Opinion
Index No.: 653586/2013
09-29-2014
JCMC FLATIRON, LLC, Plaintiff, v. PR1NCETON HOLDINGS LLC, and JOSEPH TABAK, Defendants.
Motion Seq, No.: 002
Motion Date: 6/2/2014
This matter comes before the Court on Defendants Princeton Holdings LLC ("Princeton") and Joseph Tabak's ("Tabak") motion to dismiss Plaintiff JCMC Flatiron LLC's verified complaint pursuant to CPLR 3211(a)(1) and (a)(7). Plaintiff opposes. For the reasons that follow, Defendants' motion is granted in part and denied in part.
BACKGROUND
This action arises out of a dispute over the attempted acquisition of a tenant-in-common interest in fourteen commercial buildings located in midtown Manhattan (the "MR TIC Interests"). The properties in question are described as "over 1,200,000 square feet of prime Manhattan real estate" which presented "very profitable long-term investment and development opportunity." (Complaint ("Compl.") ¶ 2.)
Plaintiff is a Delaware limited liability company with its principal place of business in New York. Defendant Princeton is a New York limited liability company with its principal place of business in New York. Defendant Tabak is an individual residing in Brooklyn, New York, and is one of the principals of Defendant Princeton. During time of the events in question, Defendant Tabak is alleged to have owned and controlled Defendant Princeton. Though not expressly stated, it appears that the parties to this action are all regularly involved in the acquisition and development of real estate.
On February 24, 2011, Defendant Princeton entered into a letter agreement with nonparty Michael Ring and a number of related entities, pursuant to which Defendant Princeton had "the right to acquire the MR TIC Interests for the aggregate purchase price of SI 12,500,000." (Compl. ¶ 11.) The February letter agreement was amended by two subsequent letter agreements, each dated March 14, 2011 (together, with the February letter agreement, the "Letter Agreements"). In order to secure its rights under the Letter Agreement, Defendant Princeton deposited $10,066,082.03 in an escrow account. (Compl. ¶ 12.)
Shortly thereafter, Michael Ring attempted to unilaterally terminate the Letter Agreements, and an arbitration between Defendant Princeton and Michael Ring ensued. While Defendant Princeton ultimately obtained a favorable arbitration award, litigation continued in a proceeding in New York County Supreme Court to confirm the arbitration award captioned Princeton Holdings LLC v. Michael Ring, and The Broadsmoore Group, LLC, index number 651483/2011, which was presided over by Justice Marcy Friedman. That proceeding was commenced on May 31, 2011, and thereafter discontinued by stipulation dated June 18, 2013.
In August 2012, while that litigation was ongoing, Plaintiff, through its principal Joseph Chetrit ("Chetrit"), approached Defendants about the possibility of jointly acquiring the MR TIC Interests with Defendant Princeton. "Chetrit . . . proposed that Princeton and JCMC would jointly own and operate the MR TIC Interests upon their acquisition." (Compl. ¶ 13.)
Further negotiations ensued, during which Defendant Tabak stated that he was committed to completing the acquisition of the MR TIC Interests. Defendant Tabak also proposed that Plaintiff substitute its own funds for the amount that Defendant Princeton had previously placed in escrow. On this point, the parties ultimately agreed that Plaintiff would pay Defendant Princeton $12.5 million in exchange for all of Defendant Princeton's right, title, and interest in the escrowed $10,066,082.03. Plaintiff also contributed S1 million to help cover acquisition costs.
Chetrit informed Defendant Tabak that the deposited funds would be "pledged by JCMC in connection with the proposed transaction would be subject to [Section] 1031" of the Internal Revenue Code as part of a so-called "like-kind exchange." (Compl. ¶¶ 18-19,) All parties are alleged to have been aware that Plaintiff would suffer serious tax consequences if the like-kind exchange failed to take place. As consideration for the opportunity to participate in the acquisition, Plaintiff would also be required to make a one-time payment of $46 million to Defendant Princeton upon the closing of the acquisition of the MR TIC Interests.
On August 7, 2012, Plaintiff and Defendant Princeton memorialized these negotiations by entering into the "Contribution Agreement," in furtherance of what Plaintiff characterizes as a joint venture to acquire the MR TIC Interests. Notably, the Contribution Agreement made Defendant Princeton "solely responsible to engage in all the negotiations, discussions or communications and enter into any additional agreements necessary to carry out the transactions contemplated under the [Letter Agreements]," (Compl ¶ 29.) According to Plaintiff, Defendant Princeton was required "to do so solely for the benefit of the joint venture." (Compl. ¶ 29.)
