Opinion
Index No. 305424/2008
04-18-2024
S.G., Plaintiff, v. P.G., Defendant.
Counsel for Plaintiff Michael Moscarello, Esq., Attorney at Law By: Michael Moscarello, Esq. Counsel for Defendant Pryor Cashman LLP By: Donald Shuck, Esq. and Matthew Marcus, Esq.
Unpublished Opinion
Counsel for Plaintiff Michael Moscarello, Esq., Attorney at Law By: Michael Moscarello, Esq.
Counsel for Defendant Pryor Cashman LLP By: Donald Shuck, Esq. and Matthew Marcus, Esq.
Ariel D. Chesler, J.
Procedural History
On November 2, 2022, this Court issued an order resolving certain aspects of motions 4 and 5 filed in response to Reports issued by the Special Referee in this matter, and otherwise set the matter down for an evidentiary hearing.
Such hearing was held in July 2023 over two days. The parties stipulated to certain facts, to the entry of various evidence, and to the qualifications of each of their experts - J.H., CPA/CVA/CDFA and M.G., CPA/ABV/CFF.
Post-hearing briefs and affirmations regarding legal services provided were submitted in December 2023.
Brief Background
During the parties' marriage, the Plaintiff started the Project, which turned 1,500 acres of vacant land in [REDACTED Country] into a new city complete with office towers, residential buildings, retail stores, hotels, a museum, a park modeled after [REDACTED] Park and a championship golf course.
As was discussed in the November 2, 2022 Decision, the parties entered into various stipulations collectively referred to as the "Postnuptial Agreement." Pursuant to the Postnuptial Agreement, Defendant was entitled to 10% of the "Net Profit Distribution" from the Project for her lifetime. (Ex. A p.9, ¶10). The Postnuptial Agreement specifically defined "Net Profit Distribution" as "the sum remaining from a "Distribution" net after the "Tax Charge" (as defined below) and after the "Capital Interest Recovery" (as defined below).
"Distribution" was defined as "net earnings received by S.G., directly or indirectly through any entity of which he is a principal, owner, shareholder, or member, emanating from the Project, but not including funds paid as a return of capital or for interest and principal on account of any loans or indentures." (Ex. A p.7, ¶(6)(d)(i)).
At the Hearing, both experts acknowledged there was no return of capital or applicable loan identified during the period 2009-2014.
In relevant part, a "Tax Charge" was defined as "an allowance for the anticipated capital gains or ordinary income taxes payable to S.G. on a taxable Distribution, the rate of which shall be determined by applying applicable Federal and State marginal rates prevailing in the year of Distribution taking into account the deductibility of State taxes for determining Federal taxes." (Ex. A p.7 ¶(6)(d)(iii)).
A "Capital Interest Recovery" was defined as "the interest, accruing at the rate of 8% per annum, compounded annually, attributable to Pam's proportionate ten (10%) percent share of any additional capital contributions that Stan may be required to make to the Project. S.G. shall provide documentation to P.G. supporting the capital call requirement." (Ex. A p.7 ¶(6)(d)(iv)). At the Hearing, both experts acknowledged there were no additional capital contributions by Plaintiff in 2009-2014 so "Capital Interest Recovery" was inapplicable.
The parties also stipulated to the following: 1) the cash distribution amounts received by Plaintiff for the period 2009 to 2014 totaled $9,657,451; 2) Defendant is entitled to a 10% share of the cash distribution amounts or $965,745.10 as a Net Profit Distribution under the Post Nuptial Agreement; 3) Plaintiff paid Defendant the sum of $965,745.10 as an advance for her share of Net Profit Distributions for the period 2009 to 2014 without prejudice; 4) the interest income amounts set forth in the relevant K-1 forms for Plaintiff's businesses total $21,118,240 for the period 2009 to 2014.
On or about February 9, 2017, Defendant filed a motion to enforce the terms of the Postnuptial Agreement and compel discovery to recover her 10% share of the "Net Profit Distribution" from the Project. Plaintiff opposed the 2017 motion and cross-moved for counsel and expert fees on the basis that he would be the "successful party" in the litigation, and thus should be reimbursed for fees and costs. On consent, the discovery issues and Defendant's share of the "Net Profit Distribution" were referred to Special Referee D.S. for mediation and a hearing which was held before the Special Referee on September 17 and 18, 2019.
