Opinion
600137-2008.
Decided March 3, 2010.
Hogan Hartson LLP, Baltimore (Lauren S. Colton of counsel), for Coco Investments, LLC, Leonid Redensky and Gabfree, LLC, plaintiffs.
Nesenoff Miltenberg, LLP, New York City (Andrew T. Miltenberg of counsel), for Zamir Manager River Terrace, LLC, Zamir Equities River Terrace Apartments, LLC, Asher Zamir and Joshua Zamir, defendants.
Defendants move for summary judgment pursuant to CPLR 3212 to dismiss the action of plaintiffs in its entirety. Plaintiff investors seek to recover a $750,000 investment in defendants' $500 million condominium conversion project. For the following reasons, the motion for summary judgment is granted in part and denied in part.
Background
A. The Parties
Plaintiffs are investors in the condominium conversion project at issue. Defendant Zamir Manager River Terrace, LLC (Zamir Manager) is a Delaware limited liability company formed to manage and control the business of the project. Defendant Zamir Equities River Terrace Apartments, LLC (Zamir Equities) is the sole member of Zamir Manager and is a New York limited liability company in the business of acquiring and managing commercial office buildings in Manhattan. On October 21, 2005, Zamir Equities purchased a building in Manhattan for approximately $363 million in a joint venture with C K Properties. Defendants Asher Zamir (Asher) and Joshua Zamir (Joshua) are principals of Zamir Equities and signatories to the contract in dispute.
B. The Project
"River Terrace Apartments" was the name of the condominium conversion project located at 515 East 72nd Street. According to Zamir Equities' website, the River Terrace Apartments was originally constructed in 1985, and contained 408 residential units and approximately 100,000 square feet of commercial space divided between a 35,000 square foot parking garage and 65,000 square feet of medical office space.
C. The LLC Agreement
Plaintiffs allege that from approximately August to October 2005, defendants solicited plaintiffs to invest in the project. Plaintiffs claim that defendants represented that the project consisted of a "straight-forward" conversion of a residential rental building into condominium units (Complaint ¶ 19). Plaintiffs further assert that defendants promised, among other representations, that "the anticipated total return on the Project would be between 200% and 270%, or an annual cash on cash return in excess of over 70%'" ( id. ¶ 21).
Plaintiffs then allege that based on these representations, on October 21, 2005, plaintiffs and Zamir Manager executed the Limited Liability Company Agreement of Yahalom River Terrace, LLC (the "LLC Agreement"). Pursuant to the LLC Agreement, a company titled Yahalom River Terrace, LLC (the "Company") was formed to hold assets of the building, with Zamir Manager named as the Company's Manager (affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 1.22 [Manager]). Plaintiffs contributed $750,000 to the project.
D. Plaintiffs' Allegations
Plaintiffs first allege that defendants failed to disclose, prior to soliciting plaintiffs' investments, defendants' intention of proceeding with an "Arizona-style," first-of-its-kind spa branding strategy in Manhattan. The building would be marketed as an upscale residential community with "[c]onsiderable previously unplanned renovations" including "overhauling, expanding and relocating the health club space, and the garden courtyard, the creation of building treatment areas for skin care and massage therapy, renovating the pool, whirlpool, sauna and steam facilities, creating an on-site spa cafe and constructing a 3,900 square foot yoga studio" (Complaint ¶ 35 [f]), which would "decreas[e] the number of condominium units available for sale" ( id. ¶ 35 [a]). Plaintiffs claim this branding strategy caused constructions costs to skyrocket ( id. ¶ 38), created substantial delays and problems with lenders ( id. ¶¶ 41-42), and dramatically increased the sale prices with higher common charges significantly above market prices ( id. ¶ 35 [b]-[c]), causing the project to falter.
