To be Argued by:
DAVID S. PEGNO
(Time Requested: 30 Minutes)
APL-2013-00162
New York County Clerk’s Index Nos. 109565/03E and 600448/06E
Court of Appeals
of the
State of New York
CDR CRÉANCES S.A.S., as Successor to Société de Banque Occidentale,
Plaintiff-Respondent,
– against –
MAURICE COHEN,
Defendant-Appellant,
SUMMERSON INTERNATIONAL ESTABLISHMENT,
BLUE OCEAN FINANCE, LTD., WORLD BUSINESS CENTER, INC.,
and IDERVAL HOLDING, LTD.,
Defendants.
——————————————————————
(For Continuation of Caption See Reverse Side of Cover)
BRIEF FOR DEFENDANTS-APPELLANTS
DEWEY PEGNO & KRAMARSKY LLP
Attorneys for Defendants-Appellants
Maurice Cohen, Leon Cohen,
Sonia Cohen, Allegria Aich
and Robert Maraboeuf
777 Third Avenue
New York, New York 10017
Tel.: (212) 943-9000
Fax: (212) 943-4325
Date Completed: September 13, 2013
Index No.
109565/03E
CDR CRÉANCES S.A.S., as Successor to Société de Banque Occidentale,
Plaintiff-Respondent,
– against –
LEON COHEN a/k/a LEON LEVY a/k/a LEON LEVY COHEN a/k/a
LEON COHEN LEVY a/k/a LEON COHEN-LEVY a/k/a LEVY COHEN a/k/a
LEVY LEO COHEN a/k/a LEO COHEN LEVY a/k/a LEON COMEN;
MAURICE COHEN a/k/a MAURICIO ASSOR a/k/a MAURICIO
COHEN ASSOR a/k/a MAURICE ASSOR; SONIA COHEN,
ROBERT MARABOEUF and ALLEGRIA ACHOUR AICH,
Defendants-Appellants,
IDERVAL HOLDINGS, LTD.; BLUE OCEAN FINANCE, LTD.;
WORLD BUSINESS CENTER, INC.; EDOUARD SONNENSCHEIN;
ROBERT HARRISON; MICHELLE SENAT; CLARA LOPEZ;
JUDI YOUMANS; PATRICIA HABIB PETETIN; MARTINE GALES;
JOELLE HABIB and SUMMERSON INTERNATIONAL ESTABLISHMENT
f/k/a FLATOTEL INTERNATIONAL ESTABLISHMENT,
Defendants.
Index No.
600448/06E
TABLE OF CONTENTS
TABLE OF AUTHORITIES .................................................................................... v
QUESTIONS PRESENTED ..................................................................................... 1
STATEMENT OF JURISDICTION ......................................................................... 2
PRELIMINARY STATEMENT ............................................................................... 3
BACKGROUND FACTS ....................................................................................... 11
A. The Underlying Real Estate Transaction ............................................ 11
B. Litigation in France ............................................................................ 12
C. The Transfer of the Plato tel ................................................................ 13
D. The Judgment in France and CDR's Proceedings in the
United States ....................................................................................... 13
E. The EALC Bankruptcy and CDR's Settlement With Elias ................ 14
F. CDR Commences Pursuing Its Claims Against Appellants ............... 15
1. The Prior Default ...................................................................... 16
2. Proceedings After Reversal of the Default
Order ......................................................................................... 17
3. Discovery Proceedings After the Actions Are
Assigned to Justice Yates ......................................................... 17
4. CDR Moves for Default ........................................................... 19
5. CDR's Renewed Motion .......................................................... 20
6. The Testimony at the Hearing .................................................. 20
1
7. The Trial Court Decision on the Motion for Default. .............. 23
H. The Proceedings Assessing Damages Without a Hearing .................. 24
I. The Appellate Division Decision ....................................................... 25
ARGUMENT .......................................................................................................... 28
I. THE LOWER COURTS IMPROPERLY ENTERED A
DEFAULT AGAINST APPELLANTS BASED ON
VIGOROUSLY DISPUTED ALLEGATIONS OF
MISCONDUCT ............................................................................................ 28
A. The Appellate Division Misread Its Own and Other New
York Precedent ................................................................................... 29
B. The More Developed Jurisprudence of Federal and Other
State Courts Mandates a Heightened Standard .................................. 33
1. Courts Based "Fraud on the Court" Rulings on the
Inherent Power of the Court ..................................................... 33
2. Courts Refuse to Strike Pleadings Where the Alleged
Misconduct is Genuinely Disputed .......................................... 34
3. The Alleged Misconduct Must Go to Issues Central to
the Litigation ............................................................................ 37
4. Courts Strongly Favor Adjudication on the Merits .................. 38
5. Courts Protect a Party's Right to a Jury Trial .......................... 39
C. The Evidence Below Presents Genuine Issues of Fact That
Fell Far Short of Conclusively Demonstrating a Fraud on the
Court ........................................................................... .' ....................... 42
11
1. Maurice and Leon Cohen, Allegria Aich and Robert
Maraboeuf Denied Being Part of an Agreement to
Testify Falsely .......................................................................... 42
2. The Testimony Supporting the Supposed False
Testimony Is Itself Subject to Considerable
Impeachment ............................................................................ 44
a. The witnesses were highly motivated to testify
favorably to CDR ........................................................... 44
b. The witnesses' excuses for lying were
themselves demonstrably false ...................................... 46
D. CDR Fell Far Short of Conclusively Establishing
Submission of False Documents ........................................................ 48
1. CDR's Reference to Supposedly False Mfidavits
Raises Yet Another Fact Issue ................................................. 48
2. There Was No Basis to Default Appellants Based on
Submission of Allegedly False "Whitebury"
Documents ................................................................................ 49
E. The Default Cannot Be Premised on a CPLR § 3126
Violation ............................................................................................. 51
1. A Default For "Fraud on the Court" Is Different from
One Based on CPLR § 3126 .................................................... 51
2. There Were No§ 3126 Violations Below ................................ 53
F. The Default Was Particularly Inappropriate Given
Defendants' Meritorious Defenses ..................................................... 57
G. The Appellate Division Improperly Relied on the Cohens'
Sentencing Proceedings ...................................................................... 59
111
II. APPELLANTS WERE IMPROPERLY ASSESSED NINE-
FIGURE DAMAGES ON AN IMPROPER LEGAL THEORY
WITHOUT AN EVIDENTIARY HEARING .............................................. 62
A. Appellants Were Entitled to Contest CDR's Claimed
Damages ............................................................................................. 62
B. CDR's Claim For the "Unpaid Loan Balance" Is Flawed .................. 63
1. CDR Has Not Established Its Actual Damages ....................... 63
2. There Is No "Unpaid Loan Balance" Because CDR
Transferred All Claims to the Loan and the Debt Was
Satisfied and Discharged .......................................................... 67
3. CDR Cannot Recover the "Unpaid Loan Balance"
Under an Alter Ego Theory ...................................................... 68
III. THE JUDGMENT AGAINST SONIA COHEN IS
UNCONSCIONABLE .................................................................................. 71
CONCLUSION ....................................................................................................... 74
lV
TABLE OF AUTHORITIES
Cases Page(s)
317 W. 87 Assocs. v. Dannenberg,
159 A.D.2d 245 (1st Dep't 1990) ........................................................... 29, 30
A.l.A. Holdings, S.A. v. Lehman Bros., Inc.,
No. 97 CIV. 4978 (LMM),
2002 WL 1271722 (S.D.N.Y. May 29, 2002) .............................................. 35
Amusement Bus. Underwriters v. Am. Int'l Grp., Inc.,
66 N.Y.2d 878 (1985) ................................................................................... 62
Aoude v. Mobil Oil Corp.,
892 F.2d 1115 (1st Cir. 1989) ...................................................... 34 37, 53, 72
Asch Webhosting, Inc. v. Adelphia Bus. Solutions Inv., LLC,
No. Civ.A. 04-2593(MLC),
2006 WL 1098235 (D.N.J. Mar. 31, 2006) ................................................... 36
Baba-Ali v. State of New York,
19 N.Y.3d 627 (2012) ............................................................................. 28 n.5
Bailon v. Guane Coach Corp.,
78 A.D.3d 608 (1st Dep't 2010) ................................................... 9, 68, 69, 70
BankAtlantic v. Blyth Eastman Paine Webber, Inc.,
127 F.R.D. 224 (S.D. Fla. 1989) ............................................................. 41 n.7
Block v. Nelson,
71 A.D.2d 509 (1st Dep't 1979) ................................................................... 59
Campione v. New Hampshire Ins. Co.,
76 A.D.3d 484 (1st Dep't 2010) ................................................................... 28
Cardinal Holdings, Ltd. v. Indotronix Int'l Corp.,
73 A.D.3d 960 (2d Dep't 2010) .................................................................... 68
v
Cases Page(s)
Carroll ex rel Pfizer, Inc. v. McKinnell,
19 Misc.3d 1106(A) (Sup. Ct. N.Y. Cnty 2008) ........................................... 61
CDR Creances S.A. v. Euro-American Lodging Corp.,
40 A.D.3d 421 (1st Dep't 2007) ................................................................... 64
CDR Creances S.A. v. Euro-American Lodging Corp.,
