Preview
INDEX NO. 600562/2008
FILED: NEW YORK COUNTY CLERK 04/15/2010
NYSCEF DOC. NO. 48 RECEIVED NYSCEF: 04/15/2010
SUPREME COURT OF THE STATE OF NEW YORK.
COUNTY OF NEW YORK
HSH Nordbank AG,
Plaintiff,
Index No.: 08/600562 (Lowe, J.)
—
——=. -against-
Motion Sequence 3
UBS AG and UBS Securities LLC,
Defendants.
PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO
DEFENDANTS’ MOTION FOR SANCTIONS
QUINN EMANUEL URQUHART
OLIVER & HEDGES, LLP
Peter E. Calamari
Philippe Z. Selendy
Robert S. Loigman
Isaac Nesser
51 Madison Avenue
New York, New York 10010
212-849-7000
Attorneys for Plaintiff HSH Nordbank AG
November 24, 2009
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .
STATEMENT OF FACTS
A HSH’s 2006 Investigation of UBS’s Conduct Did Not Result in Litigation
B HSH’s 2007 Investigation of UBS’s Conduct Resulted in Litigation
HSH Processed the Waas and Helms Emails Pursuant to Routine and
Good Faith Document Retention Practices
HSH’s Nearly Two-Million Page Document Production Discloses the Acts
and Impressions of Messrs. Helms and Waas, Eliminating any Prejudice.
E HSH’s Conduct was Vetted and Cleared During the Forensic Examination
ARGUMENT..
1 THE MOTION SHOULD BE DENIED BECAUSE HSH DID NOT
ANTICIPATE LITIGATION WHEN THE EMAILS WERE MARKED FOR
DELETION
T THE MOTION SHOULD BE DENIED BECAUSE HSH’S CONDUCT WAS
REASONABLE 11
A The Emails Were Not Intentionally Deleted 11
B HSH Did Not Anticipate Litigation in New York Until August 2007, and
Acted Reasonably Under German and English Law Prior to that Date . 13
Cc. The Emails Were Deleted in Good Faith and in the Ordinary Course of
Business 16
Ill. THE MOTION SHOULD BE DENIED BECAUSE UBS CANNOT
DEMONSTRATE PREJUDICE... 17
A. UBS Cannot Demonstrate that the Waas and Helms Emails Are “Crucial”
—To the Contrary, All the Relevant Facts Are Disclosed in the Two
Million Pages of Documents Produced by HSH.............. 18
UBS Cannot Demonstrate That the Waas and Helm Emails Would Favor
UBS -— To the Contrary, the Evidence Suggests They Would Favor HSH. 21
Cc The Mailbox Limit Did Not Apply to Helms or Waas, and Is Irrelevant... 24
CONCLUSION 25
TABLE OF AUTHORITIES
Page(s)
Cases
1199 Hous. Corp. v. Kelly Tank Co.,
No. 0600525-02, 2005 WL 6056057 (Sup. Ct. N.Y. Co. Dec. 5, 2005) 17, 18, 21, 22
Acorn v. County of Nassau,
No. 05-cv-2301, 2009 WL 605859 (E.D.N.Y. Mar. 9, 2009)... 21
Allstate Ins, Co. v. Gonyo,
No, 07-cv-1011, 2009 WL 1924769 (N.D.N.Y. July 1, 2009) 18
Amaris v. Sharp Elecs. Corp.,
304 A.D.2d 457 (st Dep’t 2003) 22
Am, Bus. Training, Inc. v. Am. Mgmt. Assoc.,
No. 603909-02, 2005 WL 6205454 (Sup. Ct. Nass. Co. Apr. 11, 2005) 17
Anderson v. Sotheby's Inc. Severance Plan,
No. 04-cv-8180, 2005 WL 2583715 (S.D.N.Y. Oct. 11, 2005). 14
Andretta y. Lenahan,
303 A.D.2d 527 (2d Dep’t 2003).. 18
Atlantic Mut. Ins. Co. v. Sea Transfer Trucking Corp.,
264 A.D.2d 659 (1st Dep’t 1999) 18
Balaskonis v. HRH Const. Corp.,
1 A.D.3d 120 (1st Dep’t 2003) 16, 18
Barsoum y, N.Y. City Housing Auth.,
202 F.R.D. 396 (S.D.N.Y. 2001) 22
Bon Jour Group, LLC v. Wathne, Ltd.,
No, 603432-04, 2006 WL 5111085 (Sup. Ct. N.Y. Co. Sept. 8, 2006) 12,17
Brown y. Parfums Jacques Bogart S.A.,
No. 606329-98, 2006 WL 2085478 (Sup. Ct. N.Y. Co. May 31, 2006) 15,17
Cache La Poudre Feeds, LLC v. Land O’Lakes, Inc.,
244 F.R.D, 614 (D. Colo. 2007) cee 7,8, 10
Calixto v. Watson Bowman Acme Corp.,
No. 07-cv-60077, 2009 WL 3823390 (S.D. Fla. Nov. 16, 2009) 14-15
i
Calyon v. Mizuho Sec. USA, Inc.,
No, 07-cv-2241, 2007 WL 2050297 (S.D.N.Y. July 17, 2007) 14
Cameron v. Nissan 112 Sales Corp.,
10 A.D.3d 591 (2d Dep’t 2004)... 17
Chan v. Triple 8 Palace, Inc.,
No. 03-cy-6048, 2005 WL 1925579 (S.D.N.Y. Aug. 11, 2005). 22
Cooney v. Osgood Mach.,
81 N.Y.2d 66 (1993) vercsssssees 13
Cupp v. Naughten,
414 US. 141 (1973) 20
DiDomenico v. C & S Aeromatik Supplies, Inc.,
252 A.D.2d 41 (2d Dep’t 1998) 19
Fitzpatrick v. Toy Indus. Ass'n,
No. 116548-05, 2009 WL 159123 (Sup. Ct. N.Y. Co. Jan. 5, 2009), 7,17
Fortis Corp. Ins., SA v. Viken Ship Mgmt., AS,
No. 04-cv-7048, 2007 WL 3287357 (N.D. Ohio Nov. 5, 2007) 15
Green v. McClendon,
No. 08-cv-8496, 2009 WL 2496275 (S.D.N.Y. Aug. 13, 2009).. 17
Henkel Corp. v. Polyglass USA, Inc.,
194 F.R.D, 454 (E.D.N.Y, 2000)
Herbert v. City of N.Y.,
12 A.D.3d 209 (1st Dep’t 2004) sess 16, 18
Hynix Semiconductor, Inc. v. Rambus, Inc.,
591 F. Supp. 2d 1038 (ND. Cal. 2006) 7,10
Innis Arden Golf Club v. Pitney Bowes, Inc.,
257 F.R.D. 334 (D. Conn. 2009). 10
Kirkland v. N.Y. City Hous. Auth.,
236 A.D.2d 170 (1st Dep’t 1997). 22
Klein v. Ford Motor Co.,
303 A.D.2d 376 (1st Dep’t 2003) 22
Knightner v. Custom Window & Door Prods., Inc.,
289 A.D.2d 455 (2d Dep’t 2001) .sccscssnse 16
Lane v. Fisher Park Lane Co.,
276 A.D.2d 136 (1st Dep’t 2000) 17
ill
Lovell v. United Skates of Am., Inc.
28 A.D.3d 721 (2d Dep’t 2006) 18
Melendez v. City of N.Y.
2 A.D.3d 170 (Ist Dep't 2003) 22
Minaya v. Duane Reade Int'l, Inc.,
66 A.D.3d 402 (ist Dep’t 2009) 22
Mitchell v. Fishbein,
No. 01-cv-2760, 2007 WL 3256859 (S.D.N.Y. Nov. 16, 2007). 21-23
Myers v. Sadlor.
16 A.D.3d 257 (1st Dep’t 2005) 16, 18
Nat’l Union Fire Ins. Co. v. Murray siSheet Metal Co.,
967 F.2d 980 (4th Cir. 1992)...
People v. Richter,
182 Misc. 96 (Mag. Ct. City of N.Y. 1943) 20
Popfinger v. Terminix Int’
251 A.D.2d 564 (1st Dep’t 1998) 16
Reino de Espana v. Am. Bureau of Shipping,
No. 03-cv-3573, 2006 WL 3208579 (S.D.N.Y. Nov. 3, 2006). 15
Renda v. King,
347 F.3d 550 (3d Cir. 2003). 20
Robertsv. Consol. Edison,
273 A.D.2d 369 (2d Dep't 2000) 17
Rutgerswerke AG v. Abex Corp.,
No. 93-cv-2914, 2002 WL 1203836 (S.D.N.Y. June 4, 2002) 15
Sage Realty Corp. v. Proskauer Rose, LLP.
275 A.D.2d 11 (Ist Dep’t 2000) 12,17
Scalera y, Electrograph Sys., Inc.,
No. 08-cv-0050, 2009 WL 3126637 (E.D.N.Y. Sept. 29, 2009) 17, 21, 23
Standard Fire Ins. Co. v. Fed. Pac. Elec. Co.,
14 A.D.3d 213 (Ist Dep’t 2004) 22
State v. Shaw Contracting Flooring Servs., Inc.
No. 3875-06, 2008 WL 1881555 (Sup. Ct. Alb. Co. Apr. 22, 2008). 22
Tawedros v. St. Vincent's Hosp. of N.Y.
281 A.D.2d 184 (1st Dep’t 2001) 16, 17, 18, 19
Iv
Thomas v. City of N.Y.,
9 A.D.3d 277 (1st Dep’t 2004) 16
Toussie v. County of Suffolk,
No. 01-cv-6716, 2007 WL 4565160 (E.D.N.Y. 2007). 21
Turner v. Hudson Transit Lines, Inc.,
142 F.R.D. 68 (S.D.N.Y. 1991)
Zubulake v. UBS Warburg LLC,
220 F.R.D, 212 (S.D.N.Y. 2003)... 22
Zubulake v. UBS Warburg LLC,
229 F.R.D. 422 (S.D.N.Y. 2004) ..... eee 22
Statutes
Fed. R. Civ. P. 37(e) 16
Briefs
Br. of Pl.-Appellant, Andretta v. Lenahan,
No. 20203-97 (2d Dep’t), 2003 WL 23323998 (Feb. 28, 2003). 18
Br. of PL-Appellant, Herbert v. City of N.Y.,
No. 14680-99 (Ist Dep’t), 2004 WL 5358477 (Jan. 14, 2004). 18
Miscellaneous
Assoc. of the Bar of the City of N.Y. Joint Comm. on Electronic Dise.,
Explosion of Electronic Discovery in All Areas of Litigation
Necessitates Changes in CPLR (Aug. 2009)
The Sedona Conference,
The Sedona Commentary on Legal Holds: The Trigger and the Process
(Connor R. Crawley et al. eds. 2007).
Plaintiff HSH Nordbank AG (“HSH”) respectfully submits this memorandum in
opposition to the motion for sanctions filed by Defendants UBS AG and UBS Securities, LLC
(collectively “UBS” or “Defendants”).
