CDR CRéances S.A.S. v. Cohen

• Decision Date: 08 May 2014
• Citation: 23 N.Y.3d 307,15 N.E.3d 274,2014 N.Y. Slip Op. 03294,991 N.Y.S.2d 519
• Parties: CDR CRÉANCES S.A.S., as Successor to Société de Banque Occidentale, Respondent, v. Maurice COHEN, Appellant, et al., Defendants. CDR Créances S.A.S., as Successor to Société de Banque Occidentale, Respondent v. Leon Cohen, Also Known as Leon Levy and Others, et al., Appellants, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

23 N.Y.3d 307
15 N.E.3d 274
991 N.Y.S.2d 519
2014 N.Y. Slip Op. 03294

CDR CRÉANCES S.A.S., as Successor to Société de Banque Occidentale, Respondent,
v.
Maurice COHEN, Appellant, et al., Defendants.
CDR Créances S.A.S., as Successor to Société de Banque Occidentale, Respondent
v.
Leon Cohen, Also Known as Leon Levy and Others, et al., Appellants, et al., Defendants.

Court of Appeals of New York.

May 8, 2014.

[991 N.Y.S.2d 522]

Dewey Pegno & Kramarsky LLP, New York City (David S. Pegno of counsel), for appellants in the first and second above-entitled actions.

Kellner Herlihy Getty & Friedman LLP, New York City (Douglas A. Kellner of counsel), and Lewis Johs Avallone Aviles, LLP, Islandia (Robert J. Cimino and Robert A. Lifson of counsel), for respondent in the first and second above-entitled actions.

OPINION OF THE COURT
RIVERA, J.

In this appeal we conclude that where a court finds, by clear and convincing evidence, conduct that constitutes fraud on the court, the court may impose sanctions including, as in this case, striking pleadings and entering default judgment against the offending parties to ensure the continuing integrity of our judicial system. With one exception, the record on this appeal supports such sanctions, and we therefore affirm, in part, the Appellate Division (104 A.D.3d 17, 957 N.Y.S.2d 75 [1st Dept.2012] ).

I

This appeal arises from fraudulent conduct by defendants during the course of litigation by plaintiff, CDR Créances S.A.S., to recover wrongfully diverted and concealed proceeds of a loan agreement. There is an extensive history of legal actions that is the backdrop for the current appeal, involving numerous individuals and businesses, claims of unlawful money and stock transfers, and charges of manipulation of offshore business entities in furtherance of a conspiracy to conceal funds from plaintiff. Despite the complexities of the various financial matters involved, the focus of the years of litigation is quite simple: the recovery of payment on a loan agreement entered into as part of a hotel business venture. Several of plaintiff's New York legal actions have asserted that defendant Maurice and his son Leon Cohen have conspired to avoid repayment by denying their ownership and control over entities used to conceal the converted funds.

In 1990 Société de Banque Occidentale (SDBO), the subsidiary of a major French bank and plaintiffs predecessor in interest, entered a partnership with SNC Coenson International et Cie (SNC), controlled by defendant Maurice Cohen. The purpose of the partnership was to develop the Flatotel hotel in Paris, France, as part of a worldwide franchise, which SDBO agreed to finance. Later that same year, SDBO and SNC entered an agreement and became shareholders of Euro–American Lodging Corporation (EALC), an American corporation also controlled by defendant Maurice Cohen, for the purpose of converting a Manhattan building into a Flatotel hotel (New York Flatotel). Then, in 1991, SDBO and EALC entered into a loan agreement, governed by French law, whereby SDBO would provide $82,704,990 for acquisition and development of the Manhattan project and EALC would pay property taxes.

Problems developed between SDBO and EALC, and SDBO refused to make any further payments on the loan agreement, alleging that EALC was diverting funds.

[991 N.Y.S.2d 523]

Thereafter, EALC commenced suit in France seeking to compel SDBO to make payments in accordance with the loan agreement, and SDBO counterclaimed to accelerate repayment of the loan debt caused by EALC's default. In February 2003, the French court directed EALC to repay the loan and nearly $14 million in unpaid taxes to New York City, pursuant to the loan agreement. In 2005, the New York courts recognized the French judgment against EALC, eventually entering judgments for $95,837,522 and $112,159,088.41 in interest, respectively.¹ The Appellate Division affirmed the judgments ( 40 A.D.3d 421, 837 N.Y.S.2d 609 [1st Dept.2007] ).

II

As part of its efforts to recover payment of the loan agreement, plaintiff commenced two actions in Supreme Court in 2003 and 2006, based on what plaintiff alleged was an extensive and intricate conspiracy orchestrated to conceal stock transfers and other transactions by Maurice and Leon Cohen. The 2003 complaint alleged breach of contract, fraud, tortious interference with contract, conversion, and unjust enrichment. The complaint named as defendants Maurice Cohen, EALC, and several corporate entities controlled by Maurice which served as alter egos of each other, including Blue Ocean Finance, Ltd. (Blue Ocean), a Panamanian entity; World Business Center, Inc. (World Business), a New York corporation; and several other business enterprises involved in fraudulent stock transfers which were alter egos for and controlled by Simon Elias, a resident of New York and alleged to be the officer and/or director of several defendant entities.² In February 2006, Supreme Court entered a preliminary conference order in the 2003 action directing defendants who had not yet answered to do so.