43 A.D.3d 45 (1st Dep't 2007) ..................................................................... 12
CDR Creances S.A.S. v. Cohen,
62 A.D.3d 576 (1st Dep't 2009) ................................................................... 16
Chambers v. NASCO, Inc.,
501 U.S. 32 (1991) ........................................................................................ 33
Christian v. City of New York,
269 A.D.2d 135 (1st Dep't 2000) ........................................................... 41 n.7
Cohain v. Klimley,
Nos. 08 Civ. 5047(PGG), 09 Civ. 4527(PGG),
09 Civ. 10584(PGG), 2010 WL 3701362 (S.D.N.Y. Sept. 20, 2010) .......... 68
Corley v. McElmeel,
149 N.Y. 228 (1896) ..................................................................................... 40
Corman v. LaFountain,
38 A.D.3d 706 (2d Dep't 2007) .................................................................... 68
Denenberg v. Mahler,
335 F. Supp. 2d 362 (E.D.N.Y. 2004) .......................................................... 69
DePinto v. Ashley Scott, Inc.,
222 A.D.2d 288 (1st Dep't 1995) ................................................................. 69
Duffy v. Vogel,
12 N.Y.3d 169 (2009) ................................................................................... 40
Vl
Cases Page(s)
Francois v. Harris,
366 So. 2d 851 (Fla. Dist. Ct. App. 1979) ...................................................... 5
Gilbert v. Eckerd Corp. of Fla., Inc.,
34 So. 3d 773 (Fla. Dist. Ct. App. 2010) ..................................... 34-35, 36, 38
Greene v. Dolphy Constr. Co., Inc.,
187 A.D.2d 635 (2d Dep't 1992) ............................................................. 71-72
Hazel-Atlas Glass Co. v. Hartford-Empire Co.,
322 U.S. 238 (1944) ...................................................................................... 33
Hernandez v. City of Miami,
35 So. 3d 942 (Fla. Dist. Ct. App. 2010) ................................................. 35-36
Hydro Air of Conn., Inc. v. Versa Techs., Inc.,
99 F.R.D. 111 (D. Conn. 1983) ..................................................................... 69
In re Dynex Capital, Inc. Sec. Litig.,
No. 05 Civ. 1897(HB)(DF),
2011 WL 2581755 (S.D.N.Y. Apr. 29, 2011) ....................................... passim
In re Euro-American Lodging Corp.,
No. 06-11325 (SMB),
2007 WL 7144834 (Bankr. S.D.N.Y. Nov. 1, 2007) .............................. 15 n.2
In re Gupta,
38 A.D.3d 445 (1st Dep't 2007) ................................................................... 64
In re Pfizer Inc. Sec. Litig.,
288 F.R.D. 297 (S.D.N.Y. 2013) .................................................................. 40
Jerome J. Steiker Co., Inc. v. Eccelston Props. Ltd.,
593 N.Y.S.2d 394 (Sup. Ct. N.Y. Cnty 1992) ........................................ : ..... 61
lung v. Neschis,
No. 01 Civ. 6993 (RMB)(THK),
2009 WL 762835 (S.D.N.Y. Mar. 23, 2009) .................................... 28, 52, 58
Vll
Cases Page(s)
Kaminsky v. Kahn,
20 N.Y.2d 573 (1967) ................................................................................... 40
Kinetics, Inc. v. El Paso Prods. Co.,
653 P.2d 522 (N.M. Ct. App. 1982) ............................................................. 70
Kaschak v. Gates Construction Corporation,
225 A.D.2d 315 (1st Dep't 1996) ................................................................. 32
Kosinski v. Comm 'r of Internal Revenue,
541 F.3d 671 (6th Cir. 2008) ........................................................................ 60
Lama Holding Co. v. Smith Barney Inc.,
88 N.Y.2d 413 (1996) ................................................................................... 64
Lauria v. City of New Rochelle,
225 A.D.2d 1013 (3d Dep't 1996) ................................................................ 59
Maciel v. Comm'r of Internal Revenue,
489 F.3d 1018 (9th Cir. 2006) ...................................................................... 60
Maness v. Daily,
184 P.3d 1 (Alaska 2008) .............................................................................. 61
McMunn v. Memorial Sloan-Kettering Cancer Center,
191 F. Supp. 2d 440 (S.D.N.Y. 2002) ...................................................... 6, 51
Melcher v. Apollo Medical Fund Management L.L.C.,
52 A.D.3d 244 (1st Dep't 2008) ............................................................ passim
Montano v. City of Chicago,
535 F.3d 558 (7th Cir. 2008) ........................................................................ 71
Morris v. Penn Mut. Life Ins. Co.,
Civ. A. No. 87-7063,
1989 WL 14063 (B.D. Pa. Feb. 21, 1989) .................................................... 69
Vlll
Cases Page(s)
Mulligan v. Lackey,
33 A.D.2d 991, 992 (4th Dep't 1970) ........................................................... 59
New York Annual Conference ofthe United Methodist Church v. Preusch,
51 A.D.2d 711 (1st Dep't 1976) ............................................................. 41 n.7
Raffe v. John Doe,
619 F. Supp. 891 (S.D.N.Y. 1985) ............................................................... 61
Reynolds Sees., Inc. v. Underwriters Bank and Trust Co.,
44 N.Y.2d 568 (1978) .............................................................................. 62-63
Reynolds v. Univ. of Penn.,
684 F. Supp. 2d 621 (E.D. Pa. 2010) ............................................................ 36
Roadway Express, Inc. v. Piper,
447 u.s. 752 (1980) ...................................................................................... 28
Rockdale Mgmt. Co., Inc. v. Shawmut Bank, N.A.,
638 N.E.2d 29 (Mass. 1994) ............................................................... 5, 39, 41
Rokina Optical Co., Inc. v. Camera King, Inc.,
63 N.Y.2d 728 (1984) ................................................................................... 63
Rose Hall, Ltd. v. Chase Manhattan Overseas Banking Corp.,
576 F. Supp. 107 (D. Del. 1983) ................................................................... 70
Ruiz v. City of Orlando,
859 So. 2d 574 (Fla. Dist. Ct. App. 2003) .................................................... 38
Rybner v. Cannon Design, Inc.,
No. 95 Civ. 0279-(55),
1996 WL 470668 (S.D.N.Y. Aug. 20, 1996) ................................ 6, 28, 37, 72
S.E.C. v. Monarch Funding Corp.,
192 F.3d 295 (2d Cir. 1999) .......................................................................... 60
lX
Cases Page(s)
Simcuski v. Saeli,
44 N.Y.2d 442 (1978) ................................................................................... 32
Smith v. Malarczyk,
118 A.D.2d 934 (3d Dep't 1986) ................................................ 26, 32, 35, 64
St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc.,
884 F.2d 688 (2d Cir. 1989) .......................................................................... 68
Standard Oil Co. of California v. U.S.,
429 u.s. 17 (1976) ........................................................................................ 33
Starr Found. v. Am. Int'l Grp.,
76 A.D.3d 25 (1st Dep't 2010) ..................................................................... 64
Starski v. Kirzhnev,
No. 06-10157-DPW,
2011 WL 923499 (D. Mass. Mar. 15, 2011) ................................................ 56
Suppa v. Costa Crociere S.P.A.,
No. 07-60526-CIV,
2008 WL 936903 (S.D. Fla. Apr. 7, 2008) ................................................... 37
Taieb v. Hilton Hotels Corp.,
131 A.D.2d 257 (1st Dep't 1987) ................................................................. 31
Trussell v. Quest Diagnostics Inc.,
No. 8:09-cv-811-T-33AEP,
2010 WL 1223890 (M.D. Fla. Mar. 24, 2010) ...................................... passim
United States v. Lamanna,
114 F. Supp. 2d 193 (W.D.N.Y. 2000) ......................................................... 61
United States v. Consortium De Realisation S.A. (In re Grand Jury),
117 Fed. Appx. 5 27 (9th Cir. 2004) ................................................................ 9
Walley v. Leatherstocking Healthcare, LLC,
79 A.D.3d 1236 (3d Dep't 2010) .................................................................. 71
X
Cases Page(s)
Young v. Curgil,
358 So. 2d 58 (Fla. Dist. Ct. App. 1978) ...................................................... 36
Zelnik v. Bidermann Indus. U.S.A., Inc.,
242 A.D.2d 227 (1st Dep't 1997) ......................................................... 70 n.l3
Statutes & Other Authorities
12 U.S.C. § 1843, NY Banking Law§ 98(1) .......................................................... 11
CPLR § 3126 .................................................................................................... passim
CPLR § 3215(a) ....................................................................................................... 63
David Jolly, Role of France Telecom Chief in Tapie Affair to Be Investigated,
N.Y. TIMES, June 12, 2013 ............................................................................ 10
Fed. R. Civ. P. 37 ................................................................................................ 6, 52
MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY (11th ed. 2003) ......................... 29
Press Release, Federal Bureau of Investigation,
Credit Lyonnais and Others Plead Guilty and Pay
$771 Million in Executive Life Affair (Dec. 18, 2003) ............................. 9-10
XI
QUESTIONS PRESENTED
Question 1
Whether the Appellate Division erred in affirming a default based on an
alleged "fraud on the court", holding that such an allegation may be granted on a
showing by a preponderance of the evidence, where prior First Department case
law held that such allegations must be "conclusively demonstrated", Melcher v.
Apollo Medical Fund Management L.L.C., 52 A.D.3d 244, 245 (1st Dep't 2008),
other non-New York State and federal courts have held that such drastic relief is
not warranted if the alleged misconduct is subject to a bona fide dispute, and where
the alleged misconduct was in fact vigorously and genuinely disputed?
