Opinion
604263/01.
Decided June 29, 2005.
This dispute arises out of the failed joint venture to develop a luxury hotel in Manhattan's "Meat Packing District." In motion sequence 008, defendants William Achenbaum, the Achenbaum Family Partnership, L.P. and Gansevoort Hotel, LLC (collectively, the "Achenbaum Defendants") move for summary judgment pursuant to CPLR 3212, and in motion sequence 009, defendants Joseph Neumann, Charles Herzka and David Weldler (collectively, the "Neumann Group") move for summary judgment. Motion sequence numbers 008 and 009 are herein consolidated for disposition.
Background
In 1998, Robert Gladstone, principal of the real estate development firm, plaintiff Madison Equities, Inc. ("Madison Equities"), approached the Neumann Group to discuss financing the development of a hotel on a parcel of land located in Manhattan ("Project Site"), then being used as a parking lot. Plaintiffs allege that Madison Equities and the Neumann Group orally agreed to form a joint venture ("Joint Venture") to jointly pursue the development of the hotel.
The agreement to form a joint venture was "confirmed by a handshake," although its terms were never fully memorialized in writing. Transcript of Deposition, Gladstone at 72, Vol. I. Transcripts of depositions are herein after referred to as "[Deponent's name] Dep. at [page number]."
In the amended complaint, plaintiffs allege that pursuant to the terms of the Joint Venture, ownership of the project would be shared between Madison Equities and the Neumann Group. Madison Equities alleges that it was to hold a 15% undiluted interest that would carry over to the completed hotel, and the Neumann Group would hold the remaining 85% interest in the project. Additionally, Madison Equities was to be the exclusive developer for the Hotel, receiving a 5% fee based on the project's hard costs as payment. The Neumann Group vigorously denies that it ever agreed to these terms, arguing that Gladstone's propositions that plaintiff be the exclusive developer for the project and that he hold an undiluted interest were, simply put, his "wishes," although the Neumann Group acknowledges that plaintiff was responsible for procuring financing for the project.
This 15% interest was to be derived from the hotel's income once completed, and would last "forever, until the end of the lease." Gladstone Dep. at 49, Vol. II.
The Neumann Group formed Hudson Green, LLC ("Hudson Green") in April of 1999, as a single-purpose entity for the development of the hotel, and Madison Equities thereafter formed plaintiff Madison Hudson Associates, LLC ("Madison Hudson"), to hold its 15% membership interest in Hudson Green that it eventually acquired. The remaining 85% interest in Hudson Green was held by the managing members, the Neumann Group. Additionally, plaintiffs allege that Hudson Green was to hold the joint venture's 100% ownership of the project to develop the hotel.
Gladstone, Madison Equities and Madison Hudson are herein after referred to collectively as "plaintiffs."
Defendant Achenbaum Family Partnership, L.P. ("Achenbaum Family") is a limited partnership, whose general partner and president is defendant William Achenbaum. Defendant Gansevoort Hotel, LLC (the "Gansevoort") is also managed by the Achenbaum Family. The Gansevoort was formed in March of 2001, during negotiations between the Neumann Group and the Achenbaum Defendants for a potential buyout of the Neumann Group's interest in Hudson Green.
In April of 1999, Hudson Green entered into a long-term ground lease ("Lease") for the Project Site. However, due to a downturn in the hotel development market, in addition to mounting costs related to the project, the Neumann Group claims it became increasingly more difficult to procure financing for the hotel. Accordingly, the Neumann Group decided it wanted to end its participation in the project by selling its interest in Hudson Green to a third-party or to plaintiffs, who remained very committed to developing the hotel.
Plaintiffs and the Neumann Group began negotiations for a buyout of the latter's interest in Hudson Green, resulting in three letter agreements executed in mid to late 2000 which contemplated the terms of Madison Hudson's potential buyout of the Neumann Group's interest.
Letter Agreements of 2000
Pursuant to the letter agreement executed on June 2, 2000, plaintiffs had until July 18, 2000 to notify Neumann Group of its intention to purchase its interest and to make a deposit of $500,000. In the event that plaintiffs failed to make the payment and provide notification, the Neumann Group was free to sell Hudson Green's property to a third-party. The deadline for a buyout passed with no deal, however, and the parties continued to negotiate, resulting in another letter agreement executed on October 20, 2000.
Under this Agreement, Madison Hudson agreed to make the upcoming rent payment on the Lease of $500,000, thereby preserving its right to continue pursuing a buyout of the Neumann Group's interest, by November 6, 2000. The deadline again passed, and no buyout was consummated, but based on the belief that a deal was imminent, in what Neumann Group describes as plaintiffs' "last clear chance" to purchase its interest, the parties entered into a third letter agreement on November 13, 2000 ("November 13 Agreement").
The November 13 Agreement provided that Madison Hudson would make an additional payment of $500,000, thereby increasing it's aggregate capital contribution to Hudson Green to $1 million, and reducing the Neumann Group's aggregate capital contribution to $900,000. The Agreement additionally stated that in the event a buyout did not occur by November 20, 2000, the Neumann Group could exercise its option to market and sell Hudson Green's property to an unrelated third-party, plaintiffs' entire capital contribution to Hudson Green would be returned, and Madison Hudson would continue to hold a 15% interest in Hudson Green. Formation of the Gansevoort
The meaning and consequences of several key terms of the November 13 Agreement remains sharply in dispute. According to plaintiffs, the November 13 Agreement was not intended to extinguish the oral Joint Venture agreement, therefore, even if plaintiffs did not procure a buyout and the Neumann Group sold Hudson Green's Lease to a third party, Madison Hudson would continue to own a 15% undilutable carried interest in the project, and Gladstone would remain the exclusive developer. In contrast, the Neumann Group alleges that the November 13 Agreement specifically provided that if a buyout from Madison Hudson was not effectuated, return of plaintiffs' $1 million deposit notwithstanding, upon the Neumann Group's sale of the Lease to a third party, the parties would be released of all obligations to each other.
Despite the efforts made, an agreement for the buyout of the Neumann Group's interest in Hudson Green never came to fruition, and the Neumann Group notified plaintiffs of its intention to market and sell Hudson Green's property.
