Zemel v Horowitz

[*1] Zemel v Horowitz 2006 NY Slip Op 50276(U) [11 Misc 3d 1058(A)] Decided on March 2, 2006 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 2, 2006
Supreme Court, New York County

Alexander Zemel and Rona Zemel, Plaintiffs,

against

Steven A. Horowitz, Carey Kolapski and Dupont Securities Group, Inc., Defendants.



601073/03



For Plaintiff:

Dito & Internicola, LLP

1610 Richmond Road

Staten Island, NY 10304

(Charles N. Internicola)

For Defendants:

Bracken & Margolin, LLP

Attorney for defendant Steven A. Horowitz

One Suffolk Square-Suite 300

Islandia, New York 11749

(Jeffrey D. Powell)

Lederman Abrahams & Lederman, LLP

Attorney for defendant Carey Kolapski

567 Broadway

Massapequa, NY 11758

Sheldon H. Gopstein, Esq.

Attorney for Defendant Dupont Securities, Inc.

185 Madison Ave., 10th Floor

New York, NY 10016

Bernard J. Fried, J.

In this action for fraud, breach of contract, breach of fiduciary duty, unjust enrichment, conversion and negligence, plaintiffs Alexander and Rona Zemel allege that they sold certain securities in order to loan the proceeds to defendant Steven A. Horowitz (Horowitz), and that Horowitz failed to repay the loan. Horowitz denies that any of the proceeds were loaned to him, and claims that plaintiffs sold the stock on his behalf, and that he replaced it a few days later. It is undisputed that, on their tax returns, plaintiffs did not report any gain from the sale of the stock, which would have been required under applicable tax laws had they actually sold the stock, and loaned the proceeds to Horowitz. Instead, plaintiffs represented to the Internal Revenue Service, under oath and subject to the penalty of perjury, that they had sold stock which they subsequently acquired, the equivalent of a "short sale." [*2]

Horowitz now moves, pursuant to CPLR 3212, for summary judgment dismissing the complaint against him, on the ground that plaintiffs are estopped from claiming that they loaned the proceeds of the stock sale to him, because they reported the transaction on their tax returns as a sale, instead of a loan. Defendant Carey Kolapski (Kolapski) cross-moves for the same relief. For the reasons set forth below, both the motion and cross motion for summary judgment are granted.

The following factual background is comprised of facts taken from plaintiffs' complaint, Horowitz's Statement of Uncontested Facts (the Statement),[FN1] and the affidavits submitted by the parties: from August 1997 through 1999, plaintiffs invested more than $250,000 in Creative Technology, LLC (Creative Technology) and its successor companies, in exchange for equity interests therein (Complaint, ¶ 18). As a result of a series of mergers, acquisitions and other transactions organized by Horowitz, plaintiffs' initial equity investment in Creative Technology was converted into stock ownership in CDKNET.COM Inc. (CDK), the successor in interest to Creative Technology (id., ¶¶ 16, 20).

As of March 17, 2000, plaintiffs jointly owned in excess of 187,000 unrestricted common shares in CDK, valued at $1,402,323 (id., ¶ 21). These shares were maintained in an investment account at defendant Dupont Securities Group, Inc. (Dupont), under the supervision and control of defendant Kolapski, a securities broker employed by Dupont (id., ¶¶ 9, 22).

Plaintiffs contend that Horowitz had personally held himself out to them as an experienced and trusted tax advisor, attorney, investment banker and manager of private placements and public offerings, and that plaintiffs have relied upon and/or retained Horowitz as legal counsel involving issues of tax planning and counseling, estate planning and representation in legal proceedings (id., ¶¶ 25-26).

On March 17, 2000, at plaintiffs' request, Kolapski sold 187,000 shares of CDK stock owned by plaintiffs and maintained in their investment account with Dupont (the CDK Shares) (id. ¶ 31; Statement, ¶ 1). The proceeds from the sale of the CDK Shares amounted to $1,402,323 (Complaint, ¶ 32; Statement, ¶ 2).