In his 2019 Report, Special Referee D.S. addressed the same issue before this Court, to wit: whether interest income reported in Box 5 of Schedule K-1s of the Korea Project entity, [COMPANY] (owned 100% by Plaintiff) constituted a "Net Profit Distribution" under the Postnuptial Agreement. Special Referee D.S. determined:
As the K-1 forms show, the interest income went to [COMPANY], an entity of which the parties stipulated Plaintiff owns 99% directly (the other 1% is owned by [CORPORATION]., which is wholly-owned by Plaintiff). Plaintiff's contention that he did not "receive" this income is thus facially implausible. Nor has Plaintiff shown that the interest income should have been excluded from the definition of "Distributions" under the Postnuptial Agreement. The interest income derived from the Project is thus properly included in the "Net Profit Distributions" of which Defendant is owed 10% (emphasis added). (Ex. V, p.7).
Accordingly, Special Referee D.S. awarded Defendant 10% of the interest income reported on the K-1 of [COMPANY], owned by Plaintiff, for the years 2011 and 2014, totaling $3,840,462 of which $384,046.20 was Defendant's 10% share. (Ex. V, p.7). This was in addition to distributions previously stipulated to by the parties and paid by Plaintiff (Ex. V, p.3). The 2019 Report also awarded Defendant $399,541 for attorney and expert fees. (Ex. V, p.10). Thereafter, each party filed a motion to renew and reargue parts of the 2019 Report.
Thereafter, in the 2020 Report, addressing Plaintiff's cross motion to reargue the 2017 Motion (i.e., motion sequence no. 02, which was the subject of the two-day hearing in 2019) the issue of inclusion of interest income among the Distributions which Defendant was entitled to share, the Referee ruled that the cross motion did not "meet the standard of a motion to reargue" (2020 Report, at 5-6). The referee found unpersuasive Plaintiff's argument that the interest income on the Schedule K-1 forms is only an "accounting entry" and not evidence of income received, because Plaintiff failed to "offer any affirmative evidence of his theory that the reported interest income is merely an accounting entry" (id. at 6). Hence, the Referee ruled that "this does not constitute the overlooking or misapprehension of facts or misapplication of law required in order to prevail on a motion to reargue" (id.).
Moreover, while acknowledging Plaintiff's argument that there was no evidence presented at the hearing that interest income appeared on his personal tax returns (because his tax returns were not introduced as evidence), the Referee stated that, under the Postnuptial Agreement, there is "no requirement" that such income appear on his personal tax returns to be considered "Distributions," because Plaintiff "appeared to concede" that income may be deemed a "Distribution," if it is distributed to an entity in which he has an interest, and in this case, the "interest income was to [COMPANY], an entity in which Plaintiff is the 99% owner" (id.).
The Referee also noted that there are tax authorities which indicate that interest income "in Box 5 of a K-1 form should be reported as taxable interest on line 2b of Form 1040 or 1040-SR" and that "such income is considered received or at the very least earned" by the tax filer (id. at 7, citing IRS instructions). The Referee concluded that Defendant met her initial burden of proof because the K-1 forms for tax years 2011 and 2014 indicated that the interest income in Box 5 was attributable to [COMPANY] in which Plaintiff is the 99% owner, and that Plaintiff failed to meet his burden of showing that such interest income "attributable to [COMPANY] was not in fact received by [COMPANY] and/or Plaintiff" (id.).
In the November 2022 order, this Court rejected Plaintiff's argument that "the definition of 'Distribution' requires that he must have "actually received" in hand a payment or transfer, either personally or through a Project entity in which he has an interest, for a Distribution to have occurred." This Court went on to add that: "On its face, the express language for 'Distribution' does not require that a payment or transfer be 'actually received' by Plaintiff, as it simply states that the payment or transfer (or the 'net earnings,' the exact wording used) be 'received by S.G., directedly or indirectly through any entity of which he [has an interest,] emanating from the Project' (Postnuptial Agreement, at 7)."
This Court further noted that the Referee's conclusion that Defendant is owed 10% of the interest income is entitled to deferential treatment due to the definition of "Distribution" and the documentary evidence before the Referee.
However, because there was limited evidence on the interest income issue before the Referee, and in order to give both parties experts an opportunity to explain their views, this Court determined a hearing was appropriate as to interest income in all the relevant years. Thus, this Court held in abeyance any awards related to interest income. In addition, the Court held in abeyance the awards of counsel and expert fees.
Hearing
A. M.G.
In advance of the hearing, M.G. submitted an expert report. In her report, she explained that Plaintiff held his ownership interest in the Project "through a web of multiple pass-through entities that flowed from NSIC and GIK to [Plaintiff], directly or indirectly to through various entities owned or controlled by him, relating to the Project."
