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CDR Creances S.A. v. Cohen

Supreme Court of New York, First Department

December 27, 2012

CDR Créances S.A., as Successor to Societe de Banque Occidentale, Plaintiff-Respondent,
Maurice Cohen, Defendant-Appellant, Summerson International Establishment, et al., Defendants. CDR Créances, S.A., as Successor to Societe de Banque Occidentale, Plaintiff-Respondent,
Leon Cohen, etc., et al. Defendants-Appellants, Iderval Holdings, Ltd., et al., Defendants.

Maurice Cohen, Leon Cohen, Sonia Cohen, Robert Maraboeuf and Allegria Aich appeal from the judgment of the Supreme Court, New York County (O. Peter Sherwood, J.), entered September 16, 2011, awarding plaintiff the principal sum together with in prejudgment interest from July 12, 2007. Appeals from the order, same court (James A. Yates, J.), entered January 25, 2011, which, after a hearing, granted plaintiff's motion to strike the answers of defendants Maurice Cohen, Leon Cohen, Sonia Cohen, Robert Maraboeuf and Allegria Aich and enter a default judgment against them, and from the resettled order of the same court (O. Peter Sherwood, J.), entered September 15, 2011, and from the order, same court and Justice, entered February 24, 2011.

Dewey Pegno & Kramarsky LLP, New York (David S. Pegno of counsel), for appellants.

Kellner Herlihy Getty & Friedman LLP, New York (Douglas A. Kellner of course), for respondent.

Luis A. Gonzalez, P.J. Peter Tom James M. Catterson Dianne T. Renwick Rosalyn H. Richter, JJ.

TOM, J., J.

This matter arises out of the diversion of the proceeds of a loan made by plaintiff's predecessor in interest to finance the renovation of a Manhattan property as a hotel. The conversion of the funds was accomplished by capital transfers to shell entities controlled by defendants Maurice Cohen and his son, Leon (collectively, the Cohens) [1]. They were assisted in this enterprise by Sonia Cohen, wife of Maurice Cohen, and two family employees, Robert Maraboeuf and Allegria Achour Aich (collectively, appellants). We agree with Supreme Court's overall conclusion that these defendants have exhibited no less dishonesty before the courts as in their dealings with business associates and the federal taxing authorities. Thus, in view of their well-documented acts of deceit and fraud committed to suborn the judicial process, this Court concludes that the sanction of striking their pleadings and entering judgment on default in the principal sum of $135, 359, 331.30 with prejudgment interest, was entirely appropriate.

Plaintiff is the successor in interest to Societe de Bank Occidentale (SDBO), a wholly owned subsidiary of French bank Credit Lyonnais. SDBO and SNC Coenson International et Cie (SNC) formed a partnership to develop the Flatotel hotel in Paris, part of a worldwide franchise of hotels. In 1990, SDBO and SNC became shareholders of Euro-American Lodging Corporation (EALC), whose purpose was to convert a Manhattan building into a Flatotel hotel. SDBO was to provide financing and SNC to provide expertise in the hotel industry. SNC nominally purchased SDBO's share in EALC for $50, 000 because SDBO, as a foreign bank operating in the United States, could not own shares in a nonbanking business. SDBO's financing, pursuant to a pledge agreement, was secured by a mortgage and security interest in all of EALC's outstanding stock. In 1991, the parties entered into a new loan agreement, governed by French law, under which SDBO was to provide financing of $82, 704, 990 to the Manhattan Flatotel venture, to be disbursed as construction progressed, and EALC, among other things, was to pay taxes on the Manhattan property.