Plaintiffs allege that, on March 18, 2000, Horowitz contacted plaintiff Alexander Zemel (Zemel) by phone, and informed him that he was aware of plaintiffs' sale of CDK stock; advised Zemel that he "was having problems and needed a large amount of money"; requested that plaintiffs "loan him the proceeds from the [recent] sale of [plaintiffs'] CDK stock"; and offered and represented that he would repay such loan "within a year" (Complaint, ¶ 35).

Plaintiffs contend that Horowitz advised Zemel that there would be no tax consequence in loaning him the CDK stock sale proceeds, because he would structure it so that the tax obligation would be deferred, and plaintiffs would not be required to recognize a capital gain (id., ¶ 36; Zemel Aff., ¶ 6). When plaintiffs expressed concern to Horowitz about a possible tax consequence with respect to plaintiffs' sale of CDK stock, Horowitz advised Zemel that he would contact Dennis Blanco (Blanco), plaintiffs' personal accountant at Citrin Cooperman & [*3]Company, LLC (Citrin Cooperman), as to the appropriate reporting (Complaint, ¶ 37; Zemel Aff., ¶ 6]). Plaintiffs allege that, on March 27, 2000, Horowitz e-mailed Blanco to instruct him as to the treatment and categorization of plaintiffs' CDK stock sale proceeds for tax recognition purposes (Complaint, ¶ 38; Zemel Aff., ¶ 7).

Plaintiffs contend that on April 4, 2000, they agreed to loan Horowitz $1,192,460, subject to the following terms and conditions: (1) the loan was to repaid by Horowitz in full "within a year"; and (2) Horowitz would be required to pay interest, upon repayment of the loan in a lump sum, at the interest rate typically charged/incurred by plaintiffs' company when borrowing funds (the Loan Agreement) (Complaint, ¶ 40; Zemel Aff, ¶¶ 5, 8). Plaintiffs do not, however, attach any documents to the complaint memorializing the Loan Agreement, and there are no allegations that such Agreement was in writing.

Plaintiffs allege that, pursuant to the Loan Agreement, and at Horowitz's request, on April 4, 2000, Zemel instructed Kolapski to (1) transfer $769,810 from plaintiffs' Dupont account into Horowitz's Dupont account; and (2) wire transfer $422,650 into an account that was designated by Horowitz (id., ¶ 41). Zemel asserts that he relied on Horowitz to correctly take care of the tax reporting issues, and because the loan was short-term and was supposed to be repaid in a year, he did not believe he was getting bad advice from Horowitz (Zemel Aff., ¶ 8).

Plaintiffs assert that, unknown to them, on April 27, 2000, Kolapski, at Horowitz's instruction, transferred 246,875 "restricted" shares of CDK stock owned by Horowitz (the Restricted Stock) from Horowitz's Dupont account into plaintiffs' Dupont account (id., ¶ 43). Plaintiffs contend that Horowitz directed and transferred the Restricted Stock into plaintiffs' Dupont account to avoid compliance with the Loan Agreement, so that Horowitz could later claim that the Loan Agreement was somehow repaid with the transfer of the Restricted Stock (id., ¶ 44).

On April 27, 2000, after reviewing plaintiffs' Dupont account statement, Zemel contacted Horowitz, and advised him that the Restricted Stock did not belong to plaintiffs, and should not have been transferred into plaintiffs' account (id., ¶ 45). Plaintiffs contend that Horowitz advised Zemel that the transfer had nothing to do with the Loan Agreement, and that he "would take care of it" (id., ¶ 46).

Plaintiffs assert that, at present, the Restricted Stock is worthless, and that Horowitz has refused to pay the amounts due under the Loan Agreement (id., ¶ 48).

Horowitz contends that the amounts due under the Loan Agreement have not been paid because he "did not borrow money from Plaintiffs and I have denied these allegations in my Answer to Plaintiffs' Complaint" (Horowitz Aff., ¶ 2). Horowitz claims that plaintiffs sold the CDK Shares on his behalf, and that he replaced the shares a few days later. Indeed, Horowitz's tax returns demonstrate that he sold CDK stock and reported the transactions on Schedule D of his tax returns as a gain (id., ¶ 3; Exh A). Horowitz also claims that plaintiffs only sought to recast the transaction as a loan after the CDK stock price plummeted.

