Pegasus Aviation I, Inc., et al., Appellants,v.Varig Logistica S.A., Defendant, MatlinPatterson Global Advisers, LLC, et al., Respondents.BriefN.Y.October 13, 2015To 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) BRIEF FOR PLAINTIFFS-APPELLANTS RICHARD R. PATCH COBLENTZ PATCH DUFFY & BASS LLP One Ferry Building, Suite 200 San Francisco, California 94111 Tel.: (415) 391-4800 Fax: (415) 989-1663 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 January 29, 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. 13140.010 3047063v4 i TABLE OF CONTENTS Page KEY PLAYERS ......................................................................................................... 1 PRELIMINARY STATEMENT ............................................................................... 2 QUESTIONS PRESENTED ...................................................................................... 9 JURISDICTIONAL STATEMENT ........................................................................ 11 STATEMENT OF THE CASE ................................................................................ 11 A. Facts. .................................................................................................... 11 1. VarigLog Breaches Its Leases With Pegasus. .......................... 11 2. Matlin Purchases VarigLog, An Air-Cargo Company In Brazil. ........................................................................................ 11 3. Matlin And The Brazilians Have A Falling Out, Leading To A Fight For Control Of VarigLog. ...................................... 12 4. The Brazilian Court Grants Matlin’s Requested Relief, Giving It The Right To “Administer” And “Manage” VarigLog. .................................................................................. 13 5. Matlin Violates The Brazilian Court’s Order By Attempting To Take All the Money In VarigLog’s Swiss Account. .................................................................................... 16 6. Matlin Enjoys Complete Managerial Control of VarigLog. .................................................................................. 17 (a) Matlin Appoints VarigLog’s Board Of Directors. ......... 19 (b) Matlin Chooses Lap Chan’s Sister To Serve As VarigLog’s CEO. ............................................................ 20 (c) Matlin Picks Its Insiders To Serve As VarigLog’s New Brazilian Shareholders. .......................................... 20 13140.010 3047063v4 ii (d) Matlin Directs VarigLog’s Core Business Activities. ........................................................................ 21 (e) Matlin Decides How VarigLog’s Resources Should Be Allocated. ...................................................... 21 (f) Matlin Decides How VarigLog Should Settle Its Account With Pegasus And Matlin Conducts The Negotiations With Pegasus. ............................................ 22 (g) Matlin Decides To Put VarigLog In Bankruptcy Proceedings. .................................................................... 23 (h) Matlin Replaces VarigLog’s Outside Counsel With Lawyers More To Matlin’s Liking. ................................ 23 7. Matlin Fails To Take Any Steps To Preserve VarigLog’s Documents Despite Knowing That They Are Vital To This Litigation. .......................................................................... 25 B. Procedural History. .............................................................................. 27 ARGUMENT ........................................................................................................... 29 A. Legal Standards. .................................................................................. 29 1. It Is Well Established That Parties to Litigation Are Required to Implement Comprehensive “Litigation Holds” Preserving All Documents That May Be Relevant to the Claims and Defenses in the Case. ................................... 29 2. This Court Should Clarify That Spoliation Standards Do Not Vary Based on the Nature of the Destroyed Evidence. ................................................................................... 32 B. Both Supreme Court and the Appellate Division Found That Matlin Had Control of VarigLog’s Documents and Therefore a Duty to Preserve Them. ....................................................................... 35 1. The Lower Courts’ Factual Finding as to Matlin’s Control Is Binding on This Court. ............................................ 35 13140.010 3047063v4 iii 2. Overwhelming Evidence Supports the Lower Courts’ Control Finding. ........................................................................ 36 C. Matlin’s Failure to Preserve Documents in Its Control Was at Least Grossly Negligent. ..................................................................... 41 1. Supreme Court Held That Matlin Was Grossly Negligent Because It Did Not Take Any Steps Whatsoever to Preserve VarigLog’s Documents. ............................................. 41 2. The Appellate Division Deemed Matlin’s Conduct Merely Negligent, but Its Reasoning Is Inconsistent With More Persuasive Case Law and Also Inconsistent With Its Own Finding That Matlin Had Control of VarigLog’s Documents and a Duty to Preserve Them. ............................... 44 (a) This Court Should Apply the Law to the Facts Found by Supreme Court and Ignore Any Contrary Facts Found by the Appellate Division. ......................... 47 (b) Matlin’s Preservation of Its “Own” Documents Is Meaningless. ................................................................... 48 (c) Matlin Cannot Pass Off What Was Plainly Its Preservation Duty onto VarigLog or VarigLog’s Counsel. .......................................................................... 49 (d) If Documents Had Been Properly Preserved, VarigLog’s Alleged Computer Crashes Would Have Had No Impact. ..................................................... 51 D. Pegasus Has Satisfied Any Modest Burden It Might Have to Prove the Relevance of the Vast, Unknown Quantity of Documents It Was Prevented From Accessing as a Result of Matlin’s Failure to Preserve Them. ..................................................... 55 1. Because Matlin’s Conduct Was Grossly Negligent, the Relevance of the Destroyed Documents Is Presumed and Pegasus Need Not Affirmatively Prove Relevance. ................. 55 2. Any Burden That an Innocent Party Might Have to Prove Relevance Is Not a Significant One. ......................................... 56 13140.010 3047063v4 iv 3. Pegasus Has Adduced Sufficient Extrinsic Evidence From Which a Trier of Fact Could Conclude That VarigLog’s Internal Communications, Its Communications with the Brazilian Fiscais, and Its Bank Records Would Have Been Favorable to Pegasus. ................... 60 (a) VarigLog’s Communications with the Fiscais. .............. 61 (b) VarigLog’s Internal Communications. ........................... 64 (c) VarigLog’s Bank Records. ............................................. 67 E. The Appellate Division’s Holding Must Be Reversed Because It 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. ......................... 70 CONCLUSION ........................................................................................................ 73 13140.010 3047063v4 v TABLE OF AUTHORITIES Page(s) Cases 915 Broadway Assocs., LLC, v. Paul, Hastings, Janofsky & Walker, LLP 34 Misc.3d 1229(A), 2012 N.Y. Misc. LEXIS 708 (Sup. Ct. N.Y. Cty. 2012) ............................................................................ 43, 58 Ahroner v. Israel Disc. Bank of N.Y., 79 A.D.3d 481 (1st Dep’t 2010) ............................................................. 41, 42, 56 Alleva v. UPS, 112 A.D.3d 543 (1st Dep’t 2013) ....................................................................... 58 Biniachvili v. Yeshivat Shaare Torah, Inc., 120 A.D.3d 605 (2d Dep’t 2014) ........................................................................ 32 Campaign for Fiscal Equity, Inc. v. State, 100 N.Y.2d 893 (2003) ....................................................................................... 52 Chartis Prop. Casualty Co. v. Olmsted, No. 152088/12, 2014 N.Y. Misc. LEXIS 2063 (Sup. Ct. N.Y. Cty. Apr. 28, 2014) .................................................................... 34 Cheng v. Lakeforest Assocs., LLC, No. CBD-13-1365, 2014 U.S. Dist. LEXIS 88421 (D. Md. June 30, 2014) ....................................................................................... 37 Coral Group, Inc. v. Shell Oil Co., 286 F.R.D. 426 (W.D. Mo. 2012) ....................................................................... 37 County of Erie v. Abbott Laboratories, Inc., 30 Misc.3d 837 (Sup. Ct. Erie Cty. 2010) .......................................................... 43 Dorchester Fin. Holdings Corp. Banco BRJ, S.A., No.11-cv-1529, 2014 U.S. Dist. LEXIS 146666 (S.D.N.Y. Sept. 12, 2014) ................................................................................... 54 13140.010 3047063v4 vi Duluc v. AC&L Food Corp., No. 302417/10, 2014 N.Y. App. Div. LEXIS 5214 (1st Dep’t July 10, 2014) .................................................................................... 34 Enstrom v. Garden Place Hotel, 27 A.D.3d 1084 (4th Dep’t 2006) ....................................................................... 32 Ezzard v. One East River Place Realty Co., LLC, No. 114803/08, 2014 N.Y. Misc. LEXIS 755 (Sup. Ct. N.Y. Cty. Feb. 19, 2014) ..................................................................... 34 Glenbriar Co. v. Lipsman, 5 N.Y.3d 388 (2005) ........................................................................................... 36 Gordon Partners v. Blumenthal (In re NTL Inc. Sec. Litig.), 244 F.R.D. 179 (S.D.N.Y. 2007) ........................................................................ 36 Hameroff & Sons, LLC v. Plank, LLC, 36 Misc. 3d 1229(A), 959 N.Y.S.2d 89 (Sup. Ct. Albany Cty. 2012) ............................................................................... 30 Harry Weiss, Inc. v. Moskowitz, 106 A.D.3d 668 (1st Dep’t 2013) ....................................................................... 43 Haskins v. First Am. Title Ins. Co., No. 10-5044, 2012 U.S. Dist. LEXIS 149947 (D. N.J. Oct. 18, 2012) ........................................................................................ 36 Hawley v. Mphasis Corp., 302 F.R.D. 37 (S.D.N.Y. 2014) .......................................................................... 45 Johnson v. Edwards, 41 Misc. 3d 756, 971 N.Y.S.2d 848 (Sup. Ct. Kings Cty. 2013) ....................... 30 Keane v. Keane, 8 N.Y.3d 115 (2006) ........................................................................................... 36 Mangione v. Jacobs, 37 Misc. 3d 711, 950 N.Y.S.2d 457 (Sup. Ct. Queens Cty. 2012) ..................... 30 Morris v. New York State Dep’t of Taxation & Fin., 82 N.Y.2d 135 (1993) ......................................................................................... 71 13140.010 3047063v4 vii New York City Housing Auth. v. Pro Quest Security, Inc., 108 A.D.3d 471 (1st Dep’t 2013) ....................................................................... 58 Ortega v. City of New York, 9 N.Y.3d 69 (2007) ....................................................................................... 31, 32 Pegasus Aviation I, Inc. v. Varig Logistica, SA, 118 A.D.3d 428 (1st Dep’t June 5, 2014) ....................................................passim Pension Committee of University of Montreal Pension Plan v. Banc of America Securities, 685 F. Supp.2d 456 (S.D.N.Y. 2010) ..........................................................passim Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99 (2d Cir. 2002) ........................................................................... 56, 59 Roberts v. Corwin, 41 Misc. 3d 1210(A), 980 N.Y.S.2d 278 (Sup. Ct. N.Y. Cty. 2013) ................ 30 Sage Realty Corp. v. Proskauer Rose LLP, 275 A.D.2d 11 (1st Dep’t 2000) ......................................................................... 57 Santana v. Castillo, 114 A.D.3d 621 (1st Dep’t 2014) ....................................................................... 58 Sekisui American Corp. v. Hart, 945 F. Supp.2d 494 (S.D.N.Y. 2013) ........................................................... 45, 53 Stern v. DMG World Media (USA), Inc., No. 112119/10, 2013 N.Y. Misc. LEXIS 6246 (Sup. Ct. N.Y. Cty. Dec. 26, 2013) ..................................................................... 34 Strong v. City of New York, 112 A.D.3d 15 (1st Dep’t 2013) ..................................................................passim In re Terrorist Attacks on September 11, 2001, No. 03-1570, 2013 U.S. Dist. LEXIS 155085 (S.D.N.Y. Oct. 28, 2013) .............................................................................. 59, 63 Voom HD Holdings LLC v. EchoStar Satellite LLC, 93 A.D.3d 33 (1st Dep’t 2012) ....................................................................passim 13140.010 3047063v4 viii Wachovia Secs. LLC v. Loop Corp., No. 05-C-3788, 2008 U.S. Dist. LEXIS 49251 (N.D. Ill. June 27, 2008) ..................................................................................... 36 Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003) .................................................................passim Statutes C.P.L.R. § 5602(b)(1) .............................................................................................. 11 Other Authorities N.Y. Const. Art. VI, § 3 ........................................................................................... 36 NEW DEVELOPMENTS IN EVIDENTIARY LAW IN NEW YORK 2014 ED., 2014 WL 2344834 .............................................................................................. 30 Prosser & Keeton on Torts § 34 (5th ed. 1984) ....................................................... 46 13140.010 3047063v4 1 KEY PLAYERS Lap Chan: Matlin partner in charge of the firm’s investment in VarigLog. Santiago Born: Matlin partner, second in command to Chan, appointed as VarigLog’s administrator. Peter Miller: Senior Matlin employee and Brazilian national appointed by Matlin to VarigLog’s Board of Directors and Matlin’s choice to serve as one of VarigLog’s new shareholders. Lup Ohira: Sister of Lap Chan and Brazilian national appointed by Matlin (1) to VarigLog’s Board of Directors, and (2) to serve as VarigLog’s CEO, and also Matlin’s choice to serve as one of VarigLog’s new shareholders. Mario Abad: Matlin consultant in charge of negotiating with VarigLog’s creditors, such as Pegasus, and improving VarigLog’s flight and cargo operations. Roula Zaarour: Matlin consultant in charge of downsizing VarigLog’s international operations and re-organizing its IT systems. Ladislav Petric: Matlin consultant in charge of the maintenance of VarigLog’s aircraft. Volo Logistics, LLC (“Volo”): Delaware company formed by Matlin for the purpose of buying VarigLog. Volo owned a majority of the equity in Volo do Brasil, SA, which in turn owned VarigLog. Volo do Brasil, SA (“VdB”): Brazilian company formed by Matlin and three Brazilian businessmen to purchase VarigLog. Direct owner of VarigLog. 13140.010 3047063v4 2 PRELIMINARY STATEMENT When a party to litigation intentionally or negligently destroys evidence, the integrity of judicial administration requires that party to suffer sanctions that can take any one of various forms. Supreme Court has the discretion to fashion an appropriate remedy that may range in severity from an imposition of costs at the low end of the spectrum to, in escalating order, an adverse-inference charge, the preclusion of evidence, or the ultimate sanction of a default judgment. This case presents the question of whether a party that has a clear legal duty to preserve documents for use in litigation, but admittedly does absolutely nothing, should be sanctioned for that wrongdoing when tens of thousands of probative documents are lost as a result. Approximately ten years ago, Plaintiff-Appellant Pegasus1 leased three cargo planes to Defendant Varig Logistica, S.A. (“VarigLog”), a Brazilian air- cargo company. Starting in 2006, VarigLog was owned and controlled by Defendant-Appellee MatlinPatterson,2 a New York-based private-equity company. In 2007, VarigLog defaulted on the lease agreements and at Matlin’s direction, it refused to pay Pegasus millions of dollars in past-due rent and likewise refused to 1 The Plaintiffs-Appellants in this case are Pegasus Aviation I, Inc., Pegasus Aviation IV, Inc., and Pegasus Aviation V, Inc., and will be collectively referred to as “Pegasus.” 