Opinion
101396/04.
Decided June 28, 2005.
In this action for fraud and unjust enrichment in connection with the sale of a leasehold, TAG 380, LLC ("TAG"), the owner of the leasehold for a commercial building located at 380 Madison Avenue in Manhattan, sues the prior owner of the leasehold, Spartan Madison Corp. and its principals Frederick Barclay and David Barclay (collectively "Spartan"); Howard Ronson ("Ronson"), who allegedly controlled Spartan and was a principal of the owner of the leasehold prior to Spartan; and ComMet 380, Inc., the owner of the fee estate, and its alleged owners, RREEF Corp. and New York State Common Retirement Fund (collectively "ComMet"). TAG seeks damages and injunctive relief based on the allegations that these defendants fraudulently inflated the rent of the leasehold and fraudulently deprived TAG of an option to purchase the fee estate. TAG, which is owned entirely by Sheldon Solow, also sues Allen Silverman, who was the 100 percent owner of TAG at the time the agreement to purchase the leasehold was made, and from whom Solow purchased his interest in TAG. TAG alleges that Silverman participated in the fraud of the other defendants and also charged Solow excessive and illegal closing costs in connection with Solow's purchase of TAG. Defendants Ronson, Spartan, ComMet and Silverman each move to dismiss the second amended complaint ("Complaint"), pursuant to CPLR 3211(a)(7) and (1), and for sanctions.
It is well settled that on a motion to dismiss pursuant to CPLR 3211(a)(7), "the pleading is to be afforded a liberal construction ( see, CPLR 3026). We accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." ( Leon v. Martinez, 84 NY2d 83, 87-88. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 NY2d 144.) However, "the court is not required to accept factual allegations that are plainly contradicted by the documentary evidence or legal conclusions that are unsupportable based upon the undisputed facts." ( Robinson v. Robinson, 303 AD2d 234, 235 [1st Dept 2003]. See also Water St. Leasehold LLC v. Deloitte Touche LLP, ___ AD3d ___, 2005 WL 1389104 [1st Dept 2005].) When documentary evidence under CPLR 3211(a)(1) is considered, "a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." ( Leon v. Martinez, 84 NY2d at 88; Arnav Indus., Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder Steiner, L.L.P., 96 NY2d 300.)
The relevant facts, as alleged in the complaint and conceded to be true for purposes of these motions, are as follows: On or about January 26, 1989, the then owner of the premises, Irving Trust Company, as Trustee under the Last Will and Testament of Harold D. Uris, Deceased for the Benefit of Ruth D. Uris ("Uris Trust"), entered into a 25 year lease of the premises with 380 Madison Avenue Partners ("MAP"). MAP was a general partnership controlled by Ronson. (Complaint, ¶¶ 14, 15.) In 1990, MAP filed a voluntary petition for bankruptcy. MAP's Plan of Reorganization included the sale of the leasehold to Spartan, an entity purportedly affiliated with the Barclays and controlled by Ronson. ( Id., ¶¶ 22, 24.) On or about March 12, 1996, the Uris Trust transferred the fee estate of the premises to 380 Madison Avenue LLC which, on or about June 5, 1997, transferred the fee estate to its current owner, ComMet. ( Id., ¶¶ 30, 32.) On or about November 16, 2000, Spartan and TAG entered into a Purchase and Sale Agreement under which TAG agreed to purchase the leasehold from Spartan for $65 million. ( Id., ¶ 33.) At that time, TAG was wholly owned by Silverman. On or about February 27, 2001, Sheldon Solow purchased Silverman's entire interest in TAG. ( Id., ¶ 34.) On or about February 28, 2001, Spartan assigned the leasehold to TAG. ( Id., ¶ 36.)
According to the complaint, defendants Ronson, the Barclays and Spartan (the "leasehold defendants") participated in an elaborate, if not outlandish, scheme in which they entered into a lease for an excessive rent; failed to exercise an option in the lease to purchase the fee estate and otherwise took fraudulent steps to maintain the excessive rent, notwithstanding that they themselves (or their companies) paid such rent for over a decade; then defrauded TAG by selling the leasehold to TAG without disclosing that the rent had been artificially inflated.
