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Ask Y. : David Scharf Talks Complex Litigations and Family Squabbles

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Y. David Scharf’s family began emigrating to the U.S. from Eastern Europe in the 1950s. The paternal side of his family hails from Poland, the maternal side from Czechoslovakia and Romania. Once they arrived on American soil, the family began developing assisted living communities in the outer boroughs. As such, real estate was always something that was discussed around the dinner table in the Scharf household.

But unlike the rest of the family, who stayed in the brick-and-mortar side of the business, Scharf carved out his own path in the law instead—albeit on the legal side of real estate.

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“I went my own way,” Scharf said. “And, I love what I do. I always say the day I stop enjoying it is the day I start my new career.”

Scharf grew up in Borough Park, Brooklyn, and Belle Harbor, Queens. He attended New York University’s Undergraduate School of Business before Brooklyn Law School and was soon plunging into legal matters pertaining to real estate’s most infamous and prominent names.

One of his first assignments was representing Leona and Harry Helmsley in a multitude of litigations. This head-first dive into dealing with “dicey matters and legal conundrums” required immediate and positive outcomes for demanding clients, Scharf said. It would only get dicier from there.

In fact, the current president of the United States was a client from 2001 to 2006, a relationship that ended when Scharf’s firm, Morrison Cohen, filed a proceeding against Trump for almost $500,000 in outstanding legal fees. Trump, in turn, sued Scharf and the firm, alleging that he had been treated like a “cash cow.” The two parties agreed to a confidential settlement in 2009. Scharf declined to comment on the matter, although the two are on good terms now, according to a Reuters article from 2015.

Today, Scharf, 49, is a partner and chair of Morrison Cohen’s real estate loan workouts, restructurings and foreclosures practice. He also just celebrated his 27th wedding anniversary to his wife, Cheryl. With five kids (the second-youngest of which, at 14, already has his eyes on a legal career), Scharf has honed his negotiation and mediation skills both at work and at home. “Each kid has their own personality and needs to be treated in their own way and with individual care. And that’s also how I approach projects that clients entrust to me,” he explained of his approach to the sometimes messy but always interesting cases he works on.

Commercial Observer: How long have you been practicing law?

Y. David Scharf: Since 1991, so it’s been more than 25 years, I guess. I just aged myself. I’ve been with Morrison Cohen since November of 2000.

What has been the most complex transaction of your career, would you say?

One that I found extremely challenging, because it had so many moving parts to it, was the Kent Swig restructuring [of Swig’s holdings in 2008, in order to pay $50 million back to a variety of creditors for failed projects]. I represented Kent and put the basic form of the restructuring in place. He had many creditors, all of whom had very disparate interests and different leverage positions; some of them were secured creditors, some of them were unsecured creditors, some of them were judgment creditors, and some of them weren’t. We had to get them to understand that there was an ability to maximize recovery for everybody if they acted in a collaborative manner, as opposed to focusing only on their individual interests—which is often very difficult to do—and then come up with a strategy that appealed to each of the creditors. We worked through various different iterations to be able to ultimately come up with a plan that ended up outside of a bankruptcy, and that allowed him to pay back his creditors over time and give him a new life so that he could move forward. It was one that was very dominant of my time in the swirls of the financial crisis.

I’ll bet. How did your cases differ during that time?

Well, people in the real estate industry are notoriously scrappy and very attached to their assets. That resulted in a real need for lawyers who had worked through a down cycle already—which I had, earlier in my career. It spawned the real estate workout and foreclosure group that I headed [at Morrison Cohen], and it worked in an interdisciplinary way with practitioners in the bankruptcy group and in the real estate group as well as the litigation group. We had a lot of business and developed notoriety for the quality of work and the expertise that we brought to the table, as well as the outcomes that we were able to achieve for our clients both in and out of the courtroom.

You represent lenders and borrowers?

Yes. One of the unique features of my practice has been that I represent both, whereas many lawyers represent either/or. As a consequence I’m able to help clients problem-solve, because very often the disconnect happens when the borrower doesn’t understand the lender’s perspective or vice versa. It’s helped me to be a better adviser and counselor. What I have also seen, not surprisingly, is that every iteration of a financial crisis that spawns litigation results in follow-up lawyering to avoid some of the issues that end up being litigated in the courtrooms during that crisis.

So, crises teach valuable lessons, in a way?