2 There are six Defendants-Respondents in this appeal that shall be collectively referred to as “Matlin”: (1) MatlinPatterson Global Advisers, LLC; (2) MatlinPatterson Global Opportunities Partners II, LP; (3) MatlinPatterson Global Opportunities Partners (Cayman) II, LP; (4) Oskars Investments Ltd.; (5) Volo Logistics LLC; and (6) Volo do Brasil, S.A. 13140.010 3047063v4 3 return the planes. Pegasus ultimately sued both VarigLog and Matlin, alleging breach-of-contract and conversion claims against the former, and alter-ego and conversion claims against the latter. Discovery in this case was protracted and in the words of Supreme Court (N.Y. County, Commercial Division), “tortured.” For years, VarigLog refused to produce documents and ultimately turned over only a minuscule proportion of what it should have produced. As a result of numerous discovery motions filed by Pegasus, conferences before a referee, and orders issued against VarigLog by Supreme Court, the truth finally emerged: VarigLog had almost no documents to produce—neither paper nor electronic documents—because nothing had been done to preserve them. The destruction of VarigLog’s documents did not simply implicate VarigLog in wrongdoing. Rather, the facts show—and Supreme Court and the Appellate Division agreed—that Matlin played a principal role as well. Through documents produced by Matlin, as well as depositions of both Matlin and VarigLog personnel, Pegasus learned that Matlin exercised substantial day-to-day management of VarigLog, and that in fact, it had been given the right to “administer and manage” VarigLog by a Brazilian court presiding over a dispute between Matlin and three Brazilian VarigLog shareholders (who Matlin had initially installed and funded to circumvent Brazilian ownership restrictions). 13140.010 3047063v4 4 Emails and testimony of Matlin’s own personnel confirm that beginning in April 2008, they were regularly present in VarigLog’s São Paulo offices, created and implemented VarigLog’s business plan, and directed its most basic operations, from the planes and routes it would fly, to the creditors it would pay (or not pay) and the service providers it would do business with. Discovery also showed that its intimate control of VarigLog gave Matlin ready access to VarigLog’s paper and electronic records. Matlin’s central defense has been that it lacked the ability to dominate VarigLog or convert Pegasus’s planes because its management of VarigLog was entirely subordinate to the supervision of three monitors appointed by the Brazilian court called “fiscais.” According to Matlin, it was the fiscais who held the true power at VarigLog. Pegasus, of course, intends to prove otherwise. But whether Pegasus ultimately can and does prove that Matlin dominated and controlled VarigLog for purposes of its alter-ego claim is neither the issue on this appeal nor relevant to the spoliation claim. The record shows, and both Supreme Court and the Appellate Division found, that Matlin had more than sufficient direct control over VarigLog’s documents to trigger preservation obligations. The mere fact that at trial Pegasus will have to prove a different kind of control to establish its alter-ego claim (it also has a viable conversion claim), does not somehow relieve Matlin of 13140.010 3047063v4 5 its preservation obligations or require some greater showing by Pegasus on a spoliation motion. Indeed, the standard Pegasus must meet at trial merely reinforces the critical nature of the lost material. The loss of virtually all of VarigLog’s documents is deeply prejudicial to Pegasus. It means that Pegasus will have to go to trial without the evidence that would have best enabled it to discredit Matlin’s “fiscais defense.” For example, Pegasus has been deprived of all of VarigLog’s communications with the fiscais, which Pegasus would have used to establish that they were little more than bystanders to Matlin’s absolute administration and control of VarigLog. Pegasus has similarly been deprived of all of VarigLog’s internal communications between its own employees. These too would have substantially aided Pegasus in proving that Matlin personnel, not VarigLog personnel or the fiscais, were running the company, and that it was Matlin who determined the fate of the Pegasus planes. Finally, Pegasus never received a full set of VarigLog’s bank records for the period in question. These documents would have entitled Pegasus to show that Matlin’s domination of VarigLog directly benefitted Matlin at Pegasus’s expense: at the same time it was preventing VarigLog from paying for Pegasus’s planes, it required VarigLog to pay millions of dollars to other Matlin-owned entities. The sheer volume of destroyed VarigLog documents and the resulting prejudice to Pegasus left it with no choice: Pegasus filed sanctions motions against 13140.010 3047063v4 6 both VarigLog and Matlin, seeking a default judgment against the former and an adverse inference against the latter. Pegasus argued that Matlin’s far-reaching control of its subsidiary meant that it had a duty to preserve VarigLog’s documents for use in this litigation, something Matlin admits it never did. Supreme Court granted both motions. VarigLog did not appeal, but Matlin did. A divided 3-2 panel of the First Department reversed. The Appellate Division unanimously agreed with Supreme Court that Matlin had control of VarigLog’s documents and therefore a duty to institute preservation measures to ensure their availability for use in this case. The Appellate Division also agreed with Supreme Court that Matlin had done absolutely nothing to comply with this preservation duty. Nonetheless, the Appellate Division held that Matlin’s wrongdoing amounted to only simple negligence whereas Supreme Court had deemed Matlin grossly negligent. One of the questions for this Court is whether the established facts support a finding of gross negligence or only simple negligence. The issue is a threshold question because while even simple negligence may form the basis for an imposition of sanctions, the degree of the spoliator’s culpability determines whether the innocent party bears some burden of proving the relevance of the destroyed documents. 13140.010 3047063v4 7 As discussed below, the Appellate Division’s simple negligence finding is fundamentally flawed because it ignores the gravity of Matlin’s failure in doing absolutely nothing to preserve VarigLog’s documents. Courts have found spoliators grossly negligent even where they implement incomplete or inadequate litigation holds. By comparison, it makes no sense to treat the total abdication of this responsibility as merely negligent. The Appellate Division’s mere negligence finding meant that it required Pegasus to affirmatively prove that the destroyed documents—thousands of VarigLog internal emails, bank records, and communications with the Brazilian fiscais—were relevant, meaning that they likely would have supported Pegasus’s claims. The Appellate Division concluded that Pegasus had not carried this burden. That holding triggers a second question for this Court: Assuming that the proven misconduct amounted to only simple negligence, did Pegasus satisfy the relevance requirement? As discussed below, the majority’s holding that Pegasus did not is clearly an unreasonable application of the relevance requirement that is not supported by case law, or the evidence in this case. To the extent Pegasus bore any burden to prove relevance, that burden was a modest one that Pegasus easily satisfied. It pointed to specific deposition testimony, emails, and related documents that lead to a single conclusion—the destroyed documents would indeed have been favorable to its 13140.010 3047063v4 8 claims and undermined Matlin’s defenses. The Appellate Division’s contrary holding reflects an excessive and unrealistic demand that innocent victims of spoliation make a rigorous showing as to the contents of the very documents they have been prevented from reviewing by the spoliating party’s destruction. Such an interpretation risks creating a jurisprudence in which innocent parties deserving of relief will be denied it and spoliating parties deserving of punishment will escape it. Supreme Court had presided over this case for more than four years by the time it granted Pegasus’s motion and had a long history with the parties’ discovery disputes. Its factual findings are supported by the record and its legal conclusions supported by the law. Allowing the Appellate Division’s reversal of that order to stand will mean that Matlin will not suffer any consequences for what both Supreme Court and the Appellate Division agreed was its culpable behavior in failing to take any steps to preserve VarigLog’s documents. Indeed, the only party that will suffer any consequence will be Pegasus through a diminished ability to prove its claims and discredit Matlin’s defenses. The law does not support such an inequitable outcome. This Court should reverse the order of the Appellate Division and reinstate the adverse-inference charge against Matlin. 13140.010 3047063v4 9 QUESTIONS PRESENTED 1. Where the Appellate Division affirms a factual finding of Supreme Court and that finding is substantially supported by the record, there are no grounds for this Court to overturn it. Here, Supreme Court found that Matlin had control of VarigLog’s documents and therefore a duty to preserve them; the Appellate Division affirmed that finding; and the record is replete with evidence supporting it. Is there any basis for this Court to reverse that “control” finding? 2. Courts have held that parties who incompletely or inadequately preserve documents are grossly negligent. Likewise, the lower courts across the State have held that a finding of gross negligence is proper when a party fails to do any one of the following things: (1) issue a written litigation hold, (2) identify all persons likely to have relevant information and ensure that their paper and electronic records are preserved, and (3) stop automatic deletion protocols. Where there is no dispute that Matlin did not undertake any preservation measures at all, including any of the three enumerated above, did it behave in a grossly negligent way? 3. Assuming that an innocent party has some burden of showing that destroyed documents were “relevant” insofar as they would have been favorable to the innocent party, courts have repeatedly cautioned that this is a “limited” and “not too strict” burden because the very destruction of the evidence makes it 13140.010 3047063v4 10 impossible to definitively ascertain its contents. Where Pegasus has cited specific deposition testimony, emails, Brazilian court orders, and related documents establishing that VarigLog’s now destroyed internal communications, bank records, and communications with the Brazilian fiscais would have supported Pegasus’s alter-ego and conversion claims and belied Matlin’s defenses, has Pegasus satisfied its “limited” and “not too strict” burden of proving relevance? 4. When an innocent party establishes that the opposing party had control of certain relevant documents and failed to preserve them, spoliation sanctions should be imposed for the destruction of the documents. Where Pegasus made the necessary showing here, was an adverse-inference charge properly imposed against Matlin? 5. To obtain sanctions against Matlin, Pegasus must prove in part that Matlin had control over VarigLog’s destroyed documents (which both Supreme Court and the Appellate Division found). To prevail on the merits of its alter-ego claim, on the other hand, Pegasus must prove that Matlin had control of VarigLog, and specifically VarigLog’s relationship with Pegasus. Where the required control showings are different—control over documents versus control over VarigLog—is there any risk that imposing an adverse inference against Matlin will automatically result in an alter-ego judgment for Pegasus, such that innocent parties should be completely precluded from receiving adverse-inference sanctions? 13140.010 3047063v4 11 JURISDICTIONAL STATEMENT This Court has jurisdiction under C.P.L.R. § 5602(b)(1) to review an order of the Appellate Division (R. 1237-64) which does not finally determine an action. The Appellate Division granted Pegasus’s motion for leave to appeal on November 18, 2014. (R. 1236.) The issues raised in this appeal were raised before Supreme Court and decided by the Appellate Division. (R. 9-43, 1237-64.) STATEMENT OF THE CASE A. Facts. 1. VarigLog Breaches Its Leases With Pegasus. In 2005 and 2006, Pegasus leased three cargo planes to VarigLog. At about the same time, the private-equity fund MatlinPatterson decided to purchase VarigLog. (R. 690-92 [Chan Tr.] at 33:11-35:4; R. 636 [Hefter Aff.], ¶¶3-6.) Beginning in September 2007, VarigLog defaulted on its lease agreements by failing to pay millions of dollars in rent owed to Pegasus. VarigLog and its new parent, Matlin, refused to return the planes to Pegasus for over two years and failed to properly maintain them during that period, causing substantial and avoidable damage. 2. Matlin Purchases VarigLog, An Air-Cargo Company In Brazil. Matlin invests in failing companies with the goal of turning them around and then selling them for a profit. Brazilian law prohibits foreigners from owning majority stakes in Brazilian airlines. Matlin therefore recruited three Brazilian 13140.010 3047063v4 12 businessmen to front as its investment partners, thus giving its purchase of VarigLog the needed legal cover. (R. 723-24 [Born Tr.] at 46:12-47:1; R. 694 [Chan Tr.] at 94:6-23.) Matlin and the Brazilians owned VarigLog through two subsidiaries. Matlin formed a Delaware company called Volo Logistics, LLC (“Volo”), which was a wholly-owned company of Matlin Fund II. (R. 636, ¶1.) Volo then had an ownership stake in Volo do Brasil, SA (“VdB”), a Brazilian company which in turn owned VarigLog. (R. 636, ¶¶4-6.) Matlin controlled one-hundred percent of VarigLog’s equity. (R. 636, ¶7.) To satisfy Brazil’s aviation-ownership law, however, the Brazilian businessmen initially owned eighty percent of VdB’s voting shares, and Matlin owned the remaining twenty percent. (Id.; R. 903 [Brazilian Order].) None of the Brazilians contributed any of their own money to the purchase transaction, and Matlin at all times had the right to force them to sell their shares to Matlin on demand. A Brazilian court later determined that the Brazilians’ involvement as “investors” was a sham designed to circumvent the requirements of the country’s airline ownership law. (R. 903 [Brazilian Order].) 