SCHNEIDER v. WIEN MALKIN LLP

Full title: IRVING SCHNEIDER and LEONA M. HELMSLEY, individually and on behalf of 112…

Court: Supreme Court of the State of New York, New York County

Date published: Nov 1, 2004

2004 N.Y. Slip Op. 51328 (N.Y. Misc. 2004)

Opinion

601363/02.

Decided November 1, 2004.

[EDITOR'S NOTE: This case is unpublished as indicated by the issuing court.] MARCY S. FRIEDMAN, J.

In these derivative actions, plaintiff Irving Schneider, individually and on behalf of three partnerships, sues Wien Malkin LLP and Peter Malkin, the supervisor of the partnerships and its principal (collectively "Wien Malkin"), to recover damages for defendants' alleged breach of their fiduciary duty to the partnerships. Joint trial of the actions, without a jury, was held on 10 dates. Decision was reserved pending submission of post-trial briefs and proposed findings of fact and conclusions of law.

Background

Two of the partnerships which are the subject of these actions, 112 West 34th Street Company ("112 W. 34") and 1333 Broadway Associates ("1333 Broadway"), own and operate a commercial building located at the address after which the partnership is named. The third partnership, 1359 Broadway Associates ("1359 Broadway"), was the holder of a net lease of a commercial building located at that address. These partnerships were among many real estate investments on which Lawrence Wien and Harry Helmsley collaborated and which are widely regarded as having provided innovative opportunities for investors. Mr. Wien and Mr. Helmsley were initial investors and partners in each of the partnerships. Mr. Schneider, who was a senior executive in the Helmsley organization and is now the principal of Helmsley-Spear, Inc., was an initial investor and partner in 112 W. 34 and 1333 Broadway and became an investor and partner in 1359 Broadway after its formation. Mr. Malkin, who was Mr. Wien' son-in-law and a partner in Wien Malkin, was an initial investor and partner in 1333 Broadway, and became an investor and partner in 112 W. 34 and 1359 Broadway after their formation. In 112 W. 34 and 1333 Broadway, Mr. Wien and Mr. Malkin syndicated their interests to passive investors known as participants. From the formation of each of the partnerships, the partnership's managing agent was Helmsley-Spear, Inc. or prior entities operated by the Helmsley organization ("Helmsley-Spear"), and its "supervisor" was the law firm with which Lawrence Wien was associated or its successors ("Wien Malkin"). Helmsley-Spear provided services in connection with the management and leasing of the properties. Wien and Malkin, according to the partnership agreements for each of the three partnerships, was responsible for maintaining the books and records of the partnership and supervising the operation of the partnership agreements. (Partnership Agreements [PX 233].) Wien Malkin's duties as supervisor included payment of mortgages and taxes, performance of accounting functions involving tax returns and monthly financial statements, and conduct of annual partnership meetings.

It is an understatement that the relationship between the successors of Mr. Wien and Mr. Helmsley, who are both deceased, has broken down. In 1997, Wien Malkin commenced an arbitration ("1997 Arbitration") to remove Helmsley-Spear from its position as managing agent of 11 buildings, including the three at issue here. Helmsley-Spear, acting by Irving Schneider, interposed a counterclaim alleging ethics violations by Wien Malkin. ( Wien Malkin LLP v. Helmsley-Spear, Inc., American Arbitration Assn. Case Nos. 13 180 00976/97, 13 180 00964/97, Award dated Mar. 30, 2001 at 1-3 ["Arbitration Award" or "Award"].)

The Arbitration Award was discussed at length in this court's written trial ruling dated September 24, 2003, which considered the collateral estoppel effect of various findings in the Award. Generally speaking, the Award denied Wien Malkin's claim, finding that there was no credible proof of cause for Helmsley-Spear's termination, and that the votes of certain partnerships to terminate Helmsley-Spear without cause were invalid due to Wien Malkin's failure to provide the partners with disclosure on which they could exercise informed consent. (Award at 15-16.) The Award also made a finding that the latest incarnation of Helmsley-Spear, an entity that is controlled by Mr. Schneider, is the valid successor in interest of a prior entity of the same or a similar name that had been operated by the Helmsley organization; and the Award upheld a voting agreement between Helmsley-Spear and Mrs. Helmsley, under which Mrs. Helmsley would vote to maintain the current Helmsley-Spear entity as the managing agent for certain partnerships so long as it is controlled and run by Mr. Schneider or his partner (now deceased). ( Id. at 119-123.) As to Helmsley-Spear's counterclaim, the Award found that Wien Malkin had "breached numerous ethical obligations in its activities as supervisor and in the conduct of this litigation," but that Helmsley-Spear lacked standing to seek relief on behalf of the partnerships. ( Id. at 16.) The Award limited relief on the counterclaim to "requiring disclosure of Wien Malkin's past and present conduct in any future vote on [Helmsley-Spear's] termination." ( Id. at 17.)

