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New York Appeal to Vacate Settlement

                                 To Be Argued By: Susan Chana Lask, Esq.

Bronx County Clerk’s Index No. xxxxx/02

New York Supreme Court

APPELLATE DIVISION----FIRST DEPARTMENT

______________________________________________

LANETT DANIELS, 

Plaintiff-Respondent,

-against­

CONCOURSE ANIMAL HOSPITAL,       

STEVEN M. Smith & DAVID MILLER,

Defendants-Appellants.

BRIEF FOR DEFENDANTS-APPELLANTS

LAW OFFICES OF SUSAN CHANA LASK

Attorneys for Defendants-Appellants

                                                                                                                                             244 Fifth Avenue, Suite 2369 New York, New York 10001  

(212) 358-5762

REPRODUCED ON RECYCLED PAPER

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TABLE OF CONTENTS

Page No.

I. QUESTIONS PRESENTED............................................................           1

II. NATURE OF THE CASE..............................................................             1-3

III. ARGUMENT................................................................................            4

A.            THE LOWER COURT ERRED AS A MATTER OF LAW TO ENFORCE A SETTLEMENT THAT APPELLANTS’ COUNSEL ENTERED INTO WITHOUT APPELLANTS’ AUTHORIZATION, WHEN APPELLANTS WERE NOT PRESENT, UPON TERMS APPELLANTS EXPRESSLY REJECTED AND WITHOUT INQUIRY... 4-7

i. The Lower Court Erred in Denying Appellants’ Order to     Show Cause Alleging Fraud by Counsel When There was No Affidavit Submitted by a Party With Actual Knowledge Opposing Appellants Affidavit of Facts................................ 7-9

B.            SETTLEMENT TERMS DENOMINATING THE TOTAL SETTLEMENT OF $95,000.00 AS EMOTIONAL DISTRESS TO AVOID FEDERAL, STATE & LOCAL TAXES ARE ILLEGAL TERMS AND VOIDS SETTLEMENT .............................................. 9-13

IV. CONCLUSION........................................................................ 14

Printing Specification Statement .............................................. 15

Proof of Service ...................................................................... 16

TABLE OF AUTHORITIES

CASES CITED PAGE(S)

Bright v. Bechtel Petroleum, Inc.,    780 F.2d 766 (9th Cir.1986)................... 12

 Carmine v. Murphy, 285 N.Y. 413 (1941).......................................12

Duse v. IBM Corp., 252 F.3d 151(2d Cir, 2001)................................. 13

Hallock v. State of NY, 64 NY2d 224(1984).................................................. 5-7

Kaufman v. Cohen, 307 A.D.2d 113, 120, 760 N.Y.S.2d 157................. 7

Mazella v. American Home Construction Co., 211 N.Y.S. 2d 131(1st Dept, 1961)........................... 5-6

Sabia v. Mattituck Inlet Mar. and Shipyard, Inc.,

                    24 A.D.3d 178 (2005).......................................... 12

Solomon v. Gilmore, 248 Conn., 769, 785, 731 A.2d 280, 289 (1999).............. 13

Stone v. Freeman,

298 N.Y. 268, 271 (1948).............................. 12

United States v. Burke,

          504 U.S. 229, 233, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992).....  11

 

Whitney Holdings, Ltd. v. Givotovsky,

           988 F.Supp. 732, 748 (U.S. Dist., S.D.N.Y.)............. 7

STATUTES

Internal Revenue Code 26 U.S.C. §61(a)....................................... 11

26 USC §104(a)(2) ................................................... 11

26 U.S.C. § 3402(a)(1).............................. 12

26 U.S.C §3403.......................................... 12-13

I. QUESTIONS PRESENTED

1                 Did the Lower Court commit reversible error by denying to vacate a stipulation of settlement that was agreed to by counsel without his client present and without any contact made to his client confirming his consent before the settlement was spread on the record?

2                 Can this or any court permit a settlement agreement predicated upon the illegal motive and terms to avoid paying taxes by unlawfully denominating the entire $95,000 settlement of an employment case as “emotional distress” and stipulating that a party shall not file Federal, State or Local tax forms nor make deductions as mandated by law?