In her report, and at the hearing, M.G. reviewed and discussed an organizational chart, which showed the organizational structure of the various pass-through entities that connected to the Project. Critically, she found that "[t]he interest income reported through the web of entities on Schedule K-1's is passed through to [COMPANY], which Mr. G. is a 100% owner" and that "In this case, entities owned or controlled by Mr. G. received (earned) the interest income from the Project and reported same on Schedule K-1's setting forth Mr. G.'s distributive share of this interest income from the Project.
M.G.'s opinion was that:
that interest income was earned from the Project, specifically by NSIC and GIK, and was received or earned by Mr. G. directly or indirectly through the various entities owned or controlled by him. Therefore, such interest income for the period 2009 through 2014, as reported on the various tax documents for Mr. G. and the entities he owned or controlled relating to the Project is a "Distribution" and accordingly a "Net Profit Distribution" as defined in the Postnuptial Agreement for which Ms. G. is entitled to her 10% share.
M.G. found that Defendant's "10% share of interest income received by Mr. G. from the Project, directly or indirectly, through entities owned or controlled by him for the years 2009 through 2014, is $2,111,824."
M.G. testified that she focused her analysis on the interest income received by certain entities based on the Court's prior order.
Based on her understanding of the Postnuptial Agreement, Defendant "is entitled to ten percent of net distributions received directly or indirectly by S.G. from the earnings emanating from the Project." She explained that the definition of net profit distribution in the Postnuptial Agreement did not limit it to cash received, and did not state that it had to flow through any particular box on the K-1 form.
M.G. also explained that if Plaintiff were correct that Defendant were only entitled to a percentage of a Box 19 distribution it would make the "tax charge" language meaningless because Box 19 distributions are not taxable. On the other hand, she stated that interest income is taxable.
M.G. went on to explain that a significant portion of her work involves structuring agreements like the one at issue. If the goal was to limit the definition of a distribution to actual cash received, she would have had the agreement say "exactly that," i.e. "[a]ctual cash received as reported on a taxpayer's K-1." However, pursuant to the parties' agreement, "net earnings would typically mean all of the income item types, such as sales or investment income, dividend income, interest income, all areas of items of income minus any cost or expenses associated with the income."
M.G. further explained the interest income was reported in the various K-1 forms for the various pass through entities, and was ultimately reported in Plaintiff's personal tax returns. She also opined that there is no correlation between interest income that is reported on line five and distributions on line 19 of the K-1.
M.G. disagreed with J.H.'s conclusion that "you can't just look at interest income without looking at interest expense," at least "[n]ot for purposes of interpreting the postnuptial agreement definitions." In any event, she explained that interest expense was accounted for in the ordinary business income box of the K-1, and in her professional opinion "interest expense [has] been accounted for before you get to Box 5, interest income in the K-1."
Although M.G. only looked at the issue of interest income for this hearing, she testified that if they were "starting from scratch" Defendant might be entitled to other categories that fall within net earnings.
On cross-examination, M.G. agreed that the sole issue for the hearing is whether Defendant is entitled to an interest income related award. She agreed that "[t]he fact that [COMPANY] had interest income allocated to it doesn't mean that cash equal to that interest income moved from N.S. and G.I. to [COMPANY]."
M.G. reiterated that had everything been considered in the earlier hearings, she would opine that Defendant receive her share of all shares of income, including rental income and ordinary business income.
M.G. also stated that, in general, partnerships decide each year how much cash to distribute to partners. She believed that is also how the partnerships involved here operated.
In response to questions about the 2011 K-1 issued to [COMPANY], M.G. agreed that in that year there was an ordinary business income loss of $49,735,311, which was greater than any positive amounts in the earnings section of the K-1. She did not account for any net loss because she was only tasked with looking at the interest income. Yet, she agreed that if everything was considered and there was a net earnings loss that Defendant would not be entitled to an award.
She further clarified that although Plaintiff ultimately pays tax on the interest income allocated to his various entities, the interest income itself accrues and resides in the accounts he owns through his entities.
Although M.G. did not look at interest expense she reviewed J.H.'s report which did. She agreed that his report showed that in each year there was negative net interest. However, she opined that Defendant should still receive ten percent of the interest income because the interest expense is accounted for elsewhere in the K-1 or the balance sheet of the entity.
