Opinion
2324/09.
Decided March 25, 2010.
Daniel Flanigan, Esq., Polsinelli Shalton Flanigan Suelthaus PC, New York, New York, Robert J. E. Edwards, Esq., Kansas City, Missouri, Attorneys for Plaintiff.
Mitchell D. Haddad, Esq., Sills Cummis Gross, One Rockefellar Plaza, New York, NY, Seith Eisenberger, Esq., Nanuet, New York, Joseph Zelmonovitz, Esq., Stahl Zelmanovitz, New York, NY, Attorneys for Defendants.
This action arises out of alleged contractual and loan defaults relating to the development of condominium buildings in Brooklyn, New York. Defendants 32nd Street Investors III LLC (32nd Street) and NCC Capital, LLC (NCC) move to dismiss the third, fourth, fifth and thirteenth causes of action of the complaint as they relate to them pursuant to CPLR 3211(a)(1), (3) and (7).
For the reasons set forth below, the moving parties motions to dismiss the third, fourth, fifth and thirteenth causes of action of the complaint are denied. The motions to dismiss the claim for punitive damages and attorneys fees are granted.
Facts
RCGLV/Maspeth
Defendant Maspeth Properties L.L.C. (Maspeth) holds title to 84 and 100 Maspeth Avenue in Brooklyn, upon which two condominium buildings have been constructed (the Maspeth Property). Plaintiff RCGLV Maspeth LLC (RCGLV) made a series of capital contributions totaling $11,300,000 over the span of several years from November 2004 until May 2007, in exchange for 100% of the Class A membership interest in Maspeth. Defendant Isack Rosenberg is the only other member of Maspeth, holding 100% of the Class B membership interest. RCGLV, Isack Rosenberg and manager Aron Deutsch executed the Operating Agreement, which governed the formation and operation of Maspeth. The Operating Agreement required that Maspeth redeem RCGLV s investment by October 1, 2007. In order to secure repayment of RCGLV s capital contributions to Maspeth, RCGLV, Isack Rosenberg and Abraham Rosenberg executed a Maspeth Pledge Agreement, in which Isack Rosenberg pledged his interest in Maspeth, and Isack and Abraham Rosenberg pledged their right, title and interest in Waterfront Realty II LLC (Waterfront), Certified Lumber Corporation (Certified) and Boro Park Home Center Corp. (Boro Park), three companies which are wholly-owned by them, as security. The complaint alleges that both the Operating Agreement and the Maspeth Pledge Agreement prohibit the granting to third parties of security interests in, or other encumbrances upon, the collateral pledged to RCGLV without RCGLV s consent as the Class A member under the Operating Agreement and as the secured party under the Maspeth Pledge Agreement.
We rely primarily upon the facts alleged in the plaintiffs complaint as true [and] accord the plaintiffs the benefit of every possible favorable inference as required by CPLR 3211(a)(1) ( Leon v. Martinez, 84 NY2d 83, 87-88 [1994]).
The Operating Agreement, as referred to herein, is the Operating Agreement dated November 4, 2004, as amended March 24, 2005, as amended June 30, 2006, as amended January 18, 2007, as amended May 25, 2007 and as amended June 2007, executed by RCGLV, Isack Rosenberg and Aron Deutch.
The Maspeth Pledge Agreement, as referred to herein, consists of the Pledge and Security Agreement dated November 4, 2004, the Amended and Restated Pledge and Security Agreement dated June 30, 2006, the Amended and Restated Pledge and Security Agreement dated March 1, 2007 and the Amended and Restated Pledge and Security Agreement dated May 25, 2007, all of which were purportedly executed by RCGLV, Isack Rosenberg and Abraham Rosenberg. The Amended and Restated Pledge and Security Agreement dated May 25, 2007, is the only agreement annexed to the motion to dismiss, as Exhibit 4 to the Affirmation of Isack Rosenberg (1) In Support of Defendants Application for Temporary Restraining Order and Preliminary Injunction and (2) In Opposition to Plaintiff s Application.
