FILED: NEW YORK COUNTY CLERK 10/19/ :19 PM INDEX NO /2013 NYSCEF DOC. NO. 46 RECEIVED NYSCEF: 10/19/2015

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1 FILED: NEW YORK COUNTY CLERK 10/19/ :19 PM INDEX NO /2013 NYSCEF DOC. NO. 46 RECEIVED NYSCEF: 10/19/2015 SUPREME COURT OF THE STATE OF NEW YORK Index No.: /2013 COUNTY OF NEW YORK X JUDI GHEDINI, Plaintiff, Notice of Motion for -against- Summary Judgment Against Defendant ARTHUR SHAPOLSKY, Arthur Shapolsky -and- Defendant, ANTONIA SHAPOLSKY, SABRINA SHAPOLSKY, CHANTAL MEYERS, and JOHN DOES 1-100, Relief Defendants X Please take notice that, upon the annexed affirmation of Richard E. Lerner, and the exhibits thereto, and the accompanying memorandum of law, a motion pursuant to CPLR 3212 will be made in behalf of plaintiff Judi Ghedini for summary judgment against defendant Arthur Shapolsky before the Supreme Court of the State of New York, 60 Centre Street, New York, New York, in Room 130, at 9:30 am, on the 16th day of November, 2015, or as soon thereafter as the parties may be heard, and holding the defendant liable to the plaintiff for $500,000 that was lent to him, plus interest at the compound rate of 10%, and dismissing the defendant s affirmative defenses of (1) failure to state a cause of action; (b) assumption of risk; and (c) failure to mitigate damages.

2 Please take further notice that answering papers must be served at least seven days prior to the return date hereof. Dated: New York, New York October 19, 2015 Respectfully submitted, THE LAW OFFICE OF RICHARD E. LERNER, P.C. By: Richard E. Lerner Counsel for plaintiff Judi Ghedini 1375 Broadway, 3rd Floor New York, New York Phone: (917) Fax: (347) To: (Via e-filing) Cardenas Law Office Counsel for defendant Arthur Shapolsky 119 West 57th Street, Suite 1215 New York, New York (Phone)

3 SUPREME COURT OF THE STATE OF NEW YORK Index No.: /2013 COUNTY OF NEW YORK X JUDI GHEDINI, Plaintiff, Affirmation in Support -against- ARTHUR SHAPOLSKY, -and- Defendant, ANTONIA SHAPOLSKY, SABRINA SHAPOLSKY, CHANTAL MEYERS, and JOHN DOES 1-100, Relief Defendants X I, Richard E. Lerner, an attorney duly admitted to practice before the courts of the State of New York, affirm under penalty of perjury, pursuant to CPLR 2106, as follows: 1. I am the principal of The Law Office of Richard E. Lerner, P.C., counsel of record for the plaintiff, Judith Ghedini (a/k/a Judi Ghedini). I submit this affirmation, and the exhibits hereto, in support of Ms. Ghedini s motion for summary judgment against the defendant, Arthur Shapolsky. All facts stated herein are known to me based upon my prosecution of the case to this point and upon my review of the file maintained for and during that prosecution. 2. In support of this motion, I submit these exhibits: Exhibit A Amended summons and complaint, dated October 8, Exhibit B Defendant Shapolsky s answer, dated July 21, Exhibit C A note for the principal sum of $250,000 dated October 10, Exhibit D Bank checks drawn by Ms. Ghedini and made payable to defendant Shapolsky in the amounts of (1) $250,000, dated 10/11/07; $100,000, dated 10/29/07; (3) $125,000, dated 11/15/07; and (4) $25,000, dated 12/08/08. Exhibit E Ms. Ghedini s affidavit in support of this motion, dated October 12, Exhibit F Ms. Ghedini s notice to admit, dated July 28, Exhibit G Defendant Shapolsky s August 18, 2014 responses to the notice to admit.

