After a Manhattan judge gutted a former hedge fund manager's potential damages against Greenberg Traurig, an appeals court on Thursday has allowed some damages testimony back in the case.

Still, the First Department, Appellate Division, attached some conditions to that testimony and affirmed that other expert testimony, that would have had the potential to increase damages even further against Greenberg, is still out of the case.

The First Department's decision is the latest chapter in an 11-year-old lawsuit brought by James Melcher against Greenberg Traurig and former shareholder Leslie Corwin, claiming attorney deceit under Judiciary Law Section 487. Melcher claims Greenberg and Corwin helped their client, an adversary of Melcher, deceive the court after the client claimed he accidentally burned a critical document while making tea.

With the ruling, the long-running case, after several appeals, is ready for trial.

Melcher was seeking more than $16 million in damages from his Section 487 attorney deceit claim against Greenberg and Corwin.  But as a result of last year's ruling by Manhattan Supreme Court Justice O. Peter Sherwood and the appellate panel's decision Thursday, the total amount of damages he can seek are much less.

“We are pleased that the appellate court has upheld the key limitations on the plaintiff's claims and possible recovery,” said a Greenberg spokeswoman Thursday. Thomas Rice, of counsel at Simpson Thacher & Bartlett, represents Greenberg and Corwin.

Still, Melcher's attorney, solo practitioner, Jeffrey Jannuzzo, sounded an optimistic note. “Our damages are still very substantial, and we still expect a jury verdict against Greenberg Traurig for intentional deceit perpetrated on the courts,” he said in a statement.

Jannuzzo said the plaintiff's team will be working on a revised damages calculation, though he could not specify the amount.

Burned Document

In an underlying lawsuit, his client, Melcher, claimed that as a former member of the Apollo Medical Fund Management hedge fund, he was entitled to profits that were withheld from him. He sued Apollo and its principal, Brandon Fradd, in 2003 seeking those profits.

In January 2004, Melcher said Corwin, who represented Apollo and Fradd, informed him of a 1998 agreement he claimed limited profits Melcher could realize from the hedge fund.

Melcher asked to see the document and said he was prepared to use forensic testing to verify if it did, in fact, date to 1998.

But he said Corwin told him that Fradd burned the two-page document while making tea. Melcher took the position that the 1998 writing was a fabricated and backdated document that Fradd had created in 2003, when the dispute with Melcher arose, and that Fradd had deliberately burned the document when Melcher demanded it, according to the appellate panel's decision.

Later on, Melcher settled his spoliation and fraud claims against Fradd, and agreed to discharge the judgment against Apollo, in exchange for a payment of $5 million from Fradd. In the settlement, Melcher reserved any rights he might have against Corwin, then no longer representing Fradd and Apollo.

In 2007, Melcher sued Greenberg Traurig and Corwin alleging attorney deceit under Section 487, which allows for treble damages. He contended they tried to help Fradd deceive the court about the document's authenticity and the circumstances of its damage.

In seeking damages against Greenberg, Melcher proposed to call James Lynch, an accountant, who was prepared to testify about what Melcher could have collected in the Apollo action had he been able to obtain a judgment before Apollo Medical Fund became insolvent.

Melcher's other proposed expert witness, attorney Jonathan Lupkin, prepared a report calculating the attorney fees and other costs Melcher incurred in litigating the Apollo action beginning from 19 different points in time during the litigation. Under Lupkin's report, Melcher was seeking $12 million in damages.

In his ruling last year, Sherwood precluded the testimony of Lupkin and Lynch as expert witnesses for Melcher, gutting much of the damages Melcher could seek.

In its ruling Thursday, a First Department panel agreed that Lynch's testimony should be precluded.

The panel, composed of Justices David Friedman, Peter Tom, Angela Mazzarelli and Anil Singh, said it was “entirely a matter of speculation whether the Apollo action would have been resolved while [the hedge fund] was still solvent had the 1998 writing not been propounded.”

Moving on to the other proposed expert, the panel pointed to concerns in Lupkin's report and said its damages calculation “cannot be endorsed,” even assuming that Melcher proves that Corwin violated Section 487.

Contrary to Melcher's arguments, the panel said, Sherwood correctly held that Section 487 entitles Melcher to a recovery based only on the extra legal costs he incurred in the Apollo action that were proximately caused by Corwin's alleged deceit.

Thus, Melcher cannot recover the costs he incurred in litigating the Apollo action after Corwin disclaimed any further reliance on the 1998 writing, the panel said, adding the potential damages figures proposed in Lupkin's report do not constitute a proper basis for recovery.

Nonetheless, the panel said it was “cognizant” of the intent of Section 487 to enforce an attorney's “special obligation” to protect the integrity of the courts.

The appellate judges said Lupkin could be called as an expert witness at trial, on the condition that his testimony be limited to the extra legal costs that Melcher was required to incur during a specific five-year window of time.