Additionally, plaintiffs assert that defendants undertook a self-interested restructuring of the loans, which allowed defendants to avoid personal liability and placed plaintiffs at "the back of the line" in priority of distributions, contrary to their initial investment agreement ( id. ¶¶ 42-52). Further, plaintiffs maintain that defendants "spent large quantities of time living outside of the country" when key decisions regarding the project were made ( id. ¶ 40), failed to provide critical financial information to plaintiffs ( id. ¶¶ 65-67), and misused Company assets for personal reasons, including selling units to friends and family at huge discounts, allowing family members, friends and employees to live in the building without paying rent or utilities, and making substantial charitable donations with company funds ( id. ¶¶ 53-57).
E. Procedural History
On January 16, 2008, plaintiffs filed suit against defendants, asserting eight causes of action for (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) breach of fiduciary duty, (4) gross negligence, (5) fraudulent misrepresentation, (6) fraud, (7) willful misconduct, and (8) tortious interference with contract. On February 29, 2008, defendants filed their answer. On October 27, 2008, Justice Herman Cahn marked defendants' motion for summary judgment (motion sequence 001) and defendants' motion for a protective order (motion sequence 002) as moot, as the case was alleged to have been settled.
On August 13, 2009, plaintiffs filed an unopposed motion to restore defendants' motion for summary judgment to the calendar (motion sequence 003), which this Court granted. Thus, the motion now at issue is defendants' motion for summary judgment, restored as motion sequence 004, which the Court denies in part and grants in part for the following reasons.
Discussion
To succeed on a motion for summary judgment, a movant must establish its claim or defense "sufficiently to warrant the court as a matter of law in directing judgment" (CPLR 3212 [b]), and it "must do so by tender of evidentiary proof in admissible form" ( Zuckerman v City of New York, 49 NY2d 557, 562). To defeat a motion for summary judgment, the opposing party must "show facts sufficient to require a trial of any issue of fact" (CPLR 3212 [b]). "The proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case" ( Winegrad v NY Univ. Med. Ctr., 64 NY2d 851, 853). Once the proponent "has met its burden, it is incumbent upon [the opposing party] to establish, by admissible evidence, that a triable issue of fact exists" ( SCP (Bermuda) Inc. v Bermudatel Ltd., 224 AD2d 214, 216 [1st Dept 1996]). Applying this standard, the Court addresses each cause of action in turn.
A. First Cause of Action: Breach of Contract
The LLC Agreement provides that "the rights and obligations of the parties under this Agreement shall be governed by . . . law of the State of Delaware" (affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 10.13 [Applicable Law]). For a breach of contract claim, "the plaintiff must demonstrate: first, the existence of the contract, whether express or implied; second, the breach of an obligation imposed by that contract; and third, the resultant damage to the plaintiff" ( VLIW Tech., LLC v Hewlett-Packard Co., 840 A2d 606, 612 [Del 2003]). Here, issues of fact exist with respect to at least the following alleged breaches by defendants of sections 3.3, 3.5, and 6.4 of the LLC Agreement.
First, section 3.3 of the LLC Agreement states:
"The Manager shall be under a fiduciary duty to conduct the affairs of the Company in the best interests of the Company and the Members, including the safekeeping and use of all assets for the exclusive benefit of the Company and the Managers shall not employ such funds or assets in any manner except for the exclusive benefit of the Company."
(Affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 3.3 [Fiduciary Duty].)
Here, an issue of fact exists over whether defendants failed to act in the Company's best interests in breach of section 3.3. Notwithstanding whether defendants' pursuit of the branding initiative was in the Company's best interests, plaintiffs demonstrated that defendants may have committed numerous other acts that were not "for the [Company's] exclusive benefit" ( id.). For one, defendants allowed family, friends and employees to live in the project free of charge and/or at greatly reduced rates, and went as far as to waive utilities for many of these tenants (affidavit of Ira D. Cohen [June 6, 2008] ¶¶ 57-60, exhibit 8). Defendants have also made large charitable contributions to numerous charities under the name of the Company, and have charged to the Company unexplainable expenses. For example, defendants donated $25,000 to the Central Park Conservancy on October 4, 2007. ( Id. ¶ 61, exhibit 9.) As the project is not located near Central Park, it is unclear how a donation using company assets benefits the project or its investors.
