Petition for Writ of Certiorari — Cohen v. Reed

') nove Lea : Supreme Court, U.S.

IN THE JAN

Supreme Cot of the United

October Term, 1989

F. SPANIOL, JR

CLERK

ees

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ROBERT COHEN, individually and as a Partner of

SIMON COHEN REAL ESTATE & MANAGEMENT

CO., SIMON COHEN REALTY CO., SIMON COHEN

COMPANY and ALJER REALTY CO. suing on behalf of

himself and all other partners, both general and limited,

and in the right and on behalf of SIMON COHEN

REAL ESTATE & MANAGEMENT CO., SIMON COHEN

REALTY CO., SIMON COHEN COMPANY and ALJER

REALTY CO.,

Petitioner,

against

ROBERT J. REED, SIDNEY HACKELL, BEATRICE

POTTER and the FIRST NATIONAL CITY BANK, in-

dividually and as Exeeutors of the Last Will and Testa-

ment of SIMON COHEN, deceased, WILLIAM B.F.

WERNER, individually and doing business as MID-IS-

LAND HOSPITAL, JUAN SOTO, ELAINE WILSCHEK,

JIS.K. CLEANING SERVICES, INC., JUDAH FEIN-

ERMAN, JASDANE, INC., SHELDON KATZ, VOLUME

FEEDING, INC., DADGAB, INC., BRIMSCO, INC.,

SIMON COHEN REAL ESTATE & MANAGEMENT

CO.. SIMON COHEN REALTY CO. and ALJER

REALTY CoO.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF THE STATE

OF NEW YORK, APPELLATE DIVISION,

SECOND JUDICIAL DEPARTMENT

Micuar. E. ScHoEMAN

Attorney of record for Petitioner

ScuHoeman, Marsy, Uppixe & WELT

60 East 42nd Street

New York, New York 10165

(212) 661-5030

Question Presented

is the due process clause of the Fourteenth Amendment

violated when, in a derivative action, a state court inter-

venes in a trial to impose a settlement proposed by the

defendants, where neither the sole representative plaintiff

nor his attorney nor the derivative entity has consented to

such settlement?

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Table of Contents

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Certiorari Should be Granted ......................

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IV

Table of Authorities

Cases

Cafeteria & Restaurant Workers v. McElroy, 367

eS ost in sven esd ee eh eh verse cate cick

Lassiter v. Department of Social Services of

Durham County, 452 U.S. 18 (1981) ...............

Logan v. Zimmermann Brush Co., 455 U.S. 404

ER rr Oc ee rear inr e eeh cai eh laa es'«s 4

Constitutional Provision

U.S. Constitution, Amendment XIV ................

Statute

N.Y. Partnership Law, § 1l5-a ......................

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Introduction

Petitioner Robert Cohen, individually and as a partner

of Simon Cohen Real Estate & Management Co.

(“SCREAM”), Simon Cohen Realty Co. (“SCR”), Simon

Cohen Company (“SCC”) and Aljer Realty Co. (“Aljer”),

respectfully prays that a writ of certiorari issue to the

Appellate Division, Second Judicial Department, of the

Supreme Court of the State of New York to review its

judgment and opinion entered in this proceeding on May

5, 1986.

Opinions Below

The opinion of the Appellate Division is reported at 120

A.D.2d 480, 501 N.Y.S.2d 685 (2d Dept. 1986) (mem.) and is

reproduced at A-i. The Appellate Division's order affirmed

a settlement decree of the Surrogate’s Court of the State of

New York, in respect of which an opinion was rendered by

Radigan, Surr., on April 27, 1984. The Surrogate’s opinion is

unreported and is reproduced at A286.

References are to pages of the Appendix annexed to the

petition. |

Jurisdiction

The judgment of the Appellate Division, affirming a

settlement decree of the Surrogate Court, was entered on

May 5, 1986. Timely petitions to the Court of Appeals of the

State of New York for leave to appeal to that Court were

filed by the petitioner herein. Three of such petitions were

dismissed for lack of jurisdiction in that, under the Consti-

tution of the State of New York, the judgment appealed

from was not a final order and therefore not appealable to

the Court of Appeals. These dismissals were rendered

without opinion and are reported at 68 N.Y.2d 807, 506

N.Y.S.2d 1037 (Sept. 16, 1986); 69 N.Y.2d 1038, 517 N.Y.S.2d

1031 (June 4, 1987); and 70 N.Y.2d 899, 524 N.Y.S.2d 427

2

(Dec. 17, 1987); and are reproduced at A40L, A403 and A408.

