Roy Reardon and William T. Russell Jr.
Roy Reardon and William T. Russell Jr. ()

This month we address cases concerning the appropriate standard for finding that a litigant has perpetrated a fraud on the court, a court’s authority to dismiss on the basis of forum non conveniens absent a formal motion to do so, and a driving-under-the-influence suspect’s right to communicate with counsel prior to submitting to a chemical breath test.

Fraud on the Court

In CDR Creances S.A.S. v. Cohen, the court determined the appropriate standard for finding that a litigant has perpetrated a fraud on the court. The court, in a unanimous decision by Judge Jenny Rivera,1 adopted the approach taken in federal cases and ruled that a court must find by clear and convincing evidence that a party engaged in a fraud on the court before imposing appropriate sanctions.

This case arose out of the financing of efforts to develop a hotel in New York City as part of the Flatotel chain in the early 1990s. Plaintiff’s predecessor in interest, Societe de Bank Occidentale (SDBO), entered into a partnership with an entity controlled by defendants Maurice Cohen and his son Leon Cohen to develop the New York hotel. SDBO also provided an $82.7 million loan for the acquisition and development of the project. Problems developed between the parties that led to litigation in France resulting in a judgment in favor of plaintiff in 2003 against Euro-American Lodging Corporation (EALC), another entity controlled by the Cohens. In 2005, New York courts recognized this French judgment and entered judgments in favor of plaintiff for $95.8 million and $112.2 million in interest against EALC.

Plaintiff commenced actions against the Cohens and others in New York Supreme Court in 2003 and 2006 in an effort to collect what it was owed. Plaintiff alleged that the Cohens and others conspired to conceal transactions and strip EALC of assets. Plaintiff further alleged that the Cohens sold the New York Flatotel for $33 million and diverted the proceeds to another entity without making any payment on the 2005 judgments.

The 2003 and 2006 actions were consolidated and the parties conducted discovery including depositions in which both of the Cohens testified that they had no involvement in the sale of the Flatotel or the diversion of its sale proceeds and no ownership interest in the various entities involved in the transactions. Before discovery was concluded, however, Maurice and Leon Cohen were arrested and federally charged in Florida with tax evasion in connection with the proceeds from the Flatotel sale and with conspiracy to commit fraud in connection with the New York actions by forging documents and suborning perjury by instructing employees to provide false corroborating testimony at their depositions. The Cohens were convicted of tax evasion and, at their sentencing, the Florida District Court found that they had perpetrated fraud on the New York court.

Plaintiff then moved in the New York action to strike defendants’ pleadings and enter a default judgment pursuant to CPLR 3126. After a full evidentiary hearing, which included evidence that the Cohens had given other deponents a written “script” providing them with false answers to be given at depositions, Supreme Court determined by clear and convincing evidence that the Cohens had perpetrated a fraud on the court, struck the Cohens’ answer and entered a default judgment against them. The Appellate Division, First Department affirmed in a 4-1 decision and the court granted leave to appeal.

Judge Rivera noted the importance of maintaining the integrity of the judicial process but at the same time cautioned that dismissal with prejudice is an extreme remedy that “must be exercised with restraint and discretion.”2 Defendants argued that sanctions cannot be imposed unless a court finds that the evidence “conclusively demonstrates” a fraud on the court. In other words, a court could not make such a finding unless the fraud were admitted or undisputed.

Rivera noted that such a standard would be unworkable in practice, as any party could avoid such a finding simply by denying the truth of the allegations. Instead, the court adopted the standard employed in a long line of federal decisions and determined that sanctions may be imposed where a court finds by clear and convincing evidence that a litigant has perpetrated such a fraud. In this case, the court found that the numerous instances of perjury, subornation of perjury, witness tampering and falsification of documents more than met this standard. Accordingly, the court upheld the striking of the Cohens’ answers and the entry of a default judgment.

Although the standard for finding that a litigant has perpetrated a fraud on the court in New York is now clear, the actual application of this standard will still depend on the unique facts and circumstances of each case.

Forum Non Conveniens

In Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Brothers Company (AHAB), the court affirmed dismissal of a case on the basis of forum non conveniens even in the absence of a formal motion to dismiss.

Mashreqbank (Mashreq), a Dubai bank, and Ahmed Hamad Al Gosaibi & Brothers Co. (AHAB), a partnership Mashreq alleged was headquartered in Saudi Arabia, agreed to a foreign exchange swap of U.S. dollars for Saudi Arabian riyals. Mashreq transferred $150 million to AHAB at Bank of America in New York on April 28, 2009. AHAB, according to Mashreq, agreed to pay Mashreq an equivalent value in riyals on May 5, 2009, but payment was not made.

Mashreq sued in New York. AHAB answered and impleaded in a third-party complaint Maan Abdul Waheed Al-Sanea and Awal Bank BSC, a bank headquartered in Bahrain and controlled by Al-Sanea. AHAB alleged Al-Sanea, an AHAB employee, had engaged in a massive scheme to loot AHAB; that the Mashreq $150 million transaction was part of that scheme; and that by participating in that and other corrupt transactions Mashreq had aided and abetted Al-Sanea’s fraud. AHAB also alleged that Mashreq’s $150 million had been transferred at Al-Sanea’s direction from Bank of New York to Awal’s account at the New York branch of a different bank.

In the Supreme Court, only Al-Sanea moved to dismiss the third-party complaint based on forum non conveniens. No such motion was made addressed to Mashreq’s complaint. The Supreme Court nonetheless dismissed both Mashreq’s complaint and AHAB’s third-party complaint on forum non conveniens grounds.