The instant actions by Mr. Schneider, in his capacity as an investor in the partnerships, followed. These actions assert many of the claims against Wien Malkin that Helmsley-Spear had sought to assert in the arbitration. The allegations of the pleadings in fact track various findings albeit, in some instances, dicta from the Arbitration Award.

The Arbitration Award was initially confirmed by order of this Court (Gammerman, J.), dated July 23, 2001, which was affirmed by the Appellate Division of this Department ( 300 AD2d 32.) The affirmance was vacated by the United States Supreme Court (___ US ___, 124 S Ct 222), and remanded for further consideration in light of a recent case clarifying the applicability of the Federal Arbitration Act ("FAA") to arbitration agreements entered into by state (here, New York) entities. In a decision rendered after the conclusion of the instant trial (2004 NY Slip Op 07357 [Oct. 14, 2004]), this Department applied the FAA standards of review upon the remand, and vacated the Arbitration Award to the extent that it determined that the Helmsley-Spear entity controlled by Mr. Schneider is the valid successor in interest of the prior Helmsley-Spear entity, and that Helmsley-Spear could not be terminated as managing agent due to defects in the proxy procedure. These aspects of the Award were not the basis of any collateral estoppel findings made by this court, and are not relevant to the issues to be determined in the instant actions. The decision upon the remand accordingly does not govern the outcome here.

The complaints in these actions allege that Wien and Malkin committed breaches of fiduciary duty to plaintiff partnerships by commencing unauthorized litigation (the 1997 Arbitration); acting in its own interests rather than the partnerships' interests in seeking removal of Helmsley-Spear in the arbitration; disseminating false and misleading information to the partnerships; presenting misleading information to the Arbitration panel and the Manhattan District Attorney's Office; converting partnership funds; failing to return unearned fees; and testifying falsely under oath at the 1997 Arbitration. ( See generally 112 W. 34 1333 Broadway Complaints, ¶¶ 2, 25.) In 1359 Broadway's action, the complaint also alleges that defendants breached their fiduciary duties to that partnership due to a conflict of interest in representing both 1359 Broadway and Marlboro Building Associates ("Marlboro"), the fee owner of the property leased by 1359 Broadway, in connection with the lease renewal for the property. (1359 Broadway Amended Complaint, ¶ 2.) In the causes of action for breach of fiduciary duty, the complaints seek injunctive relief removing Wien Malkin as supervisor for the partnerships, as well as damages. The complaints also seek an accounting for each partnership.¹

1 By decision in the 112 W. 34 action, dated December 9, 2002, this Court (Gammerman, J.) granted a motion to dismiss causes of action alleging violations of Judiciary Law § 487, and generally upheld the breach of fiduciary cause of action based on the allegations of wrongdoing in the complaint. The decision held, however, that there was no cognizable cause of action for fraudulent or perjured testimony in the arbitration and that "allegations of deceit and collusion with respect to [Wien Malkin's] conduct as attorneys at the arbitration proceedings * * * should have been addressed in that proceeding." (Decision at 9-10.) The decision also upheld the accounting cause of action. ( Id. at 11-12.)

At the trial, plaintiff offered extensive evidence regarding his claim that Wien Malkin breached its fiduciary duties to all three partnerships by taking improper fees. In particular, plaintiff claimed that Wien Malkin took two fees from the partnerships without obtaining partnership consent: a "1% fee" for 1% of the interest earned on tenant security deposits held in interest bearing accounts established for each of the partnerships; and a "10% fee" equal to 10% of the interest earned on the partnerships' temporary excess funds that were invested in supervisory accounts for the partnerships. Plaintiff also claimed that Wien Malkin violated an August 21, 1984 letter agreement by failing to provide additional supervisory services to the partnerships that were allegedly required in return for fee increases.

In further support of his breach of fiduciary causes of action for all three partnerships, plaintiff introduced extensive evidence regarding defendants' animus against Helmsley-Spear in the arbitration, including evidence that Wien Malkin created false and misleading partnership documents, principally inspection reports and meeting minutes. In connection with his animus charge, plaintiff also introduced evidence that Wien Malkin provided the Manhattan District Attorney with false and misleading evidence (the Tockstein tape) concerning Helmsley-Spear's alleged malfeasance.

With respect to 1359 Broadway, plaintiff also based his claim of breach of fiduciary duty upon extensive evidence as to Wien Malkin's alleged conflict of interest in representing both 1359 Broadway and Marlboro on the lease renewal. Plaintiff claimed that as a result of the conflict, 1359 Broadway lost the opportunity for a lease extension and was ultimately destroyed.

In his post-trial submissions, plaintiff premises his breach of fiduciary duty claim only on defendants' alleged creation of false and misleading partnership documents; their taking of the 1% and 10% fees without authorization, and retention of unearned fees; and, in the case of 1359 Broadway, Wien Malkin's conflict of interest in connection with the lease renewal. Plaintiff also abandons his request for injunctive relief removing Wien Malkin as supervisor for the three partnerships, and seeks only an order enjoining Wien Malkin "from future breaches of their fiduciary duties." (P.'s Post-Trial Brief ["P.'s Brief"] at 8.)