Question 2
Whether the Appellate Division erred in ruling that Appellants were
properly defaulted under CPLR § 3126, where, from the time of the Appellate
Division's reversal of an initial default for discovery violations until the time of the
decision defaulting Appellants, Appellants complied fully with the trial court's
discovery orders and Plaintiff-Respondent's extensive requests for discovery, so
that, before the default based on the alleged "fraud on the court", the trial court
made no finding that Appellants had failed to comply with discovery, and the basis
of the default was not Appellants' formal compliance with discovery, but the
content of the discovery they provided?
Question 3
Whether the Appellate Division erred in affirming entry of judgment for
over $185 million without a hearing on CDR's claim for its alleged ''unpaid loan
balance", where CDR never established that the loan balance constituted its actual
damages, and those damages were subject to many other dispositive defenses?
STATEMENT OF JURISDICTION
This Court has jurisdiction to entertain this appeal pursuant to CPLR §
5602(a) because leave to appeal was granted by the Court of Appeals, by order
entered June 25, 2013. (RA-3).
This appeal is timely because Defendants-Appellants flied a motion for
leave to appeal with the Court of Appeals on April22, 2013, within 30 days of
receipt of notice of entry of the Appellate Division's order affirming the order of
Supreme Court, New York County. See CPLR § 5513(b).
All questions raised herein were raised in hearings before Supreme Court;
Defendants-Appellants' briefs flied in the Appellate Division, First Department;
Supreme Court's January 20, 2011 Decision; the Appellate Division's December
27, 2012 Decision and in the record on appeal. (E.g., RA-13-14; RA-19-20; RA-
22-26; R38-55; R70-71; R2566-82; R2794-820; R3941; R4330-32; R6112;
SR1179-85; SR2566-82; SR2794-820, SR28061 4.02).
2
PRELIMINARY STATEMENT
This Court should not let stand as controlling precedent the decision of the
Appellate Division below upholding-{)n a mere preponderance of the evidence
standard-the striking of Appellants' answer and entry of a $185 million default
judgment, where vigorously contested fact issues involving the merits were
inextricably involved in the alleged wrongful conduct. To affirm those rulings
would not, as the courts below suggested, vindicate the authority of the courts.
Rather, an affirmance would deprive Appellants of their right to a jury trial based
on a process and standard that are both (a) fundamentally at odds with the fair
administration of justice; and (b) inconsistent with fraud on the court jurisprudence
nationwide, while at the same time giving Plaintiff-Respondent ("CDR") a
windfall judgment to which it has not, and could never, prove it is entitled.
First, the Appellate Division majority's ruling that a court can strike a
pleading based on an alleged "fraud on the court" based on a finding by a "mere"
preponderance of the evidence (RA-14)-which finding would itself then be
entitled to deference-is contrary to authority in New York and other jurisdictions.
Indeed, it is inconsistent (as Justice Catterson noted in dissent) with the Appellate
Division's own ruling in Melcher v. Apollo Medical Fund Mgmt. L.L.C., 52
A.D.3d 244, 245 (1st Dep't 2008), in which the court held unequivocally that
"[d]eceit warranting the striking of the answer" must be "conclusively
3
demonstrated". Cases from New York and other jurisdictions have denied
applications to strike pleadings where the alleged misconduct was subject to bona
fide dispute. E.g., In re Dynex Capital, Inc. Sec. Litig., No. 05 Civ.
1897(HB)(DF), 2011 WL 2581755, at *4, *5 (S.D.N.Y. Apr. 29, 2011) ("the
squarely contradictory nature of the declarations" were "insufficient to satisfy
Defendants' burden"; declining to hold hearing because "determining the truth or
falsity of the substance of the allegations" at issue ''falls within the province of the
jury" and "the jury-not the court-should determine whether fact witnesses are
credible"); Trussell v. Quest Diagnostics Inc., No. 8:09-cv-811-T-33AEP, 2010
WL 1223890, at *1, *2 (M.D. Fla. Mar. 24, 2010) (motion for default based on
claim plaintiff "fabricated evidence and committed perjury during his deposition"
denied where plaintiff denied allegations; court ruled "[i]t is not this Court's role to
make credibility determinations on a motion to dismiss").
It is entirely proper that the standard be so very high. Were it otherwise,
litigants could end-run a plenary trial by seizing on allegations that their
adversaries are testifying untruthfully (hardly an uncommon contention), and
convincing the court to hold a hearing at which the trial judge believes one set of
witnesses over another, and enters judgment accordingly-thereby abrogating the
alleged offenders' essential rights to, among other things, full discovery and trial
by jury. To prevent such a gross distortion of the normal course of litigation-
4
exactly what happened here-courts must reject default motions when the alleged
misconduct is subject to bona fide dispute. As one judge put it:
The precious right of trial by jury is jeopardized by any
suggestion that a jury case may be dismissed or the
defendant may be defaulted whenever a motion judge or
trial judge, after measuring a party's credibility and
without the benefit of an admission such as the judge had
in this case, fmds by "clear and convincing evidence"
that that party has committed perjury as "part of a pattern
or scheme to defraud."
Rockdale Mgmt. Co., Inc. v. Shawmut Bank, N.A., 638 N.E.2d 29, 33 (Mass. 1994)
(concurring); see also Francois v. Harris, 366 So. 2d 851, 852 (Fla. Dist. Ct. App.
1979) (rejecting motion for fraud on the court; "[i]n all but the most extreme cases,
our system entrusts juries with the ultimate decisions").
Moreover, the Appellate Division's other ground for affirmance also cannot
stand: that this case merely involves an ordinary sanctions application to be
reviewed under CPLR § 3126. (RA-20 ("conspiring to provide false testimony and
to mislead the court did not comply with Supreme Court's [discovery]
directives")). The default below was not entered because Appellants failed
formally or physically to comply with the trial court's discovery orders, by wilfully
declining to provide written discovery responses or to attend noticed depositions.
Appellants did, in fact, comply with the trial court's discovery orders. Rather, the
default was premised on the content of the discovery provided about the merits of
the dispute; under those circumstances, the proper analysis is under the court's
5
inherent powers, and not statutory discovery sanctions. McMunn v. Mem'l Sloan-
Kettering Cancer Ctr., 191 F. Supp. 2d 440, 446-60 (S.D.N.Y. 2002) (dismissal
inappropriate under Fed. R. Civ. P. 37 where defendant submitted uncontradicted
proof that plaintiff lied repeatedly in deposition testimony and produced
fraudulently altered audio tapes while testifying that they were the unedited
originals because conduct did not violate discovery orders). Therefore, the fraud
on the court standard should have been applied here.
Second, the evidence below did not come close to satisfying the appropriate
Melcher standard ("conclusively demonstrated"). Here, two French sisters who
had been sued by CDR-Joelle Habib and Patricia Benharbon-struck a highly
questionable bargain with CDR to cooperate with CDR (a French government
entity) in this case. After cutting this deal-under which they paid nothing to
CDR, CDR is paying their legal fees and holds confessions of judgment to ensure
they will provide it with favorable testimony-they testified that Maurice Cohen
and his son Leon asked them to testify falsely on one issue in the case (whether the
Cohens owned the New York City Flatotel). The Cohens denied owning it.
However, no "fraud on the court" was perpetrated because neither Ms. Habib nor
Ms. Benharbon ever actually offered any substantive deposition testimony at all,
choosing to invoke their Fifth Amendment rights. See Rybner v. Cannon Design,
Inc., No. 95 Civ. 0279-(55), 1996 WL 470668, at *4 (S.D.N.Y. Aug. 20, 1996)
6
(even isolated instances of established perjury are not sufficient for default). Thus,
they never actually testified falsely pursuant to the alleged "agreement".
Furthermore, in direct contradiction of the hearing testimony of these two
witnesses, four other co-defendants-Maurice and Leon Cohen, Allegria Aich and
Robert Maraboeuf-unequivocally asserted, in affidavits and sworn testimony, that
there was no agreement to testify falsely, and that their own testimony on this issue
(and the prior statements made by Ms. Habib and Ms. Benharbon) were accurate,
contentions for which there is independent documentary support; and the testimony
of Ms. Habib and Ms. Benharbon is subject to very significant impeachment, given
their cooperation agreements with both the Government and CDR, their
acknowledged prior inconsistent statements, and many other inconsistencies in
their testimony. Thus, the $185 million default below was entered based on a
classic swearing match as to one issue-a dispute that could not have been
resolved on summary judgment, let alone a motion for a default.
Third, emblematic of the approach throughout the proceedings below, the
trial court also completely failed to distinguish among Appellants. Thus, the trial
court defaulted, and then entered a nine-figure judgment against, Sonia Cohen,
Maurice's wife and a 70-year-old housewife and grandmother, even though there
are no factual allegations against her in the complaint at all; CDR's own witnesses
expressly disclaimed any participation by Ms. Cohen in the alleged effort to
7
procure inaccurate testimony (which was never given); and the basis for CDR's
default against her consisted of unauthenticated documents she allegedly signed
literally a generation ago and other alleged matters-in particular her alleged
management of a perfume shop in Paris-completely unrelated to this case.
Unless this Court is willing to endorse the imposition of liability on purely marital
and blood ties, the default against Mrs. Cohen cannot stand.
Similarly, the courts below lumped all Appellants together as having been
previously defaulted for discovery violations (R22-23), when two of the
Appellants, Allegria Aich and Robert Maraboeuf, had in fact never been
sanctioned before CDR's "fraud on the court" application.