The Neumann Group thereafter retained the brokerage firm of Grub Ellis to market the Lease. According to plaintiffs, however, instead of marketing Hudson Green's Lease in good faith to an "unrelated third-party" pursuant to the November 13 Agreement, the Neumann Group undermined Grub Ellis' marketing efforts in order to jointly develop the hotel with its current business partners, the Achenbaum Defendants, without the plaintiffs' participation.
To this end, plaintiffs allege that the Neumann Group and the Achenbaum Defendants secretly arranged that in exchange for the transfer of the Lease for inadequate consideration, the Neumann Group would retain a 20% interest in the development entity formed by the Achenbaum Defendants, the Gansevoort, for the purpose of pursuing the project to develop the hotel. Pursuant to this alleged secret arrangement, the Achenbaum Defendants were to develop the hotel, in direct contravention to that provision of the Joint Venture agreement which granted Madison Equities the exclusive right to be developer of the Hotel, while additionally diluting Madison Hudson's interest in Hudson Green.
According to the Neumann Group, it marketed the Lease in good faith by retaining a broker. Eventually it sold the Lease to the Achenbaum Defendants on April 17, 2002, for $2.77 million because they proved to be the most viable purchaser. Further, the Neumann Group argues that following the sale of the Lease, neither Hudson Green nor the Neumann Group retained any interest or rights in the property, nor did Neumann Group retain any interest in the project to develop the hotel.
The Achenbaum Defendants acknowledge that while negotiating with the Neumann Group for the sale of the Lease, it formed the Gansevoort in contemplation of an arrangement whereby in exchange for the Lease, the Neumann Group would acquire a 20% interest in the Gansevoort. Despite forming this entity, the Achenbaum Defendants argue that no agreement was ever reached for the transfer of the Lease to the Gansevoort.
Further, the Achenbaum Defendants' position throughout this action has been that plaintiffs named the wrong entity in this action, "Gansevoort Hotel LLC," as this entity holds no interest in the Lease, because negotiations with the Neumann Group did not result in an executed agreement. The Achenbaum Defendants argue that instead, plaintiffs should have named "Hotel Gansevoort Group," ("HG Group"), the entity that eventually purchased the Lease from Hudson Green. The Achenbaum Defendants respond that "the leasehold interest of Hudson Green was never transferred to defendant Gansevoort or to any of the Achenbaum Defendants."
Gabriele Aff. at 5; See also Achenbaum Defendants' Not. Mot. at ¶ 15 ("Hudson Green . . . transferred the leasehold interest in the Premises [Hotel] to HG Group, not to any of the Achenbaum Defendants").
The Achenbaum Defendants repeat several times throughout their papers, that "the leasehold interest of Hudson Green was never transferred to . . . any of the Achenbaum Defendants," Gabriele Aff. at 5., in addition to "the Achenbaum Defendants were not involved in the lease acquisition; it was [HG Group]." Achenbaum Aff. at ¶ 28. Buried in its affidavits, however, the Achenbaum Defendants admit that HG Group was actually formed by and is currently managed by the Achenbaum Defendants. Achenbaum Aff. at ¶ 18.
According to the NYS Department of State ("DOS"), Division of Corporations Entity Information, HG Group was formed as a limited liability corporation and filed as such with the DOS on April 19, 2002, just two days after the Neumann Group sold the Lease to HG Group. Incidentally, the same address is listed for service of process to the Department of State for defendant Gansevoort as for HG Group. See also the letter agreement between Hudson Green and HG Group of 8/17/02, regarding HG Group's buy-out of Hudson Green's Lease, wherein it states that Hudson Green is to assign the Lease to HG Group or "any entity by HGG [HG Group] which is owned and/or controlled, and/or managed by William S. Achenbaum," who is defined as the "Purchaser." The court remains perplexed and troubled by the Achenbaum Defendants' and its counsel's misleading sworn statements that the Achenbaum Defendants are not involved with, nor do they have any interest in HG Group, the current owners of the Lease. These documents prove otherwise.
Plaintiffs commenced this action in August of 2001, seeking (1) declaratory judgment that sale of the Lease is void as ultra vires, (2) breach of the Joint Venture agreement by the Neumann Group's dilution of its interest in Hudson Green and granting development rights to the Achenbaum Defendants, (3) breach of fiduciary duty by diverting corporate opportunities, (4) specific performance of the Joint Venture agreement, (5) an accounting and constructive trust, (6) tortious interference with the Joint Venture agreement and the November 13 Agreement, (7) breach of the November 13 Agreement by retaining Madison Hudson's capital contributions, (8) unjust enrichment, (9) fraudulent conveyance by rendering Hudson Green insolvent and selling the Lease for unfair consideration, and (10) breach of fiduciary duty and waste by rendering Hudson Green insolvent. The fourth, sixth and ninth causes of action are asserted against the Achenbaum Defendants in addition to the Neumann Group, and the eighth cause of action is asserted against the Achenbaum Defendants only. The Neumann Group counterclaimed plaintiffs for tortious interference and defamation, and the Achenbaum Defendants counterclaimed plaintiffs for defamation, and abuse of process and malicious prosecution.
The Neumann Group previously moved to dismiss the complaint, which was denied by this Court on September 30, 2002. The Neumann Group and the Achenbaum Defendants, again moved for dismissal, which was denied by the Court on August 1, 2003, on the ground that numerous questions of fact remained and plaintiffs should be afforded the right to conduct discovery. At the same time, the Court granted plaintiffs' cross motion for partial summary judgment for the return of $1 million capital contribution from the Neumann Group. Discussion
Since the Court's decision, the parties have conducted extensive discovery, including the production of thousands of documents, and sixteen depositions.
Due to the parties' inability to stipulate as to what date interest on this sum began to accrue, on July 23, 2004, the Court ordered an evidentiary hearing to resolve the factual issue of whether the Neumann Group's marketing efforts were a sham, such that interest began to accrue on February 26, 2001 as provided in the November 13 Agreement, rather than when the Lease was actually sold, on August 8, 2002. In a conference held on August 13, 2004, the court reserved determination of this factual issue in lieu of holding a hearing; this determination has not yet been made.