On re-direct, M.G. explained that from an accountant's point of view it is true that interest income is just one component of net earnings. However, ordinary business income, the rental income, any capital gains and losses, and any other expenses or deductions the business Incurs would also be part of net earnings. Neither she nor J.H. calculated all the component parts between 2009 and 2014 because the scope of this hearing was limited to interest income.
She believed Referee D.S. was correct when he found interest income was part of net earnings. She added that if you were to add all the component parts to determine the net earnings that should be done on an annual basis, particularly so you could account for any tax charges.
M.G. prepared an exhibit looking at all the K-1 forms and all the components of net earnings to respond to the questions she had been asked on cross-examination. The exhibit showed there were positive net earnings in 2010 and 2014. In 2010, there were net earnings of $14,287,514 and in 2014 there were net earnings of $20,845,009. Thus, according to M.G., even considering all the components, Defendant would be entitled to 10 % of the net earnings or $3,513,252. That sum is more than $500,000 greater than the monies already awarded to Defendant and the requested award related to interest income. In other words, Plaintiff had benefited from the more limited ruling of Referee D.S.
Gallagher also explained that two entities owned by Plaintiff-N.S. and G.I.-had actually received the interest income.
B. J.H.
In his expert report, J.H. did not contest Plaintiff's ownership and the organizational structure of the entities related to the Project. However, J.H. focused on the actual cash distributions made to [COMPANY] which were reflected in Box 19 of the Schedule K-1 forms issued to the [COMPANY].
J.H. opined that:
Net earnings represent the net of all income and expenses of a business. Interest income is only one component of net earnings (loss). Using interest income and net earnings as separate, standalone calculations for determining Net Profit Distributions, as Ms. G. argues, amounts to double counting...
The M.G. Report's tracing of interest income is just an allocation (on paper) among the Project Entities to the [COMPANY], LLC and eventually S.G. It fails to consider corresponding interest expense associated with loans between the two Project Operating Entities and other interest expense that enabled loan proceeds to generate interest income.
In this regard, he noted:
While "net earnings" is not a defined term in the Postnuptial Agreement, such term is generally synonymous with net income or net profit and is the net of all income (including, among other items of income, interest income) and expenses of a business. A partner/owner's allocable share of income, loss, deductions and other items reflected on such partner/owner's Schedule K-1 is a reasonable approach to adopt in giving meaning to the reference to "net earnings" in the definition of "Distribution" in the Postnuptial Agreement.
Moreover, J.H. claimed that the M.G. report failed to consider corresponding interest expense associated with loans between the two Project Operating entities and other interest expenses that enabled loan proceeds to generate interest income. And, he maintained that interest expense exceeded interest income in all years in the relevant time period.
J.H. further found that "Flow-through entity income is taxed once to a partner/owner when the income of such entity is allocated (on paper) to its partners/owners at the end of the year, whether or not amounts resulting from such income are distributed to them." He added that:
Box 19 of a Schedule K-1 reflects actual distributions of cash and property from a partnership made to the partner/owner to whom the Schedule K-1 was issued. It is the only box of a Schedule K-1 which demonstrates what actual cash and property the partner/owner to whom the Schedule K-1 was issued actually received as a result of his participation in the investment/partnership.
Accordingly, it was J.H.'s opinion that Defendant was only entitled to 10% of any distributions found in Box 19 of the relevant Schedule K-1s.
Regarding interest income, J.H. stated that "The recognition of income by a partner/owner is not always or necessarily accompanied by the actual flow of cash or property distributions to such partner/owner."
At the hearing, J.H. testified that he was aware the parties had stipulated that Defendant was entitled to 10% of the 2011 and 2014 cash distributions that were made to Plaintiff. He did not agree with M.G.'s conclusions and did not believe Defendant was entitled to any interest income related awards.
J.H. explained that a pass through entity does not pay taxes. In describing what appears on the K-1 forms, J.H. said that it would show the allocable share of income deductions, and credits for that specific partner in the partnership, which would include interest income. He noted that while the interest income is actually generated by the operating entities-N.S. and GIK-it filters down to the pass through entities. J.H. further explained that interest income is not necessarily received by the pass through entities but is allocated to it.
J.H. also opined that although Plaintiff's taxes may have reflected an allocable share of interest income and other type of income, this did not mean he actually received cash equal to each of those incomes. He noted that companies consider various needs in determining whether to make any cash distributions to partners.
J.H.'s understanding of the Postnuptial Agreement was that there needed to be net earnings from the Project, and something needed to be received in order to entitle Defendant to an award. For him, this would not include interest income.