More particularly, as alleged in the complaint, MAP, which was the first owner of the leasehold estate and was allegedly controlled by Ronson, entered into the lease in 1989 for a rent "so exorbitantly high and excessive that no reasonable lessee would have entered into it." (Complaint, ¶ 16.) While MAP was the owner of the leasehold, Ronson diverted $50 million in funds from a mortgage secured by the leasehold to Ronson for his personal benefit, thus maintaining the rent at an excessive rate. Ronson's wrongful scheme was then concealed and furthered by Spartan, an entity purportedly also controlled by Ronson, upon MAP's sale of the leasehold to Spartan in 1991 for a fraction of its value. This transfer of the leasehold to Spartan incidentally also perpetrated a fraud upon the Bankruptcy Court, as it was not disclosed that Spartan was a related purchaser. ( See Complaint, ¶¶ 19-27.) After Spartan acquired the leasehold, it fraudulently nullified the lease option to purchase the fee estate by failing in 1996 to exercise the option, again for the purpose of "maintaining the Leasehold interest at an artificially high rent." ( Id., ¶ 31.) ComMet allegedly knew of and benefitted from this scheme by collecting the artificially inflated rent. ( Id., ¶ 32.)
The underpinning of TAG's fraud claim is the allegation that TAG "acquired the Leasehold with no knowledge that (i) the rent had been fraudulently inflated, or (ii) the Option had been fraudulently nullified through the collusion among Ronson, the Barclays, Spartan Madison and ComMet." ( Id., ¶ 37.) The complaint is significant for what it omits: any allegation that TAG purchased the leasehold, or that Solow purchased his interest in TAG and thereby acquired TAG's interest in the leasehold, without full knowledge of both the rent reserved in the lease and the expiration of the option.
"Count One" of the complaint, the fraud cause of action which is asserted against all of the defendants, summarizes the fraudulent acts of defendants as follows:
55. Defendants knew, but did not disclose to TAG 380, that the ground rent payments as set forth in the Lease did not reflect good faith, arms length negotiations, prevailing economic conditions, or industry custom and practice, but were instead a mere instrumentality of Ronson's illegal scheme to profit from (i) Ronson's fraudulent leasehold mortgage on the Premises, (ii) Ronson's corrupt "sweetheart" deals with related entities, (iii) Ronson's theft of $50 million in mortgage proceeds from the Leasehold owner, and (iv) the resulting and highly profitable "flip" by Ronson of the Leasehold to TAG 380.
57. TAG 380 acquired the Leasehold in reasonable reliance on the false representations and fraudulent omissions by Spartan Madison and the undisclosed participation in the fraud by each of the other defendants.
Count Three of the complaint alleges a related cause of action against ComMet, based on the above allegations, for a declaratory judgment that the rent set forth in the lease is unconscionable. Count Four further alleges that "Ronson, the Barclays and Spartan Madison, with the complicity of ComMet, and its owners, RREEF, the NYSCRF and the DMPF, conspired to nullify the Option [to purchase the premises] in order to keep the ground rent artificially high," and that "[t]he Leasehold owner, now TAG 380, has been deprived of its right to exercise the Option as a result of defendants' self-dealing and illegal and inequitable conduct." (Complaint, ¶¶ 69, 70.) In this cause of action, TAG seeks a declaratory judgment that it is entitled to exercise the option. Count Two, the unjust enrichment claim against the leasehold defendants, and Count Six, the unjust enrichment claim against ComMet, repeat the allegations of the complaint and allege, without elaboration, that these defendants have been unjustly enriched to TAG's detriment. ( Id., ¶¶ 60-63, 77-79.)