On a motion for summary judgment, the movant must demonstrate by admissible evidentiary proof that no disputed issues of material fact remain that would otherwise warrant a trial. Garrett v. Unanimity Construction, 160 AD2d 546, 547 (1st 1990). For the foregoing reasons, the defendants' motions for summary judgment are granted on all claims with the exception of the claim for an accounting and unjust enrichment, asserted against the Neumann Group.
A. Declaratory Judgment
Plaintiffs argue they are entitled to a declaratory judgment that sale of the Lease is void as ultra vires because the sale was effectuated without plaintiffs' consent, in violation of Limited Liability Corporations Law § 402 and § 503. Plaintiffs maintain that by increasing its aggregate capital contribution in Hudson Green to $1 million, pursuant to the November 13 Agreement, plaintiffs held a 52.63% majority interest in Hudson Green, while the Neumann Group's capital contributions capped at $900,000, a 47.37% interest in Hudson Green. Therefore, plaintiffs argue its consent was required for the sale of Hudson Green's only income producing asset. The Neumann Group maintains that they had plaintiffs' permission to sell the Lease by its execution of the November 13 Agreement, which authorized the Neumann Group to exercise its option to market and sell the Lease.
The LLCL provides that "the vote of a majority interest of the members entitled to vote thereon shall be required to . . . approve the sale, exchange, lease, mortgage, pledge or other transfer of all or substantially all of the assets of the limited liability company." LLC § 402(d)(2).
Members of a limited liability corporation may provide written consent in order to take action in lieu of an actual vote, unless the operating agreement provides otherwise. LLC § 407(a) ("Whenever under this chapter members of a limited liability company are required or permitted to take any action by vote, except as otherwise provided in the operating agreement, such action may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action to so taken shall be signed by the members who hold the voting interests having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting . . .").
The Neumann Group argues that by executing the November 13 Agreement, plaintiffs authorized the Neumann Group to sell the Lease, and therefore, a vote was not required. The November 13 Agreement provides in part,
In the event the closing of the Transaction [Madison Hudson's buyout of the Neumann Group's interest] does not occur by November 22, 2000, Broadway [Neumann Group], at its option, shall be free to cease negotiations with . . . Madison [Hudson] regarding the Transaction, and, thereafter . . . Broadway shall have the right, at its option, to market and sell the property [the Lease] owned by the Company [Hudson Green] to any third-party . . .
As to whether Hudson Green's operating agreement allows for a vote on action to be taken by written consent, under Hudson Green's Operating Agreement, dated September 24, 1998, section 2.10 "Voting Rights", states only that "the affirmative vote of the holders of, in the aggregate, a majority of the Interests shall be required for the approval of any action or matter requiring a vote or consent of the Members . . ."
While plaintiffs allege in its amended complaint that Hudson Green has no operating agreement, the Neumann Group has produced Hudson Green's operating agreement, dated September 24, 1998, that was fully executed by its founding members, Neumann, and Herzka. Plaintiffs do not dispute that they were made aware of this version of Hudson Green's operating agreement, based on a memorandum from Gladstone's counsel to the Neumann Group's counsel, and "cc'ed" to Gladstone, entitled "Hudson Green LLC Operating Agreement." The opening sentence of the memorandum states, "I thought it would be helpful to put several of the significant issues in a short memo to act as a guide for the first re-draft of the Operating Agreement."
That plaintiffs' counsel was negotiating a redraft of Hudson Green's operating agreement with the Neumann Group clearly indicates that plaintiffs had both knowledge of the operating agreement's existence and a familiarity with its terms. Neither party disputes that plaintiffs' suggested re-draft of the operating agreement was never adopted by the parties.
In Tic Holdings, in determining whether an LLC's manager had the authority to bind the LLC to a transfer of all of the LLC's assets to a third party in the absence of a majority vote of the LLC's members entitled to vote, the court looked to whether the LLC's operating agreement delegated to the manager any authority to override the voting requirements of LLCL § 402(d)(2). Tic Holdings v. Hr Software Acquisition Group, 194 Misc 2d 106, 109 (NY Cty 2002) affd 301 AD2d 414 (1st Dept 2003).
As the operating agreement at issue delegated authority to the manager to make sales or transfers of the LLC's assets only if done in the ordinary course of business, and otherwise required the affirmative vote of its members, the court held the transfer of assets void, because the operating agreement required the affirmative vote of the majority in interest of plaintiff's members in order to transfer the LLC's assets, and the manager's proposal to effect the transfer unless the LLC's members objected did not constitute an affirmative vote. Tic Holdings, 194 Misc 2d at 109.
Unlike in Tic Holdings, here, Madison Hudson provided affirmative authorization by its execution of the November 13 Agreement. Further, plaintiffs acknowledge that subsequent to execution of the November 13 Agreement, it understood that the Neumann Group intended on exercising its option to sell the Lease, whereas in Tic Holdings, the manager notified the members that he would effect a transfer of assets unless he received objections by a certain date, after being notified that plaintiff would be away on holiday during the time period the manager allotted for objections, and therefore was unable to render objections. Id. at 107.
The court also rejects plaintiffs' additional argument, that although the November 13 Agreement authorized the Neumann Group to market and sell the Lease, the parties thereafter "set aside" this agreement so the parties could include Achenbaum into the existing Joint Venture. Plaintiffs offer no further evidence to support Gladstone's claim that the parties intended to "set aside" the November 13 Agreement. Documentation submitted by the Neumann Group suggests otherwise. In a letter to Gladstone dated December 5, 2000, Weldler writes, ". . . please be advised that pursuant to paragraph 4 of our letter agreement of November 13, 2000, we have begun negotiating the sale of the property to a third party." Further, Gladstone's letter of December 19, 2000 to Weldler discusses his wish to be informed of the Neumann Group's marketing efforts to sell the property, indicating his acknowledgment that the November 13 Agreement remained in effect, and that the Neumann Group was exercising its option to market and sell the Lease. Accordingly, because the November 13 Agreement amounted to written consent to action taken by Hudson Green, the sale of Hudson Green's property pursuant to that Agreement did not violate LLCL § 402 and is not ultra vires. Plaintiffs' claim for a declaratory judgment must be denied.