J.H. also claimed that the M.G. report incorrectly conflated "earned" with "received" in its analysis. J.H. believed that "received" had to mean cash or something received by an owner. Yet, he admitted that the definition in the Agreement did not use the word "cash."
Next, J.H. described his concern that interest expense was not considered. However, he agreed that it was possible that interest expense was accounted for in Box 5 of the K-1, as argued by M.G.. He found that interest expense had been greater than interest income in each year between 2008 and 2014.
J.H. agreed that interest income is only one component of net earnings, and that making an award on net earnings would entail considering all income and all losses.
On cross-examination, J.H. agreed that Defendant is entitled to ten percent of Distributions. J.H. conceded that cash distributions which appear in Box 19 of a K-1 form on not generally taxable, and thus does not account for the parties inclusion of a tax charge in the Agreement.
J.H. also agreed that Plaintiff owns 100% of [COMPANY] and owned 70% of the operating entities through various other entities.
Discussion
A. Interest Income
It is truly unfortunate that this litigation continues after seven years, and that in all likelihood it will continue for some time at the appellate level. This case is also a reminder that contracts, including Postnuptial Agreements, should be as specific as possible and should be drafted to have a plain meaning in line with the actual desires of the parties.
It must also be noted that it was within the powers of the parties to resolve this entire dispute. As it is, the parties were able to agree and stipulate on certain aspects of the case as outlined above.
It is often said that parties "to a civil dispute are free to chart their own litigation course" (Mitchell v. New York Hosp., 61 N.Y.2d 208, 214 [1984]), and "may fashion the basis upon which a particular controversy will be resolved" (Cullen v. Naples, 31 N.Y.2d 818, 820 [1972]).
Here, the parties have agreed that Defendant is entitled to a 10% share of the cash distribution amounts or $965,745.10 as a Net Profit Distribution under the Post Nuptial Agreement, and that Plaintiff already paid her that amount. They also agreed that the interest income amounts set forth in the relevant K-1 forms for Plaintiff's businesses total $21,118,240 for the period 2009 to 2014.
In this Court's November 2022 interim order, it was made clear that the scope of the hearing would be narrow and would focus only on the interest income issue for the relevant years, and that the issues of counsel and expert fees were held in abeyance pending the hearing. Critically, this means that because of the course the parties have charted and the interim findings of the Court, the parties cannot begin anew and rethink from scratch how they might have argued for the interpretation of the Postnuptial Agreement at a de novo hearing.
The standards for reviewing a Referee's report are well settled in that the report should generally be confirmed where the Referee "clearly defined the issues, resolved matters of credibility, and made findings substantially supported by the record." (Rosenbloom v. Gurary, 59 A.D.3d 274 [1st Dept 2009]; accord Carpet Resources, Ltd. v JP Morgan Chase Bank, N.A., 83 A.D.3d 460 [1st Dept 2011]).
This Court has previously found that Referee D.S.'s conclusion that Defendant is owed 10% of the interest income is entitled to deferential treatment due to the definition of "Distribution" and the documentary evidence before Referee D.S.. The Court has now given the parties an opportunity to have their experts explain their views of interest income, and received into evidence documentation of the total of the interest income in the relevant years, as well as tax returns and critical corporate organizational information. To the extent Referee D.S.'s interest income related awards were not supported by the record, the record has now been supplemented, and now supports such awards. As permitted under CPLR 4403, the Court has ordered an additional hearing and makes new findings.
While the Court generally credits the testimony of both experts, particularly in the areas where they agreed, the Court finds that where there were areas of disagreement the expert opinion of M.G. was far more persuasive, was supported by the record evidence, and tracked the controlling language in the parties' Postnuptial Agreement.
In the November 2022 order, this Court rejected Plaintiff's argument that "the definition of 'Distribution' requires that he must have "actually received" in hand a payment or transfer, either personally or through a Project entity in which he has an interest, for a Distribution to have occurred." This Court went on to add that: "On its face, the express language for 'Distribution' does not require that a payment or transfer be 'actually received' by Plaintiff, as it simply states that the payment or transfer (or the 'net earnings,' the exact wording used) be 'received by S.G., directedly or indirectly through any entity of which he [has an interest,] emanating from the Project' (Postnuptial Agreement, at 7)."
The expert opinion put forth by J.H. strained to add language to the Agreement that is not there. Specifically, J.H. could point to no language in the Agreement requiring that cash or a cash equivalent be received by Plaintiff for a Distribution to have occurred. On the other hand, M.G. convincingly explained that, pursuant to the unique language in the agreement, various categories of earnings received by Plaintiff-including interest income-whether directly or indirectly through any of the entities related to the project, constitute a Distribution, to which Defendant is entitled to her ten percent share.