On May 9 and 10, 1988, the Surrogate’s Court entered a

supplemental decree (A455) and an order (A458) which

resolved the remaining issues under its earlier decree and

apparently satisfied the New York constitutional require-

ment of finality. Petitioner then moved again for leave to

appeal to the Court of Appeals and that motion was denied

by the Court of Appeals on October 26, 1989, without

opinion. Such denial is not yet officially reported and is

reproduced at A463. This Court’ certiorari jurisdiction

is invoked under 28 U.S.C. § 1257.

Constitutional Provisions

The Fourteenth Amendment to the United States Con-

stitution provides, in relevant part:

...nor shall any State deprive any person of life,

liberty, or property, without due process of law;...

Statutory Provisions

Section ll5-a of the Partnership Law of New York

provides, in relevant part:

1. An action may be brought in the right of a limited

partnership to procure a judgment in its favor, by a

limited partner, additional limited partner, or a

substituted limited partner.

~ * *

4. Such action shall not be discontinued, compro-

mised or settled, without the approval of the court

having jurisdiction of the action. If the court shall

determine that the interests of the limited partners,

additional limited partners or substituted limited

partners, will be substantially affected by such

discontinuance, compromise or settlement, the

court, in its discretion, may direct that notice, by

3

publication or otherwise, shall be given to the

limited, additional or substituted limited partners

whose interests it determines will be so affected; if

notice is so directed to be given, the court may

determine which one or more of the parties to the

action shall bear the expense of giving the same, in

such amount as the court shall determine and find

to be reasonable in the circumstances, and the

amount of such expense shall be awarded as special

costs of the action and recoverable in the same

manner as statutory taxable costs.

Statement of the Case

Petitioner Robert Cohen sued individually and on behalf

of four partnerships, SCREAM, SCR, SCC and Aljer, in

Surrogate’s Court, Nassau County, New York for an

accounting, reformation of a lease and other relief. The

complaint was based, in part, on the misappropriation of

income from the four partnerships by the deceased man-

aging general partner, Simon Cohen, acting in conjunction

with the various individual and corporate defendants. The

misappropriation also took the form of interest-free loans

to the general partner as well as various schemes for

siphoning income by assigning the right to perform

various services used by the partnerships to certain of

the defendants.

The two principal partnerships, SCR and its successor

SCREAM, leased premises in Bethpage, New York to Dr.

William Werner, starting in 1960. Under the lease arrange-

ments, Dr. Werner operated a medical facility known as

Mid-Island Hospital as a sole proprietorship at that site

and agreed to pay the net profits of the Hospital to these

partnerships as rent.

The Hospital was actually operated not by Dr. Werner,

but by Simon Cohen, as the Hospital’s managing director.

Because Simon Cohen was also the general partner SCR

and then of SCREAM, he should have vigilantly protected

4

the interests of those partnerships for whom he was a

fiduciary. Instead, with the active assistance of many of

the defendants, he improperly diverted hospital income

for his own purposes and those of other defendants,

thereby sharply reducing the rent paid to the part-

nerships. For example, in 1963, Simon Cohen caused the

hospital to grant a concession for its gift shop, snack bar,

vending machine and television rental services to his own

cronies and caused the hospital to overpay for the services,

to the prejudice of the rental income paid to the

partnerships.

Also in 1963, Simon Cohen caused the hospital to “sell” to

another Simon Cohen crony a cobalt machine that the

hospital purchased a few months earlier, and thereafter to

contract with the owner of the machine for its use. Profits

from use of the machine were thereby diverted from the

hospital and in turn from SCREAM; instead they wound

up with another of Simon Cohen’ close friends.

In 1964 the hospital’s food services were spun off to

respondents Volume Feeding Inc., an entity owned and

operated by cronies of Simon Cohen, which then over-

charged the hospital for its purported food services.

