A New Jersey appeals court on Wednesday reversed a $2.6 million damages judgment and a $107,858 sanction in a workers’ compensation fraud case, finding the trial judge wrongly characterized as spoliation the defendant’s delay in providing evidence.

In the Somerset County suit, Liberty Mutual Ins. Co. claimed that Viking Industrial Security Co. underreported its payroll total to reduce its workers’ comp insurance premium; failed to pay $253,000 in premiums; and refused to permit an audit.

After a company bookkeeper testified that it kept two sets of payroll records, Viking was ordered to turn over the second set to Liberty Mutual.

Viking handed over a compact disc that Liberty Mutual and the state of New Jersey, which intervened, could not open. A second CD from Viking was missing certain records, Liberty Mutual claimed. Nearly a year after requesting the records, kept on a QuickBooks accounting program, the plaintiffs received them in April 2009.

In August 2009, Liberty Mutual and the state filed a motion for discovery sanctions, seeking to recover attorney fees and expenses over Viking’s initial failure to produce the records and a spoliation order seeking to “conclusively establish” claims running to 18 paragraphs in the plaintiff’s complaint.

The motion also sought a negative inference jury charge against Viking with respect to damages and preclusion of its counterclaim that it lost a client when Liberty Mutual canceled its policy.

Assignment Judge Yolanda Ciccone granted the motion in September 2009 and a month later awarded $92,513 in fees and costs to Liberty Mutual and $215,345 to the state.

In March 2010, she granted summary judgment on the workers compensation fraud, insurance fraud and common law fraud counts.

At trial, Superior Court Judge Edward Coleman found for the plaintiffs on the remaining counts, which included failure to pay a promissory note, quantum meruit and liability for refusal to permit an audit.

Liberty Mutual was awarded $2.2 million in damages, which represents a partial trebling, and the state roughly $400,000.

Viking appealed, conceding it did not provide the records when requested.

But it said that since the plaintiffs received the records in time for depositions and trial preparation, the spoliation order was akin to entering judgment for the plaintiffs on the workers’ compensation fraud, insurance fraud and common law fraud counts.

Appellate Division Judges Jose Fuentes, Douglas Fasciale and Michael Haas said that although Ciccone properly found that Viking did not turn over the QuickBooks records for nearly a year, her spoliation finding was not supported by the record.

A spoliation claim arises when a party has hidden, destroyed or lost relevant evidence and impaired another party’s ability to prosecute or defend the case, whereas in this case, the records were eventually provided, they noted.

Since neither Liberty Mutual nor the state demonstrated they were prejudiced by Viking’s initial failure to turn over the records, “lesser sanctions would have been sufficient to level the playing field,” the panel said in in Liberty Mutual Ins. Co. v. Viking Industrial Security Co.

The spoliation orders “formed the linchpin for everything that followed, including plaintiffs’ successful summary judgment motions and the final judgments entered following trial,” the panel said in reversing.

Viking’s lawyer, Eilish McLoughlin of Charles Shaw’s office in Dumont, says the sanctions “were draconian.”

Jonathan Kuller of Goldberg Segalla in Princeton, who represented Liberty Mutual, declines to comment.