In Commercial Breach of Fiduciary Duty/Breach of Contract Lawsuit, NY Appeals Court Elevates Substance Over Form July 9, 2009

On June 25, 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, as it confirmed 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.

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 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.  This statement was untrue, however; in fact, Morgan Stanley neglected to produce another 498,000 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. (Some of the details are salacious: it turns 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.

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.

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.

Jonathan Cooper is a New York Business Litigation and New York Commercial Litigation Lawyer with a focus on New York breach of contract and New York business fraud claims before the Nassau, Queens, Brooklyn, Bronx, Westchester and Suffolk County courts of New York State. For more information, feel free to contact his Long Island office at 516-791-5700.

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