's internal communications and its communications with the fiscais-even existed. This contention is almost unworthy of debate. Matlin's own documents establish that VarigLog's employees had individual email accounts and that these accounts were a primary means of communication within the company. Just as there were thousands of pages of internal Matlin emails, there should have been thousands of pages of internal VarigLog emails?l Pegasus, however, received virtually none of these. 20 Moreover, VarigLog had no real defense to Pegasus's breach-of-contract claim. Pegasus's ability to prevail on that claim never depended on VarigLog making a full and complete production. VarigLog's documents were instead crucial to proving Pegasus's alter-ego and conversion claims against Matlin. VarigLog's documents were thus far less important for what they revealed about VarigLog's liability-which was practically a foregone conclusion-and much more important for what they revealed about Matlin's liability. 21 It also bears repeating that Pegasus's request for VarigLog's internal communications was not limited just to emails. It also included other types of written communications, such as letters, memos, notes of conversations, and similar documents. 53 Insofar as Matlin's argument is that there is no evidence "that VarigLog employees emailed one another discussing the manner in which the MP Defendants played a role in VarigLog's operations," that too is not well taken. (Matlin Br. at 67.) Matlin asks the Court to believe the improbable: That it took over VarigLog in April 2008; relieved VarigLog's Board of Directors and senior management; appointed its own personnel and close relatives of its personnel to the Board and to the CEO position; inserted its own partners, employees, and consultants to take control of all aspects of Va rig Log's business; told VarigLog employees what to do; and yet, despite all this, there were no written communications of any sort between VarigLog's employees about how their job duties, expectations, and experiences had been affected by Matlin's "administration and management" of the company for which they worked. Common sense does not support that contention and neither does the record. As described in the Opening Brief, at least one VarigLog manager felt compelled to articulate a list of concerns about the way Matlin was running the company directly to Matlin. (R. 1231-32.) If such skepticism and unease concerning Matlin's post-takeover intentions motivated one VarigLog employee to address Matlin directly, then it's a reasonable inference that similar questions and concerns about Matlin's management were communicated between VarigLog's employees and would have been reflected in their internal correspondence (emails and other 54 written exchanges) with one another. In the same fashion, the fact that Matlin personnel were giving VarigLog employees instructions about what to do and not to do almost necessarily would have occasioned discussions among VarigLog's employees simply to carry out those instructions. (R. 1203-09.) With respect to VarigLog' s communications with the fiscais, Matlin mistakenly tries to confine this category of documents to emails too, and points to evidence suggesting that email was not "the standard mode of communication between the Judicial Oversight Committee and VarigLog." (Matlin Br. at 67.) True, Matlin personnel Peter Miller and Mario Abad testified that they only rarely communicated with the fiscais in writing, but "rarely" does not mean the same thing as "never." And irrespective of what Matlin's "standard mode of communication" with the fiscais was does not mean that VarigLog employed the same mode of communication. Peter Miller testified that the fiscais periodically requested information and meetings with VarigLog employees. (R. 895-96.) It stands to reason, then, at least some written communications were generated between VarigLog and the fiscais, none of which Pegasus has ever received.22 22 Moreover, Matlin has defended this case by insisting over and over again that the fiscais were in charge ofVarigLog and had to approve of Va rig Log's business decisions which, according to Matlin, were made by VarigLog's Board and management, not it. Matlin cannot have it both ways. If all of that is true, then plainly there must have been written communications between VarigLog employees and the fiscais. 