Similarly, in 1967 the hospital entered into an agreement

with J.S.K. Cleaning Services, Inc., a newly-formed corpo-

ration, whereby J.S.K., using the hospital’ own former

cleaning employees, was to provide maintenance services.

J.S.K.'s profits on the maintenance contracts were then

siphoned off to benefit Simon Cohen by having J.S.K.

perform maintenance contracts for other entities owned

by Simon Cohen.

In addition to using these siphoning devices, Simon

Cohen also diverted income during the period 1965

through 1970 by borrowing millions of dollars, in approx-

imately 200 separate transactions, from SCREAM, SCR,

SCC and the Hospital. No interest was ever paid by Simon

Cohen for use of these funds and no accounting was ever

rendered by him. Many of these borrowings were paid at

year-end, and the funds reborrowed at the start of the

oO

succeeding year, in order to avoid disclosure of the loans on

year end balance sheets of the partnerships and the

hospital.

Robert Cohen’s amended supplemental complaint

asserted 17 causes of action. The first sixteen causes of

action were asserted on behalf of the partnerships’ and

alleged that Simon Cohen borrowed funds from the part-

nerships without paying interest, disclosing the facts or

obtaining the consent of his partners. They alleged that

Simon Cohen had created various satellite companies,

which he placed in the hands of trusted nominees, and

manipulated their dealings for his purposes to the preju-

dice of his partners. They also alleged that the executors of

the Estate of Simon Cohen attempted to cover un this

misconduct by issuing false financial statements, testify-

ing falsely and concealing the facts.

The action was commenced in Supreme Court, Nassau

County, on August 13, 1971 and thereafter transferred to

Surrogate’s Court, Nassau County, on November 24, :97L

After a lengthy period of discovery, the trial commenced in

Surrogate’s Court on March 4, 1980 and extended for 55

trial days until October 22, 1981

At that point, before petitioner had rested, the Surrogate

intervened to force a settlement. The Surrogate refused to

set any further trial dates and pressed the parties to agree

to settle the case.

While the case was in limbo—with the trial stalled by

the Court—a dispute then arose between petitioner and

his then counsel of record, Stephen Hochhauser. Petitioner

then moved in March 1983 for an order substituting new

counsel and Hochhauser countered with a cross-motion

sceking removal of Robert Cohen as a representative

plaintiff on the ground that Cohen had allegedly had a

conflict of interest. To resolve the substitution application

and Hochhauser'’s claim, the Surrogate held four days of

evidentiary hearings in the Fall of 1982, at which both

‘A seventeenth cause of action, asserting Robert Cohen's claim to be a

general partner cf SCREAM, was withdrawn with prejudice in 1985.

6

Robert Cohen and Hochhauser testified extensively. The

result was a decision by the Surrogate dated January 18,

1983 in which he determined that the substitution should

be made and that Hochhauser’s charges of conflict of

interest should be dismissed.

However, before these issues were decided and while

Hochhauser’s unfounded charges were still pending, the

Surrogate requested on December 17, 1982 that the defen-

dants present a settlement proposal. The defendants then

delivered such a proposal to the Surrogate, ex parte, and

on January 24, 1983 the Surrogate distributed notice of this

proposal to the limited partners of the various limited

partnerships. Only when he received this notice did

Robert Cohen learn of the terms of the defendants

settlement proposal.

Responses from the limited partners to the Surrogate’s

notice came only from holders of a small minority of the

partnership interests. Like defendants’ proposal, these

responses were received by the Surrogate ex parte; they

were not disclosed to Robert Cohen until May 1983, after

he learned of them and objected to their secret nature. The

Surrogate then directed that a hearing be held on May 24,

1983 at which Robert Cohen and those who had objected

show cause why the proposed settlement should not be

approved.

At the May 24, 1983 hearing, the defendants presented

no evidence in support of their proposal. Nevertheless,

instead of dismissing the proposed settlement, the Surro-

gate on June 22, 1983 requested certain modifications to

the proposal, indicating that these had been suggested by

some of the limited partners’ earlier written responses.

The defendants then responded by indicating their accep-

tance of these certain modifications. Thereafter on Janu-

ary 6, 1984, the Surrogate proposed further modifications

and gave the defendants time within which to consider

and accept or reject them. Again the defendants accepted.