Upon the failure to redeem RCGLV s interest by October 1, 2007, the parties to the Maspeth Pledge Agreement began negotiating a Maspeth Forbearance Agreement, which was executed in July of 2008. The Maspeth Forbearance Agreement required that Isack and Abraham Rosenberg make all payments due on or before September 30, 2008, which they also failed to do.
RCG and Galster/McCaren
Defendant McCaren Park Mews LLC (McCaren) holds title to 202-226 North 11th Street in Brooklyn, New York, upon which a condominium project has also been constructed (the McCaren Property). Defendant Isack Rosenberg allegedly holds a 50% interest in McCaren and non-party Yitzchok Schwartz owns the remaining 50% interest. From February 2006 until June 25, 2007, Plaintiffs RCG Longview II, L.P. (RCG) and Galster Funding, L.L.C. (Galster) collectively loaned $13,000,000 to Isack Rosenberg, as evidenced by a Note. The loan was secured through the McCaren Pledge Agreement allegedly executed by Isack and Abraham Rosenberg in favor of RCG and Galster, pledging Isack Rosenberg s interest in McCaren and both Rosenbergs interest in Certified and Waterfront. Plaintiffs RCG and Galster allege that, like the Maspeth Pledge Agreement, the McCaren Pledge Agreement prohibits the granting to third parties of security interests in, or other encumbrances upon, the collateral pledged to RCG and Galster without RCG and Galster s consent as secured parties under the McCaren Pledge Agreement.
RCG is a member of RCGLV and executed the Maspeth Operating Agreement on RCGLV s behalf.
The Note refers to the Consolidated and Restated Promissory Note executed on June 25, 2007 by Isack Rosenberg in favor or RCG and Galster.
The McCaren Pledge Agreement was never submitted as an exhibit to the complaint or the motion to dismiss. The McCaren Pledge Agreement is alleged to consist of the Pledge and Security Agreement dated February 28, 2006 as executed by RCG, Galster and Isack Rosenberg, the Pledge and Security Agreement dated February 28, 2006 as executed by RCG, Galster, Isack Rosenberg and Abraham Rosenberg, the Amended Pledge and Security Agreement dated June 25, 2007 as executed by RCG, Galster and Isack Rosenberg and the Amended Pledge and Security Agreement dated June 25, 2007 as executed by RCG, Galster, Isack Rosenberg and Abraham Rosenberg.
Yitzchok Schwartz, RCG and Galster also allegedly executed a Pledge and Security Agreement dated August 5, 2008 in which Schwartz pledged his remaining 50% membership interest in McCaren, however, that agreement is unrelated to this action.
The Note required that Isack Rosenberg repay the loan by March 1, 2008, which he failed to do. Abraham Rosenberg, who signed a limited guaranty securing the Note, defaulted as well. Abraham and Isack Rosenberg subsequently entered into the McCaren Forbearance Agreement with RCG and Galster around July of 2008, in which Isack and Abraham Rosenberg agreed to make all required payments by August 28, 2008, which they also failed to do. RCG and Galster sue now in connection with damages suffered from the devaluation of Waterfront as secured collateral.
32nd Street and NCC Mortgages
Plaintiffs claim that, unbeknownst to them, Maspeth, Boro Park, Waterfront and Franklin Realty Corp., an entity not a party to this action, together granted the 32nd Street Mortgage to defendant 32nd Street on November 8, 2007. The 32nd Street Mortgage was not recorded until September 8, 2008, approximately two months after the execution of the Maspeth and McCaren Forbearance Agreements, thus avoiding notice to plaintiffs of the alleged violation of the Operating Agreement, the Maspeth Pledge Agreement and the McCaren Pledge Agreement. Maspeth allegedly also granted a similar mortgage to NCC on or about February 12, 2008. According to the complaint, the NCC Mortgage was not recorded until November 20, 2008, approximately four months after the execution of the Maspeth Forbearance Agreement, also avoiding notice to RCGLV of the alleged violation of the Maspeth Operating Agreement and the Maspeth Pledge Agreement.