Fourth, the courts below next handed CDR a nine-digit judgment without
requiring that it prove damages at a hearing at all. CDR's damages claim-
seeking to recover the supposed ''unpaid loan balance" not from its erstwhile
borrower, but from individuals-is by no means liquidated and was subject to
many meritorious factual and legal defenses. The law is established that after a
default the complaint's allegations relating to damages are not deemed admitted;
unless damages can be determined in a ministerial fashion (certainly not the case
here), an inquest is mandatory.
Similarly, CDR's claim that Appellants are liable for the unpaid loan
balance because Appellants are alter egos of the corporate borrower is subject to
8
multiple, substantial threshold legal challenges that render the claim wholly
meritless. For example, CDR's claim is entirely derivative of any rights that CDR
have against the actual borrower: Appellants "must be treated as having stepped
into the shoes of' the entity of which they are supposedly alter egos, "and their
liability would be that of' that entity. Bailon v. Guane Coach Corp., 78 A.D.3d
608, 608 (1st Dep't 2010). If CDR has no rights against the borrower, it has none
against Appellants as its supposed alter egos. /d. Here, CDR has assigned away
the entirety of its claims against the borrower. In return, CDR (undisputedly)
received $105 million, more than the principal amount of its loan. Those claims
were then extinguished in the borrower's bankruptcy proceeding. Accordingly,
CDR has no alter ego claims.
Fifth, it is a fact that Maurice and Leon Cohen (but not any other Appellant)
were found guilty of tax evasion, just as CDR pled guilty to federal criminal
charges, see United States v. Consortium De Realisation S.A. (In re Grand Jury),
117 Fed. Appx. 527,528 (9th Cir. 2004) (reviewing ''five-year grand jury
investigation of several individuals and European companies, including the CDR
Parties, for violation of federal banking law related to the fraudulent acquisition of
assets"); Press Release, Federal Bureau of Investigation, Credit Lyonnais and
Others Plead Guilty and Pay $771 Million in Executive Life Affair (Dec. 18,
2003 ), http://www .fbi.gov /news/pressrel/press-releases/credit -lyonnais-and-others-
9
to-plead-guilty. Indeed, even now CDR and its former head are under
investigation in a corruption scandal that goes to the very highest levels of the
French government. See, e.g., David Jolly, Role of France Telecom Chief in Tapie
Affair to Be Investigated, N.Y. TIMEs, June 12, 2013,
http://www.nytimes.com/2013/06/13/world/europe/role-of-france-telecom-chief-
in-tapie-affair -to-be-investigated.html? _r=O (summarizing allegations of
"organized fraud" against CDR's former chief executive, Jean-Franc;ois Rocchi,
and other French financiers, including "suspicion" of wrongdoing by I.M.F. Chief
Christine Lagarde). The tax charges against the Cohens bear the unmistakable
stamp of CDR, which instigated and promoted those charges to advance its civil
litigation goals. Yet their tax conviction does not mean that CDR should simply
prevail on the merits of this civil case, that Appellants forfeit their due process
rights, that Appellants are entitled to any less consideration of their opposition to
CDR's default motion, or that a judgment of this magnitude should be entered
against them based on the wrong legal standard, manifestly erroneous fmdings and
sharply contested facts. And the tax case certainly can have no impact on any of
Maurice and Leon Cohen's three co-Appellants here, each of whom is entitled to
an individual assessment of his or her case.
10
This Court should not grant CDR an end run around having to prove either
liability or damages, and should reverse the judgment below, and remand so that
this action, at long last, can be determined on the merits.
BACKGROUND FACTS1
A. The Underlying Real Estate Transaction
This case is but one chapter in a long series of litigations arising out of a
commercial real estate loan dating back to 1990. At that time, SDBO, a French
bank and CDR's predecessor, entered into an agreement to take a 50% interest in
Euro-American Lodging Corporation ("EALC"), which was being formed to
purchase and develop a building in Manhattan as a "Flatotel" hotel franchise.
(R5713-14116-7; R6118-1912, R6121-22118-13). The other 50% ofEALC
was owned by an entity affiliated with Maurice Cohen. (R5712-13 1 3; R6140
1121-22). Mter the transaction closed, SDBO learned that it was illegal for it to
hold equity in EALC. (See 12 U.S.C. § 1843, NY Banking Law§ 98(1)). (R5715
19; R5935). SDBO' s 50% equity interest in EALC was therefore transferred to a
company affiliated with EALC's other existing 50% owner. (R5715-16119-10;
R5935).
1 References to "R_" are to the Record on Appeal previously filed with Appellants' appeal to
the Appellate Division from the trial court's ruling defaulting Appellants. When judgment was
entered, the parties stipulated, and the Appellate Division agreed, that the prior record could be
used and supplemented with whatever additional materials were appropriate. References to
"SR_" are to those additional materials. References to "RA_" are to the new material relevant
to the current Appeal.
11
The parties ultimately entered into a May 10, 1991 Loan Agreement under
which SDBO provided $87 million for acquisition and development of the project.
(R6145 § 100).
B. Litigation in France
The relationship between SDBO and EALC quickly soured. In August
1992, SDBO claimed (as CDR does here) that it was "the victim of a significant
diversion of funds". (R6268; R6127<][29). SDBO purported to terminate the loan
and demanded repayment of over $77 million. (R6268). EALC sued SDBO in
Paris, claiming a breach of the parties' loan agreement. See generally CDR
Creances S.A. v. Euro-American Lodging Corp., 43 A.D.3d 45, 47 (1st Dep't
2007) (recounting factual and procedural history).
As recounted by a prior ruling of the Appellate Division in a related
litigation, on June 14, 1993, the Paris court ruled that SDBO had breached the loan
agreement, and rejected its claims regarding "diversions" of loan proceeds.
(R6293-94). CDR Creances, 43 A.D.3d at 48. French appellate courts affirmed.
/d. In October 1999, a court-appointed expert calculated EALC's losses from
CDR's breach (SDBO had by this time been taken over by CDR, an
instrumentality of the French government) at $33.3 million. (R6113-14).
12
C. The Transfer of the Flatotel
In early 2000, EALC and the Flatotel franchisee that was running the hotel
were transferred to affiliates of a third-party, Simon Elias (the "Elias Entities").
(R5922117). The then-Elias-controlled EALC approached CDR in an effort to
settle the litigation, stressing the strength of its legal position and that CDR was
owed nothing. (R6322-29).
D. The Judgment in France and CDR's Proceedings in the United
States
In February 2003, a French appeals court ruled that EALC was entitled to
$770,779 in damages against CDR (R5922115; R6339); however, the court
further ruled that the ten-year term of the loan matured not later than May 2001,
and therefore CDR was entitled to repayment of the loan from EALC in the
amount of $82,704,990. (R5922115; R6339-40). See also CDR Creances, 43
A.D.3d at 48.
Thereafter, CDR commenced a series of litigations in New York. (See
R5922-251118-26). Included in these efforts were these actions. In 2003, CDR
sued entities affiliated with Maurice Cohen and Elias, asserting six claims,
including breach of contract and fraud. (R5361-631158-78). In 2006, CDR
commenced an additional action, filing a 522-paragraph Complaint asserting 38
claims against some 35 persons and entities. (R5225-345). CDR asserted that
virtually every action for nearly twenty years relating to the Flatotel was part of a
13
conspiracy to defraud CDR, orchestrated by (among others) the Cohens; Elias, his
wife and father; a number of French nationals and attorneys; New York attorneys;
Atlantic Bank of New York; and Israel Discount Bank. (R5229-37 ']{']{ 18-57; see
also R5228 ']I 11). CDR's litigation efforts were initially focused on the then-
existing owners of the Flatotel, the Elias Entities.
E. The EALC Bankruptcy and CDR's Settlement With Elias
In June 2006, having faced a number of setbacks in court, CDR filed an
involuntary bankruptcy petition for EALC. (R5926 ']I 28; R6374).
In about July 2007, CDR resolved its litigation with EALC and its owners
(again, affiliates of Elias). CDR assigned the entirety of its claim under the Loan
Agreement with EALC to another Elias affiliate, 135 West 52nd LLC ("135
LLC"), in exchange for 135 LLC's payment of $105 million. (SR2577). Despite
the $105 million payment to CDR-well in excess of the principal amount of its
loan-the trial court simply accepted CDR's highly misleading contention that
"[n]o payments of interest or principal have ever been made by EALC under the
loan agreement." (R12).
Under this agreement, CDR transferred its rights under the Loan, including
the various judgments based on it. (SR2577). The agreement further confirms that
CDR transferred the Loan and its related documents to 135 LLC, and CDR "grants
14
discharge there for". (ld.). This "discharge" states that CDR assigned "all of its
rights and actions deriving from the transferred contractual debt". (SR2579).
The assignment contains a "carve-out" for claims CDR had "brought against
Mr. Maurice COHEN, members of his family and his group, and of the companies
in which he holds interests, directly or indirectly". However, the claims that CDR
reserved were identified as not being under the Loan Agreement, but those "based
on their tortious or quasi-tortious liability". (SR2579).2
F. CDR Commences Pursuing Its Claims Against Appellants
Mter its $105 million settlement with Elias, CDR began to prosecute the
actions against Appellants, which had previously lain dormant for several years;
indeed the cases were so moribund that certain defendants moved to dismiss for
lack of prosecution. (R5370-73, R5391-5403).
