Today, the Appellate Division, First Department issued a decision in U.S. Bank National Association, et al. v. GreenPoint Mortgage Funding, Inc. that held that as an initial matter, the producing party must bear the costs of production (including with regard to electronically stored information),  therefore adopting the standards articulated by the Southern District of New York in 2003 in Zubulake v. UBS Warburg LLC.  This case is particularly relevant to recent state court mortgage-backed securities litigations involving thousands of individual loans and thus significant production and review expenses.

U.S. Bank, as trustee, sued GreenPoint, a mortgage originator, based on alleged “gross violations” of GreenPoint’s representations and warranties with respect to the loans making up a trust for which U.S. Bank acted as trustee. In the lower court proceedings, GreenPoint moved to stay discovery and for a protective order that provided that “each party would pay for its own discovery requests (i.e., U.S. Bank would pay the costs associated with its requests to GreenPoint and GreenPoint would pay the costs associated with its request to U.S. Bank) and that U.S. Bank would pay for GreenPoint’s pre-production attorney review time for the purposes of privilege and confidentiality assertions.” The lower court concluded that the party requesting discovery bears the costs incurred in its production, but that this did not extend to paying the other party’s attorneys’ fees.

The First Department noted that  “there has been a movement among other courts, where the costs of discovery production is significant, to adopt the standards articulated by the United States District Court in Zubulake v. UBS Warburg LLC [citation omitted], and to place the costs of discovery, including searching for, retrieving and producing ESI [Electronically Stored Information], at least initially, on the producing party.” The court observed that while Zubulake holds that the initial burden is on the producing party, cost shifting is allowed upon the lower court’s discretion.  The First Department held that GreenPoint’s motion was premature: it should have “first ma[de] a motion to limit or strike the discovery requests . . . that it found to be overbroad, irrelevant, or unduly burdensome,” and “[i]f, following the resolution of that motion, [GreenPoint] still believed the costs associated with searching for, retrieving and producing ESI to be prohibitive, [it] could then file a motion for the costs to be shifted to plaintiff.”   The court held that the lower courts, in their discretion,  could determine the need for cost shifting based on the following Zubulake factors, which are intended to be a guide versus a checklist:

(1) [t]he extent to which the request is specifically tailored to discover relevant information; (2) [t]he availability of such information from other sources; (3) [t]he total cost of production, compared to the amount in controversy; (4) [t]he total cost of production, compared to the resources available to each party; (5) [t]he relative ability of each party to control costs and its incentive to do so; (6) [t]he importance of the issues at stake in the litigation; and, (7) [t]he relative benefits to the parties of obtaining the information. (Zubulake, 217 FRD at 322).

The decision comes on the heels of the First Departments January, 2012 decision in Voom HD Holdings LLC v. Eschostar Satellite LLC, which held that the Zubulake spoliation and preservation holdings applied in state court. In Voom, the Appellate Division held:

In Zubulake, the court stated that “[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold’ to ensure the preservation of relevant documents” (220 FRD at 218). As has been stated, “[I]n the world of electronic data, the preservation obligation is not limited simply to avoiding affirmative acts of destruction. Since computer systems generally have automatic deletion features that periodically purge electronic documents such as e-mail, it is necessary for a party facing litigation to take active steps to halt that process” (Convolve, Inc. v Compaq Computer Corp., 223 FRD 162, 175-76 [SD NY 2004]). Once a party reasonably anticipates litigation, it must, at a minimum, institute an appropriate litigation hold to prevent the routine destruction of electronic data  (see Pension Comm. of the Univ. of Montreal Pension Plan, 685 F Supp 2d at 473). Regardless of its nature, a hold must direct appropriate employees to preserve all relevant records, electronic or otherwise, and create a mechanism for collecting the preserved records so they might be searched by someone other than the employee. The hold should, with as much specificity as possible, describe the ESI at issue, direct that routine destruction policies such as auto-delete functions and rewriting over e-mails cease, and describe the consequences for failure to so preserve electronically stored evidence. In certain circumstances, like those here, where a party is a large company, it is insufficient, in implementing such a litigation hold, to vest total discretion in the employee to search and select what the employee deems relevant without the guidance and supervision of counsel (id.).

It is important to note that Zubulake, Voom and U.S. Bank all involved the obligations of parties to the litigation.  Other commentators have raised questions about the obligations of non-parties in light of  Zubulake.  See, Discovery, What Ever is a Non-Party to Do? (New York Law Journal); Amended Rule 45 (New York Law Journal).