Significantly, pursuant to the Postnuptial Agreement, Defendant was entitled to 10% of the "Net Profit Distribution" from the Project for her lifetime. (Ex. A p.9, ¶10). The Postnuptial Agreement specifically defined "Net Profit Distribution" as "the sum remaining from a "Distribution" net after the "Tax Charge" (as defined below) and after the "Capital Interest Recovery" (as defined below). The experts agreed that there was no tax charge or capital interest recovery at issue here.
"Distribution" was defined as "net earnings received by S.G., directly or indirectly through any entity of which he is a principal, owner, shareholder, or member, emanating from the Project, but not including funds paid as a return of capital or for interest and principal on account of any loans or indentures."
As M.G. explained, to give meaning to the parties' Agreement, which does not have a narrow or limited definition for net earnings, "net earnings would typically mean all of the income item types, such as sales or investment income, dividend income, interest income, all areas of items of income minus any cost or expenses associated with the income." Further, she noted that it could not be that the language meant only cash distributions shown on Box 19 of the K-1 form, particularly since such distributions are not taxable which would render the "tax charge" clause meaningless. On the other hand, she stated that interest income is taxable.
The evidence also demonstrated, and M.G. explained, that the interest income was reported in the various K-1 forms for the various pass through entities, and was ultimately reported in Plaintiff's personal tax returns. J.H. did not dispute her tracing of the interest income or the ownership structure she explained.
While J.H. claimed that M.G. failed to consider corresponding interest expense, which would reduce any net earnings from interest income, M.G. had a compelling answer. She explained that interest expense was already accounted for in the ordinary business income box of the K-1, and in her professional opinion "interest expense [has] been accounted for before you get to Box 5, interest income in the K-1."
J.H. spent much of his testimony focusing on his view that to be a Distribution cash must be received. In this regard, he opined that although Plaintiff's taxes may have reflected an allocable share of interest income and other type of income, this did not mean he actually received cash equal to each of those incomes. But, J.H. could not strongly relate his opinion to the actual language in the Agreement. Moreover, he ultimately agreed that net earnings include interest income.
Beyond the deference afforded to Referee D.S., and the persuasive views of M.G., based on the plain language of the Agreement interest income must be considered a part of "net earnings." Indeed, "Clear, unambiguous contractual terms must be enforced according to their plain meaning; when the terms are clear and unambiguous, the court cannot look beyond the four corners of the contract A court should not strain to find an ambiguity in contractual terms" (B.D. v. E.D., 218 A.D.3d 9, 14 [citations omitted]; see also Blonder v. Blonder, 171 A.D.3d 1043, 1045 [2d Dept 2019]["Where such an agreement is clear and unambiguous on its face, the intent of the parties must be gleaned from the four corners of the instrument, and not from extrinsic evidence."]).
In other words, there is no basis to read into the Agreement a requirement that Plaintiff receive cash, directly or indirectly. Nor is there is a basis to limit Distribution to what appears in Box 19 of a K-1 form. Neither of these limitations is found within the four corners of the contract. The plain language is broad and does not limit it to any particular categories of income and both experts agreed that net earnings would include interest income. Of course, "courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing" (Keller-Goldman v. Goldman, 149 A.D.3d 422, 424 [1st Dept 2018]).
Notably, as in B.D., the parties were represented by counsel when they negotiated the Agreement, and, had they wanted to limit the definition of Distribution or net earnings they could have done so. They chose not to do so. In fact, M.G. explained that had the intention been to limit it to cash she would have had the agreement say "exactly that," i.e. "[a]ctual cash received as reported on a taxpayer's K-1."
It is also critical that "[a] contract should not be interpreted in such a way as would leave one of its provisions substantially without force or effect" (Strong v. Dubin, 75 A.D.3d 66, 68-69 [1st Dept 2010]). The expert testimony made clear that the tax charge clause would be rendered meaningless if only Box 19 contributions were considered a Distribution as defined by the Postnuptial Agreement.
Ultimately, the agreement is clear and unambiguous, and a reasonable interpretation is that the parties intended that Defendant would receive 10% of net earnings-broadly defined to include all categories of income, including interest income-coming from the Project, and whether or not such earnings were received by Plaintiff directly or indirectly through various entities in which he had an interest.