PRELIMINARY STATEMENT
This is a baseless motion intended to distract the parties and the Court from the merits.
The emails at issue relate to only two HSH employees and were marked for deletion —
more than two years prior to filing the complaint — when HSH and its European lawyers did not
anticipate litigation at all, much less anticipate litigation in New York. These steps were taken.
pursuant to HSH’s routine document retention policies. HSH never deleted any document with
the knowledge, much less the intent, that it would become unavailable in this action. To the
contrary, HSH’s conduct was legally, technologically, and commercially reasonable at all times.
Moreover, UBS’s claims of prejudice are speculative and false. HSH has produced
nearly two million pages of documents in this litigation — including agendas, internal
memoranda, credit applications, quantitative analyses, and emails —- prepared by HSH’s
negotiation team, credit committee, credit secretariat, and board of directors. These documents
provide deep disclosure regarding HSH’s pre-transaction deliberations, belying any suggestion
that UBS is without the means to assess those matters. All the evidence, as distinct from UBS’s
baseless speculation, suggests that the missing documents would support HSH’s claims rather
than contradict them. Indeed, more than a year-and-a-half before it filed suit, HSH affirmatively
sought to recover the emails at issue in order to support its assessment of this matter.
For nearly a year, HSH has turned over every piece of information that UBS has
requested regarding HSH’s document retention policies and the specific emails at issue here.
HSH went so far as to permit UBS forensic experts to spend a week at HSH’s German
headquarters, examining HSH’s computer systems and interviewing I.T. personnel (the
“Forensic Examination”). Rather than generate evidence of wrongdoing, these efforts —
undertaken at great expense and inconvenience — proved just the opposite: that HSH’s conduct
was reasonable, that there was no wrongful loss of evidence, and that there was no prejudice to
UBS. It is time for the distraction to end. The motion should be denied with UBS ordered to pay
HSH’s costs and expenses associated with the Forensic Examination and this motion.
STATEMENT OF FACTS
A HSH’s 2006 Investigation of UBS’s Conduct Did Not Result in Litigation
In late 2005, HSH’s senior management launched an internal investigation of UBS’s
management of several transactions in which HSH had invested, including North Street 2002-4
(“NS4”), at issue in this litigation. Aff. of Michael A. McNicholas 4/3. This investigation was
coordinated by Michael A. McNicholas, a transactional lawyer in HSH’s offices in England. 7d.
On December 21, 2005, as one of his first tasks in coordinating the investigation, Mr
MeNicholas hired the financial consulting firm Devon Capital LLC (“Devon”) and assembled a
team of HSH quantitative analysts to work on the investigation. At that time, Mr. McNicholas
did not, and could not, know whether the investigation would result in litigation. Id 4.
Between December 21, 2005 and February 2006, Devon and HSH conducted certain
quantitative analyses of large volumes of data relating to UBS’s management of NS4 and related
matters. By the end of February 2006, Mr. McNicholas received preliminary reports at which
point the possibility of a dispute with UBS became clearer. However, at that time, HSH still had
no firm view as to how this dispute would unfold and, although litigation was possible, HSH
then did not expect that it would commence litigation in New York. Jd. {| 5-6.
The investigation continued from March 2006 through September 2006, focusing on
analysis of large volumes of quantitative data. In September 2006, Mr. McNicholas and other
members of the team thought it would also be helpful to review documents regarding the
negotiation of NS4. As part of this effort, in October 2006, Mr. McNicholas asked Katharina
Bruhn (an HSH analyst and a member of the investigative team) to procure the emails of certain
individuals including Franz Waas and Rainer Helms. Jd. (| 7-9; Aff. of Katharina Bruhn { 9.
Ms. Bruhn contacted HSH’s information technology (“I.T.”) department and learned that
the emails at issue had become unavailable pursuant to the routine operation of the document
retention policy in HSH’s Kiel office. Bruhn Aff. | 9. As described in further detail below, the
emails had become unavailable because, in 2005, Mr. Waas had left HSH and Mr. Helms had
transferred to HSH’s Luxembourg office. During the same period, Mr. Helms directly confirmed
that emails from his tenure in Kiel were unavailable. Jd. This was the first time Mr. McNicholas
or Ms. Bruhn learned about the applicable document retention policies. Jd. § 10; McNicholas
Aff. § 10. Indeed, Mr. McNicholas, who works in HSH’s London office, had no experience with
the document retention policies applicable in HSH’s German offices at all. Id. § 10.
Tn any event, in October or November 2006, active work on the internal investigation
concluded and no claims were filed against UBS. Jd 411.
B. HSH’s 2007 Investigation of UBS’s Conduct Resulted in Litigation
In February 2007, long after the emails of Messrs. Waas and Helms had become
unavailable, UBS made a series of massive substitutions into NS4. These substitutions appeared
patently improper, and HSH restarted the internal investigation. On June 13, 2007, HSH met
with UBS in New York to express its displeasure. On August 8, 2007, having not heard back
from UBS following the June 13 meeting, Mr. McNicholas contacted HSH’s U.K. counsel to
discuss a potential lawsuit against UBS, including possible forums. This was the first time that
Mr. MeNicholas or HSH had seriously considered suing UBS in New York, although Mr.
MeNicholas did not consult with New York litigation counsel at this time. Jd. §] 12-14.
On August 10, 2007, Mr. McNicholas sent another letter to UBS reiterating HSH’s
concerns. A meeting with UBS was scheduled for August 14, 2007, but UBS cancelled on short
notice without explanation, On August 15, 2007, Mr. McNicholas sent a letter to Huw Jenkins,
then Chairman and CEO of UBS Investment Bank, expressing deep disappointment with regard
to what Mr. MeNicholas believed was UBS’s obstructive behavior. Jd. J¥ 15-16.
On October 9, 2007, UBS sent HSH a letter denying any wrongdoing. On that date, Mr.
MeNicholas developed the view that litigation was likely to ensue. In December 2007, HSH
retained Quinn Emanuel Urquhart Oliver & Hedges, LLP (“Quinn Emanuel”) to pursue its
claims. Shortly thereafter, Quinn Emanuel prepared document retention notices and HSH
circulated them. HSH filed its complaint in this Court in February 2008. Jd. 7§ 16-17.
Cc HSH Processed the Waas and Helms Emails Pursuant to Routine and Good
Faith Document Retention Practices
The emails at issue were subject to the following document retention practices: First, if
an individual left the bank or transferred from the Kiel office, HSH’s human resources
department would notify HSH’s IT. department of the departure. Aff. of Jason Velasco 5.
Second, the .T. department would delete the individual’s user account including the individual’s
active email account, causing associated data on backup tapes to be “marked for overwriting.”
Third, automatically and without any human involvement, any backup tape data became "eligible
for overwriting" 90 days later (or 180 days after deactivation of the user account in the case of
board members like Franz Waas), at which time the data could be retrieved, only by forensic
experts at great expense, if at all. Jd. HSH’s legal department was not involved with this
process. MeNicholas Aff. ¥ 10.
The foregoing rules applied only to email. Velasco Aff. | 6. Other electronic documents,
such as Word, and Excel documents, were preserved on backup tapes for 995 days following
deletion of the user’s active account. Hard copy documents were not affected, nor were
4
electronic documents (including emails) stored on shared drives, or emails sent to or from others
which were preserved in the mailboxes of those senders or recipients. Id. These categories of
documents are not at issue on this motion, which relates only to the limited category of emails
present on HSH’s server at the time of the departure of Messrs. Helms and Waas.
In accordance with the foregoing, Rainer Helms’s backup data was marked for
overwriting on October 31, 2005; as an automatic result, email on backup tapes became eligible
for overwriting and practically unavailable on January 30, 2006. Similarly, Franz Waas’s
backup data was marked for overwriting on January 4, 2006; as an automatic result, email on
backup tapes became eligible for overwriting and practically unavailable on July 4, 2006 (more
than a year-and-half before this lawsuit was filed). Id. {| 6-7.
The software and hardware platforms that HSH uses to maintain its active data and its
disaster recovery system are common and standard in the industry, and are technologically
reasonable and defensible. Id. 4 4.
D. HSH’s Nearly Two-Million Page Document Production Discloses the Acts
and Impressions of Messrs. Helms and Waas, Eliminating any Prejudice
HSH has produced nearly two million pages of documents in this litigation, including
documents from 37 current and former employees. Affirmation of Isaac Nesser {| 2 (“Nesser
Aff.”), These documents include large numbers of (a) memoranda regarding the transaction; (b)
agendas for meetings to discuss and negotiate the transaction; (c) draft credit applications; (d)
credit secretariat opinions; and (ec) HSH board minutes. Velasco Aff. 6. Mr. Waas and Mr.
Helms indicate that they are willing to be deposed in this action.' Nesser Aff. 7 5-6.
) UBS argues that it has produced more documents than HSH. Yet UBS’s conduct is primarily at issue in this
Jawsuit and more UBS employees than HSH employees were involved with NS4. Indeed, UBS has searched for
emails from roughly twice as many employees as has HSH.
Accordingly, UBS has a rich body of documents, and will have deposition testimony,
disclosing every aspect of HSH’s decision-making process. Mr. Waas’s emails would be
unlikely to add anything of significance — he was a high-level HSH board member with little
day-to-day involvement with NS4, as is evident from the fact that there is not a single email to or
from Mr. Waas in UBS’s entire production of “more than 95,000 e-mails” (UBS Br. at 10). As
for Mr. Helms, in addition to the foregoing reports and memoranda, HSH has produced more
than 500 emails sent to or from Mr. Helms; scores of his electronic documents (e.g., Microsoft
Word files); and nearly 2000 documents on which his name appears. Nesser Aff. 14. And Mr.
Helms was not the only HSH negotiator — several others were involved, for whom large
volumes of emails were produced. We discuss these matters in further detail at page 19 below,
including citations to many of the relevant documents which are attached to UBS’s brief and to
this brief, In short, UBS cannot demonstrate that the Waas and Helms emails would have
contained crucial evidence that would have been favorable to UBS — UBS’s arguments to the
contrary improperly rest on bare unsubstantiated speculation.
E. HSHA’s Conduct was Vetted and Cleared During the Forensic Examination.
In July 2009, in response to UBS’s concerns and in coordination with Special Master
Donohue, a forensic expert designated by HSH and a forensic expert designated by UBS spent a
week at HSH’s Hamburg office, investigating among other things the scope and effect of HSH’s
document retention policies and practices. Id. §6. The investigation included a physical
inspection of HSH’s computer servers and backup systems, and interviews with HSH 1.T.
representatives and third-party vendors. Velasco Aff. 3. Among other things, the Forensic
Examination confirmed that HSH took reasonable steps to locate, collect, preserve, and produce
relevant electronically stored information in the course of this litigation, including by conducting
defensible and comprehensive searches across a vast I.T. infrastructure. The forensic experts
were unable to locate any data that HSH had not previously searched for production. Jd. { 8.
