Merrill Lynch, Pierce, Fenner & Smith, Incorporated, et al., Respondents,v.Global Strat Inc.,, et al., Defendants, Ezequiel Nasser, et al., Appellants.

Brief

N.Y.September 10, 2013

New York County Clerk’s Index No. 601012/08 Court of Appeals STATE OF NEW YORK MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED and MERRILL LYNCH CAPITAL SERVICES, INC., Plaintiffs-Respondents, against GLOBAL STRAT INC. a/k/a GLOBAL STRATEGIES INC., EXCEL GLOBAL OPPORTUNITIES FUND, LTD., INVERSIONES PATAGONIA INTERNATIONAL, S.A., SALUC LIMITED, TAFFER COMPANY and JOHN AND JANE DOES (1-50), Defendants, and EZEQUIEL NASSER, RAYMOND NASSER, ALBERT NASSER and SCARLETT NASSER, Defendants-Appellants. >> >> To Be Argued By: Charles B. Manuel, Jr. Time Requested: 30 Minutes APPELLANTS’ BRIEF SHIBOLETH LLP One Penn Plaza, Suite 2527 New York, New York 10019 212-244-4111 CharlesM@Shiboleth.com RobertR@Shiboleth.com Attorneys for Defendants-Appellants Of Counsel: Charles B. Manuel, Jr. Robert A. Rosenberg (Additional Caption On the Reverse) Date Completed: January 15, 2013 GLOBAL STRAT INC. a/k/a GLOBAL STRATEGIES INC., EXCEL GLOBAL OPPORTUNITIES FUND, LTD., INVERSIONES PATAGONIA INTERNATIONAL, S.A. and SALUC LIMITED, Counterclaim Plaintiffs, against MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED and MERRILL LYNCH CAPITAL SERVICES, INC., Counterclaim Defendants, and MERRILL LYNCH & CO., INC., BANCO MERRILL LYNCH DE INVESTIMENTOS S.A., MERRILL LYNCH REPRESENTACOES LTDA, DANIEL SONTAG, DARCIE BURK, RICHARDO MOREAN, CARLA LUALDI PIMENTEL, RENATA SCHOP-KLEIN, RENATO MALZONI and GUY MOSZKOWSKI, Additional Counterclaim Defendants. TABLE OF CONTENTS Table of Authorities ....................................................................................................................... iii Jurisdiction .......................................................................................................................................1 Questions Presented For Review .....................................................................................................1 Statement of the Case .......................................................................................................................2 Preliminary Statement ......................................................................................................................3 Statement of Facts and Procedural History ......................................................................................7 A. Factual Background .................................................................................................7 B. Proceedings in the Supreme Court, New York County ...........................................8 C. Proceedings in the Appellate Division, First Department .....................................15 D. FINRA Decides Sophin Matter, Dismisses All Claims Against Ezequiel Nasser................................……….........16 E. The Underlying Action is Currently Moving Forward Before JHO Gammerman and Merrill Has Not Yet Completed Their Document Production ..........................…….........18 ARGUMENT .................................................................................................................……........20 PART ONE: THE DEFAULT JUDGMENT THE $99 MILLION DOLLAR DEFAULT JUDGMENT IS A GROSS MISCARRIAGE OF JUSTICE ............................................................…...20 A. The Appellate Division Should Have Vacated the Judgment as the Record Does Not Support CPLR § 3126(3) Sanctions ..............................................……22 B. The Record Does Not Support the Appellate Division’s Inference of Willful, Contumacious And Bad Faith Conduct Sufficient to Warrant § 3126(3) Sanctions and Entry of the Judgment. ...........................................……25 1. The Appellants Completed Their Production In Accordance with the Deadline Set by the February 4, 2008 Discovery Order…………………………………………...….26 i 2. Appellants Provided Reasonable Explanations To the Referee as Well as in Their Briefs to the Appellate Division - to No Avail.………………………………….28 3. The Alleged Misrepresentations Predate the Discovery Order and Were Made After the Relevant Documents Had Been Produced.………………………………...…….31 C. The Appellate Division Committed The Same Reversible Error as the Lower Court In Relying on the Referee’s “Report.”. ................................................……33 D. This Is Another Example - and Certainly the Most Extreme Example - of JHO Gammerman Exceeding His Authority Under CPLR § 3126..............................................……34 E. Assuming, Arguendo, that Any Sanction Was Warranted, A $99 Million Default Judgment Was Grossly Excessive.............................……39 PART TWO: JURISDICTION THE DECISION SHOULD BE REVERSED AND THE COMPLAINT SHOULD BE DISMISSED AS AGAINST ALBERT NASSER, WHO IS NOT SUBJECT TO NEW YORK JURISDICTION ............................................................…..40 A. The Legal Standard for Long-Arm Jurisdiction .............................................…….41 B. The Court Does Not Have Long-Arm Jurisdiction Over Albert Nasser and the Appellate Division Erred in Reversing the Lower Court’s Order ............................................….……44 1. Albert Nasser Did Not Purposefully Transact Business in New York by Allegedly Calling in Trades to His Financial Advisor in New York…………………..........................45 2. The Record Does Not Support the Appellate Division’s Finding that Albert Nasser Purposefully Transacted Business in New York During the March 18, 2008 Meeting..……….……...…..50 3. The Appellate Division’s Reliance on Kreutter v. McFadden Is Misplaced and There is No Basis for Imputing Personal Jurisdiction Over Albert Nasser Based on Agency Theory…………………...…53 CONCLUSION…………………………………………………………….………………….....60 ii TABLE OF AUTHORITIES CASES Apex Equity Partners Inc. v. Murray, 2008 WL 498468, 859 N.Y.S.2d 892 (Sup. 2008) ..................................................................44 Barington Capital Group v. Arsenault, 281 A.D.2d 166, 721 N.Y.S.2d 58 (1st Dep’t 2001) ...............................................................46 Bassett v. Bando Sangsa Co., Ltd., 103 A.D.2d 728, 478 N.Y.S.2d 298 (1st Dep’t 1984) ....................................................... 22-23 Builer v. Giorno, 28 A.D.3d 258, 813 N.Y.S.2d 394 (1st Dep't 2006) ...............................................................54 Chiu Ping Chung v. Caravan Coach Co., 285 A.D.2d 621, 728 N.Y.S.2d 767 (2d Dep’t 2001) ..............................................................40 C-Life Group Ltd. v. Generra Co., 235 A.D.2d 267, 652 N.Y.S.2d 41 (1st Dep’t 1997) ...............................................................50 Cantos v. Castle Abatement Corp, 251 A.D.2d 40, 673 N.Y.S.2d 662 (1st Dep’t 1998) ...............................................................35 Cespedes v Mike & Jac Trucking Corp., 305 A.D.2d 222, 758 N.Y.S.2d 489 (1st Dep't 2003) ..............................................................23 Christian v. City of New York, 269 A.D.2d 135, 703 N.Y.S.2d 5 (1st Dep't 2000) ............................................................23, 30 Citibank [S.D.] v Johnson, 206 A.D.2d 942, 615 N.Y.S.2d 180 (4th Dep’t 1994) .............................................................37 Commerce & Indus. Ins. Co. v. Lib-Com, 266 A.D.2d 142, 699 N.Y.S.2d 16 (1st Dep't 1999) ..........................................................24, 35 Corner Realty 30/7 v. Bernstein Management Corp., 249 A.D.2d 191, 672 N.Y.S.2d 95 (1st Dep’t 1998) ............................................23, 25, 35, 37 Corporate Campaign, Inc. v. Local 7837, United Paperworkers Intern. Union, 265 A.D.2d 274, 697 N.Y.S.2d 37 (1st Dep’t 1999) .........................................................42, 52 Cosmetic Int'l, LLC v. Der Kwei Enter. & Co., 943 F. Supp. 311 (S.D.N.Y. 1996)...........................................................................................43 iii Courtroom Television Network v. Focus Media, Inc., 264 A.D.2d 351, 695 N.Y.S.2d 17 (1st Dep’t 1999) ...............................................................47 De Socio v. 136 East 56th Street Owners, Inc., 74. A.D.3d 606, 903 N.Y.S.2d 45 (1st Dep’t 2010) ................................................................23 Deutsche Bank Sees., Inc. v. Montana Bd. of Investments, 7 N.Y.3d 65, 818 N.Y.S.2d 164 (2006) .................................................................. 42-43, 46-47 E.W. Howell Co., Inc. v. S.A.F. La Sala Corp., 36 A.D.3d 653, 828 N.Y.S.2d 212 (2d Dep’t 2007) ......................................................... 39-40 Falow v. Cucci, 2003 WL 22999458 (S.D.N.Y. 2003) ......................................................................................57 Ferrante v. Lasker-Goldman, 26 N.Y.2d 280, 309 N.Y.S.2d 913 (1970) ...............................................................................58 First Bank of Americas v. Motor Car Funding, 257 A.D.2d 287, 690 N.Y.S.2d 17 (1st Dep’t 1999) ......................................................... 35-36 Fischbarg v Doucet, 9 N.Y.3d 375, 849 N.Y.S.2d 501 (2007) ................................................................ 42-43, 46-47 Glassman v. Hyder, 23 N.Y.2d 354, 296 N.Y.S.2d 783 (1968) ...............................................................................43 Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 401 N.Y.S.2d 182 (1977) ...............................................................................44 Hertz, Newmark & Warner v. Fischman, 53 Misc. 2d 418, 279 N.Y.S.2d 97 (N.Y. Civ. Ct., N.Y. County 1967) ...................... 54, 57-58 Harris v City of New York, 211 AD2d 663, 622 N.Y.S.2d 289 (1995) ...............................................................................37 Ifraimov v. Phoenix Indus. Gas, 4 A.D.3d 332, 72 N.Y.S.2d 78 (2d Dep’t 2004) ......................................................................40 Interface Biomedical Laboratories Corp. v. Axiom Medical, Inc., 600 F. Supp. 731 (E.D.N.Y. 1985) ..........................................................................................44 Joan Hansen & Co. v. Everlast World's Boxing Headquarters Corp., 296 A.D.2d 103, 744 N.Y.S.2d 384 (1st Dep't 2002) ........................................................ 53-54 iv Kaplan v. KCK Studios, 238 A.D.2d 264, 657 N.Y.S.2d 26 (1997) ................................................................... 35, 37-38 Klein v. Ford Motor Co., 303 A.D.2d 376, 756 N.Y.S.2d 271 (2d Dep’t 2003) ..............................................................39 Kreutter v. McFadden Oil, 71 N.Y.2d 460, 522 N.E.2d 40 (1988) ................................................................... 52-53, 56-57 Kimco Exchange Place Corp. v. Thomas Benz, Inc., 824 N.Y.S.2d 353, 824 N.Y.S.2d 353 (2d Dep't 2006) ...........................................................43 Laufer v. Ostrow, 55 N.Y.2d 305, 434 N.E.2d 692 (1982) .............................................................................45, 53 Libra Global Tech. Servs. (UK) v. Telemedia Int’l., 279 A.D.2d 326, 719 N.Y.S.2d 53 (1st Dep’t 2001) ...............................................................50 Longines-Wittnauer Watch Co. v. Barnes & Reinecke, Inc. 15 N.Y.2d 443, 261 N.Y.S.2d 8 (1965) ...................................................................................46 M. Katz & Son Billiard Prods. v. G. Correale & Sons, 20 N.Y.2d 903, 285 N.Y.S.2d 871 (1967) ...............................................................................43 McGowan v. Smith, 52 N.Y.2d 268, 437 N.Y.S.2d 643 (1981) ......................................................................... 41-42 McKee Elec. Co. v. Rauland-Borg Corp., 20 N.Y.2d 377, 283 N.Y.S.2d 34 (1967) .................................................................................42 Merrill Lynch, Pierce, Fenner & Smith Inc. v. Alexiou, 397 F. Supp. 1292 (S.D.N.Y. 1975) .........................................................................................58 Merrill Lynch, Pierce, Fenner & Smith, Inc. v. McLeod, 208 A.D.2d 81, 622 N.Y.S.2d 954 (1st Dep't 1995) ................................................................57 Marks v. Vigo, 303 A.D.2d 306, 756 N.Y.S.2d 568 (1st Dep't 2003) ..............................................................24 Newman v. Chartered New England Corp., 63 A.D.2d 617, 405 N.Y.S.2d 87 (1st Dep’t 1978) .................................................................37 OneBeacon Am. Ins. Co. v. Newmont Min. Corp., 82 AD3d 554, 918 N.Y.S.2d 470 (2011) .................................................................................53 v Orlando v. Arcade Cleaning Corp., 253 A.D.2d 362, 676 N.Y.S.2d 164 (1st Dep’t 1998) .......................................................22, 31 Palmenta v. Columbia University, 266 A.D.2d 90, 698 N.Y.S.2d 657 (1st Dep't 1999) ................................................................22 Polansky v. Gelrod, 20 A.D.3d 663, 798 N.Y.S.2d 762 (3d Dep’t 2005) ................................................................53 Pramer S.C.A. v. Abaplus Intern. Corp., 76 A.D.3d 89, 907 N.Y.S.2d 154 (1st Dep’t 2010) .................................................................53 Prudential-Bache Metal Co. v. Binder, 121 A.D.2d 923, 504 N.Y.S.2d 646 (1st Dep't 1986) ..............................................................54 Roman v. City of New York, 38 A.D.3d 442, 832 N.Y.S.2d 528 (1st Dep't 2007) ...............................................................22 Seneca Ins. Co., Inc. v. Boss, 256 A.D.2d 175, 681 N.Y.S.2d 529 (1st Dep't 1998) ........................................................50, 52 Shiboleth v. Yerushalmi, 268 A.D.2d 300, 702 N.Y.S.2d 32 (1st Dep’t 2000) ...............................................................35 Spangenberg v. Chapoluka, 229 AD2d 482, 645 N.Y.S.2d 514 (2d Dep’t 1996) ..........................................................13, 33 Sud v. Sud, 211 A.D.2d 423, 621 N.Y.S.2d 37 (1st Dep’t 1995) ...............................................................44 Turk Eximbank-Export Credit Bank of Turkey v. Bicakcioglu, 81 A.D.3d 494, 916 N.Y.S.2d 502 (1st Dep't 2011) .......................................................... 