55 5. Matlin Has Not Rebutted Pegasus's Showing That the Destroyed Documents Would Have Supported Pegasus's Alter-Ego and Conversion Claims. Matlin admits that Pegasus "point[s] to parts of the record that [it] believe[s] support[s] the underlying merits of [its] alter-ego claims." (Matlin Br. at 70.) That concession should put an end to this Court's consideration of whether Pegasus has satisfied its relevance burden because pointing to existing evidence in support of its claims is exactly what Pegasus must do to meet that burden. Despite this notable concession, Matlin says that just because the available evidence may support Pegasus does not mean that the destroyed evidence would have done so as well. Putting aside the inherently speculative nature of such a claim, if accepted it would mean that innocent parties would never be able to obtain spoliation sanctions. The whole point of requiring innocent parties to marshal proof substantiating their assertion that the destroyed evidence would have helped them is because available proof serves as a fair and reasonable proxy for what the missing evidence would have shown. To the extent that Matlin argues that the existing evidence actually implies that the destroyed evidence would have cut against Pegasus, that argument is not persuasive. For instance, Matlin claims that given the Brazilian court orders, VarigLog's communications with the fiscais might have supported Matlin. Matlin does not explain what about the Brazilian court orders gives rise to any such 56 inference and in fact it cannot offer any such explanation: The Brazilian court orders did not describe in any detail whatsoever what the fiscais were supposed to do and only addressed the fiscais' involvement in monitoring VarigLog's Swiss bank account (because Matlin surreptitiously tried to empty it). The silence of the court orders means that one must necessarily look to the written communications between VarigLog and the fiscais-the very documents that Matlin failed to preserve-to know what the fiscais were actually doing and how extensive or limited their "oversight" was. The available evidence-especially Peter Miller's testimony that the fiscais did not interfere with any of Matlin's business plans, strategies, or key decisions for VarigLog-strongly suggests that ifVarigLog's communications with the fiscais had been produced, they would have supported Pegasus's alter-ego and conversion claims by showing that it was Matlin, not the fiscais, in charge of Va rig Log and in charge of the fate of Pegasus's planes. Matlin also discounts the evidence Pegasus has cited tending to show that VarigLog's internal communications would have favored Pegasus. But as described above, the substantial evidence of Matlin's pervasive management of VarigLog necessarily prompts the reasonable inference that the emails of VarigLog's employees would have revealed that they took direction from Matlin and lacked the authority to independently set VarigLog's agenda or manage its affairs. And that is certainly the conclusion to be drawn from the email sent by the 57 VarigLog employee to Matlin directly asking about why Matlin had made what were, in the employee's mind, certain questionable decisions on behalf of the company. Matlin goes so far as to contend that it's equally conceivable that V arigLog' s internal communications might have shown that "VarigLog management exercised autonomy." (Matlin Br. at 71.) That is an incredible statement on this record, and devoid of any evidentiary support, it smacks of the very "speculation" and "conjecture" that Matlin wrongly attributes to Pegasus. Finally, Matlin does not even bother to rebut Pegasus's showing that VarigLog's unproduced bank records would have been favorable to it by demonstrating that VarigLog made preferential payments to other Matlin-owned companies, while completely flouting its payment obligations to Pegasus. Matlin instead dismisses these bank records as "cumulative." Pegasus has never received a complete set of Va rig Log's bank records so the notion that the missing records would be cumulative of the produced records is simply wrong. And if they somehow would be cumulative, Matlin has no answer for Voom's holding that the cumulative nature of destroyed evidence does not militate against the imposition of an adverse inference. 