The Contribution Agreement also restricted Plaintiff from carrying on any independent negotiations regarding the acquisition of the MR TIC Interests and from "'engag[ing] in any discussions, negotiations or communications, or enter into any agreements, with respect to any property adjacent to any Property that has the ability to grant development, air rights or other rights for the benefit of, or that would enhance the value of, such Property.'" (Compl. ¶ 30.)
Exhibit A to the Contribution Agreement was an operating agreement (the "Operating Agreement"), which the parties agreed to execute if and when the acquisition of the MR TIC Interests occurred. The Operating Agreement set forth Plaintiff and Defendant Princeton's rights and obligations as 50% co-owners of a limited liability company through which they would jointly own and develop the properties underlying the MR TIC Interests.
Plaintiff contends that it fulfilled all of its obligations under the Contribution Agreement, while Defendant Princeton breached the Contribution Agreement by secretly assigning its rights under the Letter Agreements to nonparty Extell Development Company ("Extell"). That assignment closed in April 2013, for which Defendant Princeton received $65 million. As a result, the acquisition of the MR TIC Interests by Plaintiff and Defendant Princeton, as contemplated by the Contribution Agreement, did not occur.
Following the completion of the assignment to Extell, Defendant Princeton paid Plaintiff "$21,410,048 [which] included (i) the return of JCMC's $12.5 million deposit, (ii) 50% of monies remaining in the parties' joint bank account ($480,000), and (iii) a purported "50% Profit Share" of the "profits" after expenses, which was only $8,430,048 of the $65 million." (Compl. ¶ 49.)
Plaintiff thereafter commenced this action on October 16, 2013, claiming, among other things, that Defendant Princeton breached the Contribution Agreement by assigning its interests in the Letter Agreements to Extell; that the portion of the assignment proceeds paid to Plaintiff was insufficient; and that as joint venturers (and therefore as fiduciaries), Defendant Princeton had an obligation to first offer Plaintiff the opportunity to acquire the interest in the Letter Agreements, which it instead assigned to Extell, The seven-count complaint sets forth causes of action for breach of contract, breach of fiduciary duty, imposition of constructive trust, breach of the implied covenant of good faith and fair dealing, fraud, conversion, and an accounting.
ANALYSIS
I. The Standard on a Motion to Dismiss
"On a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a libera! construction. We accept the facts as alleged in the complaint as true, accord plaintiff's 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 N.Y.2d 83, 87-88 (1994). In addition, "[a] plaintiff may provide, and the court can consider, sworn affidavits to remedy any defects in the complaint and preserve a possibly inartful pleading that may contain a potentially meritorious claim." Ray v. Ray, 108 A.D.3d 449, 452 (1st Dep't 2013).
A motion to dismiss under CPLR 3211(a)(7), for failure to state a cause of action, must be denied if the factual allegations contained within "the pleadings' four comers . . . manifest any cause of action cognizable at law." 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144. 151-52 (2002). While factual allegations contained in a complaint should be accorded a favorable inference, bare legal conclusions and inherently incredible facts are not entitled to preferential consideration. Sud v. Sud, 211 A.D.2d 423, 424 (1st Dep't 1995).
Where the motion to dismiss is based on documentary evidence under CPLR 3211(a)(1), the claim will be dismissed only "if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." Leon, 84 N.Y.2d at 88 (emphasis added); see 150 Broadway NY Assocs., L.P. v. Bodner, 14 A.D.3d 1, 5 (1st Dep't 2004).
II. Breach of the Contribution Agreement
The first count of the complaint is for breach of the Contribution Agreement by Defendant Princeton. Defendants seek dismissal on the basis that this claim is foreclosed by various sections of the Contribution Agreement.
A. The Limitation of Remedies Provisions
Defendants assert that dismissal of count one is mandated by Sections 10(b)(i) and (ii) of the Contribution Agreement, both of which contain so-called "limitation of remedies" provisions. Section 10(b)(ii) applies if, "prior to or within 30 days following the Closing Date," Defendant Princeton "is otherwise obligated to close under this Agreement but willfully fails to close" in order to "enter into a binding written agreement with another party" to transfer its "rights under the Letter Agreements," and Defendant Princeton actually "enters into such a binding written agreement with such party." (Contribution Agreement at 13.)
Under those circumstances, Plaintiff may "pursue any remedy available to [Plaintiff] at law or in equity, including seeking specific performance or monetary damages (but excluding incidental or consequential damages, except for reasonable attorneys fees incurred by [Plaintiff] in pursuing such remedy)." (Contribution Agreement at 13.) Alternatively, Plaintiff may obtain the remedy provided for by Section 10(b)(i).