Further, defendants sold the commercial unit in the project to themselves for $70 million when they had valued it at over $72 million, and marketed the space for approximately $73.5 million ( id. ¶ 63). Defendants claim they engaged two brokers to sell the commercial space, but were unable to obtain a satisfactory buyer (affidavit of Asher Zamir [Apr. 4, 2008] ¶¶ 35-37). However, defendants failed to produce any documents evidencing the engagement of brokers, their efforts to sell the space, the bid received, etc. Thus, whether defendants acted in the Company's best interests or engaged in self-dealing is an issue of fact for trial.
"Conduct by an entity that occupies a fiduciary position . . . may form the basis of both a contract and a breach of fiduciary duty claim" ( RJ Assoc., Inc. v Health Payors' Org. Ltd. Partnership, HPA, Inc., 1999 WL 550350, *10, 1999 Del Ch LEXIS 161, *34 [Del Ch 1999]). "[O]ne of an LLC manager's duties is to govern the LLC in accordance with the LLC Agreement. If an LLC manager knowingly permitted the LLC to violate a contractual duty owed to one of the company's members, that would . . . constitute a breach of fiduciary duty." ( Metro Communication Corp. BVI v Advanced Mobilecomm Tech. Inc., 854 A2d 121, 141 [Del Ch 2004].) The duty of loyalty requires a fiduciary to refrain from self-interested transactions with the corporation unless the terms of such a transactions are entirely fair ( e.g. Weinberger v U.O.P., Inc., 457 A2d 701, 710). It mandates that those in control of corporate processes do not unfairly manipulate those processes to retain such control ( see Blasius Indus., Inc. v Atlas Corp., 564 A2d 651, 661 [Del Ch 1988]). Although the duty may be limited to some extent by the LLC Agreement (Del Code Ann, tit 6, § 18-1101 [d]), it cannot be, and was not here, wholly eliminated.
Second, section 3.5 of the LLC Agreement requires that Asher and Joshua "devote such time and effort to the business of the Company as may be necessary to promote adequately the interests of the Company and the mutual interests of the Members" (affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 3.5 [Services of the Manager]). Yet, during critical times in the project, it is alleged, Joshua founded and worked at another company, had abandoned his office at Zamir Equities, and was unavailable for extended periods of time (affidavit of Ira D. Cohen [June 6, 2008] ¶¶ 34-38). Whether defendants, therefore, devoted an adequate amount of time and effort to the project is an issue of fact that cannot be decided on summary judgment.
Third, section 6.4 of the LLC Agreement also requires defendants to furnish financial reports and "audited balance sheet[s]" to each plaintiff "[w]ithin ninety (90) days after the end of each fiscal year" (affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 6.4 [Reports]). Not until October 10, 2007, after plaintiffs retained counsel, did defendants finally send the financial reports for the "year ended December 31, 2006" (affidavit of Ira D. Cohen [June 6, 2008] ¶ 55, exhibit 7). "The face of the documents, however, shows that those financial statements had been completed by the auditors as of May 9, 2007" ( id.). Thus, whether defendants met their obligations under section 6.4 of the LLC Agreement is a material issue of fact precluding summary judgment. Accordingly, defendants' motion for summary judgment to dismiss plaintiffs' first cause of action for breach of contract is denied.
B. Second Cause of Action: Breach of Implied Covenant of Good Faith and Fair Dealing
Third Cause of Action: Breach of Fiduciary Duty
"At common law the duty of fair dealing and good faith was deemed impliedly to be a part of contracts of every kind" ( Merrill v Crothall-Am., Inc., 606 A2d 96, 101 [Del 1992]). "This obligation requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the contract" ( Wilgus v Salt Pond Inv. Co., 498 A2d 151, 159 [Del Ch 1985]). "Thus, parties are liable for breaching the covenant when their conduct frustrates the overarching purpose' of the contract by taking advantage of their position to control implementation of the agreement's terms" ( Dunlap v State Farm Fire Cas. Co., 878 A2d 434, 442 [Del 2005]). "The implied covenant applies even where the contract allows a party to exercise discretion" ( PAMI-LEMB I Inc. v EMB-NHC, L.L.C., 857 A2d 998, 1016 [Del Ch 2004]).