93 A.D. 3d at 47. The extent of the prejudice that Pegasus will suffer if the Appellate Division's order is not reversed should not be taken lightly. Thousands of documents have been permanently lost as a result of Matlin's failure to preserve 58 them. Matlin does not point to any cases in which a litigant can preside over the destruction of such critical evidence as virtually all internal communications and escape without paying any price whatsoever. The adverse inference that Supreme Court awarded is the proper sanction to deter Matlin and other similarly situated litigants from engaging in spoliation in the future and is the best way to level the litigation playing field that presently tilts in Matlin's favor. In addition, the adverse inference is a middle-of-the-road sanction (not as harsh as a default judgment or an evidence-preclusion order and not as lax as a costs order) that properly takes account of the harm Pegasus has suffered without prejudicing Matlin's ability to present its defenses at trial. And the permissive nature of the adverse inference means that the jury may, but will not be required to, assume that the destroyed evidence would have substantiated Pegasus's claims. Anything less than an adverse inference under the circumstances of this case would be a pointless slap on the wrist. CONCLUSION Pegasus respectfully requests that the Court reverse the order of the Appellate Division and reinstate the adverse inference against Matlin. 59 Dated: San Francisco, California March _, 2015 Respectfully submitted, COBLENTZ PATCH DUFFY & BASS LLP By:&!::!!i//d1'1 ~ Ann E. Johnston (of the bar of the State of California) By permission of the Court COBLENTZ PATCH DUFFY & BASS LLP M. Zimmerman SKARZYNSKI BLACK LLC One Battery Park Plaza, 32nd Floor New York, NY 10004 (212) 820-7700 By~i Allison L. Ehlert (of the bar of the State of Californi ) By permission of the Court EHLERT APPEALS P.O. Box 1024 El Cerrito, CA 94530 (415) 828-5350 Attorneys for Plaintiffs-Appellants Pegasus Aviation L Inc., Pegasus Aviation IV, Inc., and Pegasus Aviation V, Inc. REPRODUCED ON RECYCLED PAPER 60 Addendum - Excerpts from Pegasus Supreme Court Spoliation Motion dated March 2, 2012 - Copy of full brief submitted to Clerk's Office as instructed in connection with Opening Brief preserve relevant evidence. As a result, that evidence has been IOSt.15 When viewed in isolation, Matlin's and VarigLog's total abdication of their legal obligations in this regard - which continues to this day - has been at best "grossly negligent." When viewed in conjunction with its other discovery abuses in this action, VarigLog's conduct evidences an affirmative intent to frustrate Pegasus's ability to discover documents relevant to its claims against not only VarigLog, but also its claims against Matlin. 3. The Lost Or Destroyed Records Were Relevant To The Issues In This Action. Finally, where, as here, gross negligence in connection with a failure to preserve documents is established, the relevance of the lost/destroyed documents is presumed and the movant need not prove their relevance. See, e.g., Voom HD, 2012 N.Y.App. Div. LEXIS 559 at *23; Ahroner v. Israel Discount Bank of New York, 79 A.D.3d 481,482 (1st Dep't 2010) (holding that where a computer drive was destroyed at least as a result of gross negligence, the trial court properly concluded that the emails stored on the drive were relevant); County of Erie, 30 Misc. 3d at 841-842 (imposing adverse inference even where it was not established that the missing evidence was ever in the plaintiff s possession or that the evidence was significant because the plaintiff entirely failed to institute a litigation hold between the commencement of the lawsuit and three-and-a-halfyears later). The failure of Va rig Log and Matlin to institute any litigation hold means that Pegasus is not required to prove the relevance of the lost or missing documents, and that their relevance 15 Had Matlin or VarigLog issued a litigation hold and made backup copies of the relevant data from key witnesses when it was first obligated to do so, the alleged "computer crashes" in 2009 would not have resulted in the loss of virtually all ofVarigLog's electronic records. Thus, as in Wilson, it was at least "grossly negligent" for VarigLog to have failed to make copies of the computer files "before [they] allegedly failed." Wilson, 2010 WL 1712236, at *3. To make matters worse, VarigLog (and Matlin) failed to preserve the allegedly corrupted hardware and software. Had it done so, Pegasus could have requested that the Court order an independent forensic investigation to both confirm whether the alleged "crashes" occurred as VarigLog described, and to attempt to recover the allegedly lost data itself. 