II. NATURE OF THE CASE

Plaintiff-Respondent was an employee at Defendants’-Appellants veterinary hospital located in the Bronx. Appellant Stephen Smith is the owner of the veterinary hospital. R.29,42. On July 30, 2002 Respondent filed a complaint alleging discriminatory employment practices against Appellants and requesting back and severance wages for what she alleged to be her unlawful discharge. R.32,41-53. On March 7, 2006 a jury trial was to commence. R.33. Before the commencement of the trial, counsel William A. Sipser for Respondent, counsel Stuart E. Kahan for Appellants and the Plaintiff Lanett Daniels entered Hon. Norma Ruiz’ robing room to place on the record a settlement before the lower court. R.7-8. When the settlement was placed on the record, the lower court engaged Respondent in a detailed colloquy regarding her consent to settlement. R.7-13.  No such colloquy occurred with Appellants because Appellants were not present during that settlement conference nor when the settlement was placed on the record. R.23-31. Appellants never agreed to the settlement placed on the record. R. 30.

The settlement spread on the record was $95,000.00 scheduled to be paid by Defendants to Plaintiff’s counsel, by a $50,000.00 payment paid by April 10, 2006 and the balance in $10,000 payments paid monthly until a final $15,000 payment made August 10, 2006. R.13-18  The settlement specifically denominated the entire $95,000 settlement amount resulting from an employment litigation as “emotional distress”, stipulating that no Federal, State or local taxes shall be withheld by the Appellant employer from that entire settlement despite Respondent never proving personal injury damages in any amount, no less the entire settlement amount. R.15.

The settlement payment schedule spread on the record was the exact payment schedule Appellants previously unconditionally rejected. R.30.  Stephen Kahan’s March 8, 2006 letter to Appellants confirms he made a settlement by agreement with Respondent’s counsel, and not with Appellants’ consent. R.23-24,26-28,30. Appellants did not consent to the settlement terms, and had previously rejected the same payout schedule presented to them before March 7, 2006. R.30. On March 30, 2006 Appellants filed an Order to Show Cause to vacate the settlement based on counsel Stephen Kahan’s lack of authority to enter into a settlement rejected by Appellants. R.21-22.  The lower court added upon that Order to Show Cause: “Ordered that Mr. Stephen E. Kahan personally appear in Part IA22 on April 10, 2006.” R.21.  Respondent’s opposition claimed that Stephen Kahan had authority to enter into a settlement because he was Appellants’ trial counsel, that he negotiated with Respondent’s counsel the terms of that settlement and that Appellants offered no factual or legal basis to vacate the settlement. R.32-37.  Stephen E. Kahan did not submit an affirmation denying Appellants’ position that he had no authority to enter into that settlement.  On April 10, 2006 Appellants new counsel, Respondent’s counsel, Respondent and Steven Kahan appeared before Hon. Norma Ruiz.  Appellants were not permitted to examine Steven Kahan in any way, a hearing did not proceed, and no stenographer was present as Hon. Ruiz considered that appearance an oral argument on the motion. Hon. Ruiz does not permit stenographers during oral argument.

On June 2, 2006 the lower court’s decision and order denied Appellants’ motion to

vacate the March 7, 2006 stipulation of settlement. R.6.

III. ARGUMENT

A. THE LOWER COURT ERRED AS A MATTER OF LAW TO ENFORCE A SETTLEMENT THAT APPELLANTS’ COUNSEL ENTERED INTO WITHOUT APPELLANTS’ AUTHORIZATION, WHEN APPELLANTS WERE NOT PRESENT, UPON TERMS APPELLANTS EXPRESSLY REJECTED AND WITHOUT INQUIRY

In no uncertain terms did Appellants swear under oath in their March 30, 2006 Order to Show Cause that their counsel Stephen E. Kahan had no authority to enter into the very settlement he agreed to on the March 7, 2007 record. Appellant Smith stated “3. I was asked by Stuart E. Kahan to approve a $95,000.00 settlement with a $50,000.00 payment by April 10, 2006. I rejected that proposal unequivocally!!” R.29. Appellants affidavit attaches the March 8, 2006 letter from Mr. Kahan admitting that the settlement resulted from discussions with Respondent’s counsel, not with Appellant, and that March 8, 2006 letter was the first time Appellant learned of the terms agreed to by Mr. Kahan that were not authorized by Appellants. R.29. Appellant’s affidavit and the March 7, 2007 settlement transcript make clear that Appellant was not present in any way, shape or form on March 7, 2006 when the unauthorized settlement was agreed to by Mr. Kahan. R.29-30,7-20. Appellants’ motion makes clear that counsel feared proceeding with an employment discrimination trial because they never handled such a trial, so they avoided it by agreeing to a settlement that Appellants’ rejected, and sheepishly did so when Appellant was not present. R.29-20.