Defendants acknowledge their status as fiduciaries, but deny any breach of fiduciary duties on their part. They also seek judgment on counterclaims against plaintiff for tortious interference with contract.

Discussion 1% Fee

It is undisputed that since the early 1970s, Wien Malkin has been collecting the 1% fee not only for the three partnerships at issue but for numerous other partnerships formed in connection with real estate investments in which Mr. Helmsley and Mr. Wien had an interest. The evidence was overwhelming that Mr. Helmsley and Mr. Wien verbally agreed to the 1% fee in 1973; that since the early 1970s, Mr. Schneider has been aware of Wien Malkin's collection of the fee for the partnerships at issue and others; and that he never took any formal action, prior to the 1997 arbitration, to contest the fee.

Despite this long-standing course of conduct, Mr. Schneider appears to argue that there was never any oral agreement for payment of the fee to Wien Malkin. In the alternative, he argues that even if there was an agreement, it was made without the consent of a required majority of the partners and/or participants in each partnership.

In support of his claim that there was no agreement for the fee, plaintiff cites evidence that the leases given by the partnerships to tenants occupying the properties provided that interest on the tenants' security deposits would be payable to their landlords i.e., to the partnerships; that interest on the security deposits was never recorded in the partnerships' financial statements as either income or expense; that the banks in which the security deposits were held made checks for the interest payable to the partnerships; and that Wien Malkin endorsed such checks over to itself.

This evidence, although undisputed, is not persuasive as to the absence of an agreement authorizing Wien Malkin to collect the fee. The lease provisions entitling the partnerships to interest on their tenants' security deposits are not inconsistent with the partnerships' entry into a separate agreement with Wien Malkin for the latter to retain the interest in exchange for services necessary to administer the security deposit accounts on behalf of the partnerships. Plaintiff's further suggestion that Wien Malkin's payment of the fee to itself was clandestine or even illegal Plaintiff characterizes Wien Malkin's endorsement to itself of bank checks for the interest as "altering" the checks or part of a "scheme to take the funds" (P.'s Brief at 12) is not supported by the evidence which, as discussed at greater length below, left no doubt that all of the partners, although not all of the participants, in the partnerships were aware from the early 1970s of Wien Malkin's collection of the fee.

Plaintiff's further claim that other documentary evidence belies the existence of the oral fee agreement is not supported by the documents cited. Moreover, while there was no contemporaneous record of the 1% fee agreement, and there was some evidence of a general practice of reducing agreements to Wien Malkin's fees to writing ( see Tr. at 920-923 [Malkin]), the absence of such a writing is not probative in light of the convincing evidence, to which the court now turns, that Mr. Helmsley and Mr. Wien agreed to the 1% fee in 1973.

Mr. Malkin gave credible testimony that he was present at a meeting with Mr. Helmsley and Mr. Wien in 1973 at which the agreement was reached. He recalled the discussion at the meeting as follows: Mr. Wien suggested placement of the tenants' security deposits in interest bearing accounts. Mr. Helmsley initially said he did not want to do it because it was not legally required for commercial tenants and he did not "want Helmsley-Spear to be bogged down with details like that." Mr. Wien told Mr. Helmsley that he thought it would be good for tenant relations, and offered to have Wien Malkin administer the accounts for the 1% statutory fee. Mr. Helmsley "said yes." (Tr. at 400-401; 926; 398.)²

2 That Mr. Malkin has at different times recalled the year of the meeting as 1971 rather than 1973 does not, plaintiff's protestations to the contrary, undermine his credible testimony that the meeting occurred.

Mr. Malkin's testimony was corroborated by that of several other witnesses who confirmed not only the existence but also Mr. Schneider's long-standing knowledge of the agreement. These witnesses included Joseph Licari, who as of 1972 was a Vice President of Helmsley Enterprises and later held the position of Chief Financial Officer until 1986.³