33 must be presumed. Nonetheless, the import of those documents to the claims and defenses in this case merit a brief discussion to show the full extent of the prejudice Pegasus will suffer in the absence of appropriate sanctions. The lost records regarding communications between VarigLog, on the one hand, and the Brazilian Court and the court-appointed committee, on the other, would have evidenced the nature, purpose and scope of the court's purported involvement. VarigLog's lost internal emails would have been a fertile source of information about the degree of control Matlin actually exercised over VarigLog. VarigLog's banking and financial records, and its communications with various Matlin-owned entities would have shown the extent to which Matlin was exerting its control over VarigLog to benefit itself and to the detriment of Pegasus. Finally, records regarding Matlin's investment in VarigLog would have revealed whether, as Pegasus contends, VarigLog was intended - from the outset - to be a "puppet" entity controlled by Matlin. In short, the loss of virtually all of Va rig Log's relevant electronic documents and paper records relevant to these issues is prejudicial to Pegasus's ability to prove its alter-ego claim and conversion claims against Matlin, and to defend itself against the maintenance-reserve counterclaim asserted by both Matlin and VarigLog. On this record, the appropriate remedy for Matlin's spoliation of evidence is to sanction Matlin with an adverse inference that the aforementioned categories oflostldestroyed documents would have (a) supported Pegasus's claim that Matlin is VarigLog's alter ego and contradicted Matlin's claim that it is not, and (b) would not have supported Defendants' maintenance-reserve counterclaim and instead would have supported Pegasus's defenses. See Horizon Inc. v. Wolkowicki, 55 A.D.3d 337,338 (1st Dep't 2008) (holding in an alter-ego case that an adverse inference charge was an appropriate sanction for the defendants' failure, despite four court orders, to produce financial documents 34 Addendum - Excerpts from Pegasus Supreme Court Spoliation Reply dated April 20, 20 12 - Copy of full brief submitted to Clerk's Office as instructed in connection with Opening Brief Matlin also says that there is no evidence that the computer crashes were anything other than unintentional. That argument is a strawman. Pegasus is not challenging the nature of the crashes-whether intentional or unintentional-nor is it arguing that Matlin and VarigLog should have "installed a better sprinkler system," to use Matlin's words, to ensure that the crashes did not occur. Rather, Pegasus's point is that Matlin's failure to take well established and reasonable steps to preserve documents in its control, even iflocated in VarigLog's offices, has resulted in an unacceptable loss of information for which Matlin should be held accountable. D. The Lost Documents Are Unquestionably Relevant To The Claims And Defenses In This Case. Matlin fails to acknowledge that where a party neglects to institute a litigation hold, the opposing party need not establish the lost documents' relevance. Relevance is presumed to have resulted from the grossly negligent behavior of failing to preserve. Voom HD, 2012 N.Y. App. Div. LEXIS 559, at *23; Ahroner v. Israel Discount Bank of NevI" York, 79 A.D. 3d 481, 482 (1 st Dep't 2010); County o/Erie v. Abbott Laboratories, Inc., 30 Misc. 3d 837 (Sup. Ct. Erie Cty. July 19,2010). Even though Pegasus is not required to do so, it can easily show both relevance and prejudice here. 1. VarigLog's Communications With The Judicial Committee. Matlin maintains--even in its opposition to this discovery motion-that it never had operational control of Va rig Log and that its "management and administration" of the company was at all times subject to the "strict" oversight of the Brazilian court and its appointed committee (the fiscai). Communications between VarigLog and the judicial committee are therefore vital to challenging Matlin's "Brazilian court" defense to alter-ego liability. Matlin argues that there's no evidence that any such written communications ever existed but Matlin cannot have it both ways. It cannot insist, on the one hand, that the involvement of the judicial committee over a period of 12 nine months was so extensive and intrusive that it cannot be "overstated," and expect Pegasus or this Court to believe, on the other hand, that no written communications ever existed. Likewise, while Matlin employees testified that their communications with the fiscai were mostly verbal, they implicitly admitted that they had at least some written communications with the fiscai. And just because Matlin employees primarily communicated verbally with the fisc ai, does not mean the same was true for VarigLog's employees. Matlin also contends that the record as it presently exists contains ample evidence concerning the "nature, purpose, and scope" of the fiscais' oversight of Va rig Log and that therefore Pegasus has not been prejudiced by the apparent destruction of all of VarigLog's communications with the fiscai. Matlin is wrong. The Brazilian court order installing the fiscai is extremely