Opinion
603305/03.
April 14, 2006.
This action arises from the resignation of the individual defendants from plaintiffs Realty Holdings of America LLC, U.S. Realty Advisors, LLC and U.S. Realty Advisors Inc. (for ease of reference, the three plaintiff companies are referred to as U.S. Realty). Plaintiffs allege that they bought out defendant Jonathan Molin's interests in their business and in certain real estate deals for $2.2 million, based on Molin's promises not to interfere with plaintiffs' business, employees or clients, but that he planned a joint departure together with defendants J. Suzi Wilson, Mark Sard, and Stephan Rosen, who secreted proprietary information from U.S. Realty, and together the four defendants promoted a competitive venture.
By decision and order dated July 26, 2004, the court dismissed the first cause of action as against defendant Molin, to the extent it was based on fraud, and the second, third and fourth causes of action against Molin on the basis of a general release. The court also dismissed the tortious interference claims pled in the seventh, eighth and ninth causes of action as against the defendants Wilson, Sard and Rosen. The order was affirmed by the Appellate Division, in Ledy v Wilson ( 15 AD3d 299 [1st Dept], Iv dismissed 5 NY2d 746).
Accordingly, plaintiffs' remaining claim against Molin for breach of their Separation Agreement is set forth in the first cause of action. In the fifth and sixth causes of action plaintiffs allege that Wilson, Sard and Rosen breached their fiduciary duty to their former employers, and aided and abetted Molin's breach of fiduciary duty. The tenth cause of action seeks imposition of a constructive trust upon assets of Wilson, Sard and Rosen, and upon those of their new employer, Net Lease Capital Advisors, Inc.
Molin has counterclaimed for the recovery of his attorneys' fees pursuant to the provision of the Separation Agreement allowing for an award of attorneys' fees to the prevailing party in the event of any litigation concerning it. Defendants Sard and Rosen have interposed a counterclaim for breach of contract and unjust enrichment, based on the claim that plaintiffs' buyback of Sard and Rosen's interests in certain real estate deals at book value did not comply with an agreement providing for purchase at fair market value.
All parties now move for full or partial summary judgment, pursuant to CPLR 3212, and motion sequence numbers 006 and 007 are consolidated for disposition.
FACTS
The following facts are undisputed. U.S. Realty provides real estate advisory services to public pension funds and other clients, and specialize in transactions knows as "credit tenant leasing" or "single tenant net leasing." Prior to May 2003, U.S. Realty's pension clients included four California pension funds: L.A. Fire and Police Retirement Association (L.A. Fire and Police); Contra Costa Employees Retirement Association (Contra Costa); San Diego County Employees Retirement Association (San Diego County); and San Diego City Employees Retirement Systems (San Diego City) (collectively referred to herein as the Pension Funds). Defendant Molin was a founding member and employee of U.S. Realty until his resignation on April 28, 2003, and he had supervisory authority over the business of the Pension Funds and certain other clients. Defendants Wilson, Sard and Rosen were employed by plaintiff U.S. Realty Advisors Inc. until various dates in May 2003, and worked with and under the supervision of Molin.
In a net lease transaction, the purchaser/lessor buys property from the owner/occupants, and leases the property back to the seller. The lessor then owns the property, and the lessee has control over the operation and use of the real estate, pays rent, and assumes the obligations, risks and costs of maintaining the property.
The members of U.S. Realty were governed by an Operating Agreement, dated as of December 31, 1997, to which Molin was a signatory. The Operating Agreement provided that in the event of a member's resignation prior to the end of 2004, the withdrawing member was to sell his or its interest in U.S. Realty for a purchase price in an amount equal to the book value of tangible assets as of the date of the exercise of the option by the managing member. The Operating Agreement further provide, among other things, that a member may not, during his term and for one year after resignation, engage in business activities involving single tenant net lease transactions, except through U.S. Realty.
The members of U.S. Realty, including Molin, acquired certain interests in numerous net lease transactions (the Deals). The Deals' Operating Agreements each had similar buy-out provisions in the event that any individual member terminated employment with U.S. Realty.