Gladstone Dep. at 52, Vol. II.
The letter can be found at Neumann Group's Not. Mot. at Exh. 10.
The letter can be found at Neumann Group's Not. Mot. at Exh. 11.
B. Breach of the Joint Venture Agreement
Plaintiffs argue that the Neumann Group breached several key terms of the Joint Venture agreement by granting development rights to the Achenbaum Defendants and by diluting Madison Hudson's interest in the hotel by its sale of the Lease. Plaintiffs urge the court to deny the Neumann Group's motion for summary judgment to dismiss this claim on the ground that disputed issues of fact exist as to whether the parties intended these terms of the oral Joint Venture agreement to exist independently of and survive the letter agreements.
The Neumann Group argues that it did not agree to be bound by the terms that plaintiffs allege were breached, and further, the parties intended to terminate their relationship under the November 13 Agreement, irrespective of whether Madison Hudson succeeded in buying out its interest. Therefore, the Neumann Group argues, it cannot be held liable for breaching obligations which the plaintiffs voluntarily surrendered by its execution of the November 13 Agreement.
While an underlying oral joint venture can survive the parties' subsequent written agreements, the evidentiary record must demonstrate that the parties intended the joint venture to survive as such. Louis Dreyfus Corp. v. ACLI International, Inc., 52 NY2d 736, 739 (1980) (where two parent corporations entered into an oral partnership agreement to share profits between their subsidiaries, a merger clause contained in a subsequent written agreement between the subsidiaries did not preclude the enforceability of the oral partnership agreement which contained differing terms not encompassed by the subsequent written agreement).
Moreover, plaintiffs, as the parties seeking to enforce these terms of the oral Joint Venture agreement with the Neumann Group, bear the burden of demonstrating that these terms were binding on the Neumann Group beyond the sale of its interest, as contemplated in the November 13 Agreement. Paz v. Singer Co., 151 AD2d 234, 235 (1st Dept 1989) ("It is black letter law that the burden of proving the existence, terms and validity of a contract rests on the party seeking to enforce it"). In the event that ambiguity exists regarding terms, plaintiffs may rely on parol evidence to establish acts of part performance that confirms the existence of these terms. Eden Temp. Serve. v. House of Excellence, Inc., 270 AD2d 66 (1st Dept 2000).
In support of its claim, plaintiffs argue that although a written joint venture agreement was never executed, its essential terms were indisputably reduced to writing. To this end, plaintiffs rely on a letter sent to Neumann, dated July 16, 1998, wherein Gladstone writes that he is attaching a "brief summary of what I believe we discussed regarding our partnership agreement." Under the section entitled "Madison Equities' Role and Remuneration," Gladstone writes,
The Letter can be found at Goldman Aff. at Exh. B.
Receipt of a 15% equity interest in the project . . . Madison's carried interest will not be diluted, pledged or assessed.
Plaintiffs further rely on an amended memo of a proposed re-draft of Hudson Green's operating agreement, sent by Gladstone's counsel to Weldler's counsel, and dated April 19, 1999. The proposed terms include a section stating, "Under no circumstances is Madison to be diluted," and another section indicating that the parties should draft a development agreement setting forth "Madison's role as developer for the project."
The letter can be found at Goldman Aff. at Exh. D.
Plaintiffs additionally rely on the deposition testimony of Gladstone, wherein he testified, "I told them [Neumann Group] that I wanted a 15% undiluted interest in the property," and although this was agreed to in principle, the parties also agreed that Madison Hudson's percentage interest could go down in the event that the Neumann Group transferred more than 60% of the remaining interest in the hotel to another party. Plaintiffs do not submit any documentary or testamentary evidence suggesting that the Neumann Group agreed to adopt these terms, however, and neither party disputes that Hudson Green's operating agreement was ever amended to include Gladstone's proposed terms.
Gladstone Dep. at 68, Vol. I.
Gladstone Dep. at 72, Vol. I.
The Neumann Group opposes plaintiffs' assertions that these terms were agreed upon, arguing instead that while the parties discussed these terms, its enforceability was contemplated only to the extent that Madison Hudson and the Neumann Group continued the project together. Accordingly, once it became evident that the Neumann Group desired to end its participation in the project by entering into the November 13 Agreement, the Neumann Group intended to end its participation in the project to build the hotel, in addition to its purported joint venture with plaintiffs.
To demonstrate that the parties intended the joint venture to end, the Neumann Group relies on the deposition testimony of Gladstone, and correspondence exchanged between the parties following the specified deadline for a buyout by Madison Hudson under the November 13 Agreement. Following is an excerpt of Gladstone's deposition,
Q. Is the reason that you entered into this letter agreement [November 13 Agreement] with the Neumann [Group] defendants because you both wanted to terminate your relationship with each other?
A. They told me they did not want to go forward with their development . . . I wanted to go forward with the development. I would have still done it with them . . .
Q. The Neumann [Group] Defendants wanted out of their relationship with you, isn't that correct, in November of 2000?
A. They wanted me to buy them out or they wanted to sell the property.
Q. They wanted out of the relationship with you?
A. Well, that's two different concepts. . . .
Gladstone further testified that in March of 2002, in the midst of negotiating a buyout by the Achenbaum Defendants, the Neumann Group met with plaintiffs to once again discuss the possibility of a buyout. Gladstone indicated that Weldler told him at this time that the price for a buyout of its interest was $3 million. Weldler additionally told Gladstone that if this buyout was successful, then, "we [Neumann Group] are history . . . we want out."
Gladstone Dep. at 30, Vol. II.