As defendants correctly argue, none of these alleged events, even if true, could possibly constitute a fraud or unjust enrichment at TAG's expense. Not only is it undisputed that all of the acts which resulted in the alleged fraudulent inflation of the rent and nullification of the option occurred in the decade or more before TAG's acquisition of the leasehold; but it is also undisputed that TAG purchased the leasehold, and Solow purchased his interest in TAG, in an arms length transaction with full knowledge of the rent that TAG would be obligated to pay under the lease and the fact that the option had expired.
A cause of action for fraudulent concealment requires "an allegation that the defendant had a duty to disclose material information and that it failed to do so." ( P.T. Bank Cent.Asia v. ABN AMRO Bank N.V., 301 AD2d 373, 376 [1st Dept 2003] [emphasis supplied].) TAG cites no authority in support of its baseless contention that the long past circumstances under which the rent was set or the option expired were material to the arms length transaction that Solow entered, or that defendants had any obligation, even if they had knowledge of such circumstances, to disclose the history of the leasehold in the decade before Solow decided to purchase it. TAG's invocation of the "special facts" doctrine is wholly unwarranted on the pleaded allegations. Under this doctrine, "a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair." ( Swersky v. Dreyer Traub, 219 AD2d 321, 327 [1st Dept 1996] [internal citations and quotation marks omitted].) TAG makes no showing that this doctrine has been or could be applied to require disclosure of the history of the leasehold to a purchaser where, as here, the purchaser has been fully apprised of the essential terms of the leasehold, including the ground rent reserved in the lease and the expiration of the option to purchase contained in the original lease, and elects to purchase the leasehold with such knowledge.
On the contrary, any contention that such disclosure would be material under these circumstances is insupportable under New York law. Even if TAG had been informed of the circumstances in which its predecessor let the option lapse years before TAG's purchase, TAG would not have had a legal basis to revive the option, given TAG's purchase of the leasehold with full knowledge that the option had expired. ( See Chock Full O'Nuts Corp. v. NRP LLC I, 11 AD3d 385 [1st Dept 2004] [assignee of lease whose assignor failed to exercise renewal option lacked equitable grounds for relief from assignor's failure, where assignee took lease with full knowledge of significant question as to whether lease had expired].)
TAG's contention, in opposition to the motions to dismiss, that there is an issue of fact as to whether the option has in fact expired, is a red herring. This contention is based on an allegedly recently discovered document namely, a 1997 Mortgage Consolidation and Modification Agreement (Granting Clause, ¶ b [Ex. A to P.'s Aff. In Opp.]) in which Spartan granted its mortgagee all of its rights in the lease, including but not limited to the option to purchase the premises contained in Article 16 of the lease. Even assuming, without dignifying, the assertion that this mere boilerplate could raise an issue of fact as to the viability of the option, TAG's claim in this action is not that the option may be viable, but the opposite: that the lease required the option to be exercised upon the death of Ruth Uris in 1996 (Complaint, ¶¶ 17, 31), and that defendants committed a fraud by failing to exercise the option at that time. ( Id., ¶¶ 31, 37, 68-72.)
The circumstances under which the rent was set or maintained are likewise immaterial, given TAG's acceptance of the rental amount in an arms length transaction. Even where representations as to material facts are at issue, it is well settled that where a party could have discovered the facts through the exercise of "ordinary intelligence," but failed to do so, it may not complain that it was induced to enter into the transaction by fraud. ( See Abrahami v. UPC Constr. Co., 224 AD2d 231, 234 [1st Dept 1996], quoting Schumaker v. Mather, 133 NY 590, 596.) "A party will not be relieved of the consequences of his own failure to proceed with diligence or to exercise caution with respect to a business transaction." ( Cantor Fitzgerald Inc. v. Cantor Fitzgerald Sec., 268 AD2d 324, 326 [1st Dept 2000], affd 95 NY2d 919, quoting Hyman, Inc. v. Olsen Indus., 227 AD2d 270, 277 [1st Dept 1996].)
