The Essentials of a Discovery Proceeding
November 30, 2015
This month’s blog post will address a recent decision by the Appellate Division, First Department, entered in In re Perelman, that helps reiterate and define the parameters of discovery proceedings. The case is interesting not only for its facts and the issues they presented, but for its litigants: Ronald Perelman, of Revlon and corporate raider fame, and James Cohen, the President and CEO of Hudson News, and President of Hudson Enterprises.
The Decedent, Claudia Cohen, a well-known gossip columnist at the time of her death, was the sister of James Cohen, and was Ronald Perelman’s former spouse. She died on June 15, 2007, with an estate amounting to approximately $68 million, survived by her daughter, Samantha, who was her sole surviving heir. Pursuant to the terms of her Will, Claudia, after making some specific bequests, left the residue of her estate to her daughter, in trust, until a stated age, and appointed Mr. Perelman, who was Samantha’s father, as the executor and trustee thereunder.
James and Claudia Cohen were the children of Robert and Harriet Cohen. Robert died several years after Claudia, in 2012, and Harriet is still living. Over the course of his life, Robert amassed a considerable fortune through his ownership and control of a number of family businesses, including Hudson News. James participated in these family businesses for his entire career.
In June 2010, Perelman commenced a discovery proceeding against James Cohen, his two sons, Justin and Robert II, Hudson News Company, and Robert Cohen, seeking information and a turnover of assets allegedly belonging to the Estate of the decedent within the knowledge, possession and/or control of the Respondents. Subsequent to the filing of his initial petition, Perelman amended his pleading in order to, more specifically, assert claims against James Cohen for fraud and undue influence in effectuating transfers of Robert Cohen’s business interests to himself to the detriment of his sister, Claudia, and her estate. The Amended Petition sought, amongst other things, to recover any interest of Claudia in one or more of the various Cohen family businesses, including but not limited to Hudson News, which may have been misappropriated by James.
It is significant that the amended petition failed to identify any specific property that Claudia owned at the time of her death that was being withheld by the Respondents, or any specific property that was converted from her by the Respondents. Rather, it was predicated upon Perelman’s supposition that Claudia owned an interest in the Hudson News group, based upon the allegations against James Cohen, and his desire to test that belief through an examination of the books and records of the company.
It is worth noting that the discovery proceeding came at the heels of multiple proceedings that had been instituted by Perelman in his fiduciary capacity against members of the Cohen family in the New Jersey State and Federal courts, all of which he lost. It is also important to note that in the context of the foregoing litigation, Perelman sought and obtained discovery of more than 2.1 million pages of documents, and conducted 30 depositions. That discovery revealed that the only interest Claudia had owned in the family business during her lifetime was .36% of 1 share of stock of Hudson News, which she sold in 1990.
The Respondents moved to dismiss the Amended Petition arguing that Perelman’s claims were barred by documentary evidence, and on the basis of the statute of limitations, res judicata and collateral estoppel. More specifically, the Respondents claimed that the unequivocal documentary proof established that the Decedent sold her entire interest in Hudson News in 1990, and owned no interest in any other Cohen family business at death. Further, they alleged that SCPA 2103 did not permit an unbridled search for unknown and unidentified assets based on nothing more than a surmise and a possibility that the Decedent may have owned those assets.
Perelman, nevertheless, maintained that he was entitled and duty-bound as fiduciary to determine, amongst other things, whether Claudia transferred her entire interest in Hudson News and was paid in full for that transfer, and whether she held any interest in any of her family’s other businesses. Further, Perelman maintained that SCPA 2103 has been broadly construed so as to allow a “fishing expedition” in order to assist the fiduciary in recovering property or administering an estate.
In an opinion and Order, dated February 15, 2015, the Surrogate’s Court, amongst other things, denied the motion to dismiss finding that the documentary evidence left unresolved questions as to the interest of the Decedent in Hudson News and Hudson Enterprises, that dismissal on the basis of the statute of limitations was premature, since the Amended Petition did not identify a time when any alleged wrong occurred, and that the executor had a responsibility to marshal the decedent’s assets and the right to conduct discovery to satisfy himself and the beneficiaries that he diligently attempted to ascertain the scope of those assets.
Finally, the Court rejected the Respondents’ res judicata and collateral estoppel claims holding that the issues raised by the New Jersey litigation were distinct from those raised in the New York proceedings. An appeal followed.
Although the appeal addressed multiple issues, one of the principal issues was whether SCPA 2103 discovery is tantamount to a fishing expedition, or something more limited in scope.
The Respondents maintained that while discovery pursuant to SCPA 2103 is often labeled a “fishing expedition”, the authorities did not consider it to be a fishing expedition with an unlimited license. Rather, they argued that a discovery proceeding only lies where it is alleged that it relates to specific personal property or money or the value or the proceeds thereof.
On the basis of the foregoing, Respondents claimed that Perelman was simply on a mission to open up the books and records of Hudson News and its related entities rather than pursue estate assets, which he knew did not exist.
Moreover, to this extent, Respondents argued that the documentary evidence (consisting, in part, of the Shareholders Agreement for Hudson News, the decedent’s tax returns, and the balance sheet from her 1993 divorce from Perelman) unequivocally established that the Decedent sold her entire interest consisting of .36% of 1 share in Hudson in 1990, and that she had no other interest at death in the enterprise.
Perelman, on the other hand, argued SCPA 2103 affords a party broad latitude to explore a Decedent’s assets, tantamount to a fishing expedition. Given this scope, it was Perelman’s contention that the burden rested on the Respondent’s to show that regardless of what information might be elicited in discovery, it was inconceivable that the examination could lead to any information that would assist the fiduciary in recovering or administering estate assets.
To this extent, Perelman maintained that the documentary evidence failed to satisfy this burden.
The Appellate Division rejected Perelman’s argument, unanimously reversed the order of the Surrogate, and dismissed Perelman’s claim for discovery.
Notably, on the issue of 2103 discovery, the Court iterated and reminded us all that a fiduciary seeking discovery pursuant to the statute cannot go on an unabridged fishing expedition to search for assets of an undefined nature that he has a hunch belongs to the estate.
Rather, citing the decision in Matter of Castaldo, 180 AD2d 421 (1st Dept. 1992) the Court held that a fiduciary invoking the statute must demonstrate the existence of specific personal property or money which belongs to the estate, or even a reasonable likelihood that such specific property might exist.
Significantly, in this regard, the court held that, in light of the documentary evidence submitted by Respondents, Perelman had failed to satisfy his burden of establishing that the Decedent may have held an interest in the family business after the sale of her stock in 1990. The Court found that Perelman’s contentions that she did hold such an interest were speculative at best.
Perelman made a motion for leave to appeal this result to the Court of Appeals, which application was denied, with costs.
So, at least from the First Department’s perspective, and perhaps the perspective of the Court of Appeals, we are seemingly left with the lesson that unless a petition for SCPA 2103 discovery seeks specific property or money that is in the possession or knowledge of a Respondent, or with reasonable likelihood is in the possession or knowledge of the respondent, the proceeding must be dismissed.