4 Exhibit H Exhibit I Exhibit J Exhibit K A letter of December 14, 2009 from CPA Martin H. Lager, memorializing that he is defendant Shapolsky s accountant, confirming that Ms. Ghedini had lent Mr. Shapolsky $500,000 at an interest rate of 10%. A handwritten ledger prepared by defendant Shapolsky s assistant, Mitchell Martin, showing interest accruing and payable on a principal sum of$500,00 and compounding daily at 10%. Ms. Ghedini s July 28, 2014 discovery demand, seeking, inter alia (in items 9, 10 and 11), the production of any and all documents evidencing that moneys she lent defendant Shapolsky bore entrepreneurial, nonrecourse, risk (as opposed to full recourse, general credit risk, see discussion infra) or were converted into an equity ownership interest or equivalent non-debt profit-sharing instrument in any of defendant Shapolsky s business deals. Defendant Shapolsky s October 20, 2014 responses (social security number(s) redacted). 1 Exhibit L Deposition transcript of defendant Shapolsky, dated December 5, Exhibit M Deposition transcript of Arthur Shapolsky, dated May 6, Exhibit N Deposition transcript of Martin Lager, CPA, dated August 17, 2015, confirming that Mr. Shapolsky took tax deductions based upon interest rate of 10% for moneys lent by plaintiff Ghedini to defendant Shapolsky and that none of the tax records show that the loan was converted to equity. Exhibit O Exhibit P Profit and loss statement prepared by Martin Lager re two Detroit properties owned by LLC s owned by defendant Shapolsky. An Excel spreadsheet (excerpted and converted to a PDF) prepared by counsel showing the amount currently due, inclusive of interest compounding at 10%, with offsets for interest previously paid (i.e., $117,977.80). 2 1 No documents were ever produced which were, or disclosed, or would lead to anything else which was, or would disclose, evidence that any such moneys Ms. Ghedini lent defendant Shapolsky ever bore entrepreneurial risk or ever were converted into equity or the equivalent. 2 A complete version of the Excel spreadsheet has been provided to defendant s counsel on this date, prior to the service of the motion, so that counsel may himself verify the data and methodology.

5 Part I: Introduction: This is a Simple Collection Matter. 3. Plaintiff Ghedini, by her complaint, has sued defendant Shapolsky to recover the unpaid principal and interest due on a $500,000 demand loan at 10% compound interest which she extended to him in late 2007, the principal dispensed to him in four tranches over two months. 4. Defendant Shapolsky, by his answer and subsequent deposition testimony, has admitted that Ms. Ghedini lent him $500,000 at 10%; however, he claims that, first of all, interest was not compound, but simple, and also claims that, in any event, in or about 2008 he and Ms. Ghedini agreed to, and did, convert the then-outstanding loan principal, $500,000 plus all accumulated and then-unpaid interest into an equity interest in a certain two of his real estate ventures. 5. His claim that interest was simple, not compound, as a matter of law must be trivially resolved in Ms. Ghedini s favor because (1) the note instrumenting at least half ($250,000) of the loan does not specify whether it is compound or simple; (2) the note has no merger and integration term; (3) thus by black-letter contract law the court may resolve this ambiguity by looking outside the four corners of the instrument; and (4) the course of conduct of the parties shows that all interest payments and it was defendant Shapolsky who undertook to compute them were always computed and then paid out on a compound basis, which is the only affirmative evidence of their meeting of the minds and thus must be conclusive that the interest on the loan was compound. 6. His claim which of course Ms. Ghedini refutes that the loan was discharged, or extinguished, by its conversion to equity must also be trivially resolved in Ms. Ghedini s favor. First of all, besides his bare naked parol assertions, no evidence, or anything that might

