Standing, left to right: Judges Jenny Rivera, Robert Smith, Susan Phillips Read, Sheila Abdus-Salaam, and Eugene Pigott Jr. Seated, Judge Victoria Graffeo and Chief Judge Jonathan Lippman (Skip Dickstein)
ALBANY – Adopting a hard-line position against litigants who engage in deceitful and obstructionist conduct, the state Court of Appeals on Thursday said judges can toss out a case when “clear and convincing” evidence shows that an individual attempted to dupe the court.
“Fraud on the court warrants heavy sanctions, including the striking of an offending party’s pleadings and dismissal of the action,” Judge Jenny Rivera (See Profile) wrote in a 6-0 opinion joined by Chief Judge Jonathan Lippman (See Profile) and judges Victoria Graffeo (See Profile), Susan Phillips Read (See Profile), Robert Smith (See Profile) and Eugene Pigott Jr. (See Profile). Judge Sheila Abdus-Salaam (See Profile) did not take part.
In CDR Creances S.A.S. v. Cohen, 81, the court adopted the “clear and convincing” standard of proof embraced by some federal courts rather than a more stringent standard that the defendants in this case sought. The decision provides a virtual road map on how a fraud-on-the-court finding is made, and the consequences for offenders.
Rivera said the standard applied by the federal courts “is sufficient to protect the integrity of our judicial system and discourage the type of egregious and purposeful conduct designed to undermine the truth-seeking function of the courts, and impede a party’s efforts to pursue a claim or defense.”
The court said that to establish fraud on the court, the non-offender must show that the offender intentionally set in motion a scheme to “hinder the fact finder’s fair adjudication of the case.” However, the court cautioned “dismissal is an extreme remedy” that should be reserved for “particularly egregious” conduct, such as the case decided Thursday.
“Dismissal is most appropriate in cases like this one, where the conduct is particularly egregious, characterized by lies and fabrications in furtherance of a scheme designed to conceal critical matters from the court and the non-offending party; where the conduct is perpetrated repeatedly and willfully, and established by clear and convincing evidence, such as the documentary and testimonial evidence found here,” Rivera wrote.
The case involved a complicated and high stakes lawsuit rooted in a failed Manhattan hotel project more than 20 years ago.
It centered on a loan agreement dating back to the early 1990s and allegations that the defendants, developer Maurice Cohen, his wife and son conspired to avoid repaying by misrepresenting their control over entities that allegedly concealed funds from CDR, the plaintiff. While the civil matter was in discovery, the Cohens were convicted in 2010 of federal tax fraud for failing to report the same funds CDR was seeking to recover. They each were sentenced to 10 years in prison.
After CDR sought a default judgment, then Manhattan Supreme Court Justice James Yates found clear and convincing evidence that the Cohens had committed a fraud upon the court by offering false evidence and concealing evidence. He awarded CDR more than $135 million in compensatory damages, plus about $51 million in prejudgment interest.
The Appellate Division, First Department, affirmed in a 4-1 decision, with a dissenter arguing that a fraud on the court must be “conclusively demonstrated” and that the alleged “deceit must be admitted or undisputed,” a different and higher standard than the federal courts require (NYLJ, Dec. 28, 2012).
But the Court of Appeals agreed with the “clear and convincing” standard embraced by the First Department majority in this case, not the “conclusively demonstrated” standard it used in a 2008 case, Melcher v. Apollo, 52 AD3d 244. It parted with the Appellate Division majority only with regard to Cohen’s wife and said the evidence was insufficient to justify the default judgment against her.
Douglas Kellner, a partner at Kellner Herlihy Getty & Friedman, represents CDR. The Cohens are represented by David Pegno, a partner at Dewey Pegno & Kramarsky.
Also on Thursday, the court issued an important opinion clarifying the legal standard necessary to sustain an enterprise corruption conviction.
In a single opinion deciding People v. Kancharla, 82, and People v. Barone, 83, the 6-0 court said the Appellate Division, First Department, had applied an improper standard in reviewing the sufficiency and the weight of the evidence.
Kancharla and Barone stemmed from an investigation into Testwell Laboratories, a construction materials testing firm.
In 2008, officials at the company were charged with falsifying strength tests and inspection reports for materials used in major construction projects, including the new Yankee Stadium, the Freedom Tower and Jet Blue facilities at JFK Airport. V. Reddy Kancharla, the chief executive officer and owner of Testwell, and Vincent Barone, the vice president of engineering, were convicted at a joint trial of enterprise corruption and other charges.
The First Department vacated the enterprise corruption convictions, finding they were against the weight of the evidence because the prosecution “failed to produce any evidence that either defendant knew that test results and inspection reports were fabricated, much less that the defendants spearheaded a criminal enterprise.”
The court also said that the prosecution did not establish “a leadership structure, overall planning of the criminal enterprise, or any communications between [the defendants and employees] in furtherance of the criminal enterprise.”
On Thursday, the Court of Appeals, in an opinion by Graffeo, said the First Department misapplied the law.
“Direct proof … is not essential to a legally sufficient case of enterprise corruption,” she wrote. “To the contrary, the overall pattern of criminal activity and the involvement of various individuals at all levels of Testwell Laboratories’ corporate structure allowed the jury to infer that Kancharla and Barone, as high-level corporate officers, were aware of, participated in and directed others to commit crimes in furtherance of the Testwell Group’s objectives.”
Graffeo said the prosecution evidence, contrary to the finding of the First Department, was legally sufficient to sustain the enterprise corruption convictions. She said the mid-level panel’s decision that the verdict was against the weight of the evidence “was infected by the same error of law.”
The court sent the case back to the First Department for reconsideration of the enterprise corruption count for a determination of whether the evidence was factually sufficient. It did not disturb the defendants’ convictions on several lesser charges, including offering a false instrument for filing and scheme to defraud.
Amyjane Rettew, an assistant Manhattan district attorney, argued for the prosecution. Zuckerman Spaeder partner Paul Shechtman appeared for Kancharla. Andrew Lankler, previously a partner at Lankler, Carragher & Horwitz and now a partner at Baker Botts, represented Barone.
Manhattan District Attorney Cyrus Vance Jr. said in an interview that the First Department holding had resulted in confusion on the type of cases that would support an enterprise corruption conviction.
“I think the Court of Appeals here significantly clarified the state of the law in three principle respects: not every defendant needs to know all of the other crimes being committed by all of the other defendants; the court does not require direct proof of members communicating and planning the illegal business of the enterprise; and third, criminal enterprise corruption doesn’t only apply when the corporation is wholly or largely devoted to crime,” he said.
Vance said the decision makes clear that a company like Testwell, “a real corporation that did real work,” is susceptible to an enterprise corruption charge
“I think the decision provides important clarification for judges and practitioners, which we have all been waiting for,” he said.
Shechtman said he is “disappointed” in the decision, “but we are heading back to the First Department and hoping to persuade them the conviction was against the weight of the evidence.”
Lankler was not immediately available for comment.