38-39 Walkovszky v. Carlton, 18 N.Y.2d 414, 276 N.Y.S.2d 585 (1966) ...............................................................................55 STATUTES CPLR § 302(a)(1) .................................................................................................................. passim CPLR § 3211(a)(7) ........................................................................................................................15 CPLR § 3211(a)(8) ........................................................................................................................15 CPLR § 3126.......................................................................................................................... passim vi vii TREATISES 1 Weinstein-Korn-Miller, N.Y. Civ. Prac., ¶ 302.06) ........................................................................................................46 CPLR § 3126 Commentary CPLR 3126, C3126:10 .............................................................................................................24 N.Y. Advisory Comm. Rep., N.Y. Legis. Doc. 1958, No. 13, at 39-40 .................................................................................46 Siegel, Practice Commentary, McKinney's Cons.Laws of N.Y., Book 7B, CPLR 3126, C3126:8, at 758 ..................................................................................24 Siegel, New York Practice, § 86 at 152 (4th ed. 2005) .........................................................................................................54 1 JURISDICTION This Court has jurisdiction over this appeal because the appellate division’s April 10, 2012 decision constitutes a final order within the meaning of C.P.L.R. 5602(a)(1). QUESTIONS PRESENTED FOR REVIEW 1. Did the supreme court err as a matter of law, fact, or both, and exceed its authority under CPLR § 3126 in striking appellants' answer and entering a $99 million default judgment, given that (i) respondents failed to prove that the alleged noncompliance was willful, contumacious, or in bad faith; (ii) the record does not support an inference of willful or contumacious behavior; and (iii) appellants substantially complied with their disclosure obligations? The Appellate Division failed to answer this question, making its own inference based on new facts which appellants contend was erroneous and fail to support CPLR § 3126(3) sanctions. 2. Should Albert Nasser’s motion to dismiss Merrill’s complaint as against him for lack of personal jurisdiction pursuant to CPLR § 302(a)(1) have been granted? The Appellate Division answered this question “No” and appellants contend that this ruling was erroneous. 2 STATEMENT OF THE CASE Defendants-Appellants Ezequiel Nasser, Raymond Nasser, Albert Nasser Shayo and Scarlett Nasser (together, the “Individual Defendants” or “appellants”), having been granted leave by this Court, respectfully submit this brief in support of their appeal of the entire April 10, 2012 decision and order by the Appellate Division of the Supreme Court of the State of New York, First Judicial Department, entered April 10, 2012 (the “Decision”). In this brief, there are two separate parts of the appeal which are addressed in Part One and Part Two. Part One addresses the appellate division’s error in upholding the default judgment of the Supreme Court, New York County, entered on August 9, 2010 (the “Judgment”). Part Two deals with the appellate division’s error in reversing the lower court’s decision on appellants’ motion to dismiss the amended complaint as against them, mot. seq. no. 007, dated August 14, 2008, on the issue of jurisdiction over appellant Albert Nasser Shayo (“Albert Nasser”), entered on or about January 31, 2011. 3 PRELIMINARY STATEMENT One of the grossest injustices in civil litigation in the history of this state has been perpetrated in the form of a $99,013,769 default judgment based upon a purported discovery default. At each level in the system, the adjudicative bodies failed: • A referee assigned to hear and report upon the defendants’ alleged failure to produce documents – after defendants had produced over 11,000 pages of documents and attested that they had produced everything they could find in their files after a diligent search – never held a hearing on the disputed matter and never communicated with counsel for either side after an introductory conference, and then after more than 10½ months rendered his “report.” • That “report” included one sentence of “analysis” that cited a single case inapposite to the matter at hand. • The judicial hearing officer, who had been reversed time and again, in far less egregious circumstances, for entering “default” judgments for amounts that never exceeded one percent of the judgment at bar, almost literally rubber-stamped the referee’s barren “report” and furnished zero analysis of his own in doing so. The decision-making by the judicial hearing officer 4 consisted of a statement that he was adopting the so-called “report” of the referee and entering judgment thereon. • The appellate division, which had been furnished 130 pages of briefs and a 1224 page record, rendered a two page decision, two sentences of which addressed the default judgment, with unexplained citation to two cases and zero analysis of the matter at issue. • Amazingly, the plaintiffs did not even request a default judgment: During the May 5, 2009 conference before referee Lancelot Hewitt, plaintiff’s counsel stated for the record that they were “seeking as an initial matter, to take depositions of the [Defendants] in an effort to determine what steps exactly were taken to gather documents and search appropriate places in order to comply with the discovery requests.” (R. 1070.) Plaintiff’s counsel restated this request in their May 15, 2009 submission (R. 1082-1103) and thereafter in a letter to the referee, dated June 17, 2009, in which they wrote: “To repeat what we said in our initial submission, at this point, what Merrill Lynch is seeking are depositions of Ezequiel Nasser, Albert Nasser, Raymond Nasser, and anyone acting on behalf of the Nasser Entities, to ascertain what steps were taken to comply with Merrill Lynch’s document requests and Judge Gammerman’s orders. Merrill Lynch is not now asking the Special Referee to recommend that Judge Gammerman enter a default 5 judgment against the defendants.” (Emphasis added.) (R. 934-35.) The judgment granted at this stage by JHO Gammerman was not even requested by the Plaintiffs. • At no stage did any court give consideration to a lesser sanction (even assuming that any sanction would have been appropriate at this stage). The referee, who dedicated one sentence of “analysis” to a $99 million case, made no recommendation of sanction. The judicial hearing officer simply entered his usual default judgment. The appellate division simply ignores appellant’s arguments in its 3 sentence decision. • The lawsuit is between contracting companies that had done business as companies. Plaintiffs later added the individual defendants on a piercing- the-corporate-veil theory. At an early stage, the JHO opined that plaintiff’s theory had a weak foundation, at best, for this theory. Yet, in all of this, through the date of judgment, no adjudicative entity has even considered the fact that the individual defendants had made a strong case that no cause of action had even been stated against them. • Subsequent to the appellate division decision, however, in a closely related case, a three-member FINRA arbitration panel, following a 23-day hearing, flatly rejected Merrill’s claim that Ezequiel Nasser could be found personally liable for losses in another company account at Merrill. 6 An onlooker from almost any civilized system of jurisprudence would look upon (i) the utter lack of any careful, reasoned analysis by the referee, the judicial hearing officer, and the appellate division, and (ii) an outcome that converted an unproven discovery default into a $99 million judgment against parties against whom no claim may have been stated, and that onlooker would conclude that the world’s leading seat of justice and fairness simply went haywire in this case. What has happened is that the courts’ reasonable desire to ensure compliance with discovery obligations has become the sad excuse, in this case, for a complete abandonment of fairness, rhyme or reason. On the issue of jurisdiction, the appellate division was presented with the question of whether respondents had provided sufficient proof to establish personal jurisdiction over defendant Albert Nasser, a non-domiciliary, under the long-arm provisions of CPLR § 302(a)(1). There is no basis in law or fact to support the appellate division’s finding that Albert Nasser is subject to jurisdiction in New York pursuant to CPLR § 302(a)(1). The appellate division improperly accepted Merrill’s argument that a handful of telephone calls with the Merrill broker after she was transferred to New York, and Albert Nasser’s telephoning into a March 18, 2008 meeting at Merrill (during which he said nothing) was sufficient to confer personal jurisdiction under CPLR § 302(a)(1). 7 This Court is the last guardian of justice in this case. We respectfully ask the Court to correct the horrifying injustices that have occurred here. We ask that the appellate division’s decision and order be reversed insofar as appealed from, on the law, with costs; that the lower court’s default judgment be vacated; and that the complaint against Albert Nasser be dismissed for lack of personal jurisdiction. STATEMENT OF FACTS AND PROCEDURAL HISTORY A. Factual Background. The underlying action arises out of Merrill’s seizure and liquidation of all the company defendants’ assets held at both MLPFS and MLCS in or about March 2008. As set forth in the complaint (R. 882-928), in or about March 2008, based on recommendations and reports by Merrill’s analysts, which at the time Merrill knew to be false and misleading, the company accounts were holding large positions in Bear Stearns stock and options. Merrill continued to promote Bear Stearns to its clients, including the company defendants, while reducing its own position in Bear Stearns – actions by Merrill that were, indeed, a precipitating cause of Bear Stearns’s failure. Merrill commenced this action, but the defendants are the true victims. On March 18, 2008, the company defendants had a going concern value of over $200 million in their MLCS accounts. That same day Merrill recklessly seized and began to liquidate these accounts in breach 8 of the respective International Swaps and Derivatives Association (“ISDA”) agreements. This amount, along with a claim for $400 million in punitive damages for fraud and reckless annihilation of highly valuable operating enterprises, establishes the total damages of $612 million sought in the company defendants’ counterclaims. B. Proceedings in the Supreme Court, New York County. On April 7, 2008, Merrill commenced this action against the company defendants and against individual defendants Ezequiel Nasser, Raymond Nasser and Albert Nasser in the Supreme Court of the State of New York, New York County, Index No. 601012/2008, by filing a complaint together with an ex parte order to show cause, seeking a temporary restraining order and an order of attachment. The justice sitting in the emergency motion part (Silbermann, J.) issued the ex parte temporary restraining order, freezing the assets of not only the company defendants (a freeze that was not contested because Merrill had already freezed and liquidated all of the company defendants’ assets) but the Nassers as well, even though the accounts were not in their names and there are no personal guarantees for any of the company accounts. On May 2, 2008, the lower court vacated the order of attachment against the individual defendants and denied Merrill’s motion for a preliminary injunction (“May 2, 2008 Decision”) (R. 81-105), stating as follows: 9 I am going to grant the [Plaintiffs’] first motion [for an attachment], but only with respect to the corporate defendant[s] [as to which Defendants have raised no issue at this time], and I am going to grant the [defendants’] cross-motion [to vacate the attachment and temporary restraining order against the individuals] because I don’t think that Merrill Lynch has made a sufficient showing at this point to justify tying up the assets of the individual [defendants based upon the] piercing the corporate veil argument. (R. 85.) With respect to the non-Company Defendants … the restraints are lifted … The lifting of the restraints will become effective at five o’clock on Tuesday [May 6, 2008]. (R. 94-95.) On May 27, 2008, Merrill brought their appeal of the May 2, 2008 decision before a panel of the Appellate Division, First Department, which declined to reverse or modify the May 2, 2008 decision (R. 106.) On May 28, 2008, Merrill brought a motion to reconsider the attachment back to JHO Gammerman who again refused to reinstate the attachment. (R. 107-42.) In short, JHO Gammerman, undisturbed by the appellate division, has ruled that the Nassers’ personal assets may not be attached in this case. On June 17, 2008, Merrill served its amended complaint against the defendants1 alleging (1) breach of contract based upon margin shortages and losses in the company defendants’ accounts (First through Eighth Causes of Action), (2) fraudulent conveyance and a breach of fiduciary duty in connection with certain transfers of funds (Ninth through Fifteenth Causes of Action), and (3) 1 At this time Scarlett Nasser, who was a college student at the time, was added as a Defendant. 