First Department Upholds Commercial Division Decision Striking Parties' Answer And Entering Default Judgment As A Sanction For Discovery Violations

In Suffolk P.E.T. Mgt., LLC v. Anand, 2013 NY Slip Op 02335 (First Dep’t April 4, 2013), the Appellate Division, First Department affirmed an Order by the Supreme Court, New York County Commercial Division (Bernard J. Fried, J.) to strike defendants’ answer for noncompliance with discovery orders and directives, enter default judgment against defendants on liability, and refer the matter to a special referee for damages.

The case arose from a series of agreements whereby plaintiffs Suffolk P.E.T. Management, LLC and the Sagemark Companies, Ltd. (“Plaintiffs”), who operate and/or manage outpatient medical diagnostic imaging centers, leased radiology equipment to defendants Azad K. Anand, M.D., and his designated entities (collectively “Defendants”). Defendants were obligated to pay plaintiffs the net proceeds derived from use of such equipment, and Plaintiffs alleged that Defendants breached the agreements by making unauthorized deductions and failing to provide proper documentation for the use and revenues derived from the equipment.

After numerous discovery disputes regarding defendants’ failure to produce, the trial court referred plaintiffs’ motion for discovery sanctions to a Special Referee (“Referee”), who issued a report and findings.

Based on testimony from six witnesses, the Referee found that “the evidence demonstrates that defendants had notice of the instant matter but intentionally or otherwise failed to preserve discoverable materials,” He also found that defendants “obstructed discovery with respect to the deletion of information,” as evidenced by testimony of two of plaintiffs’ witnesses: (1) a paralegal from Plaintiffs’ law firm, who testified that based on her review of the documents provided by defendants, documents were clearly missing; and (2) a reviewer of documents at Defendants’ facilities who testified that Defendants’ employees attempted to prevent her from inspecting or copying documents by interrupting her, removing boxes and removing flags she placed on certain documents.

The Referee also found that all of Defendants’ witnesses lacked credibility. Specifically, two defense witnesses, Dr. Anand and the CFO of one of the Anand entities, presented testimony at the hearing regarding preservation and gathering of documents that conflicted with their respective deposition testimonies. In light of the evidence, the Referee recommended that the defenses and counterclaims asserted in defendants’ answer be stricken.

Pursuant to CPLR 4403, Plaintiffs then moved to confirm the Referee’s report and obtain entry of judgment in their favor. Upon Plaintiffs’ motion, Judge Fried confirmed the Referee’s report and entered judgment in favor of plaintiffs, noting that “[i]t is fundamental that a referee’s report and recommendation should generally be confirmed so long as it is substantially supported by the record.” The trial court further found that “[t]he imposition of the drastic remedy of striking the defendants’ answer pursuant to CPLR 3126(3) is appropriate as the record is replete with examples of willful and contumacious behavior. The defendants’ failure to preserve and produce documents precludes the plaintiffs from fairly litigating their claims and prosecuting this action.”

The Appellate Division, First Department affirmed, explaining that despite Defendants having “produced much documentation during discovery,” the evidence showed that Defendants had not produced all relevant documents (including electronic documents), that the records Defendants failed to provide were material to Plaintiffs’ case, and that Defendants, over a two-year period, failed to conduct timely searches for requested documents, failed to preserve despite notice of the litigation, and otherwise “affirmatively interfered with plaintiffs’ efforts to collect discoverable material.” The Appellate Division indicated that defendants should have anticipated these dire consequences given the numerous discovery hearings held by the court. Thus, the Appellate Division upheld the trial court’s order striking defendants’ answer and entering a default judgment against defendants.