The Neumann Group's numerous expressions of its desire to end its participation in the project, coupled with its' actions of exercising its option to market and sell the property amount to a withdrawal by a joint venturer, such that the joint venture was terminated. A joint venture cannot exist where one party makes evident its intent to no longer be associated with the other joint venturer. North River Insurance Co. v. Spain Oil Corp., 135 Misc 2d 480, 483 (Sup Crt NY County 1987). Rather, the existence of a joint venture is established by acts "manifesting the intent of the parties to be associated as joint venturers, mutual contribution to the joint undertaking through a consideration of property, financial resources . . . a measure of joint proprietorship and control over the enterprise, and a provision for the sharing of profits and losses." Richbell Info Servs. v. Jupiter Partners L.P., 309 AD2d 288, 298 (1st Dept 2003). Further, "a partnership or joint venture terminates with the withdrawal of any joint venturer or partner, or on the parties' agreement to terminate the venture." North River Insurance Co. v. Spain Oil Corp., 135 Misc 2d 480, 483 (Sup Crt NY County 1987).
In addition to acknowledging that the Neumann Group was withdrawing from its association with plaintiffs, Gladstone indicates his understanding that the sale of the Neumann Group's interest in Hudson Green would necessarily terminate any obligations the Neumann Group may have had to the project to develop the hotel, to plaintiffs, and additionally, if the Neumann Group sold the Lease to a third party, the plaintiffs would then logically have no obligations or rights in the project. Indeed, Gladstone testified,
Q. Was it your understanding that once you bought out the Neumann [Group] defendants, they would have no more responsibilities for the property?
A. That's correct.
Q. And isn't it a fact that if the Neumann [Group] defendants sold the property to someone else, neither you nor them would have any responsibilities for the property?
Gladstone Dep. at 235-236, Vol. I.
Furthermore, as to the terms of the joint venture that plaintiffs seek to enforce beyond the November 13 Agreement, testamentary evidence on both sides contradicts the alleged term that Gladstone would be the exclusive developer for the project, even beyond a sale of the Lease. Madison Hudson's principal, Lesher, who worked closely with Gladstone on all aspects of Madison Hudson's dealings in the project to build the hotel, testifies that it was understood that if the property were sold to a third party, Gladstone's role as developer would necessarily cease.
Q. Is it your understanding that if the Neumann [Group] defendants sold the property to an unrelated third party in an arm's-length transaction, that Madison Equities would no longer have any association with the property?
A. You mean if the entire property was sold 100% to some third party? That's correct.
Q. So it was not a requirement under the letter agreement that if the property were sold you — and I say 'you' meaning the entities of Gladstone — would continue to be developer for the property?
A. I don't remember it being phrased that way, no.
Lesher Dep. at 176.
Gladstone himself concedes in his deposition testimony that if the property were sold, his role as exclusive developer would necessarily end.
Q. . . . that exclusivity [as developer] wouldn't apply if the property were sold; correct?
A. If the property were sold, it wouldn't apply, correct.
Gladstone Dep. at 180, Vol. II.
Q. . . . If the Neumann [Group] defendants had sold the property in accordance with the November 13th letter agreement, would you agree you would have no property to develop, you and Madison Equities?
A. It was an unrelated third party in accordance with this?
Q. Right.
Gladstone Dep. at 272-273, Vol. II.
Moreover, the Neumann Group has submitted testamentary evidence indicating that it held a similar understanding, specifically, that Gladstone would be the developer of the hotel only if Hudson Green remained involved in the project.
Q. . . . it was understood that Mr. Gladstone was going to be the project developer?
A. It was understood that if we [Hudson Green] were to develop the property and build the hotel that Mr. Gladstone would be the developer.
Weldler Dep. at 52.
As for the term that Madison Hudson was to hold a 15% undiluted carried interest in the hotel beyond a sale of the Lease to a third party, Lesher additionally testifies to his understanding that this term was effective and binding only prior to Neumann Group's sale of the Lease.
Q. . . . Assuming for the moment there had been a [Lease] sale to an unrelated third party in an arm's length transaction, is it correct that your [Madison Hudson's] undiluted 15% interest in the entity [Hudson Green] ended at that point?
A. I'm just assuming that the sale was made and was a sale of 100% interest. Our 15% undiluted interest would have been liquidated, we would have received a check and that was the end of it.
Lesher Dep. at 205.
The record before the court indicates that the Neumann Group and plaintiffs intended the enforceability of these terms to end upon the Neumann Group's sale of the Lease. Furthermore, plaintiffs have failed to raise a disputed issue of fact that the Neumann Group breached the joint venture by selling the entire Lease to the Achenbaum Defendants without reserving any rights for plaintiffs' continued participation in the project, either as the exclusive developer or as holder of a 15% undiluted interest. Neither does the record indicate acts of part performance by Madison Hudson which otherwise confirms that these terms were intended to survive the Neumann Group's sale of the Lease. Eden Temp. Serve. v. House of Excellence, Inc., 270 AD2d 66 (1st Dept 2000).
Plaintiffs' argument that this court already rejected the Neumann Group's position that the November 13 Agreement terminated the joint venture is unavailing and, further, is a mischaracterization of this court's decision. Rather than rejecting the Neumann Group's position, the court held that the motions were premature and discovery was necessary. As extensive discovery has been conducted by all parties since that decision, and plaintiffs have otherwise failed to demonstrate factual evidence sufficient to overcome substantial contradictory evidence that the Neumann Group intended to withdraw from the joint venture, signifying an end to the enforceability of these terms, defendants' motion for summary judgment on the claim for breach of the Joint Venture agreement is granted.
See Court's Decision of 9/30/02 and 8/1/03.
C. Breach of Fiduciary Duty
Plaintiffs claim that the Neumann Group breached its fiduciary duty as joint venturer by diluting Madison Hudson's 15% ownership in Hudson Green without its consent, and by diverting business opportunities belonging to the Joint Venture, including 100% ownership in the proposed hotel and 100% ownership of the Lease.
Members of a joint venture owe a fiduciary duty to one another, which includes the duty of undivided loyalty. Blue Chip Emerald LLC v. Allied Partners Inc., 299 AD2d 278, 279 (1st Dept 2002). Furthermore, co-venturers may not engage in self-dealing, and are otherwise under an affirmative duty to communicate business opportunities to one another. Birnbaum v. Birnbaum, 73 NY2d 461, 466 (1989). The fiduciary duties of co-venturers subsists only while the association continues, however. NOW Productions, Inc. v. Ernest Tidyman Productions, Inc., 73 AD2d 168, 171 (1st Dept 1980). Accordingly, while the Neumann Group had a duty not to exclude plaintiffs from business opportunities while associated with the joint venture, Meinhard v. Salmon, 249 NY 458, 465 (1928), this duty necessarily ceased with the termination of the joint venture by the Neumann Group's withdrawal therefrom.