3. Matlin And The Brazilians Have A Falling Out, Leading To A Fight For Control Of VarigLog. In approximately mid-2007, Matlin and its three Brazilian partners got into a heated dispute when the Brazilians failed to follow Matlin’s instruction to repay certain loans that Matlin had extended to VarigLog through Volo. (See R. 637-39 13140.010 3047063v4 13 [Hefter Aff.], ¶¶8-15.) The purpose of the loans was to help VarigLog fund the acquisition and re-sale of its old parent company, Varig. (Id.) When VarigLog sold Varig, Matlin demanded that its loans be repaid out of the proceeds of the sale. (Id.) The Brazilians refused and deposited the cash proceeds— approximately $98 million—in a Swiss bank account. (Id.) Matlin responded by attaching the account. (Id.) The rift continued to widen, with each side filing litigation against the other, and with the Brazilians temporarily denying Matlin access to VarigLog. (R. 149 [Ehlert Aff.], ¶69; R. 903-04 [Brazilian Order].) In the Brazilian court that presided over the parties’ dispute, Matlin sought an order ousting its erstwhile partners, and demanded the right to exercise total control over VarigLog. (Id.) 4. The Brazilian Court Grants Matlin’s Requested Relief, Giving It The Right To “Administer” And “Manage” VarigLog. On April 1, 2008, the Brazilian court granted Matlin’s request and cleared the way for it to “take over the administration and management” of VdB and VarigLog. (R. 903-04 [Brazilian Order].) Under the terms of this provisional order, which became final in December 2008, Matlin (through Volo) became the sole shareholder of VdB, which in turn was the sole shareholder of VarigLog. (Id.; R. 799-809 [Brazilian Order].) The April 1 court order vested “administration and management” of VarigLog in Matlin (specifically, Volo). (R. 903-04 [Brazilian Order].) The 13140.010 3047063v4 14 decision gave Matlin, as VarigLog’s ultimate parent and sole shareholder, the exclusive power to appoint the company’s Board and hire its officers, which Matlin promptly did. The April 1 order also explained that in exchange for receiving the right to manage VarigLog, Matlin had agreed to use the cash in the Swiss account to pay VarigLog’s operating expenses, and not to repay the Volo loans. (Id.) The order closed the proceedings for “judicial administration” and opened new proceedings for “judicial oversight.”3 (Id.) The court said that it would retain two persons to act as overseers (referred to as the “fiscais”), but it did not delineate in any way their role or responsibilities. (Id.) Matlin internally described the Brazilian court’s order as granting it “control” of VarigLog and also characterized this resumption of control as a “takeover.” (R. 465 [Email chain between Matlin’s Abad and Born]; R. 1130-65 [August 2008 “Investment Update”].) Matlin made the same representations to third parties. Indeed, Matlin—not VarigLog—reached out to Pegasus just three days after the Brazilian court order was issued. (R. 467 [Email chain between Matlin’s Abad and Pegasus’s Sarria].) Matlin consultant Mario Abad told Pegasus that Matlin “got [V]ariglog back” and asked about settling the amounts VarigLog owed Pegasus. (Id.) 3 The reference to “judicial administration” pertained to a period in early February and March 2008, during which VarigLog was managed by court-appointed administrators while the court considered whether to grant Matlin’s petition. 13140.010 3047063v4 15 Matlin didn’t waste any time in assuming the reins at VarigLog. It immediately installed its own team of Matlin employees and consultants to run the company. (R. 465-66 [Email chain between Matlin’s Born and Abad].) This team was led by Lap Chan, the Matlin partner responsible for the specific Matlin fund (“Fund II”) that owned VarigLog. (R. 1167-69 [Miller Tr.] at 32:17-33:3, 34:6-8.) Chan supervised several Matlin partners and consultants who were responsible for different aspects of VarigLog’s business. Matlin partner Santiago Born focused on VarigLog’s finances and was appointed as VarigLog’s administrator by the Brazilian court as a result of misconduct committed by Chan (more on that below). (R. 481 [Brazilian Order]; R. 1167, 1169-70 [Miller Tr.] at 32:17-25, 34:24-35:2.) Matlin consultant Mario Abad negotiated settlements with VarigLog’s creditors and focused on the company’s cargo operations, including the routes it flew. (R. 1169 [Miller Tr.] at 34:6-20; R. 488 [Abad Tr.] at 60:20-23.) Consultant Roula Zaarour was responsible for restructuring VarigLog’s IT systems and downsizing its international operations. (R. 1168-69 [Miller Tr.] at 33:18-22, 34:13-15; R. 1216-19 [Emails from Zaarour].) Consultant Ladislav Petric was in charge of overseeing the maintenance of VarigLog’s aircraft. (R. 1168-69 [Miller Tr.] at 33:18-22, 34:21-23.) The team was further complemented by three Matlin associates who mainly supported Born’s efforts to straighten out VarigLog’s finances. (R. 1167-70 [Miller Tr.] at 32:17-33:9, 34:24-35:6.) And before long, 13140.010 3047063v4 16 Matlin employee Peter Miller and Lap Chan’s sister, Lup Chan Ohira, both Brazilian citizens, would join the team as VarigLog directors and proposed shareholders (taking the place of the ousted Brazilians to satisfy the airline- ownership restriction). (R. 1170 [Miller Tr.] at 35:5-21; R. 1189-90 [Ohira Tr.] at 58:22-59:24; R. 964 [Table B].) Ohira would ultimately become CEO of VarigLog. (R. 963 [Table A].) 5. Matlin Violates The Brazilian Court’s Order By Attempting To Take All the Money In VarigLog’s Swiss Account. Less than two weeks after the Brazilian court had granted Matlin control over VarigLog, the court learned that Lap Chan had attempted to transfer the entire balance of VarigLog’s Swiss bank account to Volo. (R. 1193-95 [Brazilian Orders].) The court was highly disturbed, concluding that Chan’s conduct was a direct violation of its April 1 order. (Id.) Based on Matlin’s theft attempt, the Brazilian court ordered the seizure of Chan’s passport and said that “papers [should] be forwarded to the Federal Police.” (Id. at 1195.) A few days later at a hearing attended by Santiago Born, the court prohibited the disbursement of money out of the Swiss account without the prior approval of the fiscais and the court. (R. 922-24, at 923 [Brazilian Order].) This was the only issue on which the court exercised any direct oversight over how Matlin managed VarigLog and it did so in direct response to Matlin’s attempt to empty the Swiss account. 13140.010 3047063v4 17 6. Matlin Enjoys Complete Managerial Control of VarigLog. Throughout this litigation, Matlin has claimed that its role at VarigLog was limited to “monitoring” its investment “for a short period of time” in 2008, and that VarigLog’s management was “strictly supervised” by the court-appointed fiscais “that controlled VarigLog’s major decisions.” (See excerpts from Respondents’ Appellate Division brief (Appellants below), annexed as an Addendum hereto.) These assertions are false. For starters, there is no evidence that the fiscais approved of any payments to anyone except those that involved disbursements from VarigLog’s Swiss bank account. And as already described, that supervision only came about because Matlin had attempted to transfer all of that cash to itself. Moreover, it was Matlin that made the decisions in the first place about which of VarigLog’s suppliers and creditors to pay, in what amount, and when. (R. 1199-1200 [Email chain between Matlin’s Chan and Born]; R. 1201-02 [Email chain between Matlin’s Chan, Miller and Abad]; R. 1203-09 [Email chain between Matlin’s Chan and VarigLog’s Araujo].) Moreover, Peter Miller’s testimony belies Matlin’s contention that it was a mere “monitor” bereft of any real authority over VarigLog. Miller, a senior Matlin employee, was appointed by Matlin to VarigLog’s Board and nominated as the new Brazilian shareholder to replace the ousted shareholders (Miller held dual 13140.010 3047063v4 18 citizenship in the United States and Brazil). Miller testified that the fiscais did not exercise any control over basic business operations: Q: Was the approval of the fiscai need to terminate employees at VarigLog? A: No. Q: Was the approval of the fiscai needed to hire employees at VarigLog? A: No. Q: Was the approval of the fiscai needed with respect to the routes that VarigLog’s fleet would fly? A: No. Q: Was the approval of the fiscai needed for any marketing materials or campaigns that VarigLog might use or initiate? A: No. Q: Was the approval of the fiscai needed for VarigLog to bid on any business contracts? A: No. (R. 1172 [Miller Tr.] at 53:4-21.) Similarly, Miller testified that while the fiscais reviewed business plans, they did not dictate the contents of those plans or oppose Matlin’s wishes: Q: So did the fiscai ask questions then about the projections or the business plan? A: Yes. Q: Did they demand any changes to proposals presented to them about how to operate VarigLog? A: No, they didn’t demand any changes. They asked questions and provided their views on certain issues. Q: Did anything that any of the fiscai ever said in relation to business projections or business plans ever cause VarigLog to change its business plan? A: I would say no. 13140.010 3047063v4 19 (R. 1171-72 [Miller Tr.] at 52:13-53:3.) Consistent with Miller’s testimony, the facts show that Matlin wielded extensive, indeed unmatched, power to “administer and manage” VarigLog: (a) Matlin Appoints VarigLog’s Board Of Directors. The Brazilian court’s April 1, 2008 order gave Matlin the exclusive authority to appoint VarigLog’s Board of Directors, which Matlin promptly did. On April 8, at a meeting attended by only three people—Matlin partners Lap Chan and Santiago Born, and VarigLog’s CEO—VarigLog’s prior directors were removed and its three new directors were installed. (R. 966-67.) Matlin later added two of its insiders as directors, Peter Miller and Lup Chan Ohira, Lap Chan’s sister. (R. 964, 979-81.) Chan, again, was the Matlin partner responsible for Matlin’s investment in VarigLog, making the appointment of his sister something far less than a disinterested choice. Beginning in May 2008, Matlin controlled the Presidency of the Board because first Miller, then Ohira, continuously held that post throughout Matlin’s “administration and management” of VarigLog. (R. 964.) There is no evidence that Matlin sought the approval of the fiscais or the Brazilian court for these Board appointments or that such approval was required. 13140.010 3047063v4 20 (b) Matlin Chooses Lap Chan’s Sister To Serve As VarigLog’s CEO. Matlin’s hand-picked Board then appointed VarigLog’s officers. In November 2008, the person Matlin originally selected to serve as the company’s CEO was replaced, and Matlin was behind that decision. On October 28, 2008, Lap Chan emailed his boss, David Matlin, to confirm that he would discuss management changes at VarigLog with Matlin before making any final decisions but that “[t]he only position that I might need to move quickly this week is the President and we all are in agreement of him leaving ([P]eter [Miller], [S]anti[ago] [Born], and myself).” (R. 1176.) Conveniently, the person chosen to replace the outgoing President was Chan’s sister, Lup Ohira, even though she had no experience in the aviation industry and had never held a comparable position. (R. 1179-88, 1191 [Ohira Tr.] at 17:20-22, 19:8-21:23, 32:18-38:4, 61:19-25.) There is no evidence that Matlin sought the approval of the fiscais or the Brazilian court to replace VarigLog’s President with Lap Chan’s sister, or that such approval was required. (c) Matlin Picks Its Insiders To Serve As VarigLog’s New Brazilian Shareholders. Since the April 1 court order left Matlin as VarigLog’s only shareholder, it had to identify Brazilian citizens it could partner with to satisfy the aviation- ownership law. Matlin once again tapped its own insiders—Miller and Ohira—to 13140.010 3047063v4 21 fulfill this role. (R. 1170 [Miller Tr.] at 35:7-21; R. 1189-90 [Ohira Tr.] at 58:22- 59:24.) There is no evidence that Matlin sought the approval of the fiscais or the Brazilian court to name them as proposed shareholders of VarigLog, or that such approval was required. (d) Matlin Directs VarigLog’s Core Business Activities. Matlin decided what planes and routes VarigLog would fly, what cargo contracts it should bid on, and how it should be staffed, electing to substantially downsize its employees. (R. 1131-65 [“Investment Update”]; R. 1216-17 [Email chain between Matlin’s Zaarour, Miller, Born, and Abad].) Matlin even oversaw VarigLog’s IT applications. In April 2008, Matlin consultant Roula Zaarour sent an email update to her Matlin colleagues about her efforts to reduce VarigLog’s IT expenses and “re-design the whole infrastructure.” (R. 1216-17.) There is no evidence that Matlin sought the approval of the fiscais or the Brazilian court concerning VarigLog’s planes, routes, contract bids, decisions to downsize, or changes to the company’s IT architecture, or that such approval was required. (e) Matlin Decides How VarigLog’s Resources Should Be Allocated. It was Matlin that decided which of VarigLog’s creditors would be paid and the terms of payment. Lap Chan himself played a pivotal role in determining how VarigLog’s resources should be spent. For example, at one point, he criticized a financial plan Born had prepared for VarigLog, instructing Born to preserve 13140.010 3047063v4 22 VarigLog’s cash for its operational needs and avoid paying it to VarigLog’s creditors: “[P]reserving cash outline [sic] is important and really require an important step. Can’t pay out a lot to old creditors . . . a lot of the numbers are crazy.” (R. 1199.) Chan likewise directed that certain payments should be delayed, or not made at all. For instance, when an aircraft maintenance provider refused to return fan blades belonging to one of the Pegasus planes unless and until VarigLog paid its debt to the provider, Chan told a VarigLog employee not to pay. He reasoned that because the maintenance provider was “holding assets that are for aircrafts that we are not using, I see no reason why we should do business with them.” (R. 1203.) There is no evidence that Matlin consulted the fiscais and the Brazilian court concerning which VarigLog suppliers and creditors to pay or not to pay, or that such consultation was required. (f) Matlin Decides How VarigLog Should Settle Its Account With Pegasus And Matlin Conducts The Negotiations With Pegasus. After it resumed control of its subsidiary, Matlin (and Matlin alone) undertook direct negotiations with Pegasus to attempt to settle the rent arrearages VarigLog owed Pegasus. Lap Chan and Peter Miller determined that any settlement with Pegasus had to be a “global settlement” and that they would not return Pegasus’s planes without first obtaining concessions from Pegasus concerning VarigLog’s outstanding liability. (R. 1173-74 [Miller Tr.] at 130:12- 13140.010 3047063v4 23 131:15; R. 1211-12 [Chan Tr.] at 268:16-269:13.) There is no evidence that the fiscais or the Brazilian court knew about these negotiations. (g) Matlin Decides To Put VarigLog In Bankruptcy Proceedings. Lap Chan made the decision to have VarigLog petition for bankruptcy protection. In an email in December 2008, he confided that he had “[d]ecided to send Variglog into bankruptcy process” and that he was “getting things legally in place hopefully.” (R. 1214-15.) There is no evidence that Matlin sought the approval of the fiscais or the Brazilian court to have VarigLog file for bankruptcy protection at the time Chan said the process was underway. (h) Matlin Replaces VarigLog’s Outside Counsel With Lawyers More To Matlin’s Liking. Finally, Matlin supervised litigation to which VarigLog was a party by, at a minimum, hiring VarigLog’s counsel. Having supervised this aspect of VarigLog’s litigation, it is safe to assume that Matlin could have, and should have, supervised document preservation efforts at VarigLog. At the time the April 1 Brazilian order was issued, VarigLog was a defendant in two lawsuits, one brought by Pegasus in Florida state court to seize one of its planes that had landed at Miami International Airport, and the other brought by Matlin affiliate Volo in New York state court for repayment of the loans it had extended to VarigLog (the same money that had been the subject of the attempted Swiss account theft). (R. 142-43 [Ehlert Aff.], ¶¶75-80.) After 13140.010 3047063v4 24 resuming control of VarigLog, Matlin replaced VarigLog’s counsel in both cases. In the Florida case, Matlin chose a law firm that just a few months earlier had represented another Matlin affiliate in a suit against VarigLog. (Id., ¶78.) In the New York Volo action, Matlin not only replaced VarigLog’s counsel, but continued to litigate against it for the money in the Swiss bank account, even though it was firmly in charge of VarigLog thanks to the April 1 court order. (Id., ¶79.) The counsel Matlin chose to defend VarigLog did a rather lax job of it: He failed to file any opposition to Matlin’s summary judgment motion, resulting in a multi-million-dollar judgment for Matlin (i.e., Volo) against VarigLog. (Id.) * * * These facts, taken together, demonstrate that Matlin’s “administration and management” of VarigLog was almost completely unfettered, and the only restriction Matlin was subjected to—obtaining approval for withdrawals from VarigLog’s Swiss account—was one of Matlin’s own making. Likewise, it is clear that VarigLog’s officers and directors were not an independent check on Matlin’s prerogatives, since all five of the directors were selected by Matlin (two of them were Matlin insiders occupying the role of Board President), and the CEO of the company was Lap Chan’s sister. 