10 attorneys’ fees (Sixteenth Cause of Action) (R. 143-68.) The company defendants served their answer to Merrill’s amended complaint (“complaint”) on September 17, 2008 (R. 366-79) and their amended counterclaims (“counterclaims”) on February 20, 2009 (R. 882-928). On August 14, 2008, Ezequiel Nasser, Raymond Nasser, Scarlett Nasser and Albert Nasser Shayo (named in the amended complaint and in this brief as “Albert Nasser”), each a foreign citizen, moved to dismiss the complaint as against them for lack of personal jurisdiction and failure to state a claim. (R. 169-70). Merrill filed opposition papers to the counterclaims on October 31, 2008 followed by the Nassers’ reply on December 3, 2008. Discovery in this action commenced on September 17, 2008 with Merrill serving its notice of discovery and inspection on all the company defendants (R. 250-329), Albert Nasser (R. 232-50), Ezequiel Nasser (R. 330-47) and Raymond Nasser (R. 348-365). Merrill did not serve a notice of discovery and inspection upon Scarlett Nasser. On November 21, 2008 the company defendants responded to Merrill’s first demand for discovery and inspection (R. 572-690). The Nassers moved to stay all discovery against them pending determination of their motion to dismiss. On December 17, 2008, JHO Gammerman “stayed discovery in connection with the claims against the [Nassers]” (the “stay order”). (R. 1033.) 11 On February 4, 2009, a conference was held in response to letters written by Merrill’s counsel regarding defendants' document production. (R. 1034-41.) During this conference, Merrill’s counsel noted that documents which defendants had committed to deliver on Thursday, January 29, 2009, were not delivered until two business days later, Monday, February 2, 2009. (R. 1042-58.) JHO Gammerman ordered that: [If] there is not a full and accurate and detailed response [by February 20], that will be it. I will strike the answer and enter a judgment in this case, I am telling you that right now. (R. 1051-52.) On February 20, 2009, defendants timely completed their response to Merrill’s discovery demands, consisting of 11,700 pages of documents and 90 pages of interrogatory answers. This production included responses from each of the Nassers to (i) plaintiffs’ first set of interrogatories (R. 772-86), and (ii) plaintiffs’ first notice for discovery and inspection of documents (R. 787-881). On February 25, 2009, less than six months after the start of discovery, another conference was held in response to Merrill’s claim that the corporate defendants had not fully complied with Merrill’s discovery demands. (R. 1108-13). JHO Gammerman, refusing to listen to any arguments at that time, referred this discovery issue to a referee to “hear and report with recommendations, and to the extent that the discovery vis-à-vis by way of deposition be necessary, I will leave it for the Referee to make that determination.” (R. 1110.) Five days later 12 defendants’ counsel sent a letter to JHO Gammerman (R. 929-31), informing him that Merrill had failed to comply with defendants’ discovery demands (R. 948-87). When a conference was held on May 6, 2009, instead of referring Merrill’s non- compliance to the referee, JHO Gammerman ruled that defendants’ discovery requests would be held in abeyance pending the referee’s findings.2 This ruling made no sense because (i) Merrill has the same disclosure obligations as defendants and (ii) the case was still proceeding on claims and counterclaims. On May 5, 2009, a twenty-minute initial conference was held by Referee Lancelot Hewitt, at which time both parties presented their position statement to the referee (R. 988-1006; 1082-1102). Merrill’s counsel requested in their position statement that they be allowed to take the depositions of the company defendants and some of the individual defendants and stated that they were not seeking a default judgment (R. 1070): [W]e are at this time seeking as an initial matter, to take depositions of the Nassers and representatives of the Nasser entities in an effort to determine what steps exactly were taken to gather documents and search appropriate places in order to comply with the discovery requests. 2 Defendants served their (i) First Demand for Production of Documents, dated April 14, 2009 (R. 948-71); (ii) First Set of Interrogatories and Second Request for Production of Document, dated April 28, 2009 (R. 872-984); and (iii) Notice of Depositions, dated April 13, 2009 (R. 985- 88). For the reasons noted below, Merrill’s production of documents did not begin until October 2912, nearly 4½ years after the case began, and the document production has thus far spanned three months, and counting. No default judgment has been requested against Merrill, just as Merrill did not request a default judgment against defendants. 13 Merrill restated their request to take depositions (R. 1101) in their May 15, 2009 submission to the Referee (R. 1082-1103), and thereafter in a letter to the referee, dated June 17, 2009 (R. 932-35), in which they wrote: To repeat what we said in our initial submission, at this point, what Merrill Lynch is seeking are depositions of Ezequiel Nasser, Albert Nasser, Raymond Nasser, and anyone acting on behalf of the Nasser Entities, to ascertain what steps were taken to comply with Merrill Lynch’s document requests and Judge Gammerman’s orders. Merrill Lynch is not now asking the Special Referee to recommend that Judge Gammerman enter a default judgment against the defendants. (Emphasis added.) (R. 934-35.) On March 19, 2010 – 10½ months after the initial conference – the referee, having never further communicated with the parties, having never ordered any depositions, and having never conducted any hearing, issued his “report” summarizing the parties’ position papers along with the following one-sentence “analysis,” which we quote in its entirety: After review of the voluminous materials submitted by the parties, I find that there is insufficient evidence that the Nasser entities failed to comply with plaintiffs’ discovery demands with regard to the Nasser entities, but that there is sufficient evidence that the Nassers failed to comply with such discovery demands (see, Spangenberg v. Chapoluka, 229 AD2d 482, 484 [2nd Dept. 1996]). (R. 1078.) (R. 1074-79.) The sole legal authority cited by the referee in his one-sentence "analysis," the Spangenberg decision, addresses the issue of service of process, which has absolutely nothing whatsoever to do with this case. 14 On May 10, 2010, Merrill filed their motion to confirm the referee’s report and for a default judgment against the Nasser defendants. On June 1, 2010, the individual defendants submitted their papers in opposition to Merrill’s motion to confirm the referee’s report. Merrill filed reply papers on June 7, 2010. On July 14, 2010, in a seven-minute bench conference, JHO Gammerman struck the individual defendants’ answer based solely on the referee’s “report” and directed that an inquest would be held July 29, 2010. (R. 48-65.) On July 29, 2010 an inquest was held and again JHO Gammerman refused to hear any arguments from the Nassers with respect to the referee’s report or the still undecided motion. Despite the magnitude of these issues JHO Gammerman has vehemently refused to listen to any arguments. In accord with the lack of attention and time that had been afforded this matter, JHO Gammerman ruled that his judgment would simply grant the relief sought in Merrill’s complaint, struck the Nassers’ answer and directed entry of the $99 million judgment against appellants, entered August 9, 2010. (R. 75-80, 7-11.) On January 27, 2011, 2½ years after defendants filed their motion, JHO Gammerman finally issued a decision on the Nassers’ motion to dismiss the amended complaint as against them (mot. seq. no. 7.), (i) dismissing Albert Nasser from the action, (ii) dismissing the third cause of action by MLPFS for breach of contract against Ezequiel Nasser, Raymond Nasser and Excel Global, (iii) 15 dismissing the eighth cause of action against alleging fraudulent misrepresentation by Ezequiel Nasser, Raymond Nasser and Albert Nasser, and (iv) dismissing the sixteenth cause of action for legal fees as against Scarlett Nasser only. (R. 26-47.) That same day JHO Gammerman also decided Merrill’s motion to dismiss the counterclaims (mot. seq. no. 9.), determining that the swaps counterclaim could go forward as a breach of contract claim. C. Proceedings in the Appellate Division, First Department. On August 10, 2010, appellants, the individual defendants, filed their notice of appeal and pre-argument statement, appealing the default judgment. (R. 5-6.) On March 14, 2011, appellants filed their notice of appeal and pre-argument statement, appealing each and every part of the lower court’s decision on mot. seq. no. 7, pursuant to CPLR 3211(a)(7) and CPLR 3211(a)(8), except for those parts (i) dismissing Albert Nasser from the action, for lack of jurisdiction, (ii) dismissing the third cause of action, against Ezequiel Nasser and Raymond Nasser, (iii) dismissing the eighth cause of action against Ezequiel Nasser and Raymond Nasser, and (iv) dismissing the sixteenth cause of action against Scarlett Nasser only (R. 12-17.) A separate appeal was filed by counterclaim plaintiffs, the company defendants, on the lower court’s decision with respect to mot. seq. no. 9, which was not perfected. On March 25, 2011, Merrill filed their notice of cross- appeal and pre-argument statement appealing the following parts of the lower 16 court’s decision on mot. seq. no. 7: (i) granting the motion to dismiss Albert Nasser for lack of personal jurisdiction, (ii) granting the motion to dismiss the third cause of action as against Ezequiel and Raymond Nasser, and (iii) granting the motion to dismiss the eighth cause of action as against Ezequiel and Raymond Nasser (R. 18- 25.) On June 9, 2011, the appellate division granted appellants’ motion to consolidate the two motions, dated April 11, 2011. Oral argument was held before the Appellate Division, First Department, on January 25, 2012. On April 10, 2012 the appellate division affirmed the default judgment against the individual defendants and modified the order to deny Albert Nasser’s motion to dismiss for lack of personal jurisdiction. Notice of entry of the appellate division’s order was served on April 10, 2012. (R. 1227-29.) On May 10, 2012, appellants made a motion before this Court for leave to appeal the appellate division’s ruling. On May 25, 2012 Merrill filed their opposition to appellants’ request for leave to appeal. On August 28, 2012, this court granted appellants’ motion for leave to appeal. (R. 1230.) D. FINRA Decides Sophin Matter, Dismisses All Claims Against Ezequiel Nasser. Sophin Investments, S.A. (“Sophin”) is another corporate entity that had accounts at MLPFS and MLCS for which Ezequiel Nasser had management and trading responsibility, as well as a beneficial ownership interest. Sophin, like the defendants herein, sustained losses in its brokerage account at MLPFS, but was 17 simultaneously earning millions of dollars in its swaps trading accounts at MLCS. When Sophin was faced with negative trading positions in the MLPFS brokerage accounts, Merrill pillaged Sophin’s accounts at MLCS by unlawfully terminating live swaps trading positions, confiscating millions of dollars in collateral, and violating the ISDA agreements in place. On September 10, 2012, after 23 days of hearings, during which time Merrill had the opportunity to present all the evidence it could muster, a three-member panel of Financial Industry Regulatory Authority (“FINRA”) arbitrators found Merrill