6 lead to the discovery of evidence, has been produced which is at all probative of this claim. In fact, whatever was produced that is at all probative supports Ms. Ghedini s refutation that there was no debt-to-equity conversion. In such a situation there is no material factual dispute and so summary judgment lies. 7. And relatedly and dispositively the evidence that was produced estops defendant Shapolsky from arguing that there was a debt-to-equity conversion. That evidence consists of defendant Shapolsky s tax returns, his related deposition testimony, and the related deposition testimony of his accountant, Martin H. Lager, CPA, as to the tax treatment with respect to the loan that defendant Shapolsky took on the federal tax returns that Mr. Lager prepared for him. All of this evidence confirms that at all times, for federal income tax purposes, the loan was knowingly and purposefully treated as, and reported on those returns as exactly that a loan. There was no treatment of the moneys as equity, even after the supposed debt-toequity conversion. New York law bars a litigant from taking a position in litigation before its courts, especially a debt/equity controversy, which is contradicted by a position he s taken on tax returns. Mahoney-Buntzman v. Buntzman, 12 N.Y.3d 415 (2009) (discussed infra). 8. Clearly, the fact that defendant Shapolsky is barred from maintaining or even presenting that conversion defense, plus the fact that that is his only defense, dictate that summary judgment for liability on the debt must issue forthwith. 9. Accordingly, Ms. Ghedini asks this court to enter judgment on the debt in her favor and then if the defendant credibly challenges the interest calculations set forth in the accompanying Excel spreadsheet (exhibit P ), which your affirmant declares to be a true and

7 accurate accounting of the moneys owed refer the matter to a referee or master for inquest into computation of the damages due her. 3 Part II: Issues to be Resolved. 10. Based upon the pleadings and the evidence adduced, this court is now called upon to resolve the following issues: a. Was there a meeting of the minds that the 10% interest rate would be compound interest rather than simple interest? Plaintiff s Proposed Answer: The plaintiff submits that the documentation shows that there was a meeting of the minds that the interest would be compounded. This is evidenced by (1) the fact that defendant Shapolsky s bookkeeper carried the loan on defendant s books as a compound interest loan of 10%; (2) the loan was carried on the books as a $500,000 loan, and there was no amortization of principal when interest payments were made, which payments were at the rate of 10%, and interest rates reflective of a compound rate were reported to the IRS; (3) this was consistent with the prior dealings between the parties. b. Was the loan converted into an equity position in defendant Shapolsky s investments? Plaintiff s Proposed Answer: The plaintiff submits that the loan was not converted into an equity position in Mr. Shapolsky s investments. This is evidenced by (1) there is absolutely no documentation to support the proposition that the loan was converted into equity; (2) payments made to plaintiff Ghedini were always reported to the IRS as interest payments; (3) the defendant never provided any K-1 s or the like to the plaintiff; (4) at deposition, the defendant could not identify when or how the loan was converted to an equity position, could not identify what the terms of the deal were, or what share of any investment vehicle the plaintiff came to own when the loan was allegedly converted to an equity position. 3 In the event the court does refer this matter to a referee for determination of damages, as there is no material factual dispute and the issue thus entirely one of law, the plaintiff respectfully asks that this court hold that the 10% interest payable on the loan was compound, not simple, and to incorporate that finding into the order of reference to the referee or master who will conduct the damages inquest.

8 Part III: Facts Germane to Resolution of the Two Issues Presented. 11. The following contentions have been admitted: (See notice to admit dated July 28, 2014, and defendant Shapolsky s August 18, 2014 response thereto (Exs. E & F, respectively)): a. On October 11, 2007, plaintiff lent defendant $250,000, payable on demand, at 10%. b. On October 29, 2007, plaintiff lent defendant $100,000, payable on demand, at 10%. c. On November 15, 2007, plaintiff lent defendant $125,000, payable on demand, at 10%. d. On December 8, 2007, plaintiff lent him $25,000, payable on demand, at 10%. 12. Thus, it has been conceded that the plaintiff loaned $500,000 at the rate of 10%. 13. To date, defendant Shapolsky has paid the plaintiff only $117, in interest, and nothing in principal. (Ghedini affidavit, 4,7). 14. The most recent interest payment of $5,325 was made by check on August 28, 2010 (Ghedini affidavit, 4,7), which itself proves that there was a meeting of the minds that the interest would be compounded: Mathematically, an interest payment of $5,325 means that as of the date of payment (August 28, 2010), the accrued debt carried on Mr. Shapolsky s books was $639,000. ($5,325 x 12 months = $63,900, and $63,900 is 10% of $639,000). 15. In contrast, if only simple interest had been agreed to, the monthly interest due would never have varied from $4, (i.e., 10% of $500,000 = $50,000, and $50,000 divided by 12 = $4,166.66). 16. Notwithstanding that defendant Shapolsky paid interest at a 10% compound rate, he has denied that the 10% interest rate was intended to be compound versus simple interest.