3 The parties sharply disputed the admissibility of the witnesses' testimony as to Mr. Helmsley's statements about the agreement. Plaintiff objected, based on the "Dead Man" statute (CPLR 4519), to Mr. Malkin's testimony. The court denied the objection, stating that it would reconsider the ruling upon a dual showing that plaintiff had not opened the door to the questioning by himself inquiring about Mr. Helmsley's consent to the agreement, and that the Dead Man statute would bar the testimony. It is undisputed that plaintiff did not seek to make this showing at a later time in the trial. Plaintiff objected, on grounds of hearsay, to the testimony of Mr. Licari concerning Mr. Helmsley's statements as to the fee agreement. Defendants offered the statements under Partnership Law § 22 which provides: "An admission or representation made by any partner concerning partnership affairs within the scope of his authority as conferred by this chapter is evidence against the partnership." It was unquestionably within the scope of Mr. Helmsley's authority as a partner to make agreements for services to the partnership. In arguing that the fee agreement was not within such scope, plaintiff argued not that the subject matter of the agreement was outside the scope of Mr. Helmsley's authority, but that a fee agreement could be approved only by a majority interest in the partnership which Mr. Helmsley did not have by himself. Put another way, plaintiff argued in effect that under Partnership Law § 22, the statements of Mr. Helmsley would not be admissible unless he had a majority of the partnership. The Partnership Law, read as a whole, does not support this position. Section 40(8) specifies that partnership business may be decided by a majority of the partners unless the partnership agreement provides otherwise. Section 22, in contrast, does not set forth the requirements for a partner's act to be effective against another partner, but is an evidentiary statute. ( See I Bromberg Ribstein, Partnership, § 4.05, at 4:92.) The court accordingly overrules plaintiff's objection to the Licari testimony as to Mr. Helmsley's statements. However, as the court ruled at trial, only Mr. Licari's testimony in which he recounts Mr. Helmsley's statements, rather than sets forth his interpretation of Mr. Helmsley's position on the fee agreement, will be admitted. Thus, for example, plaintiff's objections to the following testimony are sustained: Licari Dep. 73 line 11 to 74 line 1; 79 lines 6-8; 82 lines 6-7 beginning with: "And I also remember * * * *."

Mr. Licari gave the following testimony: In the early 1970s, after it came to his attention that the 1% fee was being paid to Wien Malkin, he went to Mr. Helmsley to inquire about the fee because the Helmsley organization "normally" gave the interest on security deposits back to the building. ( See Licari Dep. [DX 306] at 19-20, 68.) Mr. Helmsley responded: "I make a lot of money with the buildings I manage. This is nothing to nitpick on. Drop it." ( id. at 19-20); "I don't want to be involved in it. * * * This is nitpicking." ( Id. at 68.) About the time of this conversation with Mr. Helmsley ( id. at 81), Mr. Schneider approached Mr. Licari to ask him whether he knew about the fee, and Mr. Licari told him of his conversation with Mr. Helmsley. ( Id. at 82.) Mr. Schneider said he did not think it was right for Wien Malkin to take the fee, and Mr. Licari pointed out to him that "Mr. Helmsley has a different feeling because of his direct relationship with Lawrence Wien and the firm." ( Id. at 21.) Mr. Licari informed Mr. Helmsley of Mr. Schneider's objection to the fee. ( Id. at 21, 85.) He also had a discussion with Mr. Schneider in the early 1980s in which Mr. Schneider again objected to the fee. ( Id. at 88.) While Mr. Licari's testimony reflected some confusion as to whether he first discussed the agreement with Mr. Schneider in the early 1970s or early 1980s, the thrust of his testimony was that he first spoke with Mr. Helmsley about the fee agreement in the early 1970s and that he also spoke with Mr. Schneider at that time.

Jerome Paikin, who was employed by Helmsley-Spear from 1965 through 1998 as a manager for various buildings supervised by Helmsley-Wien partnerships (although not any of the three at issue), also submitted an affidavit confirming the 1% fee agreement. He attested that he worked regularly with Mr. Schneider throughout most of his employment, and that, in a discussion in the 1980s, Mr. Schneider mentioned to him "in passing" that Wien Malkin received the 1% fee for handling the administration of tenant security accounts for buildings that Helmsley-Spear managed on behalf of Wien Malkin-supervised partnerships. He also stated that "Mr. Schneider described this as a long-standing arrangement with Wien Malkin and contrasted it with Helmsley-Spear's practice of providing tenant security services for non-Wien Malkin properties without payment of the 1% fee." (DX-110, ¶ 4.)

Significantly, Mr. Schneider did not testify at the trial, and therefore did not personally dispute this credible evidence given not only by his adversary but by members of the Helmsley organization. Based on this credible evidence, and Mr. Schneider's failure to controvert it, the court finds that Mr. Helmsley and Mr. Wien agreed to the 1% fee in or about 1973, and that Mr. Schneider has had knowledge of the agreement since the early 1970s.

Plaintiff further argues that even if there was an agreement between Mr. Helmsley and Mr. Wien, it was unauthorized because Mr. Helmsley and Mr. Wien did not have a majority of the partnership interests in the three partnerships. ( See P.'s Brief at 12-13.) Plaintiff does not contend that the partnership agreements contained any provision specifying the consent required for partnership acts involving payment of fees. Rather, plaintiff appears to take the position that a majority vote was required on payment of the 1% fee pursuant to Partnership Law §§ 40(5) and 40(8), which plaintiff characterizes as "provid[ing] for a majority vote on matters in the absence of an agreement calling for a different percentage." (P.'s Brief at 14, n 10.)

Defendants do not dispute that these provisions of the Partnership Law required consent of a majority of the general partners of the partnerships to the agreement between Mr. Helmsley and Mr. Wien. However, defendants deny that the agreement was made without consent of the majority of the partners, and they contend that the consent of the participants was not required to this agreement.