As indicated above, the joint venture between the Neumann Group ended by the exercise of its option to market and sell the Lease pursuant to the November 13 Agreement, therefore, the Neumann Group was not under an affirmative duty to communicate business opportunities related to the project to plaintiffs after this point in time. Neither have plaintiffs alleged or offered a factual basis demonstrating that the Neumann Group engaged in acts constituting breach of its fiduciary duty prior to execution of the November 13 Agreement. Therefore, the third cause of action is dismissed.
D. Specific Performance and Injunctive Relief
Plaintiffs seek specific performance of the Joint Venture agreement by directing the Neumann Group to restore the joint venture by reconveying the Lease back to Hudson Green, and confirming Madison Hudson's 15% ownership interest in the hotel, Gladstone's right as the exclusive developer for the hotel, and permanently enjoining defendants from closing on any agreements that relate to the property, without plaintiffs' prior consent.
Generally, "specific performance is appropriate when money damages would be inadequate to protect the 'expectation interest of the injured party,' and when performance will not impose a disproportionate or inequitable burden on the breaching party." Cho v. 401-403 57th St. Realty Corp., 300 AD2d 174, 175 (1st Dept 2002). As the hotel has already been developed and has been fully operating for some time, plaintiffs' claim for specific performance is virtually impossible. Further, plaintiffs have not demonstrated that they are entitled to equitable relief because money damages are inadequate. Therefore, the fourth cause of action is dismissed.
E. Accounting and Constructive Trust
Plaintiffs seek an accounting for Hudson Green, including information related to income received by Hudson Green from operation of the parking lot in its capacity as lessee, and an award of income it alleges is rightfully owed to Madison Hudson. Additionally, plaintiffs seek a constructive trust to the extent of awarding Madison Hudson 15% ownership interest in the hotel, including Madison Hudson's share of all profits derived by the Neumann Group for sale of the Lease.
The right to an accounting "is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest." Palazzo v. Palazzo, 121 AD2d 261, 265 (1st Dept 1990). Further, in order to obtain a court order to obtain an accounting, "plaintiff must show a demand for an accounting and a failure or refusal by the partner with the books, records, profits or other assets of the partnership in his possession to account to the other partner." Blaustein, 161 AD2d at 508.
As plaintiffs have failed to raise an issue of disputed fact establishing a breach of fiduciary duty by the Neumann Group in its sale of the Lease, discussed above, which it seeks an accounting of, plaintiffs' claim for an accounting of the sale of the Lease also fails. Palazzo, 121 AD2d at 265. Plaintiffs have raised an issue of fact, however, relating to whether the Neumann Group provided an accounting upon plaintiffs' demand, for income received by the operation of the parking lot prior to the sale. Under the November 13 Agreement, Madison Hudson is entitled to 15% of the net proceeds of the operations of the parking lot, until the time that Hudson Green sold the Lease:
. . . After such time as the Company shall have made distributions to Broadway [Neumann Group] and Madison [Hudson] in an amount equal to their aggregate capital contributions, all distributions [from operations on the property] shall be made 85% to Broadway and 15% to Madison.
Accordingly, the Neumann Group is not entitled to summary judgment on plaintiffs' claim for an accounting of Hudson Green until the Lease was sold.
A constructive trust may be imposed when property has been acquired in such circumstances that the holder of legal title may not in good conscience retain the beneficial interest, and "it requires a showing of a confidential or fiduciary relationship, a promise, a transfer of property in reliance on that promise and unjust enrichment." Sharper v. Harlem Teams for Self-Help, Inc., 257 AD2d 329, 332 (1st Dept 1999). While the joint venture clearly establishes the existence of a confidential or fiduciary relationship between plaintiffs and the Neumann Group, and there was, indisputably, a transfer of property by the sale of the Lease to the Achenbaum Defendants, plaintiffs have otherwise failed to establish a promise or undertaking on the Neumann Group's part respecting that property. Indeed, as discussed at length above, the Neumann Group clearly indicated its intention to exercise its option to market and sell the property. Therefore, the cause of action for a constructive trust as to the Neumann Group is dismissed.
To the extent that plaintiffs seek an accounting and imposition of a constructive trust against the Achenbaum Defendants, the claim is dismissed, as these claims cannot stand in the absence of a fiduciary or other confidential relationship. Saunders v. AOL Time Warner, Inc., 2005 NY App Div Lexis 4762, 3 (1st Dept 2005).
F. Tortious Interference with Contractual Relations
Plaintiffs claim that the Achenbaum Defendants deliberately interfered with and induced a breach of the Joint Venture agreement, and that term of the November 13 Agreement requiring that the Lease be sold to an "unrelated" third party.
As discussed above, the Joint Venture agreement was not in effect by the time the Lease was sold, therefore only the claim for tortious interference with the November 13 Agreement will be discussed herein.
The Achenbaum Defendants move for summary judgment on this claim, on the ground that while they did have knowledge of the November 13 Agreement, as they are not a "related party," and, furthermore, although it performed services on the project prior to the sale of the Lease, and eventually purchased the Lease from Hudson Green through HG Group, there is no evidence to suggest that it did anything to affirmatively solicit or induce the Neumann Group to breach the November 13 Agreement by the Neumann Group.
The Achenbaum Defendants additionally argue that plaintiffs are not permitted to raise an alternate cause of action in its opposition to summary judgment that they failed to plead in the amended complaint. That plaintiffs did not plead tortious interference with the November 13 Agreement in the amended complaint, rather only pled tortious interference with the Joint Venture agreement, is not grounds for the grant of summary judgment on the claim in favor of the Achenbaum Defendants as a matter of law, however, if plaintiffs' submissions in opposition to the motion otherwise provide evidentiary facts making out a cause of action for tortious interference with the November 13 Agreement. Alvord Swift v. Stewart M. Muller Constr. Co., 46 NY2d 276, 281 (1978). See also Irving Finance Corp. v. Wegener, 30 AD2d 958, 959 (1st Dept 1968) ("A motion for summary judgment, to be decided in the interests of justice, is to be determined upon the facts appearing in the record without regard to technical defects or deficiencies in the pleadings.") Therefore, the court will consider the facts underlying the claim for tortious interference with the November 13 Agreement submitted in opposition to defendants' motion for summary judgment.