As a sophisticated real estate developer, Solow had the means available through the exercise of ordinary diligence, and the obligation, to determine whether the ground rent for this leasehold that had no option to purchase was within the range of prevailing rates for comparable commercial properties. ( See P. Chimento Co. v. Banco Popular de Puerto Rico, 208 AD2d 385 [1st Dept 1994]. See also Northridge Coop. Section No. 1, Inc. v. 32nd Ave. Constr. Corp., 2 NY2d 514, affg 286 AD 422 [1st Dept 1955].)
Moreover, TAG does not dispute, and the documentary evidence confirms, that in its agreement with Spartan to purchase the leasehold, TAG was expressly advised of the expiration of the option to purchase the fee estate, and acknowledged that it had the right to conduct, and was "satisfied" with the results of, its due diligence. (Purchase Sale Agreement, §§ 7.2.6[a], 4.1, 4.5 [Ex. 5 to Fink Aff. In Support of Ronson Motion to Dismiss].) Upon the closing of the purchase of the leasehold, TAG (then owned by Solow), executed a "due diligence acknowledgment" in which it further confirmed that it had "conducted all such inspections, * * * appraisals and evaluations of the Property * * * as Purchaser considers necessary or appropriate." (Purchaser's As-Is Certificate, dated Feb. 28, 2001, § 1.1 [Ex. 6 to Fink Aff.].)
Having accepted the rent with expired option in this arms length transaction, Solow cannot now be heard to claim that the rent was inflated, or that he was induced to enter into the transaction by fraudulent omissions of fact as to his predecessors' long past acts, even if such acts may have affected the amount of rent he knowingly agreed to pay. ( See, e.g., Northridge Cooperative Section No. 1, Inc. v. 32nd Ave. Constr. Corp., 2 NY2d 514, supra; Valassis Communications, Inc. v. Weimer, 304 AD2d 448 [1st Dept 2003], appeal dismissed 2 NY3d 794; IFD Constr. Corp. v. Corddry Carpenter Dietz Zack, 253 AD2d 89 [1st Dept 1999]; P. Chimento Co. v. Banco Popular de Puerto Rico, 208 AD2d 385, supra.)
As there is no legal basis whatsoever for TAG's fraud claim (Count One) based on the acts alleged, this claim must be dismissed. Counts Three and Four, based on the same allegations, must likewise be dismissed.
In view of this holding, the court need not address the numerous other infirmities in the pleading of the fraud claim. Parenthetically, however, the court notes the blunderbuss fashion in which the complaint is pleaded. For example, the complaint, by its terms, asserts the fraud claim against all of the defendants, including Silverman who was the owner of TAG at the time TAG entered into the agreement to purchase the leasehold estate from Spartan. Even in response to Silverman's motion to dismiss the complaint, TAG (now owned by Solow) does not expressly seek to withdraw the first cause of action as against Silverman but merely asserts that the complaint does not allege that Silverman had knowledge of or participation in the fraudulent scheme of the leasehold defendants before he sold TAG to Solow. ( See P.'s Memo. In Opp. at 19 n. 7.) The fraud claim is also defectively pleaded as against ComMet, as it is devoid of any factual allegations to support the conclusory assertion that ComMet knew of the leasehold defendants' fraud, notwithstanding that it did not purchase the fee estate until 1997, after the occurrence of all of their alleged acts to inflate the rent or nullify the option. ( See SNS Bank, N.V. v. Citibank, N.A., 7 AD3d 352 [1st Dept 2004].) The complaint further lacks factual, as opposed to conclusory, allegations that the individual defendants controlled the corporate entity and are liable in their individual capacity. ( See, e.g., Metropolitan Transp. Auth. v. Triumph Advertising Prods., Inc., 116 AD2d 526 [1st Dept 1986]; Itamari v. Giordan Dev. Corp., 298 AD2d 559 [2nd Dept 2002].)