general and vague. It does not spell out in any detail at all what the role of the fiscai would be. That was apparently left to be worked out in practice. Written exchanges between VarigLog and the fiscai-whether in the form of emails, letters, memoranda, handwritten notes, or the like-are therefore crucial to understanding exactly what the fiscai did and what degree of supervision they were actually exercising. There is nothing like this in VarigLog's production, despite Matlin's repeated contentions concerning the breadth and depth of the fiscais' involvement. Matlin further claims that there is no evidence suggesting that the lost communications between VarigLog and the fiscai would be favorable to Pegasus's claims. This too is not well founded. Contrary to Matlin's view, and as described above, there is considerable evidence suggesting that the fiscais' supervision was limited to one of Va rig Log's bank accounts (an account that Matlin was caught trying to empty) and that they did not interfere with any of Matlin's plans for the company in any way. 2. VarigLog's Internal Communications. VarigLog has produced almost no internal emails or other communications between its 13 own employees. Matlin argues that there is no proof that discussions about its control of VarigLog would be found in such communications. This is absurd on its face and contradicted by the evidence. Matlin argues that it was completely shut out of Va rig Log for six months during which time the company was run by Matlin's erstwhile Brazilian business partners, but none of their internal emails have been produced. Then, in April 2008, the Brazilian comt not only restored Matlin's access to VarigLog, but ousted the Brazilian businessmen and turned over to Matlin the "management and administration" of the company. It's implausible to think that the emails of VarigLog's employees would not have revealed anything about their experiences working under Matlin's direction. Those emails undoubtedly would have provided valuable insights into whether VarigLog's officers and employees believed they could function independently and exercise their own discretion in planning and organizing the company's affairs, or whether they understood their role to be that of implementing Matlin's objectives. Indeed, the partial record that exists on this subject shows that at least one VarigLog employee wrote directly to Matlin partner Lap Chan to question some of Matlin's decision-making with respect to VarigLog's operations. (Ehlert Reply Aff ~ 13, Exh. 0.) The Willingness of one VarigLog employee to take up his grievances directly with Matlin strongly suggests that VarigLog's internal emails would have been probative of how Matlin exercised its managerial and administrative power, a subject that is directly relevant to Pegasus's ability to prosecute its alter-ego claim. 3. The Remaining Missing Evidence. Matlin cannot plausibly argue that the remainder of the documents missing from VarigLog's production are not relevant, or that Matlin's production somehow cures the deficiencies of Va rig Log's production. Pegasus still does not have a complete set of Va rig Log's banking and financial records and therefore cannot effectively piece together the entire picture of 14 payments VarigLog made to Matlin and Matlin-related entities. Matlin's production does not contain a complete set of these records either. Likewise, it defies reason to think that VarigLog would not have any documents relating to its acquisition by Matlin. Such documents would consist of emails, letters, memoranda, and draft term sheets and would certainly be relevant to revealing the parties' expectations as to the degree of control that Matlin would exercise as VarigLog's new controlling shareholder. III. CONCLUSION The evidence establishes that Matlin had control over VarigLog's documents. It therefore had an obligation to ensure the preservation of those documents for use in this case. Matlin's abdication of this duty has resulted in the destruction of an overwhelming number of VarigLog's responsive documents, including its communications with the fiscai and virtually all its emails. Matlin's conduct amounts to gross negligence that warrants the imposition of an adverse inference. Dated: New York, New York April 19, 2012 Of Counsel: James Sandnes Aron Zimmerman Of Counsel: Richard R. Patch (pro hac vice) Ana E. Johnston (pro hac vice) Allisoll L. Ehlert (pro hac vice) Jana L. Contreras (pro hac vice) Respectfully submitted, COBLENTZ, PATCH, DUFFY & BASS LLP One Ferry Building, Suite 200 San Francisco, CA 94111-4213 (415) 391-4800 Attorneys for Plaintiffs PEGASUSAVIATION L INC.. PEGASUSAVIATION IV,INC.. and PEGASUS AVIATION V, INC. 15 Addendum - Excerpts from Pegasus Appellate Division Respondent's Brief dated March 19, 2013 - Copy of full brief submitted to Clerk's Office as instructed in connection with Opening Brief Realty). Or, as the 915 Broadway court put it, it is "inherent[ly] unfair[]" to demand that a party prove the relevance of documents destroyed by the opposing party. 