Molin voluntarily resigned his positions with U.S. Really on April 28, 2003. He and the plaintiffs negotiated and entered into a Separation Agreement dated April 30, 2003. Pursuant to the Separation Agreement, Molin sold his interest in U.S. Realty for $400,000 to plaintiffs and his interest in the Deals for $1.8 million. In exchange, Molin agreed to the issuance of the following press release, and further agreed that "any communications" regarding the cessation of his employment "will at all times be consistent with the Press Release." Golenbock 8/12/05 Affirm.: Separation Agreement, ¶ 1. The Press Release provided:
NEW YORK, NEW YORK — U.S. Realty Advisors, LLC today reported that Jonathan Molin has resigned his position as president of U.S. Realty Advisors, LLC, effective April 30, 2003, to pursue other interests.
"We understand and respect Jon's decision," said Richard Ader, Chairman of U.S. Realty. "We are all grateful to Jon for his many contributions to the success of our company."Id.: Separation Agreement, Exh. A thereto. In paragraph 11 of the Separation Agreement, Molin agreed that, except for the Press Release, he would keep strictly confidential the nature, terms and negotiation of the Separation Agreement.
In addition, paragraph 6 of the Separation Agreement provide that Molin would not, for a period of one year, directly or indirectly manage, operate or participate in a net lease business. However, the Separation Agreement expressly permitted Molin to act as a real estate broker or salesperson or mortgage broker in connection with single-tenant net lease and sale/leaseback real estate transactions, provided he could not do business with U.S. Realty clients without the company's involvement. Molin could also purchase net lease real estate investments or other real estate investments for his own personal portfolio.
In paragraph 7 of the Separation Agreement, Molin covenanted that he would not, through December 31, 2004, directly or indirectly (i) interfere with the employment relationships between U.S. Realty and its employees; (ii) solicit or encourage any employee to terminate his or her employment or participate in independent business ventures; or (iii) hire any employees of U.S. Realty.
Defendant Wilson resigned on the morning of May 8, 2003. Sard resigned on May 13, 2003, and Rosen resigned on May 14, 2003. Wilson, Sard and Rosen were all employees at will, capable of resigning at any time. None of these defendants ever signed an employment agreement or any type of non-competition agreement with U.S. Realty.
On June 16, 2003, Wilson, Sard and Rosen formed an entity called Allegiant Advisors LLC in order to work together with respect to the net lease real estate investing business. On July 24, 2003, they entered into a term sheet with certain of the principals of Net Lease Capital Advisors, Inc. (NLCA) to form Net Lease Capital Investors LLC (NLCI), and the certificate of formation for Allegiant Advisors LLC was amended to change its name to NLCI. NLCA is a licensed commercial real estate broker that specializes in credit tenant properties. It was started in 1997 by non-parties Douglas Blough, Bruce McDonald and Bill Hanson. Wilson, Rosen and Sard became employees of NLCI as of August 1, 2003.
After Molin departed from U.S. Realty, plaintiffs lost a fund with Contra Costa, San Diego County, and San Diego County. They also lost business from L.A. Fire and Police and were put on hold for a program they had with San Diego County. However, they retained and still do business with San Diego City.
As part of their employment by U.S. Realty, Rosen and Sard had been each granted 1% individual member interests in over 40 limited liability companies (LLCs) indirectly owned by plaintiffs. After they resigned, Rosen and Sard received correspondence dated May 29, 2003 from Richard Ader, as the managing member of the LLC, in which plaintiffs elected to purchase Sard and Rosen's interests in all of the LLCs for "book value" pursuant to paragraph 22(y) of the Operating Agreements. Each of the letters represented that the book value of each LLC was less than the mortgage balance, and thus Rosen and Sard would be paid only $1 for each of their interests, except for one entity valued at $95.00. On June 9, 2003, Rosen and Sard each executed an "Instrument of Assignment," whereby each agreed to assign his respective interests in all of the LLCs to plaintiffs' designee.
The correct reference is to section 22(ii)(y).
After the commencement of this lawsuit, defendants Rosen and Sard claimed for the first time that they were entitled to be paid the "fair market value" for their interests in 15 of the LLCs. Defendants contend that section 22(ii)(z) of the Operating Agreements for these 15 LLCs provides for repurchase of an individual member's interests based on a fair market value calculation.