2 The comprehensive nature of this assignment was confirmed in the EALC bankruptcy after the
settlement was reached; all such rights under the loan agreement were satisfied and discharged
by the bankruptcy court. (SR1179, SR1185); see also In re Euro-American Lodging Corp., Plan
of Reorganization, No. 06-11325 (SMB), 2007 WL 7144834, at *10 (Bankr. S.D.N.Y. Nov. 1,
2007). EALC, the bankruptcy trustee, the reorganized debtor and other related parties all gave
broad releases of claims related to EALC and the bankruptcy against EALC' s former
"representatives" or "direct and indirect shareholders". /d. at *20. (See also SR1186-87 (broad
release of EALC "current or former representatives, officers, directors, employees, agents,
members, direct and indirect shareholders")). Similarly, all holders of claims against the
bankruptcy estate gave broad releases, including ones to "current or former representatives,
directors, officers and employees of' EALC. 2007 WL 7144834, at *21.
15
1. The Prior Default
In February 2008, the actions were reassigned to Justice Tolub, who held his
first conference on March 4, 2008. (R2332-33). After a series of discovery
disputes, on April25, 2008-less than two months after the initial conference-
CDR moved for a default against the Cohens for discovery violations. (R2334-42).
On August 7, 2008, Justice Tolub granted CDR's motion. (R370-71). Appellants
Allegria Aich and Robert Maraboeuf, two French nationals, had been separately
defaulted not for discovery violations (as the decisions below suggest) but for
failing to answer the complaint. (R376).
The defendants then retained new counsel; the Cohens retained separate
counsel from the other defendants-French nationals Aich and Maraboeuf, Joelle
Habib and Patricia Benharbon (named here as defendant Petetin). (R2347-48;
R2350-52).3
On May 21, 2009, the Appellate Division reversed Justice Tolub's default,
ruling that he had "improvidently exercised [his] discretion" and noting "the facial
merit of [Defendants'] defenses". CDR Creances S.A.S. v. Cohen, 62 A.D.3d 576,
577 (1st Dep't 2009). The Court further ruled that CDR's request for summary
judgment on the merits of its claims was "without merit". !d. Some of Appellants'
factual defenses are detailed in section I.F. below.
3 Maurice and Sonia Cohen are Spanish nationals. Leon Cohen is a naturalized American
citizen.
16
2. Proceedings After Reversal of the Default
Order
At a compliance conference one week after the Appellate Division's reversal
of the default, deposition dates were set for the Cohens. (R2360). These
obligations were met in July 2009 when the Cohens gave testimony in New York
for seven days spanning 1,031 pages. They testified until Justice Tolub gave them
explicit permission to return home. (R5433-34). Allegria Aich appeared for her
deposition for two days in October 2009, which was suspended pending a dispute
regarding how long the deposition would last. (R706, R797-802).
On August 24,2009, CDR moved by order to show cause on a number of
discovery issues. (R2375-77). Despite CDR's and the trial court's purported
desire to move the case forward expeditiously, CDR sought a stay of its own
discovery obligations, which was granted (over Appellants' objection). (R2376,
R2386, R2389; R2399, R2400).
3. Discovery Proceedings After the Actions Are Assigned to
Justice Yates
Upon Justice Tolub's retirement, these matters were reassigned to Justice
Yates, who held a status conference on January 22, 2010, at which, deferring to his
predecessor, he adhered to various of Justice Tolub's previous discovery rulings,
including that Maurice and Leon Cohen and Ms. Aich had to return to New York
for yet further testimony. Appellants complied with these orders. Allegria Aich
17
appeared for a second session of her deposition for two days on March 9 and 10,
2010 (R2451-62), and the Cohens appeared for depositions commencing Apri112,
2010. Justice Yates ruled Maurice Cohens' deposition concluded on Wednesday,
Apri114, 2010 (and thus it ultimately proceeded for 1,086 pages of testimony).
Leon Cohen's deposition did not recommence because Maurice and Leon Cohen
were arrested on tax charges in New York on Apri115, 2010. (R2465).
Robert Maraboeuf was permitted to appear for his deposition in Paris due to
health conditions, and did so on June 7 and 8, 2010. (R2469-70; R14; R2472-84).
Mr. Maraboeuf was represented by additional, independent counsel at that
deposition. (R2473, R2479). Ultimately, Appellants collectively provided 2,219
pages of deposition testimony over 16 days. (R2327Cj[48).
No CDR witness was ever examined.
Patricia Benharbon and Joelle Habib, who are sisters, appeared at their
depositions in New York on April22 and 23, 2010, an~ asserted the Fifth
Amendment. (R2485-90; R2491-95). Before the Cohens' arrest, they had
attempted to have their depositions take place in France, citing significant child
care and other personal issues (R5610-46), which requests were denied. They
retained separate counsel after the Cohens' arrest. (R2496-97).4
4 After the original default, Ms. Aich, Mr. Maraboeuf, Ms. Benharbon and Ms. Habib retained
separate counsel. In around January 2010, these separately represented parties retained
18
During this time, discovery was proceeding in a related proceeding in
Florida brought by CDR against the Cohens and entities that CDR alleges they
control (the "Florida State Court Action"); defendants in that action produced over
70,000 pages of documents. (R2325'][30).
4. CDR Moves for Default
On July 21, 2010, CDR issued a Notice for Discovery and Inspection to
Appellants. Two days after Appellants served their responses, CDR moved for
default based on the Cohens' purported discovery violations. (Rlll-12). CDR in
particular sought the materials produced by the Government to the Co hens'
criminal counsel in Florida (much of which CDR had itself provided to the
Government in an effort to promote the criminal case against the Cohens). (R126-
27'][28). New York defense counsel obtained the documents from Florida and
produced all of the documents directed by the trial court-over Appellants'
objections, and amounting to hundreds of thousands of pages-within weeks, by
September 15, 2010. (R2630-37).
CDR also sought a default based on allegations in the federal criminal action
that Maurice and Leon Cohen had arranged for other defendants to testify falsely in
this case (Rlll-115); however, it did not press that argument at that time (see
R4322-53).
Appellants' current counsel; after the Cohens' arrest Benharbon and Habib obtained their own,
separate counsel.
19
5. CDR's Renewed Motion
The tax case against Maurice and Leon Cohen went to trial in federal court
in Miami on September 16, 201 0; Ms. Habib and Ms. Benharbon testified for the
government in exchange for an agreement that they would not face any criminal
charges. The Cohens were convicted on October 6, 2010. (R3787).
On October 20, 2010, CDR renewed its motion for a default based on the
allegation that Maurice and Leon Cohen had asked co-defendants to testify falsely
in this case. (R2902-04<][<][2-3). The trial court ordered an evidentiary hearing
over the objection of Appellants, who argued that, because there was a factual
dispute regarding CDR's allegations, the drastic relief that CDR sought was not
proper. (R70-71).
6. The Testimony at the Hearing
The trial court held an evidentiary hearing from November 29 through
December 3, 2010 (R6779-7657) (not, as incorrectly recounted by the trial court,
"from November 29 through November 30, 2010" (R15)). Ms. Habib and Ms.
Benharbon testified, and the parties submitted other documentary and testimonial
evidence.
Ms. Benharbon testified that from 1987 to 1997 she worked in a perfume
shop in Paris that she believed was owned by Maurice Cohen, and that Sonia
Cohen managed. (R6816-19, R6824-26). Ms. Habib testified that she was for
20
many years until2005 Maurice Cohen's personal assistant. (R6972, R6978,
R6981). She testified that Mr. Cohen asked her to come to New York to attend the
February 2000 closing on the sale of the New York Flatotel with Ms. Aich, and
that she signed documents at the closing on behalf of a company with which she
had no real involvement. (R7049, R7051).
Ms. Benharbon testified that when she learned that they had been sued in
New York, she was told by her sister and Ms. Aich that the matter would be taken
care of. (R6829-30). She did not, at this time, speak to any lawyer in the United
States. (R6831). She testified that when the witnesses learned that default
judgments had been entered against them in 2008, they testified that they
understood that the new lawyers representing them would be paid by Maurice
Cohen, but that they should not disclose that fact. (R6836-37; R6839-40).
Ms. Habib and Ms. Benharbon testified that, after the default was vacated,
they met with the Cohens, Ms. Aich and Mr. Maraboeuf, at which meeting the
Cohens instructed them to testify at their depositions that they did not work for the
Cohens (R7010-ll), who, they were further.instructed to say, did not own
Flatotels. (R7007). They said they were given written "questionnaires" that they
were supposed to memorize and destroy. (R6858-59, R6996-97, R7005). Ms.
Habib asserted that she did not destroy her "questionnaires", and she purported to
identify it. (R6997).
21
The first such alleged meeting with the Cohens was before meetings
between the witnesses and their American lawyers in Paris. (R6858-62 (describing
7/15/2009 meeting with Maurice and Leon Cohen); R6861-62 (identifying
attorneys present at 7/17/2009 meeting); R7001-02). Both Ms. Habib and Ms.
Benharbon asserted that they lied extensively to the attorneys at those meetings.
(E.g., R6865-67, R6930, R7003). They said they were instructed not to tell the
lawyers of the plan to give inaccurate testimony. (R7094).
Sonia Cohen was not alleged to have been part of any of these meetings or
the claimed agreement to testify falsely. (R6966).
