Articles Tagged with “Business Records”

We have been discussing what records a New York Business should keep on file when it is faced with litigation: Records that are relevant to whether it should win or lose the dispute, and any records that could lead to such evidence. We also have spoken briefly about the different penalties that can be imposed for failing to preserve those records. For the most part, they consist of making it harder to win the dispute once a lawsuit has been commenced. Now we are going to analyze the legal requirements for imposing sanctions on the party that fails to save relevant evidence when it has a duty to preserve the evidence.

This may seem like an esoteric discussion, without implication to the typical New York business. There are, however, myriad examples of businesses being penalized for transgressions involving the loss of evidence. They range from the bad faith destruction of evidence (e.g., the accounting firm Arthur Andersen, which reportedly destroyed, over the course of weeks, multiple boxes of documents relevant to an investigation of Enron, and, as a result, lost such a large portion of its business that it had to lay off approximately 85,000 people); to evidence being discarded due to a business’ gross disregard of its obligation to preserve it; to documents being carelessly discarded due to a business not carefully following its attorney’s instructions to save them (see Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004). Knowing the rules, the possible penalties, and the tests for imposing them, therefore, is an important lesson every New York business should learn in order to avoid such costly mistakes.

Spoliation is usually penalized during the litigation itself, with penalties that are intended to level the playing field; i.e., to try to ensure that the party that should have preserved the evidence does not gain an unfair advantage by depriving its opponent of the opportunity to use the evidence. The party that is deprived of the evidence (the “Injured Party”) is the one that asks the court to sanction the party that “lost” the evidence (the “Spoliator”). In order to penalize a party for Spoliation, however, the offending party must have had control over the evidence and a duty to preserve it at the time it was lost or destroyed. That is, if a party had a record or document, but did not have to keep it, then the party cannot be penalized for discarding it. The party must have lost or destroyed the document with a culpable state of mind: It could have deliberately destroyed the document to keep it from being used in the dispute; it could have failed even to try to save the document after it knew the document should be kept; or it could have negligently discarded the document. Finally, the missing evidence must be relevant to the party’s claim or defense, which means at the time of trial it reasonably could have been used to help decide who should win the dispute. See VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (1st Dept.2012); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003); and Gaffield v. Wal-Mart Stores E., LP, 616 F. Supp. 2d 329, 337 (N.D.N.Y. 2009).

Perhaps the hardest part of the test to satisfy is to demonstrate that the missing evidence is relevant to the Injured Party’s claim or defense, since the Injured Party cannot know exactly what is in it, because the Injured Party does not have access to it, since the evidence was lost or destroyed.
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In our last post we asked the question: What records does a business have to keep when it is, or it reasonably believes it will become, involved in litigation? The answer is, generally, that a business must preserve records and documents which support its claims, or support defenses against its claims, or which might lead to discoverable evidence. See Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). That is, it must keep records that could help it or hurt it, or which might lead to other evidence that could help it or hurt it, in the dispute/litigation. If the business does not save those records, it can be penalized for “Spoliation.”

Spoliation is the significant alteration or destruction of evidence, or the failure to save or preserve evidence or something that could be used as evidence in litigation, whether it is reasonably foreseeable that the litigation will occur or it already has commenced. See West v. Goodyear Tire & Rubber Co., 167 F.3d 776 (2d Cir.1999); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). See also VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (First Dept. 2012). Penalizing Spoliation is in essence a way to prevent one side from losing, or even destroying, evidence that could help its opponent. Both state and federal courts in New York favor deciding cases on the merits. See Robles v. Grace Episcopal Church, 192 A.D.2d 515 (2nd Dept. 1993); and Traguth v. Zuck, 710 F.2d 90 (2d Cir. 1983). Preserving documentary evidence relevant to the issues in a dispute is one way to ensure that the merits are reached.

A business runs a major risk if it fails to save documents that are relevant to a dispute that could devolve into litigation. The risk involves the litigation itself: The penalty is enforced by making it more difficult, if not impossible, for the offending party to prevail in the litigation. The more egregious the offense, the harsher the penalty and the more difficult it will be for the offending party to win.

What records does a business have to keep and for how long? That may seem simple enough to answer, but it isn’t. It depends on the situation. There are rules governing tax records; rules for certain kinds of licensed professionals; and rules for when a business becomes involved in litigation. We’re going to talk about a business involved in litigation. What makes that so important is that the same rules often apply even before anyone has been sued.

A business normally generates a lot of paperwork. This frequently includes correspondence, bids, proposals, contracts, sales records, invoices, and receipts. It would cost a tremendous amount of money to maintain all of those records for an indefinite period of time, and that money probably could be better spent elsewhere, including on improving the business. As a result, a business often keeps certain types of documents, such as letters or emails, for only a relatively short time before it discards them.

Most New York businesses are faced with litigation at one time or another. It might be a contract dispute, where your customer doesn’t want to pay you for the goods it purchased, or you don’t want to pay your supplier full price because some of the items you bought were defective or arrived late. It could be an action for wrongful termination of an employee. Maybe the dispute is about the terms of a lease, including whether the landlord or the tenant is responsible for making repairs; or the duties under a financing agreement or insurance policy. Most times, the business becomes aware of the problem before someone starts a lawsuit. Often, the parties will try to settle the dispute first, on their own, without going to court. It’s only after negotiations fail that one of them will sue the other to get what it wants. When, exactly, should a business begin to make sure it keeps all the records necessary to protect itself, and what records, out of all the ones that it generates, should it keep?