NEW YORK CITY-A state judge has refused to lift a default judgment of $265 million against a group of individual and corporate investors in a 16-year dispute over repayment of a loan used to develop Manhattan's Flatotel hotel.

In a Nov. 21 decision, Supreme Court Justice Walter B. Tolub rejected the argument of "law office failure" made by defendants in CDR Créances v. Cohen, 600448/06 and 109565/03. The state Supreme Court decision will be published on Friday.

The investors plan to appeal, according to David S. Pegno of Dewey Pegno & Kramarsky, counsel for developer Leon Cohen and his parents, Maurice Cohen and Sonia Cohen, who are among the defendants.

The investors already have successfully petitioned the Appellate Division, First Department, to stay the default judgment rendered on Aug. 7 by Tolub.

"Our clients were certainly very disappointed," said Pegno in a phone interview. He called the default amount and its application to individual, as opposed to only corporate defendants, "unprecedented" in New York.

The case arose in 1991 when a French bank, Société de Banque Occidentale, loaned the defendants approximately $92 million to develop the Manhattan hotel at 135 W. 52nd St. The bank went to court in 1994 to force payment of the debt.

In 1995, the bank was taken over by the French government and rolled into the government-owned CDR Créances.

In 2003, CDR won a successful judgment for $96 million in Paris Commercial Court against Euro-American Lodging Corp., the principal entity named on the loan, said to be controlled by the Cohens and other defendants.

In 2005, CDR won an action upholding the Paris decision in New York courts, said Douglas A. Kellner of Kellner Herlihy Getty & Friedman in New York, attorney for CDR Créances.

A special referee appointed by the New York court determined that the defendants now owed $265 million, which included interest and other payments such as attorney fees and court costs.

Following what Kellner said were unsuccessful attempts to collect on the loan, CDR in 2006 commenced another action accusing the defendants of hiding assets, including proceeds from the 2000 sale of the Flatotel, through shell entities located in Liechtenstein, the British Virgin Islands, Panama, Québec, France, Delaware and New York.

"The scheme is very complex," Kellner said of the allegations, "because it involves this complex web of offshore corporations."

The defendants "categorically deny" the fraud allegations, Pegno said in an interview.

Earlier this year, CDR moved for a default judgment, claiming the defendants failed to provide discovery or fulfill deposition demands. Justice Tolub granted their motion in August.

"Defendants' longstanding patterns of default, lateness and abject failure to comply with court orders amounts to willful conduct, which not only warrants, but necessitates award of default judgment," the judge wrote in the August ruling.

The Cohens and the other defendants moved to renew the case and vacate the default in October. Among their reasons was what they described as "law office failure."

The investors claimed that their former counsel, John Gleason of Gleason & Koatz in New York, failed to inform them of the ramifications "of their inaction and non-responsiveness to court orders and discovery and deposition demands."

Tolub observed that "There is a very fine line" between a claim of law office failure, "as in 'the case wasn't properly calendared,' 'the office moved and the file was misplaced,' or simply 'we forgot' and a claim of deliberate failure to represent one's client. The former examples are heralded as classic law office failure. The latter is not, and the serious nature of this allegation demands supporting documentation, which, not surprisingly, is not found in any of the defendants' papers."

In rejecting defendants' claims, Tolub said, "When counsel for the parties first appeared in this Part in March of 2008, they were put on notice that this court was not going to tolerate any further discovery delays even when presented with motions which otherwise provide for an automatic stay of discovery."

Reached by telephone, Gleason declined to comment, but he confirmed he is not currently representing any of the defendants. Pegno was hired in August, after the judge issued the original default decision.

Kellner said that Leon Cohen, whom he called the "principal figure" among the New York defendants, also is named as a defendant in CDR v. Cohen, 08-50688 CA 32, which was filed in Miami-Dade County Circuit Court earlier this year.

In that action, CDR is seeking to prevent the Cohens and other individual and corporate defendants from "fraudulently transferring assets and property located in Miami-Dade County."

Justin B. Elegant of Petros & Elegant in Coral Gables, Fla., counsel for the Cohens in the Miami action, said his clients are defending the matter "aggressively."

Cohen is developing twin 110-story residential apartment buildings in Miami, called the Empire World Towers. The multi-million-dollar project is billed as the tallest residential structure in the world should it be completed.

Defendants Joelle Habib, Allegria Aich, Robert Maraboeuf and Patricia Petetin were represented by Bradley D. Simon and Brian D. Waller of Simon & Partners in New York. Simon said his firm was retained by those defendants to replace Gleason on Sept. 11, 2008, and prior to that, they had no involvement in the case.

In the Florida action, in addition to Kellner, CDR is represented by Miami-based attorneys Marcos Daniel Jimenez, Jeffrey E. Marcus and Christina M. Frohock of Kenny Nachwalter; and New York attorney Stephen L. Weiner.

Kate Fazzini can be reached at [email protected].