The relationship between the venture's participants began to deteriorate in 1992, when SDBO accused EALC, controlled by Maurice Cohen, of diverting funds, and as a result refused to provide further financing for the construction. A decade of litigation before the French courts began with EALC's filing an action to compel SDBO to distribute funds under the loan agreement and SDBO's counterclaim seeking to accelerate payment of the loan debt on account of EALC's default. In 2003, EALC was directed by the French court to repay the loan and $13, 923, 311 in taxes it was to have paid to the City of New York. The French judgment was recognized in this jurisdiction and, in 2005, plaintiff was granted judgment in the principal sum of $95, 837, 522 plus interest of $112, 159, 088.41, which this Court affirmed (CDR Créances S.A. v Euro-American Lodging Corp., 40 A.D.3d 421 [1st Dept 2007]). Plaintiff also instituted a mortgage foreclosure action predicated on EALC's default on the same loan agreement (CDR Creances S.A. v Euro-American Lodging Corp., 43 A.D.3d 45 [1st Dept 2007]).

Also in 2003, plaintiff instituted a tort action asserting six causes of action and, in 2006, a second tort action asserting 38 causes of action — including fraud, fraudulent conveyance and conversion — against the Cohens, Sonia Cohen, various entities alleged to be controlled by them and certain of their employees. These actions were consolidated, and the first discovery conference was held in early March 2008. By way of an order entered August 13, 2008, Supreme Court struck the answers of the Cohen defendants and others for failure to comply with discovery demands, and judgment was entered against them later that month. This Court reversed the judgment, stating that due to the brief period that had elapsed from the initial discovery order and the granting of judgment by default, "reasonable latitude should have been afforded before imposing the ultimate sanction" (62 A.D.3d 576, 577 [1st Dept 2009]). Thereafter, defendants continued to resist discovery orders that this Court found to be generally within the exercise of Supreme Court's discretion (77 A.D.3d 489, 491 [1st Dept 2010] [upholding all directives except production of Maurice Cohen's personal tax returns]).

In April 2010, Maurice Cohen (a.k.a. Mauricio Cohen Assor) and Leon Cohen (a.k.a. Leon Cohen Levy) were arrested by federal authorities for conspiracy to defraud the United States government and subscription to false income tax returns. Joelle Habib and Patricia Habib Petetin Benharbon (Petetin), two sisters who had been in the employ of the Cohen family, entered into agreements with the Justice Department's tax division to provide information, respond to questions and testify before the grand jury and at trial in exchange for the government's promise not to prosecute them for activities in connection with their involvement with Maurice and Leon Cohen. The criminal case was heard in the United States District Court for the Southern District of Florida, and the jury returned a guilty verdict in early October 2010. The testimony given by the Habib sisters at trial revealed a coordinated pattern of deceit calculated to conceal the defendants' ownership of the New York property and the shell corporations to which the proceeds of its sale were transferred. It emerged that, in violation of the loan agreement with SDBO, the defendants had caused the New York property to be sold for some $33 million and, using entities they controlled (both Panamanian), converted the proceeds to their own use and avoided paying taxes on the income derived from the sale by transferring the money first to the Swiss bank account of Blue Ocean Finance and then to the account of Carribean Business Fund, maintained at the same bank. [2]

At sentencing, the District Court found that the Cohens had engaged in criminal activity that "SPANNED THE BETTER PART OF A DECADE OR MORE, INVOLVED NUMEROUS FICTITIOUS ENTITIES, AN ELABORATE WEB OF SHELL CORPORATIONS, AND HEAVY HANDED [treatment] OF A NUMBER [of] LESS SOPHISTICATED FINANCIALLY DEPENDENT EMPLOYEES IN THE SCHEME." The court further found "THAT THE DEFENDANTS MAURICIO COHEN ASSOR AND LEON COHEN LEVY COMMITTED PERJURY." The court noted that they gave false testimony concerning such matters as the ownership of the New York property, the events that transpired at the closing of its sale, the ownership of the shell corporations they controlled, the involvement of various relatives in the operation of those entities and "THE FORGING OF SIGNATURES ON A HOST OF DOCUMENTS."