liable to Sophin for $6.1 million in compensatory damages stemming from Merrill’s unlawful liquidation of Sophin’s swaps account at MLCS.3 The facts and legal issues presented and decided during this hearing with respect to Merrill’s treatment of Sophin’s MLCS account are essentially identical to the facts and legal issues affecting the company defendants’ MLCS accounts in this case. The panel also denied all of Merrill’s claims against Ezequiel Nasser as an individual respondent allegedly responsible for margin trading losses in Sophin’s brokerage account at MLPFS – the very same claims brought by Merrill against Ezequiel Nasser, Raymond Nasser and Albert Nasser in this case. 3 The denoument of the Sophin case was the FINRA panel’s determination that Merrill was liable to Sophin for $6.1 million on swaps claims, similar to the swaps claims asserted by the company defendants in this case. That award was only partially offset by a separate award of $2.5 million in favor of Merrill on its brokerage claim, leaving Merrill with a net liability of $3.6 million to Sophin, which has been paid. 18 The FINRA decision marks the second occasion in which adjudicative bodies have actually paid attention to the legal merits (or demerits) of Merrill’s attempt to place legal responsibility individually upon Ezequiel Nasser and the other individuals who are affiliated with the companies that had accounts at Merrill. The first occasion was at the outset of this case when, as discussed above, JHO Gammerman stated that Merrill could not attach the individual defendants’ assets on an alter ego theory and that Merrill’s basis for an attachment was factually and legally insufficient. Thus, the many deeply disturbing aspects of the lower courts’ entry and affirmance of default judgment against the individual defendants in this case are multiplied and underscored by the fact that they have no legal liability on the merits. The criminal law counterpart of this situation is the wrongful conviction and execution of an innocent person. E. The Underlying Action is Currently Moving Forward Before JHO Gammerman and Merrill Has Not Yet Completed Their Document Production. It has been 2½ years since the default judgment was entered against the Appellants and discovery is still ongoing in the lower court. On April 23, 2012, a conference was held before JHO Gammerman and parties were instructed to recommence discovery with respect to the remaining claims between Merrill and the Corporate Defendants. On May 7, 2012, Defendants served their supplemental 19 demand for documents. On September 25, 2012, during the last compliance conference, before JHO Gammerman, Merrill’s counsel represented to the Court that they would produce their first wave of responsive documents “in two weeks” (October 9, 2012) followed by a second wave of documents two weeks later (October 23, 2012). Merrill failed to meet those deadlines -- a fifth wave of production was received on January 11, 2013 and additional productions have been promised by Merrill. 20 ARGUMENT PART ONE: THE DEFAULT JUDGMENT THE $99 MILLION DOLLAR DEFAULT JUDGMENT IS A GROSS MISCARRIAGE OF JUSTICE. It is difficult to conceive of a case in which a default judgment is less warranted than this case. The notion that any party in this case should be sanctioned with a default judgment is utterly unfounded, nay, unfathomable. From the first moment in April 2008 when Merrill raced to court with an ex parte order of attachment that was soon vacated as against the individual defendants, the parties have vigorously contested every aspect of this case: • On Merrill’s application for an order of attachment, the parties submitted approximately 10 inches of affidavits, exhibits and memoranda of law. Two lengthy arguments were held before JHO Gammerman, who then rendered a detailed decision on the record. (R. 81-105.) • The 10-page complaint and 60-page answer and counterclaim reflect the substantial set of issues that the parties have been litigating for nearly 5 years. • In discovery, plaintiff issued separate sets of interrogatories to all defendants. Defendants responded in full with a total of approximately 250 pages of interrogatory responses among them. 21 • In response to Merrill’s document demands, defendants worked at great length to locate as many responsive documents as possible, producing a total of approximately 11,800 pages. • Merrill, by contrast, received a stay of disclosure which postponed its responses to defendants’ discovery demands for approximately 3½ years. • Merrill has only recently produced its documents – three years after defendants’ production – in waves, with several substantial delays in the process. • The parties’ motions to dismiss have again entailed lengthy supporting papers on both sides with a detailed decision rendered by JHO Gammerman on the record. (R. 26-47.) How could it be that, in a case so hotly contested, the court below would enter a default judgment against the individual defendants, against whom the plaintiff has asserted the most tenuous of claims under an alter ego theory which was substantially refuted by JHO Gammerman himself? The answer lies in the simple fact that this respected judge has, for unexplained reasons, formulated a “one-size-fits-all,” knee-jerk approach, to discovery delays. Without detailed review or analysis of the particular circumstances in each case, JHO Gammerman has repeatedly pronounced that any shortfall in disclosure can and will lead to a 22 default judgment against the alleged non-complying party. All too often this knee- jerk approach to alleged discovery defaults has led to erroneous decisions by JHO Gammerman, an number of which have been reversed on appeal. (See discussion at 34-38 below.) In this case, JHO Gammerman has committed the same error that he has committed in a substantial number of cases, but on an unprecedented scale. Because the appellate division paid scant attention to this case, we now turn to the Court of Appeals for relief from the erroneous judgment. A. The Appellate Division Should Have Vacated the Judgment as the Record Does Not Support CPLR § 3126(3) Sanctions. The initial burden is on the party seeking sanctions under CPLR § 3126(3) to affirmatively establish that the opposing party's conduct is willful, contumacious or bad faith. Roman v. City of New York, 38 A.D.3d 442, 443, 832 N.Y.S.2d 528, 529 (1st Dep't 2007); see also Palmenta v. Columbia University, 266 A.D.2d 90, 91, 698 N.Y.S.2d 657, 659 (1st Dep't 1999). If the moving party is unable to carry its burden, as in the present case, then sanctions pursuant to CPLR § 3126(3) are deemed excessive and should be vacated on appeal. Orlando v. Arcade Cleaning Corp., 253 A.D.2d 362, 676 N.Y.S.2d 164 (1st Dep't 1998). Courts will "[afford] reasonable latitude before imposition of the harshest available penalty" (Bassett v. Bando Sangsa Co., Ltd., 103 A.D.2d 728, 728, 478 23 N.Y.S.2d 298, 300 (1st Dep't 1984)), in favor of resolution of actions on the merits. Corner Realty v. Bernstein Mgmt. Corp., 249 A.D.2d 191, 193, 672 N.Y.S.2d 95, 98 (1st Dep't 1998). This is especially true where a reasonable explanation exists for the noncompliance. De Socio v. 136 East Street Owners, Inc., 74. A.D.3d 606, 608, 903 N.Y.S.2d 45, 48 (1st Dep't 2010) ("[M]ere lack of diligence in furnishing some of the requested materials may not be grounds for striking a pleading ... particularly in light of the fact that defendants, albeit belatedly, have now come forward with an explanation for the nonproduction.") (citations omitted); Cespedes v Mike & Jac Trucking Corp., 305 A.D.2d 222, 222, 758 N.Y.S.2d 489, 490 (1st Dep't 2003) ("Although plaintiff complied late, nevertheless he has fully complied with outstanding discovery obligations, he has provided a reasonable excuse for his dilatoriness and there is no indication of bad faith."); Christian v. City of New York, 269 A.D.2d 135, 137, 703 N.Y.S.2d 5, 7 (1st Dep't 2000) (sanction was abuse of discretion where defendant filed affidavit stating that requested documents were not in its possession and there was no indication that failure to disclose was willful, contumacious or in bad faith). When CPLR § 3126(3) sanctions are deemed appropriate the Court must ensure that the sanctions are narrowly tailored to the circumstances of the individual case and not grant more relief than is reasonably necessary to protect legitimate interests. De Socio, 74. A.D.3d at 608. A “just” sanction is one that is 24 narrowly tailored to the circumstances of the individual case and does not grant more relief than is reasonably necessary to protect legitimate interests. Siegel, Practice Commentary, McKinney's Cons. Laws of N.Y., Book 7B, CPLR 3126, C3 126:8, at 758; see Commerce & Indus. Ins. Co. v. Lib-Com, 266 A.D.2d 142, 145, 699 N.Y.S.2d 16, 19 (1st Dep't 1999) (Striking a pleading “is not a sanction to be routinely imposed whenever a party fails to comply with any item of discovery, without regard for that party's substantial compliance efforts.”). (Emphasis added.) The most extreme sanctions will be found improper when compliance with a discovery order can be shown to be impossible or if striking a pleading provides the opposing party with more relief than is necessary to protect its interests. See CPLR § 3126 Commentary C3126:10; Marks v. Vigo, 303 A.D.2d 306, 307, 756 N.Y.S.2d 568, 568 (1st Dep't 2003) (The moving party “failed to substantiate any claim of prejudice and remaining belated discovery responses did not warrant outright dismissal of the complaint, particularly in view of counsel's explanation.”). In the present case, the lower court committed reversible error by improvidently striking appellants' answer and entering a multi-million dollar default judgment against the appellants, where (i) the respondents failed to carry their burden, (ii) the record does not support the inference of willful, contumacious and/or bad faith conduct, (iii) the appellants complied with their discovery requirements and where they could not produce certain documents they set forth a 25 reasonable excuse, (iv) respondents have not alleged nor is there any evidence of prejudice from the alleged non-disclosure, and (v) the courts below erred in failing to consider any alternative sanctions before entering quite possibly the most extreme and unjust sanction ever imposed by any court in the State of New York. B. The Record Does Not Support the Appellate Division’s Inference of Willful, Contumacious And Bad Faith Conduct Sufficient to Warrant § 3126(3) Sanctions and Entry of the Judgment. The appellate division’s two-sentence decision on sanctions affords no insight or analysis whatsoever to support its inference of “willful and contumacious conduct” (R. 1228), for the obvious reason that there is nothing remotely approaching such conduct in this case. But the authority to impose the most extreme sanctions, namely striking a party's pleading or rendering a judgment by default, is only appropriate "where a clear showing has been made that the noncompliance with a discovery order was willful, contumacious or due to bad faith." Corner Realty v. Bernstein Mgmt. Corp., 249 A.D.2d 191, 193, 672 N.Y.S.2d 95, 98 (1st Dep't 1998). The appellate division's decision fails to support its entirely conclusive assertion of willful and contumacious conduct that could sustain the most extreme sanctions under CPLR § 3126, namely, a $99 million default judgment. The court merely gave a bare recitation of (i) appellants’ alleged failure to comply with discovery deadlines, (ii) appellants' failure to offer a reasonable excuse for such 26 failure, and (iii) misrepresentations by defendants' counsel in open court as to the cause of the violations. These three issues are unrelated to the reference that was made to the referee, whose report is the sole basis for the lower court’s judgment, namely, whether the appellants “complied fully with JHO Gammerman’s discovery order.” (R. 1069.) These three issues are also inaccurate, unsupported in the record, and cannot sustain the type of sanctions that were imposed in this case. Below we will address each one and show why the decision must be vacated. 1. The Appellants Completed Their Production In Accordance with the Deadline Set by the February 4, 2008 Discovery Order. The appellate division unexplainably ignore the fact that the appellants met the only deadline set by the court and in the process fully responded to the document demands4 and interrogatories,5 producing every document that they could find, after a diligent search, in accordance with respondents' demands and the court's stay order. (R. 1200.) In their briefing and argument to the appellate division, Merrill’s counsel distorted key facts in their effort to sustain the $99 million judgment. The most glaring distortion found in respondents' appellate division brief is their rendering of alleged orders and warnings appellants received from the lower court with respect 4 Document Responses: Ezequiel (R.787-827), Raymond (R.828-854), Albert (R.855-881) 5 Interrogatories: Ezequiel (R.772-775), Raymond (R.776-779), Albert (R.780-78 I), Scarlett (R.783-786), Global (R.705-722); Excel (R.723-739), Inversiones (R.740-754). 