A divided state appellate panel has upheld a $135 million default judgment against developer Maurice Cohen and his wife and son in a lawsuit accusing them of misappropriating the proceeds of a loan, finding that the default judgment was warranted because the three had committed fraud upon the court.

The 4-1 Appellate Division, First Department, panel ruled yesterday in CDR Créances v. Cohen, 109565/03, that Manhattan Supreme Court Justice James Yates did not abuse his discretion when he imposed the sanction of striking the Cohens pleadings and entering default judgment against them.

Justice Peter Tom (See Profile), joined by Justices Luis Gonzalez (See Profile), Dianne Renwick (See Profile) and Rosalyn Richter (See Profile), wrote the majority opinion. Justice James Catterson (See Profile) dissented.

The plaintiff in the case, CDR Créances S.A., is the successor to the Société de Banque Occidentale (SDBO), a subsidiary of French bank Credit Lyonnais. In 1990, SDBO agreed to provide $83 million in financing to a company controlled by Maurice Cohen to develop a hotel in Manhattan. The hotel was to be part of a global franchise based on the Flatotel in Paris.

However, in 1992, SDBO refused to continue financing the project because it believed Cohen was misappropriating the money for himself. In 2003, following a decade of litigation, a French court ordered Cohen’s company to pay back the loan. That judgment was never paid.

In 2003 and 2006, CDR filed tort actions in Manhattan Supreme Court against Cohen, his wife Sonia, his son Leon and employees of the family. The actions were later consolidated.

In 2010, Maurice and Leon Cohen were arrested on tax evasion charges. During the tax evasion case, which took place in federal court in Florida, Joelle Habib and Patricia Habib Petetin, two sisters who worked for the Cohens, testified that they had used a network of shell companies they controlled to hide income. The Cohens were each sentenced to 10 years in prison in 2011 and are currently serving their sentences.

In light of the information revealed by the tax evasion case, CDR moved to strike the Cohens’ pleadings in the New York tort case, arguing that they had committed a fraud on the court by concealing their shell companies.

At an evidentiary hearing in 2010, the Habib sisters testified that the Cohens had held multiple meetings with the witnesses in the case to plan false testimony they were to give. The witnesses, including the Habib sisters themselves, planned to deny that the Cohens controlled various shell companies and to provide fictitious names of people who purportedly did control them. Maurice Cohen’s brother-in-law also testified that the Cohens submitted a forged document with one of their briefs.

Justice Yates ruled that the Cohens’ deception was enough to warrant striking their pleadings and enter a default judgment, and the First Department agreed.

Tom wrote yesterday 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.”

He said it was not even necessary to prove fraud on the court to impose the sanction of striking the pleadings.

“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,” he said.

Catterson, in his dissent, wrote that the default judgment should have been vacated and the case remanded to a jury. He said the Habib sisters were not necessarily credible.

“It is incomprehensible that the motion court was able to find fraud on the court simply by crediting only the testimony of two witnesses who essentially admitted that they had lied at every stage of this action,” Catterson said. “Moreover, because the defendants sharply dispute the testimony of those two witnesses and thereby raise material questions of fact, precedent mandates that the issue could only be resolved by a jury.”

“We’re pleased with the decision,” said Douglas Kellner of Kellner Herlihy Getty & Friedman, who represents CDR. “This was an important case because the court has vindicated its authority by striking the pleadings of defendants who seek to undermine the truth-finding process of the court.”

The Cohens are represented by David Pegno of Dewey Pegno & Kramarsky, who could not be reached for comment.

@|Brendan Pierson can be reached at bpierson@alm.com.