It’s interesting—we’re seeing issues that the court had to resolve previously now be resolved in contracts instead. The typical lender liability claims that I was litigating in the early 1990s had been solved by the change in the form of the loan documents when those issues came up in 2009 or 2010.

How have loan documents evolved with the market?

I think they’re becoming more lender-friendly. They’re getting tighter in terms of borrower rights and borrowers’ ability to take issue with terms and conditions being set by lenders. The market will only start adjusting to this when borrowers get more market leverage and are able to negotiate terms with lenders. In a lot of the litigation that is at the fore of what we’re seeing right now, the borrowers are in very difficult positions because they negotiated loan documents at a time when there was scarcity of capital and they were captive to their lenders’ imposing terms and restrictions from which they really have zero pull-room.

Are you still litigating anything from the last crisis?

There is still some hangover litigation that is wrapping up from the problems of 2007 to 2009, but I think it’s coming to a tail. What we’re starting to see now is the notices of default, the planned restructurings and the strategic maneuvering by different lenders who have different positions of control or lack of control in capital stacks of CMBS loans.

Take us back to some of the legal conundrums you worked on for the Helmsleys.

I represented Leona Helmsley for 12 to 14 months, right after she came out of prison.

One matter involved a racketeering lawsuit against Mrs. Helmsley’s former lawyers for overbilling practices, in 1992. Any time somebody is bringing a lawsuit against people of your own profession it’s quite a weighty matter and I spent a tremendous amount of due diligence time preparing billing records and backups to billing records that my client had received. The billing practices occurred while Mrs. Helmsley was in prison, so the theory was that they took advantage of her absence. We filed a claim for racketeering practices in connection with what we alleged were fraudulent billing practices. Obviously when we filed the lawsuit it was met with very heavy opposition and the blowback was challenges to Harry Helmsley’s capacity to bring the lawsuit. We eventually entered into a confidential settlement of the matter.

One of the other interesting issues that I worked on for [Leona Helmsley] was her parole program; after prison she needed to do community service and we created a program that was approved by the New York State Parole board where she would provide hotel management and training to kids from underprivileged and under-resourced communities. They would come into the [Helmsley] Hotel under various disciplines—food and hospitality, concierge, guest services—teenagers who would have the benefit of training in the Helmsley Hotel as an internship program as a means for her community service.

For me, as a young lawyer, these two matters were significant—especially since my interaction with her on those matters was daily, and there was a lot at stake. I would meet with her at the Park Lane Hotel.

Donald Trump was once a client of yours also, I understand?

Yes. I began representing a company that was known as Spectrum Communities and, through them, met the Trump Organization and our current president and began doing work for him.

One matter was his feud with Conseco over the General Motors Building?

Conseco and Trump were partners in the GM building, and Trump had entered into an agreement to buy out Conseco’s interest [for $295 million in 2000, according to The New York Times]. The deal required certain types of financing, all of which were committed to by Deutsche Bank. It was scheduled to close on Sept. 30, 2001, and then the attacks of Sept. 11 happened. The financial markets were in turmoil, Deutsche Bank’s headquarters in New York were destroyed, and the financing was not able to close on time. We ended up in a litigation…Conseco then attempted to exercise its rights to buy out Trump’s interest. We went down the road with what turned out to be two arbitrations; the first was disbanded when the lead arbitrator was removed because we had uncovered certain bias and prejudice against our client. We got a new arbitrator, and the matter ended up in court before being settled out of court in a manner that everyone was happy with but that resulted in Trump’s interest in the building being bought out by Conseco [for $15.6 million in 2003].

Is Carl Icahn (founder of Icahn Enterprises) still a client of yours?

No. I represented Carl from 2003 to 2005 in a number of lawsuits. In one, he was a shareholder in real estate investment trusts that were being sold and he alleged that the sale was an insider deal where management had stripped out the best assets for themselves, not maximizing shareholder value. We resolved that very favorably for him on a confidential settlement basis. I was also involved in a lawsuit, which has become known as the initial feud between Bill Ackman [founder and CEO of Pershing Square Capital Management] and him—they were on CNBC trading barbs with each other. It was the Gotham [Partners] versus High River case—a lawsuit that I really call a split decision between Carl and Bill, in that it involved Carl’s purchase of shares in a company and an agreement that he would pay Bill’s company an amount above the purchase price for something that was called “schmuck insurance”—meaning that if, within a short period of time, Carl resold the stock and shares in the company that he would pay a portion of the profit over to Bill.