27 to Merrill’s request for documents. Respondents would have this Court believe that appellants received "multiple," "numerous," "repeated" opportunities to comply with "repeated warnings" and "Orders."6 In actuality, only one discovery order was given in this case. (R. 522.) On February 4, 2009, five months after discovery commenced, a pre-motion conference was held in response to Merrill’s claim that the company defendants' first wave of production, which was due on Thursday, January 29, 2009, was not delivered until Monday, February 2, 2009, two business days later. (R. 512-27.) Despite the fact that there had been no prejudice to Merrill and the documents had been delivered, JHO Gammerman ordered that: [If] there is not a full and accurate and detailed response [by February 20], that will be it. I will strike the answer and enter a judgment in this case, I am telling you that right now. (R. 522.) This was the only discovery order. On the appointed date of February 20, 2009, defendants completed their response to Merrill's discovery demands in accordance with the deadline set in the order. Thus, in a matter of six months, the defendants completed their discovery production, which consisted of approximately 11,800 pages of documents and 90 pages of interrogatory answers for each defendant, including each of the appellants (R. 327-41, 606-700). As explained to the lower court, the referee and the appellate division, this production 6 Passim, e. g., Merrill Br. 16, 21, 26, 30, and 33. 28 encompassed every responsive document that defendants could locate after a diligent search. To the extent that the appellate division’s decision implies that there were "repeated” failures to comply with court orders and “multiple” violations, the appellate division is mistaken as to the facts in this case. 2. Appellants Provided Reasonable Explanations To the Referee as Well as in Their Briefs to the Appellate Division - to No Avail. The appellate division improperly concluded that the appellants failed to offer a “reasonable excuse” for their noncompliance with discovery requests. But defendants in fact complied with the requests. Defendants informed the lower court, the referee and the appellate division that all responsive documents that could be located concerning claims against the company defendants were in the possession of and produced by the company defendants, which the referee found to have complied with the discovery order. Prior to the order, the lower court "stayed discovery in connection with the claims against the [individual defendants]" pending a decision on their motion to dismiss the amended complaint for failure to state a claim and lack of jurisdiction (the "stay order"). (R. 470.) Thus, if the individual defendants were required to produce any documents, such production was limited to documents related to Merrill’s claims against the company defendants. (R. 503.) As clearly set forth in 29 the submission to the referee, each of the individual defendants conducted a thorough search of their personal records for any documents responsive to Merrill’s claims against the company defendants. (R. 1196-1220.) As affirmed in defendants' submission to the referee, the company defendants' files contained all documents in defendants' possession, custody and control responsive to Merrill’s claims against the company defendants, and all of these documents were turned over to Merrill’s counsel. The individual defendants did not have separate files responsive to Merrill’s claims against the company defendants and hence there were no additional documents to turn over. Therefore, if, as the referee found, the company defendants made their production in compliance with the discovery demands, and if the individual defendants did not maintain separate files relating to the companies, then all the defendants were in compliance with the discovery demands. Remembering that the individual defendants were the operating managers of the company defendants, it is unremarkable that they maintained all company-related documents in company files. The appellate division’s bare assertion that appellants failed to "offer a reasonable excuse for their noncompliance with discovery requests" is erroneous on its face. (R. 1196-1220.) First, defendants responded to each itemization, listing the corresponding Bates numbers where responsive documents had been produced or stating that the requested documents could not be found. (R. 1206-15.) Second, 30 as to the demands for which Merrill claimed "defendants have not produced any documents in response" or only “minimal documents responsive,” the simple answer is that defendants could not locate such documents after a diligent search. (R. 1092-94.) As to those documents, the individual defendants affirmed to the referee that they were not able to find any responsive documents after conducting a thorough search of their records. (R. 1203.) Another apparent key fact overlooked by the lower courts is that it was specifically the Corporate Defendants' production that Merrill took issue with – not the Individual Defendants’ production. Merrill’s counsel argued during the February 4th conference: "[We] asked for a conference with your Honor to address the significant problem that the defendants, particularly the corporate Nasser Company Defendants ... they had not produced any documents ... so my letter on [February 2, 20101, your Honor, brought to your attention the fact that the defendants, the Company Defendants in particular had failed to meet [production of "first wave"]. (R. 514.) The individual and company defendants cannot be expected to produce documents that do not exist or cannot be located in their respective files after conducting a diligent search, and sanctions resulting from such failure to produce documents are in clear violation of the courts' authority and power under CPLR § 3126. Christian, 269 A.D.2d at 137, 703 N.Y.S.2d at 7. Relying simply on the record, the lower court's stay order, the referee's finding that the company defendants had complied with their discovery demands, 31 the uncontroverted truth that all documents responsive to claims against the company defendants were lodged with the company defendants, the failure of the referee and the lower court to hold a hearing or to grant the depositions proposed by Merrill, and with no evidence establishing willful, contumacious or bad faith conduct by the individual defendants, there is simply nothing to show that the appellants failed to comply with the discovery demands and court order. The appellate division erred in the assertion that appellants did not provide a reasonable excuse. 3. The Alleged Misrepresentations Predate the Discovery Order and Were Made After the Relevant Documents Had Been Produced. There was no intentional misrepresentation by appellants' undersigned counsel and it is respectfully submitted that Merrill’s counsel have exaggerated what is at most an error. We refer here to the alleged "package" issue, referenced in counsel’s February 2, 2009 letter to the Court. Not only did this event occur prior to the lower court’s discovery order, but the comment made by counsel in court is thus unrelated to the issue of non-production in response to that order, which was the basis for sanctions. In any event, the comments are insufficient to support the most extreme sanctions under CPLR § 3126. Orlando v. Arcade Cleaning Corp., 253 A.D.2d 362, 676 N.Y.S.2d 164 (lst Dep't 1998). 32 Merrill’s counsel base their contention on the word "package" in the February 2, 2009 letter from the undersigned (R. 1040-41), which was written in response to Merrill’s counsels' letter from that same day (R. 1037-39). In the responsive letter the undersigned explained that he had instructed his associate to deliver the "first wave" of documents on Thursday, January 29, 2009, "but the package inadvertently did not go out" which is a true statement. (R. 1040.) The associate had assembled the documents in a computer folder containing over 11,000 documents and not an actual "postal" package. (R. 520-21.) This at most reflects counsel’s slight misapprehension of the status of the process. Whether or not the "package" was created on February 2, 2009 is irrelevant since Merrill’s counsel received the documents just two business days after they were due and within a few hours of discovering that the documents hand not gone out on Friday, January 29, 2009. Merrill was not prejudiced by this minor delay, nor has it alleged or made any motion claiming prejudice. Furthermore, counsel's statement could not form the basis for a $99 million discovery sanction for violation of a court order as it was made prior to the February 4, 2009 order and contemporaneously with appellants' February 2, 2009 document production. It is also worth mentioning that Merrill recently failed to complete its own document production in the time period represented by its counsel, a matter which 33 has not resulted in multiple letters and motions for discovery sanctions from defendants. C. The Appellate Division Committed The Same Reversible Error as the Lower Court in Relying on the Referee’s “Report.” The appellate division disregarded the deficiencies in the referee's report, which the lower court inappropriately and exclusively relied upon without any findings of its own, in entering quite possibly the most extreme § 3126 discovery sanctions in the history of this state. The referee's report consisted of a one- sentence “analysis” and cited one second department case which has absolutely nothing to do with the case at bar: After review of the voluminous materials submitted by the parties, I find that there is insufficient evidence that the Nasser entities failed to comply with plaintiffs' discovery demands with regard to the Nasser entities, but that there is sufficient evidence that the Nassers failed to comply with such discovery demands (see, Spangenberg v. Chapoluka, 229 AD2d 482,484 [2nd Dept. 19961]. (R. 548.) The Report failed to answer the reference from the lower court to "hear and report with recommendations, and to the extent that the discovery vis-á-vis by way of deposition be necessary, I will leave it for the referee to make that determination." (R. 1110; emphasis added.) No hearing was held; no true report was made; no recommendations whatsoever were made; and no ruling regarding depositions was ever made. 34 Amazingly, the plaintiff did not even request a default judgment. During the May 5, 2009 conference before referee Lancelot Hewitt, Merrill’s counsel stated for the record that they were "seeking as an initial matter, to take depositions of the [Defendants] in an effort to determine what steps exactly were taken to gather documents and search appropriate places in order to comply with the discovery requests." (R. 1070, 1082-1103.) Thereafter, in a letter to the referee dated June 17, 2009, counsel again wrote: To repeat what we said in our initial submission, at this point, what Merrill Lynch is seeking are depositions of Ezequiel Nasser, Albert Nasser, Raymond Nasser, and anyone action on behalf of the Nasser Entities, to ascertain what steps were taken to comply with Merrill Lynch's document requests and Judge Gammerman's orders. Merrill Lynch is not now asking the Special Referee to recommend that Judge Gammerman enter a default judgment against the defendants. (Emphasis added.) The lower court never heard any arguments on discovery; the referee never held a hearing or ordered a deposition, and the record is silent as to the bases for the referee reaching the oddly worded conclusion that he did. This report is a nullity and should not have been made the basis for the lower court’s $99 million default judgment. D. This Is Another Example - and Certainly the Most Extreme Example - of JHO Gammerman Exceeding His Authority Under CPLR § 3126. This is far from the first time that the appellate courts have reviewed a decision of this nature by JHO Gammerman. “[T]his court has repeatedly found 35 [JHO Gammerman] to be too precipitous in striking a party’s pleadings based on imperfect compliance with discovery demands.” Commerce & Indus. Ins. Co. v. Lib-Com, 266 A.D.2d 142, 144, 699 N.Y.S.2d 16, 18 (1st Dep’t 1999); see also Shiboleth v. Yerushalmi, 268 A.D.2d 300, 702 N.Y.S.2d 32 (1st Dep’t 2000); First Bank of Americas v. Motor Car Funding, 257 A.D.2d 287, 690 N.Y.S.2d 17 (1st Dep’t 1999); Cantos v. Castle Abatement Corp, 251 A.D.2d 40, 673 N.Y.S.2d 662 (1st Dep’t 1998); Corner Realty v. Bernstein Management Corp, 249 A.D.2d 191, 672 N.Y.S.2d 95 (1st Dep’t 1998); Kaplan v. KCK Studios, 238 A.D.2d 264, 657 N.Y.S.2d 26 (1st Dep’t 1997). In each of these cases, the Court found JHO Gammerman to have acted outside his authority and accordingly vacated the judgment and reinstated the struck pleadings. • In Commerce, JHO Gammerman struck plaintiff's pleading for failing to comply with production requirements for two of approximately twenty interrogatories. When the missing documents were produced, JHO Gammerman concluded that the plaintiff had been “playing games” and dismissed the complaint. The appellate division reinstated the complaint based on the plaintiff's substantial compliance efforts. Commerce, 266 A.D.2d at 144, 699 N.Y.S.2d at 18. • In Shiboleth, the appellate division ruled: “[T]he IAS court acted improperly in … sua sponte striking [defendants'] answer. There was no showing of contumacious conduct or a pattern of noncompliance by defendants, who simply expressed displeasure with the Special Referee's directives and sought a decision by the court.” Shiboleth, 268 A.D.2d at 300, 702 N.Y.S.2d at 32, citing Commerce. 