Section 10(b)(i) applies where Defendant Princeton fails to satisfy its obligations under the Contribution Agreement other than as described in Section 10(b)(ii) (or Section 10(b)(iii), which is inapplicable here). Under Section 10(b)(i), Plaintiff's "sole remedy" is the return of "the JC Deposit (minus any amount of the Princeton Deposit that has been previously paid to JC Partner)." (Contribution Agreement at 13.)
1. The Occurrence of the Closing Date as a Condition Precedent to the Applicability of Section 10(b)
Defendants argue that, assuming this action falls within the scope of Section 10(b)(ii), Plaintiff failed to give the notice required by that section. Specifically, Section 10(b)(ii) provides that Plaintiff "may elect, by written notice delivered to [Defendant Princeton] within 90 days following the Closing Date" either of the permissible remedies. (Contribution Agreement at 13.) That section further provides that "if [Plaintiff] does not deliver [the written notice] to [Defendant Princeton] within 90 days following the Closing Date," then Plaintiff would be deemed to have elected the return of its deposit under Section 10(b)(i) as its sole remedy. Defendants' position is that the deposit was already returned as part of the payment of $21,410,048 from the proceeds of the assignment to Extell. Alternatively, if this action falls within the scope of Section 10(b)(i), then the result is the same.
Section 10(b) provides, among other things, that "if Contributor fails to perform any of its obligations required to be performed under this Agreement on the Closing Date, then" and thereafter enumerates the available remedies. (Contribution Agreement at 13.) According to Plaintiff, the use of the phrase "on the Closing Date" means that the occurrence of the Closing Date is a condition precedent to the applicability of the limitation of remedies provision.
Section 9 provides that "[t]he Closing Date shall not be less than three (3) Business Days following delivery of a written notice thereof from Contributor to JC Partner." (Contribution Agreement at 12.) Plaintiff contends that no such notice was ever provided. (Affidavit of Joseph Chetrit ("Chetrit Aff.") ¶ 26.) Without such notice, argues Plaintiff, the Closing Date could not have occurred and the condition precedent could not be satisfied.
In addition, Section 9 defines "Closing Date" as follows:
The closing of the transactions in Section 2(b) hereof (the "Closing") shall occur, and the documents referred to in Section 8 shall be delivered upon the contribution and assignments to the Company by Contributor and JC Partner as provided in Section 8, by 10:00am eastern time on the date on which the MR TIC Interests Acquisition is closing (the "Closing Date").(Contribution Agreement at 12.) Based on this definition, it is Plaintiff's position that because the Closing did not occur, the Closing Date could also not have occurred, such that the condition precedent would also not be satisfied.
The First Department has held that "an agreement is ambiguous if 'on its face [it] is reasonably susceptible of more than one interpretation.'" Ellington v. EMI Music Inc., 106 A.D.3d 401, 402 (1st Dep't 2013). While Defendants dispute Plaintiff's reading of Section 10(b), the Court finds Plaintiff's interpretation to be at least reasonable, such that there is presently an ambiguity as to whether the occurrence of the Closing Date is a condition precedent to the applicability of the limitation of remedies provisions.
2. The Applicability of the 90-Day Notice Period
Even if the introductory language of Section 10(b) were not read as requiring the occurrence of the Closing Date as a condition precedent, there is a separate question as to whether the 90-day notice period of Section 10(b)(ii) is applicable.
Section 10(b)(ii) requires that Plaintiff's election of remedies be made by written notice to Defendant Princeton "within 90 days following the Closing Date," or Plaintiff would "be deemed to have elected" the return of its deposit as its sole remedy. (Contribution Agreement at 13.) Thus, it could be argued that if, as Plaintiff alleges, the Closing Date did not occur, then the 90-day notice period would not start to run, and Plaintiff's failure to give notice would not prevent it from commencing this action,
This interpretation is informed by a separate reference within Section 10(b)(ii) to the period "prior to or within 30 days following the Closing Date." (Contribution Agreement at 13.) The fact that the 90-day notice period is only following the Closing Date, while the reference to the 30-day period contains the additional phrase, "prior to," is instructive as to the parties' intent that the 90-day notice period should run, if at all, only after the Closing Date had occurred.
It also bears mentioning that Plaintiff's allegations comport with the circumstances described in Section 10(b)(ii), such that limitation of remedies provided for by Section 10(b)(i) would not otherwise be implicated. That is, Defendant Princeton failed to close under the Contribution Agreement and executed a transfer of its rights under the Letter Agreements to a third party. Accordingly, Plaintiff's alleged failure to give Defendants notice of its election of remedies does not provide a basis for dismissal at this juncture.
