Rosemarie A. Herman,, et al., Respondents, Avon Bard LLC, et al., Plaintiffs,v.Julian Maurice Herman, et al., Appellants, Michael Offit, et al., Defendants. (And a Third-Party Action.)

Brief

N.Y.October 10, 2017

To Be Argued By: JOHN SIEGAL New York County Clerk’s Index No. 650205/11 New York Supreme Court APPELLATE DIVISION—FIRST DEPARTMENT ROSEMARIE A. HERMAN, individually, as beneficiary of the trust created by Harold Herman as Grantor under agreement dated March 1, 1990 and as beneficiary of the trust created by Rosemarie A. Herman as Grantor dated November 27, 1991 and on behalf of MAYFAIR YORK LLC, WINDSOR PLAZA LLC, a New York Limited Liability Company, Plaintiff-Respondent, AVON BARD LLC, MERIT MANAGEMENT LLC, PRIMROSE MANAGEMENT LLC, KEYSTONE MANAGEMENT LLC by their 50% owner of their membership interests ROSEMARIE A. HERMAN as Natural Guardian for and , individually, as beneficiaries of the trust created by Harold Herman as Grantor under agreement dated March 1, 1990 and as beneficiaries of the trust created by Rosemarie A. Herman as Grantor dated November 27, 1991, Plaintiffs, —against— (Caption continued on inside cover) BRIEF FOR DEFENDANTS-APPELLANTS AND THIRD PARTY PLAINTIFF-APPELLANT REPRODUCED ON RECYCLED PAPER JOHN SIEGAL ERICA BARROW BAKER HOSTETLER LLP 45 Rockefeller Plaza New York, New York 10111 (212) 589-4200 jsiegal@bakerlaw.com ebarrow@bakerlaw.com Attorneys for Defendants-Appellants and Third Party Plaintiff-Appellant JULIAN MAURICE HERMAN; J. MAURICE HERMAN, as Trustee of the J. Maurice Herman Revocable Trust dated October 28, 2002; J. MAURICE HERMAN, as Trustee of the trust created by Harold Herman as Grantor under agreement dated March 1, 1990, Defendants-Appellants, MICHAEL OFFIT; MICHAEL OFFIT, as Trustee of the trust created by Harold Herman as Grantor under agreement dated March 1, 1990; MICHAEL OFFIT, as Trustee of the trust created by Rosemarie A. Herman as Grantor dated November 27, 1991; MAYFAIR YORK LLC; WINDSOR PLAZA LLC, a New York Limited Liability Company; WINDSOR PLAZA LLC, a Delaware Limited Liability Company, AVON BARD LLC; MERIT MANAGEMENT LLC; PRIMROSE MANAGEMENT LLC; KEYSTONE MANAGEMENT LLC; CONSOLIDATED REALTY HOLDINGS LLC; SETON INDUSTRIAL CORP.; ARDENT INVESTMENTS LLC; TRUST FOR ARCHITECTURAL EASEMENTS; “ABC COMPANY #1” through “ABC COMPANY #10”, the last ten entities being fictitious and unknown to the Plaintiffs, the entities intended being the entities, if any, involved in the acts or omissions described in the Complaint; and “JOHN DOE # 1” through “JOHN DOE # 10”, the last ten names being fictitious and unknown to the Plaintiffs, the persons intended being the persons, if any, involved in the acts or omissions described in the Complaint, Defendants-Respondents. JULIAN MAURICE HERMAN, Third-Party Plaintiff-Appellant, —against— JOSEPH ESMAIL, Third-Party Defendant, SOLITA N. HERMAN, Third-Party Defendant-Respondent. TABLE OF CONTENTS Page -i- PRELIMINARY STATEMENT ............................................................................... 1 ISSUES PRESENTED ............................................................................................... 3 STATEMENT OF THE CASE .................................................................................. 3 A. Background ........................................................................................... 3 B. IAS Court Proceedings .......................................................................... 6 1. Compliance With the IAS Court’s July 13, 2015 Order ............. 7 2. Compliance With The IAS Court’s October 20, 2015 Order ... 11 3. Compliance with the IAS Court’s November 16, 2015 Order ......................................................................................... 12 4. Compliance with the IAS Court’s December 15, 2015 Order .. 12 C. The Underlying Motion ....................................................................... 14 ARGUMENT ........................................................................................................... 15 POINT I BARRING DEFENDANT HERMAN FROM THE INQUEST WAS ERRONEOUS AS A MATTER OF LAW ................................................... 15 POINT II THE IAS COURT ABUSED ITS DISCRETION IN IMPOSING FURTHER SANCTIONS .............................................................................. 23 POINT III RELIEF IS WARRANTED FROM THE INQUEST PRECLUSION ORDER BECAUSE ANY DISCOVERY DEFICIENCY WAS DUE TO A REASONABLE EXCUSE ........................................................................ 28 POINT IV THE IAS COURT IMPROPERLY DENIED DEFENDANTS’ CROSS- MOTION TO EXCLUDE EVIDENCE POST-DATING THE 1998 TRANSACTION ........................................................................................... 30 CONCLUSION ........................................................................................................ 33 TABLE OF AUTHORITIES Page (s) -ii- Cases Amusement Bus. Underwriters, a Div. of Bingham & Bingham, Inc. v. Am. Int’l Grp., Inc., 66 N.Y.2d 878 (1985) ......................................................................................... 18 Arent Fox Kintner Plotkin & Kahn, PLLC v. Lurzer GmbH, 297 A.D.2d 590 (1st Dep’t 2002) ................................................................. 18, 19 CDR Creances S.A.S. v. Cohen, 23 N.Y.3d 307 (2014) ............................................................................. 18, 23, 26 Figdor v. City of New York, 33 A.D.3d 560 (1st Dep’t 2006) ......................................................................... 27 Fuentes v. Shevin, 407 U.S. 67 (1972) .............................................................................................. 17 Gardner v. Florida, 430 U.S. 349 (1977) ...................................................................................... 20, 21 Geer, Du Bois & Co. v. O. M. Scott & Sons Co., 25 A.D.2d 423 (1st Dep’t 1966) ......................................................................... 22 Gibbs v. St. Barnabas Hosp., 16 N.Y.3d 74 (2010) ........................................................................................... 28 Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413 (1996) ......................................................................................... 31 Langer v Miller, 2002 WL 34081942 (Sup. Ct. NY Cty 2002), aff’d as modified on other grounds, Langer v Miller, 305 A.D.2d 270 (1st Dep’t 2003) ................... 17 Langer v. Miller 281 A.D.2d 338 (1st Dep’t 2001) ................................................................. 16, 17 Mathews v. Eldridge, 424 U.S. 319 (1976) ............................................................................................ 17 TABLE OF AUTHORITIES (continued) Page (s) -iii- Mendoza v Highpoint Assoc., IX, LLC, 83 A.D.3d 1 (1st Dep’t 2011) ............................................................................. 