Treeline 990 Stewart Partners LLC v. Rait Atria, LLC

Full title: TREELINE 990 STEWART PARTNERS LLC, Plaintiff, v. RAIT ATRIA, LLC, RAIT…

Court: SUPREME COURT - STATE OF NEW YORK TRIAL/IAS, PART 1 NASSAU COUNTY

Date published: Nov 15, 2011

2011 N.Y. Slip Op. 33028 (N.Y. Sup. Ct. 2011)

Opinion

INDEX No. 18904/10 Motion Sequence # 003 Motion Sequence # 004

11-15-2011

TREELINE 990 STEWART PARTNERS LLC, Plaintiff, v. RAIT ATRIA, LLC, RAIT PARTNERSHIP, L.P. RAIT GENERAL, INC. and 990 STEWART AVENUE INVESTORS LLC, Defendants.

STEPHEN A. BUCARIA

SHORT FORM ORDER

Present:

HON.

Justice

The following papers read on this motion:

Notice of Motion.......................................XX
Affirmation/Affidavit in Opposition.........XX
Reply Affirmation......................................XX
Memorandum of Law.................................XXX
Reply Memorandum of Law.......................X

Motion pursuant to CPLR 3211(a)(1), (a)(5) and (a)(7) by defendants RAIT Atria, LLC, RAIT Partnership, L.P., RAIT General, Inc., (collectively the RAIT defendants) to dismiss the amended complaint and the answer and interpleader complaint of defendant/interpleader plaintiff 990 Stewart Avenue Investors, LLC (990 SAI) pursuant to CPLR 3211(a)(7) is granted.

Motion by defendant/interpleader plaintiff 990 Stewart Avenue Investors LLC pursuant to CPLR 1006 for permission to pay certain monies into court and to submit financial reports to the court and not to the RAIT defendants is denied as academic.

FACTUAL BACKGROUND

Pursuant to the Operating Agreement of 990 SAI, executed on November 1, 2006, as amended by a certain First Amendment to Operating Agreement of 990 Stewart Avenue Investors LLC dated January 29, 2010, plaintiff Treeline 990 Stewart Partners LLC (Treeline), as a common capital/managing member, and defendant RAIT Atria, LLC, as preferred capital member, formed 990 SAI, a limited liability company, for the purpose of acquiring certain property known as 990 Stewart Avenue, Garden City, New York, for the purchase price of $45,996,195. The Operating Agreement states that the members:

"acknowledge and confirm that (i) there is only one Preferred Capital Member, namely RAIT Atria, LLC, which shall contribute the entire amount of the Preferred Capital Member Contribution and which owns 100% of the Preferred Capital Units of the Company and (ii) there is only one Common Capital Member, namely Treeline 990 Stewart Partners LLC, which will act as the Managing Member of the Company, contribute the entire amount of the Common Capital Member Contribution and own 100% of the Common Capital Units of the Company. The powers of the Managing Member are set forth in Section 14 of this Agreement.

With respect to the members' respective contributions, the Operating Agreement further states that:

"the Preferred Capital Member will contribute the Preferred Capital Member Contribution, in an aggregate amount of $7,750,000 (less any reasonable due diligence expenses incurred by Preferred Capital Member in connection with this transaction), to the Company and (ii) the Common Capital will contribute the Common Capital Member Contribution, in an aggregate amount of $ 11,658,500, to the Company. The Managing Member will give notice to the Preferred Capital Member of the anticipated closing date (the "Closing Date") for the acquisition of the Property, at least, five (5) business days before the Closing Date. The Preferred Capital Member will contribute the entire amount of the Preferred Capital Member
Contribution to the Company on the Closing Date. The Common Capital Member will contribute up to $4,000,000 of the Common Capital Member Contribution to the Company upon signing this Agreement and the balance of the Common Capital Member Contribution will be payable to the Company no later than three (3) business days before the Closing Date."