On a claim for tortious interference with a contract, plaintiffs must demonstrate the existence of a valid contract between itself and the Neumann Group, the Achenbaum Defendants' knowledge of that contract, intentional interference with that contract without justification, and resulting breach of the contract, and damages therefrom. 330 Acquisition Co., LLC v. Regency Savings Bank, F.S.B., 293 AD2d 314, 315 (1st Dept 2002). Plaintiffs must prove that the contract would not have been breached but for the Achenbaum Defendants' conduct. Lana Samer, Inc. v. Goldfine, 7 AD3d 300, 301 (1st Dept 2004). The Achenbaum Defendants concede that it gained knowledge of the November 13 Agreement while meeting with the Neumann Group to discuss the prospect of purchasing the Lease, and in fact, reviewed the Agreement.
The parties sharply dispute their intent behind inserting the term "related" in the November 13 Agreement, and neither does the Agreement define it.
Under the November 13 Agreement,
In the event the closing of the Transaction [a buyout] does not occur by November 22, 2000, Broadway [Neumann Group], at its option, shall be free to cease negotiations with TSP and Madison [Hudson] regarding the Transaction, and . . . Broadway shall have the right, at its option, to market and sell the property [the Lease] owned by the Company [Hudson Green] to any third-party. Notwithstanding the foregoing, if the closing of the Transaction shall fail to occur by November 22, 2000, Broadway shall undertake, prior to February 22, 2001, to cause the Property to be marketed for sale in a bona-fide arms-length transaction to any unrelated third-party. If Broadway shall not have caused the Property to be so marketed . . . Broadway shall cause the Company . . . to distribute, by wire transfer of immediately available funds, to Madison the outstanding amount of Madison's capital contributions, in which event, Broadway shall have no further obligations to cause the Property to be marketed for sale.
Plaintiffs wish the court to adopt the construction that this provision was intended to mark the boundaries of any permissible relationship between the Neumann Group and the ultimate purchasers by limiting the pool of potential purchasers, and therefore. Furthermore, plaintiffs urge the court to rule as a matter of law that the Achenbaum Defendants are related parties in breach of the November 13 Agreement, due to the Neumann Group and the Achenbaum Defendants' partnership involving their joint sale of property in December of 2000, and the overlapping of the commencement of negotiations regarding Hudson Green's property and this partnership, in addition to an investment deal undertaken jointly in Atlanta in the summer of 2003.
In contrast, the Neumann Group argues that by its execution of the November 13 Agreement, plaintiffs consented to an unrestricted sale with full authority granted to the Neumann Group to sell to whomever they wished. Furthermore, the Neumann Group argues that the term "sale to an unrelated third-party" was inserted to insure the sale price was for fair value, and they have otherwise demonstrate that the sale was made for fair value. Peter Miller, Esq., who represented the Neumann Group in negotiating the drafting of the November 13 Agreement, testified that plaintiffs requested this provision be inserted to preclude a sale to any of the Neumann Group members, Neumann, Herzka, or Wedler, or any entity they owned,
Q. . . . Madison Equities didn't want the property sold to an entity owned by Messrs. Herzka, Neumann and Weldler. Well, did you ask Madison Equities why if the property [Lease] were going to be sold for a fair and adequate consideration it would care to whom it was sold.
A. I don't recall.
Q. . . . Do you recall a discussion of what the concept "unrelated" meant?
A. I have testified an entity that was not controlled by Messrs. Neumann, Herzka and Weldler.
P. Miller Dep. at 38-41.
As for Gladstone, while testifying that he had not actually read the November 13 Agreement before he signed it, he stated his understanding of what an "unrelated" third party otherwise meant to him,
A. An unrelated third party is a party to which has no previous business relationship with the first party, is not related to them through birth, does not — I don't know the seven degrees of separation.
Q. So is your understanding of an unrelated third party then if two individuals had entered into a previous business agreement and that agreement had been terminated, would they then be considered related parties?
A. They're related parties.
Q. . . . You would agree with me you are limiting the market of individuals you can sell the property [Lease] to under your definition of unrelated third parties?
Q. . . . What is the source of your information that leads you to believe that is the definition of an unrelated third party?
A. It's unquestionable that that would be a related third party, people that have had business before.
Q. I am asking you what is the basis of your belief of this information?
A. The words [of the November 13 Agreement].
Q. . . . What did you base your understanding of unrelated third party to mean, that it could not involve someone who had prior business dealings; did you look at a book?
A. No, I read the words.
Q. . . . Did you have a discussion with the Neumann [Group] defendants about your understanding of what unrelated third party meant.
Gladstone Dep. at 249-253, Vol. II.
The parties sharply dispute the meaning of the term "sale to an 'unrelated' third-party" in the November 13 Agreement, and neither does the evidentiary record establish what the parties intended due to the existence of disputed issues of fact. Moreover, the court is not prepared to rule that the Achenbaum Defendants are or are not "related" parties as a matter of law while these issues remain outstanding, necessary for determining whether a breach occurred. Accordingly, summary judgment on this theory is not warranted.
However, the letter agreement provides that the lease may be sold to "any third party" and that in the event the property is not "so marketed" to unrelated parties, the remedy shall be the return of plaintiff's capital contribution by an accelerated date. The only damages plaintiffs could assert for the failure to "so market" was the return of the capital contributions, which return has been made, mooting this claim. Accordingly, summary judgment on this claim is granted.
G. Unjust Enrichment
Plaintiffs base their claim for unjust enrichment on the substantial contributions and expenditures invested in the project. In addition, plaintiffs maintain that all defendants unfairly benefitted from its preservation of the Lease by making the required rent payment in 2000. The Neumann Group benefitted from it with the profit it earned from sale of the Lease, and he Achenbaum Defendants benefitted from it in the form of a preserved leasehold interest to purchase. Plaintiffs maintain that equity and good conscience require that defendants should not be permitted to retain these benefits without making restitution to plaintiffs.