ARGUMENT
I THE MOTION SHOULD BE DENIED BECAUSE HSH DID NOT ANTICIPATE
LITIGATION WHEN THE EMAILS WERE MARKED FOR DELETION
UBS asserts that HSH deleted the emails of Messrs, Helms and Waas during a period in
which HSH anticipated litigation. This is false. The emails were marked for deletion in October
2005 and early January 2006, respectively, well before the end of February 2006, when HSH
first saw litigation even as a possibility. fd 7; McNicholas Aff. J 6.
The law governing retention of documents in anticipation of litigation is well established.
“Sanctions for discarding items in good faith and pursuant to a company’s normal business
practices are inappropriate in the absence of pending litigation or notice of a specific claim.”
Fitzpatrick v. Tay Indus. Ass’n, No. 116548-05, 2009 WL 159123 (Sup. Ct. N.Y. Co. Jan. 5,
2009). As such, the duty to preserve does not attach until litigation is “likely,” and “more than a
mere possibility.” Cache La Poudre Feeds, LLC v. Land O'Lakes, Inc., 244 FRD. 614, 621,
626 (D. Colo. 2007) (denying sanctions) (citing inter alia Henkel Corp. v. Polyglass USA, Inc.,
194 F.R.D. 454, 456 (E.D.N.Y. 2000)?
The court’s refusal to impose sanctions in Iynix Semiconductor, Inc. v. Rambus, Inc.,
591 F. Supp. 2d 1038 (N.D. Cal. 2006), is instructive. There, the plaintiff met with its lawyers to
design a “litigation strategy,” later engaged in multiple “Shred Days” during which it destroyed
? See Hynix Semiconductor Inc. v. Rambus, Inc., 591 F. Supp. 2d 1038, 1061 (N.D. Cal. 2006) (“probable”) (citing
inter alia ABA Sec. of Litig., Civil Disc. Standards, Aug. 1999, Standard No. 10 (“probable”)); Turner v. Hudson
Transit Lines, Inc., 142 F.R.D. 68, 72-73 (S.D.N.Y, 1991) (“likely”); The Sedona Conference, The Sedona
Commentary on Legal Holds: The Trigger and the Process (Connor R. Crawley et al. eds. 2007) (putative plaintiff
must “anticipate taking legal action to initiate litigation,” and litigation must be “likely”); Assoc. of the Bar of the
City of N.Y, Joint Comm. on Electronic Disc., Explosion of Electronic Discovery in All Areas of Litigation
Necessitates Changes in CPLR (Aug. 2009), 10-11 (“the word ‘likely,’ with its suggestion that a more than 50%
(footnote continued)
documents, and thereafter filed suit. The “litigation strategy” discussions did not trigger an
obligation to preserve documents in anticipation of litigation:
Although [Plaintiff] began formulating a licensing strategy that included a
litigation strategy as of early 1998, [Plaintiff] did not actively contemplate
litigation or believe litigation against any particular... manufacturer to be
necessary or wise before [certain] negotiation... failed, namely in late 1999... [I]t
would appear that litigation became probable shortly before the initiation of the
“beauty contest” in late 1999 in which litigation counsel... was selected
Id. at 1053-54, 1064. The Cache court reasoned similarly:
[A] party’s duty to preserve evidence in advance of litigation must be predicated
on something more than an equivocal statement of discontent, particularly when
that discontent does not crystalize into litigation for nearly two years.
Cache La Poudre Feeds, LLC, 244 F.R.D. at 623. See Nat’l Union Fire Ins. Co. v. Murray Sheet
Metal Co., 967 F.2d 980, 984 (4th Cir. 1992) (high bar necessary because litigation “is an ever-
present possibility”).
Here, Michael McNicholas, who coordinated HSH’s internal investigation, first saw
litigation as a possibility at the end of February 2006, after the internal investigation began to /
generate preliminary results. McNicholas Aff. { 6. Thus, assuming that New York document
retention rules applied (they did not as discussed in section II,B below), February 28, 2006 is the
earliest possible date on which HSH could have been required to preserve documents in
anticipation of litigation.
HSH therefore did nothing wrong regarding Mr. Helms’s emails. Those emails were
marked for overwriting on October 31 2005, two months before Mr. McNicholas even began
coordinating the internal investigation. Jd. 4/3, 10. The emails became practically
unrecoverable when they became available for overwriting on January 29, 2006, well before
chance is required, provides better guidance and a somewhat higher threshold for triggering a duty to preserve than
the more vague ‘reasonably anticipated’ standard”).
HSH anticipated the possibility of litigation at the end of February — and nearly two years
before HSH seriously considered the possibility of litigation in the United States. id. {§ 6, 10.
The facts are similar for Mr. Waas, whose emails were marked for overwriting on
January 4, 2006, nearly two months before HSH first anticipated litigation. Although Mr.
Waas’s emails theoretically remained available for recovery from backup tapes until July 2006,
the January date was the last time that any HSH employee took any affirmative step regarding
Mr. Waas’s data. After January 4, 2006, all interactions with that data were automated, and
recovery of the data would have required specific knowledge that the data (a) had been marked
for overwriting, (b) would be necessary for litigation, and (c) could be recovered after it had been
marked for overwriting— knowledge that Mr. McNicholas did not have at that time. Jd, 110
UBS has made two arguments in response. First, it argues that the emails at issue could
have been saved if an HSH lawyer had intervened some time after February 2006 to reverse the
overwriting process. This argument fails entirely as to Mr. Helms, whose emails became
permanently unavailable on January 29, 2006, prior to the date on which HSH anticipated
litigation. Jd. Even as to Mr. Waas’s emails, the only point in the deletion process at which an
HSH lawyer could realistically have intervened was at the outset of the deletion process in
January 2006, well before HSH anticipated litigation, when I.T. deactivated Mr. Waas’s email
account as a matter of standard operating procedure. Afterward, the entire process was
automated, without notice to or involvement by HSH counsel. Indeed, Mr. McNicholas did not
even know of the document retention policy in Kiel, let alone how to reverse it. Id.
Second, perhaps recognizing that HSH had no ability to recover Mr. Helms’s emails and
no reasonable opportunity to recover Mr. Waas’s emails after HSH first anticipated litigation on
February 28, 2006, UBS quibbles with the anticipation of litigation date. Specifically, UBS
argues that HSH must have anticipated litigation prior to February 28, 2006 because it hired a
financial consulting firm in December 2005 to analyze the performance of HSH’s investment in
NS4. UBS’s attempt to second-guess HSH’s own internal assessments and sworn statements
misses the mark, Mr. McNicholas hired the financial consultants as one of his first acts at the
very start of the investigation, at a time when HSH had not yet formed any working conclusion
‘as to whether UBS had engaged in wrongdoing, let alone developed any plan or expectation that
it would sue UBS. Indeed, the very purpose of the internal investigation, and the engagement of
the financial consultants, was to determine whether UBS had engaged in wrongdoing? Id. 44.
UBS’s argument that HSH anticipated litigation on the date it began its investigation in
December 2005 is also legally wrong. If the development of a legal strategy was insufficient to
support a duty to preserve in Hynix, then certainly HSH’s engagement of a financial consulting
firm to investigate potential wrongdoing in December 2005 does not support such a duty.
Rather, HSH’s concerns in December 2005 were in the nature of an “equivocal statement of
discontent” of the type at issue in Cache. If accepted, UBS’s argument would demand an absurd
result in which every company would be required to commence document preservation efforts
the instant it develops a concern about a transaction or the instant it contacts a lawyer or
consultant to inquire about conceivable legal claims. Courts and commentators reject this
unworkable approach, which would create an “intractable dilemma” for putative plaintiffs.
Cache, 244 F.R.D. at 623. See also authority cited in footnote 2 above.
UBS’s argument is further refuted by the fact that the 2005/06 internal investigation did
not result in litigation. McNicholas Aff. 911. Any “anticipation of litigation” that HSH
developed in 2006 (or even in 2005 as UBS incorrectly suggests) disappeared in October 2006,
when active work on HSH’s internal investigation came to a close with no claims being filed.
3 Distinguishable for this reason is Junis Arden Golf Club v. Pitney Bowes, Inc., 257 F.R.D. 334 (D. Conn. 2009),
in which the expert was hired to recover costs on a specific claim.
10
Litigation resulted when the investigation was restarted in February 2007, culminating with
UBS’s refusal to negotiate toward the end of that year. Indeed, October 2007 was the first date
on which Mr. McNicholas believed that litigation was more likely than not, and HSH did not hire
U.S. litigation counsel until December 2007. Id. {J 12-17.
i. THE MOTION SHOULD BE DENIED BECAUSE HSH’S CONDUCT WAS
REASONABLE
A The Emails Were Not Intentionally Deleted
UBS’s motion suggests that HSH intentionally destroyed evidence.’ This accusation is
completely false.
The data at issue was processed in accordance with HSH’s routine document retention
policy, as UBS concedes. See Velasco Aff. {{] 5-8. HSH’s lawyers were not involved in the
processing. Indeed, the lawyer who coordinated HSH’s internal investigation did not even know
that the policy existed. McNicholas Aff. Jf 10, 18. Under these circumstances, he could not
possibly have requested deletion with intent to render emails unavailable as evidence.
Tellingly, UBS nowhere suggest that HSH lawyers were involved in the deletion process.
Rather, UBS vaguely states that HSH issued “affirmative deletion instructions.” UBS Mot. at 6.
But these instructions were mere ministerial notices sent by human resources to I.T., announcing
that certain individuals had left HSH or the Kiel office. Upon receipt, HSH’s LT. department did
the expected: it turned off the departing user’s email account and other electronic accounts.
MeNicholas Aff. { 10. These two ministerial steps -- H.R.’s departure notice and L.T.’s
deactivation of the user’s account — were the only human involvement in the process. Yet they
4 See UBS Motion at 1 ( HSH “[took] steps to delete,” “affirmatively directed... that... emails be deleted,” and
“affirmatively directed its IT department... to delete... emails”), 6 (HSH sent “formal deletion instructions”), 8
(HSH “actively deleted” and “destroy[ed] relevant data after this lawsuit was filed”).
11
are the entire basis for UBS’s wildly exaggerated accusation of “affirmative deletion.” There
was no affirmative deletion here, and certainly nothing similar to the cases that UBS cites.°
Relatedly, not content to accuse HSH of affirmative deletion, UBS over-reaches even
further by arguing that HSH deleted evidence after this lawsuit was filed. UBS Mot. at 8. There
is absolutely no evidence to support this outrageous accusation. First, the accusation relates to a
folder of emails that clearly was not deleted. Katharina Bruhn, who created the folder, has
signed an affidavit confirming that the folder still exists. Bruhn Aff. 7. A mountain of
evidence confirms that conclusion: (1) the folder hierarchy located by HSH is the same as the
one Ms. Bruhn created; (2) the folder names comport with Ms. Bruhn’s common practice; (3) the
dates in subfolder names are the dates on which Ms. Bruhn recalls updating the subfolders; (4)
the emails are in pdf and the attachments are in native format, as Ms. Brubn recalls; (5) an “x” is
sed in certain file names, as Ms. Bruhn recalls; (6) the number of files matches Ms. Bruhn’s
recollection; (7) the distribution of files by year matches Ms. Bruhn’s recollection; (8) the final
email was saved to the folder on Ms. Bruhn’s final day as an NS4 analyst; and (9) nearly all the
pdfs in the folder were created using Ms. Bruhn’s user ID. Jd Far from being deleted during
the course of litigation, the folder at issue was not deleted af all.