The Appellate Division, First Department, reversed, with a two- justice dissent, on the basis of the Court of Appeals holding in VSL v. Dunes Hotels & Casinos, 70 N.Y.2d 948 (1988). The Appellate Division found that it was error for Supreme Court to dismiss the complaint in the Mashreq action sua sponte in the absence of a motion to dismiss on forum non conveniens grounds, and that CPLR 327(a) precluded such action. The Appellate Division also held that the dismissal of AHAB’s third-party action was an improvident exercise of discretion. In reaching the later conclusion, the Appellate Division found “that New York has a compelling interest in the protection of the native banking system from misfeasance or malfeasance” and that if AHAB’s third-party complaint were accepted as true, the third-party claim would be governed by New York law.

The two-justice dissent concluded the Supreme Court did not exceed its authority or discretion in dismissing the whole case, found VSL distinguishable and found that New York’s involvement with the transaction was only “peripheral and transitory.”

The court, in an opinion by Judge Robert S. Smith,3 reversed the order of the Appellate Division, found VSL clearly distinguishable and concluded that application of CPLR 327 in this case would be unfair. Moreover, the court concluded the order of the Appellate Division was premised upon two errors of law, to which the court need not defer.

The court also disagreed with the Appellate Division’s view that compelling New York banking interests were involved in the transaction and distinguished J. Zeevi & Sons v. Grindlays Bank (Uganda), 37 N.Y.2d 220 (1975), relied upon by the Appellate Division as a basis for applying New York law to the transaction. The court noted that the mere passage of funds through New York banks does not automatically implicate New York’s “compelling interest.”

Moreover, the court observed that no party was a New York resident, no conduct other than the transfer of funds occurred in New York, no important New York witnesses were identified by any party, New York law did not apply, no property involved in the transaction was located in New York, no related litigation was pending here, no other circumstance supported New York as the appropriate forum for the dispute and there were pending investigations or litigations in foreign countries.

It would appear from the court’s opinion in this case that the court may be sending a message that cases which have inadequate connection to New York, or to issues that could affect New York’s significant concerns, should not be brought here and that the sua sponte application of the doctrine of forum non conveniens should be applied in such circumstances.

Breathalyzer and Lawyers

In People v. Washington, the defendant struck and killed a pedestrian while driving a car at approximately 2 a.m. She admitted to the police she had been drinking beer earlier and she failed field sobriety tests and was accordingly arrested at 2:40 a.m. A lawyer called by her family contacted the police by telephone and reached a police sergeant where the lawyer explained that he represented Jonai Washington and requested that the police be told not to question or test his client. The attorney was told he would be contacted by the arresting officer and the discussion ended at 3:39 a.m.

While the attorney inquiry was proceeding, the police began to process Washington and advised her of her need to have a chemical breath test to determine her blood alcohol content. She was read a consent form for such a test and signed it. She was not informed, however, of her attorney’s call to the police, and she took the test at 3:39 a.m.—the same time that her lawyer’s telephonic discussion with the police concluded.

The test was positive, and Washington was indicted for second-degree manslaughter, second-degree vehicular manslaughter and two counts of driving while intoxicated. Washington later moved successfully in Supreme Court to suppress the results of the breathalyzer test on the basis that it was administered in violation of her right to counsel.

The Appellate Division, Second Department, affirmed, concluding that Washington was not told of the lawyer’s intervention before the test and that the People failed to show that notification to her, if given, would have unduly interfered with the administration of the breathalyzer.

In an opinion by Judge Victoria A. Graffeo for a four-judge majority, affirming the Appellate Division, the court recognized the important law enforcement tool that the breathalyzer test represented in combating the serious crime of driving while intoxicated. It also acknowledged that the test’s utility is time-sensitive, and that to maximize its probative value, it must be administered as close in time as possible to the motor vehicle accident, typically within two hours.

To persuade drivers to consent to such tests and avoid the need for the police to secure a court order, Vehicle & Traffic Law §1194(2)(a) provides that a driver has the qualified right to decline to submit to the test, but only after being warned that a refusal “will result in the immediate suspension and ultimate revocation of the motorist’s driver’s license for one year.” The law further provides that evidence of the refusal is admissible at any subsequent criminal trial.

The majority then explained the court’s earlier decision in People v. Gursey, 22 N.Y.2d 244 (1968), in which it held that if a defendant arrested for driving under the influence of alcohol asks to speak to an attorney before responding to a request to take a chemical test, the police must, absent justification, provide the defendant access to the lawyer if the lawyer is available in person or by immediate telephone communication and that denial of such right requires suppression.

The court explained that under Gursey the suspect’s right to communicate with the lawyer should not extend so far as to palpably impair or nullify the statutory procedure requiring that drivers choose either to take the breathalyzer test or to lose their license. Accordingly, there is no absolute right to refuse to take the test until the attorney is consulted. In short, a driver may confer with his lawyer if it will not “interfere unduly”4 with the timely administration of the test.

Here, the lawyer contact occurred before the test was actually administered, and the majority concluded that the driver’s consent to the test could have been withdrawn after conferring with the lawyer, but she was denied that opportunity. No demonstration was made that notification would have been unreasonable; suppression was therefore appropriate.

A formidable three-judge dissent by Judge Susan Phillips Read argued, among other things, that the time in which a driver can exercise the qualified Gursey right to decline to take the test should be limited to the period before consent was given.

Roy L. Reardon and William T. Russell Jr. are partners at Simpson Thacher & Bartlett.

Endnotes:

1. Judge Sheila Abdus-Salaam did not take part in the decision.

2. Quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991) (internal quotation marks omitted).

3. Judge Sheila Abdus-Salaam did not take part in the decision.

4. Quoting Gursey, 22 N.Y.2d at 227 (internal quotation marks omitted).