13140.010 3047063v4 25 7. Matlin Fails To Take Any Steps To Preserve VarigLog’s Documents Despite Knowing That They Are Vital To This Litigation. During nearly four years of discovery, VarigLog never came close to making a complete production of documents. Pegasus was repeatedly forced to litigate VarigLog’s refusal to produce documents, or to comply with Supreme Court’s orders. Pegasus appeared before Supreme Court or the appointed discovery referee no fewer than eight times. The categories of documents that should have been fully disclosed to Pegasus, but never were, included VarigLog’s internal emails and communications, its communications with the fiscais and the Brazilian court, and its financial records. VarigLog offered multiple shifting excuses for why the documents Pegasus was entitled to were unavailable. Its most prominent excuse was that its electronic data had been lost in two computer crashes. Yet, while those crashes purportedly occurred five months into this litigation, VarigLog waited nearly a full year to inform Pegasus about them and, in the interim, destroyed all the supposedly corrupted hardware without Pegasus’s knowledge. Late in the game VarigLog revealed for the first time that it had 35,000 boxes of documents that it had never reviewed, and many of which Pegasus subsequently learned were marked “for incineration.” Supreme Court, justly incensed by VarigLog’s conduct, ordered the company to produce its CEO, Lup Ohira, to testify about what VarigLog had done to search for and produce 13140.010 3047063v4 26 responsive documents. What emerged from Ms. Ohira’s deposition, as well as the deposition of Santiago Born, was a reckless indifference to discovery obligations by both parties. Unbeknownst to Pegasus until then was that the real reason VarigLog’s documents were missing was that they had never been put under a “litigation hold” and that no meaningful steps had been taken to locate and preserve relevant records. Both Ohira and Born testified that they were not aware of any instructions to any VarigLog employees to maintain relevant documents. (R. 436-37 [Born Tr.] at 100:8-101:19; R. 385-87, 391 [Ohira Tr.] at 52:7-54:3, 58:3-6.) Ohira testified that she didn’t know of any instances in which the hard drives of key VarigLog employees had been copied to preserve their electronic records. (R. 392-93 [Ohira Tr.] at 70:4-71:3.) Ohira’s and Born’s admissions meant that Matlin had done nothing to safeguard VarigLog’s documents even though: it began “administering and managing” VarigLog on April 1, 2008; it knew on that date that Pegasus had already filed suit against VarigLog in Florida state court; Matlin took a hand in that Florida proceeding by replacing VarigLog’s counsel with a firm that had an existing relationship with Matlin; Pegasus filed this case against both VarigLog and Matlin in October 2008, at a time when Matlin was still firmly in the driver’s seat at VarigLog; 13140.010 3047063v4 27 Matlin knew that VarigLog possessed electronic and paper documents relevant to the issues in the case, not least of which was Matlin’s liability as VarigLog’s alter ego; and Pegasus’s document requests to Matlin required it to search for and produce all documents within its “custody, possession, and control.” The severity of Matlin’s conduct came into clear view when Born testified that he could obtain access to VarigLog’s documents anytime he wanted merely by asking for them. (R. 435 [Born Tr.] at 99:1-14.) This fact, combined with all the others evidencing the breadth and depth of Matlin’s “administration and management” of its subsidiary, showed that Matlin had the ability and the duty to take appropriate steps to preserve VarigLog’s records. Given VarigLog’s well documented flouting of its discovery obligations and Supreme Court’s rulings, Pegasus moved for an order striking VarigLog’s answer and entering a default against it. In the same motion, Pegasus sought a lesser sanction against Matlin—an adverse inference—for its failure to take any steps to preserve VarigLog’s records. B. Procedural History. Pegasus filed this lawsuit in 2008 against VarigLog and the Matlin Defendants, asserting breach-of-contract and conversion claims against VarigLog, and alter-ego and conversion claims against Matlin. By the time Pegasus’s sanctions motion was decided, the same Supreme Court justice (Justice Barbara Kapnick) had presided over the case for more than 13140.010 3047063v4 28 four years. Through a number of hearings and case conferences, Supreme Court observed (and shared) the constant frustration Pegasus had in attempting to get discovery. After extensive written briefing and a two-hour-long hearing, Supreme Court granted Pegasus’s spoliation motion. Applying the decision in Voom HD Holdings LLC v. EchoStar Satellite LLC, 93 A.D.3d 33 (1st Dep’t 2012), Supreme Court held that: (1) Matlin had control of VarigLog’s documents, (2) Matlin’s failure to take any steps to preserve VarigLog’s documents was grossly negligent, and (3) the destroyed documents were relevant to the claims and defenses in the case. Matlin appealed. On June 5, 2014, in a divided 3-2 opinion, the Appellate Division, First Department, reversed Supreme Court’s adverse-inference order. The Appellate Division agreed with Supreme Court that Matlin had control of VarigLog’s documents and a duty to preserve them. On the question of the degree of Matlin’s culpability, the Appellate Division was split 4-1, with the three justices in the majority and the partial dissenter concluding that Matlin’s behavior evinced simple negligence, while the dissenting justice agreed with Supreme Court that Matlin behaved in a grossly negligent way. Since a majority deemed Matlin only negligent, the Appellate Division proceeded to consider whether Pegasus had satisfied its burden of establishing that the destroyed documents were relevant to the case, meaning that they would have been favorable to Pegasus. On this 13140.010 3047063v4 29 question too, the court was split. The majority held that Pegasus had failed to carry its burden. The partially dissenting justice concluded that the case should be remanded for a relevance determination by Supreme Court. And the dissenting justice concluded that since Matlin had behaved in a grossly negligent way, the destroyed documents were presumptively relevant. Pegasus moved for reargument or, in the alternative, leave to appeal to this Court. On November 18, 2014, the Appellate Division denied reargument, but granted Pegasus’s motion to appeal. (R. 1236.) For the reasons described below, Pegasus respectfully asks the Court to reverse the order of the Appellate Division and reinstate the adverse inference against Matlin. ARGUMENT A. Legal Standards. 1. It Is Well Established That Parties to Litigation Are Required to Implement Comprehensive “Litigation Holds” Preserving All Documents That May Be Relevant to the Claims and Defenses in the Case. Although this Court has not had occasion to address the document- preservation obligations of parties to litigation, the lower courts of this State have considerable experience with the issue and have borrowed and built upon such seminal federal cases as Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003), and Pension Committee of University of Montreal Pension 13140.010 3047063v4 30 Plan v. Banc of America Securities, 685 F. Supp.2d 456, 473 (S.D.N.Y. 2010). See Voom, 93 A.D.3d at 36. In Voom, the First Department explained that the spoliation standards developed in federal law are “harmonious with New York precedent in the traditional discovery context,” and have the virtue of “provid[ing] litigants with sufficient certainty as to the nature of their obligations in the electronic discovery context and when those obligations are triggered.”4 “Once a party reasonably anticipates litigation, it must, at a minimum, institute an appropriate litigation hold to prevent the routine destruction of electronic data.” Id. at 41. For a litigation hold to be effective, it “must direct appropriate employees to preserve all relevant records, electronic or otherwise, and create a mechanism for collecting the preserved records so they may be searched by someone other than the employee.” Id. A litigant must provide “key players” (i.e., the persons likely to have relevant information) with clear instructions that describe the paper and electronic records that must be maintained, the need to 4 Indeed, Voom has been followed dozens of times by the lower courts of this State and no competing standards or spoliation tests have emerged to challenge its basic tenets. See, e.g., Pegasus Aviation I, Inc. v. Varig Logistica, SA, 118 A.D.3d 428 (1st Dep’t 2014); Roberts v. Corwin, 41 Misc. 3d 1210(A), 980 N.Y.S.2d 278 (Sup. Ct. N.Y. Cty. 2013) aff’d, 118 A.D.3d 571 (1st Dep’t 2014); Johnson v. Edwards, 41 Misc. 3d 756, 971 N.Y.S.2d 848 (Sup. Ct. Kings Cty. 2013); Mangione v. Jacobs, 37 Misc. 3d 711, 950 N.Y.S.2d 457 (Sup. Ct. Queens Cty. 2012) aff’d, 121 A.D.3d 953 (2d Dep’t 2014); Hameroff & Sons, LLC v. Plank, LLC, 36 Misc. 3d 1229(A), 959 N.Y.S.2d 89 (Sup. Ct. Albany Cty. 2012) aff’d, 108 A.D.3d 908 (3d Dep’t 2013); see also “Developments in Electronically Stored Information Spoliation Cases in New York State Courts,” NEW DEVELOPMENTS IN EVIDENTIARY LAW IN NEW YORK 2014 ED., 2014 WL 2344834, at *2 (“Since Voom, New York courts have consistently applied its principles and have ordered negative or adverse inference jury instructions, as well as orders precluding testimony and other evidence, where a party has negligently spoliated ESI.”). 13140.010 3047063v4 31 disable any automatic-deletion or overwriting protocols governing electronic records (such as email), and the consequences for failing to preserve data. Id. The issuance of a litigation hold is merely the first step in a proper preservation plan. Zubulake, 229 F.R.D. at 432. The party’s counsel must oversee compliance with the litigation hold and ensure that it encompasses all potentially relevant information. Id. To that end, counsel must become familiar with the client’s information-technology systems and data retention policies by speaking with the client’s IT personnel and interviewing all the key players to understand how and where they store their paper and electronic files. Id. These preservation duties have been repeatedly reinforced in the case law during the last decade. Indeed, in 2010, the Pension Committee court commented that, “By now, it should be abundantly clear that the duty to preserve means what it says and that a failure to preserve records—paper or electronic—and to search in the right places for those records, will inevitably result in the spoliation of evidence.” 685 F. Supp.2d at 462. If spoliation does indeed occur, this Court has made clear that the judiciary “possess[es] broad discretion to provide proportionate relief to the party deprived of the lost evidence.” Ortega v. City of New York, 9 N.Y.3d 69, 76 (2007). This includes imposing sanctions in the form of evidence-preclusion orders, adverse- 13140.010 3047063v4 32 inference instructions, costs awards, or “the ultimate sanction” of a default judgment. Id. Under the common-law doctrine of spoliation, a spoliating party may be sanctioned even if it did not intentionally destroy evidence, but did so only negligently. 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). This is true because “a party’s negligent loss of evidence can be just as fatal to the other party’s ability to present a defense.” Strong, 112 A.D.3d at 21. Voom built on the common-law standard by articulating a three-part test an aggrieved party must satisfy to obtain sanctions: “(1) that the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a ‘culpable state of mind;’ and finally, (3) that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.” Voom, 93 A.D.3d at 45. 2. This Court Should Clarify That Spoliation Standards Do Not Vary Based on the Nature of the Destroyed Evidence. Pegasus moved for spoliation sanctions based on the destruction of both VarigLog’s paper and electronic files. In Strong, the Appellate Division held that the Voom test applies to the destruction of electronically stored information (ESI), 13140.010 3047063v4 33 but that the common-law test applies to all other types of evidence. 112 A.D.3d at 23. Strong involved the destruction of a police audio recording. The court did not explain why an audio recording is non-ESI (an unusual conclusion since audio recordings are routinely created and stored using computer technology). More importantly, the Strong court did not explain how or why the Voom and common- law standards differ. Notably, given the rapid rate at which all information is being digitized, the question of whether there is any different spoliation standard for paper documents, as compared to ESI, is an important issue for this Court to resolve for the benefit of all litigants. The Appellate Division in this case applied only Voom, even though Strong suggests that the common-law test should have governed the loss of VarigLog’s paper documents, while Voom should have governed the loss of its ESI. This Court should resolve the discrepancy created by Strong by holding that the law of this State does not encompass two different spoliation tests depending on the type of destroyed evidence at issue. The adoption of two different tests serves no useful purpose and will only complicate litigation. Moreover, perhaps reflecting the lower courts’ inability and/or unwillingness to make difficult sorting decisions in our increasingly technological world—is the evidence at issue properly characterized as ESI or non-ESI?—even since Strong was decided, the Voom test 13140.010 3047063v4 34 has been applied to cases involving non-ESI evidence, including surveillance videos (Strong regarded these as non-ESI), washing machines, and electrical wires. See Duluc v. AC&L Food Corp., No. 302417/10, 2014 N.Y. App. Div. LEXIS 5214 (1st Dep’t July 10, 2014) (surveillance video); Chartis Prop. Casualty Co. v. Olmsted, No. 152088/12, 2014 N.Y. Misc. LEXIS 2063 (Sup. Ct. N.Y. Cty. Apr. 28, 2014) (washing machine); Ezzard v. One East River Place Realty Co., LLC, No. 114803/08, 2014 N.Y. Misc. LEXIS 755 (Sup. Ct. N.Y. Cty. Feb. 19, 2014) (surveillance video); Stern v. DMG World Media (USA), Inc., No. 112119/10, 2013 N.Y. Misc. LEXIS 6246 (Sup. Ct. N.Y. Cty. Dec. 26, 2013) (electrical wire and commenting that the Voom standard “has been applied to other types of evidence,” i.e., non-ESI). The common-law test and Voom are in harmony in that they both prescribe that a spoliating party is subject to sanctions for the negligent, as well as the intentional, destruction of evidence. Voom merely sets forth with slightly more precision what an innocent party must show to establish its right to sanctions against a spoliating party. As described below, Pegasus has readily satisfied the Voom test and Supreme Court’s adverse-inference sanction against Matlin should therefore be reinstated.5 5 Should this Court agree with Strong that the common-law test applies to non-ESI evidence and Voom applies exclusively to ESI, and should it affirm the Appellate Division’s reversal of the adverse inference, then the Court should also remand the case for a determination of whether 13140.010 3047063v4 35 B. Both Supreme Court and the Appellate Division Found That Matlin Had Control of VarigLog’s Documents and Therefore a Duty to Preserve Them. As described below, there is no reason for this Court to disturb Supreme Court’s factual finding that Matlin had control over VarigLog’s paper and electronic documents because that finding was affirmed by the Appellate Division and is amply supported by the record. 