Opinion
Index No. 652475/2023 MOTION SEQ. No. 001
09-11-2024
27-21 27TH STREET SPONSORS, LLC, Plaintiff, v. JANOS KANTA, KENNETH TOLLEY, KST2 PROPERTIES, LLC, SZILVIA BARNETT, KERABAN, LLC, 2219 33RD STREET LLC, and SILVER HEIGHTS DEVELOPMENT, LLC, Defendants.
Unpublished Opinion
MOTION DATE 10/31/2023
PRESENT: HON. LOUIS L. NOCK Justice
DECISION + ORDER ON MOTION
LOUIS L. NOCK, J.S.C.
The following e-filed documents, listed by NYSCEF document numbers (Motion 001) 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, and 44 were read on this motion to DISMISS.
Upon the foregoing documents, the motion by defendant Kenneth Tolley to dismiss the complaint as alleged against him - specifically, the first cause of action for a declaratory judgment, the fourth cause of action for breach of contract, the sixth cause of action for breach of a guarantee, and the eleventh cause of action for unjust enrichment - is granted, for the reasons set forth in the moving and reply papers (NYSCEF Doc. Nos. 3, 8, 16) and the exhibits attached thereto, in which the court concurs, as summarized herein.
This action arises out of plaintiffs investment in the construction of a condominium building via a convertible promissory note given by defendant KST2 Properties, LLC ("KST2") and guaranteed by Tolley and defendant Janos Kanta (note, NYSCEF Doc. No. 5; guarantee, NYSCEF Doc. No. 6). Kanta was the managing member, and Tolley the minority member, of KST2 at the time the note was given. As relevant to the motion, the note provides that it will accrue interest at "the highest rate permissible by law per annum, accruing monthly in a separate capital account created by [plaintiff], and payable during the term in a maximum capped payment of [$306,000.00]" (note, NYSCEF Doc. No. 5, ¶ 1). The same cap is present in the guarantee (guarantee, NYSCEF Doc. No. 6 at 1). The note further provides that it is subject "to the express condition that at no time shall [KST2] be required to pay interest at a rate which may be deemed usurious, and if any interest charged hereunder is deemed to be in excess of the maximum legal rate, then the interest rate hereunder shall immediately be reduced to the maximum legal rate" (note, NYSCEF Doc. No. 5, ¶ 6).
Plaintiff commenced this action to recover under the note and guarantee, as well as its share of the profits of the sale of the condominium building, and a declaratory judgment that it is a member of KST2.
"On a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction" (Leon v Martinez, 84 N.Y.2d 83, 87 [1994]). "[The court] accept[s] the facts as alleged in the complaint as true, accord[ing] plaintiff the benefit of every possible favorable inference, and determining] only whether the facts as alleged fit within any cognizable legal theory" (id. at 87-88). Ambiguous allegations must be resolved in plaintiff s favor (JF Capital Advisors, LLC v Lightstone Group, LLC, 25 N.Y.3d 759, 764 [2015]). "The motion must be denied if from the pleadings' four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law" (511 West 232nd Owners Corp, v Jennifer Realty Co., 98 N.Y.2d 144, 152 [2002] [internal citations omitted]). "[W]here ... the allegations consist of bare legal conclusions, as well as factual claims either inherently incredible or flatly contradicted by documentary evidence, they are not entitled to such consideration" (Ullmann v Norma Kamali, Inc., 207 A.D.2d 691, 692 [1st Dept 1994]).
The first and fourth causes of action arise out of the KST2 Operating Agreement. Tolley is the minority member of KST2. Generally, "a member of a limited liability company ... is [not] liable for any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely by reason of being such member, manager or agent or acting (or omitting to act) in such capacities or participating (as an employee, consultant, contractor or otherwise) in the conduct of the business of the limited liability company" (Limited Liability Company Law § 609 [a]). Along these lines, the KST2 operating agreement provides that "no Member shall be personally liable for any debt, losses or obligations of the Company by virtue of being a Member" (KST2 operating agreement, NYSCEF Doc. No. 14, § 2.1). The fourth cause of action specifically seeks to enforce KST2's obligation to distribute the profits of the condominium sale, an obligation that is specific to the company itself rather than to Tolley (id., § 5.3). TKS Realty, LLC v 391 Broadway LLC (192 A.D.3d 572, 573 [1st Dept 2021]), cited by plaintiff, is not to the contrary. There, the individual liability of the members of the LLC was set forth unambiguously in the operating agreement (id. at 573 ["In any event, they each signed the agreement individually, without any limitation on their signatures, and the individual defendants' obligation to personally guaranty the buyout option is set forth in clear and explicit language, making their intent unmistakable"]).
Further, "[a] member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object is to enforce a member's right against or liability to the limited liability company" (Limited Liability Company Law § 610). The question of whether or not plaintiff is a member of KST2, the subject of the first cause of action for a declaratory judgment, is properly bought against the company, rather than members such as Tolley. Plaintiff has no meaningful opposition to Tolley's motion on this point.