DISCUSSION
Plaintiffs' Breach of Contract Claim Against Defendant Jonathan Molin
Defendant Molin contends that summary judgment in his favor is warranted because, despite months of discovery and numerous depositions, the plaintiffs have been unable to come up with any evidence to support their claim that he breached either the non-compete or the non-solicitation covenants in the Separation Agreement. He denies having any partnership or participation agreement with Wilson, Sard or Rosen, denies ever having any interest in NLCA or NLCI, and denies ever working with the individual defendants or either Net Lease entity. He contends that he had nothing to do with the decisions of Wilson, Sard and Rosen to resign, which he contends were made on their own, without consulting with him.
Molin avers that since his resignation, his only involvement in net lease transactions has been on a couple of occasions he looked into making a personal investment, allowed by the Separation Agreement, and none of those investments came to pass. In addition, he admits introducing his friend Frank Reilly to another real estate broker, Mike Farrido, in connection with a transaction that ultimately took place later in 2004. The introduction occurred because both Reilly and Farrido had expressed an interest in buying shopping centers in Florida, where Molin was living at the time. When the deal was consummated, Reilly paid Molin $56,000 out of Reilly's share of the brokerage fee that he earned in connection with the transaction. Molin contends he is permitted to act as a broker under the Separation Agreement.
Molin has established that he did not breach the non-compete provisions of the Separation Agreement by actually engaging in any net lease business during the restrictive period. There is no evidence, he did any net lease business with Legg Mason or NLCA. Molin testified and Douglas Blough confirmed that Molin has no agreements with and has had nothing to do with the business of NLCA during the period from his resignation until January 2005.
However, Molin there is or may be an issue relating to the non-solicitation of employees covenant of the Separation Agreement. That agreement not only prevented Molin from hiring Wilson, Sard or Rosen, but provided that he could not "directly or indirectly" solicit or encourage them to terminate their employment or participate in an independent business venture.
While Molin contends that neither Wilson, Sard nor Rosen consulted with him before resigning, Rosen admitted discussing his resignation with Molin before he left U.S. Realty. Rosen Tr. at 136. Most significantly, Terrie Warkenthien, who worked as Molin's and Wilson's administrative assistant, has submitted an affidavit in which she directly contradicts Molin's claim that he had no part in his team's decision to leave. According to Warkenthien, she was told by both Molin and Wilson prior to Molin's departure that they would be leaving the firm together. Wilson allegedly said that Sard and Rosen were also leaving, and that they were "guaranteed" to get the Pension Funds as clients. Warkenthien claims that after Wilson resigned, she contacted Warkenthien at home, and encouraged her to resign before U.S. Realty fired her, stating that Molin was willing to give her a salary until she found a job. Warkenthien says she was later offered a job, first by Wilson and then directly by Molin himself. It is noteworthy that Wilson, Sard and Rosen each resigned from U.S. Realty without any job prospects. Plaintiffs suggest that they did not do this unless they had a plan for continued employment and that Warkenthien's affidavit suggests their plan included Molin.
The court accepts the Warkenthien affidavit as newly-discovered evidence even though it was submitted by plaintiffs, both after the close of discovery and after these motions had been fully briefed and argued. While it is hard to believe that plaintiffs' principals never once questioned the defendants' own administrative assistant in the two years since this action was brought, it is not the function of this court to make credibility determinations on summary judgment papers. Defendant Molin will have the right to depose Ms. Warkenthien if he so chooses prior to the trial of this action.
Wilson, Sard and Rosen were apparently interviewed by Legg Mason Wood Walker, Inc. (Legg Mason) as early as May 19, 2003 in Baltimore, only five days after Rosen's departure. Richard Jacobs, Legg Mason's Managing Director of the Structured Finance Group, testified that Legg Mason's interaction with U.S. Realty was primarily through Molin, and there is evidence, albeit very limited, that Legg Mason was exploring independent deals with Molin after he resigned in early May 2003. Jacobs did not remember and could not confirm Wilson's claim that he called her at home on May 9th (only one day after she resigned) and expressed an interest in exploring employment.