The lower court’s June 2, 2006 decision relies upon Hallock v. State of NY, 64 NY2d 224 (1984). The Hallock court held actual and apparent authority existed when the attorney agreed to a settlement in court. In Hallock a co-party was actually present with his attorney when the settlement was dictated on the record and, thus, apparent authority was more apparent than not. In the present case, no party for Appellants was present when the unauthorized settlement was spread on the record and Appellants swore they unequivocally rejected the settlement their counsel agreed to the day they were not present. A settlement can not be enforced against a client who did not authorize nor approve its terms. Mazella v. American Home Construction Co., 211 N.Y.S. 2d 131(1st Dept, 1961). In Mazella, as here, no party was present during the settlement spread on the record, so that court held there could be no indication of apparent authority. Of course in Mazella the attorney there admirably admitted he did not have the client’s consent to enter into settlement. Here Mr. Kahan impliedly made such an admission when he did not submit an affidavit denying Appellant’s factual statements that he agreed to a settlement rejected by Appellant. Mr. Kahan ignoring to respond to the factual allegation of what amounts to fraud is presumptively suspect.  Although he later appeared at an April 10, 2006 oral argument as ordered by the lower court, there is absolutely no record of what occurred there because the lower court does not allow  stenographers at oral argument. What is known is oral argument proceeded that day, but no hearing for Appellants to examine and cross examine Steven Kahan was allowed.

The facts in this case are indicative of a real and different problem than what occurred in Hallock and Mazella. Appellant does not deny that Hallock holds that in the end it is the party who wants to vacate a settlement who must bear the burden of their attorney’s unauthorized actions, but, Hallock several times pointedly refers to the fact that a co-party was present at the alleged unauthorized settlement agreement spread on the record, and that fact distinguishes what occurred here. It is Appellants’ position that a more fact specific analysis by the lower court was warranted before relying on Hallock to support its decision. Unlike Hallock, Appellant was not present and did not sit silently when counsel Mr. Kahan entered into an unauthorized agreement. Appellants never gave any indication of apparent authority on March 7, 2006 to mislead Respondents as Appellants were never in the courtroom at any time the settlement conference between Steven Kahan and Respondents counsel proceeded. Not so much as a phone call was made to Appellant during or after these settlement discussion between counsel to confirm if Appellant agreed to the many terms of the settlement, the bulk of which is unlawful as explained in section B herein. In fact, it would have better served everyone to have had Appellants appear by simply making a phone call and having them present when the parties decided to spread a detailed colloquy on the March 7, 2006 record of Plaintiff’s understanding of and agreement to settlement terms, rather than without Appellants present nor a colloquy of their understanding of and agreement to the settlement terms.

i. The Lower Court Erred in Denying Appellants’ Order to Show    Cause Alleging Fraud by Counsel When There was No Affidavit Submitted by a Party With Actual Knowledge Opposing Appellants Affidavit of Facts

Appellants basically alleged that Stephen E. Kahan committed fraud in their Order to Show Cause to vacate the settlement agreement Their Order to Show Cause alleges facts that Mr. Kahan proceeded to settlement terms before the lower court that he knew his clients did not accept and he did so because he wanted to avoid conducting a trial. "Thus, where a fiduciary relationship exists, 'the mere failure to disclose facts which one is required to disclose may constitute actual fraud, provided the fiduciary possesses the requisite intent to deceive' " Kaufman v. Cohen, 307 A.D.2d 113, 120, 760 N.Y.S.2d 157 quoting Whitney Holdings, Ltd. v. Givotovsky, 988 F.Supp. 732, 748 (U.S. Dist., S.D.N.Y.) For him to proceed as alleged by Appellants was effectively his making material misrepresentation before the lower court and on his clients’ behalf, constituting at the most fraud, and in the least mistake or accident.