Second, UBS does not even contend that the emails in the Bruhn folder were deleted —
rather, UBS’s accusation of post-complaint deletion is based on HSH’s alleged deletion of
metadata (e.g., the folder’s prior name and creation date), which may be of forensic interest but
which is irrelevant to the merits. The mere loss of metadata is not equivalent to intentional
destruction of substantive evidence. Moreover, the metadata was not intentionally deleted — it
was at most automatically modified when, in October 2008, the folder was copied to a new
5 See, e.g, Sage Realty Corp. v. Proskauer Rose, LLP, 275 A.D.2d 11 (1st Dep’t 2000) (deletion of audiotapes with
intent to subvert justice); Bon Jour Group, LLC vy. Wathne, Ltd., No. 603432-04, 2006 WL 5111085, *5 (Sup. Ct.
(foomote continued)
12
directory in the ordinary course of business. See Velasco Aff. {10 (explaining that such copying
is routine). UBS’s assertion that HSH deleted documents after the initiation of litigation is, at
best, a knowing distortion of the facts.
Indeed, HSH’s conduct has always been inconsistent with an intent to destroy evidence.
First, although certain emails were marked for overwriting, other electronic documents (Word,
Excel, etc.) were preserved on backup tapes and have been produced. Jd. Second, HSH never
deleted hard copy documents created by Messrs. Helms or Waas, or their emails to the extent
preserved in the others” accounts. Third, HSH took affirmative steps in October 2006 to recover
the emails at issue. McNicholas Aff. JJ 8-9, 19. Fourth, HSH promptly preserved all relevant
documents once litigation in New York became likely. Jd 17. Fifth, HSH at great expense
permitted two UBS forensic experts to spend a week examining HSH’s computer systems and
interviewing HSH’s I.T. personnel. Nesser Aff. 6. These are not the acts of an intentional
spoliator. Rather, as discussed below, HSH acted in good faith at all times.
B. HSH Did Not Anticipate Litigation in New York Until August 2007, and
Acted Reasonably Under German and English Law Prior to that Date
As a German company, HSH was not bound by New York discovery obligations until it
anticipated litigation in New York in August 2007. See McNicholas Aff. ff] 16-18. HSH cannot
be sanctioned here for having acted in full compliance with German law during a period in which
New York litigation was not expected.
HSH cannot be accused of bad faith for having acted in compliance with the laws of its
home jurisdiction as to emails stored in that jurisdiction.® Under German law, there is generally
no obligation to preserve documents in anticipation of litigation. Aff. of Dr. Stephan
N.Y. Co. Sept. 8, 2006) (Lowe, J.) (party attempted to make a “mockery” of court orders).
13
Wilske J 11. Indeed, there is ordinarily no document production in German courts. As such,
German companies do not typically issue “litigation holds,” or take other steps to preserve
documents in anticipation of litigation. Id. J] 12-13.
A similar rule applies in England, the home jurisdiction of Mr. McNicholas. “Under
English law there is no obligation on a potential party to civil litigation to retain documents when
proceedings are in reasonable contemplation.” Aff. of Laurence Rabinowitz QC 45. Companies
cannot be sanctioned for failing to retain documents on the facts at issue here. /d. 6.
Therefore, when litigation emerged as a possibility in February 2006, HSH reasonably
relied upon its document retention protocols in compliance with German and English law. HSH
did not talk with its English lawyers about potentially suing in New York until August 2007, and
did not retain New York counsel until months thereafter.’ McNicholas Aff. ¥ 14, 17. There
was no need for HSH to comply with New York law prior to August 2007, and no reason for the
English lawyer here — who was not even familiar with New York law — to assume that his
German employer needed to do so.*
A court reached this very conclusion as to a German party just last week. Calixio v.
Watson Bowman Acme Corp., No. 07-cv-60077, 2009 WL 3823390 (S.D. Fla. Nov. 16, 2009).
There, the defendant deleted documents even after receiving a letter threatening litigation. In
opposition to a sanctions motion, the defendant argued that “because [the party receiving the
© See Cooney v. Osgood Mach., 81 N.Y.2d 66, 72 (1993) (if the purpose of a law is to regulate conduct, “the law of
the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in
regulating behavior within its borders”).
7 Although one of HSH’s financial consultants possessed a law license, he was not retained as a lawyer. See
Calyon v. Mizuho Sec. USA, Ine., No. 07-cv-2241, 2007 WL 2050297, *1-2 (S.D.N.Y. July 17, 2007) (business
person not subject to obligations as an attorney merely due to his “legal education and prior history as a lawyer”).
8 UBS cites several U.S. cases in which HSH was a party. In every such case, HSH observed the relevant U.S.
laws once it learned that litigation had commenced or would commence. No court has ever imposed a general
obligation on HSH (or any other company) to abide by U.S. laws in all of its dealings absent some warning that U.S.
litigation would commence. Anderson v. Sotheby's Inc. Severance Plan, No. 04-cv-8180, 20065 WL 2583715, *1, 4—
5 (S.D.N.Y. Oct, 11, 2005), is distinguishable because all the parties in that case were US.-based.
14
letter] is a German entity and [plaintiff is a citizen of Brazil, counsel] did not anticipate that
litigation in the United States would occur, and document preservation and discovery
requirements in other countries can differ substantially from those in the United States.” /d. *10.
The court adopted this argument and denied sanctions, holding inter alia that “because [the
recipient of the letter] is a German company and [plaintiff] is a Brazilian national, it was not
unreasonable for.., counsel... to view the letter as threatening legal action outside the United
States.” Jd. *17. Similarly, another court has observed that
Perhaps in the fullness of time foreign-based companies doing business in the
[U.S.] will be held to the same ‘litigation holds’ and other devices now routinely
applied by litigants here.... But I presently see no basis... for concluding that
what happened here is so blameworthy that the defendant should be deprived,
either in whole or part, of the opportunity to defend this case on the merits.
Fortis Corp. Ins., SA v. Viken Ship Mgmt., AS, No. 04-cy-7048, 2007 WL 3287357, *1-2 (N.D.
Ohio Nov. 5, 2007)
In response, UBS claims that “U.S. courts routinely apply U.S. spoliation law to foreign
patties,” UBS Br, at 4-5, but cites.three unpublished and non-binding trial court decisions that do
not support UBS’s broad assertion or its application here. Reino de Espana v. American Bureau
of Shipping, No. 03-cv-3573, 2006 WL 3208579 (S.D.N.Y. Nov. 3, 2006) merely granted a
garden-variety motion to compel. Rutgerswerke AG y. Abex Corp., No. 93-cv-2914, 2002 WL
1203836, *11-14 (S.D.N.Y. June 4, 2002) imposed sanctions on a party that destroyed directly
relevant affidavits in an attempt to subvert justice, in a manner that would violate the law in any
jurisdiction. Brown v. Parfums Jacques Bogart S.A., No, 606329-98, 2006 WL 2085478 (Sup.
Ct. N.Y. Co. May 31, 2006), involved destruction of documents during “active litigation.” None
of these cases deal with conduct that, as here, occurred years prior to the start of U.S. litigation.
15
c The Emails Were Deleted in Good Faith and in the Ordinary Course of
Business
Under New York law, there is no basis for sanctions here. New York courts routinely
decline to impose sanctions for good faith loss of evidence, even when acts leading to the
destruction were intentional. For example, Popfinger v. Terminix International, 251 A.D.2d 564,
565 (Ist Dep’t 1998), concerned alleged termite infestation. Sanctions were denied even though,
“[p]rior to commencing the action, the plaintiff had the termite damage repaired and discarded
the damaged wood....” Jd. The First Department held that, “under these circumstances, the
plaintiff should not be sanctioned for intentional spoliation.” Jd.
Such holdings are common, See Myers vy. Sadlor, 16 A.D.3d 257, 257-258 (1st Dep’t
2005) (no sanctions where evidence “was inadvertently corrupted and destroyed”); Herbert v.
City of N.Y., 12 A.D.3d 209, 210 (1st Dep’t 2004) (sanctions unwarranted absent “indication that
defendants... disposed of crucial evidence with knowledge of its potential evidentiary value”);
Tawedros v. St. Vincent’s Hosp. of N.Y., 281 A.D.2d 184 (1st Dep’t 2001) (no sanctions “since it
was not established that [the]...failure to produce [documents]... was willful and
contumacious.... The careless loss of a record is not willful.”); Knightner v. Custom Window &
Door Prods., Ine., 289 A.D.2d 455, 456 (2d Dep’t 2001) (“dismissal would be inappropriate
here,” absent showing “that the plaintiff acted intentionally or in bad faith”)?
Sanctions are even more rare where evidence is lost due to good faith compliance with
document retention policies. See Thomas v. City of N.¥., 9 A.D.3d 277, 278 (1st Dep’t 2004)
(sanctions unwarranted where “the routine practice of [the party] is to discard [the relevant
evidence] upon removal”); Balaskonis v. HRH Const. Corp., 1 A.D.3d 120 (1st Dep’t 2003)
See also Fed, R. Civ. P. 37(e) (‘Absent exceptional circumstances, a court may not impose sanctions ...for
fail[ure] to provide electronically stored information lost as a result of the routine, good-faith operation of an
electronic information system.”).
16
(sanctions inappropriate because “there is no indication that... defendant disposed of crucial
evidence... other than in the ordinary course of business, or with notice of the evidence’s
potential evidentiary value”); Roberts v. Consol. Edison, 273 A.D.2d 369, 370 (2d Dep’t 2000)
(sanctions inappropriate because “there was no evidence that the... practice of routinely
7 10
destroying... work records was either spoliation or an effort to frustrate discovery
IL. THE MOTION SHOULD BE DENIED BECAUSE UBS CANNOT
DEMONSTRATE PREJUDICE
The “lynchpin for spoliation sanctions under New York law is prejudice.” Fitzpatrick,
2009 WL 159123, *10. Thus, “where [alleged] spoliation does not result in prejudice, it will be
disregarded.” Am. Bus. Training, Inc. v. Am. Mgmt. Assoc., No. 603909-02, 2005 WL 6205454
(Sup. Ct. Nass. Co. Apr. 11, 2005) (citing Lane v. Fisher Park Lane Co., 276 A.D.2d 136 (1st
Dep’t 2000)).
It is UBS’s burden to demonstrate prejudice. As this Court has held, “[t]he burden is on
the moving party to establish that the destroyed evidence was crucial to his or her case.” 1/99
Hous. Corp. v. Kelly Tank Co., No. 0600525-02, 2005 WL 6056057, *7 (Sup. Ct. N.Y, Co. Dec
5, 2005) (Lowe, J.) (citing Cameron v. Nissan 112 Sales Corp., 10 A.D.3d 591 (2d Dep’t 2004)
and Tawedros, 281 AD2d 184 (1st Dep’t 2001))."!