As to 112 W. 34, the evidence showed that at the time of its formation in 1967, Mr. Helmsley had a 25% interest, Mr. Wien had a 50% interest, and Mr. Schneider had a 25% interest in this partnership. (Partnership Agreement [PX 233].) Plaintiff argues that there was no evidence in the record as to their ownership shares as of the 1973 fee agreement. However, plaintiff had the burden of showing that Wien Malkin breached its fiduciary duty by collecting the 1% fee without obtaining the required consents. Plaintiff was therefore required to offer evidence, if any existed, that their ownership shares had changed as of 1973. Moreover, plaintiff failed to cite any provision in the agreements with the participants in this partnership, or any other authority, requiring that the participants consent to the fee.⁴

4 Although plaintiff asserts that it was Wien Malkin's practice to obtain consent from participants for fees, he cites only one instance in which Wien Malkin solicited consent for the sizeable one-time fee of an outside consultant regarding the 1359 Broadway lease renewal which, as discussed below, was the subject of major controversy. That fee was therefore not analogous to the 1% fee. ( See P.'s Brief at 13-14; DX 148.)

As to 1333 Broadway, while this partnership was not formed until after the 1973 fee agreement, at its inception in 1979 Mr. Helmsley, Mr. Wien, Mr. Schneider, and Mr. Malkin each had a 25% interest. (Partnership Agreement [PX 233].) The credible evidence showed that the 1973 agreement was not limited in duration ( see Tr. at 401 [Malkin]), and was followed by all of the Helmsley-Wien partnerships. As in the case of 112 W. 34, plaintiff made no showing that the consent of the participants in this partnership was required.

As to 1359 Broadway, however, defendants concede that Mr. Helmsley and Mr. Wien each had only a 20% interest as of its formation in 1953, and that they did not together have a majority in or after 1973. While defendants argue that the interests of Mr. Wien's family and business associates, when added to Mr. Wien's, created a majority ( see Tr. at 402 [Malkin]), this argument is not persuasive in the absence of any evidence that these other investors in fact consented to the 1973 fee agreement. Nevertheless, the fee is valid as to this partnership, as the evidence further showed that Mr. Schneider, who was also a partner in 1359 Broadway, ratified the fee agreement.

Ratification is the express or implied adoption of the unauthorized acts of another. ( Holm v. C.M.P. Sheet Metal, Inc., 89 AD2d 229, 232-233 [4th Dept 1982].) "One may be deemed to have ratified the acts of an [unauthorized] agent through silence when there is an opportunity to speak and, under the circumstances, a desire to repudiate would normally be expressed." ( Orix Credit Alliance v. Phillips-Mahnen, Inc., 1993 WL 183766 at 5 [SD NY 1993] [applying New York law]; J.M. Heinike Assocs. v. Chili Lumber Co., 83 AD2d 751 [4th Dept 1981].)

As of 1983, Mr. Helmsley's interest in 1359 Broadway had increased to 42.5%, and Mr. Schneider had acquired a 17.5% interest in the partnership. ( See DX 49.) As of 1997, Mr. Helmsley and Mr. Schneider had these same shares. ( See PX 4.) As found above, Mr. Schneider had knowledge of the 1% fee agreement from the early 1970s. While he made his disagreement with Wien Malkin's collection of the fee known within the Helmsley organization in the course of conversations with Mr. Licari, there was no evidence in the record that Mr. Schneider ever took any formal action, in his capacity as a member of the partnerships, either to challenge the partnerships' payment of the fee to Wien Malkin or to claim that the payment of the fee was not binding upon him in his capacity as a partner. To the contrary, the evidence showed that Mr. Schneider did not object to the fee until the 1997 arbitration and, even then, the objection was asserted in a counterclaim brought in the name of Helmsley-Spear rather than the partnerships. Under these circumstances, Mr. Schneider ratified the 1973 fee agreement on behalf of 1359 Broadway because he failed to object to the fee, dating back at least to 1983 when his interest in the partnership, together with that of Mr. Helmsley who had affirmatively consented to the fee, constituted the majority.

While the court thus concludes that the 1% fee was authorized for all three partnerships, the court finds questionable Wien Malkin's failure to disclose the fee in the partnerships' financial statements over the many years it was collected.⁵ It is undisputed that Wien Malkin did not disclose the fee in its financial statements until 2001 ( see PX 49), after disclosure was effectively directed by the Arbitration Award. Defendants assert that the 1% fee was not reported as either income or expense to the partnership in the operating statements because the fee is deducted from interest otherwise payable to the tenants. ( See id.) This assertion is belied by the tenants' leases (PX 7), which provided for the landlords' (i.e., partnerships') retention of 1% of the interest on security deposits. Moreover, once Wien Malkin finally disclosed the fee, it reported the fee as a transaction with a related party. ( See Financial Statement, n 7 [PX49].) In light of this acknowledgment that Wien Malkin was a related party, a serious question exists as to whether, under professional accounting standards, payment of the fee to Wien Malkin should have been disclosed each year it was collected, notwithstanding that there was no net income effect to the partnerships. However, the court does not reach the issue, as plaintiff did not address the accounting standards; did not argue that the failure to disclose was an independent breach of fiduciary duty; and, in any event, did not make any showing that the failure to disclose caused any damage to the partnerships.