Plaintiff's 2006 action alleged, inter alia, that defendants Maurice and Leon Cohen conspired with others—whose identities had now been ascertained—to strip EALC of its operating income—the collateral for the loan agreement—and sold the New York Flatotel, in violation of the loan agreement, for $33 million, the proceeds of which were diverted to Blue Ocean without any payment made to plaintiff on the 2005 judgments. Plaintiff asserted claims for fraud, breach of fiduciary duty, fraudulent conveyance, tortious interference with contract, unjust enrichment and conversion. In addition to Maurice and Leon Cohen, plaintiff named as defendants Maurice's wife Sonia Cohen, former chief executive officer of EALC Robert Maraboeuf, former director of EALC Patricia Habib Petetin,

[991 N.Y.S.2d 524]

officer of Blue Ocean Allegria Achour Aich, Maurice's secretary and Petetin's sister Joelle Habib, and several corporate entities controlled by Maurice and Leon Cohen, including Blue Ocean and World Business. Defendants Maraboeuf, Aich, and Patricia Habib failed to appear and a default judgment for $265,865,120.81 was entered against them in January 2008.

In August 2010, plaintiff made separate motions to strike the answers of Maurice, Leon and Sonia Cohen, Joelle Habib, and World Business for failure to comply with discovery obligations in both the 2003 and 2006 actions. Defendants Maraboeuf, Aich and Patricia Habib Petetin appeared and moved to vacate their default in the 2006 action. The 2003 and 2006 actions were consolidated and in August 2008, Supreme Court granted plaintiff's motions to strike and denied defendants' motion to vacate the default judgments. All of the defendants appealed and the Appellate Division reversed, citing the brief period that had elapsed between the first discovery order and the defaults, the magnitude of the judgments and the lack of specific prejudice to the plaintiff (CDR Créances S.A.S. v. Cohen, 62 A.D.3d 576, 880 N.Y.S.2d 251 [1st Dept.2009] ).

Upon remand, discovery resumed in the 2003 and 2006 actions. Defendants Maraboeuf, Aich and Patricia Habib Petetin answered and along with defendants Maurice, Leon and Sonia Cohen submitted to depositions. In the course of these depositions, Maurice and Leon Cohen denied any involvement in the sale of the New York Flatotel or the diversion of funds from the loan agreement. Maurice stated he did not own any of the defendant entities and was not involved in the negotiations and sale of the New York Flatotel. Leon denied that he or any member of his family had any ownership interest in any of the defendant entities plaintiff alleged he and his father controlled. Defendant Sonia Cohen stated that she neither had knowledge of, nor ever participated in, her husband's business ventures. Defendant Aich stated that a man by the name of Jim Cox controlled Blue Ocean, that she had met him in person several times, and that he showed an interest in purchasing the New York Flatotel. She named Francois Lavalle as the person in charge of the New York Flatotel, and she denied any knowledge that Maurice Cohen owned any of the defendant entities. Defendant Maraboeuf denied serving as the chief executive officer of EALC, and further stated that Maurice Cohen did not control any of the defendant entities and that he had not had contact with Maurice in several years.

Before the conclusion of discovery in New York, federal authorities arrested Maurice and Leon Cohen in Florida where they were residing, and charged them with tax evasion in connection with the profits made from the proceeds of the sale of the New York Flatotel, and additionally alleged a conspiracy to commit fraud on the New York court by forging documents and suborning perjury. The indictment specifically alleged that Maurice and Leon Cohen forged and falsified documents, and instructed Habib, Petetin, Aich, and Maraboeuf to give false testimony at their depositions that would corroborate Maurice and Leon Cohen's perjury. The federal charges did not implicate Sonia Cohen as part of the conspiracy.

At trial in the United States District Court for the Southern District of Florida, defendants Habib and Petetin (the Habibs) were the government's key witnesses. In exchange for immunity from prosecution, the Habibs testified to an extensive, systematic effort to conceal from Supreme Court Maurice and Leon's efforts to conceal proceeds from the $33 million sale of the New York Flatotel, and the transfer of

[991 N.Y.S.2d 525]

the proceeds to offshore accounts to avoid taxes. During the federal case, the Habibs also settled with the plaintiff in the New York 2003 and 2006 actions. A jury subsequently convicted defendants of tax evasion.

At the August 2010 sentencing, the District Court concluded that Maurice and Leon Cohen had perpetrated fraud on Supreme Court in New York. The District Court found Maurice and Leon Cohen's...