36 • In First Bank, the court was presented with a set of facts quite similar to those of the case at bar. In that case, dealing with fraud and breach of contract claims, Justice Gammerman sua sponte struck defendants' answer for failure to comply with discovery demands where 60 days had passed since the discovery demands had been served and neither party had completed discovery. Furthermore, defendant had produced 104 of 115 requested documents. Justice Gammerman refused to order plaintiffs to comply with defendants' own pending document requests until defendants had produced all of their documents. The appellate division reinstated defendants' answer, finding JHO Gammerman’s actions “too drastic” where the record failed to support willful or contumacious conduct by Defendnat. A detailed quotation from the appellate division decision (id. at 290-93) reveals some of the significant parallels between the two cases: MCF was able to produce some but not all of [the requested] documents. The court set a new compliance deadline of March 3, 1997, which was later adjourned to April 10, 1997. . . . Although the majority of its efforts were successful, MCF was not able to produce all of the requested documents by April 10. The court ruled that “discovery” had to be completed by June 17. . . . Plaintiff's discovery requests . . . were . . . served . . . May 5, 1997. Defendants claim that they responded to the majority of the requests, while plaintiff argues that the responses were materially deficient. Defendants served their own requests on June 17. . . . On June 17, another conference was held before the court and the matter was adjourned to June 30 and then adjourned again to July 15. The court advised that defendants were in danger of having their answer stricken if they did not comply with the discovery demands. This severe sanction was not suggested by plaintiff; the court proposed it sua sponte. Defendants' counsel attempted to raise the issue of their own pending document request and deposition notice, but the court said there would be no depositions nor any order that plaintiff comply until defendants produced all the documents. On July 15, the court struck defendants' answer, notwithstanding defendants' production of 104 out of 115 Title Documents and the fact that discovery was incomplete on both sides after less than 60 days from 37 the serving of discovery demands. The court cut off defense counsel's attempt to discuss these objections. The issue of damages was referred to a Referee, who recommended $2.6 million. The court directed an inquest to be held on October 9, 1997. . . . The court . . . reiterated its prior conclusion that striking the answer was an appropriate sanction for defendants' discovery noncompliance under CPLR § 3126. . . . Turning to the merits, it was entirely inappropriate to strike defendants' answer. . . . (see, Citibank [S.D.] v Johnson, 206 AD2d 942 [dismissal of complaint inappropriate as discovery sanction where plaintiff made good-faith effort to comply]). Striking of pleadings is too drastic a remedy where the party's default is not willful (Newman v Chartered New England Corp., 63 AD2d 617). Indeed, by the time that their answer was stricken, defendants had produced the majority of the documents within a relatively short time period, though they had not been able to meet the deadlines imposed by the court (see, Harris v City of New York, 211 AD2d 663, 664). . . ([S]ee,Corner Realty 30/7 v Bernstein Mgt. Corp., 249 AD2d 191, 192-193 [court wrongly announced intent to strike pleadings unless plaintiff perfectly complied with discovery demand, ignoring plaintiff's objection to one discovery request as overbroad]). We therefore reverse the portion of the July 15, 1997 order that struck defendants' answer. • In Corner Realty, the appellate division wrote: “The IAS Court made no finding that plaintiff's noncompliance with the Stipulation was willful or contumacious, nor is one readily inferable from the record.” The court went on to say that, “Moreover, as we have previously held, it was patently improper for the court to announce prior to the hearing that the striking of the parties' pleadings would result if either party failed to comply with any item of discovery in the Stipulation.” Corner Realty, 249 A.D.2d at 194, 672 N.Y.S.2d at 98. That is exactly what JHO Gammerman stated on the record in the case at bar. • In Kaplan, the appellate division wrote: “The IAS Court erred in announcing that anything other than a ruling by the Referee that plaintiff had fully complied with all requests would result in dismissal of the complaint and further erred when it carried out that threat. The dismissal of the complaint 38 was an inappropriate response to plaintiff's supposed lapse and far more than what was necessary to protect defendants' legitimate interests.” In that case as in the one before the court now, there was no evidence of obstructive or dilatory behavior. This Court went on to state that “there is no basis, on this record, to find that plaintiff's responses were calculated to frustrate the statutory disclosure scheme” Kaplan, 238 A.D.2d at 265, 657 N.Y.S.2d at 26. While there are many parallels between these cases and the case at bar, JHO Gammerman’s actions in this matter were far more egregious and the record is fraught with more errors than those committed by this JHO in the past. For example: • The decision by JHO Gammerman at the outset of this action that the Appellants are not legally responsible for the alleged losses in the Company Defendants' accounts, which was undisturbed by the appellate division and based on long-established legal authority and practice in the securities industry, is the polar opposite result of Judgment now being appealed. • JHO Gammerman announced at the penultimate conference that "I am striking the defendants' answer" when no answer exists because the individual defendants’ motion to dismiss was then pending. • The discovery from the individual Defendants was ordered even before issue was joined. • JHO Gammerman entering the Judgment against Appellants while their Motion to dismiss was held in abeyance for 2 years, 5 months and 14 days. • The Judgment was entered upon a Referee’s Report which contained one sentence of “analysis” and could not possibly sustain the Judgment. The appellate division cited Turk Eximbank-Export Credit Bank of Turkey v. Bicakcioglu, 81 A.D.3d 494, 916 N.Y.S.2d 502 (1st Dep't 2011), another discovery 39 sanction decision issued by JHO Gammerman, in support of the court’s inference of willful and contumacious conduct. Turk is distinguishable from this case. In Turk, this Court found that the repeated failure by defendants to offer a reasonable excuse for the alleged noncompliance gave rise to an inference of willful and contumacious conduct and warranted the striking of their answer. In that case, the lower court's decision had been supported by a record from Special Referee Nicholas Doyle, which upon review shows a detailed and through analysis of the defendants' document production and recommendations for the court. This is clearly distinguishable from the referee's report in this action, which does not define the issues, resolve matters of credibility or make findings that were substantially supported by the record. E. Assuming, Arguendo, that Any Sanction Was Warranted, A $99 Million Default Judgment Was Grossly Excessive. The sanction of a $99 million default judgment was not tailored to the circumstances of this case and clearly grants vastly more relief for nondisclosure than is reasonably necessary to protect any interests that Merrill may claim. CPLR § 3126 provides a range of options for a court to utilize in addressing disobedience of a discovery order. Where non-disclosure (or in this case a delay in disclosure) would not prejudice the demanding party, then a lesser sanction, or no sanction, is appropriate. See, e.g., Klein v. Ford Motor Co., 303 A.D.2d 376, 377, 756 N.Y.S.2d 271 (2d Dep't 2003); E. W. Howell Co., Inc. v. S.A.F. La Sala Corp., 40 36 A.D.3d 653, 654-55, 828 N.Y.S.2d 212 (2d Dep't 2007); Chiu Ping Chung v. Caravan Coach Co., 285 A.D.2d 621, 728 N.Y.S.2d 767 (2d Dep't 2001); Ifiaimov v. Phoenix Indus. Gas, 4 A.D.3d 332, 334, 772 N.Y.S.2d 78 (2d Dep't 2004). JHO Gammerman failed to give a single warning of lesser sanctions, instead going directly to the most drastic sanction of striking pleadings. (R. 522.) This was clear error, perpetuated by the appellate division. PART TWO: JURISDICTION THE DECISION SHOULD BE REVERSED AND THE COMPLAINT SHOULD BE DISMISSED AS AGAINST ALBERT NASSER WHO IS NOT SUBJECT TO NEW YORK JURISDICTION. Albert Nasser is not subject to New York Jurisdiction under CPLR 302(a)(1) and it was error for the Appellate Division to reverse the lower court’s Order and consequently affirm the Judgment against Albert Nasser. This decision improperly expands the reach of CPLR 302(a)(1). As set forth below, the decision is based on inaccurate statements of fact without any support in the Record. In addition, the Appellate Division disregarded a substantial body of precedent which holds that the kinds of contacts identified in the Amended Complaint are insufficient to sustain jurisdiction over Albert Nasser. It was also inappropriate for the Appellate Court to recognize the judgment since the lower court never adjudicated the motion with respect to Albert Nasser, having 41 first dismissed all causes of action against him for lack of jurisdiction. Furthermore, the decision is defective as it fails to address whether jurisdiction exists for each cause of action asserted against Albert Nasser; provided that each cause of action asserted against Albert Nasser survived the Motion. A. The Legal Standard For Long-Arm Jurisdiction With respect to Albert Nasser,7 director of company defendant Inversiones Patagonia International, S.A.,8 a privately held investment company incorporated in the British Virgin Islands, Merrill alleges personal jurisdiction based on CPLR § 302(a)(1), New York’s long-arm statute. Pursuant to CPLR § 302(a)(1), personal jurisdiction may be obtained over a non-domiciliary “who in person or through an agent ... transacts any business within the state or contracts anywhere to supply goods or services in the state.” CPLR 302(a)(1). In order to demonstrate that an individual is transacting business within the meaning of CPLR 302(a)(1), “there must have been some ‘purposeful activities' within the State that would justify bringing the nondomiciliary defendant before the New York courts” McGowan v. Smith, 52 N.Y.2d 268, 271, 437 N.Y.S.2d 643 (1981) (emphasis added, citations omitted). Moreover, there must be “some articulable nexus between the business transaction and the cause of 7 It is undisputed that Albert Nasser, a citizen and domiciliary of Argentina, has had no physical contact with New York at all relevant times. 8 Saluc Limited is not mentioned in the judgment or the decision and therefore it is unclear if jurisdiction attached to Albert Nasser with respect to the sixth and seventh causes of action. 42 action sued upon” McGowan, 52 N.Y.2d at 272. If either prong of the statute is not met, jurisdiction cannot be conferred under CPLR § 302(a)(1). Under the “purposeful activity test,” the Court must look to “the totality of the defendant's activities within the forum” to determine whether a defendant intentionally transacted business in such a way that it constitutes purposeful activity. Deutsche Bank Sec., Inc. v. Montana Bd. of Investments, 7 N.Y.3d 65, 71- 72, 818 N.Y.S.2d 164 (2006) (defendant initiated and pursued negotiations with the plaintiff's employee in New York, engaged in approximately eight other transactions with the plaintiff and such transactions were central to defendant's operations). “Purposeful activities are those with which a defendant, through volitional acts, avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws’.” Fischbarg v Doucet, 9 N.Y.3d 375, 380, 849 N.Y.S.2d 501, quoting McKee Elec. Co. v Rauland-Borg Corp., 20 N.Y.2d 377, 382, 283 N.Y.S.2d 34 (1967). Actions initiated and carried out by the moving party cannot form the basis of the defendants’ intent, purposeful or otherwise, to avail themselves of the privilege of transacting business in the forum State. See, e.g., Corporate Campaign v Local 7837, United Paperworkers Intl. Union, 265 A.D.2d 274, 274-75, 697 N.Y.S.2d 37 (1st Dep’t 1999). 