Opinion
609493-16
09-04-2019
U.S. BANK NATIONAL ASSOCIATION, as Trustee, Successor in Interest to Bank of America, National Association, as Successor by Merger to LaSalle Bank for the Registered Holders of J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP12, Commercial Mortgage Pass-Through Certificates, Series 2007-LDP12, Acting by and Through its Special Servicer, LNR Partners, LLC, Plaintiff, v. KAHN PROPERTY OWNER, LLC; Gary Melius; Oheka Catering I LLC; Oheka Management LLC ; Oheka Catering, Inc. ; Oheka Management Corp. ; People of the State of New York; and John Doe No.1-50, Said John Doe, Defendants Being Fictitious, it Being Intended to Name All Other Parties Who May Have Some Interest in or Lien upon the Premises Sought to Be Foreclosed, Defendants. Kahn Property Owner, LLC; Gary Melius; Oheka Catering 1 LLC; and Oheka Management LLC, Third Party Plaintiffs, v. LNR Partners, LLC ; Stan Gale ; Gale International, LLC; and Starwood Capital Group, LLC, Third Party Defendants.
Law Offices of Joshua L. Dratel, P.C., for Defendants and Third-Party Plaintiffs. James M. Wicks, Franklin C. McRoberts, and Viktoriya Liberchuk, Farrell Fritz, P.C., for Third-Party Defendants Stan Gale and Gale International, LLC.
Law Offices of Joshua L. Dratel, P.C., for Defendants and Third-Party Plaintiffs.
James M. Wicks, Franklin C. McRoberts, and Viktoriya Liberchuk, Farrell Fritz, P.C., for Third-Party Defendants Stan Gale and Gale International, LLC.
Elizabeth H. Emerson, J.
Upon the following papers read on this motion to dismiss ; Notice of Motion and supporting papers 326-332 ; Notice of Cross Motion and supporting papers; Answering Affidavits and supporting papers 357 ; Replying Affidavits and supporting papers 365-367 ; it is,
ORDERED that this motion by the third-party defendants Stan Gale and Gale International, LLC, for an order dismissing the amended third-party complaint insofar as it is asserted against them is granted.
The defendant/third-party plaintiff Kahn Property Owners, LLC ("Kahn") is the owner of real property located in Huntington, New York, known as "Oheka Castle." The defendant/third-party plaintiff Gary Melius is the principal of Kahn. He is also the principal of the defendants/third-party plaintiffs Oheka Catering I, LLC, and Oheka Management, LLC (the "Oheka defendants"), which operate Oheka Castle. The plaintiff, U.S. Bank National Association ("U.S. Bank"), loaned Kahn approximately $30 million and holds a mortgage on Oheka Castle as security for the debt. After Kahn defaulted on the loan, the plaintiff commenced this mortgage-foreclosure action. Kahn, Melius, and the Oheka defendants asserted counterclaims against the plaintiff and third-party claims against LNR Partners, LLC ("LNR"); Stan Gale and Gale International, LLC (collectively, the "Gales"); and Starwood Capital Group, LLC ("Starwood").
By an order dated March 25, 2019, this court granted the plaintiff's motion for partial summary judgment and the appointment of a referee to determine, inter alia, the amount due to the plaintiff.