The Operating Agreement provides that both plaintiff Treeline and defendant RAIT Atria, LLC are entitled to certain monthly operating income distributions. Further, as the managing member of 990 SAI, plaintiff Treeline is required, inter alia, to provide the preferred capital member, defendant RAIT Atria, LLC, with various financial records at specified reporting periods [§21] and cause monthly interest payments to be made to defendant RAIT Atria, LLC. While plaintiff Treeline and defendant 990 SAI are legally distinct entities, plaintiff Treeline, as managing member, is authorized to:

execute any documents or instruments necessary to effectuate the affairs of 990 SAI (Agreement at § 14[b][(v]); make all decisions regarding the everyday operations and routine management of the property at 990 Steward Avenue (Agreement at § 14[b][viii]); and take any other action necessary and required to carry out the stated purpose of 990 SAI (Agreement § 14[b][x]).

Although defendants RAIT General, Inc. and RAIT Partnership, L.P. are not parties to either the Operating Agreement or the Amendment, the amended complaint alleges claims of breach of contract, fraud and negligent misrepresentation against all the RAIT defendants; seeks a declaration that defendant 990 SAI should not make monthly interest payments or provide monthly financial reporting to the RAIT defendants and to impose a constructive trust on monthly interest payments paid by defendant 990 SAI in service of the loan.

The Claims of the Parties

According to the amended complaint, the property herein was adversely impacted by a downturn in the economy which eroded the property's tenant base and disrupted the flow of rental revenue. During the period from approximately July 2009 to August 2010, plaintiff Treeline alleges that the parties had telephone conversations, email exchanges and in-person meetings to discuss the possibility of a discounted buyout of what the RAIT defendants dispute was a "loan," or, alternatively, some other modification or restructuring of the purported loan that would address the distressed economic situation of the property. In this regard, plaintiff alleges that the RAIT defendants presented two alternatives to plaintiff Treeline on a take it or leave it basis, to wit:

"a) RAIT would accept a payoff of the loan discounted by 37.5% of the original principal amount - a compromise between RAIT's original 25% proposal and Treeline 990's 50% discount proposal; or
b) Treeline 990 and RAIT would each advance an additional $1.5 million dollars to cover improvements and other expenses under certain terms and conditions, but the existing loan would stay in place."

Plaintiff Treeline alleges that on August 2, 2010 it advised the RAIT defendants, in a telephone conversation, that it accepted defendants' offer and agreed to buy out defendant RAIT Atria, LLC's interest at a discount of $37.5%.

In alleged reliance on RAIT defendants' purported oral agreement to discount the loan, plaintiff Treeline claims it acted to its detriment by investing an additional $ 5 million in the underlying property and by searching for financing to effectuate the repurchase of the loan.

When the RAIT defendants failed to move forward to close the alleged buyout of the loan on or about September 15, 2010, plaintiff Treeline commenced this action alleging causes of action for breach of an alleged oral agreement, fraud and negligent misrepresentation. Plaintiff also seeks a declaration that defendant 990 SAI is not required to make monthly interest payments or provide monthly financial reporting to the RAIT defendants and an injunction enjoining such payments and financial reporting and to impress a constructive trust on monies paid by defendant 990 SAI to the RAIT defendants.

The RAIT defendants dispute plaintiff Treeline's characterization of the transaction as a mezzanine loan, or form of secondary financing, and their relationship as that of borrower and lender. Rather, they maintain that the transaction was a $7.75 million preferred equity investment in defendant 990 SAI. In this regard, defendants argue that the parties' relationship is a contractual one governed by the Operating Agreement, which prohibits any modification, including any purported discounting of the amount of their investment, without a signed writing.

As plaintiff Treeline views the controversy, the RAIT defendants are breaching their agreement to sell the loan to plaintiff at discount and are playing a "game of semantics," calling an independent oral contract to sell the loan a partnership modification. Plaintiff Treeline asserts that the documents on which the RAIT defendants rely, i.e., the Operating Agreement and First Amendment thereto are, in essence, loan documents which provide a mechanism for interest payments to the RAIT defendants, defendants' rights upon default, and a recovery mechanism. Since the oral agreement to sell the loan is an independent agreement, and not a modification of the written Partnership Agreement, plaintiff Treeline argues, it need not be in writing.