Numerous questions of fact exist regarding the extent to which defendants breached the implied covenant of good faith and fair dealing and of fiduciary duty. Plaintiffs advanced specific allegations evincing defendants' bad faith, including defendants' failure to timely provide plaintiffs with financial statements (affidavit of Ira D. Cohen [June 6, 2008] ¶ 55, exhibit 7), and when the project's profitability was in doubt, defendants' abandonment of their duties as Manager in favor of trading away the Company's assets to limit their individual liability (Complaint ¶¶ 42-52). Additionally, factual issues exist as to whether defendants engaged in self-dealing when they permitted friends, employees and family members to live, free of rent, in the building (affidavit of Ira D. Cohen [June 6, 2008] ¶¶ 57-60, exhibit 8), and when they sold the commercial portion of the building to themselves for a price below the asking price and the market value ( id. ¶ 63). Further, factual issues exist as to whether defendants satisfied specific contractual obligations ( see, supra Discussion, Part A). Thus, defendants' motion for summary judgment to dismiss plaintiffs' second and third causes of action for breach of implied covenant of good faith and fair dealing and breach of fiduciary duty, respectively, is denied.
C. Fourth Cause of Action: Gross Negligence
Seventh Cause of Action: Willful Misconduct
New York law is essentially the same as Delaware law for the tort claims of gross negligence and willful misconduct. Gross negligence "involves a devil-may-care attitude or indifference to duty amounting to recklessness . . . In order to prevail on a claim of gross negligence, a plaintiff must plead and prove that the defendant was recklessly uninformed or acted outside the bounds of reason" ( Albert v Alex Brown Mgt. Servs., 2005 WL 5750602, *4, 2005 Del Ch LEXIS 133, *14 [Del Ch 2005] [internal quotation marks omitted]; cf. Kleartone Transparent Products Co., Inc. v Dun Bradstreet, Inc., 88 AD2d 353, 356 [2d Dept 1982]). "Willful conduct has been defined as a conscious indifference' or I don't care attitude which is the prerequisite of wanton behavior'" ( Midland Red Oak Realty, Inc. v Friedman, Billings Ramsey Co., Inc., 2005 WL 445710, *4, 2005 Del Super LEXIS 57, *12-13 [Del Sup Ct, New Castle County 2005]). Wanton behavior is a "conscious indifference to consequences in circumstances where probability of harm to another within the circumference of the conduct is reasonably apparent, although harm to such other is not intended" ( Eustice v Rupert, 460 A2d 507, 509 [Del 1983]; cf. Seminara v Highland Lake Bible Conference, Inc., 112 AD2d 630, 633 [3d Dept 1985]).
"Under New York law, then, tort claims are outside the scope of contractual choice-of-law provisions that specify what law governs construction of the terms of the contract, even when the contract also includes a broader forum-selection clause" ( Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., 414 F3d 325, 335 [2d Cir 2005]).
Here, under section 3.7 (a) of the LLC Agreement, "Covered Person[s] shall be liable for . . . [their] gross negligence or willful misconduct" (affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 3.7 [a] [Liability and Indemnification]). Plaintiffs allege that defendants willfully and recklessly wasted the Company's assets to further an alleged, self-serving plan ( Petrakis v Rose, 12 Misc 3d 1194[A], 1194[A], 2006 NY Slip Op 51566[U], *5 [Sup Ct, Nassau County 2006]; see, supra Discussion Parts A-B). The allegations of self-dealing and neglect are sufficiently at issue. Thus, defendants' motion for summary judgment to dismiss plaintiffs' fourth and seventh causes of action for gross negligence and willful misconduct, respectively, is denied.