1. The Lower Courts’ Factual Finding as to Matlin’s Control Is Binding on This Court. The first element of the spoliation test requires a showing that Matlin had control of VarigLog’s documents and an obligation to preserve them. Voom, 93 A.D.3d at 45. For purposes of this Court’s review, that issue is settled: Supreme Court made a factual finding that Matlin did indeed have the necessary control over VarigLog’s documents to trigger a duty to preserve them for use in this litigation.6 (R. 31.) The Appellate Division affirmed that finding, stating, “We conclude that the record supports the motion court’s determination that [Matlin] had a sufficient degree of control over VarigLog to trigger such a duty.” Pegasus Aviation I, 118 A.D.3d at 430-31. The Appellate Division’s affirmance means that the “control” finding is treated as established and unreviewable by this Court. Pegasus is entitled to sanctions based on Matlin’s destruction of VarigLog’s non-ESI paper files. Since the Appellate Division applied only Voom, that question was left unanswered. 6 The trial judge stated that Matlin “was put in to manage and administer the company, which means you r[a]n the company, [and had] access to the records. . . . You could have made sure there was some kind of litigation preservation in there, and you had nothing.” (R. 31.) 13140.010 3047063v4 36 N.Y. Const. Art. VI, § 3; Keane v. Keane, 8 N.Y.3d 115, 122 (2006) (“As a court of law we are precluded from reviewing affirmed findings of fact unless there is a question of legal sufficiency of the evidence.”); Glenbriar Co. v. Lipsman, 5 N.Y.3d 388, 392 (2005) (stating that, “where, as here, there are affirmed findings of fact supported by the record . . . this Court cannot review those facts and substitute its own findings”). 2. Overwhelming Evidence Supports the Lower Courts’ Control Finding. It is well established that “the first step in any discovery effort is the preservation of relevant information.” Pension Comm., 685 F. Supp.2d at 464. A party to litigation has a duty to preserve and produce all potentially relevant documents that it controls, even if those documents are physically located in the files of some other person or entity. “Control” in this context is defined broadly to include documents that the party has the “practical ability to obtain.” Gordon Partners v. Blumenthal (In re NTL Inc. Sec. Litig.), 244 F.R.D. 179, 195 (S.D.N.Y. 2007). Indeed, “[a] party’s control over documents in the possession of a corporate affiliate rests on a determination of whether the defendant has practical and actual managerial control over, or shares such control with, its affiliate, regardless of the formalities of the corporate organization.” Wachovia Secs. LLC v. Loop Corp., No. 05-C-3788, 2008 U.S. Dist. LEXIS 49251, at *3 (N.D. Ill. June 27, 2008); see also Haskins v. First Am. Title Ins. Co., No. 10-5044, 2012 U.S. Dist. LEXIS 13140.010 3047063v4 37 149947, at *3-4 (D. N.J. Oct. 18, 2012) (“control” exists if a party has “a right to access the requested documents or obtain copies of them” (internal quotation marks and citation omitted)); Coral Group, Inc. v. Shell Oil Co., 286 F.R.D. 426, 441 (W.D. Mo. 2012) (same); Cheng v. Lakeforest Assocs., LLC, No. CBD-13- 1365, 2014 U.S. Dist. LEXIS 88421, *12-14 (D. Md. June 30, 2014) (same). The record here is replete with overwhelming evidence in support of both lower courts’ finding that Matlin had “control” of VarigLog’s documents and an ability—in fact, the duty—to preserve them.7 On April 1, 2008, the Brazilian court presiding over the shareholder dispute between Matlin and its former business partners granted Matlin “administration and management” of VarigLog. (R. 903-04.) Matlin interpreted that decision as giving it unbridled control over VarigLog and it moved quickly to take charge of its subsidiary’s operations. (R. 465, 1130-65.) Within a week, Matlin replaced all of VarigLog’s existing directors with its own hand-picked representatives, which ultimately included senior Matlin employee, Peter Miller, and Lup Chan Ohira, the sister of Matlin partner Lap Chan. (R. 964, 966-67, 979-81.) Chan subsequently 7 Both Supreme Court and the Appellate Division expressly acknowledged that the “control” standard in the spoliation context is distinct from the “control” standard in the alter-ego context. (R. 29-30; Pegasus Aviation I, 118 A.D.3d at 431.) To prevail on the first element of the spoliation test (as it has), Pegasus had to show only that Matlin had control of VarigLog’s documents, not that it had control of VarigLog, the company. The question of Matlin’s control over VarigLog (and more precisely, its control over VarigLog’s relationship with Pegasus) will be resolved at summary judgment or trial as part of the ultimate determination of Matlin’s liability as VarigLog’s alter ego. 13140.010 3047063v4 38 fired VarigLog’s CEO and installed Ohira in that position, despite her lack of qualifications for the job. (R. 1176, 1179-88, 1191.) Matlin partners, employees, and consultants were dispatched to VarigLog’s offices where they fanned out into every sector of VarigLog’s operations. The very day the Brazilian court issued its “administration and management” order (April 1, 2008), Matlin partner Santiago Born emailed Matlin consultant Mario Abad, advising him that Matlin had “control of VarigLog” and instructing him “to get the team together.” (R. 465-66.) This “team” consisted of Matlin personnel, all under Lap Chan’s direction, who were each responsible for different aspects of VarigLog’s business, ranging from the company’s finances, to its negotiations with creditors, to its aircraft maintenance, and its IT systems. (R. 488, 1167-70, 1216- 19.) Reflecting what the Appellate Division correctly deemed its “intimate involvement in directing VarigLog’s business,” Pegasus Aviation I, 118 A.D.3d at 431, Matlin took over all of the following: Determining how VarigLog’s resources should be allocated. (See, e.g., R. 1199-1200 [Chan, commenting on a financial plan for VarigLog, disagreed with its parameters and told Born to “preserve cash” and not “pay out a lot to old creditors”].) Determining whether VarigLog’s creditors were paid or not. (See, e.g., R. 1203-09 at 1203 [Chan instructing VarigLog employee Rogerio Araujo not to pay an aircraft maintenance provider, even if it meant that the provider would not return equipment belonging to one of Pegasus’s planes].) Dictating the basic terms of any settlement with Pegasus. (See, e.g., 13140.010 3047063v4 39 R. 1166-75 at 1173 [Miller testifying that Pegasus’s planes would not be returned absent an agreement on the amount of money VarigLog would have to pay in outstanding rent]; R. 1210-13 at 1211-12 [Chan testifying that there needed to be a “global settlement” before Pegasus’s planes would be returned].) Selecting the planes VarigLog would fly and the geographic markets it would serve. (See, e.g., R. 1131-65 [August 2008 “Investment Update” prepared by Matlin describing VarigLog’s “status” at “takeover” and what had been accomplished since, including the reduction in VarigLog’s service routes and fleet].) Recruiting the lawyers who represented VarigLog in pending litigation, including in litigation against Matlin. (R. 142-43.) Reorganizing VarigLog’s IT systems. (See, e.g., R. 1216-17 [Matlin consultant Roula Zaarour emailing her Matlin colleagues with an “IT update” and a description of her efforts to “re-design the whole infrastructure”].) Directing VarigLog to petition for bankruptcy protection. (See, e.g., R. 1214-15 [Chan confiding in a colleague that he had “[d]ecided to send VarigLog into [the] bankruptcy process” and was “getting things legally in place hopefully”].) Given the power that Matlin exerted over VarigLog, it is no wonder that Santiago Born testified that he was able to obtain any VarigLog documents he wanted merely by asking for them. (R. 435 [Born Tr.] at 99:1-14; Pegasus Aviation I, 118 A.D.3d at 431 [“The MP defendants admit that they could obtain documents from VarigLog upon request.”].) All of these facts led the Appellate Division to correctly conclude, as did Supreme Court, that: 13140.010 3047063v4 40 [I]n view of [Matlin’s] status as sole shareholder, determination of the membership of VarigLog’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 I, 118 A.D.3d at 431 (quoting GenOn Mid-Atlantic, LLC v. Stone & Webster, Inc., 282 F.R.D. 346, 355 (S.D.N.Y. 2012), aff’d 2012 U.S. Dist. LEXIS 70750 (S.D.N.Y. 2012)). And while Matlin maintained that its control of VarigLog was subject to the oversight of the Brazilian fiscais, the courts below rejected that argument. The Appellate Division explained that Matlin had not pointed to any evidence establishing that the fiscais would have prevented it from implementing standard preservation procedures at VarigLog, had Matlin ever attempted to do so. Pegasus Aviation I, 118 A.D.3d at 432, n.4. In sum, the factual finding of Supreme Court that Matlin had “control” of VarigLog’s documents was properly affirmed by the Appellate Division and is supported by substantial evidence. There are no grounds for this Court to disturb that finding. 13140.010 3047063v4 41 C. Matlin’s Failure to Preserve Documents in Its Control Was at Least Grossly Negligent. A party who engages in spoliation may be sanctioned only if it acted with a culpable state of mind which, as noted above, includes mere negligence. In this case, Supreme Court concluded that Matlin had behaved in a grossly negligent way given its utter failure to do anything at all to preserve VarigLog’s documents. The Appellate Division reversed, holding that Matlin was only negligent. The Appellate Division’s conclusion—while enough to support the imposition of sanctions against Matlin—is erroneous because that court misapplied the law and relied on irrelevant and unsupported facts, including a factual finding that directly contradicts an amply supported finding of Supreme Court. 1. Supreme Court Held That Matlin Was Grossly Negligent Because It Did Not Take Any Steps Whatsoever to Preserve VarigLog’s Documents. The second element of the spoliation test is a showing that the spoliator acted with a culpable state of mind. “A ‘culpable state of mind’ for purposes of a spoliation sanction includes ordinary negligence.” Voom, 93 A.D.3d at 45; Ahroner v. Israel Disc. Bank of N.Y., 79 A.D.3d 481, 482 (1st Dep’t 2010). When the spoliator’s conduct was grossly negligent or worse, however, the aggrieved party is not required to affirmatively prove the third and final element of the sanctions test, that is, the relevance of the destroyed documents. Voom, 93 A.D.3d at 45 (holding that when the spoliating party has behaved in at least a grossly 13140.010 3047063v4 42 negligent way, “the relevance of the evidence is presumed and need not [be] demonstrated by [the innocent party]”); Ahroner, 79 A.D.3d at 482 (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 of the e-mails stored on the drive”). Following the lead of the federal courts, the Voom court specified three instances in which a finding of gross negligence is appropriate: “(1) the failure to issue a written litigation hold, when appropriate; (2) the failure to identify all of the key players and to ensure that their electronic and other records are preserved; and (3) the failure to cease the deletion of e-mail.” 93 A.D.3d at 45 (citing Pension Comm., 685 F. Supp.2d at 471). Here, there is no dispute that Matlin did not do any of these things: Matlin did not issue a written litigation hold to VarigLog’s personnel, or even a verbal litigation hold for that matter; Matlin did not identify any of the VarigLog personnel likely to possess information relevant to this case; and Matlin did not halt the automatic purging of VarigLog employees’ emails, which was ongoing because employees’ email accounts were subject to size limits. (R. 233-37.) Surely if any one of the situations identified in Voom can support a finding of gross negligence, then the presence of all three—which we have here—can do the same thing. 13140.010 3047063v4 43 Supreme Court concluded that Matlin’s complete abdication of its duty to implement any preservation measures at VarigLog justifies a finding of gross negligence. Justice Kapnick stated: Nobody double-checked to make sure that there was any kind of litigation hold, which as we know there wasn’t, or that anyone was making any efforts to save any of the documentation or back up any of the documentation or look for any of the documents that were clearly necessary to be preserved for this case. (R. 28.) Later, she remarked in the same vein: You were running the company. You could have made sure there was some kind of litigation preservation in there, and you had nothing. (R. 31.) Supreme Court’s conclusion that Matlin behaved in a grossly negligent way is amply supported by case law. See, e.g., Harry Weiss, Inc. v. Moskowitz, 106 A.D.3d 668, 669 (1st Dep’t 2013) (holding that the failure to issue a litigation hold, “either written or oral,” to preserve electronic data supported a finding that plaintiff’s disposal of a computer containing relevant information “constitute[d], at the least, gross negligence”); County of Erie v. Abbott Laboratories, Inc., 30 Misc.3d 837, 841 (Sup. Ct. Erie Cty. 2010) (“Plaintiff’s failure to place any sort of ‘litigation hold’ on the routine destruction of documents which would be potentially relevant to this lawsuit is ‘grossly negligent.’”); 915 Broadway Assocs., LLC, v. Paul, Hastings, Janofsky & Walker, LLP, 34 Misc.3d 1229(A), 2012 N.Y. 13140.010 3047063v4 44 Misc. LEXIS 708, at *22 (Sup. Ct. N.Y. Cty. 2012) (stating that the plaintiff’s outside consultant’s “blatant disregard for his preservation duties constitutes, at the least, gross negligence”). 