The RAIT defendants' motion to dismiss the amended complaint is predicated on the ground that the terms of the underlying Agreement cannot be orally modified. Thus, defendants argue, the amended complaint fails to allege facts sufficient to support a claim of breach of contract, fraud and/or negligent misrepresentation.

ANALYSIS

The Operating Agreement specifically provides in § 28 that it

"shall be governed by the laws of the State of Delaware (except the provisions thereof related to conflict of laws and except that any provision related to the Property shall be governed by the laws of the State of New York."

The parties have cited to both New York and Delaware law in support of their respective positions. Nevertheless, as there is no "actual conflict" between the rules of substantive law in each state, there is no occasion for the court to determine a choice of law question (Allstate Ins. Co. v Stolarz, 81 NY2d 219, 223 [1993]).

For purposes of this CPLR 3211(a)(1) and (a)(7) dismissal motion, the court must presume that the allegations of the amended complaint are true and must accord them every favorable inference, except insofar as they consist of bare legal conclusions or are inherently incredible or flatly contradicted by documentary evidence. Parsippany Const. Co., Inc. v Clark Patterson Associates. P.C., 41 AD3d 805, 806 [2nd Dept. 2007]; Beattie v Brown & Wood, 243 AD2d 395 [1st Dept. 1997], accord Allied Capital Corp. v GC-Sun Holdings. L.P., 910 A2d 1020, 1030 [Del. Ch. 2006]. Where affidavits are submitted on a motion to dismiss, the court may consider allegations set forth in the affidavits to remedy any deficiencies in the pleadings. Nonnan v City of New York, 9 NY3d 825, 827 [2007]. Dismissal pursuant to CPLR 3211(a)(1) is warranted where the documentary evidence submitted conclusively establishes a defense to the claims asserted as a matter of law. Fontanetta v John Doe 1, 73 AD3d 78, 83 [2nd Dept. 2010].

The RAIT defendants assert that the first cause of action of the amended complaint for breach of contract should be dismissed because plaintiff Treeline's claim of an oral agreement to buy back/restructure the purported loan is precluded by General Obligations Law § 15-301(1) pursuant to which written agreements, which expressly proscribe oral modifications, cannot be changed by oral executory agreements. B. Reitman Blacktop. Inc. v Missirlian, 52 AD3d 752, 753, [2nd Dept. 2008]; Ralco. Inc. v Citibank. N.A., 32 AD3d301 [1st Dept. 2006].

Plaintiff Treeline argues in opposition that the parties waived the signed writing requirement contained in the Operating Agreement by virtue of an alleged course of conduct, including lengthy negotiations vis-a-vis buyback of the loan, telephone calls, in-person meetings and email exchanges between the parties. Plaintiff Treeline further maintains that any technical writing requirement was fulfilled when Greg Marks, identified in the amended complaint as a Senior Vice President of RAIT, confirmed the alleged oral agreement of the parties on behalf of the RAIT defendants.

Plaintiff Treeline asserts that it was Greg Marks, on behalf of the RAIT defendants, who first proposed, in or about July, 2009, that defendants would sell the loan to plaintiff at a discount of 25%. Plaintiff Treeline claims that it rejected that initial offer but ultimately agreed to accept an offer made by the RAIT defendants to sell the loan to plaintiff at a discounted payoff of 37.5% with a closing date of on or about September 15, 2010.

It is axiomatic under both Delaware and New York law, that when parties set down their agreement in a clear, complete document, their writing should, as a rule, be enforced according to its terms. Riverside South Planning Corp. v CRP/Extell Riverside. L.P., 60 AD3d 61, [1st Dept. 2008], affirmed 13 NY3d 398 [2009]. Construction of an unambiguous contract is a matter of law which may be determined by the court on a motion to dismiss. Semerjian v Bver-White, 81 AD3d 919, 920 [2nd Dept. 2011]; Pellaton v Bank of New York, 592 A2d 473,478 [Del. Supr. 1991]. Where the intentions of the parties may be gathered from the far corners of the instrument, the contract should be enforced according to its terms. Beal Sav. Bank v Sommer, 8 NY3d 318, 324 [2009]. The rules of construction of contracts require that the court adopt an interpretation of the agreement which realizes the reasonable expectations of the parties. Gutierrez v State, 58 AD3d 805, 807 [2nd Dept. 2009]. A written agreement that is complete, clear and unambiguous on its fact must be enforced according to the plain meaning of its terms. Greenfield v Philles Records, Inc., 98 NY562, 569 [2002]; Lorillard Tobacco Co. v American Legacy Foundation, 903 AD2d 728, 739 [Del. Supr. 2006].