43 Where the alleged contact is limited to telephone calls, as argued in this case, New York courts have generally refused to find jurisdiction. Kimco Exchange Place Corp. v. Thomas Benz, Inc., 824 N.Y.S.2d 353, 354 (2d Dep't 2006) quoting, Deutsche Bank, 7 NY3d at 71-72 (“‘telephone calls … in and of themselves, are generally not enough to establish jurisdiction’ unless it is established that the communications were employed ‘by the Defendant deliberately to project itself into business transactions occurring within New York State.’”). See also, Glassman v. Hyder, 23 N.Y.2d 354, 362-63, 296 N.Y.S.2d 783 (1968) (telephone communications with New York real estate broker and his clients, at broker's initiative, not “transaction of business” in New York); M. Katz & Son Billiard Prods. v. G. Correale & Sons, 20 N.Y.2d 903, 285 N.Y.S.2d 871 (1967) (the simple placing of an order by a telephone call to New York insufficient to constitute the transaction of business within New York). Only when the evidence supports the conclusion that the telephone call was knowingly employed by the defendant to project himself into business transactions occurring within the New York will long-arm jurisdiction attach. Fischbarg, 9 N.Y.3d at 380-383. When there are multiple causes of action, the issue of personal jurisdiction must be determined separately for each cause of action. Cosmetic Int'l, LLC v. Der Kwei Enter. & Co., 943 F. Supp. 311, 317 (S.D.N.Y. 1996). Accordingly, the Court may determine that personal jurisdiction exists for some causes of action but 44 not others. Interface Biomedical Laboratories Corp. v. Axiom Medical, Inc., 600 F. Supp. 731, 737 (E.D.N.Y. 1985) (Jurisdiction exists for declaratory judgment claim, but not for other claims). B. The Court Does Not Have Long-Arm Jurisdiction Over Albert Nasser and the Appellate Division Erred in Reversing the Lower Court’s Order. While a plaintiff need only establish a prima facie case to establish personal jurisdiction on a pre-answer motion under CPLR 3211(a)(8), it is well settled that courts are not required to accept as true bare legal conclusions or factual claims that are either inherently incredible or flatly contradicted by documentary evidence. E.g., Sud v. Sud, 211 A.D.2d 423, 621 N.Y.S.2d 37 (1st Dep’t 1995). The Court may also consider a defendant’s affidavit which refutes plaintiff’s claims on jurisdiction. Apex Equity Partners Inc. v. Murray, 2008 WL 498468 at *4-5, 859 N.Y.S.2d 892 (Sup. 2008); Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182 (1977). In this case, the record does not support the Appellate Division’s decision which identified two actions, rejected by the lower court, as satisfying the plaintiff’s prima facia burden to show that Albert Nasser is subject to jurisdiction in New York: (i) “in the first three months of 2008, [Albert] actively traded in the New York-based Merrill Lynch accounts of Inversiones, his personal holding company;” and (ii) “[Albert] participated by telephone in a March 2008 meeting 45 with Merrill Lynch in New York concerning the trading activities at issue in the case.” (R. 1228) Respondents fail to put forward any evidence to support these allegations which consist of inaccuracies set forth by their counsel (R. 383.) and which are refuted by affidavits submitted in the lower court by Merrill’s own employees (R. 494-502, 515-24, 564-71) as well as the appellants9 (R. 171-95, 1231-35). Furthermore, there was no evidence presented during oral argument that would establish that Albert Nasser purposefully engaged in any activity whatsoever in New York. Laufer v. Ostrow, 55 N.Y.2d 305, 434 N.E.2d 692 (1982). 1. Albert Nasser Did Not Purposefully Transact Business in New York by Allegedly Calling in Trades to His Financial Advisor in New York. Respondents improperly argued in their brief to the Appellate Division that: “In the first three months of 2008, Albert actively traded in his New York-based Merrill Lynch accounts. (RA. 382-383) Albert admits that he made a number of telephone calls to Merrill Lynch’s New York office in early 2008. (RA. 382-383).” (Merrill Br. 43-44.) As evidenced by the record, these statements are not accurate and are based entirely on an unverified affirmation submitted by 9 Affidavit of Albert Nasser, dated August 13, 2008 (R. 1231-35), Affidavit of Raymond Nasser, dated August 13, 2008 (R. 171-81); Affidavit of Ezequiel Nasser, dated August 13, 2008 (R. 188-95). 46 Merrill’s counsel, Kenneth Schacter, in opposition to the appellants’ motion. (R. 380-86): Based on a review of Merrill Lynch’s telephone records it appears that during the period from December 2007 through April 2008 there were … five (5) calls between Albert Nasser and Ms. Srour. (R. 383.) Such a vague, unspecific and tentative assertion in an attorney’s affirmation cannot possibly sustain personal jurisdiction over Albert Nasser. Even if accepted as truth, the five alleged telephone calls do not establish the requisite purposeful activity within the state sufficient to establish jurisdiction over Albert Nasser. Barington Capital Group v. Arsenault, 281 A.D.2d 166, 721 N.Y.S.2d 58 (1st Dep’t 2001) (five phone calls to plaintiff’s office in New York to place orders for the purchase of stock were not sufficient purposeful activity to support personal jurisdiction). In Longines-Wittnauer Watch Co. v. Barnes & Reinecke, Inc. 15 N.Y.2d 443, 456-57, 261 N.Y.S.2d 8 (1965), this court held that the “transact[ion of] any business within the state,” as expressed by the Advisory Committee, was to apply to a non-resident defendant who had engaged in some purposeful activity in this state in connection with the matter in suit. (See N.Y. Advisory Comm. Rep. (N.Y. Legis. Doc. 1958, No. 13) at 39-40; see also, 1 Weinstein-Korn-Miller, N.Y. Civ. Prac. ¶ 302.06). For that reason, Merrill’s reliance in the court below on Deutsche Bank, 7 N.Y.3d at 71-72 and Fischbarg, 9 N.Y.3d at 382, was improper 47 and misplaced. In both of these cases the courts were able to impute personal jurisdiction over the out-of-state defendant based on specific purposeful actions taken by the defendant within the state. In Deutsche Bank, an out-of-state investor sought out, initiated and pursued negotiations with plaintiff’s New York based securities broker and thereafter engaged in negotiations over the next thirteen months. Id. at 71. In Fischbarg, the out-of-state defendant engaged a New York attorney in the “purposeful creation of a continuing relationship.” Id. at 380-81. Albert Nasser did not seek out or contract with a New York based securities broker. Contacting Ms. Srour in New York to carry out the same transactions she had performed while located in São Paulo is not tantamount to taking advantage of a benefit particular to New York, such as the New York bond market particularly sought in Deutsche Bank, or the New York media outlet firms sought in Courtroom Television Network v. Focus Media, Inc., 264 A.D.2d 351, 353 (1st Dep’t 1999). Furthermore, Merrill’s claims fall well short of even establishing that Albert Nasser in fact transacted business during these alleged five telephone conversations, or even if Albert Nasser initiated these calls. With respect to Merrill’s claim that the accounts were maintained in New York for three months, this is simply not correct. Assuming arguendo that the accounts were transferred to New York, Merrill conceded that from the 48 opening of the corporate accounts until at least a date in February 200810 these corporate accounts were maintained at the Brazil office. (R. 383.) If the accounts were in New York they were transferred by Merrill, not by Albert Nasser, and they were not there longer than a month and a half before being terminated. But the accounts remained in São Paulo even after they were improperly terminated and Merrill began liquidating the assets. (R. 1238-244.) There are other undisputed facts that were suppressed in Merrill’s briefs and presumably disregarded by the appellate division in its analysis: • Inversiones is a privately held “corporate investment vehicle” (R. 149-51) incorporated in the British Virgin Islands. • The beneficial owner of Inversiones is the Twin Stars Trust, which Albert holds no beneficial interest in. • The company accounts were each opened at Merrill’s São Paulo, Brazil office, not New York. • There were no personal guarantees from any of the appellants with respect to the company accounts. • All documentation with respect to the transactions in question originated from Merrill’s Brazil office, not New York. • Appellants did not request that the company accounts be transferred from Brazil to New York. 10 Merrill has not provided the Court with the exact date in February on which it claims the corporate accounts were transferred from Brazil to New York. Of course, unless it claims the transfer occurred on February 1, 2008, this allows Merrill to give the misleading impression that the accounts were maintained in New York longer than actual, but in any event not three months. 49 • Merrill did not provide any formal notice of the alleged transfer of the company accounts to New York. • Merrill did not request nor did the company defendants provide any consent for the alleged transfer of the company accounts to New York Merrill has also failed to refute defendants’ argument that the company accounts were never “maintained” in Merrill’s New York office but remained in Brazil even after Ms. Srour was transferred. It was Albert’s belief and understanding that after Ms. Srour was transferred the company accounts remained in São Paulo branch and that all the transactions in these accounts were executed in the Brazil office, not New York. (R. 1231-32.) This is supported by documents received during Merrill’s recent (and ongoing) document production, which shows that the accounts remained with the São Paulo branch after the March 19, 2008 termination notices were issued; as late as April 2008 when Merrill was improperly and negligently liquidating the MLCS accounts. (R. 1238-244.) The bare conclusory allegations in Merrill’s amended complaint that “each Defendant transacts business within the State of New York” (R. 149) and that the corporate accounts were “maintained” in Merrill’s New York office (R. 149) are further undercut by the affidavits Merrill had proffered in support of their failed temporary restraining order. • In the affidavit of Renata Schop-Klein, Vice President and Administrative Manager for Merrill Lynch Representacoes Ltda., sworn to on April 25, 50 2008, Ms. Schop-Klein states: “I am employed in the São Paolo, Brazil branch office. In that capacity, I am familiar with the Defendants’ accounts and the various business records relating to their accounts maintained with Pierce.” (Emphasis added.) (R. 494.) • In the affidavit of Carla S. Lualdi Pimentel, Resident Director and Branch Manager of Merrill’s São Paulo office, sworn to on April 25, 2008, Ms. Pimentel states that: “In the capacity of Branch Manager, I am familiar with Defendants Ezequiel, Raymond Nasser and Albert Nasser and their personal holding companies identified in the caption of this action.” Id. None of these affidavits even allege that Albert Nasser transacted business through the New York office. 2. The Record Does Not Support the Appellate Division’s Finding that Albert Nasser Purposefully Transacted Business in New York During the March 18, 2008 Meeting. Albert Nasser’s participation in the March 18, 2008 meeting (the “Meeting”), by telephone from Argentina, does not satisfy the statutory requirements of CPLR § 302(a)(1). Seneca Ins. Co., Inc. v. Boss, 256 A.D.2d 175, 175, 681 N.Y.S.2d 529 (1st Dep't 1998) (presence at plaintiff's New York office did not amount to purposeful activity); see also Libra Global Tech. Servs. (UK) v. Telemedia Int’l., 279 A.D.2d 326, 327, 719 N.Y.S.2d 53 (1st Dep’t 2001) (corporate defendant did not “project” itself into New York for jurisdictional purposes via the 45-minute video-conference); C-Life Group Ltd. v. Generra Co., 235 A.D.2d 267, 267, 652 N.Y.S.2d 41 (1st Dep’t 1997) (45-minute meeting in New York that was exploratory in nature, leading to nothing more than a proposal 51 that was later negotiated, was insufficient to constitute the transaction of business under CPLR 301(a)(1)). The meeting was held at Merrill’s New York office to discuss the status of the company defendants’ brokerage MLPFS accounts which were holding Bear Stearns put options. Albert Nasser did not choose to participate in the meeting but instead was required to attend, by Merrill, as part of his duties as a manager of Inversiones. Albert Nasser also had nothing to do with the “venue” of the phone call. The fifteen or so digits that someone pressed on the telephone – was it Merrill to Albert Nasser or the other way around? – might as well have been to or from Timbuktu. All we know is that the 84 year old Albert Nasser was at his chosen venue in Argentina, trying to find out what Merrill was doing with the money held in the accounts of a company he managed, but had no beneficial ownership. (R. 1233.) The meeting did not result in any business decisions or transactions being agreed to by any of the defendants, including Albert Nasser. In fact, nothing could be decided because Merrill had yet to identify the alleged deficits in the accounts and could not provide the corporate defendants with accurate account statements for the MLCS and MLPFS accounts. The meeting was ultimately adjourned without any actions taken by the defendants and all decisions tabled until Merrill could prepare account statements showing losses and current balances in the 52 company accounts. This, of course, never occurred, as set forth in more detail in defendants counterclaims (R. 882-928) since immediately following this meeting Merrill had the MLCS accounts liquidated, despite the fact that Merrill had not yet determined the losses in the MLPFS accounts. Any transactions that did result from the meeting were carried out solely by Merrill with no participation by the defendants, resulting in the unnecessary ruination of the company defendants. Albert Nasser played no role whatsoever in these activities. Such unilateral acts cannot be imputed upon Albert Nasser to confer long-arm jurisdiction under CPLR § 302(a)(1). Corporate Campaign, Inc. v. Local 7837, United Paperworkers Intern. Union, 265 A.D.2d 274, 274-75, 697 N.Y.S.2d 37 (1st Dep’t 1999). There is also no nexus between Albert’s presence at the meeting and the causes of action alleged in this action. See Seneca, 256 A.D.2d at 175, citing Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 467, 527 N.Y.S.2d 195 (1988). There is no record of any comment by Albert Nasser during the call. At the time of the meeting, Merrill had yet to identify the purported losses in the MLPFS accounts and had yet to liquidate the MLCS accounts. The losses in the MLCS accounts were not reported until April 2, 2008 when Merrill’s Early Termination Account Statement Notices were sent out – two weeks after the Notice of Early Termination letters were sent to the company defendants. In fact, distributions 53 were scheduled to be made to each of the company defendants’ MLCS accounts as early as March 19, 2008. The deficit balances were not calculated until March 31, 2008. (R. 153.) 