Plaintiffs signed and filed a federal tax return for the year 2000 (Statement, ¶ 3 [attached to Aff. of Jeffrey D. Powell as Exh G]). On Schedule D of plaintiffs' 2000 tax return (Powell Aff., Exh C), plaintiffs declared that they sold 187,000 shares of CDK stock on March 17, 2000, for proceeds of $1,402,323 (Statement, ¶ 4). On Schedule D, plaintiffs declared that they acquired 187,000 shares of CDK stock on March 27, 2000, at a higher total price of [*4]$1,411,850 (id., ¶ 5). Plaintiffs reported a net loss on the transaction of $9,527 (id., ¶ 6).

Plaintiff did not report a capital gain on the sale of the CDK shares (id., ¶ 7). By not declaring a gain on the sale of the 187,000 shares, plaintiffs avoided paying a significant sum in income taxes, estimated at approximately $400,000 (id., ¶ 8). Plaintiffs' tax returns were signed by plaintiffs, and filed under penalty of perjury with the IRS (id., ¶ 10).

It is undisputed that Horowitz did not prepare plaintiffs' 2000 tax return but rather, that it was prepared by Blanco, plaintiffs' personal accountant (Horowitz Aff., ¶ 4; see Complaint, ¶¶ 37-38).

Plaintiffs' damages are based on Horowitz's alleged failure to repay the loan, and the possible future damages arising out of an NASD proceeding (id., ¶ 11; see Plaintiffs' Responses to Defendant's Interrogatories, ¶ 23 [Powell Aff., Exh D). The NASD proceeding involving plaintiffs was resolved without liability or damage to plaintiffs (id., ¶ 12; see Horowitz Aff., ¶ 22). Thus, plaintiffs' only remaining claims for damages are based on Horowitz's failure to repay the loan to plaintiffs (id., ¶ 13).

Plaintiffs set forth six causes of action against Horowitz for fraud, breach of contract, breach of fiduciary duty, unjust enrichment, conversion, and negligence (see Complaint, First Through Sixth Causes of Action). Plaintiffs also set forth two causes of action against Kolapski and Dupont for fraud and breach of fiduciary duty (see id., Seventh and Eighth Causes of Action). Plaintiffs contend that all of these causes of action "are predicated on the loan of $1,192,460 to Horowitz" (Pl Mem at 2).

In support of their motion for summary judgment dismissing the complaint, Horowitz and Kolapski argue that plaintiffs reported the transaction at issue on their 2000 tax returns as the equivalent of a short sale,[FN2]sold 187,000 shares of CDK stoc stating that they sold the stock on March 17, 2000, but that they reacquired it on March 27, 2000 at a higher price, thereby reporting a capital loss on the transaction. Plaintiffs did not declare the profits from the alleged sale of the CDK shares as a capital gain, nor did they pay the appropriate income taxes on such gain. Defendants contend that plaintiffs are now estopped, under the doctrine of judicial estoppel, from claiming that they sold the CDK shares and loaned the proceeds to Horowitz, when they, under oath and penalty of perjury, asserted to the IRS that the transaction was something entirely different. Thus, defendants argue, plaintiffs are estopped, as a matter of law, from recasting the transaction in a manner that is inconsistent with their tax returns. [*5]

Plaintiffs assert that judicial estoppel is inapplicable to this action, and that the allegations of the complaint give rise to significant issues of fact, precluding summary judgment.

Judicial estoppel prevents a party from asserting a factual position in a legal proceeding that is contrary to a position previously taken by the same party in a prior legal proceeding (see Bates v Long Island R.R. Co., 997 F2d 1028 [2d Cir], cert denied 510 US 992 [1993]). The purposes of the doctrine are to "preserve the sanctity of the oath" and to "protect judicial integrity by avoiding the risk of inconsistent results in two proceedings" (Simon v Safelite Glass Corp., 128 F3d 68, 71 [2d Cir 1997] [internal quotation marks omitted]). New York courts have recognized that this doctrine seeks "to preserve the integrity of judicial proceedings by prohibiting the successive assertion of factually contradictory statements as the truth" (Tozzi v Long Island R.R., 170 Misc 2d 606, 612 [Sup Ct, Nassau County 1996], affd 247 AD2d 466 [2d Dept 1998] [citations omitted]).