A party asserting a breach of contract claim must show: (1) the existence of an agreement; (2) plaintiffs performance; (3) breach of the contract by the defendant and (4) damages resulting from the breach. As a general rule, where a written contract has a provision which explicitly prohibits oral modification, such a clause is afforded great deference (General Obligations Law § 15-301 [1]; Healv v Williams, 30 AD3d 466, 467 [2nd Dept. 2006]; Calica v Reisman. Perez & Reisman, 296 AD2d 367, 368 [2nd Dept. 2002]).

An oral modification of a written contract, which expressly requires amendments to be in a signed writing, may be enforceable where the party urging enforcement is able to show that: (1) one party has partially performed under the terms of the oral agreement; (2) that party's partial performance is unequivocally referable to the modification; and (3) this conduct conferred a benefit on the party opposing enforcement. Conduct relied upon to establish estoppel, based upon a party's significant and substantial reliance on an oral modification, must not otherwise be compatible with the agreement as written. Rose v Spa Realty Assoc., 42 NY2d 338, 344 [1997].

Under Delaware law, a course of conduct can amend a contract as effectively as a written modification. Delaware law, however, will recognize an oral modification of a written agreement only when a plaintiff presents specific and direct evidence such that there is no doubt regarding the parties' intention to change the written contract. Continental Ins. Co. v Rutledge & Co., 750 AD2d 1219, 1230 [Del. Ch. 2000]. No such evidence has been presented.

The doctrine of partial performance is fundamentally premised on notions of estoppel and ratification. These notions are that a party seeking to avoid an agreement, who accepts performance tendered by a party seeking to enforce that agreement, either: (1) is estopped from denying the existence of the agreement because he accepted the benefit of the very agreement he is now seeking to avoid; or (2) his conduct in accepting the tendered performance serves as an affirmative ratification of the existence of the agreement. See R.G. Group. Inc. v The Horn & Hardart Co., 751 F.2d 69, 75-76 [2nd Cir. (N.Y.) 1984] ("[P]artial performance is an unmistakable signal that one party believes there is a contract; and the party who accepts performance signals, by that act, that it also understands a contract to be in effect.").

Partial performance is unequivocally referable to a modification if it will admit of no other possible explanation except one pointing directly to the existence of the oral agreement claimed. If the performance can be viewed as consistent with the terms of the agreement as written, then that performance is not unequivocally referable to the alleged oral modification and will not be treated as a contract modification. It is not sufficient that the alleged oral agreement give significance to plaintiffs actions. Rather, the actions standing alone must be unintelligible or, at least, extraordinary, explainable only with reference to the oral agreement. Pinkava v Yurkiw, 64 AD3d 690, 692 [2nd Dept. 2009]. In order for there to be partial performance, the party seeking enforcement of the alleged agreement must confer something of a value on the party seeking to avoid the agreement which that party has accepted.

In the case at bar, there is no partial performance or course of conduct which may be considered unequivocally referable to a new oral contract sufficient to overcome the strictures of Gen. Obligations Law § 15-301(1). The actions taken by plaintiff Treeline are explainable as preparatory steps toward the possible consummation of an agreement in the future.

Plaintiff Treeline's actions in making efforts to bring new cash to the venture; financing capital improvements to the building; and obtaining new tenants are legally insufficient to constitute partial performance, or a course of conduct, indicative of an enforceable oral agreement by the parties to restructure the purported loan. The RAIT defendants neither benefitted from, participated in, or accepted the alleged partial performance/course of conduct. Significantly, the RAIT defendants note that plaintiff Treeline cannot claim detrimental reliance based on its alleged capital expenditures given 4(c) of the Operating Agreement which provides as follows:

"In the event that the Company requires additional monies for capital improvements or any other obligation, such monies shall be contributed solely by the Common Capital Member. Other than the Preferred Capital Member Contribution, there shall be no obligation on the part of the Preferred Capital Member to contribute any funds to the Company."

