Defendant Left in the Dark After Office Power Outage

What Should a Litigant Do When Discovering from a Small-Time Adversary?

United States Magistrate Judge Kathleen Tomlinson of the Eastern District of New York recently denied a defendant law firm’s motion to impose sanctions and an adverse inference against its former client. At the evidentiary hearing, the court heard testimony from two of the plaintiff’s employees, who recounted a series of unfortunate events and office Google-ing that lead to the destruction of all documents regarding the plaintiff’s financial condition in 2009.

The present issue arises from a terminated construction contract nearing its 20th anniversary.  In May of 1996, Abcon Associates, Inc. was retained by the USPS for a construction project in Queens, New York.  Within the year, USPS terminated its contract and eventually Abcon and its president, Michael Zenobia, Jr. and his wife were ordered to pay a $2 million judgment to the United States Fidelity and Guaranty Company (USF&G).  To pay this, Abcon and the Zenobias borrowed $2 million from New York Community Bancorp, Inc. (NYCB).

In April of 1998, Abcon retained Haas & Najarian LLP (H&N) to sue USPS.  Abcon and H&N entered into a legal services agreement agreeing that would retain a lien in any amounts recovered from USPS, subordinate to any funds owed to NYCB.

After protracted litigation (10 years!) Abcon received a $2.4 million judgment, and then effectively lost it due to various judgments and claims against it.  In 2008, a court order directed distribution of money to H&N (resulting in a final payment of $463,000 for its legal fees). Another creditor appealed that order, and Abcon argued that H&N should return the money paid to it.  H&N, apparently seeing the writing on the wall that it was now or never to get paid, refused to return the payment.

On June 30, 2009, Abcon’s creditors settled among each other.  Abcon objected to the distribution of money, claiming again that H&N should not have been paid before NYCB.

Abcon filed a complaint against H&N on February 27, 2012, alleging breach of contract of the parties’ legal services agreement.  During discovery, H&N requested: “All documents concerning Abcon’s outstanding liabilities as of June 30, 2009 in excess of the sum of $5,000 owed to Persons other than [the previous litigation’s creditors]” and “Documents concerning Abcon’s financial condition of June 30, 2009, including by way of specification but not limitation, a balance sheet and an accounts payable ledger.”  Essentially, H&N wanted to be able to show that even if they were wrongfully paid in 2009, returning the money would benefit Abcon’s creditors, not Abcon.

Abcon contended that they had absolutely no documents that were responsive to those two requests, due to an office move resulting in extreme downsizing of files and power outages that totally corrupted any possibly responsive electronically stored data.  They were responsible prior to when Abcon “became inactive” and moved offices to a smaller location in September 2009, Patricia Van Dusen’s, a long-term Abcon employee and “Director of Information Services,” job was to sort the files and keep items that needed to be saved, and destroy the rest.  In order to determine what needed to be saved, Van Dusen conducted internet research on what should be kept, maintained, etc. and threw out those documents before June 30, 2009.

Next, Abcon’s Director of Marketing and Sales (and apparently also its “de facto IT person”) Eros Adragna, did not protect the company’s electronic data during the office move.  As one might expect, this ended poorly: multiple power outages occurred at the new location and, big surprise, Abcon’s server was outdated and vulnerable to viruses.  Adragna tried to back up the data but it was too late: nothing that he saved was responsive to H&N’s discovery request.

Both Van Dusen and Adragna testified before the magistrate that they did not think or know there was a “litigation hold” on Abcon’s financial records, even though Abcon was the party who eventually filed suit.  In the end, Abcon lucked out. While the court found that Abcon had a duty to preserve potential evidence, the scope of that duty did not necessarily extend to the 2009 financial documents because H&N’s legal argument that it didn’t breach the contract was so unexpected that Abcon could not have reasonably anticipated that the documents would have been relevant to its breach of contract case.

Abcon’s employees breached their duty to preserve documents, but as the court says, “at most” acted negligently as to documents that were not clearly relevant to H&N’s defense.  Therefore, the court declined to issue sanctions and an adverse inference against Abcon. Business owners, especially small business owners should learn from Abcon—don’t trust the determination of destruction of files to a couple of internet searches run by a non-attorney, and don’t entrust the preservation of data to someone also in charge of running the company’s marketing and sales. Van Dusen should have consulted with an attorney, and Abcon or Adragna should have contacted an IT specialist to preserve the data as soon as they realized there were problems with the server.  When preserving data is a side-hobby, possibly important documents that you have a duty to preserve will inevitably fall through the cracks.

Angela Raleigh is a third year law student at Seton Hall University School of Law.  She attended Montclair State University, graduating summa cum laude, and owes her interest in law to her late great-uncle, Michael Mastrangelo, who let her “work” in his law firm at age four.

Comments (1):

  1. these generally excellent blog posts would be far more useful if they included case citations (if cites are included they’re not visible on my iPhone).

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