Court Grants Defendants’ Motion To Dismiss But Also Sanctions Them For Discovery Violations

On December 22, 2023, Justice Margaret A. Chan both granted the motion by certain defendants to dismiss, but also granted plaintiff’s request for sanctions against them. The decision in SG575 Holdings LLC v. Richard Stuyvesant Holdings et al., Index No. 651246/2019, concerned an alleged Ponzi scheme. Plaintiff had deposited $1 million into the escrow account of defendant Pincus Carlebach, a now disbarred attorney, pursuant to a sale/purchase agreement regarding certain real estate, but when the agreement was cancelled, Carlebach had misappropriated the escrowed money. Defendants were parties who had also deposited funds in Carlebach’s account but received their funds back from plaintiff’s $1 million. As to the motion to dismiss, the Court explained:

The Caller Defendants argue that dismissal is warranted under the law of the case doctrine because the allegations against them are "identical" to the allegations the Appellate Division found lacking against the Reliable Defendants.

"[T]he doctrine of the 'law of the case' is a rule of practice, an articulation of sound policy that, when an issue is once judicially determined, that should be the end of the matter as far as Judges and courts of co-ordinate jurisdiction are concerned" (Martin v City of Cohoes, 31 NY2d 162, 165 [1975]). The law of the case doctrine only applies to "legal determinations that were necessarily resolved on the merits in the prior decision" (Sudarsky v City of New York, 24 7 AD2d 206 [1st Dept 1998]).

The law of the case doctrine applies here. The Appellate Division's June 2021 decision affirmed Justice Sherwood's finding that the amended verified complaint failed to state a claim against the Reliable Defendants. The decision was a merits determination against the same Amended Verified Complaint. The allegations against the Caller Defendants mirrors those against the Reliable Defendants, and there are no allegations against the Caller Defendants that do not apply to the Reliable Defendants…. Indeed, the relevant section of the Amended Verified Complaint is subtitled "$500,000 of SH575 Holdings's Funds Taken by Reliable Abstract Co., LLC., Richmond Stuyvesant Holdings, LLC, and The Marcal Group LLC"…. And as shown below, the specific causes of action against the Caller Defendants - conversion (Count 2); actual fraudulent conveyance (Count 7); constructive fraudulent conveyance (Count 12); aiding and abetting conversion (Count 16); quasi contract, unjust enrichment, and money had and received (Count 17); and negligence (Count 18) - are the same as those against the dismissed co-defendants.

And, as to the sanctions, the Court concluded:

Dismissing the complaint does not resolve plaintiff’s sanctions motions. CPLR 3126 (3) provides that if a party "refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed pursuant to this article, the court may make such orders with regard to the failure or refusal as are just," including "an order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party."

While striking the pleading is the remedy in plaintiffs motions for sanctions, given that the complaint against the Caller defendants is dismissed, plaintiffs motions to strike are denied. However, this is not to say that the Caller Defendants' repeated failures to comply with court orders should be condoned. The court has previously sanctioned the Caller Defendants for violating court orders by missing discovery deadlines thrice and failing to produce any ESI, offering no excuse until after plaintiff filed for sanctions (NYSCEF # 181 at 4-5). Yet even after sanctions and the court's repeated warnings that further violations could lead to further sanctions, the Caller Defendants have continued their pattern of ignoring court orders. "If the credibility of court orders and the integrity of our judicial system are to be maintained, a litigant cannot ignore court orders with impunity" (Kilh v Pheffer, 94 NY2d 118, 123 [1999]). Accordingly, the court therefore finds good cause to award reasonable attorneys fees and costs. A monetary sanction of an award of reasonable attorneys' fees and costs is appropriate under CPLR 3126 to compensate counsel for time expended related to a failure to provided discovery (Maxim, Inc. v Feiler, 161 AD3d 551, 554 [1st Dept 2018).

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning the law of the case doctrine or sanctions.