3. The Appellate Division’s Reliance on Kreutter v. McFadden is Misplaced and There is No Basis for Imputing Personal Jurisdiction Over Albert Nasser Based on Agency Theory. While the decision does not specifically mention “agency theory” the appellate division cites to Kreutter, 71 N.Y.2d at 467, and compares that holding to OneBeacon Am. Ins. Co. v. Newmont Min. Corp., 82 AD3d 554, 555, 918 N.Y.S.2d 470 (2011), both of which address the application of jurisdiction based on agency theory. Not only is the court’s reliance on Kreutter misplaced and the facts in this case are easily distinguishable, the record is devoid of any support for Merrill’s “agency theory” claim. Inconclusive or “bland” assertions of agency will not suffice. See Polansky v. Gelrod, 20 A.D.3d 663, 664, 798 N.Y.S.2d 762 (3d Dep’t 2005). Furthermore, claims against a corporate defendant, even if jurisdictionally viable, do not provide a basis for personal jurisdiction over a corporate official or employee who acts on behalf of the corporation. Pramer S.C.A. v. Abaplus Intern. Corp., 76 A.D.3d 89, 95-96, 907 N.Y.S.2d 154 (1st Dep’t 2010), citing Laufer v. Ostrow, 55 N.Y.2d 305, 449 N.Y.S.2d 456 (1982) (no personal jurisdiction over company president in individual capacity); Joan Hansen & Co. v. Everlast World Boxing Headquarters 54 Corp., 296 A.D.2d 103, 109, 744 N.Y.S.2d 384 (1st Dep't 2002) (a plausible claim for breach of contract against a corporation does not provide a basis for the assertion of a cause of action against corporate officers and directors whose actions allegedly brought about the breach) (internal citation omitted). This very basic proposition, that a shareholder or officer is not liable for an alleged breach of contract by a corporation has been consistently adhered to in the First Department. E.g., Prudential-Bache Metal Co. v. Binder, 121 A.D.2d 923, 926, 504 N.Y.S.2d 646 (1st Dep't 1986); Builer v. Giorno, 28 A.D.3d 258, 259, 813 N.Y.S.2d 394 (1st Dep't 2006). The refusal to impute agency activities of a broker in New York to an out-of-state principal “is also the rationale used to protect the New York courts from what might otherwise be a deluge of litigation emanating from ordinary stock transactions.” D. Siegel, New York Practice, § 86 at 152 (4th ed. 2005), commenting upon the Hertz case. The record in this case is devoid of any evidence that Inversiones engaged in New York activities sufficient to impute jurisdiction over Albert Nasser under an agency theory. One of the few uncontroverted facts in this case is that Inversiones, like the other corporate defendants, opened the brokerage account with Merrill in São Paulo, Brazil. This threshold issue was ignored in Merrill’s briefs and presumably disregarded by the appellate division in its Order. 55 Merrill improperly characterizes the corporate defendants as “personal holding companies” (cf. R. 149-51.) to support their claim yet this same theory was rejected by JHO Gammerman at the outset of the case in 2008, when he ruled that Merrill had not met its burden to establish any liability of the individuals for the company defendants’ alleged debts. The simple fact is that every corporation must act through individuals, and if the corporation is closely held, there will be few individuals through whom it can act. Dominion it seems to [the Court] is not enough, but assuming that the corporate formalities are followed, and the corporate formalities are followed in this case, the mere fact that the business of the corporation was used to some extent apparently by the individuals for their own business, in addition to the actual business of the corporation, doesn't establish sufficient facts to pierce the corporate veil; and indeed, these are offshore corporations as I understand it they were organized in the British [Virgin Islands], and the question is whether or not that constitutes any violation of the law in the British [Virgin Islands] in connection with the operation of those organizations. (R. 203-04.) And almost five years later, Merrill has still failed to put forth any evidence that would suggest that the corporate reality of Inversiones should be rejected as a sham cover for an individual. Walkovszky v. Carlton, 18 N.Y.2d 414, 418, 276 N.Y.S.2d 585 (1966). As for the alleged transactions, they are the same two transactions Merrill alleges against Albert Nasser individually – the five alleged telephone calls set forth by Merrill’s attorney and the March 18, 2008 meeting – which have been refuted above. 56 The Appellate Division’s reliance on Kreutter v. McFadden Oil, 71 N.Y.2d at 467, is simply misplaced and the facts in this case are easily distinguishable. First, the section of Kreutter cited by the appellate division (at 467) is unrelated to the two factual elements it is presumably cited to support. The first sentence recites the standard for review under CPLR § 302(a)(1). The second sentence contains the court’s analysis and defines the question based on an agency relationship; specifically, the Court was tasked to determine whether if McFadden Company’s dealings with plaintiff in New York were done “for the benefit of and with the knowledge and consent of the Texas Defendants and that they exercised some control over McFadden Company in the matter conducted with plaintiff.” Id. Second, this Court held in Kreutter that jurisdiction attached to the individual defendants in that case as a result of business that had been transacted in this State through their agent, McFadden Company. In the present case, unlike McFadden Company, the corporate accounts were not set up in New York and Albert Nasser “never visited New York or conducted business within New York with respect to any of [his] dealings with [Merrill].” (R. 1232.) Merrill has failed to put forth any evidence alleging that Albert Nasser completely controlled and dominated Inversiones, which he holds no beneficial ownership in. (R. 1233.) 57 Furthermore, Jurisdiction cannot attach over a defendant where the alleged contacts, as here, are based exclusively on plaintiff’s own activity, or the activity of plaintiff’s agent. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. McLeod, 208 A.D.2d 81, 622 N.Y.S.2d 954 (1st Dep't 1995) (focus on defendant's purposeful activity in the state rather than on the plaintiff’s activity in the state). While Merrill claims that they are not trying to impute jurisdiction based on Ms. Srour’s acts, but for the happenstance of Merrill’s election to relocate Ms. Srour, Inversiones’ broker and Merrill’s employee, to New York, there would be no contact with the State of New York. In Falow v. Cucci, 2003 WL 22999458 *4 (S.D.N.Y. 2003), which distinguished the holding in Kreutter, the court dismissed the action against a non-domiciliary where an examination of the totality of the circumstance failed to reveal that defendants engaged in purposeful activity in New York. The court specifically held that evidence of various correspondences and documents sent to plaintiff’s New York office via mail and facsimile, and several telephone conversations with plaintiff in New York, was insufficient to establish personal jurisdiction over the defendants. Id. In Hertz, Newmark & Warner v. Fischman, 53 Misc. 2d 418, 279 N.Y.S.2d 97 (N.Y. Civ. Ct., N.Y. County 1967) a New York stockbroker sued a New Jersey customer who did business at the broker’s New Jersey office. 58 The case was dismissed for lack of jurisdiction. The court found that “the acts of the plaintiff performed by it in New York City may not be attributed to the defendant for the purpose of conferring jurisdiction over the person of the defendant.” Id. at 420. This case exactly parallels Hertz in that it involves financial transactions that took place at an out-of-state office, here the Merrill office in Brazil. The only difference is that the defendant in Hertz was unsuccessfully moved to a New York court roughly 52 miles from his home; in the case at bar the distance is 5,200 miles. Similarly, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Alexiou, 397 F. Supp. 1292 (S.D.N.Y. 1975), Merrill sought to establish long-arm jurisdiction over a resident of Greece who placed numerous buy and sell orders for commodities futures contracts through Merrill’s London and New York offices. The court noted that the case involved a situation in which an agent (the broker) was suing a foreign principal, seeking to ground jurisdiction on the basis of the agent’s own activities within New York. Ordinarily, New York courts have been extremely reluctant to permit an agent to bootstrap himself into jurisdiction over a non-domiciliary principal by means of the agent’s own activities in New York. Id. at 1293. Accordingly, the court granted the defendant’s motion to dismiss for lack of personal jurisdiction. And, in Ferrante v. Lasker-Goldman, 26 N.Y.2d 280, 284, 309 N.Y.S.2d 913 (1970) this Court addressed whether a non-resident, who 59 never enters the state, can be subject to jurisdiction based on his actions in his home State which affect the performance of work by others in New York. Ultimately, this Court held that there was no transaction of business in New York when defendant was domiciled out of state, conducted his personal business activities out of state, had no office, bank account or telephone listings in New York, and neither solicited business in the state nor “entered th[is] State in connection with his dealings” with the New York plaintiff. It is hard to rationalize how jurisdiction would attach to Albert Nasser in this case when the accounts were opened in São Paulo and the only contact Albert Nasser had with New York was a result of self-interested unilateral actions by Merrill – including relocating the broker to the New York office, conducting the March 18, 2008 telephone meeting and negligently liquidating the MLCS accounts. None of the contacts alleged in the Amended Complaint were requested or initiated by Inversiones. To compel the 85-year-old Albert Nasser – now afflicted with mid-stage dementia – to litigate in New York, based on Merrill’s own actions, not his own, and to respond to a $99 million judgment would be unconscionable. If this decision is upheld and the lower court ultimately finds that Inversions is not responsible for the debts alleged in the complaint, precedents would be set where a corporate director can be found liable for the corporate debts that the 60 corporation is not liable for. Additionally, every corporation whose officers or sales personnel happen to pass the time of day with a New York customer in New York runs the risk of being subjected to the personal jurisdiction of our courts. This Court is behooven to rectify this novel issue before it is too late. CONCLUSION The appellate division’s affirmance of a $99 million default judgment as a sanction for an alleged discovery default is a gross injustice which, we respectfully submit, must be corrected. The appellate division’s error in reversing the dismissal of Albert Nasser in this case would create a precedent that would vastly, and unjustly, expand the personal jurisdiction of the New York courts beyond the scope envisioned by the long-arm statute and the Due Process clause. We respectfully ask this Court to correct that error.