Ms. Habib and Ms. Benharbon testified that on April15, 2010, they traveled
to New York for their depositions. (R6879). They were accompanied by family
members, including young children. (R7080-81). On arrival, the sisters learned
that the Cohens had been arrested. (R6879-80). They admitted that they were
terrified; they were advised by federal authorities that they should not try to return
to France. (R6936-37, R7080-81). They therefore agreed to cooperate with the
Government in exchange for non-prosecution agreements. (R3210-14, R3261-65).
CDR also agreed not to pursue its claims against them in exchange for their
cooperation, and it received confessions of judgment against both to ensure their
continued cooperation (R3364-67, R3384-85); CDR also agreed to pay their legal
fees and expenses. (R6884).
22
On cross-examination, the witnesses attested that they lied numerous times,
(R6866; R6931; R7099) including at the meetings with defense attorneys (R7094);
Ms. Habib attested to other dishonest conduct in connection with false statements
to a French court and failure to report her severance payment to French tax
authorities. (R7095). The witnesses attributed their actions to the pressure they
felt because the Co hens were paying their attorneys' fees ("I had a gun to my
head" (R7099)). These fees are now being paid by CDR.
Appellants submitted sworn statements from each of Maurice and Leon
Cohen, Allegria Aich and Robert Maraboeuf in which they expressly and
emphatically denied that they were part of any agreement to testify falsely.
(R2704-21). Maurice and Leon Cohen also submitted their testimony from the
Florida criminal trial to that effect. (R7418-19; R7524-25).
7. The Trial Court Decision on the Motion for Default
In its decision, the trial court briefly (and, in substantial measure,
erroneously) set forth the cases' underlying facts and procedural history. (Rll-15).
The court further described CDR's allegations, without reference to the counter-
statement from Appellants. (R13-14). It asserted that "[d]iscovery disputes,
involving allegations that defendants failed to follow the court's orders to produce
documents and schedule depositions, have been continually before the court"
(R14), but it did not identify any rulings that it had made that Appellants had
23
violated any discovery orders since the reversal of Justice Tolub's default (and
there were none). Furthermore, the trial court incorrectly recounted that "Justice
Tolub ordered the depositions of the Cohens to be held in July 2009. It was only in
Spring 2010 that the depositions took place." (R23). As noted, each of the Cohens
was deposed during an seven-day period in July 2009. (R1052-1986, R5843-62).
The court accepted Habib's and Benharbon's testimony without addressing
the substance of any of the grounds on which they had been impeached (R18-19),
or Appellants' sworn denials. (R21). Finally, the trial court concluded that
Appellants' alleged conduct warranted striking their answers. (R25-26).
H. The Proceedings Assessing Damages Without a Hearing
The action was reassigned to Justice 0. Peter Sherwood upon Justice Yates'
resignation from the bench.
By order to show cause dated February 25, 2011, CDR moved for entry of a
money judgment against Appellants, without any hearing, in the principal amount
of $185,423,632.42, plus punitive damages. (SR1378-79; SR3405-06). CDR's
claimed compensatory damages were calculated on the supposed outstanding
amount of the loan to EALC, including interest, less the $105 million (again, more
than the amount of its loan to EALC) it received in the bankruptcy proceeding.
(SR1380-88).
24
By order dated August 22, 2011, the trial court granted CDR's request for
the entry of a judgment on compensatory damages, with a slight adjustment of the
amount, and denied its request for punitive damages. (SR30-40). A consolidated
judgment in both actions in the amount of $186,325,301.01 was entered on
September 16,2011. (SR18-28).
I. The Appellate Division Decision
In a decision dated December 27, 2012, the Appellate Division affirmed
both the entry of a default and the assessment of damages without a hearing, with
one Justice dissenting. (RA-5-38).
In affirming the default, the Appellate Division majority addressed the
standard to be applied where there is a claim of a ''fraud on the court", and its own
prior case law on the issue, in particular Melcher, 52 A.D.3d at 245. (RA-13-15).
Appellants cited Melcher's affirmance of the trial court's denial of a motion to
strike because "[ d]eceit warranting the striking of the answer was not conclusively
demonstrated", Melcher, 52 A.D.3d at 245, and argued that "conclusively
demonstrated" was the applicable standard to be applied. The Appellate Division,
however, ruled that "the words 'conclusively demonstrated' ... is not an
evidentiary standard .... " (RA-14). Instead, the majority below ruled that
because Melcher stated "[ w ]hether the destruction of evidence was intentional or
merely negligent presents an issue for the trier of fact", Melcher, 52 A.D.3d at 245,
25
''the determination" of the fraud on the court issue "rests not on conclusive
evidence but on a mere preponderance thereof." (RA-14). The Appellate Division
reviewed the evidence at the hearing, and held while it "may not quite amount to
'undisputed untruthfulness on the record' ... it is sufficient to constitute
incontrovertible untruthfulness on the record." (ld. at A-19 (citing Smith v.
Malarczyk, 118 A.D.2d 934, 935 (3d Dep't 1986))).
The Appellate Division majority further ruled that the default could properly
be based on a violation of CPLR § 3126, which provides for discovery sanctions:
"For the purpose of imposing a sanction for discovery violations in this matter
(CPLR 3126), it need only be observed that conspiring to provide false testimony
and to mislead the court did not comply with Supreme Court's directives"
regarding discovery. (RA-20).
With respect to Appellant Sonia Cohen, Maurice Cohen's 70-year old wife,
the court held that "the proof supports a finding that she participated in the effort to
withhold from plaintiff evidence necessary to the prosecution of its case". (RA-
24). The First Department therefore affirmed the default.
The court further held that damages were "properly based on the amount of
the unpaid loan; notably, numerous causes of action against the individual
defendants concerned the fraudulent conveyance of the loan proceeds." (RA-25).
26
The court therefore affirmed the trial court's ruling that $185 million in damages
could be assessed without a hearing.
Justice Catterson dissented. He asserted that application of Melcher's
"conclusively demonstrated" standard "is mandated by precedent", and therefore
the trial court had erred in applying a "clear and convincing" standard. (RA-34).
He further noted that CDR had not cited any authority that "a motion for a default
may be granted in a situation where the allegations of fraud and deceit on the court
are the subject of a bona fide dispute." (RA-35). He reviewed the evidence
adduced at the hearing, in particular the impeachment of the witnesses at the
hearing, and determined that "[a]s in Melcher, the defendants raised a question of
material fact as to the fraudulent conduct alleged, and the issue should have been
presented to a jury." (RA-36).
The Appellate Division denied leave to appeal to this Court in an order dated
March 21, 2013. (RA-41). This Court granted leave to appeal in an order dated
June 25, 2013. (RA-3).
27
ARGUMENT
I. THE LOWER COURTS IMPROPERLY ENTERED A DEFAULT
AGAINST APPELLANTS BASED ON VIGOROUSLY DISPUTED
ALLEGATIONS OF MISCONDUCT
In ruling on a motion to strike a pleading, courts are mindful of the strong
policy favoring resolution of cases on the merits. Rybner, 1996 WL 470668, at *4
(refusing to strike pleadings despite finding ''that Rybner acted intentionally,
willfully and in bad faith in perjuring himself at his deposition and that Rybner did
so in an attempt to hinder the fair and full adjudication of the case"); see also
Campione v. New Hampshire Ins. Co., 76 A.D.3d 484, 484 (1st Dep't 2010)
(reversing default and noting "New York's strong preference for disposing of cases
on the merits").
Dismissal is "a drastic sanction, which should be imposed sparingly", and is
reserved for the most extreme cases, "where lesser sanctions would not be
meaningful". lung v. Neschis, No. 01 Civ. 6993 (RMB)(THK), 2009 WL 762835,
at *14 (S.D.N.Y. Mar. 23, 2009). It is a remedy that presents serious due process
concerns. Roadway Express, Inc. v. Piper, 447 U.S. 752, 767 n.14 (1980).
No Court of Appeals authority addresses the circumstances under which a
pleading should be stricken for a party's alleged "fraud on the court".5 However,
5 Baba-Ali v. State of New York, 19 N.Y.3d 627, 634 (2012), cited by the Appellate Division
majority, involved a prosecutor's allegedly fraudulent withholding of exculpatory evidence and,
thus, has no precedential value for the issue presented here.
28
both the intermediate appellate New York authority on the issue, in particular the
Appellate Division's own prior decision in Melcher 52 A.D.3d 244, as well as the
prevailing authority from outside this State, establish that courts do not strike
pleadings based on fraud on the court allegations where the alleged misconduct
goes to the merits of the case, and is subject to genuine factual dispute. Under the
prevailing rule, which this Court should adopt, the default below cannot stand.
A. The Appellate Division Misread Its Own and Other New York
Precedent
A review of both Melcher and the other cases from New York state courts
makes it apparent that the Appellate Division misread that decision.
In Melcher, the plaintiff appealed from the trial court's denial of his motion
to strike the defendant's answer for spoliation and for deceit, and the Appellate
Division affirmed. /d. at 244. The sole reason the Appellate Division expressed
for affirming the trial court's denial of the motion to strike was "[d]eceit
warranting the striking of the answer was not conclusively demonstrated." Id. at
245 (citing 317 W. 87 Assocs. v. Dannenberg, 159 A.D.2d 245 (1st Dep't 1990)).