27 Merrill Lynch, Pierce, Fenner & Smith, Inc. v Glob. Strat Inc., 22 N.Y.3d 877 (2013) ......................................................................................... 23 Roberts v. Corwin, 118 A.D.3d 571 (1st Dep’t 2014) ....................................................................... 25 Roberts v. Tishman Speyer Properties, L.P., 13 N.Y.3d 270 (2009) ......................................................................................... 21 Rokina Optical Co. v. Camera King, Inc., 63 N.Y.2d 728 (1984) ............................................................................... 2, 15, 16 Schwartz v. Pub. Adm’r of Bronx Cty., 24 N.Y.2d 65 (1969) ........................................................................................... 26 Serkey v. Gladstein, 40 Misc. 2d 962 (Sup. Ct. NY Cty 1963) ........................................................... 18 State by Abrams v. Ford Motor Co., 74 N.Y.2d 495 (1989) ......................................................................................... 15 Stephan B. Gleich & Associates v. Gritsipis, 87 A.D.3d 216 (2nd Dep’t 2011) .................................................................. 20, 22 Torres v. N.Y. City Hous. Auth., 298 A.D.2d 207 (1st Dep’t 2002) ....................................................................... 28 Tribeca Space Managers, Inc. v. Tribeca Mews Ltd., 138 A.D.3d 617 (1st Dep’t 2016) ....................................................................... 30 Vizcarrondo v. Bd. of Educ. of City of New York, 17 A.D.3d 144 (1st Dep’t 2005) ......................................................................... 29 Rules CPLR § 3126 ............................................................................................ 1, 17, 23, 27 CPLR § 3126(3) ....................................................................................................... 16 TABLE OF AUTHORITIES (continued) Page (s) -iv- CPLR § 3215 ................................................................................................ 16, 18, 22 CPLR § 3215(a) ....................................................................................................... 22 CPLR § 5501(c) ....................................................................................................... 15 1 This brief is submitted on behalf of Defendants-Appellants and Third Party Plaintiff-Appellant Julian Maurice Herman and Windsor Plaza LLC (collectively “Maurice”) in support of their appeal from the May 2, 2016 order of the IAS court (Hon. Shirley Werner Kornreich, J.S.C.) granting Plaintiffs-Respondents Rosemarie Herman et al.’s (“Plaintiffs”) motion under CPLR § 3126 to completely preclude Maurice from participating at the inquest assessing Plaintiffs’ damages against Maurice and denying Maurice’s cross-motion to exclude evidence from the inquest. PRELIMINARY STATEMENT The IAS court went too far. Binding Court of Appeals precedent prohibits the exact form of sanction issued by the IAS court in this matter when it precluded Maurice from participating in the inquest to determine damages that rest on the valuation of parcels of Manhattan real estate. Those real estate valuations, as real estate property valuations always are, have been hotly contested throughout the pendency of this litigation. Yet, the IAS court imposed a form of sanction strictly reserved for claims based on damages which are for a “sum certain.” Maurice has a due process right to fully participate in the inquest hearing where the referee will assess the damages to which he is liable. The IAS court had no legal authority to entirely prohibit him from attending the inquest because Plaintiffs’ claims are not based upon a sum certain. 2 Under Rokina Optical Co. v. Camera King, Inc., 63 N.Y.2d 728 (1984), the Court of Appeals requires an adversarial inquest hearing to prevent a situation in which a discovery sanction causes an inaccurate and unfair assessment of damages. If Plaintiffs are permitted to provide one-sided data and pursue valuation theories unchallenged, then they will undoubtedly receive a damages award far greater than that to which they are entitled. Sanctioning a party who defaults on a litigation requirement is one thing; compelling a trial court to enter an inaccurate judgment based on a nonadversarial “hearing” is quite another. Without reversal of the IAS court’s ruling, that would be the kind of unjust result the Court of Appeals’ ruling in Rokina was designed to prevent. (See Point I below). Plaintiffs’ damages arise from a 1998 Transaction whereby Maurice purchased Rosemarie’s trusts’ one-half interest in six limited liability companies for an allegedly deflated price. Evidence postdating the 1998 transaction is irrelevant. As such, Maurice complied with the IAS court’s numerous discovery directives by producing the documents essential to the calculation of the fair market value of the limited liability companies in 1998. Maurice’s good faith compliance with the discovery orders illuminates the IAS court’s abuse of discretion in imposing the additional sanction of inquest preclusion. (See Point II below). Any deficiencies in Maurice’s discovery production were made due to a 3 reasonable excuse and in response to the IAS court’s evolving requirements in this complex matter. (See Point III below). ISSUES PRESENTED 1. May a defaulting defendant be precluded from participating in an inquest to assess damages against him when the claim is not for a sum certain? The IAS court erroneously answered yes. 2. Was inquest preclusion a sanction commensurate with the defendant’s default? No. The IAS court’s order was an abuse of discretion. 3. Is relief warranted from the inquest preclusion sanction due to reasonable excuse? The IAS court erroneously answered no. 4. Should a plaintiff be precluded from introducing valuation evidence that post-dates the transaction at issue? The IAS court ignored settled law when it denied the request. STATEMENT OF THE CASE A. Background This action arises out of a number of transactions affecting the ownership of six limited liability companies (the “LLCs”) that, prior to 1998, were owned equally by Maurice and trusts (the “Trusts”) created for the benefit of his sister, Respondent Rosemarie Herman (“Rosemarie”). The LLCs owned six residential rental buildings located in New York, New York (the “Properties”). 