5 The Arbitration Award opined that even if Mr. Helmsley had agreed to the fee, the agreement "does not excuse Wien Malkin from its legal obligation to secure the consent of the partners and its ethical obligation to account for the commissions to the partnerships." (Award at 129.) As held in the September 24, 2003 decision, this statement does not have collateral estoppel effect. Even assuming arguendo that the statement rose to the level of a finding that the collection of the fee was invalid, the Award's treatment of the 1% fee issue was limited to a conclusory paragraph in the section of the Award determining Helmsley-Spear's counterclaim; was unsupported by any specific findings of facts; and was clearly dictum as to claims of the partnerships which the panel held Helmsley-Spear did not have standing to assert. As stated in text, however, while this court disagrees with the Award's conclusion that Wien Malkin failed to obtain required consents of the partners to the fee, the failure to disclose the fee raises different concerns.

Other Fees

Plaintiff also fails to sustain his burden of proving that the 10% fee was unauthorized. It is undisputed that since 1979, Wien Malkin has collected a fee of 10% of interest earned on the partnership supervisory accounts. There is contemporaneous evidence that in December 1978, Mr. Wien advised Mr. Helmsley of Wien Malkin's intent to collect the fee. (Letter from Mr. Wien to Mr. Helmsley, dated Dec. 18, 1978 [DX 70].) The evidence also showed that Mr. Schneider was informed in early 1979 that Mr. Helmsley had reviewed the fee with Mr. Wien. (Letter from Mr. Malkin to Mr. Schneider, dated Feb. 7, 1979 [DX 71].) While there was no evidence that Mr. Helmsley affirmatively agreed to the 10% fee, the evidence showed that neither Mr. Helmsley nor Mr. Schneider ever objected to the fee. For substantially the same reasons as set forth in connection with the 1% fee, the court finds that Mr. Helmsley and Mr. Schneider ratified the fee.

Plaintiff further fails to demonstrate that Wien Malkin breached an agreement made in 1983 or 1984 for Wien Malkin to perform additional supervisory services in exchange for an increase in Wien Malkin's supervisory fees for the partnerships at issue. In contending that such an agreement existed, plaintiff relies on a letter, dated August 21, 1984, from Mr. Helmsley to Mr. Malkin, which did not by its terms refer to a fee increase, but in which Mr. Helmsley confirmed that "Helmsley-Spear, Inc. is the Managing Agent and will continue to function as it always has. W M Properties, Inc. [an entity controlled by Wien Malkin] will co-operate in the management and will provide whatever input will be helpful to the operation of the building." (PX 199.) Plaintiff does not dispute that fee increases were agreed to for 112 W. 34 in 1979, and for 1333 and 1359 Broadway in April and February 1983, respectively. (DX 52, 63, 64.) The documents by which the fees were raised for the three partnerships did not indicate that the fee increases were tied, at the time they were approved, to additional supervisory services. Nor did plaintiff adduce any evidence that Wien Malkin's continuing receipt of these fees was made subject to an agreement to provide additional supervisory services. Plaintiff did, however, produce documents from 1984 and later in which Mr. Malkin referred generally (that is, without limitation to specific partnerships) to an undertaking by Wien Malkin "to provide additional supervision," involving review of proposals for major expenditures for improvements and bids for such work, on behalf of clients that operate properties supervised by Wien Malkin. ( See PX 86, 87, 178.).

Even assuming arguendo that this equivocal evidence was sufficient to establish an agreement for Wien Malkin to provide additional supervisory services in exchange for fee increases for the subject partnerships, plaintiff's proof that such services were not provided was based primarily on the lack of recollection of Wien Malkin's supervisors (Silverman and Shapiro) as to any additional services having been performed. This testimony was insufficient to satisfy plaintiff's burden of proof on the issue, particularly given plaintiff's failure to identify any projects for which such additional services would have been required.

Other Alleged Breaches

Plaintiff's remaining claim of breach of fiduciary duty on behalf of all three partnerships is that Wien Malkin created false and misleading partnership documents, including inspection reports and meeting minutes. This claim is in turn based on a finding in the Arbitration Award, to which this court's September 24, 2003 trial ruling gave collateral estoppel effect, that Wien Malkin created these false documents to support its position in the 1997 arbitration seeking to remove Helmsley-Spear as managing agent. ( See Arbitration Award at 14, 98-99.) The false statements in the partnership documents related to Helmsley-Spear's alleged lack of competence in the management of the properties. ( See id. at 94-102.) The creation of the false documents was thus clearly aimed at Helmsley-Spear, not at the partnerships. Moreover, although plaintiff argues that defendants had a duty to provide the partnerships with reliable information and that the failure to do so constituted a breach of fiduciary duty, plaintiff cites no authority that a breach of fiduciary duty will be found absent any showing that the unreliable information was material to a partnership decision. ( Cf. Blue Chip Emerald LLC v. Allied Partners Inc., 299 AD2d 278 [1st Dept 2002].) In addition, there was no evidence that the partnerships actually relied upon or were injured as a result of any false information in the partnership documents. Wien Malkin's acts in creating the false partnership documents therefore do not serve to establish a breach of fiduciary duty on Wien Malkin's part to the partnerships.