2. The Appellate Division Deemed Matlin’s Conduct Merely Negligent, but Its Reasoning Is Inconsistent With More Persuasive Case Law and Also Inconsistent With Its Own Finding That Matlin Had Control of VarigLog’s Documents and a Duty to Preserve Them. The Appellate Division affirmed Supreme Court’s finding that Matlin completely ignored its duty to preserve VarigLog’s documents. Pegasus Aviation I, 118 A.D.3d at 432 (stating that Matlin “fail[ed] to discharge this duty. . .”). Nor could the Appellate Division have arrived at a contrary conclusion given the testimony of Lup Ohira (VarigLog’s CEO and Board member) and Santiago Born (the Matlin partner appointed by the Brazilian court to act as VarigLog’s administrator) that they were not aware of any instructions to VarigLog’s employees to maintain relevant documents. (R. 385-87, 391-93, 436-37.) For purposes of this Court’s review then, the lower courts’ finding that no preservation plan was instituted at VarigLog is deemed established. Nonetheless, the Appellate Division reversed Supreme Court’s legal conclusion that Matlin was grossly negligent and instead held that Matlin’s 13140.010 3047063v4 45 conduct reflected simple negligence.8 Given the facts of this case—where Matlin did nothing at all—that holding sets an unjustifiably high bar for proving gross negligence and flies in the face of more persuasive case law in which courts have deemed spoliating parties grossly negligent even where they did institute preservation measures but were dilatory in doing so. In Hawley v. Mphasis Corp., 302 F.R.D. 37, 50-51 (S.D.N.Y. 2014), for example, the defendant issued a litigation hold but the court still concluded that the defendant acted with gross negligence because it failed to issue the hold until three months after the plaintiff filed suit and more than two years after the defendant should have known that litigation was reasonably foreseeable. Likewise, in Sekisui American Corp. v. Hart, 945 F. Supp.2d 494, 507 (S.D.N.Y. 2013), the plaintiff eventually issued a litigation hold, but it did not do so until fifteen months after litigation was reasonably anticipated, and it did not timely notify its IT vendor to preserve information. In both Hawley and Sekisui, the spoliating party’s conduct was deemed grossly negligent, notwithstanding the issuance of litigation holds. It makes no sense to say that a party is grossly negligent when it implements incomplete or untimely preservation safeguards, but that it is merely negligent when it does precisely nothing. Such a rule would incentivize exactly the kind of 8 As noted above, simple negligence is sufficient to impose sanctions, but the spoliating party’s level of culpability has consequences for whether the aggrieved party must prove that the destroyed documents were relevant to the case. 13140.010 3047063v4 46 inaction that Matlin displayed here and would penalize parties for at least eventually trying to do the right thing. The Appellate Division’s error stems in part from how it defined “gross negligence.” Rather than look to how that standard has been construed in the spoliation context, the Appellate Division borrowed a definition from unrelated contract case law in which parties attempt to rely on limitation-of-liability clauses to avoid paying damages for their grossly negligent conduct. Pegasus Aviation I, 118 A.D.3d at 433. In that context, “gross negligence” is defined as “conduct that evinces a reckless disregard for the rights of others or smacks of intentional wrongdoing.” Id. (citing Hartford Ins. Co. v. Holmes Protection Group, 250 A.D.2d 526, 527 (1st Dep’t 1998)). Instead of relying on an inapt definition of “gross negligence” from the contract setting, the Appellate Division should have applied the tort definition from on-point spoliation case law. In Pension Committee, for example, the court adopted the definition of gross negligence urged by Prosser & Keeton, explaining that, “‘[g]ross negligence has been described as a failure to exercise even that care which a careless person would use’” and that “most courts find that gross negligence is something more than negligence ‘and differs from ordinary negligence only in degree, and not in kind.’” 685 F. Supp. 2d 456, 464 (citing Prosser & Keeton on Torts § 34 at 211-12 (5th ed. 1984)). Under the spoliation 13140.010 3047063v4 47 definition of gross negligence, there can be no doubt that Matlin’s total abdication of its duty to preserve VarigLog’s documents was grossly negligent. Moreover, none of the reasons advanced by Matlin below, and erroneously endorsed by the Appellate Division, is sufficient to treat Matlin as merely negligent.9 (a) This Court Should Apply the Law to the Facts Found by Supreme Court and Ignore Any Contrary Facts Found by the Appellate Division. In its order granting Pegasus leave to appeal to this Court, the Appellate Division stated that its decision reversing the adverse inference against Matlin “was made as a matter of law and not in the exercise of discretion.” (R. 1236.) Although the Appellate Division had the power to substitute its own factual findings for those of Supreme Court, its pronouncement that it decided the sanctions issue “as a matter of law and not in the exercise of discretion” means that it did not displace any of Supreme Court’s factual findings. Accordingly, this Court should apply the law to the facts as found by Supreme Court, and to the extent it appears as though Appellate Division found new or different facts (as 9 The dissenting justice agreed with Supreme Court that Matlin was grossly negligent. Pegasus Aviation I, 118 A.D.3d at 439. The dissent, applying the proper standard, stated that its conclusion was based on Matlin’s “failure to take even the most rudimentary steps to ensure that potentially relevant evidence was preserved, including, but not limited to, instructing that a litigation hold be put in place.” Id. 13140.010 3047063v4 48 described below concerning VarigLog’s purported computer crashes), this Court should ignore them. (b) Matlin’s Preservation of Its “Own” Documents Is Meaningless. The Appellate Division found meaningful the fact that Matlin had preserved its “own” documents. Pegasus Aviation I, 118 A.D.3d at 433. Besides being an irrelevant consideration, separating out the documents at issue in this case as “VarigLog” documents and “Matlin” documents is to draw a distinction without a difference. Matlin had control over VarigLog’s documents, its senior personnel had the ability to access those documents anytime they wanted, and Matlin’s far- reaching management of its subsidiary meant that it necessarily had the ability to use and even create VarigLog’s documents. For all practical purposes, “VarigLog’s” documents were “Matlin’s” documents. Even accepting a clear-cut distinction between “Matlin’s” documents and “VarigLog’s” documents, Matlin’s preservation of its “own” documents only compounds its culpability in failing to take any similar precautions as to “VarigLog’s” documents. Matlin clearly knew the importance of preserving electronic and paper documents for use in this litigation, yet it entirely disregarded its duty to do so with respect to all the documents it had control of. Pegasus Aviation I, 118 A.D.3d at 440 (Richter, J., dissenting). That abdication resulted in the destruction of not merely a handful of documents, but of nearly all of 13140.010 3047063v4 49 VarigLog’s paper and electronic records. Indeed, the full extent of the data loss here is impossible to ascertain. See Pension Comm., 685 F. Supp.2d at 478 (“Because we do not know what has been destroyed, it is impossible to accurately assess what harm has been done to the innocent party and what prejudice it has suffered.”) (c) Matlin Cannot Pass Off What Was Plainly Its Preservation Duty onto VarigLog or VarigLog’s Counsel. Next, the Appellate Division concluded that VarigLog was represented by separate counsel and that there was no evidence suggesting that Matlin had a reason to believe that those lawyers were inept in advising VarigLog about document preservation requirements and supervising VarigLog’s efforts to comply. That conclusion is factually and logically wrong. First, the Appellate Division’s reasoning is rationally disconnected from its finding that Matlin had a duty to preserve VarigLog’s documents. If the duty was Matlin’s, then it did not have the luxury of relying on VarigLog’s counsel (or VarigLog) to see to it that the job was properly performed. Rather, Matlin and its own counsel were obligated to take charge of the preservation process to ensure that VarigLog’s documents were not lost. See, e.g., Zubulake 229 F.R.D. at 432 (“[I]t is not sufficient to notify all employees of a litigation hold and expect that the party will then retain and produce all relevant information. Counsel must take 13140.010 3047063v4 50 affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.”). The very least Matlin should have done was to simply inquire of VarigLog and its counsel whether and how they had put preservation procedures in place. That would have been an easy, costless conversation and would have immediately alerted Matlin to any preservation deficiencies—deficiencies which directly implicated Matlin because of its control over VarigLog’s documents. Matlin would have learned that VarigLog’s lawyer (a lawyer Matlin apparently engaged for VarigLog) was far from on top of his client’s document-preservation efforts. VarigLog’s former lawyer testified that all he did was send VarigLog’s Brazilian lawyers a copy of the relevant CPLR provision. That single act hardly passes the test for implementing proper preservation procedures. See, e.g., Zubulake 229 F.R.D. at 432 (describing counsel’s duties as including communicating with the client’s IT personnel to learn about the client’s document-retention policies and IT architecture, as well as communicating with each employee likely to have relevant information to ascertain how and where they store their paper and electronic files). But Matlin did not even do the easy thing of asking, “What are you doing on the document-preservation front?” Nor did Matlin do anything else. And when Pegasus began bringing VarigLog’s discovery non-compliance to the attention of Supreme Court in 2009, Matlin still sat on its hands. It was present at one 13140.010 3047063v4 51 discovery hearing and conference after another and was well aware that VarigLog (and its counsel) were not meeting their obligations. There’s no evidence that Matlin bothered to try to salvage the situation by implementing a preservation plan then, nor did it bother to tell Pegasus that most of the documents Pegasus was seeking were already destroyed.10 (d) If Documents Had Been Properly Preserved, VarigLog’s Alleged Computer Crashes Would Have Had No Impact. Finally, Matlin urged, and the Appellate Division accepted, the argument that Matlin’s failure to issue a litigation hold was a moot point in light of fatal computer “crashes” VarigLog says it experienced in February and March 2009. Pegasus Aviation I, 118 A.D.3d at 434. According to the Appellate Division, “plaintiffs have presented no evidence that such a ‘hold’ would have saved the relevant ESI from destruction when VarigLog’s entire computer system crashed (without any fault on the part of the MP defendants). . . .” Id. The Appellate Division’s finding on this subject is at odds with that of Supreme Court. Supreme Court found that VarigLog’s documents were destroyed because nothing was done to preserve them, not because of any computer failures: I think that the documents were not lost because of any computer crashes that happened as an act of God but really happened because there was no litigation hold. 10 At least eight discovery conferences and hearings took place before the discovery referee and Supreme Court at which VarigLog’s failure to produce documents was discussed. Matlin was represented by counsel at all of these and said nary a word. 13140.010 3047063v4 52 There was nobody told to protect any of these documents; they were just destroyed. (R. 26.) As noted above, the Appellate Division stated in its order granting leave to appeal that it reversed the adverse inference against Matlin “as a matter of law and not in the exercise of discretion.” (R. 1236.) This Court should therefore proceed on the basis of Supreme Court’s factual finding that the computer crashes were irrelevant. Even if this Court were to consider the Appellate Division’s contrary finding, it should not credit that finding because it lacks evidentiary support. See, e.g., Campaign for Fiscal Equity, Inc. v. State, 100 N.Y.2d 893 (2003) (stating that, “in light of the Appellate Division’s express and implicit substitution of its findings of fact for those of the trial court regarding the inputs, outputs and causation—we must determine which court’s findings more nearly comport with the weight of the credible evidence”). The Appellate Division’s finding is not supported by the evidence. As an initial matter, Pegasus moved for spoliation sanctions on the basis of the loss of virtually all of VarigLog’s documents and information—those stored in both 13140.010 3047063v4 53 electronic and paper form. The computer crashes plainly would not have affected VarigLog’s paper records, yet Pegasus still received almost none of those.11 Second, the computer crashes occurred in February and March 2009, at least four months after Pegasus filed suit against Matlin in October 2008, ten months from the time that Matlin obtained control of VarigLog’s records, and ten months from when it should have reasonably anticipated litigation.12 If Matlin had done what it was supposed to do by preserving VarigLog’s documents, the computer crashes would not have destroyed any of the information relevant to this case because that information would have been backed up in a separate archive, disk, or other storage mechanism. See, e.g., Sekisui, 945 F. Supp.2d at 500, 506 (describing how the plaintiff permanently destroyed relevant emails, rather than archiving or copying them to back-up tapes, after the duty to preserve had attached); Zubulake, 229 F.R.D. at 434 (describing counsel’s duty to instruct all employees to make electronic copies of their relevant files and to safeguard relevant backup tapes). Third, the purportedly crashed computers, disks and software were themselves physically destroyed. (R. 234-35.) Pegasus was thus deprived of the 11 Matlin may try to argue that Pegasus received thousands of pages of paper documents. While true, those paper documents consisted almost exclusively of the maintenance records associated with each of Pegasus’s planes and are required by law to be kept with the planes. 12 The Appellate Division stated that, “We note that the MP defendants have not denied that it was reasonably foreseeable as of April 1, 2008, that plaintiffs would ultimately sue them in connection with plaintiffs’ disputes with VarigLog. Pegasus Aviation I, 118 A.D.3d at 432, n.5. 13140.010 3047063v4 54 opportunity to test VarigLog’s assertions that fatal crashes had occurred and that no information whatsoever could be retrieved from the damaged hardware and software. Modern computer forensics can often restore “lost” data, but the decision to destroy the relevant hardware and software made that impossible. While Pegasus has consistently argued that Matlin behaved in a grossly negligent way, the physical destruction of the computers plainly was an intentional act, and irrespective of whether Pegasus could ever prove that it was done with the intent to destroy evidence does not detract from its volitional nature. Anyone who understood and respected evidence preservation obligations never would have destroyed them. Adding insult to injury, no one associated with either Matlin or VarigLog bothered to tell Pegasus about the crashes when they occurred in February and March 2009, but instead waited until January 2010, nine months later, to come clean with this pivotal information.13 See Dorchester Fin. Holdings Corp. Banco BRJ, S.A., No.11-cv-1529, 2014 U.S. Dist. LEXIS 146666, at *25-27 (S.D.N.Y. Sept. 12, 2014) (holding that the plaintiff acted in bad faith when it: (1) discarded 13 Pegasus had document requests outstanding to VarigLog as of February 10, 2009, and even though VarigLog served a written response to those requests on March 6, 2009, it said nothing at all about its recent catastrophic computer crashes. (R. 160-97.) It was fundamentally unfair to put the burden on Pegasus to prove—as the Appellate Division did—that a proper litigation hold would have prevented the data loss when Matlin and VarigLog did not disclose that the crashes had even occurred until they were forced to do so by Pegasus’s motion practice, and when the evidence that would have confirmed the crashes was itself destroyed. 13140.010 3047063v4 55 a crashed computer that contained relevant evidence at a time when it knew that it was obligated to preserve that evidence; and then (2) did not inform the defendant about the allegedly crashed and since discarded computer for more than two years). For all of these reasons, the Appellate Division erred when it reversed Supreme Court’s holding that Matlin behaved in a grossly negligent way. The Appellate Division’s conclusion is not supported by the law or the facts and should be rejected by this Court. D. Pegasus Has Satisfied Any Modest Burden It Might Have to Prove the Relevance of the Vast, Unknown Quantity of Documents It Was Prevented From Accessing as a Result of Matlin’s Failure to Preserve Them. The third element of the spoliation test is a showing that the destroyed documents were relevant such that their loss prejudices the innocent party. Assuming Pegasus even has the burden of proving relevance, its showing is more than sufficient to surmount this hurdle. 