B. The Limitation of Damages of Provision
In the alternative, Defendants seek to limit the types of damages recoverable by Plaintiff pursuant to the exclusion in Section 10(b)(ii) for "incidental or consequential damages, except for reasonable attorneys fees." There is no question that the cases cited by Defendants provide support for the broader proposition that limitation of damages provisions, as a general matter, are enforceable. However, Defendants offer virtually no analysis as to whether the damages which they seek to exclude—tax consequences stemming from the non-occurrence of the like-kind transfer, lost profits, and loss of good will—are "incidental or consequential." At bottom, it is unclear whether any of the damages sought by Plaintiff should be excluded pursuant to Section 10(b)(ii).
The Court of Appeals recently discussed the standard relevant to determining whether lost profits were "general or consequential damages." Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 806 (2014). That determination "depend[s] on whether the non-breaching party bargained for such profits and they are 'the direct and immediate fruits of the contract."' Biotronik, 22 N.Y.3d at 806 (citation omitted). In the case of a damages limitation provision which precludes the recovery of consequential damages, "where the damages reflect a 'loss of profits on collateral business arrangements,' they are only recoverable when '(1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.'" Biotronik, 22 N.Y.3d at 806 (citation omitted).
Giving Plaintiff the benefit of every reasonable inference and accepting its allegations as true, this Court cannot make a determination that the lost profits sought are consequential rather than direct. Certainly the thrust of the parties' agreement was to jointly acquire and develop the properties underlying the MR TIC Interests. As such, the lost profits were arguably "bargained for" and would constitute "the direct and immediate fruits of the contract."
Plaintiff's ability to seek tax consequences from the loss of the like-kind transfer and good will is likewise not definitely foreclosed. The exact nature of the good will is unclear, but to the extent Plaintiff expected to increase its good will upon the acquisition of the MR TIC Interests, such damages would arguably be another form of lost profits. Much the same can be said of the tax consequences, as it is alleged that the parties' principals discussed Plaintiff's intention to execute a like-kind exchange as part of its involvement in this transaction.
Plaintiff also notes that Section 2(f) of the Contribution Agreement—requiring in part that the parties' cooperation with respect to making the assignment of the Letter Agreements tax efficient to Defendant Princeton as long as doing so would not cause Plaintiff to incur any costs or "change the economies'" of the transactions adversely to Plaintiff, unless reimbursed or "made whole" by Defendant Princeton—was included to reflect the parties' understanding of Plaintiff's intent to execute a like-kind exchange.
At present, there is no basis to conclude that the damages sought are foreclosed by the limitation-of-damages provision in Section 10(b)(ii). For all of the reasons stated above, Defendants' request for dismissal pursuant to Section 10(b) of the Contribution Agreement is denied.
Though not at the forefront of their arguments, Defendants also take the position that the proceeds from the assignment to Extell were equitably distributed between Plaintiff and Defendant Princeton, and that having already received a portion of those monies, Plaintiff is not entitled to any additional recovery. In light of the parties' competing submissions, Defendants' assertion creates an issue of fact as to the correct measure of damages to which Plaintiff is entitled (if any), and so does not provide a basis for dismissal at this stage in the proceedings. See Balance Return Fund Ltd. v. Royal Bank of Canada, 83 A.D.3d 429, 431 (1st Dep't 2011) (finding that "Defendants' argument that they ultimately distributed the proceeds pursuant to a series of court orders presents a disputed question of fact going to the measurement of damages"). As the First Department has observed, "[a]lthough plaintiff may not in the end be able to prove its damages with reasonable certainty, 'a determination to that effect at this juncture would be premature.'" Red Oak Fund, L.P. v. MacKenzie Partners, Inc., 90 A.D.3d 527, 528-29 (1st Dep't 2011) (affirming denial of defendant's motion to dismiss).
C. The Grant of Discretion to Defendant Princeton
Defendants characterize the assignment to ExteU as a valid exercise of their discretion to settle the Michael Ring litigation, provided for by Section 4(b) of the Contribution Agreement. That section provides that Defendant Princeton may, "in [its] sole discretion, without obtaining consent from [Plaintiff]," take certain enumerated actions including with respect to the Letter Agreements and the Michael Ring litigation. (Contribution Agreement at 7.) Notably, these include the authority to "make all decisions with respect to the Letter Agreements and the transactions and other matters addressed in the Letter Agreements" and to make "any and all decisions with respect to any arbitration or litigation with respect to the Letter Agreements." (Contribution Agreement at 7.)