10 Contrary to UBS’s contention, the failure to implement a litigation hold is not per se gross negligence. See
Scalera v. Electrograph Sys., Inc., No. 08-cy-0050, 2009 WL 3126637, *15 (E.D.N.Y. Sept. 29, 2009) (where “no
formal written litigation hold was ever implemented,” defendants were held to have “acted negligently but not with
gross negligence.”). The federal case that UBS cites for the contrary proposition, Green v. McClendon, No, 08-cv-
8496, 2009 WL 2496275, *4 (S.D.N.Y. Aug. 13, 2009), at most held that the post-complaint failure to preserve is
grossly negligent, and the cases cited therein explicitly do not apply to the pre-complaint period.
1. Tn arguing that the burden of production should be shifted to HSH, UBS relies on inapposite cases in which the
content of the spoliated evidence was inferred from bad faith deletion. Sage, 275 A.D.2d at 15
Preview
INDEX NO. 600562/2008 FILED: NEW YORK COUNTY CLERK 04/15/2010 NYSCEF DOC. NO. 48 RECEIVED NYSCEF: 04/15/2010 SUPREME COURT OF THE STATE OF NEW YORK. COUNTY OF NEW YORK HSH Nordbank AG, Plaintiff, Index No.: 08/600562 (Lowe, J.) — ——=. -against- Motion Sequence 3 UBS AG and UBS Securities LLC, Defendants. PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION FOR SANCTIONS QUINN EMANUEL URQUHART OLIVER & HEDGES, LLP Peter E. Calamari Philippe Z. Selendy Robert S. Loigman Isaac Nesser 51 Madison Avenue New York, New York 10010 212-849-7000 Attorneys for Plaintiff HSH Nordbank AG November 24, 2009 TABLE OF CONTENTS Page PRELIMINARY STATEMENT . STATEMENT OF FACTS A HSH’s 2006 Investigation of UBS’s Conduct Did Not Result in Litigation B HSH’s 2007 Investigation of UBS’s Conduct Resulted in Litigation HSH Processed the Waas and Helms Emails Pursuant to Routine and Good Faith Document Retention Practices HSH’s Nearly Two-Million Page Document Production Discloses the Acts and Impressions of Messrs. Helms and Waas, Eliminating any Prejudice. E HSH’s Conduct was Vetted and Cleared During the Forensic Examination ARGUMENT.. 1 THE MOTION SHOULD BE DENIED BECAUSE HSH DID NOT ANTICIPATE LITIGATION WHEN THE EMAILS WERE MARKED FOR DELETION T THE MOTION SHOULD BE DENIED BECAUSE HSH’S CONDUCT WAS REASONABLE 11 A The Emails Were Not Intentionally Deleted 11 B HSH Did Not Anticipate Litigation in New York Until August 2007, and Acted Reasonably Under German and English Law Prior to that Date . 13 Cc. The Emails Were Deleted in Good Faith and in the Ordinary Course of Business 16 Ill. THE MOTION SHOULD BE DENIED BECAUSE UBS CANNOT DEMONSTRATE PREJUDICE... 17 A. UBS Cannot Demonstrate that the Waas and Helms Emails Are “Crucial” —To the Contrary, All the Relevant Facts Are Disclosed in the Two Million Pages of Documents Produced by HSH.............. 18 UBS Cannot Demonstrate That the Waas and Helm Emails Would Favor UBS -— To the Contrary, the Evidence Suggests They Would Favor HSH. 21 Cc The Mailbox Limit Did Not Apply to Helms or Waas, and Is Irrelevant... 24 CONCLUSION 25 TABLE OF AUTHORITIES Page(s) Cases 1199 Hous. Corp. v. Kelly Tank Co., No. 0600525-02, 2005 WL 6056057 (Sup. Ct. N.Y. Co. Dec. 5, 2005) 17, 18, 21, 22 Acorn v. County of Nassau, No. 05-cv-2301, 2009 WL 605859 (E.D.N.Y. Mar. 9, 2009)... 21 Allstate Ins, Co. v. Gonyo, No, 07-cv-1011, 2009 WL 1924769 (N.D.N.Y. July 1, 2009) 18 Amaris v. Sharp Elecs. Corp., 304 A.D.2d 457 (st Dep’t 2003) 22 Am, Bus. Training, Inc. v. Am. Mgmt. Assoc., No. 603909-02, 2005 WL 6205454 (Sup. Ct. Nass. Co. Apr. 11, 2005) 17 Anderson v. Sotheby's Inc. Severance Plan, No. 04-cv-8180, 2005 WL 2583715 (S.D.N.Y. Oct. 11, 2005). 14 Andretta y. Lenahan, 303 A.D.2d 527 (2d Dep’t 2003).. 18 Atlantic Mut. Ins. Co. v. Sea Transfer Trucking Corp., 264 A.D.2d 659 (1st Dep’t 1999) 18 Balaskonis v. HRH Const. Corp., 1 A.D.3d 120 (1st Dep’t 2003) 16, 18 Barsoum y, N.Y. City Housing Auth., 202 F.R.D. 396 (S.D.N.Y. 2001) 22 Bon Jour Group, LLC v. Wathne, Ltd., No, 603432-04, 2006 WL 5111085 (Sup. Ct. N.Y. Co. Sept. 8, 2006) 12,17 Brown y. Parfums Jacques Bogart S.A., No. 606329-98, 2006 WL 2085478 (Sup. Ct. N.Y. Co. May 31, 2006) 15,17 Cache La Poudre Feeds, LLC v. Land O’Lakes, Inc., 244 F.R.D, 614 (D. Colo. 2007) cee 7,8, 10 Calixto v. Watson Bowman Acme Corp., No. 07-cv-60077, 2009 WL 3823390 (S.D. Fla. Nov. 16, 2009) 14-15 i Calyon v. Mizuho Sec. USA, Inc., No, 07-cv-2241, 2007 WL 2050297 (S.D.N.Y. July 17, 2007) 14 Cameron v. Nissan 112 Sales Corp., 10 A.D.3d 591 (2d Dep’t 2004)... 17 Chan v. Triple 8 Palace, Inc., No. 03-cy-6048, 2005 WL 1925579 (S.D.N.Y. Aug. 11, 2005). 22 Cooney v. Osgood Mach., 81 N.Y.2d 66 (1993) vercsssssees 13 Cupp v. Naughten, 414 US. 141 (1973) 20 DiDomenico v. C & S Aeromatik Supplies, Inc., 252 A.D.2d 41 (2d Dep’t 1998) 19 Fitzpatrick v. Toy Indus. Ass'n, No. 116548-05, 2009 WL 159123 (Sup. Ct. N.Y. Co. Jan. 5, 2009), 7,17 Fortis Corp. Ins., SA v. Viken Ship Mgmt., AS, No. 04-cv-7048, 2007 WL 3287357 (N.D. Ohio Nov. 5, 2007) 15 Green v. McClendon, No. 08-cv-8496, 2009 WL 2496275 (S.D.N.Y. Aug. 13, 2009).. 17 Henkel Corp. v. Polyglass USA, Inc., 194 F.R.D, 454 (E.D.N.Y, 2000) Herbert v. City of N.Y., 12 A.D.3d 209 (1st Dep’t 2004) sess 16, 18 Hynix Semiconductor, Inc. v. Rambus, Inc., 591 F. Supp. 2d 1038 (ND. Cal. 2006) 7,10 Innis Arden Golf Club v. Pitney Bowes, Inc., 257 F.R.D. 334 (D. Conn. 2009). 10 Kirkland v. N.Y. City Hous. Auth., 236 A.D.2d 170 (1st Dep’t 1997). 22 Klein v. Ford Motor Co., 303 A.D.2d 376 (1st Dep’t 2003) 22 Knightner v. Custom Window & Door Prods., Inc., 289 A.D.2d 455 (2d Dep’t 2001) .sccscssnse 16 Lane v. Fisher Park Lane Co., 276 A.D.2d 136 (1st Dep’t 2000) 17 ill Lovell v. United Skates of Am., Inc. 28 A.D.3d 721 (2d Dep’t 2006) 18 Melendez v. City of N.Y. 2 A.D.3d 170 (Ist Dep't 2003) 22 Minaya v. Duane Reade Int'l, Inc., 66 A.D.3d 402 (ist Dep’t 2009) 22 Mitchell v. Fishbein, No. 01-cv-2760, 2007 WL 3256859 (S.D.N.Y. Nov. 16, 2007). 21-23 Myers v. Sadlor. 16 A.D.3d 257 (1st Dep’t 2005) 16, 18 Nat’l Union Fire Ins. Co. v. Murray siSheet Metal Co., 967 F.2d 980 (4th Cir. 1992)... People v. Richter, 182 Misc. 96 (Mag. Ct. City of N.Y. 1943) 20 Popfinger v. Terminix Int’ 251 A.D.2d 564 (1st Dep’t 1998) 16 Reino de Espana v. Am. Bureau of Shipping, No. 03-cv-3573, 2006 WL 3208579 (S.D.N.Y. Nov. 3, 2006). 15 Renda v. King, 347 F.3d 550 (3d Cir. 2003). 20 Robertsv. Consol. Edison, 273 A.D.2d 369 (2d Dep't 2000) 17 Rutgerswerke AG v. Abex Corp., No. 93-cv-2914, 2002 WL 1203836 (S.D.N.Y. June 4, 2002) 15 Sage Realty Corp. v. Proskauer Rose, LLP. 275 A.D.2d 11 (Ist Dep’t 2000) 12,17 Scalera y, Electrograph Sys., Inc., No. 08-cv-0050, 2009 WL 3126637 (E.D.N.Y. Sept. 29, 2009) 17, 21, 23 Standard Fire Ins. Co. v. Fed. Pac. Elec. Co., 14 A.D.3d 213 (Ist Dep’t 2004) 22 State v. Shaw Contracting Flooring Servs., Inc. No. 3875-06, 2008 WL 1881555 (Sup. Ct. Alb. Co. Apr. 22, 2008). 22 Tawedros v. St. Vincent's Hosp. of N.Y. 281 A.D.2d 184 (1st Dep’t 2001) 16, 17, 18, 19 Iv Thomas v. City of N.Y., 9 A.D.3d 277 (1st Dep’t 2004) 16 Toussie v. County of Suffolk, No. 01-cv-6716, 2007 WL 4565160 (E.D.N.Y. 2007). 21 Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68 (S.D.N.Y. 1991) Zubulake v. UBS Warburg LLC, 220 F.R.D, 212 (S.D.N.Y. 2003)... 22 Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004) ..... eee 22 Statutes Fed. R. Civ. P. 37(e) 16 Briefs Br. of Pl.-Appellant, Andretta v. Lenahan, No. 20203-97 (2d Dep’t), 2003 WL 23323998 (Feb. 28, 2003). 18 Br. of PL-Appellant, Herbert v. City of N.Y., No. 14680-99 (Ist Dep’t), 2004 WL 5358477 (Jan. 14, 2004). 18 Miscellaneous Assoc. of the Bar of the City of N.Y. Joint Comm. on Electronic Dise., Explosion of Electronic Discovery in All Areas of Litigation Necessitates Changes in CPLR (Aug. 2009) The Sedona Conference, The Sedona Commentary on Legal Holds: The Trigger and the Process (Connor R. Crawley et al. eds. 2007). Plaintiff HSH Nordbank AG (“HSH”) respectfully submits this memorandum in opposition to the motion for sanctions filed by Defendants UBS AG and UBS Securities, LLC (collectively “UBS” or “Defendants”). PRELIMINARY STATEMENT This is a baseless motion intended to distract the parties and the Court from the merits. The emails at issue relate to only two HSH employees and were marked for deletion — more than two years prior to filing the complaint — when HSH and its European lawyers did not anticipate litigation at all, much less anticipate litigation in New York. These steps were taken. pursuant to HSH’s routine document retention policies. HSH never deleted any document with the knowledge, much less the intent, that it would become unavailable in this action. To the contrary, HSH’s conduct was legally, technologically, and commercially reasonable at all times. Moreover, UBS’s claims of prejudice are speculative and false. HSH has produced nearly two million pages of documents in this litigation — including agendas, internal memoranda, credit applications, quantitative analyses, and emails —- prepared by HSH’s negotiation team, credit committee, credit secretariat, and board of directors. These documents provide deep disclosure regarding HSH’s pre-transaction deliberations, belying any suggestion that UBS is without the means to assess those matters. All the evidence, as distinct from UBS’s baseless speculation, suggests that the missing documents would support HSH’s claims rather than contradict them. Indeed, more than a year-and-a-half before it filed suit, HSH affirmatively sought to recover the emails at issue in order to support its assessment of this matter. For nearly a year, HSH has turned over every piece of information that UBS has requested regarding HSH’s document retention policies and the specific emails at issue here. HSH went so far as to permit UBS forensic experts to spend a week at HSH’s German headquarters, examining HSH’s computer systems and interviewing I.T. personnel (the “Forensic Examination”). Rather than generate evidence of wrongdoing, these efforts — undertaken at great expense and inconvenience — proved just the opposite: that HSH’s conduct was reasonable, that there was no wrongful loss of evidence, and that there was no prejudice to UBS. It is time for the distraction to end. The motion should be denied with UBS ordered to pay HSH’s costs and expenses associated with the Forensic Examination and this motion. STATEMENT OF FACTS A HSH’s 2006 Investigation of UBS’s Conduct Did Not Result in Litigation In late 2005, HSH’s senior management launched an internal investigation of UBS’s management of several transactions in which HSH had invested, including North Street 2002-4 (“NS4”), at issue in this litigation. Aff. of Michael A. McNicholas 4/3. This investigation was coordinated by Michael A. McNicholas, a transactional lawyer in HSH’s offices in England. 