The now twice modified settlement proposal was then

approved by the Surrogate in a decision dated April 27,

‘

1984 and was formalized in an order entered November 27,

1984. As approved, the settlement, although twice modi-

fied, was still similar to the defendants’ December 1982

proposal.

In essence, the settlement decree provided that all of

Robert Cohen’ 16 derivative causes of action were dis-

missed, claims for an accounting or other relief were

foreclosed, the defendants were to pay the partnerships

approximately $500,000 (an amount that was less than

Cohen’ actual litigation expenses) and the partners were

granted some limited inspection rights for the future.

Throughout the period from December 1982, when the

Surrogate requested the settlement proposal for the defen-

dants, to November 1984, when he approved the proposal,

Robert Cohen vigorously objected to the Court's procedure

and to the proposal itself.

The claim of violation of due process was raised before

the Surrogate in a motion for a new trial made on January

3L 1984 at pp. 9, 10 and 19 of the supporting affidavit and p. 5

of the supporting memorandum. For example, in the

supporting affidavit, at p. 19, petitioner said:

“Because my rights to a speedy disposition of

the case have been and continue to be violated,

because there is scant of the trial before Judge

Radigan being completed expeditiously, because

the delay has prejudiced my rights to a fair trial

and because I have been denied due process, the

Court should order a new trial.”

The due process claim was also raised in petitioner's brief

on appeal to the Appellate Division, inter alia at p. 38-41

“In every case known to counsel in which a

class action or derivative action settlement has

been approved, an actual settlement agreement

was agreed to by either a representative plaintiff

or a representative plaintiffs attorney. Counsel

8

have found no class action or derivative case, nor

have any been cited by the Surrogate, in which a

settlement was imposed without such an actual

agreement.

* ” ”

In approving the settlement proposal over

Robert Cohen’s objection and without an agree-

ment among counsel, the Surrogate disregarded

the principle that one side’s settlement proposal

may not be imposed on the other side without its

consent.”

The issue was also raised in petitioner's fourth motion

for leave to appeal to the Court of Appeals at pp. ll and 12 of

the supporting affidavit.

Certiorari Should be Granted

Certiorari should be granted because the order of the

Appellate Division violates the due process rights of

petitioner. It establishes a completely new—and

improper—procedure for the settlement of derivative

actions, in violation of the fundamental rule that a

settlement requires the consent of the parties on both

sides. The Appellate Division’s order is completely without

precedent. We believe it is the first reported appellate

decision anywhere, whether in New York, other states or

the federal system, in which a settlement is imposed in a

derivative case even though neither the sole represen-

tative plaintiff nor his counsel (nor the entity on whose

behalf suit is brought) has agreed to the settlement.

Due process expresses the requirement of “fundamental

fairness” and is not a mere technical conception. Lassiter v.

Department of Social Services of Durham County, 452 U.S.

18, 24 (1981); Cafeteria & Restaurant Workers v. McElroy,

367 U.S. 886, 895 (1961).

The constitutional guarantee of due process recognizes

that minimum procedural requirements are a matter of

9

federal law and are not diminished by the fact that the

state may have its own procedures that it may deem

adequate for determining the preconditions to adverse

official action. Logan v. Zimmermann Brush Co., 455 U.S.

404, 432 (1982). As a matter of federal constitutional law,

the state may not finally destroy a property interest

without first giving the putative owner an opportunity to

present his claim of entitlement. Jd. at 434. While the

nature of the required hearing will depend on the appro-

priate accommodation of the competing interests involved,

id., where the state acts only as the adjudicator of a

genuine and well-founded dispute between private parties,

its interest in terminating a private litigant’s right to a trial

is minimal. And where the trial is already in progress, the

state has no valid interest in terminating the trial by

imposing an involuntary “settlement” simply because the

proceedings prove to be lengthy or the issues are dis-

covered to be complex.

The procedure followed by the Surrogate in this case

violates petitioner’s due process rights because he, not the

trial court, has the right to conduct the litigation on behalf

of the partnerships and to negotiate settlements. Under

the Appellate Division decision, the trial judge was permit-

ted to substitute his view for the view of both the

representative plaintiff and his counsel, even where, after

an extensive hearing, the court has rejected allegations

that the representative plaintiff was acting improperly.