It is, however, unclear whether the discretion afforded to Defendant Princeton would include its decision to assign its interest in the Letter Agreements to Extell. An assignment of rights followed by the settlement of a litigation in which assignee has been substituted as a party for the assignor, is distinct from a settlement of that litigation by the assignor. Indeed, while it is alleged that the assignment to Extell took place in April 2013, the stipulation of discontinuance in the proceeding to confirm the arbitration award was filed in June 2013, approximately two months later.
Also unclear is whether the assignment to Extell would constitute a "decision[] with respect to the Letter Agreements and the transactions and other matters addressed in the Letter Agreements." The examples of such discretion enumerated in Section 4(b)(i) do not include the right to assign Defendant Princeton's interest in the Letter Agreements, though those examples may not have been intended to be exclusive. Notably, other references to the right to assign or transfer Defendant Princeton's interest in the Letter Agreements, are explicitly mentioned elsewhere in the Contribution Agreement, such as in Sections 10(b)(ii) or 10(b)(iii).
Though not discussed by the parties, Section 18(c) additionally provides that Defendant Princeton "may not assign or otherwise transfer this Agreement or any of its rights or obligations hereunder without first obtaining JC Partner's consent thereto." (Contribution Agreement at 16.) As noted above, Plaintiff alleges (and there appears to be no dispute) that Defendant Princeton "assign[ed] its rights under the Letter Agreement to Extell." (Chetrit Aff. ¶ 43.) Because certain of Defendant Princeton's rights with respect to the Letter Agreements are set forth in, for example, Section 4(b) of the Contribution Agreement, such rights may also qualify as Defendant Princeton's "rights or obligations hereunder." Arguably, in order to "assign or otherwise transfer" those rights to Extell, Section 18(c) would have required that Defendant Princeton first obtain Plaintiff's consent, taking the assignment out of the purview of the discretion granted by Section 4(b).
According to the First Department, documentary evidence must "'utterly refute[] plaintiff's factual allegations,'" in order to mandate dismissal under CPLR 3211(a)(1). Mill Fin., LLC v. Gillett, 2014 N.Y. Slip Op. 06039, at *l-2 (1st Dep't Sept. 4, 2014). Based on the foregoing, the Court finds that Section 4(b) does not utterly refute Plaintiff's allegations, such that dismissal on that basis is not warranted.
D. The Absence of an Actionable Obligation Under the Contribution Agreement
Defendants next argue that the Contribution Agreement imposes no obligations with respect to which Plaintiff's breach of contract claim may be sustained. That is, while Plaintiff may have been desirous of achieving Closing, there was no requirement that the parties do so. One example offered by Defendants is that Section 9 "expressly conditioned the creation of the joint venture on Princeton's ability to consummate the MR TIC Interests Acquisition." (Defendants' Memorandum of Law in Support at 20.)
Plaintiff, however, points to a number of provisions in the Contribution Agreement which arguably impose actionable obligations upon Defendant Princeton. For example, Section 5(a)(ii) provides in pertinent part that "[t]his Agreement and all documents executed by Contributor that are to be delivered to JC Partner at Closing . . . are, and at the time of Closing will be, the legal, valid and binding obligations of Contributor, enforceable against Contributor in accordance with their respective terms." (Contribution Agreement at 8 (emphasis added).) Clearly some obligations set forth in the Contribution Agreement were intended to be enforceable against Defendant Princeton, even prior to Closing.
Though disputed by the parties, Plaintiff alleges that Defendant Princeton breached Section 4(c) by failing to "(i) 'keep [Plaintiff] reasonably informed regarding the status of any negotiations, litigation, arbitration or other material matters relating to' Princeton's acquisition of the MR TIC Interests, and (ii) 'inform [Plaintiff] of any proposed settlement with [Ring] of the ongoing litigation and arbitration with [MR] regarding the MR TIC Interests Acquisition, before entering into any such settlement.'" (Plaintiff's Memorandum of Law in Opposition at 20 (quoting Contribution Agreement at 8).) Plaintiff argues that this breach prevented it from acting to stop the sale to Extell.
Plaintiff also contends that Defendant Princeton breached Section 8(d) of the Contribution Agreement, which recites "[t]he obligation of [Defendant Princeton] to effect the Closing." (Contribution Agreement at 11.) Section 8(d) makes that obligation "subject to the fulfillment or written waiver by Contributor at or prior to the Closing Date" of three conditions. (Contribution Agreement at 11.) Relevant here is the condition that "[t]he MR TIC Interests Acquisition shall be closing concurrently or immediately following the Closing." (Contribution Agreement at 11.)