The 32nd Street Mortgage, as referred to herein, consists of a loan given on November 8, 2007 in the aggregate principal amount of $6,000,000, which was secured by a mortgage, an Assignment of Leases and Rents, and a Security Agreement on the real property of Maspeth, Boro Park, Waterfront and Franklin Realty Corp.
This mortgage is referred to herein as the NCC Mortgage. The complaint alleges that NCC made a loan to Maspeth in the aggregate principal amount of $1,800,000, which was secured by a mortgage and a security interest consisting of the remaining 35 condominium units and other real property owned by Maspeth (Complaint ¶ 41). Moving party NCC failed to annex the actual NCC Mortgage to its Notice of Cross-Motion to Dismiss or to the annexed affirmation of Seth Eisenberger, dated March 30, 2009. The precise terms of such document have not, therefore, been revealed to this court.
Discussion
Defendants move pursuant to CPLR 3211(a)(1), (3) and (7). Under CPLR 3211(a)(1), dismissal is warranted if a defense based upon documentary evidence exists, but only if the documentary evidence submitted, conclusively establishes a defense to the asserted claims as a matter of law ( See Leon v Martinez, 84 NY2d 83 at 87) and resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff s claim ( Forftis Fin. Servs., LLC v Fimat Futures USA, Inc., 290 AD2d 383, 383 [1st Dept 2002]). Under CPLR 3211(a)(3), dismissal is warranted if the party asserting the cause of action lacks the legal capacity to sue.
Under CPLR 3211(a)(7), dismissal is warranted if the pleading fails to state a cause of action. The court must accept the facts alleged by the plaintiff as true and must liberally construe the complaint, according it the benefit of every possible favorable inference ( Campaign for Fiscal Equity, Inc. v State of New York, 86 NY2d 307, 318; see also Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414). Ultimately, the role of the court is to determine only whether the facts as alleged fit within any cognizable legal theory ( Leon, 84 NY2d 83 at 87).
The complaint contains fifteen causes of action; not all causes of action are alleged against every defendant. This motion addresses the third, fourth, fifth and thirteenth causes of action in the complaint as they relate to the moving parties. The Third and Fourth Causes of Action: Tortious Interference with Maspeth
The first cause of action alleges fraud in the inducement relating to the execution of a Forbearance Agreement (the Maspeth Forbearance Agreement) in July of 2008 between RCGLV, Isack Rosenberg and Abraham Rosenberg. The second cause of action alleges fraud in the inducement relating to the execution of a Forbearance Agreement (the McCaren Forbearance Agreement) in July of 2008 between RCG, Galster, Isack Rosenberg and Abraham Rosenberg. The sixth cause of action alleges breach of the Operating Agreement by Isack Rosenberg, Deutsch and Maspeth. The seventh cause of action alleges breach of the Maspeth Forbearance Agreement by Isack and Abraham Rosenberg. The eighth cause of action requests the court to enforce the outstanding Note and enter judgment in the plaintiffs favor. The ninth cause of action alleges breach of the McCaren Forbearance Agreement by Isack and Abraham Rosenberg. The tenth cause of action alleges breach of duty of good faith and fair dealing by Isack and Abraham Rosenberg. The eleventh cause of action alleges breach of fiduciary duty by Isack Rosenberg and Deutsch. The twelfth cause of action alleges breach of fiduciary duty by Isack Rosenberg and Abraham Rosenberg. The fourteenth cause of action requests an accounting from Isack Rosenberg, Abraham Rosenberg, Deutsch, Maspeth, McCaren, Boro Park, Waterfront and Certified. The fifteenth cause of action requests injunctive relief restraining Maspeth, Isack Rosenberg, Abraham Rosenberg, Boro Park, Waterfront and Deutsch from causing Maspeth to enter into any additional borrowing, from granting any additional liens, from otherwise encumbering the Maspeth Property or from making any mortgage payments to 32nd Street and NCC.