The gravamen of the third-party claims against the Gales is as follows: Melius had a plan to build 200 condominiums on the land surrounding Oheka Castle, some of which was owned by Kahn and some of which was owned by the neighboring Cold Spring Country Club. In 2014, Stan Gale approached Melius with a proposal that included a redesign of the golf course by Jack Nicklaus with Oheka Castle as the clubhouse (the "Nicklaus deal") in addition to the condominium development. The parties began serious negotiations in September 2015. During the negotiations, Melius advised Gale that the plaintiff had declared the loan in default and that LNR, the loan's special servicer, was threatening to foreclose on behalf of U.S. Bank. Gale told Melius that he knew the principals of Starwood (which purportedly owned LNR), that everything would be taken care of, and that there would be nothing to worry about. Between March 9 and 11, 2016, Gale and Melius negotiated the Nicklaus deal, the general terms of which were contained in an email dated March 23, 2016, that was signed by both Gale and Melius. The email reflects a purchase price of $37 million for property owned by Kahn plus one-third of the net profits of the new venture, a 99-year lease of Oheka Castle to an entity jointly owned by Jack Nicklaus and Stan Gale, and transfer of possession of Oheka Castle one year after the closing to allow for an orderly transfer of operations. The defendants/third-party plaintiffs contend that the terms of the deal allowed Melius to remain in possession of his apartment in Oheka Castle. However, the March 23, 2016, e-mail contains no such term. Gale paid Melius $300,000 earnest money when the email was signed and another $1 million at a later date.
The defendants/third-party plaintiffs contend that, after the email was signed, Stan Gale began to make demands to change the Nicklaus deal in ways that he knew would be unacceptable to Melius, such as insisting that Melius move out of his apartment in Oheka Castle. The defendants/third-party plaintiffs contend that Gale was working with LNR and Starwood to obtain Oheka Castle at a discount and profit from the Nicklaus deal themselves. They contend that Gale's strategy was to delay the Nicklaus deal until LNR could commence a foreclosure action. Gale broke off negotiations with Melius shortly before the mortgage-foreclosure action was commenced on June 24, 2016.
In their answer, as amended, Kahn, Melius, and the Oheka defendants asserted counterclaims against the plaintiff and third-party claims against the Gales, LNR, and Starwood. The third-party claims against the Gales are for tortious interference with business relations, tortious interference with contract, breach of fiduciary duty, civil conspiracy, fraud in the inducement, breach of the duty to negotiate in good faith, constructive fraud, and prima facie tort. The Gales move to dismiss the third-party action insofar as it is asserted against them.
Preliminarily, the court notes that third-party claims are limited to claims for contribution, indemnity, or subrogation (Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C1007:3). Impleader is only appropriate when the defendant in the primary action is proceeding "against a person not a party who is or may be liable to him for all or part of the plaintiff's claim against him" ( CPLR 1007 ; ( Zurich Ins. Co. v. White , 129 AD2d 388, 390 ). Some form of claim-over liability is a prerequisite (Alexander , supra ). At the least, the third-party claim must be sufficiently related to the main action to raise the question of whether the third-party defendant may be liable to the third-party plaintiff for the damages for which the latter may be liable to the plaintiff (Zurich , supra ; Long Is. Women's Health Care Assocs. v. Haselkorn-Lomasky , 10 Misc 3d 1068[A] at *8 ). Thus, the liability of the third-party defendant must arise from or be conditioned upon the liability asserted against the third-party plaintiff in the main action ( Lucci v. Lucci , 150 AD2d 649, 150 ; Hoboken Wood Flooring Corp. v. Fischoff , 10 Misc 3d 1065[A] at *2 ). It is clear that none of the third-party claims against the Gales contain the claim-over component required by CPLR 1007 and controlling case law. They are, therefore, procedurally improper and should have been asserted in a separate action against the Gales, or the Gales should have been joined as additional defendants on the counterclaims (see , CPLR 3019 [d] ). In the interest of judicial economy, however, the court will consider the Gales' motion to dismiss.
Tortious Interference with Business Relations
To establish tortious interference with business relations under New York law, a plaintiff must demonstrate: (1) that he had a business relationship with a third party, (2) that the defendant knew of and intentionally interfered with that relationship, (3) that the defendant acted with the sole purpose of harming the plaintiff or used wrongful means, and (4) injury to the business relationship ( Advanced Global Tech LLC v. Sirius Satellite Radio, Inc. , 15 Misc 3d 776, 779 [and cases cited therein], affd as mod 44 AD3d 317 ; see also , KGK Jewelry LLC v. Esdnetwork , US Dist Ct, SDNY, Jan. 9, 2013, Swain, J. [ 2013 WL 105780] at *5 [and cases cited therein] ).