At the trial, relying heavily on the Arbitration Award, plaintiff offered extensive evidence tending to bear on his claims that Wien Malkin's commencement of the 1997 arbitration was unauthorized, and that Wien Malkin acted in its own interests and based on its animus towards Helmsley-Spear in commencing and prosecuting the arbitration. While plaintiff persists in his request for findings of facts on these issues ( see P.'s Findings of Facts, ¶¶ 5, 38-41), plaintiff's briefs abandon any claim that Wien Malkin lacked authorization from the partnerships to commence the arbitration, and conspicuously omit any claim of breach of fiduciary duty against Wien Malkin based on such evidence. Plaintiff's claim against Wien Malkin based on its animus towards Helmsley-Spear, which appeared at the trial to be a central issue in this case, has thus proved to be a non-issue.

1359 Broadway Conflict

Plaintiff alleges that Wien Malkin breached its fiduciary duty to 1359 Broadway by representing both 1359 Broadway, the partnership which held a net lease on and operated the building, and Marlboro, the fee owning partnership, in connection with the renewal of 1359 Broadway's lease. Unlike the other two partnerships at issue in these actions, but like many of the real estate ventures in which Messrs. Helmsley, Wien and Schneider participated, the building was owned by one partnership and operated by another partnership in order to obtain favorable tax treatment. In ventures using this two-tier structure, Mr. Helmsley and Mr. Wien were partners in both the operating and owning partnerships; and Helmsley-Spear and Wien Malkin served as the managing agent and supervisor, respectively, for both partnerships.

In accordance with this two-tier model, from the time 1359 Broadway and Marlboro were formed in 1953, Helmsley-Spear has been the managing agent and Wien Malkin the supervisor for both partnerships. ( See 1359 Broadway Partnership Agreement [PX 233]; Marlboro Partnership Agreement [PX 114].) Since 1953, Mr. Helmsley and Mr. Wien, or their successors, have had ownership interests in both partnerships, although the extent of the ownership interests has changed over the years. Regarding 1359 Broadway, as of 1953, Mr. Helmsley and Mr. Wien each had a 20% interest. As of November 8, 2000, the date as of which plaintiff contends that Wien Malkin's conflict of interest became "palpable" concerning the lease renewal ( see P.'s Brief at 16, 26), Mrs. Helmsley's interest in this partnership was 42.5%, Mr. Schneider's interest was 17.5%, and Mr. Malkin's interest was 1.25%. ( See PX 4.) Regarding Marlboro, as of 1953, Mr. Helmsley's ownership interest was 3/18ths, and Mr. Wien's interest was 6/18ths. (Marlboro Partnership Agreement [PX 114].) By November 2000, Mr. Malkin and others at Wien Malkin served as agents for 72.2% of the interests in Marlboro, while 81.25% in interest of 1359 Broadway's partners held 24.99% of the interests in Marlboro. ( See PX 61.)

1359 Broadway's lease expired by its terms on April 30, 2003. Plaintiff argues that from November 8, 2000, the date of a 1359 Broadway partnership meeting at which the subject of the lease renewal was raised, an actual conflict developed between the interests of 1359 Broadway and Marlboro; that the conflict was of a type that was "non-consentable"; and that even if the conflict could have been waived, Wien Malkin never solicited the consent of the 1359 partners to a waiver. Wien Malkin denies that there was a conflict or, alternatively, claims that disclosure of the conflict was adequate. Specifically, Wien Malkin claims that Wien Malkin's dual role, representing both leasing and owning partnerships, was inherent in the structure of the investment; was disclosed 50 years before in the prospectus; and continued to be disclosed throughout the years in documents sent by Wien Malkin to the partnerships, including documents in connection with the lease renewal.

It is not disputed that Wien Malkin's dual role as supervisor for both partnerships was known to Mr. Schneider and the other investors of the partnerships throughout the course of their existence. Nor is it disputed that Wien Malkin repeatedly disclosed this dual role, as well as Mr. Malkin's and his family's interests in the two partnerships, in communications to investors in both 1359 Broadway and Marlboro regarding the lease renewal. Thus, for example, a September 17, 2002 letter from Wien Malkin to the partners of 1359 Broadway, the stated purpose of which was to advise the partners of the first lease renewal proposal submitted by Mr. Schneider, opened with the statement: "In reviewing these matters, please remember that, as provided from inception, Wien Malkin supervised both Associates and the fee owner." The letter also set forth the ownership interests of Peter Malkin, his business associates and family, and of partners of 1359 Broadway in the two partnerships. (PX 61. See also Wien Malkin Letter to Partners of 1359 Broadway, dated Jan. 15, 2003 [PX 121-A] [substantially similar disclosure]; Wien Malkin Letter to Partners of 1359, dated Nov. 18, 2002 [DX 284] [containing note to Financial Statement for 1359 Broadway disclosing that Wien Malkin "also serves as supervisor for Associates' lessor"].)