"Covered Persons" include any Manager, Member, officer, employee or agent of the Company or "any member, partner, shareholder, director, officer, manager, employee, agent or Affiliate of any of the foregoing" (affidavit of Asher Zamir [Apr. 4, 2008], exhibit A [LLC Agreement] § 3.7 [a] [Liability and Indemnification]).
D. Fifth Cause of Action: Fraudulent Misrepresentation
Sixth Cause of Action: Fraud
Likewise, New York law and Delaware law are fundamentally similar for the tort claims of fraudulent misrepresentation and fraud ( Iotex Communications, Inc. v Defries, 1998 WL 914265, *6, 1998 Del Ch LEXIS 236, *18-19 [Del Ch 1998] [dismissing fraud claims when applying New York law, which court recognized as "decisively to the same effect" as Delaware law]). To state a claim for fraud, plaintiffs must allege "(1) the defendant made a material false representation, (2) the defendant intended to defraud the plaintiffs thereby, (3) the plaintiffs reasonably relied upon the representation, and (4) the plaintiffs suffered damage as a result of their reliance" ( Swersky v Dreyer Traub, 219 AD2d 321, 326 [1st Dept 1996]; cf. Bergold v Anglin, 1988 WL 25859, *2, 1988 Del LEXIS 64, *5-6 [Del 1988]). "Where a cause of action or defense is based upon misrepresentation, fraud, mistake, wilful default, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in detail" (CPLR 3016 [b]).
A fraud claim should be dismissed as redundant when it merely restates a breach of contract claim, i.e., "where it alleges that a defendant did not intend to perform a contract with a plaintiff when he made it" ( Gordon v Dino De Laurentiis Corp., 141 AD2d 435, 436 [1st Dept 1988]; cf. BAE Sys. N. Am. Inc. v Lockheed Martin Corp., 2004 WL 1739522, *8, 2004 Del Ch LEXIS 119, *34 [Del Ch 2004]). In contrast, a cause of action for fraud exists if "the plaintiff plead[s] and prove[s] a breach of duty distinct from, or in addition to, the breach of contract" ( Non-Linear Trading Co., Inc. v Braddis Assoc., Inc., 243 AD2d 107, 118 [1st Dept 1998]). "For example, if a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the same circumstances also give rise to the plaintiff's breach of contract claim" ( First Bank of the Ams. v Motor Car Funding, Inc., 257 AD2d 287, 291-292 [1st Dept 1999]). Unlike a misrepresentation of future intent to perform, "a [mis]representation of present fact . . . collateral to, but which was the inducement for the contract[,]" is not duplicative of the breach of contract claim ( Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956).
Here, plaintiffs allege that defendants' misrepresentations regarding expertise, deal terms, nature, scope, due diligence and supervision in connection with the project, and more specifically, the branding concept, induced them to enter into the LLC Agreement and commit funds to the project (Complaint ¶¶ 90-106). However, these alleged misrepresentations are not collateral to the LLC Agreement; rather, each one falls within the management and fiduciary duties expressly set forth therein ( see Iotex, 1998 WL 914265, *5-6, 1998 Del Ch LEXIS 236, *15-19 [finding plaintiff's allegations that defendants had used contracts at issue to induce plaintiff to invest in development of wireless communications technology, which plaintiff would not have otherwise done, and defendants never intended to meet contractual obligations, did not sufficiently state a fraud claim]); see also Tristate Courier Carriage, Inc. v Berryman, 2004 WL 835886, *11, 2004 Del Ch LEXIS 43, *44-46 [Del Ch 2004][dismissing fraud claim where plaintiff alleged that defendant executed agreement when he had no intention of abiding by non-competition covenant contained in agreement]). "Couching an alleged failure to comply with the [LLC] Agreement as a failure to disclose an intention to take certain actions arguably inconsistent with that agreement is exactly the type of bootstrapping this Court will not entertain" ( BAE Sys., 2004 WL 1739522, *8, 2004 Del Ch LEXIS 119, *34).