7d. On December 21, 2005, as one of his first tasks in coordinating the investigation, Mr MeNicholas hired the financial consulting firm Devon Capital LLC (“Devon”) and assembled a team of HSH quantitative analysts to work on the investigation. At that time, Mr. McNicholas did not, and could not, know whether the investigation would result in litigation. Id 4. Between December 21, 2005 and February 2006, Devon and HSH conducted certain quantitative analyses of large volumes of data relating to UBS’s management of NS4 and related matters. By the end of February 2006, Mr. McNicholas received preliminary reports at which point the possibility of a dispute with UBS became clearer. However, at that time, HSH still had no firm view as to how this dispute would unfold and, although litigation was possible, HSH then did not expect that it would commence litigation in New York. Jd. {| 5-6. The investigation continued from March 2006 through September 2006, focusing on analysis of large volumes of quantitative data. In September 2006, Mr. McNicholas and other members of the team thought it would also be helpful to review documents regarding the negotiation of NS4. As part of this effort, in October 2006, Mr. McNicholas asked Katharina Bruhn (an HSH analyst and a member of the investigative team) to procure the emails of certain individuals including Franz Waas and Rainer Helms. Jd. (| 7-9; Aff. of Katharina Bruhn { 9. Ms. Bruhn contacted HSH’s information technology (“I.T.”) department and learned that the emails at issue had become unavailable pursuant to the routine operation of the document retention policy in HSH’s Kiel office. Bruhn Aff. | 9. As described in further detail below, the emails had become unavailable because, in 2005, Mr. Waas had left HSH and Mr. Helms had transferred to HSH’s Luxembourg office. During the same period, Mr. Helms directly confirmed that emails from his tenure in Kiel were unavailable. Jd. This was the first time Mr. McNicholas or Ms. Bruhn learned about the applicable document retention policies. Jd. § 10; McNicholas Aff. § 10. Indeed, Mr. McNicholas, who works in HSH’s London office, had no experience with the document retention policies applicable in HSH’s German offices at all. Id. § 10. Tn any event, in October or November 2006, active work on the internal investigation concluded and no claims were filed against UBS. Jd 411. B. HSH’s 2007 Investigation of UBS’s Conduct Resulted in Litigation In February 2007, long after the emails of Messrs. Waas and Helms had become unavailable, UBS made a series of massive substitutions into NS4. These substitutions appeared patently improper, and HSH restarted the internal investigation. On June 13, 2007, HSH met with UBS in New York to express its displeasure. On August 8, 2007, having not heard back from UBS following the June 13 meeting, Mr. McNicholas contacted HSH’s U.K. counsel to discuss a potential lawsuit against UBS, including possible forums. This was the first time that Mr. MeNicholas or HSH had seriously considered suing UBS in New York, although Mr. MeNicholas did not consult with New York litigation counsel at this time. Jd. §] 12-14. On August 10, 2007, Mr. McNicholas sent another letter to UBS reiterating HSH’s concerns. A meeting with UBS was scheduled for August 14, 2007, but UBS cancelled on short notice without explanation, On August 15, 2007, Mr. McNicholas sent a letter to Huw Jenkins, then Chairman and CEO of UBS Investment Bank, expressing deep disappointment with regard to what Mr. MeNicholas believed was UBS’s obstructive behavior. Jd. J¥ 15-16. On October 9, 2007, UBS sent HSH a letter denying any wrongdoing. On that date, Mr. MeNicholas developed the view that litigation was likely to ensue. In December 2007, HSH retained Quinn Emanuel Urquhart Oliver & Hedges, LLP (“Quinn Emanuel”) to pursue its claims. Shortly thereafter, Quinn Emanuel prepared document retention notices and HSH circulated them. HSH filed its complaint in this Court in February 2008. Jd. 7§ 16-17. Cc HSH Processed the Waas and Helms Emails Pursuant to Routine and Good Faith Document Retention Practices The emails at issue were subject to the following document retention practices: First, if an individual left the bank or transferred from the Kiel office, HSH’s human resources department would notify HSH’s IT. department of the departure. Aff. of Jason Velasco 5. Second, the .T. department would delete the individual’s user account including the individual’s active email account, causing associated data on backup tapes to be “marked for overwriting.” Third, automatically and without any human involvement, any backup tape data became "eligible for overwriting" 90 days later (or 180 days after deactivation of the user account in the case of board members like Franz Waas), at which time the data could be retrieved, only by forensic experts at great expense, if at all. Jd. HSH’s legal department was not involved with this process. MeNicholas Aff. ¥ 10. The foregoing rules applied only to email. Velasco Aff. | 6. Other electronic documents, such as Word, and Excel documents, were preserved on backup tapes for 995 days following deletion of the user’s active account. Hard copy documents were not affected, nor were 4 electronic documents (including emails) stored on shared drives, or emails sent to or from others which were preserved in the mailboxes of those senders or recipients. Id. These categories of documents are not at issue on this motion, which relates only to the limited category of emails present on HSH’s server at the time of the departure of Messrs. Helms and Waas. In accordance with the foregoing, Rainer Helms’s backup data was marked for overwriting on October 31, 2005; as an automatic result, email on backup tapes became eligible for overwriting and practically unavailable on January 30, 2006. Similarly, Franz Waas’s backup data was marked for overwriting on January 4, 2006; as an automatic result, email on backup tapes became eligible for overwriting and practically unavailable on July 4, 2006 (more than a year-and-half before this lawsuit was filed). Id. {| 6-7. The software and hardware platforms that HSH uses to maintain its active data and its disaster recovery system are common and standard in the industry, and are technologically reasonable and defensible. Id. 4 4. D. HSH’s Nearly Two-Million Page Document Production Discloses the Acts and Impressions of Messrs. Helms and Waas, Eliminating any Prejudice HSH has produced nearly two million pages of documents in this litigation, including documents from 37 current and former employees. Affirmation of Isaac Nesser {| 2 (“Nesser Aff.”), These documents include large numbers of (a) memoranda regarding the transaction; (b) agendas for meetings to discuss and negotiate the transaction; (c) draft credit applications; (d) credit secretariat opinions; and (ec) HSH board minutes. Velasco Aff. 6. Mr. Waas and Mr. Helms indicate that they are willing to be deposed in this action.' Nesser Aff. 7 5-6. ) UBS argues that it has produced more documents than HSH. Yet UBS’s conduct is primarily at issue in this Jawsuit and more UBS employees than HSH employees were involved with NS4. Indeed, UBS has searched for emails from roughly twice as many employees as has HSH. Accordingly, UBS has a rich body of documents, and will have deposition testimony, disclosing every aspect of HSH’s decision-making process. Mr. Waas’s emails would be unlikely to add anything of significance — he was a high-level HSH board member with little day-to-day involvement with NS4, as is evident from the fact that there is not a single email to or from Mr. Waas in UBS’s entire production of “more than 95,000 e-mails” (UBS Br. at 10). As for Mr. Helms, in addition to the foregoing reports and memoranda, HSH has produced more than 500 emails sent to or from Mr. Helms; scores of his electronic documents (e.g., Microsoft Word files); and nearly 2000 documents on which his name appears. Nesser Aff. 14. And Mr. Helms was not the only HSH negotiator — several others were involved, for whom large volumes of emails were produced. We discuss these matters in further detail at page 19 below, including citations to many of the relevant documents which are attached to UBS’s brief and to this brief, In short, UBS cannot demonstrate that the Waas and Helms emails would have contained crucial evidence that would have been favorable to UBS — UBS’s arguments to the contrary improperly rest on bare unsubstantiated speculation. E. HSHA’s Conduct was Vetted and Cleared During the Forensic Examination. In July 2009, in response to UBS’s concerns and in coordination with Special Master Donohue, a forensic expert designated by HSH and a forensic expert designated by UBS spent a week at HSH’s Hamburg office, investigating among other things the scope and effect of HSH’s document retention policies and practices. Id. §6. The investigation included a physical inspection of HSH’s computer servers and backup systems, and interviews with HSH 1.T. representatives and third-party vendors. Velasco Aff. 3. Among other things, the Forensic Examination confirmed that HSH took reasonable steps to locate, collect, preserve, and produce relevant electronically stored information in the course of this litigation, including by conducting defensible and comprehensive searches across a vast I.T. infrastructure. The forensic experts were unable to locate any data that HSH had not previously searched for production. Jd. { 8. ARGUMENT I THE MOTION SHOULD BE DENIED BECAUSE HSH DID NOT ANTICIPATE LITIGATION WHEN THE EMAILS WERE MARKED FOR DELETION UBS asserts that HSH deleted the emails of Messrs, Helms and Waas during a period in which HSH anticipated litigation. This is false. The emails were marked for deletion in October 2005 and early January 2006, respectively, well before the end of February 2006, when HSH first saw litigation even as a possibility. fd 7; McNicholas Aff. J 6. The law governing retention of documents in anticipation of litigation is well established. “Sanctions for discarding items in good faith and pursuant to a company’s normal business practices are inappropriate in the absence of pending litigation or notice of a specific claim.” Fitzpatrick v. Tay Indus. Ass’n, No. 116548-05, 2009 WL 159123 (Sup. Ct. N.Y. Co. Jan. 5, 2009). As such, the duty to preserve does not attach until litigation is “likely,” and “more than a mere possibility.” Cache La Poudre Feeds, LLC v. Land O'Lakes, Inc., 244 FRD. 614, 621, 626 (D. Colo. 2007) (denying sanctions) (citing inter alia Henkel Corp. v. Polyglass USA, Inc., 194 F.R.D. 454, 456 (E.D.N.Y. 2000)? The court’s refusal to impose sanctions in Iynix Semiconductor, Inc. v. Rambus, Inc., 591 F. Supp. 2d 1038 (N.D. Cal. 2006), is instructive. There, the plaintiff met with its lawyers to design a “litigation strategy,” later engaged in multiple “Shred Days” during which it destroyed ? See Hynix Semiconductor Inc. v. Rambus, Inc., 591 F. Supp. 2d 1038, 1061 (N.D. Cal. 2006) (“probable”) (citing inter alia ABA Sec. of Litig., Civil Disc. Standards, Aug. 1999, Standard No. 10 (“probable”)); Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72-73 (S.D.N.Y, 1991) (“likely”); The Sedona Conference, The Sedona Commentary