After the Legg Mason interview did not result in employment for Wilson, Sard and Rosen, there is evidence that Molin introduced his three former colleagues to NLCA principals Bruce McDonald and Douglas Blough at the offices of Frank Reilly in late June of 2003, and said "you guys might have something to talk about." Blough testified that Molin also said, "these are my friends. I would love to see them land in a good place. If you could do anything together that would be great. I'm just out of the picture and he was out of the picture." Blough also testified that they did discuss the possibility of Molin joining Wilson, Sard and Rosen after his non-compete expired, and that when Molin "came out of the dark side of the moon we would talk," but that it was not an "inevitability and it certainly wasn't a plan." Id. at 48.
Thus, while it is undisputed that Molin did not hire Wilson, Sard or Rosen after they resigned from U.S. Realty, whether he encouraged them to leave and set up an independent net lease venture with which he might later become involved is a factual issue.
While Molin may have breached the confidentiality provisions of the Separation Agreement by disclosing some details of his non-compete obligations to several individuals, including Douglas Blough of NLCA, Frank Reilly, Wilson, Sard and Rosen it appears that plaintiffs did that as well and no damages could result from such disclosure. Richard Jacobs of Legg Mason testified that he knew about Molin's non-compete clause, and that it was "common knowledge" in the industry. Wilson apparently knew of and shared some details of the Separation Agreement at an August 2003 presentation to San Diego County. She explained that Molin had:
left before being fully vested this year which meant he had to negotiate and execute a settlement agreement. As part of that agreement, he had to agree to a non-compete provision which prevents him from joining us at this time or any other competitor. John is prevented from joining any other competitor until his noncompete expires next year.
But what he can do, and what he's permitted to do under this provision is work as a broker. John has set up his own brokerage company. What he's also permitted to do is bring us transactions as a broker. So we look forward to sourcing acquisitions through John and continuing that relationship in this capacity (emphasis added).
Pls. Exh. AAA: Tr. at 8-9. Wilson repeated at least three times that NLCA was the "same pension fund division" as U.S. Realty. Id.: Tr. at 8, 12, 39. Plaintiffs contend that Wilson was implying that Molin was behind them and would be working with them in the future because of a belief that there was no way that San Diego County would have entertained the presentation if Molin were not involved.
Molin admits that he told Wilson, Sard and Rosen that he could not work with them because his agreement with U.S. Realty included a non-compte, but argues that "surely" he was entitled to tell people he had worked with that he was not going to do business with them. He avers that the people who knew about the non-compete only had a general awareness of the time limits and scope, and that he could act as a broker. Molin points out that plaintiffs also discussed the fact of the non-compete with others as indicated by Sard's testimony that Richard Ader mentioned that Molin had a non-compete. When asked whether he ever told anybody about the non-compete and non-solicitation provisions of the Separation Agreement, Ader replied "not that I recall," but clarified that his answer applied only to people "outside the company." Ader Tr. at 66. Thus any claim for breach of the confidentiality agreement is dismissed.
Molin contends that plaintiffs have conceded that it is "possible" that the Pension Funds stopped doing business with them simply because Molin was no longer with the company, citing to the deposition testimony of Jack Genende. However if Molin encouraged the entire team to depart it is possible that that resulted in some business loss as well.
On May 30, 2003, Richard Ader received a letter from Contra Costa, advising that U.S. Realty had been placed on review status "based on the latest changes in personnel at U.S. Realty." By letter dated June 23, 2003, Contra Costa again advised that "[w]ith the recent changes in management at U.S. Realty, our Board of Trustees has requested that no further investments be made on our account, until they can determine the effect of these changes." Jeff Karp, a consultant for L.A. Fire and Police, testified that the reason their contract with U.S. Realty was not renewed in June 2003 was that "[t]he people that they were dealing with left," meaning Molin, Wilson, Sard and Rosen. Karp Tr. at 48-49. In August of 2003, an industry trade publication indicated that three Pension Funds had put U.S. Realty on a watch list because of concern "about the future of the company after several top employees left the company," and named each individual defendant.
Even if plaintiffs are unable to prove actual damages, nominal damages may be awarded to a plaintiff where the law recognizes a technical invasion of his or her right or a breach of defendant's duty. Brian E. Weiss, D.D.S., P.C. v Miller, 166 AD2d 283 (1st Dept 1990), affd 78 NY2d 979 (1991); Good Karma Prods. v Penthouse Intl. Ltd., 88 AD2d 561 (1st Dept 1982), affd 59 NY2d 775 (1983).