In any event, plaintiffs' claims that defendants overstated their skill and experience, or the likelihood the project would succeed, are insufficient to support their fraud allegations ( see e.g. Solow v Aspect Resources, LLC, 2004 WL 2694916, *3, 2004 Del Ch LEXIS 151, *6-15 [Del Ch 2004] [dismissing fraudulent inducement claim where plaintiff alleged that defendants fraudulently induced him to enter into LLC agreement by misrepresenting their experience and likely success of endeavor in which he was investing]). "Even drawing all reasonable inferences in favor of plaintiff, poor performance in one venture and better results in a later venture does not reasonably imply that defendants made false representations about their experience" ( id., 2004 WL 2694916, *3, 2004 Del Ch LEXIS 151, *10). "Predictions about the future cannot give rise to actionable common law fraud. Nor can expressions of opinion." ( Great Lakes Chem. Corp. v Pharmacia Corp., 788 A2d 544, 554 [Del Ch 2001]; In re Ibp, Inc. Shareholders Litig. v Tyson Foods, Inc., 789 A2d 14, 74 [Del Ch 2001] [applying New York law, court held that "[e]xpressing confidence about a projection of future results will not support a claim for material misrepresentation"].)
As well, plaintiffs' claims for fraud are expressly barred by the Subscription Agreement, which contains express disclaimer provisions regarding the speculative and risky nature of their investment. The Subscription Agreement provides that nobody from the Company has "expressly or implicitly represented" to plaintiffs that "past performance or experience" of the Company's representatives "in any way indicates predictable results" (affidavit of Asher Zamir [Apr. 4, 2008], exhibit B [Subscription Agreement] § 5 [i] [No Representations By Company]). It further states that plaintiffs acknowledge their investment is "speculative" which "involves a substantial degree of risk of loss" of their "entire investment" ( id. § 5 [f] [Investment Risk]), and plaintiffs recognize that their investment "involves a high degree of risk, including . . . the total loss" of their investment ( id. § 5 [e] [Economic Risk]). The Subscription Agreement also maintains that plaintiffs have "received and reviewed the Company LLC Agreement and all other information . . . necessary or appropriate for deciding whether to purchase the Company Interest" ( id. § 5 [h] [Information Reviewed]). "To allow [plaintiff] to assert, under the rubric of fraud, claims that are explicitly precluded by contract, would defeat the reasonable commercial expectations of the contracting parties and eviscerate the utility of written contractual agreements" ( Great Lakes, 788 A2d at 556). Thus, plaintiffs' fifth and sixth causes of action for fraudulent misrepresentation and fraud, respectively, are dismissed.
E. Eighth Cause of Action: Tortious Interference with Contract
"[O]nly a stranger to a contract, such as a third party, can be liable for tortious interference with a contract" ( Winicki v City of Olean, 203 AD2d 893, 894 [4th Dept 1994]; see Shearin v E. F. Hutton Group, Inc., 652 A2d 578, 590 [Del Ch 1994] ["It is rudimentary that a party to a contract cannot be liable both for breach of that contract and for inducing that breach."]). Here, Asher and Joshua were signatories to the LLC Agreement on behalf of Zamir Manager. Additionally, Asher and Joshua acted on behalf of the Company when they executed the loan restructure. Indeed, Asher is also an individual member of the Company. Thus, because plaintiffs allege that Asher and Joshua interfered with their own contract, plaintiffs' eighth cause of action for tortious interference with contract is dismissed.
Conclusion
Based on the foregoing, it is:
ORDERED, that defendants' motion for summary judgment to dismiss plaintiffs' claims is granted in part and the fifth, sixth, and eighth causes of action for fraudulent misrepresentation, fraud, and tortious interference with contract, respectively, of the complaint are severed and dismissed; and it is further
ORDERED, that the remainder of the action shall continue; and it is further
ORDERED, that the parties are to appear before the Court for a preliminary conference on March 11, 2010, at 11:30 A.M.; and it is further
ORDERED, that the Clerk is directed to enter judgment accordingly.
This constitutes the Decision and Order of the Court.