2012 N.Y. Misc. LEXIS 708 at *18. Matlin fails to come to grips with this case law. It altogether ignores Ahroner and Sage Realty and only cites Voom for the unremarkable proposition that the" merely negligent" destruction of evidences requires the spoliation movant to prove relevance. Instead, citing exclusively federal cases, Matlin argues that the Trial Court erred by failing to recognize that the law permitted it to presume relevance, but did not obligate it to do so. This Court's precedents are crystal clear: When the spoliating party's misconduct rises to the level of gross negligence, "the relevance of the evidence is presumed." Voom, 93 A.D.3d at 46 (emphasis added). Even if the Trial Court could have imposed the burden on Pegasus to affirmatively prove relevance, notwithstanding its gross negligence finding, it plainly need not have done so and its decision in that regard should not be subject to second guessing. The Trial Court did not stop there, however. It also found that the evidence established that the lost documents - internal emails, 62 communications with the Brazilian fiscai, bank records, and the like-were relevant to the claims and defenses in the case. (R.17["There were very, very few e-mails exchanged here, and there were no e-lnails about certain varied relevant issues like the leases, like conversations with the Brazilian authorities, and related issues that clearly would have been important for the plaintiffs to have had .... "].) Matlin argues that it successfully rebutted the presumption of relevance by showing that the destroyed documents: (1) would not have been helpful to Pegasus's claims, and that (2) they would have been merely cumulative. As described below, there can be no reasonable doubt that the destroyed documents would have assisted Pegasus in proving its alter-ego and conversion claims and resisting Matlin's "Brazilian court" defense. Likewise, even if some small portion of the destroyed documents would have been cumulative, that factor was implicitly accounted for in the Trial Court's imposition of an adverse inference, rather than a more severe sanction. See, e.g., Voom, 93 A.D.3d at 47 (rejecting the defendant's argument that missing emails were cumulative of existing evidence because "[t]he court's imposition of an adverse inference, a lesser sanction than striking of the answer, factored this overlap into account, and reflects 63 Addendum - Excerpts from Pegasus Appellate Division Motion for Reargument and! or Leave to Appeal dated July 7, 2014 - Copy of full brief submitted to Clerk's Office as instructed in connection with Opening Brief Overlooked Facts 16. Second, the Court determined that Pegasus did not even attempt to establish the relevance of the documents that Matlin failed to preserve, but simply relied on the presumption of relevance that applies when a spoliating party has behaved in a grossly negligent manner. 2014 Slip Op. 4047, at 12, n.7, & 16, n.9. This is factually incorrect and in so holding, the Court appears to have overlooked pages 64 through 69 of Pegasus's brief in which it described, category by category, why the destroyed documents would have supported its claim that Matlin was VarigLog's alter-ego, and discredited Matlin's defenses. 17. For example, Pegasus argued that VarigLog's internal emails and other communications-i.e., communications among and between VarigLog employees-would have revealed how Matlin's control affected their job duties, and especially what degree of discretion VarigLog employees had to carry out their job functions free of Matlin's control. See Pegasus's Br. at 66-67. Pegasus pointed to other evidence in the record suggesting that VarigLog's internal communications would have been favorable to it, including an email from a VarigLog employee complaining to a Matlin partner and accusing Matlin of making decisions that were not in VarigLog's best interests.ld.; see also id. at 23 (describing email correspondence in which a Matlin partner told a VarigLog employee what to do). Likewise, Pegasus adduced evidence showing that 8 Addendum - Excerpts from Pegasus Appellate Division Motion for Reargument and/or Leave to Appeal Reply dated August 29,2014 - Copy of full brief submitted to Clerk's Office as instructed in connection with Opening Brief Pegasus Did Indeed Point to Specific Facts from Which the Jury Could Conclude That the Destroyed Documents Would Have Supported Its Claims and Belied Matlin's "Fiscais" Defense. 