Turning to the sixth cause of action for breach of the guarantee, Tolley argues that the note is usurious, as interest of $306,000.00 on a principal amount of $850,000 over one year yields an interest rate of 36%, well in excess of the civil and criminal usury rates of 16% and 25%, respectively (General Obligations Law § 5-501; Banking Law § 14-a; Penal Law § 190.40). As guarantor of the note, Tolley may raise the usury defense belonging to the principal debtor (Fred Schutzman Co. v Park Slope Advanced Med., PLLC, 128 A.D.3d 1007, 1008 [2d Dept 2015])
Usury only applies to a "loan or forbearance of any money, goods or things in action" (General Obligations Law § 5-501; Donatelli v Siskind, 170 A.D.2d 433, 434 [2d Dept 1991]). In other words, "it must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender" (Donatelli, 170 A.D.2d at 434). "The court will not assume that the parties entered into an unlawful agreement. . . when the terms of the agreement are in issue, and the evidence is conflicting, the lender is entitled to a presumption that he did not make a loan at a usurious rate" (Giventer v Arnow, 37 N.Y.2d 305, 309 [1975]). However, "[i]f usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law" (Blue Wolf Capital Fund II, L.P. v American Stevedoring Inc., 105 A.D.3d 178, 183 [1st Dept 2013]).
Here, the note provides that interest shall be at "the highest rate permissible by law per annum . . . payable during the term in a maximum capped payment of [$306,000.00]" (note, NYSCEF Doc. No. 5, ¶ 1). The highest rate permissible by law is 16%, as set by the General Obligations Law and the Banking Law. Interest of 16% on the $850,000 principal yields interest of $136,000, rather than the maximum capped payment of $306,000. Plaintiff asserts that because $306,000 is merely the maximum payment of interest possible, the reference to the maximum allowable legal rate acts as a savings clause, effectively preventing any usurious interest rate from actually applying. Plaintiff also references the provision of the note that, in effect, acts to reform the note if KST2 is ever charged a usurious rate of interest. As cases cited by both plaintiff and Tolley establish, however; such language does not preserve an agreement that is usurious on its face (Bakhash v Winston, 134 A.D.3d 468, 469 [1st Dept 2015]; Simsbury Fund, Inc. v New St. Louis Assocs., 204 A.D.2d 182, 182 [1st Dept 1994] ["We also agree with the IAS Court that the possibility of a nonusurious rate of interest in the event of defendant's full performance under the agreements, and language therein purporting to reduce the interest rate to the legal rate in the event of a finding of usury, do not make the subject agreements nonusurious"]).
Plaintiff argues that it had, in fact, proposed language setting the rate of interest at 16%, and that KST2 proposed the current language (Polyak aff, NYSCEF Doc. No. 15, ¶¶ 3-4). That KST2 drafted the note does not relieve plaintiff of the consequences of lending at usurious rates (Bakhash, 134 A.D.3d at 469). Plaintiff also argues that Tolley should not be able to raise the defense because of his own inequitable conduct; but the complaint states that Tolley was a minority member of KST2, and makes no allegations about any conduct undertaken by Tolley personally. Finally, plaintiff argues that Tolley owed plaintiff a fiduciary duty as members of KST2; but according to the complaint, plaintiff did not join KST2 until several months after the note and guarantee were executed. An arm's length business transaction does not give rise to estoppel in pais, as plaintiff argues (e.g. Kingsize Entertainment, LLC v Martino, 155 A.D.3d 856, 857 [2d Dept 2017]). Because the note is criminally usurious on its face, both the note and guarantee are void ab initio and unenforceable (Blue Wolf Capital Fund II, L.P., 105 A.D.3d at 184).
Finally, the eleventh cause of action alleges as to Tolley that he has been unjustly enriched at plaintiff s expense by the failure to repay under the guarantee and to receive its share of the profits from the sale of the condominium. These obligations are covered by the note and the KST2 operating agreement, respectively. "The 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 N.Y.2d 382, 388 [1987]). Further, where, as here, a lender has charged criminally usurious interest, the lender may not recover on an equitable claim such as unjust enrichment (Blue Wolf Capital Fund II, L.P. v Am. Stevedoring Inc., 105 A.D.3d 178, 184 [1st Dept 2013] ["Since Blue Wolf charged criminally usurious interest, it is not entitled to equitable relief']).
Accordingly, it is hereby
ORDERED that defendant Tolley's motion to dismiss the complaint as alleged against him is granted; and it is further
ORDERED that the Clerk of the Court is directed to enter judgment dismissing the action as against defendant Tolley; and it is further
ORDERED that the action is severed and continued as against the remaining defendants.
This constitutes the decision and order of the court.