The elements for recovery in unjust enrichment are, "(1) the performance of the services in good faith, (2) the acceptance of the services by the person to whom they are rendered, (3) an expectation of compensation therefor, and (4) the reasonable value of the services." Joan Hansen Co. v. Everlast World's Boxing Headquarters Corp., 296 AD2d 103, 108 (1st Dept 2002). Furthermore, plaintiffs must demonstrate defendants reaped a benefit bestowed by plaintiffs, at plaintiffs' expense. Wiener v. Lazard Freres Co., 241 AD2d 114, 119-120 (1st Dept 1998).
Plaintiffs have sufficiently demonstrated that irrespective of its capital contributions to Hudson Green, it performed services and incurred expenses on the project at the Neumann Group's behest while the parties were still associated with each other and working to develop the property jointly, Heller v. Kurz, 228 AD2d 263, 264 (1st Dept 1996), and on which it expected compensation from the Neumann Group in the form of a developer's fee for the years 1999, 2000, and 2001.
Gladstone Dep. at 88, Vol. II.
Gladstone testified that he incurred expenses related to salaries for employees he retained to perform services on the project, rent, postage, machines, messengers, utilities, and the overall costs of his operations, and which he expected his development fee to cover. Gladstone testified that of the services he performed on the project, Neumann Group paid him roughly $50,000 in 1998 only, despite assuring him that it would pay him additional amounts for those services subsequently performed. As disputed issues of fact exist as to the value of those services, the Neumann Group is not entitled to summary judgment on this claim.
Gladstone Dep. at 86-87, Vol. II.
Gladstone Dep. at 49, Vol. II.
As for the Achenbaum Defendants, the First Department stated in Heller v. Kurz, "it is not enough that the defendant received a benefit from the activities of the plaintiffs; if services were performed at the behest of someone other than the defendant, the plaintiff must look to that party for recovery." Heller, 228 AD2d at 264. Plaintiffs performed services related to the property at the 'behest' of, and expected compensation in the form of development fees, from the Neumann Group; the Achenbaum Defendants are therefore "strangers" to the association between plaintiffs and the Neumann Group, and accordingly, the benefits reaped by the Achenbaum Defendants by its purchase of the Lease is not unjust. Citrin v. Columbia Broadcasting System, Inc., 29 AD2d 740, 740 (1st Dept 1968).
H. Fraudulent Conveyance
Plaintiffs' claim for fraudulent conveyance against Hudson Green and Gansevoort is based on its assertion that at the time of the sale of the Lease pursuant to the November 13 Agreement, plaintiffs had a claim against Hudson Green's assets totaling $1 million, and a share of all the proceeds of Hudson Green's operations, which included rents and other income earned from operation of the parking lot on the Project Site. Therefore, plaintiffs argue that Madison Hudson was a creditor of Hudson Green within the meaning of NY Debtor and Creditor Law, and Hudson Green's annual $200,000 income earned from operation of the parking lot was insufficient to satisfy Hudson Green's debt to Madison Hudson.
Accordingly, plaintiffs argue, the Neumann Group's sale of the Lease divested Hudson Green of its only income-receiving asset, and rendered Hudson Green insolvent, with no capital left to satisfy Madison Hudson's claims against it. Plaintiffs maintain that the transfer constituted a fraudulent conveyance within the meaning of NY Debtor and Creditor Law § 273 and § 274. Furthermore, plaintiffs claim that there remain disputed facts regarding whether the Neumann Group deliberately undermined marketing efforts to sell the Lease for fair value, in order to sell the Lease to the Achenbaum Defendants through HG Group at an artificially depressed price.
To succeed in opposing defendants' motion for summary judgment, plaintiffs must provide a sufficient factual basis indicating that the conveyance of the Lease rendered Hudson Green insolvent, and was done without fair consideration. Wall Street Assocs. v. Brodsky, 257 AD2d 526, 528 (1st Dept 1999).
As plaintiffs no longer have financial claims against Hudson Green because it has since been returned its $1 million in capital contributions from the Neumann Group, and otherwise is no longer a creditor of Hudson Green within the meaning of the statute, this claim is moot. Furthermore, because at the time of HG Group's purchase of the Lease, the Achenbaum Defendants required the Neumann Group to sign an escrow agreement which mandated that $1 million of the $3.77 million purchase price be deposited into an escrow account to protect Madison Hudson's $1 million claim against Hudson Green, the sale of the Lease did not render Hudson Green insolvent, as Hudson Green did have assets sufficient to pay its debts. Aside from preserving assets to discharge Hudson Green's debt to Madison Hudson, Hudson Green was left with a profit of $400,000 from the sale of the Lease after payment of a security deposit and rent.
Accordingly, because plaintiffs have failed to demonstrate that Hudson Green was rendered insolvent either prior to or as a result of the sale of the Lease, the Court need not reach the element of whether the sale was for fair consideration. Therefore, defendants' motion for summary judgment dismissing the claim for fraudulent conveyance is granted.
I. Breach of Fiduciary Duty and Waste
Plaintiffs additionally fail to raise triable issues of fact on its claim that the Neumann Group, as managing members of Hudson Green, breached its fiduciary duty by wasting Hudson Green's assets. The crux of plaintiffs claim is that the Neumann Group wasted Hudson Green's assets by sale of the Lease to the Achenbaum Defendants for unfair consideration. As discussed above, plaintiffs have failed to raise an issue of fact that the sale was made for unfair consideration.
Accordingly, it is
ORDERED that defendants' motions for summary judgment are granted to the extent of granting partial summary judgment in favor of defendants as follows:
1. Neumann Group Defendants are granted summary judgment on the first, second, third, forth, fifth (only to the extent of the constructive trust claim and the accounting claim post sale), ninth and tenth claim, and the Clerk is directed to enter judgment accordingly;
2. Achenbaum Defendants are granted summary judgment and the Clerk is directed to enter judgment accordingly; and it is further
ORDERED that the remainder of the fifth cause of action for an accounting and the eighth cause of action against the Neumann Group shall continue.