Plaintiff's position is that the Closing did not occur (such that this condition could not be satisfied), but that Defendant Princeton may not rely on the non-occurrence of a condition precedent where it prevents or frustrates that precondition from occurring. See Coby Elecs. Co., Ltd. v. Toshiba Corp., 108 A.D.3d 419, 420 (1st Dep't 2013) (holding that "'[a] party to a contract cannot rely on the failure of another to perform a condition precedent where he has frustrated or prevented the occurrence of the condition'"). While Defendants attempt to distinguish the facts of this case, arguing that Michael Ring, not Defendant Princeton, was the cause of the non-occurrence, that argument merely creates a factual issue, and Plaintiff has sufficiently alleged that Defendants frustrated the Closing from occurring, they may not rely on its non-occurrence to escape their obligations under Section 8(d).
In addition, Plaintiff alleges that Defendant Princeton breached Section 20 of the Contribution Agreement—the "Further Assurances" provision—which provides in part that Plaintiff and Defendant Princeton "shall execute, acknowledge and deliver all and every such further acts, deeds, conveyances, assignments, notices, transfers and assurances as may be reasonably required by the other party for carrying out the intentions or facilitating the consummation of this Agreement." (Contribution Agreement at 16.) While Defendants argue that such a provision may not support a breach of contract claim and that, in any case, the provision was complied with, the use of the word "shall" creates a non-permissive (and therefore potentially breachable) obligation.
Based on the foregoing, Plaintiff has identified a number of obligations under the Contribution Agreement with respect to which Plaintiff has sufficiently alleged a breach.
E. The Automatic Termination Provision
It is also Defendants' position that the automatic termination provision contained in Section 9 forecloses Plaintiff's ability to bring this action. That provision reads as follows:
If the Closing does not occur on or prior to the fifth anniversary of the date of this Agreement, [that is, by August 7, 2017,] then this Agreement shall automatically terminate, whereupon, (i) if all or any amount of the Princeton Deposit is returned to Contributor, Contributor shall pay such portion of the Princeton Deposit to JC Partner and (ii) this Agreement shall be deemed cancelled and of no further force or effect, and neither party shall have any further rights or liabilities against or to the other except pursuant to the provisions of this Agreement which are expressly provided to survive the termination hereof.(Contribution Agreement at 12.) There are, however, a number of issues arising out of Defendants' argument that this provision provides a basis for dismissal.
First, the phrase, "then this Agreement shall automatically terminate," presumably means that the automatic termination provision would be applicable only if the Contribution Agreement had not already terminated for some other reason, such as in the event of default by one of the parties.
Second, the phrase, "on or prior to the fifth anniversary," indicates that the automatic termination would not take place before the fifth anniversary—August 7, 2017—and that the parties had up until that time to effectuate the Closing. Obviously that date has not yet been reached.
Lastly, applying this provision where Defendant Princeton is alleged to have breached the Contribution Agreement would render meaningless the remedies provided for by Section 10 because those remedies are not "expressly provided to survive the termination" of the Contribution Agreement. Such a result is untenable under New York law. Schiavone Constr. Co., Inc. v. City of New York, 106 A.D.3d 427, 428 (1st Dep't 2013) (holding that it is "long-standing black-letter law that a contract should not be read to 'render any portion meaningless'"). For these reasons, the automatic termination provision does not provide a basis for dismissal of the complaint.
F. The Acknowledgment that the Closing Might Not Occur
The inclusion of language in the Contribution Agreement acknowledging the possibility that the Closing might not occur, does not mandate any particular result. For example, Section 7(c) contains the phrases, "[i]f the Closing occurs" and "[i]f the Closing does not occur." (Contribution Agreement at 10.) Section 9 also provides that "the Contribution Agreement would automatically terminate if the Closing did not occur on or prior to the fifth anniversary of the date of the Contribution Agreement," meaning that the parties had considered the possibility that the transaction might not occur even after a period of five years. (Contribution Agreement at 12.) Likewise, the inclusion the default and remedies provisions in Section 10 is undoubtedly a tacit acknowledgment that one party might fail to perform. However, each of these acknowledgments, without more, does nothing to relieve the parties of their respective obligations under the Contribution Agreement.
III. The Fiduciary Claims
Plaintiff asserts causes of action for breach of fiduciary duty (count two), constructive trust (count three), and accounting (count seven). These causes of action share the common requirement of a fiduciary or confidential relationship. Here, it is alleged that a fiduciary relationship existed between Plaintiff and Defendant Princeton by having entered into the Contribution Agreement.
"The indicia of the existence of a joint venture are: [1] acts manifesting the intent of the parties to be associated as joint venturers, [2] mutual contribution to the joint undertaking through a combination of property, financial resources, effort, skill or knowledge, [3] a measure of joint proprietorship and control over the enterprise, and [4] a provision for the sharing of profits and losses." Richbell Info, Servs. v. Jupiter Partners, L.P., 309 A.D.2d 288, 298 (1st Dep't 2003).