on Legal Holds: The Trigger and the Process (Connor R. Crawley et al. eds. 2007) (putative plaintiff must “anticipate taking legal action to initiate litigation,” and litigation must be “likely”); Assoc. of the Bar of the City of N.Y, Joint Comm. on Electronic Disc., Explosion of Electronic Discovery in All Areas of Litigation Necessitates Changes in CPLR (Aug. 2009), 10-11 (“the word ‘likely,’ with its suggestion that a more than 50% (footnote continued) documents, and thereafter filed suit. The “litigation strategy” discussions did not trigger an obligation to preserve documents in anticipation of litigation: Although [Plaintiff] began formulating a licensing strategy that included a litigation strategy as of early 1998, [Plaintiff] did not actively contemplate litigation or believe litigation against any particular... manufacturer to be necessary or wise before [certain] negotiation... failed, namely in late 1999... [I]t would appear that litigation became probable shortly before the initiation of the “beauty contest” in late 1999 in which litigation counsel... was selected Id. at 1053-54, 1064. The Cache court reasoned similarly: [A] party’s duty to preserve evidence in advance of litigation must be predicated on something more than an equivocal statement of discontent, particularly when that discontent does not crystalize into litigation for nearly two years. Cache La Poudre Feeds, LLC, 244 F.R.D. at 623. See Nat’l Union Fire Ins. Co. v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992) (high bar necessary because litigation “is an ever- present possibility”). Here, Michael McNicholas, who coordinated HSH’s internal investigation, first saw litigation as a possibility at the end of February 2006, after the internal investigation began to / generate preliminary results. McNicholas Aff. { 6. Thus, assuming that New York document retention rules applied (they did not as discussed in section II,B below), February 28, 2006 is the earliest possible date on which HSH could have been required to preserve documents in anticipation of litigation. HSH therefore did nothing wrong regarding Mr. Helms’s emails. Those emails were marked for overwriting on October 31 2005, two months before Mr. McNicholas even began coordinating the internal investigation. Jd. 4/3, 10. The emails became practically unrecoverable when they became available for overwriting on January 29, 2006, well before chance is required, provides better guidance and a somewhat higher threshold for triggering a duty to preserve than the more vague ‘reasonably anticipated’ standard”). HSH anticipated the possibility of litigation at the end of February — and nearly two years before HSH seriously considered the possibility of litigation in the United States. id. {§ 6, 10. The facts are similar for Mr. Waas, whose emails were marked for overwriting on January 4, 2006, nearly two months before HSH first anticipated litigation. Although Mr. Waas’s emails theoretically remained available for recovery from backup tapes until July 2006, the January date was the last time that any HSH employee took any affirmative step regarding Mr. Waas’s data. After January 4, 2006, all interactions with that data were automated, and recovery of the data would have required specific knowledge that the data (a) had been marked for overwriting, (b) would be necessary for litigation, and (c) could be recovered after it had been marked for overwriting— knowledge that Mr. McNicholas did not have at that time. Jd, 110 UBS has made two arguments in response. First, it argues that the emails at issue could have been saved if an HSH lawyer had intervened some time after February 2006 to reverse the overwriting process. This argument fails entirely as to Mr. Helms, whose emails became permanently unavailable on January 29, 2006, prior to the date on which HSH anticipated litigation. Jd. Even as to Mr. Waas’s emails, the only point in the deletion process at which an HSH lawyer could realistically have intervened was at the outset of the deletion process in January 2006, well before HSH anticipated litigation, when I.T. deactivated Mr. Waas’s email account as a matter of standard operating procedure. Afterward, the entire process was automated, without notice to or involvement by HSH counsel. Indeed, Mr. McNicholas did not even know of the document retention policy in Kiel, let alone how to reverse it. Id. Second, perhaps recognizing that HSH had no ability to recover Mr. Helms’s emails and no reasonable opportunity to recover Mr. Waas’s emails after HSH first anticipated litigation on February 28, 2006, UBS quibbles with the anticipation of litigation date. Specifically, UBS argues that HSH must have anticipated litigation prior to February 28, 2006 because it hired a financial consulting firm in December 2005 to analyze the performance of HSH’s investment in NS4. UBS’s attempt to second-guess HSH’s own internal assessments and sworn statements misses the mark, Mr. McNicholas hired the financial consultants as one of his first acts at the very start of the investigation, at a time when HSH had not yet formed any working conclusion ‘as to whether UBS had engaged in wrongdoing, let alone developed any plan or expectation that it would sue UBS. Indeed, the very purpose of the internal investigation, and the engagement of the financial consultants, was to determine whether UBS had engaged in wrongdoing? Id. 44. UBS’s argument that HSH anticipated litigation on the date it began its investigation in December 2005 is also legally wrong. If the development of a legal strategy was insufficient to support a duty to preserve in Hynix, then certainly HSH’s engagement of a financial consulting firm to investigate potential wrongdoing in December 2005 does not support such a duty. Rather, HSH’s concerns in December 2005 were in the nature of an “equivocal statement of discontent” of the type at issue in Cache. If accepted, UBS’s argument would demand an absurd result in which every company would be required to commence document preservation efforts the instant it develops a concern about a transaction or the instant it contacts a lawyer or consultant to inquire about conceivable legal claims. Courts and commentators reject this unworkable approach, which would create an “intractable dilemma” for putative plaintiffs. Cache, 244 F.R.D. at 623. See also authority cited in footnote 2 above. UBS’s argument is further refuted by the fact that the 2005/06 internal investigation did not result in litigation. McNicholas Aff. 911. Any “anticipation of litigation” that HSH developed in 2006 (or even in 2005 as UBS incorrectly suggests) disappeared in October 2006, when active work on HSH’s internal investigation came to a close with no claims being filed. 3 Distinguishable for this reason is Junis Arden Golf Club v. Pitney Bowes, Inc., 257 F.R.D. 334 (D. Conn. 2009), in which the expert was hired to recover costs on a specific claim. 10 Litigation resulted when the investigation was restarted in February 2007, culminating with UBS’s refusal to negotiate toward the end of that year. Indeed, October 2007 was the first date on which Mr. McNicholas believed that litigation was more likely than not, and HSH did not hire U.S. litigation counsel until December 2007. Id. {J 12-17. i. THE MOTION SHOULD BE DENIED BECAUSE HSH’S CONDUCT WAS REASONABLE A The Emails Were Not Intentionally Deleted UBS’s motion suggests that HSH intentionally destroyed evidence.’ This accusation is completely false. The data at issue was processed in accordance with HSH’s routine document retention policy, as UBS concedes. See Velasco Aff. {{] 5-8. HSH’s lawyers were not involved in the processing. Indeed, the lawyer who coordinated HSH’s internal investigation did not even know that the policy existed. McNicholas Aff. Jf 10, 18. Under these circumstances, he could not possibly have requested deletion with intent to render emails unavailable as evidence. Tellingly, UBS nowhere suggest that HSH lawyers were involved in the deletion process. Rather, UBS vaguely states that HSH issued “affirmative deletion instructions.” UBS Mot. at 6. But these instructions were mere ministerial notices sent by human resources to I.T., announcing that certain individuals had left HSH or the Kiel office. Upon receipt, HSH’s LT. department did the expected: it turned off the departing user’s email account and other electronic accounts. MeNicholas Aff. { 10. These two ministerial steps -- H.R.’s departure notice and L.T.’s deactivation of the user’s account — were the only human involvement in the process. Yet they 4 See UBS Motion at 1 ( HSH “[took] steps to delete,” “affirmatively directed... that... emails be deleted,” and “affirmatively directed its IT department... to delete... emails”), 6 (HSH sent “formal deletion instructions”), 8 (HSH “actively deleted” and “destroy[ed] relevant data after this lawsuit was filed”). 11 are the entire basis for UBS’s wildly exaggerated accusation of “affirmative deletion.” There was no affirmative deletion here, and certainly nothing similar to the cases that UBS cites.° Relatedly, not content to accuse HSH of affirmative deletion, UBS over-reaches even further by arguing that HSH deleted evidence after this lawsuit was filed. UBS Mot. at 8. There is absolutely no evidence to support this outrageous accusation. First, the accusation relates to a folder of emails that clearly was not deleted. Katharina Bruhn, who created the folder, has signed an affidavit confirming that the folder still exists. Bruhn Aff. 7. A mountain of evidence confirms that conclusion: (1) the folder hierarchy located by HSH is the same as the one Ms. Bruhn created; (2) the folder names comport with Ms. Bruhn’s common practice; (3) the dates in subfolder names are the dates on which Ms. Bruhn recalls updating the subfolders; (4) the emails are in pdf and the attachments are in native format, as Ms. Brubn recalls; (5) an “x” is sed in certain file names, as Ms. Bruhn recalls; (6) the number of files matches Ms. Bruhn’s recollection; (7) the distribution of files by year matches Ms. Bruhn’s recollection; (8) the final email was saved to the folder on Ms. Bruhn’s final day as an NS4 analyst; and (9) nearly all the pdfs in the folder were created using Ms. Bruhn’s user ID. Jd Far from being deleted during the course of litigation, the folder at issue was not deleted af all. Second, UBS does not even contend that the emails in the Bruhn folder were deleted — rather, UBS’s accusation of post-complaint deletion is based on HSH’s alleged deletion of metadata (e.g., the folder’s prior name and creation date), which may be of forensic interest but which is irrelevant to the merits. The mere loss of metadata is not equivalent to intentional destruction of substantive evidence. Moreover, the metadata was not intentionally deleted — it was at most automatically modified when, in October 2008, the folder was copied to a new 5 See, e.g, Sage Realty Corp. v. Proskauer Rose, LLP, 275 