After over five years of hard-fought litigation and a twenty day arbitration evidentiary hearing, Cole Schotz obtained a $63 million arbitration award on behalf of its private investment fund client. Through the arbitration, our client sought enforcement of its security interests against a defaulted borrower, payment under an insurance policy designed to mitigate the loss resulting from such a default, as well as recoupment of its collateral misappropriated by the borrower’s attorneys.
By way of background, our investment fund client provided a $25 million loan to a borrower to support a patent infringement litigation program protected by comprehensive security interests in all of the borrower’s assets. An insurance policy covering the potential loss of the loan principal in the event the borrower defaulted further secured the loan. When the patent enforcement program failed to generate sufficient revenues to timely repay our client’s loan, the borrower defaulted. In addition, the law firm representing the borrower misappropriated the only recoveries obtained from the patent litigation program, paying those funds to itself for claimed outstanding legal fees, instead of surrendering those funds to our client pursuant to its security interests.
After three years of state court litigation in New York (Supreme and Appellate Division) followed by two additional years of arbitration proceedings, the Cole Schotz litigation team scored a sweeping victory on all of our client’s claims, securing an award for the full amount of the damages caused by the borrower, insurance company, and the law firm, totaling over $63 million. In addition, Cole Schotz further obtained reimbursement of our client’s arbitration expenses, as well as 65% of its attorneys’ fees and costs incurred in connection with the arbitration.
The team procuring the win for our client included Michael Sirota, Steven Klepper, Victoria Cioppettini, Lauren Manduke, Barry Schwartz, Neoma Ayala, Rachel Mongiello, and paralegals Kathleen Sermabekian and Karen Chiandusse. When the borrower filed for bankruptcy protection in Virginia in an attempt to evade the arbitration process, David Bass, G. David Dean, and paralegal Fran Pisano assisted the litigation team in procuring a full dismissal of that Chapter 11 proceeding.
A New Jersey Tax Court judge ruled that the State of New Jersey is obligated to act with integrity and comply with its deliberate representations that lottery winnings were not subject to income tax, therefore barring them from taxing annuity payments of our client’s $46 million lottery winnings.
On June 9, 2000, our client, Melvin Milligan won the top prize in the Big Game Drawing totaling approximately $46 million. When Mr. Milligan won and claimed his New Jersey Lottery prize, winnings from the New Jersey Lottery were specifically excluded by statute from taxable income under the New Jersey Gross Income Tax Act, N.J.S.A. § 54A:l-l, et seq. After consulting with counsel, and in reliance on the State tax laws in existence at that time, Mr. Milligan opted to receive his prize in 26 annual installments of approximately $1,769,000 each.
Mr. Milligan received the agreed-upon installments without issue until 2009, when the State of New Jersey amended the law to subject New Jersey Lottery winnings over $10,000 to the New Jersey Gross Income Tax. This amendment was enacted on June 29, 2009, but made effective retroactively as of January 1, 2009. As a result, beginning tax period 2009, and every year thereafter, Mr. Milligan and his wife, Kimberly-Lawton Milligan, began reporting the New Jersey Lottery winnings as income and paying the applicable tax in excess of $133,000 each year. The Milligans disputed New Jersey’s right to collect income tax on their prize money – a prize won over nine years before the change in the law – and filed a lawsuit against the State of New Jersey, Division of Taxation and State of New Jersey, Division of Lottery. The Milligans alleged breach of contract, violations of both the United States Constitution and New Jersey State Constitution, violations of the common-law “manifest injustice” and “square corners” doctrines, and sought reversal of their denied refund claims.
On September 26, 2016, the Honorable Judge DeAlmeida granted the Milligans partial summary judgment based on the square corners doctrine which states, in essence, that in dealing with the public the government must act with integrity and “turn square corners”. Reversing the final determinations of the Division of Taxation, the Court concluded that the State is prohibited from imposing gross income tax on the Milligan’s winnings from a 2000 New Jersey lottery prize received in installments in 2009 and later years. The Court further explained that although the 2009 amendment allows for gross income taxes on lottery prizes, the retroactive extension of state income tax to our client’s winnings is barred by such doctrine because it is indisputable that in 2000 state lottery officials actively and intentionally represented to the public that winnings were not subject to New Jersey gross income tax. These representations “became part of the contractual agreement” between the State and Milligan, who elected to receive his winnings in installments over a 26 year period with the understanding that the payments would not be subject to income tax.
In addition to the Milligans, this firm represents over two dozen other plaintiffs who are similarly challenging the State’s retroactive taxation on their lottery winnings. The Court’s ruling in Milligan applies across the board to our other clients.
In May 2006, a national bank instituted an action against an individual and his entities seeking to restrain transfers of actions relating to more than 300 real properties in New Jersey. The commencement of this action forced numerous lenders, property owners, investors and creditors claiming an interest in the properties and business entities to intervene and/or file related proceedings, resulting in the largest Chancery Court case in New Jersey of that year. Over 30 related actions were filed shortly after the commencement of this action. The Court appointed a fiscal agent/trustee in liquidation to oversee the management, operation and liquidation of the properties, valued at approximately $400 million.
Cole Schotz counseled its client through a myriad of intricate issues, protecting his ownership interest in the properties and prosecuting and defending numerous claims against the principal defendant and certain creditors. The proceedings presented complex litigation, real estate, corporate and potential insolvency issues. A team of Cole Schotz attorneys across different departments analyzed the various claims and issues of the parties and formulated a strategy to protect and stabilize the assets and the client's position. This complicated and fast-paced litigation resulted in the entry of over 250 court orders in 2006.
The proceedings afforded the multidisciplinary group of Cole Schotz attorneys opportunities to negotiate the sale of several substantial commercial properties to potential buyers, assist the fiscal agent in establishing the process and procedure for marketing and liquidating the properties in a manner that maximizes value to the estate, assist in establishing the procedure for pursuing and adjudicating creditor claims, and demonstrate its sophisticated litigation expertise.
The largest New Jersey Chancery Court cases provided the firm with the forum in which to demonstrate its capabilities across different commercial practice areas.