Generally, the defendant's conduct must amount to a crime or an independent tort ( Carvel Corp v. Noonan , 3 NY3d 182, 190 ). If it does not, the plaintiff can still recover if the defendant engaged in conduct for the sole purpose of inflicting intentional harm on the plaintiff or if the defendant used wrongful means ( Id. at 190-191 ). When the alleged interference is motivated, at least in part, by economic self interest, it cannot be characterized as solely malicious, and the plaintiff must demonstrate that the means employed by the defendant were wrongful ( Out of the Box Promotions v. Koschitzki , 55 AD3d 575, 577 ). "Wrongful means" has been defined as physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure (Carvel Corp. , supra at 191). Moreover, the conduct must be directed, not at the plaintiff, but at the party with whom the plaintiff has or seeks to have a relationship ( Id. at 192 ). Under New York law, in order to make out a claim of tortious interference with business relations, the defendant must direct some activities toward a third party (Id. ).
The defendants/third-party plaintiffs allege that Stan Gale interfered with Melius's business opportunity with Jack Nicklaus and Cold Spring Country Club by using wrongful means. The defendants/third-party plaintiffs allege that the wrongful means used was fraud or misrepresentation. They allege that Stan Gale lied to Melius about the Nickaus deal, that he never intended to be bound thereby, that he never intended to complete the deal, and that his intent was to delay Melius's development plans so that LNR could foreclose and the Gales, LNR, and Starwood could profit from developing the property themselves. These allegations fail for a two reasons. First, a mere misrepresentation of an intent to perform under a contract is not actionable as fraud ( Gorman v. Fowkes , 97 AD3d 726, 727 ; see also Brown v. Lockwood , 76 AD2d 721, 731 [mere unfulfilled promissory statements as to what will be done in the future are not actionable as fraud] ). Second, the defendants/third-party plaintiffs do not allege that Stan Gale lied to or directed any wrongful conduct at anyone other than Melius. Accordingly, the third-party complaint fails to state a cause of action for tortious interference with business relations against the Gales.
Tortious Interference with Contract
Tortious interference with contract requires the existence of a valid contract between the plaintiff and a third-party, the defendant's knowledge of that contract, the defendant's intentional procurement of the third party's breach of that contract without justification, actual breach of the contract, and damages resulting therefrom ( Lama Holding v. Smith Barney , 88 NY2d 413, 424 ). The defendants/third-party plaintiffs allege that the Gales tortiously interfered with the lending agreement between Kahn and U.S. Bank by inducing U.S. Bank to wrongfully declare the loan in default and to wrongfully foreclose on Oheka Castle.
Contrary to the contentions of the defendants/third-party plaintiffs, there was no breach of the Kahn loan agreement by U.S. Bank. By an order dated March 25, 2019, this court rejected the arguments raised by the defendants/third-party plaintiffs herein and granted partial summary judgment to the plaintiff. The court determined that it was Kahn, not U.S. Bank, who breached the loan agreement. That determination is the law of the case. Accordingly, the defendants/third-party plaintiffs cannot establish a breach of the Kahn loan agreement by U.S. Bank, and the tortious-interference-with-contract claim fails.
Breach of Fiduciary Duty
The defendants/third-party plaintiffs allege that Stan Gale had a fiduciary relationship with Melius and Kahn, which he breached by failing to act in their best interests. A fiduciary relationship may exist when one party reposes confidence in another and reasonably relies on the other's superior expertise or knowledge ( WIT Holding Corp. v. Klein , 282 AD2d 527, 529 ). An arms-length business relationship, without more, does not give rise to a fiduciary obligation (Id. ; see also AHA Sales, Inc. v. Creative Bath Prods., Inc. , 58 AD3d 6, 21 ). In order to transform a business relationship into a fiduciary one, a plaintiff must make a showing of special circumstances, such as control by one party of the other for the good of the other (Id. ).