4 In 1998, Solita Herman (“Solita”), the mother of both Maurice and Rosemarie, asked Maurice if he would consider buying Rosemarie’s Trusts’ membership interest in the LLCs. Maurice initially offered to purchase Rosemarie’s interest in the Properties for $6,270,000, which he believed was a fair price given the then-existing real estate market and the condition of the Properties. This price was also in line with Rosemarie’s own valuation of her trusts’ interests as set forth in her 1992 prenuptial agreement, in which Rosemarie valued her one- half interests in each of the Properties, minus contingent liabilities, at $4,750,000. Solita, Rosemarie’s former trustee, and Michael Offit, as Rosemarie’s then trustee, rejected Maurice’s offer and, instead, insisted on a purchase price of at least $8,000,000. Maurice agreed. Because Solita had been trustee for the previous six years and had direct knowledge of the then-current value and worth of the LLCs, she executed a “fair valuation” statement attesting that the purchase price was fair and appropriate to both of her children and testified under oath that there is no reason why she would not have advised Rosemarie of the sale. On October 6, 1998, Maurice formed Consolidated Realty Holdings LLC (“Consolidated”), a limited liability company wholly owned by him, through which he purchased the interests of the Trusts in all of the LLCs (the “1998 Transaction”). The specific terms of the 1998 Transaction are set forth in a Purchase Agreement, dated December 31, 1998, which Maurice and Offit, in 5 various representative capacities, executed. Under the terms of the Purchase Agreement, Maurice purchased the Trusts’ interests in the Properties for a total of $8,000,000, consisting of $3,000,000 in cash and $5,000,000 in notes, and other valuable consideration. The purchase payments were to be spread out over a thirteen-year period ending in January 2012. Each note had a corresponding pledge agreement. The 1998 Transaction also included a “Participation Agreement,” pursuant to which the Trusts received a percentage of the amount received from a subsequent sale of the Trusts’ interests in the Properties in excess of certain costs. In addition, Maurice and Offit executed an “Indemnification and Conditional Payment Agreement,” providing, in part, that Consolidated and Maurice would pay $2.25 million to either Rosemarie, the 1990 Trust, the 1991 Trust, or to a newly created trust under the same terms as the 1991 Trust for the benefit of Rosemarie’s issue, at Offit’s sole discretion. Notably, on June 3, 1999, Rosemarie executed a Prenuptial Agreement attesting, in a sworn statement, that her assets consisted of “marketable securities, notes, and real estate,” with a total estimated value of the assets as $10,810,000. Thus, as of June 3, 1999, Rosemarie and her legal counsel were aware, or should have been aware based on Rosemarie’s sworn statement in the 1999 Prenuptial Agreement, that the trusts’ assets no longer consisted of an ownership interest in 6 the LLCs, but instead were marketable securities and notes, which Rosemarie knew she did not own prior to the 1998 Transaction. In 2002, Maurice sold five of the LLCs to Cosmopolitan Property Acquisition Company, LLC (the “2002 Transaction”). The sale, including the sales price, was detailed in a news article in the New York Post on January 3, 2003. B. IAS Court Proceedings On January 25, 2011, thirteen years after the 1998 Transaction and nine years after the 2002 Transaction, Respondents commenced this action alleging that, despite her 1999 Prenuptial Agreement, the publicly available documents, the New York Post and other news outlets reporting the sale, and Rosemarie having lived in 36 Gramercy Park East (one of the buildings at issue), Rosemarie was unaware that her Trusts had sold her membership interests in the LLCs to Maurice and claiming that the sales price in the 1998 Transaction was unfair and far below- market value. [Docket No. 1.] Although Maurice actively and vehemently defended Plaintiffs’ allegations for more than four years, spent hundreds of thousands of dollars to comply with the IAS court’s discovery directives, and the IAS court itself acknowledged on several occasions that Maurice had valid defenses to Plaintiffs’ claims and that Plaintiffs may lose this matter, the IAS court nonetheless imposed the “ultimate penalty” by striking Maurice’s pleadings and entering a default judgment against him. 7 1. Compliance With the IAS Court’s July 13, 2015 Order In addition to the default judgment, the IAS court further directed Maurice to “produce the portion of his unsigned personal returns in Kaufman’s custody that report income, expenses, deductions, loans, losses, interest, management fees and/or any other benefit he received or deduction he took related to the LLCs in 1998 through 2003, including the K-1’s issued to him.” (R289.) The IAS court allowed Maurice to “redact information on his personal returns that is unrelated to the LLCs, except he shall not redact the tax year, the taxing authority’s information, his name, his address, the preparer’s information, the date, the signature lines and/or any part of the tax form (as opposed to entries thereon.” (R289.) But in so doing, the IAS court warned that if Maurice did not produce the redacted personal tax returns in accordance with its order, he would be precluded from contesting damages at the inquest. (R289-90.) This directive was the exact opposite of the long-standing order in this case that “Maurice’s personal tax returns are not discoverable unless the LLC tax returns are unavailable and/or do not annex Maurice’s K-1s, or unless plaintiffs show that the personal tax returns would contain relevant information not available from any other source.” (R285.) In fact, as a result of this earlier order Maurice and Kaufman searched for and produced the LLC tax returns, which Kaufman had 8 located on an archived computer file. (R287.) Because these copies were pulled from the SK&C’s archived files, they are not the signed versions. Id. The IAS court ordered Maurice to, among other things, (i) “cause Kaufman to search for Maurice’s 1997 through 2003 personal tax returns,” (i) provide authorizations to the Plaintiffs to obtain the LLC’s returns from the IRS and New York State and Delaware taxing authorities, and (iii) e-file “an admission of the authenticity of unsigned copies of said [LLC] Returns.” [Docket No. 1111.] Maurice not only provided Plaintiffs with authorizations to obtain the LLC’s Returns from various taxing authorities, but Kaufman searched for and located unsigned copies of Maurice’s personal tax returns. (R288-89.) Additionally, on May 8, 2015, Maurice e-filed an affidavit that explicitly stated that, although he is unable to do a line-by-line comparison of the unsigned versions of the returns produced by SK&C, he “do[es] not have any reason to challenge the authenticity of SK&C’s production or the content of the [LLC] tax returns. . . . Accordingly, I do not challenge or doubt the authenticity of SK&C’s production of the tax returns for the LLCs for the years 1998 through 2002 and believe them to be the same as the ones that were signed by me and filed with the tax agencies.” [Docket No. 1117 at ¶4.] After Maurice averred that he does not challenge or doubt the authenticity of the unsigned returns, the IAS court entered a new Order directing Maurice to consent “to file a stipulation