As luck would have it, the company that Carl bought the stock in ended up in a merger which resulted in a significant profit on the shares. Bill claimed that he was entitled to the schmuck insurance and Carl claimed that the merger wasn’t a sale of the stock—instead, it was something that was happening by operation of law and that was not covered by their agreement to pay the additional proceeds. Bill prevailed on that part of the claim, but we prevailed on Bill’s claim that he was also entitled to his legal fees which amounted to many millions of dollars as that fight went all the way up to the New York court of appeals. It ultimately ended up with Bill winning one part and Carl winning the other.

You mentioned CMBS earlier. Do you have many CMBS clients, and are you seeing more activity from the controlling class representatives?

Yes, I represent CMBS servicers, borrowers and lenders, and yes, very much so. In fact, what I’m seeing is a lot of trading and jockeying for position to become the controlling holder and that is a market that is extremely opaque. I don’t say that in a negative way, but the players at field are extremely active right now, and recognizing that being the controlling holder—as much as you can hold on to that position or position yourself to be next up—can be a very valuable position in a restructuring process.

 Is that an additional hurdle for you to surmount?

I look at it as a new dynamic. It’s dynamic because you don’t know what that control position traded for and what the goal of the person that traded into or ascended into that position has in mind. It’s just a matter of trying to get across the table from [the CCR] and communicating with them. From the borrower perspective, being able to get to a point of communication is critical.

What else is keeping you busy?

We’re seeing family squabbles and fights to do with defaulted assets or even good assets—it always results, unfortunately, in unnecessary litigation.

What are the fights mainly about?

The properties. Whether to sell, keep, finance, the leasing strategy, how to deal with tenants, how to recapitalize…I’ve been involved in that litigation for quite some time.

The litigation around Two Herald Square [in which squabbling between Sitt family members and investors has left the property bleeding money] has caused the asset—an asset that I didn’t believe was distressed—to be labeled as distressed, which affects the ability for people to see their way forward.

Part of my very early experience in 1991 to 1993 was a very fierce family battle over multifamily properties across Queens and Brooklyn. Watching and learning that dynamic and ultimately being at the center of that resolution gave me unique insight into the dynamic of family squabbles. I’m constantly telling family members that there are a lot cheaper ways to resolve your issues than fighting about the real estate—because you’re only going to hurt yourself, and there are only a limited numbers of outcomes you can get to in a tax efficient way. The litigation, to use a family analogy, is no different than a divorce; the real estate is the kids in the scenario, and the kids are going to get hurt in a long protracted divorce.

Why do you think familial disputes get so nasty?

Real estate is something that can be passed on generationally, and it increases at an intrinsic value. Once it becomes a generational asset you’re looking at the second or third or fourth generations and a larger class of interests of people with different interests who have grown up differently and want different things out of the real estate. Some want capital appreciation, some want growth. How you achieve each these outcomes can be done in multiple ways, and it becomes an ego thing as to who is smarter and who gets what. Then you have the underlying issues of who is loved more or less, which starts clouding judgment.

Speaking of family disputes, what’s the latest on Two Herald Square?

We’re representing Eddie [Sitt] until the beginning of September; then, he’ll have to get new counsel, provided that the judge lets us out of the case. We made a motion asking to be released as counsel in the matter. It’s a contentious and extremely emotional case. I think it’s fair to say that sometimes lawyers can’t meet their clients’ expectations because certain expectations are unachievable—I’m not necessarily saying that is the case here, but attorney-client relationships are intimate relationships of common trust and people have to be rowing in the same direction. When people can’t get on the same page I think it sometimes leads to a natural evolution of the relationship coming to an end.

Familial disputes, multiple creditors…you seem to often be the middleman in multiparty lawsuits?

There’s an old adage that every settlement or resolution means that everyone is equally unhappy, but I do think the converse can be true. If you find a mutual happiness quotient for each side in a litigation and you’re able to take personality and personal animus out of the battle and instead make it a financial cost-benefit analytic and keep clients and litigants focused on that? That’s the best way to get people to have an equivalent happiness quotient.

Never a dull moment, though?

The real estate industry people are passionate about their real estate. The fights are not cyclical and the counseling is not cyclical; it’s an ongoing daily part of the life of significant real estate, and I’m blessed and fortunate to be a part of this industry.