This principle thus precludes a party who assumed a certain position in a prior legal proceeding, and who secured a judgment or order in his or her favor, from assuming a contrary position in another action simply because his or her interests have changed (see Ford Motor Credit Co. v Colonial Funding Corp., 215 AD2d 435 [2d Dept 1995]). "The doctrine is invoked to estop parties from adopting such contrary positions because the judicial system cannot tolerate this playing fast and loose with the courts" (id. [citations omitted]).

It is well settled that the doctrine of judicial estoppel is limited to only those instances where the non-moving party (1) advanced an inconsistent factual position in a prior legal proceeding; and (2) secured a favorable judgment as a result of the inconsistent position (BNP Paribas (Suisse) S.A. v Chase Manhattan Bank, 298 AD2d 167 [1st Dept 2002]; Bono v Cucinella, 298 AD2d 483 [2d Dept 2002).

Although plaintiffs argue that judicial estoppel does not apply to this situation, as plaintiffs' 2000 tax returns cannot be considered a prior legal proceeding pursuant to which they obtained a final and favorable judgment, the cases they cite refer to the most basic form of "judicial" estoppel. However, the form of estoppel that is applicable here is not classic judicial estoppel. The same policies and principles underlying classic judicial estoppel have been extended to non-judicial circumstances by courts throughout the United States, including New York, where parties have been precluded from asserting inconsistent positions in a variety of situations, including positions taken on tax returns.

Accordingly, where, as here, the original position is represented in a context not precisely falling in the "judicial" forum category, the same principles are nevertheless applied, and often designated "quasi estoppel" or "estoppel against inconsistent positions." These estoppel principles forbid a party from receiving the benefits of a transaction or statute, and then subsequently taking an inconsistent position to avoid the corresponding effects. Thus, whether using the appellation of judicial estoppel, quasi estoppel, or estoppel against inconsistent positions, courts have consistently held that a party is estopped from adopting in court a position contrary to that previously asserted on his or her tax returns.

For instance, in Estate of Ginor v Landsberg (1998 WL 514304 [2d Cir 1998]), the Court held that a party who obtained a tax deduction by representing to the IRS on his tax returns that a wrap note was included in a partnership's property was estopped, in a subsequent litigation, from claiming that the note was not a genuine partnership obligation: [*6] [W]e hold the appellants to be estopped from pressing their current interpretation of the wrap note's terms: Having obtained some $14.5 million in tax deductions by representing to the IRS that the wrap note, whose $13.5 million face value was included in the partnership's basis in the properties, was a genuine debt obligation, the appellants may not now represent to this Court that that note was no obligation at all (i.e., that it could be costlessly cancelled at will simply by assuming the genuine underlying mortgages.

Id. at * 1 (citation omitted).

Likewise, in Meyer v Insurance Co. of America (1998 WL 709854 [SD NY 1998]), the plaintiff had applied for and received total disability benefits from the defendant insurer beginning in 1998. On her tax returns, however, the plaintiff stated that she was engaged in the business of options, commodities and future trading, and that she was working full time on those activities. The insurer claimed that the plaintiff was not disabled, and sought a refund of benefits paid. The Court noted that: It has often been stated that cheating on one's tax return is American as apple pie. In this case, plaintiff's statements on her 1992 tax return whether truthful or an example of tax cheating in order to obtain a business expense deduction has cost her a much larger benefit under a long-term disability policy.

Id. at * 1. The Court observed that IRS regulations require that all tax returns contain or be verified by a signed declaration by the taxpayer, under penalty of perjury, and that, by signing her tax return, the plaintiff declared all statements contained therein to be true under penalty of perjury. The Court then agreed with the insurer, and held that the plaintiff was "estopped from now taking a position inconsistent with [her] representations to the IRS" (id. at *10 [citations omitted]).