1. Because Matlin’s Conduct Was Grossly Negligent, the Relevance of the Destroyed Documents Is Presumed and Pegasus Need Not Affirmatively Prove Relevance. The test of relevance in the spoliation context is whether “the trier of fact could find that the [destroyed] evidence would support” the innocent party’s claims or defenses. Voom, 93 A.D.3d at 45. “Relevance” for purposes of spoliation thus means something more than just discoverable and instead entails a showing that the destroyed evidence “would have been of the nature alleged by the party 13140.010 3047063v4 56 affected by its destruction.” Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 109 (2d Cir. 2002). If this Court holds that Matlin acted with gross negligence, it need not reach the question of whether the destroyed documents were relevant. That is true because when a spoliating party behaves in at least a grossly negligent manner, “the relevance of the evidence is presumed and need not [be] demonstrated by [the innocent party].” Voom, 93 A.D.3d at 45; Ahroner, 79 A.D.3d at 482. 2. Any Burden That an Innocent Party Might Have to Prove Relevance Is Not a Significant One. Since it concluded that Matlin was merely negligent, the Appellate Division required Pegasus to affirmatively prove relevance. As described below, the Appellate Division ultimately rejected Pegasus’s showing as merely “speculative.” Pegasus Aviation I, 118 A.D.3d at 433, 435. In doing so, it implicitly construed the relevance element of the spoliation test as imposing an exacting and high burden on spoliation movants. But that view is in conflict with the much more relaxed way the relevance requirement has been applied by other courts of this State and the federal courts. For example, the Appellate Division’s application of the relevance requirement in this case is directly at odds with its application of the relevance requirement in Strong. In both cases, the Appellate Division concluded that the spoliating defendants—Matlin and the New York Police Department—behaved 13140.010 3047063v4 57 only negligently in failing to preserve evidence. In this case, the Appellate Division held that Pegasus is obligated to affirmatively prove the relevance of VarigLog’s destroyed documents by showing that “the trier of fact could find that the [destroyed] evidence would support [Pegasus’s] claims.” Pegasus Aviation I, 118 A.D.3d at 430. In Strong, on the other hand, the Appellate Division held that the plaintiffs were not required to prove the relevance of the deleted audio recording at issue there, explaining, “Plaintiffs’ inability to establish whether the missing evidence would have been helpful to them [i.e., whether it was relevant] cannot serve to support the City’s opposition to sanctions, since that inability is the City’s fault, not plaintiffs’.” 112 A.D.3d at 24 (emphasis added). The Appellate Division’s holdings in this case and in Strong simply cannot be reconciled. One of them must be wrong. Strong’s approach is much more realistic because it takes account of the aggrieved party’s inability to know with certainty what the contents of the destroyed evidence would have revealed. Even if an aggrieved party bears some burden to establish relevance when the spoliating party has behaved only negligently, that burden must be a modest one. In fact, the lower courts of this State have repeatedly said as much precisely because demanding a rigorous relevance showing risks penalizing the innocent party further and letting the spoliator get away with its destruction. In Sage Realty Corp. v. Proskauer Rose 13140.010 3047063v4 58 LLP, 275 A.D.2d 11 (1st Dep’t 2000), for example, the court stated that, “it is the peculiarity of many spoliation cases that the very destruction of the evidence diminishes the ability of the deprived party to prove relevance directly.” See also Santana v. Castillo, 114 A.D.3d 621 (1st Dep’t 2014) (commenting that, “the destruction of evidence may diminish a party’s ability to prove the relevancy of, and need for, the destroyed evidence”); Alleva v. UPS, 112 A.D.3d 543, 544 (1st Dep’t 2013) (holding that “[p]laintiff cannot be faulted for his inability to establish that the missing records contained critical evidence,” and stating that an adverse- inference charge at trial might be appropriate); New York City Housing Auth. v. Pro Quest Security, Inc., 108 A.D.3d 471, 473-74 (1st Dep’t 2013) (holding that the defendants were entitled to a preclusion order preventing the plaintiff from introducing a redacted surveillance video into evidence, and doing so without requiring the defendants to prove that the portions wrongly deleted by the plaintiff were relevant); 915 Broadway Assoc. LLC, 2012 N.Y. Misc. LEXIS 708 at *18 (“Given the inherent unfairness of asking a party to prove that the destroyed evidence is relevant even though it no longer exists and cannot be specifically identified as a result of the spoliator’s own misconduct, courts will usually reject an argument that the deprived party cannot establish the relevance of the evidence. . . .”). 13140.010 3047063v4 59 Federal spoliation case law is in accord. The Second Circuit has stated that “[c]ourts must take care not to ‘hold the prejudiced party to too strict a standard of proof regarding the likely contents of the destroyed [or unavailable] evidence’ because doing so ‘would subvert the purposes of the adverse inference, and would allow parties who have destroyed evidence to profit from that destruction.’” Residential Funding Corp., 306 F.3d at 109 (quoting Kronisch v. United States, 150 F.3d 112, 128 (2d Cir. 1998) and Byrnie v. Town of Cromwell, 243 F.3d 93, 110 (2d Cir. 2001)). And in Pension Committee, the court held that the spoliation movants had satisfied their “limited burden of demonstrating that the lost documents would have been relevant” where “[t]he volume of missing emails and documents can never be learned, nor can their substance be known.” 685 F. Supp.2d at 478-79 (emphasis added). Indeed, the federal courts have characterized an innocent party’s burden as no greater than coming forward with “some evidence that suggests that items relevant to substantiating its claim would have been included among the withheld or destroyed files.” See, e.g., In re Terrorist Attacks on September 11, 2001, No. 03-1570, 2013 U.S. Dist. LEXIS 155085, *1001 (S.D.N.Y. Oct. 28, 2013) (emphasis added). This Court should make clear that the relevance requirement is not onerous and simply requires the innocent party to adduce “some evidence” that the 13140.010 3047063v4 60 destroyed documents would have supported its position. Applying that common- sense standard, Pegasus has easily carried its relevance burden. 3. Pegasus Has Adduced Sufficient Extrinsic Evidence from Which a Trier of Fact Could Conclude That VarigLog’s Internal Communications, Its Communications with the Brazilian Fiscais, and Its Bank Records Would Have Been Favorable to Pegasus. Pegasus argued below that at least three categories of destroyed information would have been favorable to its claims, including: (1) VarigLog’s communications with the fiscais, (2) VarigLog’s internal communications between and among its own employees, and (3) VarigLog’s bank records. Supreme Court found that the spoliated documents “clearly would be very relevant and important for the plaintiff to prove their case.” (R. 17.) The Appellate Division disagreed and arrived at two contradictory conclusions about Pegasus’s relevance showing. On the one hand, the Appellate Division held that Pegasus did not even attempt to satisfy the relevance requirement, but instead relied on the presumption of relevance arising from Matlin’s gross negligence. Pegasus Aviation I, 118 A.D.3d at 433, n.7. On the other hand, the Appellate Division implied that Pegasus did attempt to establish the relevance of the destroyed documents, but offered “only speculat[ion]” that they would have been favorable to it. Id. at 433-34. Putting aside the logical inconsistency in the Appellate Division’s opinion, its relevance holding is not supported by the record and not entitled to any deference. Pegasus has pointed to a plethora of evidence—deposition testimony, 13140.010 3047063v4 61 emails, and the like—that strongly gives rise to the inference that the three categories of documents enumerated above would indeed have supported Pegasus’s alter-ego and conversion claims and belied Matlin’s defenses. Given that the existing evidence supports Pegasus, the only logical conclusion is that the destroyed documents would have done so as well. The opposite inference—that the destroyed documents would have supported Matlin instead—is just not plausible. Put simply, where the documents that Matlin did not destroy are overall favorable to Pegasus, it would be dubious to infer that the documents Matlin did destroy would be unfavorable to Pegasus. (a) VarigLog’s Communications with the Fiscais. Throughout these proceedings, Matlin’s central defense to liability has been that its management of VarigLog was at all times “subject to the strict control and supervision by” the Brazilian fiscais who made all “major decisions” for VarigLog. (See excerpts from Respondents’ Appellate Division brief (Appellants below), annexed as an Addendum hereto.) According to Matlin, it lacked the ability to dominate and control VarigLog’s relationship with Pegasus, or convert Pegasus’s planes, because its decision making and influence were entirely subordinated to that of the fiscais. VarigLog’s communications with the fiscais were therefore vital to challenging Matlin’s “fiscais” defense. 13140.010 3047063v4 62 Pegasus has marshalled substantial evidence tending to show that had they not been destroyed, those communications would have supported Pegasus’s alter- ego claim by establishing that the fiscais served in an entirely passive role of simply reporting to the Brazilian court on Matlin’s management of VarigLog and how it was utilizing the money in VarigLog’s Swiss account. The Brazilian court naturally had an interest in these matters since it was keen to make sure that Matlin did not make a second attempt to transfer the balance of the Swiss account to one of its own bank accounts, and because the court had yet to make a final decision about who should prevail in the shareholder dispute, Matlin or its estranged business partners. In other words, the existing evidence shows that the fiscais were bystanders to Matlin’s control, and not the other way around. This evidence includes the following: Matlin principal Peter Miller’s testimony that Matlin did not need the approval of the fiscais to make business decisions for VarigLog and that the fiscais did not interfere with any of Matlin’s business plans for the company. (R. 1171-72 at 52:13-53:21.) The April 1, 2008 Brazilian court order giving Matlin the “administration and management of VarigLog” did not give the fiscais the right to veto any of Matlin’s decisions. The only other court order that addressed the role of the fiscais was limited to instructing them to monitor Matlin’s disbursements from VarigLog’s Swiss bank account. And that order stemmed directly from what the Brazilian court regarded as Lap Chan’s potentially criminal conduct in trying to use that money to pay back Matlin for loans it had previously extended to VarigLog. (R. 903-04, 1193-94.) 13140.010 3047063v4 63 Emails showing that Matlin, not the fiscais, decided how VarigLog’s resources would be spent. (R. 1131-65, 1199-1209, 1216-17.) Emails and deposition testimony showing that Matlin controlled the negotiations with Pegasus over the return of its planes and that the fiscais were never even present for any of those discussions. (R. 1173-74, 1211-12.) Emails showing that it was Matlin, not the fiscais, who made the major decision to put VarigLog into bankruptcy. (R. 1214-15.) Indeed, the lack of any documentary evidence is itself a valuable evidentiary point. Had the records not been spoliated, Pegasus could show that the existence of a small number of communications with the fiscais demonstrates that the fiscais were not controlling VarigLog. But now, if Pegasus directs a jury to the lack of these communications, Matlin can (and assuredly will) counter that it is merely speculation that any such documents existed because the computer crashes destroyed them. Plainly, this is deeply prejudicial to Pegasus’s case. Pegasus has more than satisfied its “limited” burden of coming forward with “some evidence” that VarigLog’s destroyed communications with the fiscais would have bolstered Pegasus’s claims and debunked Matlin’s “fiscais defense.” Pension Committee, 685 F. Supp.2d at 478-79; In re Terrorist Attacks, 2013 U.S. Dist. LEXIS 155085, at *1001. The Appellate Division did not consider any of the foregoing evidence or what it suggests about the likely contents of the destroyed documents. Given that Matlin’s preservation failures have caused the complete destruction of VarigLog’s communications with the fiscais, it’s not at all apparent 13140.010 3047063v4 64 what additional evidence Pegasus should be forced to adduce to carry its minimal relevance burden or why Pegasus should have to do more than it already has. To hold that the deposition testimony, emails, Brazilian court orders and related evidence described above is insufficient to establish that the destroyed documents are indeed relevant would be to do exactly what the case law counsels against, that is, subject Pegasus to an impossible burden of proof to establish the contents of documents it has been completely deprived of. Finally, it merits pointing out that if Matlin had evidence showing that it was merely the agent of the fiscais, it certainly would have produced it. But Matlin has not done so. It has not proffered any evidence showing that the fiscais prevented it from running VarigLog as it saw fit, let alone that the fiscais prevented it from returning Pegasus’s planes and reaching an agreement on VarigLog’s outstanding debt to Pegasus. The lack of any such production from Matlin only heightens the inference that had VarigLog’s communications with the fiscais not been destroyed, they would have been helpful to Pegasus, and harmful to Matlin. (b) VarigLog’s Internal Communications. VarigLog produced almost no internal emails or other communications between its own employees. Those emails would have revealed valuable insights into the experience of VarigLog employees working under Matlin, and specifically, whether VarigLog’s employees felt free to function independently, or 13140.010 3047063v4 65 whether they felt beholden to Matlin’s orders. That in turn would have been probative of Matlin’s control of its subsidiary. Again, the available evidence points squarely to the conclusion that had VarigLog’s internal communications been produced, they would have supported Pegasus’s claims. They would have shown that Matlin dominated VarigLog’s operations (and more particularly, its relationship with Pegasus), and that Matlin insisted on holding Pegasus’s planes hostage, despite having no legal basis for doing so. For starters, the evidence of Matlin’s control over VarigLog and over the Pegasus planes is reflected in Matlin’s selection of VarigLog’s board, Matlin’s installation of its own personnel to run VarigLog’s day-to-day affairs, and Matlin’s leading role in the negotiations with Pegasus. On top of that, an email produced by Matlin shows that VarigLog’s employees knew that they had to follow Matlin’s instructions and that they were at least skeptical of Matlin’s intentions. In the email, a senior VarigLog employee wrote to Lap Chan questioning Matlin’s decision making with respect to VarigLog’s fleet. (R. 1231-32.) He summarized “a sample of actions being implemented against VarigLog[’s] interest,” but said that if these decisions were “part of MatlinPatterson[’s] strategy for the company . . . we will do our best efforts to get