9 17. The defendant has also argued that the loan was converted into an equity position in defendant s investments; however, he has admitted the truthfulness of item 6 in plaintiff s notice to admit: (See Exs. E and F ). Item 6 of notice to admit: Neither defendant Shapolsky, nor any of his employees, agents or accountants, ever provided K-1 forms, K-1 Schedules or Schedule Q s, or other tax forms, to plaintiff Ghedini with respect to any deal as to which any of the aforementioned monies were invested. Defendant s response to item 6: Defendant admits the truthfulness of the matter of fact set forth herein. 18. His deposition testimony also belies his claims. See Shapolsky deposition testimony as follows: Shapolsky, 12/5/14, p.73, ll.19-20: There are no papers that say we re partners. Shapolsky, 5/6/15, p.122, ll.21-24: Q. I m asking you whether you have any recollection whether it [i.e., the money loaned to defendant by plaintiff] went in [to the alleged investments], in some way prior to acquisition or did it go in after acquisition? A. I don t remember. Shapolsky, 5/6/15, pp : With respect to one of the entities that Shapolsky postulates the plaintiff s money was invested in, entitled SA 08 Roanoke, LLC, and as to which no LLC documents have ever been disclosed, Shapolsky admitted that he was its sole member/owner. Shapolsky, 5/6/15, pp : He admitted that there is no documentation, and he could not independently remember, what percentage interest he believes that plaintiff Ghedini acquired in the project when he allegedly converted the debt to equity, or what the valuation of her interest was.

10 Shapolsky, 5/6/15, p.146, ll.6-10: As to the OR Flint, LLC project that Shapolsky allegedly invested the moneys in, he admitted that he was the sole owner: Q. Do you remember who owned the membership interests in OR Flint, LLC? A. I did. Q. All of them 100 percent? A. Yes. Shapolsky, 5/6/15, p.150, l.22 p.151, l.15: Q. I short, do you agree that my client transmitted to you on various occasions a total amount of $500,000. A. Yes. Q. And you have testified that with her consent and informed consent, you say, that that was converted from debt to equity in projects and that these [SA 08 Roanoke, LLC and OR Flint, LLC] are the two projects that it went into. You testified to this already. I m asking you to just put it all together and confirm. A. Okay, I confirm. Q. Therefore, necessarily, the [$500,000] that you ve just testified again as to what she gave you went into these projects in a ratio that you don t remember? A. Yes. Shapolsky, 5/6/15, pp.159, : Defendant s tax returns and ledgers show interest being either owed or paid to plaintiff in years 2007 through 2010 at a rate of 10%. Q. You ve testified that her claim that the interest you were supposed to be paying her was 10 percent is correct, that is the correct rate? You ve testified to that. A. Yes. (p.167, ll.3-7). Shapolsky, 5/6/15, pp , p.184: Defendant acknowledges that his ledger for 2010 shows interest payments to the plaintiff in Additionally, for example, the interest payments show compounding, in that if only simple interest of 10% had been agreed to, then the monthly interest payments would have always remained $4, (i.e., 10% of $500,000 is $50,000, so each of the 12 monthly interest payments would have been $4,166.66). However, the interest payments shown on the books were for amounts in the $4,300 range, indicating that the yearly total then due (i.e. due to compounding) was about $525,000.