Although plaintiffs are far from having established as a matter of law that Molin breached his contract, summary judgment is not appropriate to Molin with respect to the "encouragement" claim and as to plaintiffs on that claim. However, if a deposition of Warkenthien does not substantiate her affidavit claims, the court will reconsider Molin's application for summary judgment.
The Claims Against Defendants Wilson, Sard and Rosen
An employee may create a competing business prior to leaving his employer without breaching any fiduciary duty, unless, in doing so, he or she makes improper use of the employer's time, facilities or proprietary secrets. Frederic M. Reed Co. v Irvine Realty Group, Inc., 281 AD2d 352 (1st Dept 2001); Schneider Leasing Plus, Inc. v Stallone, 172 AD2d 739, 741 (1st Dept), appeal dismissed 78 NY2d 1043 (1991). A breach of fiduciary duty may also occur if the employee solicits clients or attempts to divert any of his or her employer's business while still employed, or by employing fraudulent or unlawful means. Stoeckel v Block, 170 AD2d 417 (1st Dept 1991); Headquarters Buick-Nissan v Michael Oldsmobile, 149 AD2d 302, 303-04 (1st Dept 1989).
The fact that Wilson, Sard and Rosen all resigned, without notice, shortly after Molin's departure from U.S. Realty is not evidence of anything other than three at-will employees, who were dissatisfied with their jobs after the departure of their boss, resigned and may have acted unprofessionally by not giving notice. Even if Wilson lied about the reason for her departure, and was "in league with Molin," she was not required to give a reason to depart her at-will employment, and she was entitled to seek help getting a new job from any source.
Plaintiffs have failed to raise a triable issue of fact that either Wilson, Sard or Rosen attempted to solicit clients of U.S. Realty while still in its employ. Indeed, the evidence establishes that the three did not even have a competing venture set up until the middle of July 2003, more than a month afer they left U.S. Realty's employ. In the absence of any agreement restricting post-employment competition, any solicitation of U.S. Realty's clients that Wilson, Sard and Rosen may have made after their respective resignations could not constitute a breach of fiduciary duty. Frederic M. Reed Co., 281 AD2d at 352-53 ("In the absence of a covenant between the parties restricting defendants' solicitation of [plaintiff's former] clients, their solicitation was not actionable.")
Nor is there any evidence that Wilson, Sard and Rosen used U.S. Realty's time and resources to plan a competing venture. The fact that the three spoke to each other on the telephone often during the period preceding their resignations is merely evidence that they spoke, hardly surprising given that their boss had just left the company and they all worked together.
Although Wilson, Sard and Rosen may have removed Wilson and Rosen's contact lists, a present value calculation that Sard had e-mailed to his home before his resignation, and a U.S. Realty template for letters of intent, plaintiffs have furnished no evidence that these lists contained any information that could be considered confidential or proprietary. The identity of clients is not proprietary or otherwise confidential where it is readily ascertainable from publically-available sources.Leo Silfen, Inc. v Cream, 29 NY2d 387, 392 (1972); Ruesch Intl., Inc. v MacCormack, 222 AD2d 343 (1st Dept 1995). Defendants have established that the Pension Funds are public entities that are required by law to provide to the public information concerning their operation and investments, including the contact information of individuals responsible for making investment decisions. U.S. Realty's own website identified San Diego City as a client back in 2003, and industry trade journals identified U.S. Realty as the advisor to this fund as well as San Diego County and Contra Costa. Wilson also allegedly told Warkenthien that she had copied the "firm's Microsoft Access Database list," but neither Warkenthien or plaintiffs' counsel explains what this is a list of or how it is confidential.