24. Matlin claims that Pegasus has done nothing more than point to arguments in its brief-not facts-that the Court overlooked in concluding that Pegasus had not carried its burden of establishing that VarigLog's documents would have supported its claims. That is not correct. 25. At pages 64-69 of Pegasus's appellate brief, it described in detail why VarigLog's destroyed internal communications, communications with the fiscais, and other documents would have supported its claims and discredited Matlin's defense. That section of the brief necessarily summarized and referred back to the substantial evidence set forth in pages 11-26 of the brief. Pegasus relied on no fewer than twenty-four pieces of evidence, including Brazilian court orders, VarigLog Board meeting minutes, emails, deposition testimony, and the like, that give rise to the strong inference that had VarigLog's internal communications and communications with the fiscais been preserved, they would have supported Pegasus's claim that Matlin was in control of VarigLog and discredited Matlin's defense that the Brazilian fiscais were in control. This extrinsic evidence included the following: • The April 1, 2008 Brazilian court order giving Matlin the "administration and management of VarigLog" (R. 903-04); 16 • Emails and internal analyses in which Matlin described the Brazilian court order as giving Matlin "control" of Va rig Log and enabling its "takeover" of Va rig Log (R. 465; R. 1130-65); • Emails and deposition testimony describing how Matlin installed its own employees and consultants to run VarigLog (R. 465-66; R. 1167-70; R. 488; R. 1216-19; R. 1189-90; R. 963-64); • Emails showing that Matlin, not the fiscais, decided which of VarigLog' s suppliers and creditors would get paid, in what amount, and when (R. 1199-1200; R. 1201-02; R. 1203-09); • Deposition testimony showing that the fiscais did not exercise any control over VarigLog' s business plan or basic operations (R. 1171-72); • VarigLog Board meeting minutes showing that Matlin appointed the Board (R. 966-67; R. 979-81; R. 964); • Emails showing that Matlin selected VarigLog's senior personnel (R. 1176; R. 1170; R. 1189-90); • Emails and internal analyses showing that Matlin controlled VarigLog's core business activities and how its resources should be spent (R. 1131- 65; R. 1216-17; R. 1199; R. 1203); • Emails and deposition testimony showing that Matlin controlled the negotiations with Pegasus over the return of its planes (R. 1173-74; R. 1211-12); • Emails showing that Matlin decided to put VarigLog in bankruptcy (R. 1214-15); • Emails showing that VarigLog employees were concerned about Matlin's management of the company (R. 1231-32). 26. All of this abundant evidence-no fewer than twenty-four independent pieces-is sufficient for a reasonable trier of fact to conclude that 17 VarigLog's communications with the fiscais and its internal communications would have supported Pegasus's contention that Matlin controlled and dominated VarigLog, and would likewise have discredited Matlin's defense that the Brazilian fiscais were in charge. But this Court's analysis of the relevance requirement shows that it did not take this evidence into account and instead dismissed Pegasus's relevance showing as speculation. Pegasus Aviation 1,987 N.Y.S.2d at 355 ("As to VarigLog's internal emails and email exchanges with the judicial oversight committee, plaintiffs only speculate that these would have provided support for their claim that VarigLog was an alter ego of the MP defendants."). 27. The Court should grant reargument and hold that Pegasus has satisfied its burden of establishing that the lost documents would have supported its claims. To decline to do so will set a precedent by which spoliation movants will almost never be able to satisfy the relevance requirement because if the evidence that Pegasus has marshaled is regarded as "weak," it is hard to imagine what would qualify as a "strong" or at least a "sufficient" showing. Id. at 357. The Court Misconstrued How the Adverse-Inference Charge Would Affect the Jury's Consideration of the Merits and, in So Doing, It Effectively Ruled That Adverse Inferences Are Unavailable, as a Matter of Law, to Plaintiffs in Alter-Ego Cases. 28. The Court reversed the adverse inference against Matlin in large part because it concluded that awarding the plaintiff an adverse inference in an alter- ego case would compel the grant of summary judgment to the plaintiff. Pegasus 18