11 19. As noted above, defendant Shapolsky made his most recent interest payment in the amount of $5,325, by check dated August 28, (Ghedini affidavit, 4). Mathematically, this means that on that date, the defendant principal, against which the interest was determined, was $639, Defendant s accountant Martin Lager corroborated that Shapolsky acquired 100% of the LLC s, and that no shares were transferred to plaintiff Ghedini: Lager, 8/17/15, p.20, l.18, p.21, ll.10-14: A. Yes. It s [SA 08 Roanoke, LLC] a single member LLC. [ ] Q..[I]t s Arthur Shapolsky, the individual taxpayer, who acquired a hundred percent of the membership interest? A. Right. Lager, 8/17/15, p.22-23: During the entire time he owned SA 08 Roanoke, LLC, Shapolsky treated the LLC as a disregarded entity on his taxes, meaning that he was the sole owner throughout. Lager, 8/17/15, p.38, l.18 - p.39, l.2: Q. Do you have any information that indicates that [plaintiff] was, in fact, a tax partner [in SA 08 Roanoke, LLC] at any time? A. No. Q. Therefore, you could not answer the question, what were the allocations to her in accordance with the partnership agreement because, as far as you know, there wasn t any such thing? A. Right, I couldn t answer the question. Lager, 8/17/15, p.39, ll.22-25: As to OR Flint, LLC, it too was always accounted for as a disregarded entity. Lager, 8/17/15, p.40, ll.13-16: Q. [Y]ou have no information to indicate that at any time [plaintiff Ghedini] became a tax partner [of OR Flint, LLC]? A. Correct.

12 Lager, 8/17/15, p.41, ll.5-15: Payments made to plaintiff Ghedini in 2010 are reflected on defendant Shapolsky s tax returns as interest payments. Lager, 8/17/15, p.42, ll.5-10: Q. Sir, do you agree that had he converted all of her debt into equity, then whatever he was paying her couldn t be deducted as interest because it would not be payment for the forbearance of the use of money anymore? A. Correct. Lager, 8/17/15, p.47, l.10 - p.48, l.23: Q. [Y]ou have no information that would at all indicate my client ever became a tax partner in any of those deals? A. Correct. Q. And that as late as of 2010 you prepared returns deducting interest payments which came to my client. A. Correct. [ ] Q. Under state law you can be a member of an LLC, but it doesn t mean that you re a partner for tax purposes. For example, you can have only voting rights, as a lender might protect the bankruptcy interests, but you wouldn t have any financial interest in the partners [sic. should read partnership ]. You could be a member, but not a partner? A. Correct. Q. And you could also be a partner, but not a member insofar as you are an assignee of somebody s interests? A. Correct. Q. So just to be clear, do you have any knowledge of any kind to indicate that [plaintiff Ghedini] was ever a member of any of those LLC s under state law. A. I have no knowledge. 21. For the reasons set forth in the accompanying memorandum of law, and upon the further facts set forth therein, it is respectfully requested that this court grant summary judgment in plaintiff s favor.

13 Conclusion WHEREFORE, plaintiff Judi Ghedini respectfully requests that this court issue an order granting summary judgment against defendant Arthur Shapolsky in the amount of the entire $500,000 principal plus accrued interest at 10% per annum, compounding daily, in accordance with the accompanying Excel spreadsheet, which your affirmant swears is a true and correct accounting of the moneys owed, taking into account the interest payments of $117, that have previously been made. Upon so holding, it is respectfully submitted that the debt instrument be deemed to have been reformed accordingly. Finally, it is respectfully requested that the defendant s affirmative defenses be dismissed as meritless. Dated: New York, New York October 19, 2015 Respectfully submitted, THE LAW OFFICE OF RICHARD E. LERNER, P.C. By: Richard E. Lerner Counsel for plaintiff Judi Ghedini 1375 Broadway, 3rd Floor New York, New York Phone: (917) Fax: (347) richardlerner@msn.com To: (Via e-filing) Cardenas Law Office Counsel for defendant Arthur Shapolsky 119 West 57th Street, Suite 1215 New York, New York (Phone)