The necessary implication of this holding is inescapable: Had the deceit been
conclusively demonstrated-i.e., established irrefutably (see MERRIAM-WEBSTER's
COLLEGIATE DICTIONARY (11th ed. 2003) (definition of "conclusive"))-the court
would have reversed and stricken the defendant's answer. Hence, it follows that
29
conclusive evidence of deceit was required as a standard of proof in Melcher, as
Justice Catterson concluded in dissent. (RA-33-34).
The Appellate Division majority brushed aside this necessary implication in
a non-sequitur: "[h]owever, a cursory examination of the context in which the
statement was issued reveals that it does not purport to pronounce an evidentiary
standard. Rather, the purpose was to distinguish the circumstances of the matter
before us from the authority cited, 317 W. 87 Assoc. v. Dannenberg". (RA-13-14).
But the Melcher Court was not distinguishing Dannenberg, but relying on it; and
in any event the basis for the affirmance of the motion to strike in Dannenberg was
that the third-party defendant was guilty of "'undisputed untruthfulness' on the
record"; the admitted misconduct included participation in the submission of a
fraudulent agreement, which was then falsely authenticated in deposition
testimony. 159 A.D.2d at 245. Again, the clear implication of this holding is that,
had there been any factual dispute about the authenticity of the agreement, the
order striking the pleading would have been reversed. Thus, contrary to the
Appellate Division majority's reasoning herein-that Melcher's citation to
Dannenberg shows that "conclusively demonstrated" is not an evidentiary
standard, 159 A.D.2d at 245-the converse is true.
30
The Appellate Division majority then compounded its error in what it then
described as the true "holding" of Melcher-in the process parting company with
every other decision dealing with allegations of fraud on the court. (RA-14 ).
Quoting Melcher's statement that "'whether the destruction of evidence was
intentional or merely negligent presents an issue for the trier of fact"' (id.), the
Appellate Division majority erroneously concluded that when a judge sits as the
trier of fact in a contested hearing to strike a pleading, the determination "rests not
on conclusive evidence but on a mere preponderance thereof." (!d.). Thus, the
Appellate Division majority below held that on a motion to strike a pleading for
fraud on the court, a judge faced with disputed evidence of the fraudulent conduct
may hold an evidentiary hearing and resolve the disputed facts on the basis of a
"mere" (to use the Appellate Division's word) preponderance of evidence. (!d.).
Once again, this was an erroneous reading of the case. Melcher's reference
to "[ w ]hether the destruction of evidence was intentional or merely negligent
presents an issue for the trier of fact", 52 A.D.3d at 245, was clearly to the jury as
trier of fact, and not the court. Melcher's citation to Taieb v. Hilton Hotels Corp.,
131 A.D.2d 257 (1st Dep't 1987), confirms this. The court in Taieb reversed an
Appellate Term reversal of a jury verdict in the Civil Court, holding that there was
sufficient evidence to raise triable issues of fact for the jury to decide the issue. !d.
at 259. The ruling that Appellants' pleading can be stricken based on a "mere"
31
preponderance of the evidence here is all the more remarkable, since CDR's
underlying claims on the merits sound in fraud and therefore must themselves be
established by clear and convincing evidence. Simcuski v. Saeli, 44 N.Y.2d 442,
452 (1978) ("as in the instance of fraud claims generally, this plaintiff, too, will be
required to prove her claim by clear and convincing evidence").
Accordingly, the Appellate Division's ruling below was premised on an
incorrect reading of its own precedent. Melcher means what it said: Deceit
warranting the striking of a pleading must be "conclusively demonstrated."
None of the other Appellate Division rulings relied on below is contrary to
Melcher, and in fact to the extent those rulings are relevant they support it. See
Dannenberg, 159 A.D.2d at 245-46 ("Contributing to 'undisputed untruthfulness'
on the record justifies the imposition of sanctions under CPLR § 3126"; affirming
striking of third-party answer); Smith, 118 A.D.2d at 935 ("Given the undisputed
untruthfulness of defendant's testimony at his examination before trial" new trial
should have been granted). Indeed, Kaschak v. Gates Construction Corporation,
225 A.D.2d 315 (1st Dep't 1996), cited by the Appellate Division, refers to a
party's "duplicity" as being a "fraud upon the court", 225 A.D.2d at 316, but the
case involved misleading allegations in connection with determining proper venue,
and not striking a pleading. Therefore, Kaschak provides no guidance here, despite
the Appellate Division majority's reliance on it.
32
Accordingly, New York authority holds that striking a pleading for a fraud
on the court is not proper unless the alleged misconduct is "conclusively
demonstrated".
B. The More Developed Jurisprudence of Federal and Other State
Courts Mandates a Heightened Standard
Decisions in federal cases and state cases outside of New York have
developed a fairly extensive jurisprudence governing fraud on the court
allegations. Those decisions agree on a number propositions, which reflect the
grave concerns that striking a party's pleadings on that basis raises, and which lead
to the conclusion that the default was not proper here.
1. Courts Based "Fraud on the Court" Rulings on the Inherent
Power of the Court
The imposition of sanctions for a fraud on the court is premised on the
inherent power of a court to impose sanctions to punish and deter fraud, bad faith,
and other conduct endangering the integrity of the courts and of the administration
of justice. See Chambers v. NASCO, Inc., 501 U.S. 32, 43-44 (1991); Hazel-Atlas
Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 246 (1944), overruled on other
grounds by Standard Oil Co. of California v. U.S., 429 U.S. 17, 18 (1976). In one
frequently cited formulation, a default is proper when "a party has sentiently set in
motion some unconscionable scheme calculated to interfere with the judicial
33
system's ability impartially to adjudicate a matter". Aoude v. Mobil Oil Corp., 892
F.2d 1115, 1118 (1st Cir. 1989).
2. Courts Refuse to Strike Pleadings Where the Alleged
Misconduct is Genuinely Disputed
Critically, courts refuse to strike pleadings based on fraud on the court
allegations where the alleged misconduct is subject to bona fide factual dispute. 6
E.g., Dynex Capital, 2011 WL 2581755, at *4, *5 ("the squarely contradictory
nature of the declarations" was "insufficient to satisfy Defendants' burden";
declining to hold hearing because "determining the truth or falsity of the substance
of the allegations" at issue "falls within the province of the jury" and "the jury-
not the court-should determine whether fact witnesses are credible"); Trussell,
2010 WL 1223890, at *1, *2 (motion for default based on claim plaintiff
"fabricated evidence and committed perjury during his deposition" denied where
plaintiff denied allegations; court ruled "[i]t is not this Court's role to make
credibility determinations on a motion to dismiss"); Passlogix, 708 F. Supp. 2d at
406 (motion for default denied where defendant rebutted "nearly all of [plaintiffs]
evidence and present[ed] a colorable counter-narrative"). This is true even where
courts apply a clear and convincing evidence standard adopted by some federal
courts. E.g., Dynex Capital, 2011 WL 2581755, at *2; Passlogix, 708 F. Supp. 2d
at 393; see also Gilbert v. Eckerd Corp. of Fla., Inc., 34 So. 3d 773, 776 (Fla. Dist.
6 As discussed below, the alleged misconduct must also be material to the merits of the action.
34
Ct. App. 2010) ("if the motion to dismiss for fraud would not likewise survive a
motion for summary judgment, the trial court should presume the matter not
subject to dismissal"); Trussell, 2010 WL 1223890, at *2 ("[i]n this case, a jury
must make a credibility determination").
This heightened standard of proof is consistent with the one applied in the
few New York State cases, before the Appellate Division's ruling here, dealing
with the issue. (See RA-34 (Catterson, J., dissenting) ("Melcher's requirement of a
'conclusive' demonstration of alleged deceit comports with a heightened standard
of proof where, as the defendants assert, 'conclusive' ordinarily means 'putting an
end to debate or question especially by reason of irrefutability."')); see also
Dannenberg, 159 A.D.2d at 245 (fraudulence of document offered under affidavit
"admitted" by defendant); Smith, 118 A.D.2d at 935 ("undisputed untruthfulness"
of defendant's testimony).
Numerous other courts have applied this principle. E.g., A.l.A. Holdings,
S.A. v. Lehman Bros., Inc., No. 97 CIV. 4978 (LMM), 2002 WL 1271722, at *2
(S.D.N.Y. May 29, 2002) (court denied a motion to strike because "[w]hile
defendants have made some showing that the two documents submitted by
plaintiffs in support of their motion for summary judgment may well have been
doctored, they have not met their burden of proving, by clear and convincing
evidence, that plaintiffs knowingly committed a fraud on the Court"); Hernandez v.
35
City of Miami, 35 So. 3d 942, 943 (Fla. Dist. Ct. App. 2010) (power to strike
pleadings "should be exercised cautiously, sparingly, and only upon a clear
showing of fraud on the court"; reversing grant of motion to strike); Asch
Webhosting, Inc. v. Adelphia Bus. Solutions Inv., LLC, No. Civ.A. 04-2593(MLC),
2006 WL 1098235, at *15, *16 (D.N.J. Mar. 31, 2006) (denying motion based on
series of claimed perjuries where opponent "has provided at least a reasonably
plausible interpretation of his inconsistent statements"; in denying motion court
noted nonetheless that witness's testimony was '"less than forthright"'); see also
Reynolds v. Univ. of Penn., 684 F. Supp. 2d 621, 628 (E.D. Pa. 2010) (refusing to
grant motion where plaintiff "expressly denied making such an admission or
relying on fraudulent evidence", contrasting that to other cases in which pleadings
were struck where misconduct was "admitted"); Young v. Curgil, 358 So. 2d 58,
59-60 (Fla. Dist. Ct. App. 1978) (power to strike pleadings "should be cautiously
and sparingly exercised and only upon the most blatant showing"; denying motion
where "the matter is fairly debatable and should have been decided by the trier of
fact, here a jury, as our law generally contemplates.").