The Appellate Division decision erroneously relies upon

the court-solicited “consent” of some of the limited part-

ners, none of whom is a party or representative plaintiff, or

otherwise appeared in the proceeding. These limited part-

ners, as non-parties, have no fiduciary responsibility for

the course of the litigation and have no power to reach a

binding settlement agreement. State courts cannot cir-

cumvent the rights of a party to conduct litigation by the

device of soliciting such “consents” from non-parties

whose interests are indirect and whose knowledge is

highly limited. Although in class actions lower courts have

10

held that approval by class members is a relevant, albeit a

minor, factor in evaluating a settlement, prior to the

decision below no court had ever held such approval to be

sufficient to create a settlement agreement in a derivative

action where neither the representative plaintiff nor his

counsel nor the entity they represent had agreed to the

defendants’ proposal.

The Appellate Division attempted to support its decision

by referring to allegations of Robert Cohen's supposed

conflict of interest. But the Surrogate had already ruled

that those charges were not substantiated and should be

dismissed. (A205).

Due process does not permit a trial court to impose on

petitioner, as the sole representative, a settlement that

neither he nor his attorney nor the plaintiff he represents

has agreed to. Unless there is an actual settlement

agreement negotiated between the parties (and not simply

a proposal by the defendants which is “consented to” by

some non-party beneficiaries), the procedure approved by

the Appellate Division deprives this petitioner, and threat-

ens to deprive all similarly situated representative plain-

tiffs, of the right to a fair hearing.

The Appellate Division’s unconstitutional determination

has broad implications both for the state and federal court

systems. It effectively means that the trial courts are

empowered in derivative actions to disregard the wishes of

the parties and their lawyers on one side of the table and

to impose settlements proposed by the other side. To be

sure, the Surrogate did solicit the views of non-parties who

had interests in the partnerships. But they were not

partie, had no fiduciary obligations, and were not in any

position to evaluate the case properly.

Unlike a class action, where settlements have been

imposed over the wishes of class members, those class

members have the right, mandated by the due process

clause, to opt out of the settlement. Here, Robert Cohen,

the only plaintiff on behalf of the partnerships, had no

right to opt out, but was forced by the Surrogate and the

ul

Appellate Division to abide by a settlement to which he

and his lawyer vigorously objected.

This case is unlike a few lower court cases where the

views of one or more nominal representative plaintiffs

were overridden because they were not the real parties in

interest. In this case, the real party in interest is Robert

Cohen. Not only did he serve as the sole representative

plaintiff, but he also paid well in excess of $600,000 in legal

fees in support of the litigation and he actively partici-

pated in reviewing all papers, preparing for all hearings

and deciding upon the relevant legal strategies. In no

sense was he a nominal plaintiff and therefore when his

rights to a trial were abrogated without his assent or the

assent of his lawyer, he suffered a direct injury to his

constitutional rights as a litigant.

Review is needeu to prevent a miscarriage of justice.

Overwhelming evidence of waste and fraud by the defen-

dants was established during the trial. Vast sums were

taken from the partnership by Simon Cohen as interest-

free loans. Other vast sums were siphoned out of the

partnerships income stream through the use of service

companies created for Simon Cohen’ cronies. Yet without

the consent of the sole representative plaintiff or his

counsel, a settlement was imposed in which the recovery

by the partnerships will be less than the actual legal fees

paid by the representative plaintiff and where the clearly

established malfeasance of the defendants is excused

without any accounting.

The Supreme Court of the United States has never

directly addressed the question of the power of a court in a

derivative action to impose a settlement in the absence of

an agreement among the litigants. Because the Appellate

Division’s decision is a significant precedent with nation-

wide implications and because it resulted in a denial of due

process and a miscarriage of justice, this Court should

grant certiorari to consider the question presented.

12

Conclusion

For the foregoing reasons, petitioner respectfully prays

that his petition for a writ of certiorari be granted.

Dated: January 22, 1990

MICHAEL E. SCHOEMAN

Attorney of record for petitioner

SCHOEMAN, MARSH, UPDIKE & WELT

60 East 42nd Street

New York, New York 10165

(212) 661-5030