Article

Prior History:915 Broadway Associates LLC v. Paul, Hastings, Janofsky & Walker, LLP, 911 N.Y.S.2d 694 (N.Y. Sup. Ct. 2010), noted at 2011 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE 379.

Note: Normandy Acquisitions LLC (Buyer/Applicant) received a USD 20 million standby LC to purchase commercial real estate from 915 Broadway Association LLC (Seller/Beneficiary). Later when Beneficiary and Applicant entered into the revised agreement, the standby remained in escrow as temporary security for the purchase price. After the standby LC expired, Applicant breached the contract and was otherwise insolvent. Beneficiary made a "business decision" to settle with Applicant and sue Beneficiary's attorney instead, even though Beneficiary believed Applicant owed it USD 20 million.

Beneficiary sued Paul, Hastings, Janofsky & Walker, LLP (Attorney) for professional malpractice, alleging failure to draw on, or to advise Beneficiary to draw on, a standby LC prior to its expiration date. Attorney moved to dismiss and sought spoliation sanctions, alleging that Beneficiary destroyed emails regarding the LC and the proceedings. The Supreme Court of New York, New York County, Fried, J., granted Attorney's motion for spoliation sanctions and dismissed Beneficiary's suit with costs.

Beneficiary alleged that Attorney's failure to monitor the dates related to the standby LC forced Beneficiary to settle with Applicant for nothing and to promise to pay Applicant's legal fees instead of recovering the liquidated damages, which the standby represented. As a result of Attorney's allegations, the judge ordered Beneficiary to hire forensic IT experts to analyze the extent of Beneficiary's document destruction problem. The experts confirmed that Beneficiary had deleted relevant electronic documents after they had a duty to preserve those documents.

The judge ruled that (1) Beneficiary's principal agent actively deleted electronic documents; (2) they were destroyed with a "culpable state of mind" because they were deleted intentionally and then permanently destroyed beyond recovery; and (3) the evidence that was destroyed was likely relevant to Attorney's claims that Beneficiary's managing members bore at least some of the burden of monitoring the standby LC's expiration date. The judge also ruled that, at a minimum, Beneficiary's conduct was grossly negligent, but mere negligence was sufficient to warrant sanctions for destroying electronic evidence. Under New York State law, a party is required to preserve evidence that may be relevant to pending or reasonably foreseeable litigation and courts have held that computer files are analogous to contents in a filing cabinet. Traditional law suggests that courts dismiss the claims of the party responsible for the spoliation because the party's negligent loss of evidence can be fatal to the other party's ability to adequately present a defense.

[JEB/ak]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.