It follows from these cases that when a default motion is based on contested
facts such that summary judgment would be inappropriate, it is improper to grant
the motion. Gilbert, 34 So. 3d at 776 ("if the motion to dismiss for fraud woul-d
not likewise survive a motion for summary judgment, the trial court should
36
presume the matter not subject to dismissal."); Trussell, 2010 WL 1223890, at *2
(in denying motion to dismiss for fraud on the court, "[i]t is not this Court's role to
make credibility determinations on a motion to dismiss"); Suppa v. Costa Crociere
S.P.A., No. 07-60526-CIV, 2008 WL 936903, at *1-2 (S.D. Fla. Apr. 7, 2008)
(plaintiffs concealment of prior treatment for other injuries did not result in
default; court ruled while plaintiff might have "intentionally attempted to conceal
her prior treatment in an effort to make her damages appear more severe, this is a
question of credibility that is best left to the jury's consideration.").
In fact, as Justice Catterson noted, CDR did not cite any case that granted a
motion for a default where the allegations of misconduct are subject to bona fide
factual dispute, as they are here. (RA-35).
3. The Alleged Misconduct Must Go to Issues Central to the
Litigation
Dismissal is only warranted where the false testimony, documents, or
fraudulent conduct do not merely relate to collateral issues or incidental matters,
but go to core issues in the litigation. That the misconduct meriting the fmal
disposition of the case without trial on the merits must have been "calculated to
interfere with the judicial system's ability impartially to adjudicate a matter,"
Aoude, 892 F.2d at 1118, necessarily means that the fraud must relate to central
issues on the merits of the case. Thus, for example, although the court in Rybner
found by clear and convincing evidence that the plaintiff had submitted a falsified
37
resume to the defendant in this employment disability discrimination case, then-
District Judge Sotomayor declined to dismiss the complaint. 1996 WL 470668, at
*4, *6. She reasoned:
The Condensed Resume is not directly relevant to the
central issue in the action which is whether [defendant]
offered or did not offer plaintiff employment. Neither
the concealment of [plaintiffs] real employment
background nor the subsequent production of the Draft
Resume at the second deposition directly affects this
question . . . . Similarly, [plaintiffs] falsehoods at his
deposition were not related to the transaction at issue in
the litigation ....
Id. at *5. State courts agree: "the [unconscionable] scheme must go to the very
core issue at trial." Gilbert, 34 So. 3d at 775.
4. Courts Strongly Favor Adjudication on the Merits
When faced with a fraud going even to a core issue, while courts are
concerned with the need to pro!ect the integrity of the adjudicative process, they
are confronted with a countervailing policy strongly favoring adjudication on the
merits. Trussell, 2010 WL 1223890, at *2 ("[l]n this case, a jury must make a
credibility determination . . . . It is not this Court's role to make credibility
determinations on a motion to dismiss."); see also Ruiz v. City of Orlando, 859 So.
2d 574, 576 (Fla. Dist. Ct. App. 2003) ("Except in the most extreme cases, where it
appears that the process of trial has itself been subverted, factual inconsistencies,
even false statements are well managed through the use of impeachment and
38
traditional discovery sanctions" and not through dismissal of a possibly
meritorious claim.).
5. Courts Protect a Party's Right to a Jury Trial
A corollary to the strong preference for resolving disputes on the merits is
the vital right to a jury trial. As stated in Rockdale:
The precious right of trial by jury is jeopardized by any
suggestion that a jury case may be dismissed or the
defendant may be defaulted whenever a motion judge or
trial judge, after measuring a party's credibility and
without the benefit of an admission such as the judge had
in this case, finds by "clear and convincing evidence"
that that party has committed perjury as "part of a pattern
or scheme to defraud." ... In my view, in a jury case the
question whether a party's trial or deposition testimony is
true or false ought to be for the jury, not the judge, to
decide.
638 N.E.2d at 33 (concurrence).
Dynex Capital is instructive. There, the court denied defendants' motion to
dismiss a class action complaint based largely on allegedly fraudulent attribution of
statements to initially confidential insider fact witnesses. 2011 WL 2581755, at
* 1. The witnesses later submitted affidavits either denying or questioning the truth
of statements ascribed to them. Class counsel countered with attorney affidavits
swearing that they had interviewed those witnesses and described their statements
accurately in the complaint. Id. at *2. The court concluded not only that these
mutually contradictory submissions, standing alone, could not meet the clear and
39
convincing evidence standard, id. at *4, but that an evidentiary hearing was
inappropriate:
[T]he credibility issues raised by Defendants' motion
have a significant connection to the merits of Plaintiffs
underlying claims .... [T]he task of determining the truth
or falsity of the substance of the allegations contained in
the [second amended complaint] and attributed to the
[confidential witnesses] falls within the province of the
jury. . . . It is difficult to imagine how the Court could
make the findings necessary to resolve Defendants'
sanctions motion without impinging on the function of
the jury.
/d. at *5; accord In re Pfizer Inc. Sec. Litig., 288 F.R.D. 297, 331 (S.D.N.Y. 2013)
("[A] pre-trial motion for sanctions is not the appropriate vehicle to test the truth or
falsity of allegations in a complaint. ... A motion for sanctions cannot serve as an
end-run around the fact finder's exclusive role to resolve factual disputes.").
Similarly, this Court has long held in high regard the Constitutional directive
that "[t]rial by jury in all cases in which it has heretofore been guaranteed by
constitutional provision shall remain inviolate forever". N.Y. CONST. art I,§ 2
(emphasis added); see, e.g., Corley v. McElmeel, 149 N.Y. 228, 237 (1896)
(holding that a respondent's right to a jury trial as a devisee in a will contest was
"inviolate"). The Court in Kaminsky v. Kahn highlighted the special importance of
a number of procedural rights afforded to a civil defendant, and emphasized that
"[t]he most important of these rights is that of a jury trial in legal actions." 20
N.Y.2d 573, 583 (1967); see also Duffy v. Vogel, 12 N.Y.3d 169, 177 (2009)
40
("Long, and we think indispensable experience, has shown that that basic
entitlement, so closely enmeshed with and protective of the right to trial by jury,
may not be deemed secured in any individual case simply upon the foreperson's
announcement of a verdict." (emphasis added)).7
The Appellate Division's ruling below gave weight to none of the foregoing
principles. Particularly given this State's commitment to preserving the
fundamental jury trial right, the Appellate Division's decision to uphold the
default-based on, as described below, the trial court's weighing of contradictory
evidence and determining significant credibility issues-cannot stand. Therefore,
this Court should reverse the Appellate Division's decision that resulted in
Appellants' loss of the "precious right of trial by jury" Rockdale, 638 N.E.2d at 33
(concurring).
7 The size of a damage claim is also a critical factor in determining whether to grant a default.
See Christian v. City of New York, 269 A.D.2d 135, 137 (1st Dep't 2000) ("Generally, the
sanction should be commensurate with the nature and extent of the disobedience."); New York
Annual Conference of the United Methodist Church v. Preusch, 51 A.D.2d 711,712 (1st Dep't
1976) ("[A] default judgment for $5,673,844 is just too much of a penalty for this default.");
BankA.tlantic v. Blyth Eastman Paine Webber, Inc., 127 F.R.D. 224, 232, 233, 235 (S.D. Fla.
1989) (court found that "counsel made a deliberate choice to bury the evidence and prevent
disclosure" and "[t]here can be no question that Plaintiff has been prejudiced as a result of
Defendant's conduct"; however, "a twenty-nine million dollar default would be a
disproportionate sanction").
41
C. The Evidence Below Presents Genuine Issues of Fact That Fell
Far Short of Conclusively Demonstrating a Fraud on the Court
Appellants emphatically denied CDR's allegations, and the evidence that
CDR submitted was subject to impeachment and rebutted by other sworn
statements and documentary evidence. There was thus more than a genuine factual
dispute regarding the alleged "fraud on the court" and therefore no default was
proper.
1. Maurice and Leon Cohen, Allegria Aich and Robert
Maraboeuf Denied Being Part of an Agreement to Testify
Falsely
Maurice and Leon Cohen testified at their tax trial and categorically denied
advising anyone to testify falsely. (R7418-19 (Maurice testifying Leon and he did
not do so); R7524-25 (Leon testifying "[a]bsolutely not")). Allegria Aich and
Robert Maraboeuf likewise flatly denied that there was any agreement to provide
inaccurate testimony. (R2704-08; R2717-21). Nor can it be said that Aich and
Maraboeuf remain in the thrall of the Co hens that Habib and Benharbon claim to
have thrown off: each of those latter two defendants consulted independent
counsel after the Cohens were arrested in April, just as Habib and Benharbon did,
and they have not wavered in their denials. (R3967; R3918110; R2707112-4;
R2720 112-4).
Maurice Cohen explained that it was the misperception of many people-
including, perhaps, Ms. Habib and Ms. Benharbon-that he was the owner of
42
various properties because he was responsible for the Flatotel franchise, but that he
had no ownership interest. (R7378-79).
Independent evidence supports this testimony. In fact, CDR's predecessor
acknowledged in another litigation that the Flatotel was not owned by Maurice
Cohen (R6140