Liberty Mutual Insurance Company, et al. v. Viking Industrial Security, et al. – NJ Appellate Division Reverses Spoliation Sanctions; NJ Supreme Court Declines Hearing Challenge to Appellate Decision…

In this case of alleged insurance fraud, the New Jersey Appellate Division addressed the issue of whether or not the motion judge had erred in granting spoliation sanctions against the defendants.

In 2000, Mutual Liberty was assigned to provide workers compensation insurance to Viking the premiums for which would be based upon Viking’s payroll. Viking significantly underreported its payroll and in the succeeding years Liberty Mutual conducted audits of Viking’s payroll records to determine what the annual premium should be. Viking was represented in these audits by defendant, Richard Giasole, a CPA. According to Girasole, defendant Ralph Day, Sr., proposed keeping a “small” and a “big” payroll and showing Liberty Mutual only the small payroll to minimize insurance premiums.

In 2004, the State Office of Insurance Fraud contacted Liberty Mutual to tell them that a caller had alleged that Viking was not reporting its full payroll. During a lengthy investigation by Liberty Mutual, Girasole only provided the auditors with the small payroll and never disclosed that Viking maintained complete payroll records on QuickBooks. Believing it did not have Viking’s full payroll, Liberty Mutual estimated a new premium which Viking did not pay and Liberty cancelled their workers compensation insurance policy. Girasole subsequently began working with Liberty Mutual to determine the correct premium.

Viking and Liberty Mutual entered an agreement to reinstate the policy provided Viking pay a promissory note guaranteed by Ralph, Day Sr. After a few payments, Viking stopped paying the note and Liberty Mutual brought suit against Viking Industrial, Viking Alarm and Ralph Day, Sr. for failure to pay the promissory note, failure to pay insurance premiums and refusal to permit an audit of Viking’s records. Defendants filed a complaint against Liberty Mutual alleging that Liberty Mutual had wrongfully cancelled the policy. The two actions were consolidated and the State intervened alleging insurance fraud.

As part of discovery, both the State and Liberty Mutual requested the production of Viking’s electronic payroll records, however, they were not produced. In October 2008, the court appointed a discovery master who ordered Viking to produce the QuickBooks information. When the CD was provided by Viking it could not be opened. After receiving a second CD, Liberty Mutual alleged that some documents were missing. The discovery master and the motion judge then ordered that Liberty Mutual and the State should have direct access to the program. In April 2009, the parties met at Viking’s premises and the QuickBooks records were downloaded and printed displaying both the big and small payrolls and what Liberty Mutual termed a “hidden payroll” of independent contractors.

In August 2009, Liberty Mutual filed a motion requesting spoliation sanctions against defendants for the delay in providing the QuickBooks records. Defendants argued that no spoliation had occurred as Liberty Mutual was in possession of the records and there was no evidence that any of the records had been destroyed or altered. The motion judge agreed with Liberty Mutual’s assertion that there was a “calculated method of discovery misconduct by the Viking/Day parties.” The judge found that defendant had “really done everything in their power to impeded the discovery in this matter” and granted in total the discovery sanctions as well as counsel fees and costs to Liberty Mutual and the State. As a result of the sanctions, partial summary judgment was granted to Liberty Mutual and the State and after a bench trial on damages and other issues, judgments were entered against the defendants.

On appeal, the Appellate Division found that the motion judge had improperly issued the spoliation order based on Viking’s delay in turning over the computer records finding that the sanctions were “unduly hard” especially as the motion judge did not consider whether lesser sanctions were appropriate. The Appellate Division found that the record did not support the motion judge’s finding that spoliation occurred noting that “a spoliation claim arises when a party in a civil action has hidden, destroyed or lost relevant evidence and they impaired another party’s ability to defend the action.” While the QuickBooks were not produced when requested, they were eventually provided intact to the plaintiffs who were able to use them during depositions, with their experts and at trial. Citing the Supreme Court holding in Rosenblit, the Appellate Division noted that “where the party seeking the discovery ultimately receives it, whether from the recalcitrant party or from another available source, a spoliation order or inference is not appropriate.” Rosenblit v. Zimmerman, 166 N.J. 391, 401 (2001). Stating that discovery sanctions are designed to make the aggrieved party whole and create a level playing field, the Appellate Division found that neither Liberty Mutual nor the state demonstrated that they were prejudiced by defendants’ failure to turn over the records when originally sought. Finding that the spoliation orders entered by the motion judge formed the “linchpin” for everything that followed, including plaintiffs’ successful summary judgment motion and the final judgments entered following trial, the appellate judge reversed the judgments and remanded for further proceedings.

In May 2014, the New Jersey Supreme Court denied Liberty Mutual’s petition for certification in the case and will not hear their challenge to the Appellate Division’s decision to reverse discovery sanctions against the Viking defendants.

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