TAG's unjust enrichment claims against the leasehold defendants and ComMet (Counts Two and Six) do not specify the items of damages which TAG seeks. However, these claims appear to fall into two categories. First, TAG asserts that defendant Ronson received $50 million in proceeds from a mortgage for his own benefit at the time MAP owned the leasehold. Second, TAG apparently claims that defendants Spartan, the Barclays and Ronson, and defendant ComMet are liable to plaintiff for damages because their acts have caused TAG to pay ComMet an artificially high ground rent and deprived it of the opportunity to exercise the option to purchase the fee estate. In Count Five, a separate unjust enrichment claim raised only against defendant Silverman, TAG claims that Silverman is liable to it for closing costs that were not actually incurred by Silverman and included an illegal campaign contribution.
The claim against defendant Ronson for receipt of mortgage proceeds a decade before TAG purchased the leasehold fails to state a cause of action for unjust enrichment because it does not allege that Ronson received a benefit at plaintiff's expense ( see City of Syracuse v. R.A.C. Holding, Inc., 258 AD2d 905 [4th Dept 1999]) or money that was "rightfully the plaintiff's." ( See Alko Mfg. Corp. v. Neptune Meter Co., 20 AD2d 635 [1st Dept 1964], affd 16 NY2d 777.)
The claim against defendants based on TAG's payment of excessive rent or inability to purchase the premises also cannot survive under the settled precept that "[t]he existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter." ( Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co., 70 NY2d 382, 388.) Here, TAG's claim, although not clearly articulated, is that it has incurred damages based on the very terms of the contract (rent amount and expired option) which it entered into with Spartan. Unjust enrichment is not available to obtain amounts allegedly overpaid under a contract. ( See Bates Advertising USA, Inc. v. McGregor, 282 F Supp 2d 209 [SD NY 2003] [applying New York law].)
To the extent that TAG's claim (although not specifically alleged) is that the purchase price for the leasehold was excessive in view of the excessiveness of the ground rent, this claim is also barred based on the existence of a written contract governing the purchase price.
TAG's claim against defendant Silverman also fails based on the existence of a written contract which covers the subject matter of the unjust enrichment claim. The purchase and sale agreement between Silverman and Solow, dated February 27, 2001, which provided for Solow's purchase of Silverman's 100 percent interest in TAG, expressly provided that "Purchaser [Solow] shall reimburse Seller [Silverman] at the Closing for the costs and expenses set forth on Schedule 3.03(d) attached hereto." (Purchase and Sale Agreement, § 5.01.) This Schedule included, among the expenses to be reimbursed by Purchaser at the Closing, the sum of $850,782 for "Loss of Hedge." ( Id.) TAG's unjust enrichment claim against Silverman alleges that Solow paid $850,000 to Silverman for losses that Silverman claimed he had sustained on the sale of Treasury calls, and that Silverman not only did not sustain a loss but "realized a profit in excess of $12.5 million on the Treasury calls referred to in the Solow-Silverman Agreement." (Complaint, ¶¶ 48, 49.) The parties' contract thus covers the very item of damages which is the basis for TAG's unjust enrichment claim. While TAG argues that there is an issue of fact as to whether the Treasury calls that Silverman sold at a loss were the calls referenced in the Solow-Silverman Agreement, this dispute is still one governed by that Agreement and therefore not the basis of a separate unjust enrichment claim.
TAG pleads a further claim (Count Eight) against ComMet and Silverman for fraudulently inducing TAG to bear the expense of an illegal campaign contribution as part of the closing costs in connection with the Solow-Silverman Agreement. (Complaint, ¶ 96.) In a previous action brought by Silverman for release of the funds escrowed by Solow for closing costs in connection with the purchase of 380 Madison Avenue ( Piper Rudnick LLP v. Shearman Sterling, Sup Ct, NY County, Index No. 602278/01), Steven Cherniak, who described himself as "Chief Executive Officer of Solow Management Corporation, which acts as agent for Sheldon H. Solow," expressly averred that Solow had "refused" to make payment of a $50,000 political contribution that Silverman had allegedly "improperly demanded in connection with the closing of the Purchase and Sale Agreement." (Aff. of Steven Cherniak, ¶ 47 [Ex. L to Silverman Motion to Dismiss].) TAG now contends that it is alleging that Silverman concealed the payment of the political contribution in invoices that were sent to and paid by Solow. (P.'s Memo. In Opp. at 25.) However, TAG does not submit an affidavit from Mr. Cherniak qualifying his statement, or an affidavit from anyone on personal knowledge claiming that the political contribution may have been paid. Mr. Cherniak's admission that the contribution was not paid thus bars the eighth cause of action, as plaintiff does not allege damages, a necessary element of a claim of fraudulent inducement.