stating that if the taxing authorities do not 9 have copies of the LLCs’ returns for 1997 Mayfair and for all 1998-2003, then at trial he will not object to the admissibility of Kaufman’s unsigned copies for 1998- 2002.” [Docket No. 1157.] Maurice complied with the court’s directive and, by stipulation dated May 26, 2015, agreed that “any party may use and enter the unsigned Tax Returns as admissible evidence in any phase or proceeding, including motion for summary disposition or at trial in this civil action for any and all purposes if executed copies of the Tax Returns are not obtained.” [Docket No. 1159.] Accordingly, Maurice met all of the requirements levied by the IAS court to produce and authenticate the LLC tax returns, thereby negating the need to produce his personal tax returns, which are not material and necessary to these proceedings. In an effort to produce signed copies of his personal tax returns, because the alleged issue with the LLC tax return production is that they are unsigned copies, Maurice requested copies of his personal tax returns from the IRS. On August 17, 2015, Maurice produced a letter that he received from the IRS indicating that the IRS no longer had copies of Maurice’s 1998-2003 personal tax returns because they were outside of the IRS’ document retention dates. [Docket No. 1300.] Maurice, therefore, asked SK&C to prepare and produce copies of his personal tax returns in its possession and redact them in accordance with the July 13, 2015 Order. Maurice was advised that the personnel at SK&C who could obtain and 10 produce the documents were out on vacation and would produce the documents upon their return. In making a determination as to which entries on each return to redact, Maurice consulted with and relied upon the advice of Kaufman, an accountant with nearly forty-years of experience who not only had possession of the 13-17 year old tax returns, but was also responsible for preparing and filing each one. Because Kaufman had not worked on these returns for more than a decade, he reviewed the returns as well as the notes in his files and confirmed Maurice’s initial impression that no other entries or entities on the tax returns were responsive to the Court’s directive and that no other entries or entities reflected income, expenses, deductions, loans, losses, interest, management fees or any other benefits from the LLCs or the properties. On September 9, 2015, SK&C provided Maurice with copies of his redacted 1998–2003 personal tax returns, which were immediately provided to Plaintiffs. Maurice, however, noticed that SK&C had redacted information relating to Consolidated, which held the notes to Rosemarie’s Trusts and received funds from the six properties, and asked SK&C to provide a new set of his personal tax returns with that information unredacted. Those versions were immediately produced to Plaintiffs. As such, Maurice produced redacted copies of his personal tax returns for the years 1998 through 2003. 11 Lastly, in response to the order for Maurice’s communication with Kaufman, Maurice averred in his affidavit that he regularly deletes unimportant, emails on a monthly basis. Maurice was subsequently forthright with the IAS court and explained he did discover thirteen emails between himself and Kaufman but that they are irrelevant. 2. Compliance With The IAS Court’s October 20, 2015 Order After Maurice produced his personal tax returns, the IAS court’s law clerk directed Maurice to produce unredacted copies of his personal tax returns to her for in camera inspection, which Maurice did.1 (R309.) Thereafter, by Order dated October 20, 2015, the IAS court entered a new directive compelling Maurice to submit an affidavit for in camera review “stating whether any of the redacted entries on his 1998 through 2003 personal tax returns reflect monies paid to Maurice by entities listed thereon for any transaction, fee, service, or loan connected with the LLCs, and if so, Maurice shall state which entity or entities paid him, how much each one paid him, on which returns, and why he was paid by each one.” (R310.) In connection with this new Order, the IAS court again warned that “if Maurice fails to comply in any respect, on time, with the foregoing . . . he 1 Apparently, the first five pages of Maurice’s personal tax return that was submitted for in camera inspection inadvertently contained the redactions. When the law clerk advised Maurice’s counsel of such, the unredacted versions of those pages were immediately sent to the Court for replacement. 12 is precluded from offering evidence at the inquest without the necessity of a further motion.” (R310.) Maurice then complied with the IAS court’s Order by filing an affidavit as directed by the Court. 3. Compliance with the IAS Court’s November 16, 2015 Order After reviewing Maurice’s affidavit, on November 16, 2015, the IAS court entered a new order directing Maurice to “produce copies of his 1998 through 2002 personal tax returns, which shall not redact . . . any entries relating to the LLCs, Consolidated, Integrated, Seton, Ardent and Tudor.” (R313.) Maurice complied with the new directive four days later. 4. Compliance with the IAS Court’s December 15, 2015 Order On November 30, 2015, Plaintiffs submitted a letter to the IAS court alleging that they had documents from SK&C that had been produced in another action (which were not produced to Maurice) that demonstrated that Maurice should not have redacted entries for another entity, Sheffield Associates, Inc. from his personal tax returns. (R45-47.) In other words, despite having copies of Maurice’s tax returns for more than two months and having documents relating to Sheffield for almost eight months, Plaintiffs, for the first time complained about this issue. 13 Maurice, along with Kaufman, dispute that Sheffield was an entity responsive to the IAS court’s directives. Sheffield is an entity that has been owned by Maurice since 1993 and was involved in numerous business activities and investments that had nothing to do with the LLCs, including, equipment leasing, tax benefit transfer packages, building single family homes, providing financial guaranties for other companies, making loans and investing in mortgages. (R221- 23.) Beginning in or about 1996, Sheffield acted as a financial backstop and supplied a stand-by line of credit to American Art Search (“AAS”), a company involved in the buying and selling of art. Id. AAS paid Sheffield commissions for this service. Id. In all, from 1997 through 2001, Sheffield received approximately $10 million in commissions from AAS as a result of art sales. Id. These are the fees referenced in entries related to Sheffield on Maurice’s tax returns. Id. Therefore, the entries for Sheffield’s income were comprised of money received from other investments, not attributable to the LLCs and the tax returns during the 1998-2003 time period have no bearing on the LLCs. Id. On December 15, 2015, the IAS court directed Maurice to produce to Plaintiffs fully unredacted copies of his personal tax returns from 1998 through 2002. (R314-15.) Maurice complied three days later. 