This decision, accordingly, is addressed to the original complaint, as was the motion to dismiss. A motion to amend the complaint has been filed, however, the court has not yet addressed such motion due to a stay in bankruptcy relating to petitions brought by Isack and Abraham Rosenberg.
The third cause of action alleges tortious interference with contract claiming Maspeth, Boro Park, Waterfront, Deutsch and 32nd Street knew that the provisions contained within the Operating Agreement prohibited Isack Rosenberg and Maspeth from granting security interests in Maspeth without RCGLV s consent. RCGLV alleges that 32nd Street intentionally procured the breach there of through its covert execution of the 32nd Street Mortgage. The third cause of action also alleges that 32nd Street knew of the implied contractual duty of good faith and fair dealing not to frustrate the purpose of the Maspeth Pledge Agreement by encumbering the real properties owned by the entities covered thereby with additional debt (complaint ¶ 92).
The fourth cause of action alleges the same tortious interference with contract as the third cause of action except that it relates to NCC instead of 32nd Street.
CPLR 3211(a)(3): Standing
32nd Street and NCC move to dismiss pursuant to CPLR 3211(a)(3) claiming that RCGLV lacks standing to litigate those claims for tortious interference with contract set forth in the third and fourth causes of action with regard to the Operating Agreement. Movants argue that because these causes of action belong to the LLC entity Maspeth and can only be litigated derivatively by an LLC member, RCGLV is precluded from bringing such claims individually. This argument is without merit. RCGLV is not making a derivative claim that Maspeth has been harmed. Rather, RCGLV is suing in its own right to protect and enforce its own interests as a secured party under the Maspeth Pledge Agreement and as a party to the Operating Agreement. Although, as argued by movants, the Court of Appeals recently recognized the right of LLC members to file derivatives suits ( see Tzolis v Wolff , 39 AD3d 138 , 829[1st Dept 2007], aff d 10 NY3d 100, 855 NYS2d 6), there is no prohibition against individual suits brought by members based upon that member s own rights. The language in Tzolis is permissive and does not in any way impose a mandate upon all members to file suits derivatively. In this case, RCGLV, as both an investor under the Operating Agreement and a secured party under the Maspeth Pledge Agreement, possesses the necessary standing to enforce its contractual rights.
3211(a)(7): Failure to State a Cause of Action
32nd Street and NCC move to dismiss pursuant to CPLR 3211(a)(7), alleging that RCGLV fails to state cognizable claims for tortious interference with contract. Plaintiffs must demonstrate, the existence of a valid contract between the plaintiff and a third party, defendant s knowledge of that contract, defendant s intentional procurement of the third-party s breach of the contract without justification, actual breach of the contract, and damages resulting therefrom ( Lama Holding Co. v Smith Barney, 88 NY2d 413, 424).
32nd Street and NCC claim that no cause of action exists for tortious interference of an implied duty of good faith and fair dealing. RCGLV, however, is not alleging an independent cause of action based upon the implied covenant of good fath and fair dealing; the allegation is merely part of its claim for tortious interference with contract. The Court of Appeals has ruled that to establish a case for tortious interference with contract, it is axiomatic that there must be a breach of that contract by the other party ( Jack L. Inselman Co. v. FNB Financial Co., 396 NYS2d 347, 349). There exists an implied covenant of fair dealing and good faith that is implicit in all contracts ( Van Valkenburgh, Nooger Neville, Inc. v Hayden Pub. Co., 30 NY2d 34, 45). A breach of such implied covenant of fair dealing and good faith is a basis for a breach of contract claim ( Turkat v. Lalezarian Developers, Inc. , 52 AD3d 595 , 596 [2d Dept 2008]). Defendants argument, that plaintiff fails to plead a cause of action based on allegations including the breach of the implied covenant of good faith and fair dealing is without merit.