The defendants/third-party plaintiffs have made no such showing. They contend that Gale, Melius, and Kahn were fiduciaries because they agreed to share profits from the development of Oheka Castle, which made them joint venturers. While the sharing of profits is one of the indicators of a joint venture, the defendants/third-party plaintiffs do not allege an agreement to share losses or any of the other elements of a joint venture. The absence of any one element is fatal to the establishment of a joint venture ( Kidz Cloz, Inc. v. Officially for Kids, Inc. , 320 F Supp 2d 164, 171 ), and the absence of a joint venture is fatal to the breach-of-fiduciary-duty claim against the Gales ( Id. at 176 ). Accordingly, it is dismissed.
Constructive Fraud
In the absence of a fiduciary relationship, the claim for constructive fraud against the Gales also fails (see Levin v. Kitsis , 82 AD3d 1051, 1054 ).
Fraud in the Inducement
The defendants/third-party plaintiffs allege that Stan Gale induced Melius to enter into the March 23, 2016, email agreement by falsely promising to intervene on his behalf with LNR. The defendants/third-party plaintiffs allege that Gale made that promise in an email to Melius dated February 5, 2016, in which he stated, "LNR is owned by Starwood Capital. I have done business with Barry Sternlicht [the CEO of Starwood] and his CFO, Jerry Silvey. I called Jerry, and I will have him available to intercede as needed. Lets [sic] hope we are able to speak directly with Jon Kapit [the LNR loan officer in charge of the Oheka Castle loan]. Either way, we are covered."
The elements of a cause of action alleging fraud in the inducement are a material misrepresentation of an existing fact, made with knowledge of its falsity, and intent to induce reliance thereon, justifiable reliance on the misrepresentation, and damages ( Orchid Const. Corp. v. Gottbetter , 89 AD3d 708, 710 ). CPLR 3016 (b) requires that the circumstances of the fraud be stated in detail, including specific dates and items (Id. ). Except for the February 5, 2016, email, the defendants/third-party plaintiffs have failed to satisfy this heightened pleading standard. Moreover, contrary to their contentions, the email merely evinces a hope that Jerry Silvey and Jon Kapit will be persuaded to act on behalf of Melius after speaking to Gale. Vague expressions of hope and future expectation provide an insufficient basis upon which to predicate a claim of fraud (Int. Oil Field Supply Servs. Corp. v. Fadei , 35 AD3d 372, 375 ). Accordingly, the defendants/third-party plaintiffs have failed to state a cause of action for fraud in the inducement against the Gales.
Prima Facie Tort
The elements of a cause of action sounding in prima facie tort are (1) the intentional infliction of harm, (2) which results in special damages, (3) without any excuse or justification, (4) by an act or series of acts that would otherwise be lawful ( Smith v. Meridian Tech., Inc. , 86 AD3d 557, 558-559 ). Prima facie tort was designed to provide a remedy for intentional and malicious actions that cause harm and for which no traditional tort provides a remedy. It was not designed to provide a catch-all alternative for every cause of action that is not independently viable ( Backer v. Cooperatieve Rabobank U.A. , 338 F Supp 3d, 222, 232 [SDNY; and cases cited therein] ). When a prima-facie-tort claim is duplicative of a plaintiff's other tort claims, it is insufficient as a matter of law (Id. ).
The defendants/third-party plaintiffs merely restate in terms of prima facie tort the previous tort claims, which the court has determined are not viable. Moreover, the defendants/third-party plaintiffs allege that Gale was motivated, at least in part, by a desire to obtain Oheka Castle at a discount and profit from the Nicklaus deal. Thus, "disinterested malevolence" was not Gale's sole motive (Smith v. Meridian , supra at 559). A claim of prima facie tort does not lie when, as here, the defendant's action has any motive other than a desire to injure the plaintiff (Id. ). Accordingly, the defendants/third-party plaintiffs have failed to state a cause of action for prima facie tort against the Gales.