A.D.2d 11 (1st Dep’t 2000) (deletion of audiotapes with intent to subvert justice); Bon Jour Group, LLC vy. Wathne, Ltd., No. 603432-04, 2006 WL 5111085, *5 (Sup. Ct. (foomote continued) 12 directory in the ordinary course of business. See Velasco Aff. {10 (explaining that such copying is routine). UBS’s assertion that HSH deleted documents after the initiation of litigation is, at best, a knowing distortion of the facts. Indeed, HSH’s conduct has always been inconsistent with an intent to destroy evidence. First, although certain emails were marked for overwriting, other electronic documents (Word, Excel, etc.) were preserved on backup tapes and have been produced. Jd. Second, HSH never deleted hard copy documents created by Messrs. Helms or Waas, or their emails to the extent preserved in the others” accounts. Third, HSH took affirmative steps in October 2006 to recover the emails at issue. McNicholas Aff. JJ 8-9, 19. Fourth, HSH promptly preserved all relevant documents once litigation in New York became likely. Jd 17. Fifth, HSH at great expense permitted two UBS forensic experts to spend a week examining HSH’s computer systems and interviewing HSH’s I.T. personnel. Nesser Aff. 6. These are not the acts of an intentional spoliator. Rather, as discussed below, HSH acted in good faith at all times. B. HSH Did Not Anticipate Litigation in New York Until August 2007, and Acted Reasonably Under German and English Law Prior to that Date As a German company, HSH was not bound by New York discovery obligations until it anticipated litigation in New York in August 2007. See McNicholas Aff. ff] 16-18. HSH cannot be sanctioned here for having acted in full compliance with German law during a period in which New York litigation was not expected. HSH cannot be accused of bad faith for having acted in compliance with the laws of its home jurisdiction as to emails stored in that jurisdiction.® Under German law, there is generally no obligation to preserve documents in anticipation of litigation. Aff. of Dr. Stephan N.Y. Co. Sept. 8, 2006) (Lowe, J.) (party attempted to make a “mockery” of court orders). 13 Wilske J 11. Indeed, there is ordinarily no document production in German courts. As such, German companies do not typically issue “litigation holds,” or take other steps to preserve documents in anticipation of litigation. Id. J] 12-13. A similar rule applies in England, the home jurisdiction of Mr. McNicholas. “Under English law there is no obligation on a potential party to civil litigation to retain documents when proceedings are in reasonable contemplation.” Aff. of Laurence Rabinowitz QC 45. Companies cannot be sanctioned for failing to retain documents on the facts at issue here. /d. 6. Therefore, when litigation emerged as a possibility in February 2006, HSH reasonably relied upon its document retention protocols in compliance with German and English law. HSH did not talk with its English lawyers about potentially suing in New York until August 2007, and did not retain New York counsel until months thereafter.’ McNicholas Aff. ¥ 14, 17. There was no need for HSH to comply with New York law prior to August 2007, and no reason for the English lawyer here — who was not even familiar with New York law — to assume that his German employer needed to do so.* A court reached this very conclusion as to a German party just last week. Calixio v. Watson Bowman Acme Corp., No. 07-cv-60077, 2009 WL 3823390 (S.D. Fla. Nov. 16, 2009). There, the defendant deleted documents even after receiving a letter threatening litigation. In opposition to a sanctions motion, the defendant argued that “because [the party receiving the © See Cooney v. Osgood Mach., 81 N.Y.2d 66, 72 (1993) (if the purpose of a law is to regulate conduct, “the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders”). 7 Although one of HSH’s financial consultants possessed a law license, he was not retained as a lawyer. See Calyon v. Mizuho Sec. USA, Ine., No. 07-cv-2241, 2007 WL 2050297, *1-2 (S.D.N.Y. July 17, 2007) (business person not subject to obligations as an attorney merely due to his “legal education and prior history as a lawyer”). 8 UBS cites several U.S. cases in which HSH was a party. In every such case, HSH observed the relevant U.S. laws once it learned that litigation had commenced or would commence. No court has ever imposed a general obligation on HSH (or any other company) to abide by U.S. laws in all of its dealings absent some warning that U.S. litigation would commence. Anderson v. Sotheby's Inc. Severance Plan, No. 04-cv-8180, 20065 WL 2583715, *1, 4— 5 (S.D.N.Y. Oct, 11, 2005), is distinguishable because all the parties in that case were US.-based. 14 letter] is a German entity and [plaintiff is a citizen of Brazil, counsel] did not anticipate that litigation in the United States would occur, and document preservation and discovery requirements in other countries can differ substantially from those in the United States.” /d. *10. The court adopted this argument and denied sanctions, holding inter alia that “because [the recipient of the letter] is a German company and [plaintiff] is a Brazilian national, it was not unreasonable for.., counsel... to view the letter as threatening legal action outside the United States.” Jd. *17. Similarly, another court has observed that Perhaps in the fullness of time foreign-based companies doing business in the [U.S.] will be held to the same ‘litigation holds’ and other devices now routinely applied by litigants here.... But I presently see no basis... for concluding that what happened here is so blameworthy that the defendant should be deprived, either in whole or part, of the opportunity to defend this case on the merits. Fortis Corp. Ins., SA v. Viken Ship Mgmt., AS, No. 04-cy-7048, 2007 WL 3287357, *1-2 (N.D. Ohio Nov. 5, 2007) In response, UBS claims that “U.S. courts routinely apply U.S. spoliation law to foreign patties,” UBS Br, at 4-5, but cites.three unpublished and non-binding trial court decisions that do not support UBS’s broad assertion or its application here. Reino de Espana v. American Bureau of Shipping, No. 03-cv-3573, 2006 WL 3208579 (S.D.N.Y. Nov. 3, 2006) merely granted a garden-variety motion to compel. Rutgerswerke AG y. Abex Corp., No. 93-cv-2914, 2002 WL 1203836, *11-14 (S.D.N.Y. June 4, 2002) imposed sanctions on a party that destroyed directly relevant affidavits in an attempt to subvert justice, in a manner that would violate the law in any jurisdiction. Brown v. Parfums Jacques Bogart S.A., No, 606329-98, 2006 WL 2085478 (Sup. Ct. N.Y. Co. May 31, 2006), involved destruction of documents during “active litigation.” None of these cases deal with conduct that, as here, occurred years prior to the start of U.S. litigation. 15 c The Emails Were Deleted in Good Faith and in the Ordinary Course of Business Under New York law, there is no basis for sanctions here. New York courts routinely decline to impose sanctions for good faith loss of evidence, even when acts leading to the destruction were intentional. For example, Popfinger v. Terminix International, 251 A.D.2d 564, 565 (Ist Dep’t 1998), concerned alleged termite infestation. Sanctions were denied even though, “[p]rior to commencing the action, the plaintiff had the termite damage repaired and discarded the damaged wood....” Jd. The First Department held that, “under these circumstances, the plaintiff should not be sanctioned for intentional spoliation.” Jd. Such holdings are common, See Myers vy. Sadlor, 16 A.D.3d 257, 257-258 (1st Dep’t 2005) (no sanctions where evidence “was inadvertently corrupted and destroyed”); Herbert v. City of N.Y., 12 A.D.3d 209, 210 (1st Dep’t 2004) (sanctions unwarranted absent “indication that defendants... disposed of crucial evidence with knowledge of its potential evidentiary value”); Tawedros v. St. Vincent’s Hosp. of N.Y., 281 A.D.2d 184 (1st Dep’t 2001) (no sanctions “since it was not established that [the]...failure to produce [documents]... was willful and contumacious.... The careless loss of a record is not willful.”); Knightner v. Custom Window & Door Prods., Ine., 289 A.D.2d 455, 456 (2d Dep’t 2001) (“dismissal would be inappropriate here,” absent showing “that the plaintiff acted intentionally or in bad faith”)? Sanctions are even more rare where evidence is lost due to good faith compliance with document retention policies. See Thomas v. City of N.¥., 9 A.D.3d 277, 278 (1st Dep’t 2004) (sanctions unwarranted where “the routine practice of [the party] is to discard [the relevant evidence] upon removal”); Balaskonis v. HRH Const. Corp., 1 A.D.3d 120 (1st Dep’t 2003) See also Fed, R. Civ. P. 37(e) (‘Absent exceptional circumstances, a court may not impose sanctions ...for fail[ure] to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.”). 16 (sanctions inappropriate because “there is no indication that... defendant disposed of crucial evidence... other than in the ordinary course of business, or with notice of the evidence’s potential evidentiary value”); Roberts v. Consol. Edison, 273 A.D.2d 369, 370 (2d Dep’t 2000) (sanctions inappropriate because “there was no evidence that the... practice of routinely 7 10 destroying... work records was either spoliation or an effort to frustrate discovery IL. THE MOTION SHOULD BE DENIED BECAUSE UBS CANNOT DEMONSTRATE PREJUDICE The “lynchpin for spoliation sanctions under New York law is prejudice.” Fitzpatrick, 2009 WL 159123, *10. Thus, “where [alleged] spoliation does not result in prejudice, it will be disregarded.” Am. Bus. Training, Inc. v. Am. Mgmt. Assoc., No. 603909-02, 2005 WL 6205454 (Sup. Ct. Nass. Co. Apr. 11, 2005) (citing Lane v. Fisher Park Lane Co., 276 A.D.2d 136 (1st Dep’t 2000)). It is UBS’s burden to demonstrate prejudice. As this Court has held, “[t]he burden is on the moving party to establish that the destroyed evidence was crucial to his or her case.” 1/99 Hous. Corp. v. Kelly Tank Co., No. 0600525-02, 2005 WL 6056057, *7 (Sup. Ct. N.Y, Co. Dec 5, 2005) (Lowe, J.) (citing Cameron v. Nissan 112 Sales Corp., 10 A.D.3d 591 (2d Dep’t 2004) and Tawedros, 281 AD2d 184 (1st Dep’t 2001))."! 10 Contrary to UBS’s contention, the failure to implement a litigation hold is not per se gross negligence. See Scalera v. Electrograph Sys., Inc., No. 08-cy-0050, 2009 WL 3126637, *15 (E.D.N.Y. Sept. 29, 2009) (where “no formal written litigation hold was ever implemented,” defendants were held to have “acted negligently but not with gross negligence.”). The federal case that UBS cites for the contrary proposition, Green v. McClendon, No, 08-cv- 8496, 2009 WL 2496275, *4 (S.D.N.Y. Aug. 13, 2009), at most held that the post-complaint failure to preserve is grossly negligent, and the cases cited therein explicitly do not apply to the pre-complaint period. 1. Tn arguing that the burden of production should be shifted to HSH, UBS relies on inapposite cases in which the content of the spoliated evidence was inferred from bad faith deletion. Sage, 275 A.D.2d at 15