The Excel spreadsheet — which shows a simple calculation of the present value of an "Estate For Years/Remainder Interest? — that Sard e-mailed to his home account contains no information that could be considered confidential or proprietary to U.S. Realty. Sard maintains methodology for calculating present value of a property's future value and selecting the discount rate is common knowledge among net lease industry professionals, and probably among most first year business school students. Richard Ader admitted at his deposition that a present value calculation is not proprietary only the discount rates U.S. Realty used, but then acknowledged that Sard had enough experience to select discount rates on his own. Finally, there is absolutely no evidence that Sard ever used this document, which concerns a tax-savings device, to unfairly compete with U.S. Realty for any business with the Pension Funds, who are tax-exempt entities.
Plaintiffs maintain that letters of intent prepared by Sard for U.S. Realty have the same format and significant areas of verbatim language as the letters of intent he prepared for NLCA. Plaintiffs thus maintain that an inference can be drawn that Sard copied U.S. Realty's letters of intent, but a transactional document that is routinely shared with third parties cannot be proprietary.
Finally, plaintiffs contend that, in their August 2003 presentation to San Diego County, Wilson, Rosen and Sard used confidential business information. More specifically, plaintiffs claim that during the August 2003 presentation, Rosen quoted chapter and verse of specific U.S. Realty deals and strategies, including a deal which had not been completed and which could not have appeared on the Pension Fund's public records. However, the transcript of that presentation reveals that Rosen merely talked in very general terms about his involvement, while employed at U.S. Realty, in two completed and one aborted net lease deals, and nothing he said was of a confidential or proprietary nature.See Pls. Exh. AAA at 25-27.
Finally, there is no proof that plaintiff suffered any loss of business by any of this purported use of the U.S. Realty's proprietary or confidential information. There must be a causal link between the defendants' alleged conduct, and a plaintiff's loss of business.Stoeckel v Block, 170 AD2d 417 (1st Dept 1991) for this claim to be compensable. See 105 East Second Street Assoc. v. Bobrow, 176 AD2d 483 (1st Dept. 1991).
Unlike Molin, who contractually agreed that he would not solicit his former staff to leave U.S. Realty's employ, Wilson, Sard and Rosen were free to leave and set up a competing business. Not only is the record devoid of any evidence that Wilson, Sard, or Rosen unfairly competed against U.S. Realty, it is clear that they have never obtained any business from any entity that was a client of U.S. Realty. When plaintiff David Ledy was asked if any of the defendants secured any business from any of the clients of U.S. Realty, he replied "not to my knowledge." Ledy Tr. at 90-91. Jeffrey Karp, the only representative of a Pension Fund that was deposed in this action, testified that, to his knowledge, L.A. Fire and Police had never done any business with Wilson, Sard or Rosen. Rather, it is likely that Pension Funds stopped doing business with U.S. Realty because of the departures of the partner, and to an unknown extent, some of the employees who had handled the Pension Funds' accounts at U.S. Realty rather than of any direct solicitations by Wilson, Sard or Rosen.
Plaintiffs fail to identify any acts or omissions by Molin prior to his resignation that could constitute a breach of fiduciary duty, as opposed to a breach of his obligations under the Separation Agreement. Nor have plaintiffs come forth with any evidence that could support an inference that Wilson, Sard or Rosen provided him with the "substantial assistance" that would be required to maintain a claim for aiding and abetting any breach of Molin's fiduciary duty. Brasseur v Speranza, 21 AD3d 297, 299 (1st Dept 2005); Kaufman v Cohen, 307 AD2d 125 (1st Dept 2003); DePinto v Ashley Scott, Inc., 222 AD2d 288, 290 (1st Dept 1995). Defendants are entitled to summary judgment dismissing the sixth cause of action.
"A constructive trust may be imposed when property has been acquired in such circumstances that the holder of legal title may not in good conscience retain the beneficial interest," and "it requires a showing of a confidential or fiduciary relationship, a promise, a transfer of property in reliance on that promise and unjust enrichment." Sharper v Harlem Teams for Self-Help, Inc., 257 AD2d 329, 332 (1 st Dept 1999). Because there is no evidence to support plaintiffs' underlying causes of action for either breach of fiduciary duty or aiding or abetting Molin's alleged breach of fiduciary duty, there is no basis for granting the remedy of a constructive trust over any alleged profits. In any event, there is no business obtained over which a constructive trust could be imposed. Accordingly, summary judgment dismissing the tenth cause of action is warranted.