Plaintiff relies heavily upon the fourth recital paragraph of the Contribution Agreement, which states that Plaintiff and Defendant Princeton "desire to enter into a joint venture whereby, among other things, in accordance with the terms and conditions of this Agreement" they will take certain enumerated steps towards the goal of "clos[ing] with Michael Ring under the Letter Agreements." (Contribution Agreement at 1.) "Recitals, . . . unless intended themselves to embody a contractual right or obligation, may be contradicted." Hutchison v. Ross, 262 N.Y. 381, 398 (1933). Indeed, "[t]he promise is what the parties agreed to do, and hence is the operative part of the instrument, while the recital states what led up to the promise and gives the inducement for making it. When the explanation of the reason for the promise is at variance with the promise itself, the latter, if clear and unambiguous, must prevail, as it is the transaction between the parties." Williams v. Barkley, 165 N.Y. 48, 57 (1900).
Notably absent from the Contribution Agreement is any provision giving Plaintiff "a measure of joint proprietorship and control over the enterprise." As noted above, Section 4(b) provided that Defendant Princeton "and its affiliates shall be entitled, in their sole discretion, without obtaining any consent from JC Parmer, to: (i) make all decisions with respect to the Letter Agreements and the transactions and other matters addressed in the Letter Agreements." (Contribution Agreement at 7.) Furthermore, Section 4(a) explicitly forbade Plaintiff from taking any actions on its own with respect to the MR TIC Interests or related interests. Likewise, Section 4(c) provided only that Plaintiff was entitled to be kept reasonably informed by Defendant Princeton regarding the MR TIC Interests Acquisition and related matters.
Instead, Plaintiff would only be given the requisite "measure of joint proprietorship and control over the enterprise" once the parties executed the Operating Agreement, which would only take place on the Closing Date. (Contribution Agreement at 4.) Plaintiff is correct that the Operating Agreement is an exhibit to the Contribution Agreement, and that the merger clause contained in Section 12 states that the Contribution Agreement "and the Exhibits [t]hereto . . . contain all of the terms agreed upon between" Plaintiff and Defendant Princeton, (Contribution Agreement at 14.)
The Operating Agreement's inclusion as an exhibit and its reference in the merger clause does not, however, operate to make its terms instantly binding upon Plaintiff and Defendant Princeton when the parties explicitly agreed elsewhere that it would be executed at some future date. Insofar as the Operating Agreement was concerned, the parties merely had "a preliminary agreement to enter into a future agreement [which] generally does not create a binding contract." Guggenheim Corporate Funding, LLC v. Access. 1 Communications Corp., 26 Misc. 3d 1210(A), at *8 (Sup. Ct. N.Y. Cnty. 2009).
Based on the foregoing, Plaintiff fails to sufficiently allege that at the time of the events in question, a joint venture, and thus a fiduciary or confidential relationship, existed between Plaintiff and Defendant Princeton. Accordingly, counts two, three, and seven are dismissed.
IV. Breach of the Implied Covenant of Good Faith and Fair Dealing
In the fourth count of the complaint, Plaintiff asserts a cause of action for breach of the implied covenant of good faith and fair dealing against Defendant Princeton. The crux of this claim is that "Princeton deceived JCMC by making false statements and concealing material facts (including, but not limited to, the existence of, and negotiations with, the third-party buyer)." (Compl. ¶ 87.)
This allegation is not substantively different than that made with respect to the breach of contract claim that Defendant Princeton "fail[ed] to keep JCMC reasonably informed regarding the status of any negotiations, litigation, arbitration or other material matters relating to the acquisition and concealing its surreptitious negotiations to sell the rights and interest in the acquisition." (Compl. ¶ 65.) In fact, Section 4(c) of the Contribution Agreement requires that Defendant Princeton keep Plaintiff "reasonably informed regarding the status of any negotiations, litigation, arbitration, or other material matters relating to the closing of the MR TIC Interests Acquisition," making the covenant express, not implied. (Contribution Agreement at 6.)
Accordingly, the Court finds that the count four "is duplicative of the breach of contract cause of action since it is based on the same facts as are alleged in support of that cause of action," 2470 Cadillac Resources, Inc. v. DHL Express (USA), Inc., 84 A.D.3d 697, 698 (1st Dep't 2011). Moreover, as alleged, the compensatory damages sought with respect to this claim are indistinguishable from those sought with respect to the breach of contract claim. For these reasons, count four is dismissed.