Fraud, mistake or accident are causes sufficient to invalidate a stipulation of settlement. Hallock at 230. Apparently the lower court acknowledged the seriousness of Appellants’ fraud allegations when in its own handwriting it ordered  that Mr. Kahan personally appear before it on April 10, 2006. R.21. Yet on that day the lower court did not have Mr. Kahan sworn on so he could be examined by Appellants under oath, but instead the lower court proceeded with oral argument without a stenographer to record what occurred that day. The error occurred when the lower court made its July 6, 2006 decision without sworn testimony or a sworn affidavit submitted by the actual person with knowledge, Stephen E. Kahan, denying or admitting whether he entered into a settlement without authority. The only opposition submitted was from Respondent’s counsel claiming Mr. Kahan had authority because he was Appellants’ trial counsel for some time, and rationalizing that since Mr. Kahan engaged in settlement discussions with Respondent then he must have authority. R.35. However, Respondent’s counsel had no personal knowledge whether the settlement was rejected by Appellants. Respondent’s opposition ignores the fact that Mr. Kahan could have engaged in fraud when he failed to inform the lower court that Appellants’ rejected the settlement terms. Respondent’s opposition also ignores the fact that Mr. Kahan could have hastily entered into an unauthorized settlement to avoid proceeding with a trial that he was unequipped and inexperienced to handle. Namely, Respondent can not assume facts that it was not privy to, and the fact is that Appellants’ told counsel Kahan that they rejected the very terms that he agreed to on March 7, 2006. Certainly, Respondent’s counsel was not privy to such a confidential attorney-client communication because Respondent’s counsel was neither an attorney nor client of that communication. Thus, a review of Respondent’s opposition shows they had no opposition. Since Mr. Kahan submitted nothing either affirming nor denying the allegations, then the real fact of his being unauthorized to settle by the client was never opposed, and could not be determined against Appellants by the papers before the lower court. It is wholly unfair to determine otherwise as no record of the April 10, 2006 appearance exists, no examination of Mr. Kahan was permitted by Appellants and the only record is  the papers submitted; no sworn affidavit of Mr. Kahan was filed.

B. SETTLEMENT TERMS DENOMINATING THE TOTAL SETTLEMENT OF $95,000.00 AS EMOTIONAL DISTRESS TO AVOID FEDERAL, STATE& LOCAL TAXES ARE ILLEGAL TERMS AND VOIDS SETTLEMENT

More offensive than Stephen E. Kahan misrepresenting his authority during a settlement was his consent to an illegal agreement before the lower court on behalf of his clients. His agreement to unlawful terms is indicative of his haste to avoid conducting a trial he could not handle.  Agreeing to unlawful terms shows the slipshod and negligent conduct of this licensed attorney who only wanted a quick “settlement” for his own interests rather than protecting his clients’ interests. He agreed to a settlement denominating all of  an employment related $95,000.00 settlement as a personal injury settlement to avoid tax payments by Respondent as  follows:

    MR. TUCKNER: These amounts are lump -sum payments. There will be

     no withholding of any taxable component to these payments. They will

      be untouched by any state, local or Federal withholding. They will

     be denominated, these payments, for Ms. Daniels emotional distress;

     and at the beginning of the year 2007, the defendant shall issue an

      Internal Revenue Service Form 1099 to Ms. Daniels for the payment of

      these monies, just so we are clear. There will be no withholding from

      these monies. In return for these emotional distress payments, Ms.

     Daniels will indemnify and hold harmless the defendants for any potentialtaxation issues that may arise.” R.15.

The settlement purpose was to avoid paying “any state, local or federal withholding” on an amount equal to more than two years salary to Respondent. That unlawful objective voids the entire settlement because it completely contravenes federal law that defines the entire $95,000 settlement as reportable income subject to deductions to be made by the Appellant employer.  Moreover, the agreement to an “indemnification” by Respondent to Appellant is preposterous. Respondent is not the IRS, nor is she or her counsel the US District Attorney who can press federal fraud charges and jail time against Appellants if they do as the illegal settlement dictates.  In fact, all of the parties to this illegal contract would become coconspirators in an illegal scheme to avoid paying taxes.  It is as close to money laundering as you can get, only here the parties are attorneys and they are doing it under the cloak of an unwitting lower court.  Appellants never did and will not and can not agree to this illegal settlement.

