When Fiduciaries Conceal Evidence in Response to a Subpoena
A few years ago, New York's Appellate Division, First Department (the appellate court for both New York (i.e., Manhattan) and Bronx Counties) handed down an important - and logical - decision that largely flew under the radar in IDT Corp. v Morgan Stanley Dean Witter & Co..
They held - contrary to the law in some other jurisdictions - that a fiduciary, who is not a party to a particular litigation, may still be held liable for consequential damages if it breaches its fiduciary duties by fraudulently concealing documents that are demanded in a subpoena.
To that end, the Court stated, in pertinent part, as follows:
"The issue on this appeal is whether cognizable claims for fraudulent misrepresentation and fraudulent concealment may be based on intentional spoliation of evidence, notwithstanding that New York does not recognize an independent tort of third-party negligent spoliation. We conclude that intentional spoliation of evidence may be the basis for such claims."
First, a Point of Clarification
Yes, and before you raise the issue, it's true that many of the claims raised in that case were later dismissed by the Court of Appeals. However, those claims were dismissed on other, statute of limitations grounds, which does not apparently affect the validity of this decision and holding.
Why IDT Sued Morgan Stanley - Who Wasn't Even a Party to the Underlying Breach of Contract Action
This case within a case arises from an underlying breach of contract dispute between IDT, a telecommunications company, and a fiber-optic company. In that underlying case which went to arbitration, IDT subpoenaed its investment bank, Morgan Stanley, and requested a copy of all documents pertaining to this claim in order to help establish when the breach of contract occurred.
In response, Morgan Stanley produced roughly 2,000 pages, and indicated in writing that the subpoena had been fully complied with.
But that statement was a bald-faced lie.
In fact, Morgan Stanley neglected to produce another 498,000 some-odd pages, including several documents which would have fixed the fiber-optic cable company's breach at an earlier date and time, and thus, presumably, raised the damages total in the underlying action considerably.
Morgan Stanley's Failure to Produce Documents Appears Deliberate
It got even worse:
It turned out that the fiber-optic cable company was also a client of Morgan Stanley's, and that among these 498,000 documents was correspondence by Morgan Stanley seeking to convince the fiber-optic cable company to breach its agreement with IDT.
Upon learning of the existence of these documents, IDT then sued its investment bank, Morgan Stanley, on several theories including breach of fiduciary duty, fraudulent concealment, and intentional spoliation (i.e., concealment/destruction) of evidence. Morgan Stanley responded by formally asking the Court to dismiss the case on the grounds that New York's highest court (the Court of Appeals), had already decided in Ortega v. City of New York, 9 NY3d 69 (2007) that spoliation of evidence cannot, in and of itself, be the basis of a lawsuit.
Why the Appellate Court Allowed IDT's Spoliation Claim to Survive
Among the grounds it listed in reversing the trial court's order granting Morgan Stanley's motion to dismiss, the appellate court noted that unlike the defendant in Ortega, who had negligently destroyed evidence, Morgan Stanley was clearly IDT's fiduciary, yet intentionally and deliberately concealed critical documents in an effort to hide its own misbehavior in causing the cable company to breach its contract with IDT.
Consequently, in distinguishing this case from Ortega, the court stated
"The Court of Appeals' decision in Ortega v City of New York (9 NY3d 69 , supra) does not require dismissal of IDT's claims for fraud and fraudulent concealment simply because the vehicle for the alleged fraudulent conduct was concealment of evidence.
"First, the Ortega holding involved a claim of negligent spoliation of evidence, not a claim of intentional concealment or spoliation of evidence.
"Second, unlike the City in Ortega, which the court noted was a third party with a duty to preserve evidence but with no connection to the underlying litigation, Morgan Stanley was not an uninvolved third party to the arbitration proceeding between IDT and Telefonica. It had fiduciary relationships with both parties, and the concealment of documents from IDT arguably both benefitted its client Telefonica in the arbitration and protected Morgan Stanley from being sued by IDT."
A Word of Caution
While this opinion seems logical and well-reasoned, a word of caution is in order:
When procedural and substantive legal theories are in apparent conflict, you can never be certain in which direction the court will go on a motion to dismiss.
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