14 C. The Underlying Motion Despite having had information on Sheffield from SK&C since April 2015 and now having fully unredacted copies of Maurice’s tax returns, on January 22, 2016, Plaintiffs moved to preclude Maurice from participating in the damages inquest. (R243.) Maurice opposed the motion and cross-moved to (i) impose sanctions in the form of striking Plaintiffs’ pleadings for withholding key evidence and (ii) preclude Plaintiffs from introducing evidence concerning the value of the LLCs post-1998 because it is irrelevant to the damages calculations at issue. (R839.) On May 2, 2016, the IAS court granted Plaintiffs’ motion to completely preclude Maurice from participating at the inquest in which damages would be assessed against him for non-compliance of discovery directives; and denied Maurice’s cross motion seeking to strike Plaintiffs’ complaint for withholding key evidence and offering evidence at the inquest on the value of the LLCs after 1998 on the grounds of relevancy and prejudice. (R16.) Maurice now appeals from that Order. 15 ARGUMENT “The Appellate Division of the Supreme Court possesses coordinate authority with the trial court on all questions of fact and law.” State by Abrams v. Ford Motor Co., 74 N.Y.2d 495, 501 (1989). This Court’s review of the IAS court’s decision is therefore de novo. See CPLR § 5501(c) (“the appellate division shall review questions of law and fact on an appeal from a judgment or order of a court of original instance and on an appeal from an order of the supreme court”); see also 12 Weinstein-Korn-Miller, N.Y. Civ. Prac, p 5501.19 (CPLR § 5501(c) encapsulates the long-settled law that the Appellate Division may review all questions of both law and fact on appeals before it.). POINT I BARRING DEFENDANT HERMAN FROM THE INQUEST WAS ERRONEOUS AS A MATTER OF LAW The IAS court erred as a matter of law by completely precluding Maurice from participating at the inquest which will assess the damages for which he is liable. Maurice has a due process right to participate in the inquest that will determine his damages because Plaintiffs’ damages are not for a sum certain. Accordingly, the Court must reverse and vacate the Order below. There is no legal basis under well-established, clearly-decided Court of Appeals precedent for the IAS court’s order imposing the draconian sanction of inquest preclusion. Rokina Optical Co. v. Camera King, Inc., 63 N.Y.2d 728, 730 16 (1984). The Rokina plaintiff served a set of interrogatories which defendant failed to answer. Id. at 729. As a result, the IAS court granted plaintiff’s motion pursuant to CPLR § 3126(3) striking defendant’s answer and entering a judgment in plaintiff’s favor. Id. When defendant moved this Court to vacate the judgment, the Court: (i) vacated the judgment only as to the amount; (ii) ordered an inquest on the issue of damages; and (iii) precluded evidence at the inquest which mitigated defendant’s damages. Id. at 729-30. The Court of Appeals reversed, holding: Unless the damages sought in an action are for a “sum certain or for a sum which can by computation be made certain” (CPLR 3215, subd[a]), judgment against a defaulting party may be entered only upon application to the court along with notice to the defaulting party and “a full opportunity to cross-examine witnesses, give testimony and offer proof in mitigation of damages.” Id. at 730 (internal citations omitted). Pursuant to the Court of Appeals’ holding, Maurice may not be precluded from participating at his inquest because Plaintiffs’ claim is not for a sum certain as defined in CPLR § 3215. The IAS court misapprehended the law and committed reversible error when it failed to address and follow this binding authority issued by the Court of Appeals. The IAS court incorrectly relied on the inapposite decision in Langer v. Miller 281 A.D.2d 338 (1st Dep’t 2001), as authority for its order to prohibit Maurice from even attending the damages inquest. Langer does not support such a drastic sanction, however, where defendant would be prevented from seeking to 17 mitigate the claims against him for damages. The court in Langer ultimately allowed the defendant to participate in the inquest hearing to dispute plaintiff’s damages claims. Langer v Miller, 2002 WL 34081942 (Sup. Ct. NY Cty 2002) (allowing an adversarial inquest by granting defendants’ an opportunity to attend and cross examine plaintiff’s evidence and witnesses but precluding defendants’ from offering affirmative evidence), aff’d as modified on other grounds, Langer v Miller, 305 A.D.2d 270 (1st Dep’t 2003). Under the IAS court’s order, Plaintiffs would be allowed to provide any self-selected, self-interested data they choose on Manhattan’s real estate market and pursue their own damages theory without adversarial challenge before the Referee. Without the benefit of the full scope of information, analysis, and authority that an adversarial hearing will provide, the Referee will inevitably recommend a skewed damages award. One-sided justice is no justice at all. The opportunity to be heard is the essence of due process protection. Mathews v. Eldridge, 424 U.S. 319, 333 (1976). As applied in civil settings, due process places central importance on the participation of the affected party in decision-making. Fuentes v. Shevin, 407 U.S. 67, 81 (1972). Even under the broad discretion afforded pursuant to CPLR § 3126, there is no authority to nullify defendant’s due process rights to challenge and seek to mitigate the damages claims asserted against him. 18 Plaintiffs’ reliance below on CDR Creances S.A.S. v. Cohen, 23 N.Y.3d 307 (2014), to contend for inquest preclusion was also wholly inapposite. CDR stands for the limited proposition that the defendants were not entitled to an inquest because there were already foreign judgments entered against the defendants. Id. at 324-25. A claim for “a sum certain or which can by computation be made certain” as defined in CPLR § 3215 would apply to a previously rendered money judgment, even if the claim underlying it was not liquidated. Serkey v. Gladstein, 40 Misc. 2d 962, 963 (Sup. Ct. NY Cty 1963). Here, Plaintiffs do not have a prior judgment on which to base the damages award in order to constitute a sum certain amount. A “sum certain” contemplates a situation in which, once liability has been established, there can be no dispute as to the amount due. Arent Fox Kintner Plotkin & Kahn, PLLC v. Lurzer GmbH, 297 A.D.2d 590 (1st Dep’t 2002). The measure of damages in this action is uncertain and beset by complexity. As a result the valuation remains subject to various factual and legal challenges and cannot be reasonably