In litigation, the term “spoliation” generally refers to loss or destruction of evidence. Spoliation can involve physical evidence, paper documents, or electronic data. Spoliation can be intentional or unintentional. Intentional or not, spoliation can result in harsh consequences.
Here at New York Business Divorce, we have never given full treatment to a business divorce decision involving the subject of spoliation, although our colleague, Kathryn Cole, often writes about spoliation at our sister blog, All About eDiscovery. You can read examples of her work on the subject here and here. As noted in those posts, spoliation is an ever-present danger in the highly-technical world of electronic discovery, where sanction orders based on spoliation are common, especially in Federal Court.
In business divorce litigation, decisions involving evidence spoliation are far less common, which is why a recent decision by an Albany appeals court caught our eye. In Soghanalian v Young, 176 AD3d 1422 [3d Dept Oct. 24, 2019], the missing evidence was not a mundane document or an email, but a rare antique automobile, a Mercedes 300 SL, zoomorphically known as the “Gull Wing.”
The Law of Spoliation
Before we get to Soghanalian, a quick primer on the law of spoliation:
The most recent pronouncement by New York’s highest court on evidence spoliation came in Pegasus Aviation I, Inc. v Varig Logistica, S.A., 26 NY3d 543 . In Pegasus, the Court of Appeals explained that trial courts “possess broad discretion to provide proportionate relief to a party deprived of lost or destroyed evidence.” Remedies include “ the preclusion of proof favorable to the spoliator to restore balance to the litigation,  requiring the spoliator to pay costs to the injured party associated with the development of replacement evidence, or  employing an adverse inference instruction at the trial of the action.” As held in Pegasus, in deciding whether, and if so, which, sanction to impose, three rules of law apply:
- Rule #1: “A party that seeks sanctions for spoliation of evidence must show  that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction,  that the evidence was destroyed with a culpable state of mind, and  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.”
- Rule #2: “Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed.”
- Rule #3: Where “the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.”
Soghanalian involved an attorney-client / business relationship between a husband, Zaven, his wife, Jo Ann, and their lawyer, Young. In the 1980s, Young formed Stuart Realty Enterprises, Inc. (“SRE”) to protect the Soghanalian’s assets from creditors. Although Zaven and Jo Ann provided SRE’s capital, Young was the majority shareholder, with Zaven and Jo Ann owning minority interests. Jo Ann claimed total ignorance of the fact that Young was a shareholder until Young terminated Zaven and Jo Ann as clients, then sent Jo Ann’s new counsel a letter asserting he was a shareholder of the corporation, attorney conduct an earlier panel of the appellate court found “disturbing.”
After Young terminated Zaven and Jo Ann as clients, Jo Ann sued Young and Zaven alleging a variety of claims, including judicial dissolution of SRE. Young counterclaimed on behalf of SRE against Jo Ann alleging that she, in concert with Zaven, misappropriated from SRE a “silver 1957 Mercedes 300SL Gull Wing motor vehicle.” Jo Ann filed a reply to the counterclaim denying SRE’s allegations of misappropriation.
The Temporary Restraining Order
The issue of spoliation loomed large over the case from its inception.
Shortly after the case began, Broome County Supreme Court Justice Ferris D. Lebous issued Young a temporary restraining order (“TRO”) pursuant to which the Soghanalians were “enjoined and restrained from selling, removing, transferring, encumbering, pledging, damaging, hiding, concealing, assigning or otherwise disposing of the silver 1957 Mercedes 300SL Gull Wing motor vehicle or any parts to or for said vehicle located in the garage at [Jo Ann and Zaven’s residence].”
Jo Ann appeared in court on the return date of the motion. She represented to the court, through counsel, that the car would be kept in her garage at home and “would be perfectly safe.” The court directed the parties to go immediately to the garage to inspect the car. Jo Ann then abruptly changed her position, stating that the Gull Wing was not, in fact, in her garage. The court immediately directed Jo Ann to testify. Sworn in as a witness, Jo Ann admitted under oath that she had falsely represented to the court the Gull Wing was in her garage, when actually it was not.
The Contempt Orders
Based upon the disappearance of the Gull Wing, Young moved against Zaven and Jo Ann for contempt of court. At the hearing of the motion, three neighbors of the Soghanalians testified that the day before the return date of Young’s TRO application, they saw a flatbed truck arrive at the Soghanalian home, then drive off with the Gull Wing, with Jo Ann driving her own vehicle behind the flatbed truck.
In their defense, the Soghanalians testified to a rather fantastical narrative, according to which they acquired a Picasso painting from a former Iraqi army general in exchange for the Gull Wing, who then took the vehicle to Texas. Justice Lebous believed none of it, issuing a searing written decision holding Zaven and Jo Ann in contempt. The court assessed legal fees against Zaven and Jo Ann, imposed a separate $10,000 fine, and ordered Zaven jailed for 30 days unless he returned the Gull Wing to the court’s jurisdiction.
The Soghanalians refused to return the car. As a result, Zaven spent thirty days in the Broome County Jail. After serving jail time, he and Jo Ann were hit with a second contempt motion – this time for obtaining certificates of title in Texas adding as lienholders of the Gull Wing certain entities affiliated with Zaven in violation of the TRO.
The day before the second contempt hearing, Zaven fled New York, leaving his wife to appear at the contempt hearing. In a written decision, Justice Lebous found Zaven in contempt for failing to appear at the hearing, and found Jo Ann in contempt for failing to pay the $10,000 fine imposed by the first contempt order.
The Trial and Appeal
Shortly before trial on the parties’ claims, Young filed a motion in limine “seeking, among other things, to strike plaintiff’s reply to the counterclaim due to spoliation of the Mercedes.” At the hearing on the motion in limine, the court granted Young’s motion to strike Jo Ann’s pleading based on her participation in the spoliation of the vehicle. At the argument, the parties also stipulated that SRE should be dissolved.
As a result of the parties’ consent to dissolution, the trial proceeded as an accounting of SRE’s assets and liabilities, as well as on SRE’s counterclaim against Jo Ann and cross claim against Zaven for misappropriation of the Gull Wing. Following a nonjury trial, the court held that the Gull Wing was an asset of SRE, that Zaven and Jo Ann had misappropriated the Gull Wing, and awarded judgment against them.
On appeal, Jo Ann – now representing herself pro se – argued that the court erred by striking her pleading for spoliation because her husband was the primary wrongdoer. In her view, it was “[Zaven]’s actions that led to the removal of the Mercedes and she had no control over him.” The court held:
We disagree. After the first contempt hearing, the court found that plaintiff, despite having actual notice of the temporary restraining order, ‘deliberately and willfully participated in the removal of the Mercedes.’ The court also found that she was ‘a willful party to the cover-up, concealment and removal of this vehicle’ and that she purposely misled the court about the whereabouts of the Mercedes. In view of the foregoing, we reject plaintiff’s claim that she bore no culpability for the removal of the Mercedes. Furthermore, taking into account plaintiff’s willful conduct in flouting the temporary restraining order and the importance of having the Mercedes personally examined by defendants so that they could prove their counterclaim, we find that the court providently exercised its discretion in striking plaintiff’s reply.
Fortunately, in my experience, egregious cases of spoliation are relatively rare. Even so, as our friends at the All About eDiscovery blog warn readers constantly, lawyers must take care great to advise their clients to preserve any and all potentially relevant evidence and data. Soghanalian is a sobering reminder that spoliation of evidence can have punishing consequences for the wrongdoer.