The Internal Revenue Code (the “IRC”) broadly defines "gross income [to] mean[ ] all income from whatever source derived," 26 U.S.C. §61(a), subject only to exclusions specifically enumerated elsewhere in the IRC. United States v. Burke, 504 U.S. 229, 233, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992) ("The definition of gross income under the Internal Revenue Code sweeps broadly.").  IRC §104(a)(2) prohibits classifying “emotional distress” as a physical injury excluded from income. IRC §104(a)(2) was amended to exclude “emotional distress” in 1996 as a result of attorneys attempting to avoid their clients’ paying taxes on settlements as income by reducing them to the vague term of “emotional distress” in settlement agreements. Not only is the delineation of the entire settlement in this case prohibited by the IRC, but this litigation was never based upon personal injuries per se. It was based upon employment claims for back wages amounting to nothing less than severance pay, and entitlement to attorneys' fees. Those payments being in excess of $600 in settlement of employment claims, including attorneys' fees are taxable income. United States v. Burke, supra

The entire settlement was actually wages to be paid by Appellants employers to Respondent employee, and not personal injuries.  Appellants as the employer are obligated under the IRC to deduct taxes and file a W2, not a 1099 that Respondent attempts to obtain in its unlawful settlement that could fall under the radar of the tax authorities. Thus, even the payment schedule agreed to is improper as the $50,000 and subsequent $10,000 and $15,000 payments would all be much lower and different after deducting Federal, State and local income taxes.  Overall, the settlement agreed to without Appellants’ authorization in this case was predicated upon an unlawful purpose to avoid paying any income taxes and prevent the filing of W2 withholding forms.  No court in this country can enforce a settlement predicated on an illegal motive, let alone no court can be a party to this illegal contract.

"It is the settled law of this State ... that a party to an illegal contract cannot ask a court of law to help him carry out his illegal object, nor can such a person plead or prove in any court a case in which he, as a basis for his claim, must show forth his illegal purpose" Stone v. Freeman, 298 N.Y. 268, 271 (1948); Carmine v. Murphy, 285 N.Y. 413 (1941); Sabia v. Mattituck Inlet Mar. and Shipyard, Inc., 24 A.D.3d 178 (2005). Appellants must deduct taxes on the $95,000.00 else they will be liable for penalties and interest for failing to withhold the necessary taxes pursuant to 26 U.S.C. § 3402(a)(1): ("[E]very employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary."); §3403 ("The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter ...."), Bright v. Bechtel Petroleum, Inc., 780 F.2d 766 (9th Cir.1986) (holding that the duty to withhold is mandatory, rather than discriminatory, in nature). An employer's failure to withhold taxes subjects him to liability for any penalties or additions to the tax he failed to deduct and withhold. IRC §3403 ("The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter ...."). The fact that an IRS penalty exists with respect to this settlement agreement’s unlawful objective makes the settlement agreement unenforceable.   Duse v. IBM Corp., 252 F.3d 151(2d Cir, 2001); Solomon v. Gilmore, 248 Conn. 769, 785, 731 A.2d 280, 289 (1999) ( "a penalty implies a prohibition";  "every contract made for or about any matter or thing which is prohibited ... is a void contract").  Respondents can not enforce the unlawful March 7, 2006 settlement agreement.

This Court must hold Respondent and her counsel accountable for their injection of duplicitous terms to avoid paying what is legally due the Federal, State and local tax authorities. Appellant submits that if Respondent and her counsel predicated a settlement upon these unlawful terms then they most likely have done it in past settlements, and will continue to do so in future settlements with the confirmation of innocent bystander courts unless this court stops their unlawful objectives here and now by vacating the illegal settlement agreement.

IV. CONCLUSION

The June 6, 2006 decision and order of the lower court denying vacating the March 7, 2006 stipulation of settlement must be reversed and the settlement agreement must be vacated for two reasons.  First, the settlement agreement is illegal under the Internal Revenue Code and state and local tax laws because Respondent denominated the entire $95,000 settlement as “emotional distress” in an employment discrimination suit and compels Appellants to commit the illegal act of not withholding Federal, State and local taxes.  Second, the settlement was made without Appellants’ authorization as their counsel engaged in fraud by agreeing to a settlement he knew Appellants expressly rejected.

Dated: New York, New York March 12, 2007

Yours, etc.,

          LAW OFFICES OF SUSAN CHANA LASK

By: Susan Chana Lask, Esq.

Attorney for Defendant-Appellant

244 Fifth Avenue, Suite 2369

New York, NY 10001

(212) 358-5762

Tags: new york appeal, settlement, vacate