established without extrinsic proof. Although as a defaulting party Maurice is deemed to have admitted all traversable allegations in the complaint including the basic issue of liability, an allegation of damage is not a traversable allegation and, therefore, a defaulting defendant does not admit the plaintiff’s conclusion as to damages. Amusement 19 Bus. Underwriters, a Div. of Bingham & Bingham, Inc. v. Am. Int’l Grp., Inc., 66 N.Y.2d 878, 880 (1985). The value of Manhattan real estate is simply not a fixed amount. “The gravamen of this action is plaintiffs’ claim by Rosemarie Herman (Rosemarie) that her brother and her trustee, a boyhood friend of the brother, conspired to permit her brother to secretly buy her beneficial interests in valuable Manhattan real estate for far less than its true value.”2 ([Docket No. 60]). No appraisal was obtained to value the Trusts’ interest in the Properties before the 1998 Transaction. (Docket No. 1) Thus, central to this dispute is whether the Herman properties were purchased in the 1998 Transaction for fair market value and, if not, whether the 1998 Transaction constituted fraud, breach of contract, tortious interference of contract, breach of fiduciary duty, and constructive trust. Over five years, fifty- four court appearances, twenty eight motions, and fourteen appeals, the parties have contested the value of the Herman properties. See Arent Fox Kintner Plotkin & Kahn, PLLC v. Lurzer GmbH, 297 A.D.2d at 590 (ordering an inquest with full participation where “the record indicates that the amount due plaintiff is and has, in fact, been a subject of ongoing dispute between the parties”). Only recently has liability been determined due to Maurice’s default. Undoubtedly the value of the Herman Properties is hotly contested. 2 Maurice disputes the assertion that Offit is a “boyhood friend.” 20 Conversely, a claim for a sum certain “is intended to apply to only the most liquidated and undisputable of claims, such as actions on money judgments and negotiable instruments.” Stephan B. Gleich & Associates v. Gritsipis, 87 A.D.3d 216, 222 (2nd Dep’t 2011). The IAS court even acknowledged that determining the illiquid damages here will be subject to a difficult analysis, stating: It is going to be a valuation depending on half of the value of the six properties in 1998. And of course real estate has gone up tremendously since, so I am not quite sure what that value is, and of course there are deductions from the value because certain monies were paid and other things. And certainly expenses, et cetera. So this is going to be a fairly complicated damages hearing. (R.20.) (emphasis added). A non-adversarial hearing on valuation will lead to an inaccurate and patently imbalanced result. See Gardner v. Florida, 430 U.S. 349, 360 (1977) (“debate between adversaries is often essential to the truth-seeking function”). The necessity of a contested inquest is all the more evidenced by Plaintiffs’ submission to the Referee in which they assert the damages are plainly based upon the 2002 transaction payment price opposed to the fair market value of the LLCs in 1998. This assertion runs afoul of the IAS court’s analysis. In order to assist Plaintiffs in determining their 50% interest in the limited liability companies in 1998, the Weitzman Group, Inc., engaged in a qualitative and quantitative analysis utilizing the Income Capitalization and Sales Comparison Approach. (R876.) This analysis included a very detailed and nuanced 21 understanding of the real property values in 1998, coupled with an understanding of the real estate market and condition of the properties and leases at the time of the 1998 Transaction, specifically including the value of the 75 year lease starting in 1998 that Plaintiff received for the use of a unit in 36 Gramercy East, a property owned by the LLCs in the Herman portfolio. (R926-930.) Furthermore, all of the properties included in the 1998 Transaction contained rent controlled or rent stabilized apartment units. Valuation of those assets requires its own independent analysis. (R1003-06). Furthermore, two of those buildings were subject to J-51 tax abatements, as a result of their rehabilitation, which were scheduled to expire in or around 1995 thus influencing the tax liability and market value of those buildings. (R1004-06.) Second, the buildings improperly issued free market leases upon the expiration of the J-51 tax abatement program leading to contingent owner liability. (R1004-06.). As a result, any rents charged for these apartments in excess of the rent stabilized amount were an overcharge capable of recoupment by tenants. (R1004-06.); Roberts v. Tishman Speyer Properties, L.P., 13 N.Y.3d 270, 282 (2009). If a tenant was successful in such an action then rent overcharges would be trebled and the owner would also be held liable for not only his own legal fees, but the tenants’ legal fees as well. (R1006.) These contingent liabilities likewise affected the value of the two buildings included in the 1998 Transaction and are a factor in the fluid damages 22 valuation. The damages calculation is clearly not for a sum certain. Without the full breadth of this information presented at the inquest, the damages award will be completely distorted. Plaintiffs concede that the majority of their claims are not for a sum certain amount. (R1065). Therefore, an adversarial inquest must result. If one or more causes of action in a Plaintiffs’ pleading is for a sum certain and one or more other causes of action is not within the meaning delineated in CPLR § 3215, then defendant must participate in his inquest. See Geer, Du Bois & Co. v. O. M. Scott & Sons Co., 25 A.D.2d 423 (1st Dep’t 1966) (finding that if at least one cause of action is not for a sum certain then an inquest is required). Plaintiffs have asserted constructive trust and “unjust enrichment theories [which] are equitable in nature . . . [s]uch causes of action are not for a sum certain . . . under CPLR 3215(a).” Stephan B. Gleich & Associates v. Gritsipis, 87 A.D.3d at 223. Based on the two causes of actions for equitable relief alone, defendant should participate in his inquest to provide a full scope of evidence. For all of these reasons, Plaintiffs’ claims are not for a sum certain. Therefore, it was contrary to controlling authority for the IAS court to bar Maurice from participating in the inquest to determine the amount of damages he owes. 23 POINT II THE IAS COURT ABUSED ITS DISCRETION IN IMPOSING FURTHER SANCTIONS Maurice’s actions after the default decision did not rise to the level of deceit, obstruction, and falsity, and therefore should not have triggered the severe sanction of precluding him from seeking to mitigate his damages at the inquest. It is within the trial court’s discretion to determine the nature and degree of the penalty under a CPLR § 3126 application. Merrill Lynch, Pierce, Fenner & Smith, Inc. v Glob. Strat Inc., 22 N.Y.3d 877, 880 (2013). Nevertheless, a trial court’s sanction will be overturned if there has been a clear abuse of discretion. Id. “The sanction should be commensurate with the particular disobedience it is designed to punish, and go no further than that.” Id. Maurice made a good faith effort to comply with the IAS court’s discovery orders. It is only when a court finds, by clear and convincing evidence, conduct that constitutes fraud on the court, that the court may impose sanctions. CDR Creances S.A.S. v. Cohen, 23 N.Y.3d at 311. In accordance with the IAS court’s July 13, 2015 order Maurice requested copies of his personal tax returns from the IRS. On August 17, 2015 Maurice produced the only response he received, a letter indicating that the IRS no longer had copies of Maurice’s returns due to the IRS document retention policy. Maurice was able to subsequently comply with the court’s order by obtaining and producing his 1998–2003 personal tax returns from 24 personnel at SK&C, the accounting firm which originally prepared Maurice’s returns. The redactions to the personal tax returns were made pursuant to information obtained from Kaufman. The July 13, 2015 Order directed Maurice to produce his redacted personal taxes, which he did. After Maurice produced his personal tax returns, the IAS court’s law clerk directed Maurice to produce unredacted copies of his personal tax returns to her for in camera inspection, which Maurice did. Based upon that review, the IAS court’s October 20, 2015 Order directed Maurice to produce an affidavit explaining the redactions as it relates to the LLCs, which he did. Finally after Plaintiffs revealed that they had in their possession the returns from a third party throughout the entire discovery dispute and baldy asserted additional entities on the returns were relevant, the IAS Court ordered Maurice to produce the returns fully unredacted, which he did. Thus, at the time the preclusion order was issued there were and currently are no outstanding discovery demands due from Maurice. Maurice did as the IAS court ordered. Through Maurice’s productions, Plaintiffs are now in possession of all documentary evidence relevant to their claim of damages in order to assist them at the inquest, thus, preclusion is unwarranted. A second sanction of this magnitude depriving Maurice from participating in the judicial process for claims asserted against him can only be warranted in the most egregious of circumstances. See 25 Roberts v. Corwin, 118 A.D.3d 571, 573 (1st Dep’t 2014). Maurice did not willfully fail to comply with a demand nor did he disregard court orders. Any good faith violation of the discovery directives in and of itself does not reach the threshold in order to justify inquest preclusion. The IAS court issued four different discovery orders at issue on July 13, 2015, October 20, 2015, November 16, 2015, and December 15, 2015, each requiring Maurice to produce new discovery items or modifying redactions based upon new information. See (R267) 7/13/15 Order (ordering personal tax returns); (R305.) 10/20/15 Order (ordering affidavits); (R311.) 11/16/15 Order (ordering revised redactions based upon entity information) (R314.) 12/15/15 Order (ordering fully unredacted returns based upon plaintiff’s bald assertion an entity is related to the LLCs). The July 13, 2015 conditional order was not “self-executing” because the sanction contemplated in the conditional order did not automatically become absolute at a certain juncture. See Weinstein–Korn–Miller, N.Y. Civ Prac., p 3126.03 (defining conditional orders). Maurice complied with the July 13, 2015 conditional order and the IAS court issued two subsequent orders with new discovery directives. The IAS court misapprehended the facts by interpreting the alleged discovery deficiencies as the same repeated deficiency. Maurice made a good faith effort to comply with the directives of the Court which were ever evolving. 26 The IAS court issued a sanction that was not commensurate with the alleged misconduct. Instead, the IAS court issued the draconian sanction of precluding Maurice from the inquest based upon previous conduct which the default order had already remedied. Schwartz v. Pub. Adm’r of Bronx Cty., 24 N.Y.2d 65, 69 (1969) (“where it can be fairly said that a party has had a full opportunity to litigate a particular issue, he cannot reasonably demand a second one”). In so doing, the IAS court exceeded its discretion because it punished the same conduct twice. Sanctions are additionally inappropriate because Plaintiffs have not been prejudiced. The court explicitly recognized the factors that should be considered to warrant striking a pleading for failure to provide disclosure, including, among others, whether the conduct was prejudicial and impeded the movant’s ability to obtain true discovery. (R15); CDR Creances S.A.S. v Cohen, 23 N.Y.3d at 323. The IAS court failed to apply the required prong of prejudice to Plaintiffs’ motion, however. Plaintiffs did not suffer any prejudice for the improper redactions to the tax returns because Plaintiffs were already in possession of all relevant valuation information from documents previously received from SK&C. Maurice also produced to Plaintiffs copies of the LLCs’ tax returns, accounting work papers regarding the LLCs, rent rolls and year-end valuation/overhead statements for the properties. 27 No policy objective is satisfied by imposing additional sanctions on Maurice. The purpose of a preclusion order is to make the demanding party whole. Mendoza v Highpoint Assoc., IX, LLC, 83 A.D.3d 1, 8 (1st Dep’t 2011). Plaintiffs have already obtained a default judgment entered against Maurice on liability. The limited disadvantage Plaintiffs sustained from the additional redactions on Maurice’s personal tax returns which Plaintiffs already had in their possession is de minimis. To further preclude Maurice from participating in his inquest “would give plaintiff more relief than is warranted.” Id. This Court has likewise used CPLR § 3126 to ensure a party complies with discovery orders in the future. Figdor v. City of New York, 33 A.D.3d 560, 561 (1st Dep’t 2006). Maurice’s preclusion from the inquest has no specific deterrent effect because it is the final disposition in this matter as it relates to Maurice. Moreover, justice is not effectuated because a different damages amount may result for the remaining severed defendants at their contested inquest for the exact same claims and damages, thereby resulting in the Plaintiffs obtaining different judgments for the exact same claims, fact, and legal issues. For these additional reasons, the IAS court order barring Maurice from participation in the inquest should be reversed. 