Civil Conspiracy
New York does not recognize civil conspiracy to commit a tort as an independent cause of action ( Alexander & Alexander of NY v. Fritzen , 68 NY2d 968, 969 ). A cause of action alleging civil conspiracy stands or falls with the underlying tort ( McSpedon v. Levine , 158 AD3d 618, 621 ). Since all of the underlying tort claims against the Gales have been dismissed, the civil-conspiracy claim is also dismissed (Id. ).
Duty to Negotiate in Good Faith
The defendants/third-party plaintiffs allege that the March 23, 2016, email, which set forth the general terms of the Nicklaus deal, was a Type II agreement requiring Gale to negotiate in good faith to finalize the Nicklaus deal. The defendants/third-party plaintiffs allege that Gale failed to negotiate in good faith by continually changing the terms of the deal.
Ordinarily, when the parties contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract. In some circumstances, however, preliminary agreements can create binding obligations ( Adjustrite Systems v. GAB Business Services , 145 F3d 543, 548 ). Federal case law classifies preliminary agreements into two categories. Type I preliminary agreements are complete, reflecting a meeting of the minds on all issues perceived to require negotiation ( Brown v. Cara , 420 F3d 148, 153 ). Type II preliminary agreements, by contrast, are binding only to a certain degree, reflecting agreement on certain major terms, but leaving other terms open for further negotiation (Id. ). Type II agreements do not commit the parties to their ultimate contractual objective, but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed-upon framework (Id. ).
The New York Court of Appeals has not adopted the Type I-Type II distinction, but it has indicated that it does not disagree with the reasoning of the federal cases ( IDT Corp. v. Tyco Group, S.A.R.L. (13 NY3d 209, 213 n 2 ). In IDT Corp. , the parties entered into a settlement agreement that contemplated the negotiation and execution of four additional agreements. The parties negotiated for approximately three years, but failed to reach a final agreement. The plaintiff argued that the defendant had negotiated in bad faith. The Court of Appeals found that, although the parties were obligated to negotiate in good faith, that obligation came to an end without a breach by either party. The Court recognized that there is such a thing as a good-faith impasse and that not every good-faith negotiation bears fruit ( IDT Corp. v. Tyco Group, S.A.R.L. , 23 NY3d 497, 503 ).
The Gales seek dismissal of this cause of action on two grounds. First, they contend that the March 23, 2016, email does not evince an intent to be bound thereby and that it was merely part of the parties' continuing negotiations. Second, they contend that, even if the March 23, 2016, email is a Type II preliminary agreement, the defendants/third-party plaintiffs have failed to demonstrate that Gale negotiated in bad faith.
The key element in determining whether a preliminary agreement exists is intent, i.e., whether the parties intended to be bound and, if so, to what degree ( Guggenheim Corp. Funding, LLC v. Access.1 Communications Corp.-NY , 26 Misc 3d 1210[A] at *10 [and cases cited therein] ). The best evidence of the parties' intent is what they said in their writing ( Greenfield v. Phillies Records, Inc. , 98 NY2d 562, 569 ). In analyzing the language of the agreement, the court's primary inquiry is whether the agreement expressly provides that the parties will not be bound in the absence of a formal, executed writing (Guggenheim Corp. , supra at 11). No such language is found in the March 23, 2016, email. The email was initially prepared by Melius's attorneys and sent to Melius before it was sent to Gale's attorneys. In it, Melius's attorneys sought confirmation that their understanding of the Nicklaus deal was accurate. The email begins, "This email is intended to confirm how you have instructed us to proceed in response to the transaction involving Stan Gale and Jack Nicklaus and the proposed development of the Residences at Oheka." It outlines the agreements that needed to be prepared. A contract of sale and a 99-year net lease of Oheka Castle were to be prepared by Melius's attorneys, and documents pertaining to the operation of the new venture between Gale, Nicklaus, and Melius were to be prepared by Nicklaus's and Gale's attorney. The email ends, "Please advise whether this email is an accurate summary of how you have directed us to proceed." At the bottom of the email the words "agreed to above" are written in by hand. Below the handwritten words are the signatures of both Melius and Gale.