the targets and objectives established.” (R. 1232.) The writer plainly 13140.010 3047063v4 66 felt hamstrung by Matlin and concerned that it did not have VarigLog’s best interests in mind. (Id.) He concluded by stating that while he was “confident that VarigLog has a great future,” he could not “passively accept procedures and trials against it.” (Id.) If a VarigLog employee felt the need to communicate misgivings about Matlin’s management directly to Matlin, it is virtually certain that emails exchanged strictly among VarigLog employees contained similar concerns. Moreover, it must be remembered that Pegasus received almost no emails whatsoever from VarigLog. If Matlin’s production consisted of a single email in which a VarigLog employee took the unusual step of directly confronting Matlin, then it stands to reason that among the tens of thousands of VarigLog emails that were never produced, there would have been dozens or more revealing VarigLog’s impotence at Matlin’s hands. Finally, VarigLog’s destroyed emails likely would have shown that Matlin was calling the shots with respect to the Pegasus planes. Matlin’s Lap Chan and Peter Miller both testified that they refused to return Pegasus’s planes without a global settlement agreement, and were thus using their possession of the planes as leverage to drive down the amount of rent arrearages VarigLog would have to pay. Matlin also produced an email in which Lap Chan directed a VarigLog employee not to pay a maintenance provider for repairs to fan blades belonging to one of the 13140.010 3047063v4 67 Pegasus planes because, in Chan’s words, since the maintenance provider was “holding assets that are for aircrafts that we are not using, I see no reason why we should do business with them.” (R. 1203.) If documents and testimony from Matlin’s own witnesses show that Matlin, not VarigLog, was exercising dominion and control over Pegasus’s planes and what happened to them, then again the only reasonable conclusion is that VarigLog’s internal communications would have confirmed the same. In short, Pegasus identified ample extrinsic evidence to satisfy any reasonable burden of establishing that the destroyed internal emails and documents would have supported its alter-ego and conversion claims. (c) VarigLog’s Bank Records. The third category of documents that Matlin failed to preserve was VarigLog’s bank records. Pegasus presented evidence that VarigLog was required to make payments to other Matlin-owned affiliates for various services—payments that indirectly benefitted Matlin—while at the same time, Matlin saw to it that VarigLog paid nothing on its multi-million-dollar debt to Pegasus. (R. 301-30 [declaration by VarigLog employee listing VarigLog payments to Wells Fargo in connection with planes that VarigLog leased from Matlin affiliate Stratus, as well as VarigLog payments to Digex, a Matlin-owned maintenance provider].) This evidence is naturally favorable to Pegasus’s alter-ego claim in that it shows both 13140.010 3047063v4 68 Matlin’s control of VarigLog, and its use of that control to benefit Matlin and to harm Pegasus. The Appellate Division acknowledged this evidence but concluded that even if the destroyed banking records would have further substantiated the preferential payment treatment that Matlin-owned companies received relative to non-Matlin- owned companies, such proof would be “cumulative.” Pegasus Aviation I, 118 A.D.3d at 434. That conclusion only supports Pegasus’s contention that the destroyed banking records were relevant. Moreover, just because destroyed evidence would be cumulative to existing evidence is hardly a reason to deny spoliation sanctions. At some level, if the aggrieved party has satisfied its burden of establishing that the missing evidence likely would have supported its claims, then the missing evidence would necessarily be cumulative of the very evidence that the aggrieved party relied upon to establish the point. And as Voom makes clear, the possibly cumulative nature of the destroyed evidence is a factor to consider in selecting the appropriate sanction. It is not a reason to deny sanctions altogether. Voom, 93 A.D.3d at 47 (explaining that the “imposition of an adverse inference, a lesser sanction than striking of the answer, factored this overlap [i.e., how the missing evidence was duplicative of the already available evidence] into account, and reflects an appropriate balancing under the circumstances”). 13140.010 3047063v4 69 The Appellate Division also suggested that Pegasus could have obtained the bank records directly from VarigLog’s banks or could have obtained information about VarigLog’s payments to other Matlin-owned companies through requests to those entities. Such reasoning imposes an inherently unfair burden upon Pegasus. Pegasus should not be put to the expense and trouble of serving subpoenas on non- parties (many of whom are incorporated abroad, thus complicating matters) because Matlin failed to honor its preservation obligation.14 Had a full complement of VarigLog’s bank records been produced, there is every reason to believe that they would have shown additional payments from VarigLog to other Matlin-controlled companies. In sum, an enormous quantity of documents—both ESI and paper documents—were destroyed by Matlin’s failure to preserve them. Neither Pegasus nor anyone else can prove with certainty what all those bank records, VarigLog emails, and communications with the fiscais would have revealed. But the available evidence is more than adequate to compel only one conclusion: The destroyed documents would have supported Pegasus’s alter-ego and conversion 14 The Appellate Division’s suggestion that Pegasus go after VarigLog’s banks directly highlights that court’s lack of familiarity with this litigation and the years of effort Pegasus expended trying to obtain these records. In its oral decision from the bench, Supreme Court discussed the “tortured history” of discovery in this case (R. 15), including the fact that for months VarigLog resisted procuring copies of its own records directly from its banks on the grounds that Brazilian bank secrecy laws precluded it from turning over such records to Pegasus. (R. 18.) That defense proved to be completely spurious but VarigLog still never produced all its bank records, claiming that its banks had simply not responded to its requests for copies. 13140.010 3047063v4 70 claims and belied Matlin’s defenses. Pegasus has therefore satisfied what should be its modest relevance burden and the adverse inference against Matlin should be reinstated. Pegasus should not be made to try this case without a reasonable remedy for the destruction of evidence that would have enabled it to effectively cross-examine Matlin’s witnesses about the position they occupied at VarigLog vis-à-vis the fiscais, and the harm they caused Pegasus. The proper remedy—the one that will ensure that Pegasus is not litigating with one hand tied behind its back—is the adverse inference imposed by Supreme Court. E. The Appellate Division’s Holding Must Be Reversed Because It 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. An apparently significant driver of the Appellate Division’s ruling was its jurisprudentially unsound conclusion that the imposition of an adverse inference in an alter-ego case is “tantamount to granting plaintiffs summary judgment.” Pegasus Aviation I, 118 A.D.3d at 436. In so holding, the Appellate Division has created a new rule by which adverse inferences are completely unavailable to plaintiffs in alter-ego cases who prove—as Pegasus has here—that a defendant controlled evidence in the files of its alleged alter ego, but failed to comply with its duty to preserve them. There is no legal authority—other than the Appellate Division’s decision in this case—for treating adverse-inference sanctions in alter- 13140.010 3047063v4 71 ego cases differently from adverse-inference sanctions in any other type of case. The Appellate Division’s reasoning is erroneous and its holding should be reversed. To begin with, the Appellate Division confused the standard for proving control in the spoliation context with the standard for proving control in the alter- ego context. Just because Matlin had control of VarigLog’s documents such that it had a duty to ensure their preservation, does not mean it had control over the “transaction attacked”—the standard for determining liability on the first prong of the alter-ego test—which in this case means control over Pegasus’s planes. Morris v. New York State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 141 (1993). On summary judgment or trial, if Matlin can prove that it did not dominate and control what VarigLog did or did not do in relation to Pegasus’s planes, it will prevail irrespective of its control over VarigLog’s documents. Permitting the adverse inference to stand cannot, as a matter of law, result in the entry of summary judgment in favor of Pegasus because control over VarigLog’s books and records is not what Pegasus has to prove to prevail either at summary judgment or at trial. The Appellate Division also need not have been concerned that an adverse- inference instruction would prove fatal to Matlin because the jury would not be told that Matlin had “control” of VarigLog’s documents and, indeed, the model adverse-inference jury instruction (PJI 3d 1:77) does not even call for the jury to be 13140.010 3047063v4 72 told that the spoliating party had “control” of the destroyed documents. To the extent the jury would be instructed that Matlin had a duty to preserve documents in VarigLog’s paper and electronic files, that is completely consistent with both lower courts’ finding—binding on this Court—that Matlin did have such a duty. And, equally importantly, insofar as there is any risk that the jury would treat Matlin’s duty to preserve VarigLog’s documents as dispositive proof that Matlin had control of VarigLog with respect to the “transaction attacked,” that risk could be eliminated through an appropriate limiting instruction explaining that the duty to preserve documents is not sufficient to establish that Matlin was VarigLog’s alter ego. CONCLUSION For all the reasons described above, Pegasus respectfully requests that this Court reverse the order of the Appellate Division and reinstate the adverse- inference charge against Matlin. Dated: San Francisco, California January a-1, 2014 Respectfully submitted, COBLENTZ PATCH DUFFY & BASS LLP By: 'fL_.(f IL~ ~ Richard R. Patch V (of the bar of the State of California) By permission of the Court COBLENTZ PATCH DUFFY & BASS LLP One Ferry Building, Suite 200 San Francisco, CA 94111-4213 (415) 391-4800 n M. Zimmerman S YNSKI BLACK LLC One Battery Park Plaza, 32nd Floor New York, NY 10004 (212) 820-7700 Attorneys for Plaintiffs-Appellants Pegasus Aviation L Inc., Pegasus Aviation IV, Inc., and Pegasus Aviation V, Inc. REPRODUCED ON RECYCLED PAPER 73 Addendum - Excerpts from Respondents' Appellate Division brief (Appellants below) - Copy of full brief submitted to Clerk's Office as instructed ·1 I I i ! • 1 ! .. ! I i ! j ! I l j l l ,. f PRELIMINARY STATEMENT At the core of this appeal is the Trial Court's unprecedented and erroneous determination that the MP Defendants, as investors in VarigLog, a defunct Brazilian cargo airline in insolvency proceedings in Brazil, should be sanctioned for the alleged partial loss of VarigLog's electronically stored information ("ESI") caused by an inadvertant crash of the computer servers at V arigLog' s offices in Brazil in February and March 2009. Pegasus did not dispute, and presented no evidence, that Varigl..og's computer crashes were-intentional. The record evidence was similarly clear that, at the time of the computer crashes, which occurred approximately one year after Pegasus initially had commenced litigation against Varigl.og (not the MP Defendants) in Florida state court, VarigLog was preserving its ESI by actively backing up its computer system on a daily, weekly and monthly basis using Microsoft software. Despite these facts, and in reliance upon many other erroneous factual assumptions and legal conclusions, the Trial Court ordered that not only should VarigI.og be sanctioned for, inter alia, the loss of its ESI, but that the MP Defendants should suffer an adverse inference for being related to VarigLog as shareholders and for the role they played, pursuant to an order of a Brazilian court, in monitoring their investment in V arigI.og for a short time period from April to December 2008. (ii) at the time that Pegasus sued VarigLog, the MP Defendants were litigating against Varigl.og in an unrelated action based on malfeasance by the Brazilian Shareholders; and thus, the notion that the MP Defendants could have instituted a "litigation hold'' at y arigLog is baseless; (iii) while, on April 1, 2008, a court in Brazil ordered the appointment of MP Volo to administer the affairs of VarigLog, as a result of self- dealing and gross mismanagement by the Brazilian Shareholders, (a) V arigLog was still managed by an independent board of directors and officers; (b) MP Volo's "administration" was subject to strict control and supervision by the Brazilian Court and the Judicial Oversight Committee appointed by the Brazilian Court to supervise and ultimately control the affairs ofVarigLog; (c) no evidence exists that the MP Defendants had the legal right, absent approval of the Judicial Oversight Committee and the Brazilian Court, or the practical ability absent the same approval, to control VarigLog's computer systems; and ( d) V arigl.og was already represented and advised in the underlying Pegasus litigation by independent U.S. legal counsel; (iv) such independent counsel advised VarigLog concerning its document preservation obligations; (v) as of April 1, 2008, the date of the Brazilian court order,Varigl..og had already instituted electronic document preservation measures that included creating daily, weekly and monthly backup tapes for VarigLog's ESI; and (vi) the proximate causes of the loss of such ESI were two inadvertent computer crashes that destroyed the back-up files and thus, even if the MP Defendants could have implemented additional litigation hold measures at Varigl.og, it would not have prevented the loss of ESI. Despite these facts, and without any analysis of them in the Decision, the Trial Court held that the MP Defendants should be sanctioned because somehow the MP Defendants bad Hcontrol,, of the documents allegedly lost as a result of the computer crashes. As the primary basis for this legal conclusion, the Trial Court -9- I I ·! .·1 I l I . I ·l [ _! i .. Advisers. No employee, partner or officer of the MP Defendants ever served as an officer of V arigLog. 3. The Brazilian Court And .Judicial Oversight Committee Finally, the record leaves ~o question that the MP Defendants could not have been "in charge" of VarigLog because ultimately, it was the Judicial Oversight Committee and the Brazilian Court that controlled VarigLog's major decisions during the period of Brazilian Court Supervision. Members of the Judicial Oversight Committee were present at VarigLog's offices on a daily basis and were intimately involved in VarigLog's business discussions and operations. See supra Statement of Facts, § W.A.3 Significantly, during the period of Brazilian Court Supervision, all expenditures of VarigLog's very limited resources had to be approved by the Judicial Oversight Committee and/or the Brazilian Court. Id. As such, the MP Defendants plainly could.not unilaterally implement costly document preservation measures at V arigl.og. Indeed, the record not only plainly refutes the Trial Court's statement that the MP Defendants were "running" V arigLog -- the :MP Defendants complied with all requisite corporate formalities -- the only witness that was questioned specifically about the MP Defendants' access to VarigLog's documents stated unequivocally that he did not have "free access" to such documents, but rather, he -39-