Plaintiff RCGLV has asserted that the Operating Agreement and the Maspeth Pledge Agreement are validly existing contracts between RCGLV and co-defendants to the movants, Maspeth, Isack Rosenberg and Aron Deutsch who are third parties to the movants with respect to the Operating Agreement. Defendants Isack and Abraham Rosenberg are third parties as to the movants with respect to the Maspeth Pledge Agreement. RCGLV alleges that 32nd Street and NCC knew of the existence of the various agreements and intentionally took mortgages in violation of the agreements, thus causing the breach of those agreements. RCGLV further alleges that 32nd Street and NCC deliberately delayed recording their respective mortgages, a practice considered highly irregular in real estate transactions, evidencing that 32nd Street and NCC colluded with the other defendants to hide the existence of the mortgages from RCGLV until after the Maspeth Forbearance Agreement was signed. RCGLV also alleges that these illegitimate encumbrances devalued its collateral, causing damages to be sustained. The court finds the allegations sufficient to state a claim for tortious interference with contract.
CPLR 3211(a)(1): Dismissal Based on Documentary Evidence
32nd Street and NCC also move to dismiss pursuant to CPLR 3211 (a)(1), asserting that documentary evidence clearly demonstrates that no breach of either the Operating Agreement or the Maspeth Pledge Agreement occurred. They argue that, although Section 5.1.3.6 of the Operating Agreement prohibits the pledge, hypothecation, mortgaging, grant of a security interest in or otherwise encumb[rance of] any asset, other than security interests given for the purchase of lease or trade fixtures used in the operation of the Property, there is an exception within the provision which permits Maspeth to take construction loans without obtaining RCGLV s consent. The moving parties contend that the construction loan exception applies to the mortgages in question because the proceeds from the mortgages were purportedly used mostly for the development of the Maspeth Property, and RCG was also the recipient of some of the proceeds. RCGLV contends that these mortgages were not construction loans, that the Operating Agreement prohibits the mortgages in question and that defendants colluded with each other to hide the existence of the mortgages by delaying any recording of mortgages until after the Maspeth Forbearance Agreement was signed.
This dispute is factual in nature and requires discovery. The motions to dismiss the third and fourth causes of action based upon language in the Operating Agreement are denied.
As for the Maspeth Pledge Agreement, although neither party cites these provisions, Sections 3(e) and 4(c) both contain prohibitions against future borrowing or encumbrances without the consent of the secured party. While Section 4(e) may, as 32nd Street has asserted, indicate that the Maspeth Pledge Agreement does contemplate future mortgages, Sections 3(e) and 4(c) state that any future mortgages require RCGLV s consent as a secured party. This dispute is also factual in nature and requires further discovery. The motions to dismiss the third and fourth causes of action based upon the documentary evidence of the Maspeth Pledge Agreement are denied.
The Fifth Cause of Action: Tortious Interference with McCaren
32nd Street also moves to dismiss the fifth cause of action pursuant to CPLR 3211(a)(7). The fifth cause of action also alleges tortious interference against Waterfront, Deutsch and 32nd Street based upon their knowledge of the implied contractual duty of good faith and fair dealing not to frustrate the purpose of the [McCaren Pledge Agreement] by encumbering the real properties owned by the entities covered thereby with additional debt (complaint ¶ 110).
The analysis in the previous section addressing the existence of an implied duty of good faith and fair dealing applies here as well. Plaintiffs RCG and Galster have asserted that the McCaren Pledge Agreement is a validly existing contract between them and defendants Isack and Abraham Rosenberg, third parties to 32nd Street with respect to the McCaren Pledge Agreement. Plaintiffs RCG and Galster allege that 32nd Street knew of the existence of the McCaren Pledge Agreement, the purpose of which was to secure plaintiffs interests by preventing the dilution of their collateral s value through future encumbrances. Plaintiffs RCG and Galster further allege that 32nd Street intentionally took a mortgage from Waterfront, which was also pledged as collateral under the McCaren Pledge Agreement, thus causing the breach of that agreement. Plaintiffs RCG and Galster claim that 32nd Street deliberately delayed recording its mortgage, evidencing that it colluded with the other defendants to hide the existence of the mortgage from RCG and Galster until after the McCaren Forbearance Agreement was signed. Plaintiffs RCG and Galster claim that the mortgage devalued their secured interest in Waterfront, causing damages to be sustained. Because the court finds the allegations sufficient to state a claim for tortious interference with contract and because the McCaren Pledge Agreement was not included as an exhibit to the motion to dismiss, thus limiting the court s review of movants argument, 32nd Street s motion to dismiss the fifth cause of action is denied.