28 POINT III RELIEF IS WARRANTED FROM THE INQUEST PRECLUSION ORDER BECAUSE ANY DISCOVERY DEFICIENCY WAS DUE TO A REASONABLE EXCUSE A party may be relieved from a preclusion order if the defaulting party demonstrates “a reasonable excuse for the failure to produce the requested items.” Gibbs v. St. Barnabas Hosp., 16 N.Y.3d 74, 80 (2010). Any deficiencies of Maurice’s discovery productions are due to a reasonable excuse. Maurice should not be prejudiced because of the actions of a third party. Maurice was ordered to produce his personal tax returns within a limited time period even though they were not in his possession. He requested the returns from the IRS and was belatedly informed that the IRS did not have them in their possession. He subsequently sought the returns from his accountant, Kaufman. Throughout this process Maurice was at the mercy of a third party’s schedule. He promptly produced the documents, however, when he was able to reach the personnel in SK&C’s office. Maurice reasonably made every effort to timely produce the specified materials as it relates to the actions of those in his control. See Torres v. N.Y. City Hous. Auth., 298 A.D.2d 207, 207-08 (1st Dep’t 2002) (vacating sanctions where the plaintiff showed that noncompliance was not willful, despite the plaintiff’s failure to explain the egregious delay). 29 Any improper redactions to entries on Maurice’s personal tax returns were made in error based upon the advice of his accountant Kaufman. Maurice produced the tax returns in order to provide any relevant information regarding the valuation of the LLCs. Kaufman, who prepared the taxes during the relevant years, advised Maurice that no other entries or entities on the tax returns, including Sheffield, were relevant to the LLCs and that no other entries or entities reflected income, expenses, deductions, loans, losses, interest, management fees or any other benefits from the LLCs or the properties. Accordingly, Maurice’s redactions were made in a good faith and based upon the advice of the individual most knowledgeable on the returns. See Vizcarrondo v. Bd. of Educ. of City of New York, 17 A.D.3d 144, 145 (1st Dep’t 2005) (finding (i) excusable default where documents were unavailable due its possession by a third party; and (ii) although defendants had been derelict, the drastic sanctions sought against them were properly withheld). Maurice substantially complied with the vast bulk of Plaintiffs’ discovery demands, and plausibly explained his initial noncompliance as the result of a mistaken belief that certain entries were not relevant. Id. As it relates to the Kaufman communications, Maurice averred in his affidavit that he regularly deletes his unimportant emails. Maurice was subsequently forthright with the IAS court and explained he did discover thirteen emails between himself and Kaufman but that they are irrelevant. Defendant’s 30 conduct must be willful, contumacious, or in bad faith in order to warrant sanctions. Tribeca Space Managers, Inc. v. Tribeca Mews Ltd., 138 A.D.3d 617, 617-18 (1st Dep’t 2016). Far from being deceitful, Maurice offered information even when there was no additional inquiry. Thus, the IAS court’s order was excessive and should be reversed. POINT IV THE IAS COURT IMPROPERLY DENIED DEFENDANTS’ CROSS-MOTION TO EXCLUDE EVIDENCE POST-DATING THE 1998 TRANSACTION The IAS court created reversible error on the law when it failed to address Maurice’s cross-motion to exclude evidence postdating the 1998 Transaction from the inquest. Indeed, although the IAS court implicitly recognized the validity of the cross-motion by encouraging other defendants to make the same motion with respect to their now separated trial, the IAS court again treats Maurice differently that the other parties by denying his cross-motion on this point because the IAS court first decided to preclude him from participating at the inquest in the same Decision. Plaintiffs’ plea for damages based on lost profits, however, evinces the legal challenges to the damages calculation which will not be merely ministerial and they should not be allowed to flaunt the law and evidentiary procedure. Under New York law, it is well-settled that the measure of damages for claims sounding in fraud or misrepresentation—including Plaintiffs’ claims for 31 fraud and breach of fiduciary duty arising out of the 1998 Transaction—are governed by the longstanding out-of-pocket rule. Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (1996) (“The true measure of damage [for fraud] is indemnity for the actual pecuniary loss sustained as the direct result of the wrong.”). Damages are calculated by ascertaining the difference between the actual value of the Properties on the date it was sold at the time of the alleged improper transaction less the value of the consideration received. Id. Thus, any documents that post-date the 1998 Transaction should be excluded because they are irrelevant to the value calculation of the entities at the time of the 1998 Transaction. Accordingly, all evidence generated subsequent to the 1998 Transaction is irrelevant and Plaintiffs should be barred from introducing these documents into evidence at the inquest on damages. Plaintiffs may not recover opportunity profits. Plaintiffs argue their damages are plainly calculated by collecting their share of the LLCs from the sale price in the subsequent 2002 transaction, even though their alleged injury occurred in 1998. The out-of-pocket rule bars the recovery of opportunity profits, such as “profits which would have been realized in the absence of fraud.” Id. Even if the Court were to use the subsequent 2002 sale prices as a benchmark to determine Plaintiffs’ damages then such calculation would still require a qualitative analysis in order to ascertain the actual damages in 1998. In any damages theory the 32 Referee must only evaluate what injury occurred in 1998. Evidence which postdates the 1998 transaction is not only irrelevant but prejudicial and therefore should be excluded from introduction as evidence. 33 CONCLUSION For the reasons set forth above, the order below should be reversed and Maurice should be permitted to fully participate at the inquest and evidence which postdates the 1998 Transaction should be excluded. Dated: July 11, 2016 BAKER HOSTETLER LLP New York, New York By: _________________________ John Siegal Erica Barrow 45 Rockefeller Plaza New York, N.Y. 10111 (212) 589-4200 Attorneys for Defendants- Appellants and Third Party Plaintiff Appellant /s/ John Siegal PRINTING SPECIFICATION STATEMENT This computer generated brief was prepared using a proportionally spaced typeface. Name of typeface: Times New Roman Point Size: 14 Line Spacing: Double The total number of words in the brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of authorities, proof of service, certificate of compliance, or any authorized addendum is 7,232. SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ----------------------------------x ROSEMARIE A. HERMAN, in