The complaint also alleges a seventh cause of action against ComMet which seeks a declaration that TAG was not in default of the payment of interest on an allegedly late rent payment for January 2004, as asserted in a January 28, 2004 notice of default served by ComMet upon TAG. By decision and order dated February 19, 2004 and modified on April 1, 2004, this court granted TAG a Yellowstone injunction, restraining ComMet from terminating TAG's lease based on non-payment of the interest, and tolling the cure period.
The court grants ComMet's request to convert the motion to dismiss to one for summary judgment with respect to the seventh cause of action. It is undisputed that January rent was not paid until after January 12, the date by which payment was due under the parties' lease. It is further undisputed that section 2.04 of the lease requires TAG to pay interest "on demand" on late rent payments, in an amount calculated pursuant to a formula set forth in this section. On searching the record, the court finds that while ComMet is entitled to interest based on the late January payment, the notice of default, which also contains the demand for interest, is defective because it fails to specify the amount of interest required to be paid. TAG is therefore entitled to a declaration that ComMet is not entitled to terminate its tenancy based on TAG's failure to pay interest as alleged in the January 28, 2004 notice of default. This declaration shall not, however, bar a proper demand for the interest or a notice of default in the event of TAG's failure to comply with a proper demand.
Finally, the court turns to defendants' request for sanctions. Under Part 130 of the Rules of the Chief Administrator, sanctions may be awarded for "frivolous conduct" ( 22 NYCRR § 130-1.1[a]) which is defined, in pertinent part, as conduct that "is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law." ( Id., § 130-1.1[c][1].) With the exception of the seventh cause of action (on which plaintiff has prevailed based only on a defect in the notice rather than on the underlying merits), the causes of action in the complaint are frivolous within the meaning of this rule. These causes of action are completely without merit and, in the case of the fraud and unjust enrichment causes of action, not only are premised on an implausible, if not absurd, factual scenario, but also lack any legal basis whatsoever. As plaintiff's counsel thus could not reasonably have believed that these causes of action could be supported by a reasonable argument for an extension of existing law, sanctions will be awarded against both plaintiff and its law firm. In view of the egregious frivolousness of the complaint, the court will impose the maximum allowable sanctions of $10,000 each upon plaintiff and the law firm. ( See Leventritt v. Eckstein, 206 AD2d 313 [1st Dept 1994], lv dismissed in part, lv denied in part 84 NY2d 987.) In addition, all of the moving defendants will be awarded their actual expenses reasonably incurred and reasonable attorney's fees in defending this action, in an amount to be determined after a hearing. ( See 22 NYCRR § 130-1.1[a].)
While the court's decision to impose sanctions is based on the complete lack of merit of the complaint in this action, it is noted that this award of sanctions against Solow and his various attorneys is just one of several. ( See, e.g., Matter of Kalikow, US Bankr, SD NY, June 10, 2004, Lifland, J., 91-13885; Bridgewater Operating Corp. v. Feldstein, 346 F3d 27 [2d Cir 2003], cert denied sub nom Ulysses I Co. v. Feldstein, 125 S Ct 49 [2004]; Avon Prods., Inc. v. Solow, Sup Ct, NY County, May 25, 2000, Crane, J., Index No. 005802/81; Solow v. Wellner, 1991 WL 330959 (Civ Ct, New York County 1991], modified on other grounds 162 Misc 2d 565 [App Term 1st Dept 1994].)
This constitutes the decision of the court. A separate order shall issue.