After the extent of the defendants' misconduct before the courts became apparent as a result of the federal investigation, plaintiff brought the instant motion to strike appellants' pleadings in August 2010. Supreme Court held a full evidentiary hearing to assess whether appellants had perpetrated a fraud upon the court. Appellants elected not to testify, and Maurice and Leon Cohen chose to rely solely on the testimony they had given at their federal trial. Testimony was received from the Habib sisters, who described a coordinated effort to deceive the courts. After hearing the testimony and reviewing the documentary evidence, Supreme Court issued a 17-page, single-spaced decision, in which it concluded, on the basis of clear and convincing evidence, that appellants had committed a fraud on the court. In the first order appealed from, the court granted plaintiff's motion, struck appellants' answers and directed that judgment be entered on default. Following resettlement, the second order appealed from, judgment was entered against appellants in the amount of $135, 359, 331.30 with prejudgment interest from which appellants also appeal.

Appellants challenge the disposition on the grounds that the court applied the wrong standard of proof in holding that they committed a fraud directed at the court warranting the striking of their pleadings and, thus, abused its discretion in imposing the sanction of judgment by default. They further contend that the court erred in directing entry of judgment without conducting an inquest. The short answer to these assertions is that the proof elicited is more than sufficient to establish that appellants engaged in an extensive scheme to suborn perjury and subvert the judicial process; and calculation of the judgment, which is predicated on a foreign judgment recognized in this jurisdiction and affirmed by this Court, is a ministerial matter requiring only computation by the Clerk of the Court (CPLR 3215[a]).

Appellants portray the primary issue on appeal as the evidentiary standard to be applied in deciding if a fraud on the court has been committed. The parties contest whether such misconduct must be "conclusively demonstrated, " as appellants contend (citing Melcher v Apollo Med. Fund Mgt. L.L.C., 52 A.D.3d 244 [1st Dept 2008]).

Appellants' discussion of Melcher places great weight on the statement that "[d]eceit warranting the striking of the answer was not conclusively demonstrated" (52 A.D.3d at 245). However, a cursory examination of the context in which the statement was issued reveals that it does not purport to pronounce an evidentiary standard. Rather, the purpose was to distinguish the circumstances of the matter before us from the authority cited, 317 W. 87 Assoc. v Dannenberg (159 A.D.2d 245, 245 [1st Dept 1990]), in which we concluded that sanctions were supported by " undisputed untruthfulness' on the record" (quoting Smith v Malarczyk, 118 A.D.2d 934, 935 [3d Dept 1986] ["undisputed untruthfulness of defendant's testimony at his examination before trial"]). The words "conclusively demonstrated" in Melcher refer to this Court's finding in Dannenberg concerning the proof of the defendant's misconduct and is not an evidentiary standard as urged by appellants. The holding of the case, insofar as pertinent to the issue before us, is contained in the sentence immediately following: "Whether the destruction of evidence was intentional or merely negligent presents an issue for the trier of fact" (Melcher at 245). The obvious implication is that the issue is appropriate for submission to a trier of fact, which should determine the question as a trier of fact decides most civil questions, by a preponderance of the evidence. Thus, to the extent that Melcher involves an issue to be decided in connection with striking the pleadings of a party responsible for destruction of evidence or withholding evidence, it indicates that the determination rests not on conclusive evidence but on a mere preponderance thereof.

As Supreme Court noted in its decision, "Actions for fraud upon the court are rare" — so rare that the court cited only a single New York case dealing with the subject, in which we stated, "The paramount concern of this Court is the preservation of the integrity of the judicial process" (Koschak v Gates Constr. Corp., 225 A.D.2d 315, 316 [1st Dept 1996] [venue "designated as a result of duplicity... amounts to a fraud upon the court and will not be permitted to stand"]). In this jurisdiction, "fraud upon the court" is a term used to describe the perversion of the judicial process as a result of misconduct by a party or counsel (see Baba-Ali v State of New York, 19 N.Y.3d 627, 634 [2012], citing Black's Law Dictionary 686 [8th ed 2004]). With respect to the imposition of sanctions for failure to comply with discovery orders, the parties have cited no New York case that recognizes any such cause of action or, more precisely, requires that fraud on the court be established before pleadings may be stricken. Furthermore, appellants neither identify any basis for distinguishing the nature of the penalty assessed against them from one authorized under CPLR 3126 nor set forth any reason why a greater quantum of proof should be required to support imposition of the penalty.