V. Fraud
The fifth count of the complaint is for fraud and is asserted against both Defendants. Under New York law, the elements of a claim of fraud are a '"material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages."' Pramer S.C.A. v. Abaplus Int'l Corp., 76 A.D.3d 89, 98 (1st Dep't 2010).
A prima facie fraud claim may also be premised on a concealment, instead of a misrepresentation, and "[e]ven in the absence of any affirmative misrepresentation or any fiduciary obligation, a party may be liable for nondisclosure where it has special knowledge or information not attainable by plaintiff, or when it has made a misleading partial disclosure." Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 135 (1st Dep't 2014).
Here, it is alleged that Defendants induced Plaintiff to enter the Contribution Agreement by making a series of knowingly false misrepresentations regarding their desire and intent to close on the MR TIC Interests Acquisition. Plaintiff also contends that Defendants deliberately concealed, and in fact took steps to prevent Plaintiff from discovering, their negotiations with Extell, and seeks damages for the misuse of its committed funds, as well as for the loss of proceeds from the assignment to Extell, to which Plaintiff asserts an entitlement.
Fraud claims are routinely dismissed as duplicative of claims for breach of contract, where the fraud claim is "based on misrepresentations of then present facts that were collateral to the contract and involved a 'breach of duty distinct from, or in addition to, the breach of contract.'" Shugrue v. Stahl, 117 A.D.3d 527, 528 (1st Dep't 2014). In Shugrue, the First Department upheld a fraud claim, finding that it was not duplicative of a related breach of contract claim where "the chief executive officer and sole shareholder of the corporate defendants, misrepresented to plaintiffs that defendants had obtained all of the required permits and approvals and had completed the construction plans for their home renovation project, which induced plaintiffs to enter into the construction contract with defendants in October 2012." Shugrue, 117 A.D.3d at 528. Here, Plaintiff has alleged that Defendant Tabak, principal of Defendant Princeton, made a series of misrepresentations which induced Plaintiff to enter into the Contribution Agreement.
Based on the foregoing, Plaintiff has sufficiently pled its fraud claim. As alleged, that claim is not duplicative of Plaintiff's breach of contract claim. For these reasons, Defendants' request that the fifth count of the complaint be dismissed is denied.
VI. Conversion
Plaintiff additionally asserts a cause of action for conversion, alleging that "JCMC has legal ownership or an immediate right to possession of the funds that Defendants improperly took from it" and that "Defendants exercised an unauthorized dominion over the funds to the exclusion of JCMC's rights." (Compl. ¶¶ 102-03.) "[A]n action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question," Lucker v. Bayside Cemetery, 114 A.D.3d 162, 174 (1st Dep't 2013). "The plaintiff must have a superior right of possession to the funds, and the defendant must have exercised unauthorized dominion over the funds to the exclusion of the plaintiff's rights." Lucker, 114 A.D.3d at 174.
The conversion claim must be dismissed as duplicative of Plaintiff's prior claims, including those for breach of contract and fraud. See M.D. Carlisle Realty Corp. v. Owners & Tenants Elec. Co. Inc., 47 A.D.3d 408, 409 (1st Dep't 2008) (dismissing a conversion claim as duplicative of a breach of contract claim). While Plaintiff alleges that Defendants converted the proceeds from the assignment to Extell, (Chetrit Aff. ¶¶ 40-58), Plaintiff seeks identical damages with respect to its breach of contract claim, (Compl. ¶ 67), and the "right of possession" would have to be contractual in nature. To the extent Plaintiff alleges a conversion of the committed funds, those damages were already sought in Plaintiff's claim for fraud. (Compl. ¶ 98.) Moreover, Plaintiff cannot assert a "right of possession" stemming from the parties' fiduciary relationship, as Plaintiff failed to sufficiently allege that one existed.
Lastly, it bears mentioning that Plaintiff's allegations do not support the conclusion that Defendant Tabak, in his individual capacity, converted any funds to which Plaintiff had a superior right. Based on the foregoing, count six of the complaint, for conversion against Defendants Princeton and Tabak, is dismissed.
CONCLUSION
Accordingly, it is hereby
ORDERED that Defendants' motion to dismiss is granted in part, to the extent of dismissing counts two, three, four, six, and seven of the complaint, and denied in all other respects; and it is further
ORDERED that Defendants are directed to serve an answer to the complaint within 20 days after service of a copy of this order with notice of entry; and it is further
ORDERED that counsel are directed to appear for a preliminary conference on in Room 442, 60 Centre Street, on Tuesday, November 18, 2014, at 10:00 a.m.
This constitutes the decision and order of the Court. Dated: New York, New York
September 29, 2014
ENTER:
/s/________
Hon. Eileen Bransten, J.S.C