Plaintiff seeks to negate the logical conclusions reached by the Referee and M.G. regarding interest income by focusing on M.G.'s admission that had this been a de novo hearing with a broader scope, she would have looked at all categories of net earnings, not just interest income, and that in that event, Defendant's award would have been substantially greater than just the interest income and the agreed upon award for Box 19 cash distributions. However, Plaintiff places too much emphasis on this point; M.G. did not testify that awarding interest income alone would be error, and expressed her understanding of the limited nature of the hearing and the posture of the litigation. It is therefore inaccurate to say that M.G. "disproved" Defendant's case, as Plaintiff argues.
The Court finds unavailing the argument that after years of litigation and after various stipulations and agreed upon payments, the Court should conclude that no award is due to Defendant related to interest income. As noted above, the parties charted this course, and the only issue at the hearing was whether an award was appropriate related to interest income. It was not an opportunity to relitigate the entire issue of what awards were due to Defendant from scratch. Significantly, Plaintiff should be pleased that this is the case, as the evidence presented at the hearing demonstrated that if this was a "do over" from the beginning, he would owe Defendant an additional award of approximately $500,000, considering the net earnings based on all categories of income.
There is no merit to Plaintiff's contention that it is appropriate to consider the overall net earnings for the Project over all the years such that he can claim that there is an overall net loss to him, and thus no awards due to Defendant. Indeed, both experts agreed that whether an award is due to Defendant should be calculated on an annual basis. Thus, the proper calculation would be only in the individual years for which there was a net profit or net earnings. Those years-2010 and 2014-have a total net earnings of $35,132,523.
Plaintiff prefers to focus on the opinion set forth by J.H. in his Affidavit prior to the hearing, which he repeated in his report. Specifically, he stresses that J.H. opines that the only box on the K-1 form that evidences distributions to a partner is Box 19. According to J.H., all other entries, including interest income, merely represent allocations of income, and do not evidence amounts equal to the income listed having been transferred to a partner. Yet, this ignores the fact that Plaintiff was obligated to pay taxes on the interest income. More importantly, it ignores the language in the agreement that defines Distributions as "net earnings received by S.G., directly or indirectly through any entity of which he is a principal, owner, shareholder, or member." Thus, even if Plaintiff did not directly earn or receive the interest income, he received it indirectly because it was earned, allocated, and received by various entities which he owned.
Further, although J.H. opined that Box 19 distributions are not actually part of net earnings, the same is of no import, as the parties stipulated that Defendant is entitled to a 10% share or $965,745.10 as a Net Profit Distribution under the Post Nuptial Agreement.
Nor is Plaintiff aided by M.G.'s admission that companies and partnerships make cash distributions to partners based on various needs and considerations. This admission, and her testimony about how she would calculate net earnings if this were a de novo hearing, are inconsequential.
Further, to the extent interest income may have been accrued and held in accounts controlled by the operating entities/partners (in which Plaintiff had an ownership/partnership interest), such income must be considered indirectly received by Plaintiff, and thus something to which Defendant is entitled to a 10% share. Indeed, M.G. said that such entities "absolutely" received the millions of dollars in interest income at issue.
The Court has already confirmed the total amount due to Defendant with respect to those cash distributions found in Box 19-$1,357,461.09. The Court now concludes that the evidence at the hearing supports Referee D.S.'s interest income award, as well as an award based on the interest income for all the relevant years. In sum, based on the plain language of the Postnuptial Agreement and the evidence adduced at the hearing, Defendant is entitled to an award of $2,111,824.00, which is 10% of the total interest income received by Plaintiff, directly or indirectly through entities in which he had an ownership interest.
B. Counsel and Expert Fees
As noted above, the counsel and expert fees awarded by Referee D.S. were held in abeyance pending the conclusion of the hearing. Counsel for both parties have agreed to brief the counsel and expert fee issues in separate submissions, which they have done.
Article VI(32) of the Postnuptial Agreement states:
In addition to any other remedies provided by law, in the event that either party defaults in discharging any of his or her obligations undertaken in this Agreement, then and in such event, after written notice to the defaulting party, pursuant to the provisions of the following section, providing him or her with at least fifteen (15) days to cure same, the aggrieved party shall have the right to sue for the amounts in default or for any other appropriate relief. The successful party in any such suit or proceeding shall be entitled to receive payment from the other party and be reimbursed by said party for reasonable attorneys' fees, experts' fees, expenses and costs.
Further, pursuant to Domestic Relations Law ("DRL") § 238, a court in this situation "may in its discretion require either party to pay counsel fees and fees and expenses of experts directly to the attorney of the other party to enable the other party to carry on or defend the action or proceeding as, in the court's discretion, justice requires having regard to the circumstances of the case and of the respective parties."