Similarly, in Naghavi v NY Life Ins. Co. (260 AD2d 252 [1st Dept 1999]), the First Department held that the plaintiff was estopped from adopting a position different from that taken on his tax returns. The plaintiff sued to recover under a disability policy. The insurer showed that it would not have issued a policy of that type to anyone with income under $16,000, and that the plaintiff had misrepresented his income as $100,000, when it was actually less than $16,000. In affirming the trial court's dismissal of the plaintiff's claim, the Court held that the plaintiff was precluded from asserting that his income was more than that which he had declared on his tax returns.

The holdings set forth in these cases are dispositive, and compel estoppel against plaintiffs in the present case. Accordingly, plaintiffs are estopped from claiming to this Court that they sold the CDK Shares and loaned the proceedings to Horowitz when they, under penalty of perjury, asserted to the IRS that they transaction was something entirely different.

In their opposition, plaintiffs cite West 157th Street Assoc. v Sassoonian, 156 AD2d 137 [1st Dept 1989]), a case decided ten years prior to Naghavi, for the proposition that where issues of fact are raised with respect to the position taken on a prior tax return, estoppel is [*7]not applicable. That case, however, is completely inapposite, as there was absolutely no indication that estoppel was even considered by the Court.

Moreover, although plaintiffs contend that there are factual issues with respect to whether Horowitz fraudulently induced plaintiffs to report the transaction at issue in a certain way for tax purposes, plaintiffs have failed to submit any documentary evidence that Horowitz represented and/or counseled plaintiffs with respect to the preparation of the 2000 tax returns, or that Horowitz communicated with plaintiffs' personal accountant to instruct him how to report the transaction. Significantly, plaintiffs have not submitted an affidavit from Blanco, their personal accountant who prepared the 2000 tax returns. In addition, although plaintiffs now contend that the transaction at issue was really a loan, plaintiffs do not proffer any documents evidencing the alleged loan to Horowitz, or offer any evidence that they have amended their 2000 tax returns to reflect such fact.

Accordingly, plaintiffs are estopped from recasting the lynchpin transaction as a loan to Horowitz, and the eight causes of action contained in the complaint, which, according to plaintiffs, are all based on the alleged sale and loan of the proceeds of the CDK stock to Horowitz, must, therefore, be dismissed.

I have considered the remaining claims, and find them to be without merit.

Accordingly, it is

ORDERED that Horowitz's motion to dismiss is granted, and the complaint is dismissed with costs and disbursements to Horowitz as taxed by the Clerk of the Court; and it is further

ORDERED that Kolapski's cross motion to dismiss is granted, and the complaint is dismissed with costs and disbursements to Kolapski as taxed by the Clerk of the Court; and it is further

ORDERED that the Clerk is directed to enter judgment accordingly.

Dated: March 2, 2006ENTER:

_______________________

J.S.C. Footnotes

Footnote 1:Plaintiffs have not contested any of the statements set forth in the Statement, and thus, for purposes of this motion, they are deemed to be true (see Rules of the Justices of the Commercial Division, Supreme Court, NY County, Rule 19-a [c]).

Footnote 2:"The Securities and Exchange Commission has defined the term short sale' as any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or the for account of, the seller'" (Levitin v PaineWebber, Inc., 933 F Supp 325, 327 [SD NY 1996], affd 159 F3d 698 [2d Cir 1998], cert denied 525 US 1144 [1999] [quoting 17 CFR § 240.3b-3]). After the short sale, the short seller must deliver shares to cover the "short" position, which the short seller usually hopes to buy at a price lower than the sale price, and thereby make a profit (see Horowitz Aff., ¶ 11). Plaintiffs reported the transaction on their tax returns as the equivalent of a short sale, stating that they sold the stock on March 17, 2000, but that they purchased it on March 27, 2000 at a higher price, thereby reporting a capital loss on the transaction (see plaintiffs' 2000 tax returns [Powell Aff., Exh C]).