Sard and Rosen's Counterclaims
Defendants Sard and Rosen contend that they should be granted summary judgment on their counterclaims because the documentary evidence conclusively establishes that they are owed the fair market value of their interests in 15 of the LLCs in which they invested with plaintiffs.
Plaintiffs admit that 15 of the more than 40 Operating Agreements provide that repurchase of these defendants' interests in the Deals occur at fair market value, as determined by the Managing Member. However, plaintiffs contend that this was apparently the result of a drafting error on the part of U.S. Realty's counsel, Proskauer Rose LLP, that went unnoticed by anyone at U.S. Realty, including Sard and Rosen. Rather, it was the understanding of all of the members and employees of U.S. Realty that all of the Deals were structured to permit the repurchase of the interest — if the employee left — at book value. On this point, Ledy testified at his deposition that he thought
it should have a parallel clause as Ms. Hawks has that if the termination was with cause or for other than good reasons it was at book. And for circumstances of death, disability that it would be fair market value as determined by the managing member. I think our counsel [referring to Proskauer Rose], I think it was everyone's understanding they were buying on terms no more favorable than to themselves than Ms. Hawks did. And I would say that in this agreement counsel made an error in not making it a parallel paragraph.
Ledy Tr. at 133. Plaintiffs contend that it was not until this litigation that Sard and Rosen's attorneys raised the issue, after reviewing the Operating Agreements for the Deals produced as part of discovery. Plaintiffs argue that the Operating Agreements sued upon contain a mutual mistake, and that, in any event, Rosen and Sard did not object and assigned their interests at book value, thus knowingly waived this claim.
Sard and Rosen claim that when plaintiffs finally produced the LLC Operating Agreements, they realized that the statements made by Richard Ader in his May 29, 2003 letters were patently false. Defendants contend that the assignments they signed in June 2003 were either procured by fraud since Ader misrepresented the terms of the Operating Agreements for the 15 LLCs, or plaintiffs were genuinely mistaken as to the applicable buyout provisions, and either way, the assignments must be rescinded.
Repurchase of an individual member's interest in all of the Deals is governed by Section 22 of the Operating Agreements, entitled "Assignments." The 15 agreements upon which Sard and Rosen base their counterclaim provide, in subsection (ii)(z) as follows:
Upon termination of an Individual Member's employment (other than Hawkes) with RHALLC (including, without limitation, by reason of the death or disability of such Individual Member), such Individual Member shall, at the option of the Company, exercised within 60 days of such termination, be required to sell his or her Interest to the Company (or its designee). With respect to any such sale, the purchase price for the Interest shall be an amount equal to the fair market value of such Individual Member's Interest as of the date (after the cessation of such employment) that the option to purchase such Interest is exercised, as reasonably determined by the Managing Member in its good faith discretion (emphasis added).
It appears that, with two exceptions, a change was effected in May 2001, and thereafter, all of the Operating Agreements provide that repurchase of an employee's interests be at book value, unless the termination occurs after five years or is the result of death or disability. In this regard, Section 22(ii)(y) and (z) of the more recent Operating Agreements provide as follows:
(y) Upon termination of an Individual Member's employment (other than Hawkes) with RHALLC at any time prior to the fifth anniversary of the date hereof, subject to Section 22(ii)(z), below, such Individual Member shall, at the option of the Company, exercised within 60 days of such termination, be required to sell his or her Interest to the Company (or its designee). With respect to any such sale, the purchase price for the Interest shall be Book Value (as hereinafter defined) of such Individual Member's Interest as of the date (after cessation of such employment) that the option to purchase such Interest is exercised. The "Book Value" of such Individual Member's proportionate share of the book value (determined in accordance with generally accepted accounting principles) of the Company's tangible assets as of such dated, after giving effect to the distribution of any earnings held by the Company for distribution at such date (emphasis added).
(z) Upon termination of an Individual Member's employment (other than Hawkes) with RHALLC by reason of the death or disability of such Individual Member), such Individual Member shall, at the option of the Company, exercised within 60 days of such termination, be required to sell his or her Interest to the Company (or its designee). With respect to any such sale, the purchase price for the Interest shall be an amount equal to the fair market value of such Individual Member's Interest as of the date (after the cessation of such employment) that the option to purchase such Interest is exercised, as reasonably determined by the Managing Member in its good faith discretion (emphasis added).
