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Corcoran Sanctioned for Failure to Preserve E-Mail for Discovery

New York Law Journal, November 17, 2009

Noeleen G. Walder

A real estate company defendant in a lawsuit has been sanctioned by a Manhattan judge for its failure to preserve evidence and for persisting in deleting e-mails in spite of the court’s repeated warnings to comply with discovery.

Eighteen months after plaintiffs Harold Einstein and Jennifer Boyd sued the Corcoran Group in connection with the alleged deceptive marketing of a condominium, Supreme Court Justice Charles Ramos (See Profile) learned that three of Corcoran’s brokers were continuing to delete e-mails from their individual mailboxes.

“[T]he failure to implement any litigation hold, not only after the commencement of litigation, but also after this court’s repeated warnings that counsel should ‘read [their] client the riot act’, was grossly negligent and rises to the level of ‘culpable conduct’ required for a finding of spoliation” said the judge, in Einstein v. 357 LLC, 604199/07, ruling that Corcoran “willfully misled” the plaintiffs during the sale of the condominium.

Jay B. Itkowitz of Itkowitz & Harwood, who represented the condominium’s buyers, called the ruling “groundbreaking.”

He said in an interview that the ruling was the first in the state to send the “critical message” that “when you are sued or know you are going to be sued…you have to take immediate and significant steps to preserve electronic evidence.”

Errol Margolin of Margolin & Pierce, who represented the Corcoran defendants, said that he “disagreed completely” with the ruling, which he plans to appeal. Corcoran added in a statement that “we disagree with the discovery ruling and intend to file an appeal at the appropriate time. This case is still in the discovery phase and no decision has yet been made on the merits of the case.”

Mr. Einstein and Ms. Boyd purchased a condominium in June, 2007 for $1.3 million.

According to the complaint, Christina Coats, a Corcoran broker, had previously told the couple that the unit in Park Slope, Brooklyn had been taken off of the market because of a water leak, but that the condition had since been repaired.

Shortly after moving in, the buyers “experienced massive” flooding in the unit’s recreation room during a period of heavy rain.

After repeated flooding, the plaintiffs retained an expert who advised them that the “water penetration to the recreation room had spawned a mold condition,” and that the condominium was unsafe for the couple and their two children.

In December 2007, Mr. Einstein and Ms. Boyd sued Corcoran, three of its brokers, including Ms. Coats, and a number of other defendants in connection with the alleged defective design and deceptive marketing of the unit.

In June 2008, the plaintiffs served Corcoran and the brokers with a document demand.

The Corcoran defendants’ lawyers claimed at an October hearing that the defendants had produced all e-mail traffic from the individual brokers, but the defendants later admitted that they had not handed over a relevant e-mail from Adam Paceli, the vice-president of Corcoran, to a codefendant.

On Dec. 10, 2008, Justice Ramos ordered the individual brokers to “produce their respective hard drives to a non-affiliated vendor…for inspection and deleted file recovery.”

But according to plaintiffs, the Corcoran defendants failed to supply them with a list of the devices and in February 2009, the plaintiffs moved to strike defendants’ pleadings or compel compliance with discovery.

Corcoran responded with an affidavit from Terence Thomas, director of information technology for Corcoran, who testified that “all Corcoran e-mails, outgoing and incoming, are forwarded to a central server. As e-mails are sent and received, an exact replica of the central server is recorded on the hard drives of agents’ individual computers.”

The real estate company also turned over two hard drives, despite the fact that their attorneys had previously told the plaintiffs that they had no list of devices with potentially relevant data.

The plaintiffs hired Kroll OnTrack to search the hard drives, and discovered that certain e-mails were missing.

In May 2009, Mr. Thomas submitted a second affidavit, in which he said Corcoran had an e-mail deletion policy as a result of limited server space. If an individual deleted an e-mail from a local computer prior to a scheduled month-end backup, the file was not recoverable, Mr. Thomas said.

He later testified at a hearing that he had never spoken to the individual brokers about their e-mail deletion policies, did not investigate what types of electronic communication devices they used, and failed to advise anyone that a possibility existed that e-mails relevant to the litigation were being deleted.

‘Litigation Hold’

Justice Ramos concluded that the defendants’ engaged in spoilation by selectively deleting e-mails and failing to implement a “litigation hold.”

While New York case law and the Civil Practice Law and Rules are “silent” on the obligations of parties to implement a litigation hold, Justice Ramos relied on cases from the Southern District of New York in concluding that the “failure to suspend the deletion policy or to investigate the basic ways in which e-mails were stored and deleted constitutes a serious discovery default on the part of the Corcoran Defendants and their counsel rising to the level of gross negligence or willfulness.”

The judge also took to task Corcoran’s attorneys with Margolin & Pierce for making “numerous” materially false statements, such as representing to the court that all e-mail traffic had been produced.

“This Court repeatedly warned counsel for the Corcoran Defendants that the failure to make a complete production of e-mails caused the Court great concern and needed to be remedied properly. Yet the Plaintiffs, and this Court, only learned about the manual deletion policy in May 2009,” Justice Ramos wrote.

By disclosing that fact 18 months into the litigation, the judge said, Corcoran defendants “willfully and unnecessarily caused extensive motion practice and delay without any reasonable justification.”

Justice Ramos found that a “reasonable fact-finder” could conclude that “at least some of the deleted e-mails were relevant to this litigation and favorable to the Plaintiffs,” including one which suggested that the brokers cancelled an open house because of “heavy rain.”

In addition to sanctioning the Corcoran defendants by finding they misled the plaintiffs about a water infiltration problem, the judge also held that defendants’ “contumacious conduct” entitled plaintiffs to attorney’s fees and costs in connection with reviewing the two hard drives and counsel fees spent in bringing discovery motions and sanctions.

Mr. Itkowitz estimated that the plaintiffs were entitled to roughly $100,000 as a result of Justice Ramos’ ruling.

All told, the plaintiffs are requesting $5 million plus punitive damages in the litigation.