The Gales completely ignore the handwritten language at the bottom of the March 23, 2016, email when they argue that the record is devoid of any evidence that the parties intended to be bound by the terms contained therein. Contrary to the Gales' contention, the parties explicitly agreed to be bound. However, they also recognized a need for further negotiation and documentation. The March 23, 2016, email clearly contemplated the negotiation and execution of additional agreements. It, therefore, did not commit the parties to their ultimate contractual objective, but rather to the obligation to negotiate in good faith in an attempt to reach their objective within the agreed-upon framework (see , Brown v. Cara , supra at 157). Accordingly, the Gales had a duty to negotiate in good faith.
Turning to the Gales' second argument, a party may abandon the transaction as long as it has made a good-faith effort to close the deal and has not insisted on conditions that do not conform to the preliminary writing ( Gas Natural, Inc. v. Iberdrola, S.A. , 33 F Supp 3d 373, 382 [and cases cited therein] ). The defendants/third-party plaintiffs allege that Gale continually changed the terms of the deal in ways that were inconsistent with their agreement and that Gale knew were not acceptable to Melius, such as insisting that he move out of his apartment in Oheka Castle. In support thereof, the defendants/third-party plaintiffs rely on a May 28, 2016, email from Gale to Melius, the full text of which is as follows:
"I look forward to finalizing our deal and moving forward together. In addition to the existing terms we have agreed to already, the following three items will be added. 1. Your apartment will be padlocked and no one will use it. ($10m not paid.) 2. We will transition the operations and catering of Oheka on or about July 1. Let's work on a transition plan together. 3. You and I will share 50-50 the net proceeds on the condos after all expenses and all investor returns. I can't wait to get going on this exciting new venture together with you."
Counsel for the defendants/third-party plaintiffs mischaracterize this email in their brief. By omitting the first, second, fifth, and last sentences therefrom, they have changed the tone of the email to make it sound harsher than it is. Moreover, contrary to their contentions, it did not materially alter the parties' preliminary agreement.
As previously noted, nothing in the earlier March 23, 2016, email allowed Melius to remain in possession of his apartment in Oheka Castle. The parties' agreement provided for a 99-year lease of Oheka Castle to an entity jointly owned by Jack Nicklaus and Stan Gale. Thus, Melius would have had no right to continue to reside in Oheka Castle after the transition, unless both Nicklaus and Gale agreed to such an arrangement. The record reflects that, at some point, Gale offered Melius $10 million to move out of Oheka Castle and into one of the condominiums after they were built. The March 23, 2016, email contained no reference to a $10 million payment to Melius. It, therefore, was not part of the original agreement. Rather, it was a side-deal meant to incentivize Melius to move out of Oheka Castle. That Gale and Melius could not come to an agreement on Melius's apartment does not establish that Gale negotiated in bad faith. It simply establishes that they reached an impasse on that issue.
The defendants/third-party plaintiffs contend that Gale changed the time for winding down Melius's business at Oheka Castle and changed the purchase price. However, the defendants/third-party plaintiffs have chosen to ignore the second sentence of the May 28, 2016, email, "In addition to the existing terms we have agreed to already, the following three items will be added." They have also chosen to ignore the fifth sentence, "Let's work on a transition plan together." By omitting the second and fifth sentences from the May 28, 2016, email, the defendants/third-party plaintiffs have changed its meaning.
In view of the foregoing, the court finds that, shorn of its conclusory assertions, the complaint fails to allege facts sufficient to state a plausible claim that Stan Gale acted in bad faith during the negotiations with Melius ( Gas Natural , 33 F Supp 3d at 382 ). Accordingly, the claim for breach of the duty to negotiate in good faith is dismissed.
Conclusion
The third-party amended complaint is dismissed insofar as it is asserted against Stan Gale and Gale International, LLC.