Based on the extensive evidence adduced in this matter, Supreme Court did not abuse its discretion in striking the answer (Arts4All, Ltd. v Hancock, 54 A.D.3d 286 [1st Dept 2008], affd 12 N.Y.3d 846 [2009], cert denied __ U.S. __, 130 S.Ct. 1301 [2010]). The ample record is more than sufficient to demonstrate appellants' utter disregard for the judicial process, and while no finding of fraud on the court is necessary to warrant striking the pleadings, appellants' conduct is appropriately characterized as such.

As a result of the federal prosecution of the Cohens, it was learned that they had arranged for false testimony to be given by various deposition witnesses. The Habib sisters testified that the Cohens had suborned perjury by holding planning sessions on various dates, at which they provided the sisters, Robert Maraboeuf and Allegria Achour Aich with written scripts to follow in giving deposition testimony. The scripts specified false answers that were to be provided denying the Cohens' control of the various defendant shell entities, as well as fictitious names of persons who were purported to be in control of those entities ("Francois Lavalle, " "Jim Cox, " "Javier Schrimpf" and others) and the name of a person asserted to have paid the witnesses' legal fees (one "Dahan"). Although they were instructed to destroy the scripts, Joelle Habib retained her copy and furnished it to the court. She further testified that her 2008 affidavit in support of the motion to vacate the judgment against her on default (to which this Court alluded in vacating judgment) was false because Maurice Cohen had told her what to say. Furthermore, contrary to deposition testimony that the individual defendants were all paying their own lawyer, she stated that it was Maurice Cohen who paid the fees.

Testimony was also heard that appellants had submitted a forged document in opposition to a motion by plaintiff. Habib Levy Sibony (Levy), Maurice Cohen's brother-in-law, testified at both the criminal trial and a Florida civil action, in which plaintiff sought to encumber Florida real estate purchased with the proceeds of the sale of the New York property. Levy stated that an HSBC Bank letter portraying him as beneficial owner of Whitebury Shipping Ltd., an offshore bearer share entity used to conceal the proceeds of the original loan, had been forged [3]. He explained that, although his purported signature appeared on the document, he had never been asked whether his name could be used, he never gave Maurice Cohen or anyone else permission to use it, and he was never contacted by HSBC to verify his signature. Levy's disavowal of the signature was corroborated by recordings made in 2007 of his conversations with a bank officer, in which the officer was heard to state that the signature did not appear to be Levy's. Nor did Levy's passport signature match the one on the letter.

The motion to strike appellants' answer and enter judgment by default was originally supported by evidence garnered from the federal criminal trial and the Florida civil trial: the Habib sisters' testimony regarding the subornation of perjured deposition testimony; false 2008 affidavits submitted in connection with the motion to vacate the default judgment against the Habib sisters, Aich and Maraboeuf (which, as noted, this Court had mentioned in reversing Supreme Court's 2008 default order); Levy's testimony concerning his forged signature; and invoices sent to Maurice Cohen for legal representation provided to appellants, thereby contradicting Aich's deposition testimony regarding the source of payment. This evidence was augmented as a result of the hearing conducted by the motion court. The Habib sisters gave testimony consistent with that given during the Florida federal criminal and civil proceedings. Plaintiff placed in evidence the Joelle Habib deposition script, the transcript of Levy's testimony, affidavits from the attorney who handled the closing of the New York property, as well as deposition transcripts, bank records and portions of the record in the Florida civil action. Maurice and Leon ...

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