A written agreement may be reformed for mutual mistake where "the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement." Chimart Assoc. v Paul, 66 NY2d 570, 573 (1986). "Reformation is permitted where there is mutual mistake, e.g., 'where the parties have a real and existing agreement on particular terms and subsequently find themselves signatories to a writing which does not accurately reflect that agreement.'" Ribacoff v Chubb Group of Ins. Cos., 2 AD3d 153, 154 (1st Dept 2003), quoting Harris v Uhlendorf, 24 NY2d 463, 467 (1969).
David Ledy testified that there was no reason why Sard and Rosen should have gotten a better deal than U.S. Realty employee, Laurie Hawkes, who, in both versions of the Operating Agreement, was only entitled to fair market value if her termination was without cause, was a voluntary resignation with good reason, or the result of her death or disability. Jamie Grossman, who was involved in preparing the documentation for the repurchase of Sard and Rosen's interests, claims that she never noticed that some of the Operating Agreements contained different provisions with respect to plaintiffs' repurchase rights.
Moreover, Sard and Rosen agreed to book value at the time of their resignations, and only raised the issue for the first time in August of 2004. While they claim that it was only when plaintiffs finally produced the Operating Agreements that they realized that the statements made by Ader in his May 29, 2003 letters were false, it is undisputed that Sard and Rosen received copies of the Operating Agreements for three of the LLC's at issue — Ermax Equity LLC, Roadhouse Equity LLC and CH Restaurant LLC — from Proskauer Rose on February 27, 2000. Rosen further testified at his deposition that, following receipt of these agreements, he was "surprised" by the fair market valuation, because it was not in the description of the deal as presented. Rosen Tr. at 161. David M. Ledy allegedly orally represented and confirmed to Rosen that any buyout would be effected at fair market value, and that Ledy would advise Rosen if that term were to be changed in the future. Id. at 162. This evidence contradicts Sard and Rosen's claim that they were unaware of their rights in June 2003.
Finally, juxtaposed against the inference that a deliberate change was made to the Deals in May 2001 is the fact that two Deals closed on July 25, 2001, and while the Operating Agreement for one deal contains the fair market value language for termination of any kind, the other does not. This suggests that perhaps this was a scrivener's error by outside counsel for U.S. Realty, particularly since defendants fail to offer any reason for the language of Section 22 to be different for two Deals that closed on the same date.
Although plaintiffs do not submit any evidence on this issue from Proskauer Rose, at whose door plaintiffs place the blame for this drafting error and, with two exceptions, the LLC Operating Agreements requiring the repurchase of Rosen and Sard's respective interests to be effected at fair market value were earlier in time that the agreements which provide for repurchase at book value, a mutual mistake may have occurred. Nevertheless, plaintiffs have raised a triable issue of fact in the drafting of the Operating Agreements for the 15 LLCs sufficient to defeat summary judgment for defendants.
CONCLUSION AND ORDER
For the foregoing reasons, it is hereby
ORDERED that defendant Jonathan Molin's motion (seq. no. 006) for summary judgment dismissing the first cause of action alleging a breach of the Separation Agreement, and for summary judgment on his counterclaim for attorneys' fees, is denied; and it is further
ORDERED that the motion (seq. no. 007) of defendants J. Suzi Wilson, Mark Sard, Stephan Rosen and Net Lease Capital Advisors, Inc. for summary judgment dismissing all remaining causes of action against them, with prejudice, and for summary judgment on the issue of liability on their counterclaims, is granted only to the extent of dismissing the fifth, sixth and tenth causes of action in the amended complaint as against these defendants, and denied with respect to the counterclaims of defendants Mark Sard and Stephan Rosen, which are severed and continued; and it is further
ORDERED that plaintiffs' cross motion for partial summary judgment in their favor against defendant Jonathan Molin is denied; and it is further ORDERED that the Clerk is directed to dismiss the complaint as against J. Suzi Wilson, Mark Sard, Stephan Rosen and Net Lease Capital Advisors, Inc. with costs and disbursements.
Parties are directed to appear for a conference May 2, 2006 at 9:30 am.