Plaintiff offers an e-mail dated August 20, 2010 from Glenn Schor, an officer at Treeline, to Greg Marks, an officer at Rait Atria, as a memorandum of the alleged oral agreement. In the email, Schor states that "We struck a deal and we raised the money to conclude the deal," suggesting that a final agreement was reached. However, Schor further states that he will advise his attorney "whether [Rait's] partnership interest can be taken over by the new money or your entity will exit the partnership and a new entity will need to enter the partnership." Thus, Schor's email makes clear that all of the material terms of the buyout were not yet agreed upon, let alone set forth in the memorandum.

In the amended complaint, plaintiff alleges that the RAIT defendants falsely represented that they would either restructure the terms of the loan or agree that plaintiff Treeline could buy back the loan at a discount of 37.5% of the original principal. Plaintiff Treeline further alleges that in reliance upon these representations it entered into agreements to fund the buyout, and incurred legal fees and other expenses. These allegations are insufficient to state a cause of action for fraud in the absence of any allegation of a misrepresentation collateral to the alleged breach of contract.

The elements of a cause of action for fraud are a representation of fact which was false when made, and known to be so by defendant, made for the purpose of inducing the other party to rely on it, justifiable reliance by that party and injury. Chung v Wang, 79 AD3d 693, 694-695 [2nd Dept. 2010]. The circumstances must be stated with particularity as to time, place and contents of the false representation (CPLR 3016[b]).

Plaintiff Treeline has failed to specify a particular statement of fact made by the RAIT defendants - that they knew to be untrue at the time it was made - or that was made with reckless indifference to the truth. Plaintiffs claim for fraud is not separate and apart from its claim for breach of contract. The claim is predicated on the same purported wrongful conduct as is the claim for breach of contract, i.e., the RAIT defendants' failure to follow through on an alleged agreement to restructure a loan. Plaintiff does not allege breach of a duty separate and apart from the alleged contractual obligation. Greenman-Pedersen. Inc. v Levine, 37 AD3d 250 [1st Dept. 2007]. Under New York law, a fraud based cause of action is duplicative of a beach of contract claim where the only fraud alleged is that defendant was not sincere when it promised to perform under the contract. Manas v VMS Associates. LLC, 53 AD3d 451,453 [1st Dept. 2008]. Thus, plaintiffs fraud claim is not viable.

A claim for negligent misrepresentation requires the existence of a special relationship of trust or confidence between the parties which creates a duty to impart correct information to another. Generally, a special relationship does not arise out of an ordinary arms' length business transaction between two parties. Mandarian Trading Ltd. v Wildenstein, 16NY3d 173, 180 [2011].

A special relationship may be established by "persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified. Kimmel v Schaefer, 98 NY2d 257, 263 [1996].

Plaintiff Treeline fails to allege a single fraudulent statement or negligent misrepresentation made by defendants on which plaintiff justifiably relied. Since all parties were aware that the Operating Agreement required that any modifications be in writing, plaintiff Treeline's purported detrimental reliance on any oral representations made by the RAIT defendants vis-a-vis their financial relationship, i.e., the RAIT defendants' capital contribution/equity investment in defendant 990 SAI, and a possible change therein, was not justified.

Because plaintiff Treeline cannot claim that it justifiably relied on a representation that the RAIT defendants would restructure the "loan", the fraud and negligent misrepresentation claims are untenable.

Accordingly, the motion by the RAIT defendants to dismiss the amended complaint pursuant to CPLR 3211(a)(1) and (a)(7) and the answer and interpleader claim of defendant/interpleader plaintiff 990 SAI is granted.

Motion pursuant to CPLR 1006 by defendant/interpleader plaintiff 990 SAI to pay certain monies into court is denied as moot in view of the disposition of the motion by RAIT defendants.

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J. S. C.