The Thirteenth Cause of Action: Declaratory Judgment
The thirteenth cause of action requests declaratory relief and the cancellation of the 32nd Street Mortgage and the NCC Mortgage. RCGLV alleges that the loans and mortgages issued by 32nd Street and NCC are void as ultra vires, made without the consent of RCGLV and in breach of the Maspeth Operating Agreement. Because Maspeth and Isack Rosenberg acted outside of the scope of the Operating Agreement by granting the mortgages, plaintiffs allege that the mortgages are ultra vires and should be declared void by the court. 32nd Street and NCC argue that plaintiffs request for a declaratory judgment should be dismissed on the grounds that a) plaintiffs lack standing b) the request is based on defective breach claims c) granting declaratory judgment would be premature in the absence of actual damages and d) such relief is unwarranted in light of plaintiffs request for monetary damages. Clearly, RCGLV, as a member of Maspeth, has standing to litigate this claim derivatively. Notwithstanding defendants arguments to the contrary, such claim can be litigated together with individual claims in the same action ( see Tzolis v Wolff , 39 AD3d 138 , 829[1st Dept 2007], aff d 10 NY3d 100, 855 NYS2d 6where plaintiff brings both individual and derivative claims in the same action). As to movants other contentions, discovery is necessary. Should it be determined that the loans and mortgages to movants were ultra vires, such encumbrances may be void. Accordingly, 32nd Street and NCC s motions to dismiss the thirteenth cause of action are denied.
Attorneys Fees and Punitive Damages
32nd Street and NCC move to dismiss plaintiffs request for punitive damages because the plaintiffs have not sufficiently alleged willful, wanton and malicious conduct, which is required to state a claim for punitive damages ( see U.S. Trust Corp. et al., v Newbridge Partners, L.L.C. et. al., 278 AD2d 172 [1st Dept 2000]). The Court of Appeals has held that, in actions for breach of contract, a private party seeking to recover punitive damages must not only demonstrate egregious tortious conduct by which he or she was aggrieved, but also that such conduct was part of a pattern of similar conduct directed at the public generally ( see Rocanova v Equitable Life Assurance Society of the United States, 83 NY2d 603, 613). Here, although plaintiffs do allege tortious interference against 32nd Street and NCC, they fail to allege that movants behavior was directed toward the public in any way, nor have they demonstrated that such conduct was part of a larger pattern. Movants motions to dismiss with respect to punitive damages are granted.
32nd Street and NCC further move to dismiss plaintiffs request for attorneys fees, arguing that there is no contractual basis for plaintiffs claims. Plaintiffs claim that the Maspeth and McCaren Pledge Agreements contractually obligate 32nd Street and NCC to pay attorneys fees in the event of a breach of the agreements. These provisions of the Maspeth and McCaren Pledge Agreements are not applicable to 32nd Street or NCC, neither of which is a party to the contracts. It is well settled that attorney s fees may not be awarded in the absence of a statute expressly authorizing their recovery, or an agreement or stipulation to that effect by the parties ( see Scwartz v Leonard, 138 AD2d 692, 694 [App Term, 2d Dept 1988]). 32nd Street and NCC s motion to dismiss with respect to attorneys fees is granted.
Conclusion
The motions to dismiss the third, fourth, fifth and thirteenth causes of action are denied. The motions to strike claims for punitive damages and for recovery of plaintiffs attorneys fees against the moving defendants are granted.
The foregoing constitutes the decision and Order of the Court.