Pursuant to both the Postnuptial Agreement and DRL § 238, an award of attorneys' and expert fees in favor of Defendant is warranted.
First, both with regard to the previously confirmed aspects of Referee D.S.'s reports and regarding the interest income issue Defendant is the successful party and is entitled to such fee awards.
It is therefore appropriate to now confirm the fee awards made by the Referee which cover the fees incurred through 2019. Specifically, the Court now confirms the Referee's finding that for the time period through the 2019 report, Defendant should be awarded reasonable attorneys' fees in the amount of $250,000 and expert fees in the amount of $149,541. Contrary to Plaintiff's argument, the Court finds no basis to reduce these awards as excessive or to award a de minimis amount. The fees are supported by the parties' Agreement and the record (see Kosovsky v. Zahl, 96 A.D.3d 420, 421 [1st Dept 2012]).
Defendant next requests an additional award of counsel fees incurred by her prior counsel, A.A., between 2020 and 2023. Specifically, the work involved motion practice before the Special Referee, conferences with Judge M.C. (retired), settlement negotiations, and the CPLR 4403 motion practice before this Court. This request is supported by an affirmation from A.A., a retainer and invoices. Specifically, the Defendant requests an additional $322,977.81. In the Court's discretion, the Court finds it appropriate to award $200,000 for these additional counsel fees incurred by prior counsel.
Defendant also requests an award of counsel fees incurred by Pryor Cashman LLP for services rendered on Defendant's behalf in this case from December 2020 through November 30, 2023 relating to confirmation/rejection of the Special Referee Reports, discovery, the hearing before this Court and the post-hearing submissions, and for expert fees incurred by Adamy Valuations for the preparation of its report and testimony at the Hearing. Specifically, Defendant seeks awards of $329,961.38 for the counsel fees and $104,347.96 in expert fees.
These requests are supported by an affirmation, retainer and invoices. There is no question that Defendant was forced to incur these additional fees to enforce her rights under the Postnuptial Agreement, particularly because Plaintiff was unwilling to settle the matter and the parties forged ahead with the additional hearing.
In the Court's discretion, it is appropriate to award Defendant an additional $250,000 to her current counsel for all their work leading up to the hearing, at the hearing, and including post-hearing submissions. It is also appropriate to award $104,347.96 in expert fees incurred due to the hearing.
The request by Plaintiff for an award of counsel and expert fees is denied in its entirety as not warranted under the terms of the parties Agreement or DRL 238.
Conclusion
For all of the foregoing reasons, it is hereby
ORDERED that that the CPLR 4403 motion of Defendant (motion sequence number 04) seeking a decision of this court (1) to confirm the interest income awarded in favor of Defendant in the referee's Reports, and to modify the Reports with respect to Defendant's request for additional interest income award, is granted in accordance with this Decision and Order; (2) to confirm the counsel and expert fees awarded in favor of Defendant in the Reports, and to award Defendant's request for additional fees incurred during the period not covered by the Reports, is granted in accordance with this decision; and (3) to modify the Report's denial of Defendant's request for a true up or adjustment of the 2008 Net Profit Distribution amount specified in the 2009 Stipulation is denied; and it is further
ORDERED that the CPLR 4403 motion of Plaintiff (motion sequence number 05) seeking a decision of this court (1) to reject the Reports' award of interest income in favor of Defendant, and to deny Defendant's request for additional interest income award, is denied; and (2) to confirm the Reports' denial of Defendant's request for a true up of the 2008 Net Profit Distribution specified in the 2009 Stipulation is granted; and it is further
ORDERED that the CPLR 4403 motions (motion sequences 04 & 05) seeking a decision confirming the Report of the Referee insofar as it granted awards to Defendant based on cash distribution amounts received by Plaintiff, are granted; and it is further
ORDERED that Plaintiff shall pay to Defendant the sum of $2,111,824 for the interest-income related portion of the monies she is owed pursuant to the parties' Agreement; and it is further
ORDERED that Plaintiff shall pay $250,000 in counsel fees and expert fees in the amount of $149,541, in accord with the Referee's award; and it is further
ORDERED that Plaintiff shall pay an additional $450,000 in counsel fees and $104,347.96 in expert fees, in accordance with this Decision and Order.
Any other relief not granted herein or previously in the November 2, 2022 Order is denied.
This Constitutes the Decision and Order of the Court.