In arguing that there was no conflict because Wien Malkin's dual role was inherent in the structure of the investment, defendants misperceive plaintiff's claim. Plaintiff does not argue, nor could he plausibly do so given Wien Malkin's 50-year performance of this dual role, that the fact that Wien Malkin represents partnerships with potentially differing interests itself gives rise to a breach of fiduciary duty. Rather, plaintiff acknowledges that the interests of 1359 Broadway and Marlboro have generally been "congruent" over the years (P.'s Brief at 26), but contends that an actual conflict of interest developed in connection with the latest lease renewal, and that defendants were obligated to disclose the conflict.

The court finds that an actual conflict of interest developed during the lease renewal process in two respects: First, 1359 Broadway and Marlboro held conflicting positions on whether 1359's expiring lease required it to make capital improvements to the building even in the absence of a lease renewal or, put another way, whether the making of such improvements should be part of a lease renewal package. Second, the partnerships took conflicting positions on whether the best course for the property was to renew 1359 Broadway's lease or to evaluate other plans for the property, including sale or direct operation of the property. In both instances, Wien Malkin advocated the interests of Marlboro.

As to the issue of improvements, the evidence showed that at the time the lease renewal negotiations were underway and with less than two years remaining on 1359 Broadway's lease, Wien Malkin prepared a letter on behalf of Marlboro, advising 1359 Broadway that its lease required it to perform extensive repairs to the property; demanding performance of such repairs prior to the expiration of the lease term; and warning that "[p]artners in 1359 Broadway Associates may have personal liability for any failure to perform these Lease obligations." (Letter on Marlboro letterhead "c/o Wien Malkin LLP," dated Oct. 31, 2001, to 1359 Broadway [PX 59].) In its capacity as supervisor of 1359 Broadway, Wien Malkin not only forwarded Marlboro's letter demanding the repairs, but advised: "Default of a lease requirement would subject [1359 Broadway] to legal claims and possible loss of its leasehold." (Wien Malkin Letter to Partners of 1359 Broadway, dated Nov. 1, 2001 [PX 56].)⁶ Plaintiff acknowledges that this conflict was temporarily circumvented by an agreement between the partners to hire a consultant to develop specifications for work to be done to the building (P.'s Reply Brief at 22), and there is no evidence that Marlboro, or Wien Malkin on behalf of Marlboro, took any further action against 1359 Broadway to enforce its alleged repair obligations. This conflict thus appears to have been subsumed in the larger conflict over whether to renew the lease.⁷

6 Plaintiff also presented evidence that while it was in Marlboro's interest to have its lessee undertake a substantial investment in building improvements, it was not in 1359 Broadway's interest to do so unless the remaining lease period was sufficiently long to enable it to recoup the cost of the improvements. ( See 1359 Broadway 2000 Annual Meeting Minutes [PX 63].)

7 By letter dated January 15, 2003 to 1359 Broadway, Mr. Malkin, writing as a partner of 1359 Broadway but on Wien Malkin letterhead did, however, request that 1359 Broadway set aside a cash reserve for future liabilities for repairs in the event Mr. Schneider's lease renewal proposal was not accepted. ( See PX 121-A.)

As to the lease renewal process generally, 1359 Broadway consistently took the position that it sought to renew the lease, while Marlboro took the position that it would consider all options for the building. Thus, at the November 8, 2000 partnership meeting when the impending lease expiration was discussed, Mr. Schneider and Harold Meriam, Mrs. Helmsley's counsel, stated that they would take responsibility for preparing the lease renewal. (1359 Broadway 2000 Annual Meeting Minutes [PX 63].) To this end, Mr. Schneider hired independent counsel, Howard Graff, then of Baer Marks Upham, and an accounting firm, Deloitte Touche LLP, to assist with the preparation and presentation to Marlboro of the proposal. As of the November 8, 2000 partnership meeting, Wien Malkin advanced the position that 1359 Broadway was obligated under the expiring lease to make repairs, and also advised 1359 Broadway that, not yet having received a lease proposal from Mr. Schneider or Mrs. Helmsley, Marlboro was seeking to hire an independent consultant to recommend a program for the property. (PX 63; P.'s Brief at 17, n 13.)

A letter (DX 148) to Marlboro, dated March 15, 2001, written by Peter Malkin in his capacity as a joint venturer in Marlboro and on behalf of the agents for the participants and the supervisor, is of critical importance in understanding Wien Malkin's role in the lease renewal process. This letter recommended that Marlboro engage Cushman Wakefield, an expert in real estate consulting, to "develop and implement a business plan for 1359 Broadway prior to the expiration of the existing operating lease in 2003." The letter stated that Cushman Wakefield will analyze "all possible dispositions of the property including sale, net lease, exchange, joint venture, mortgage and/or direct operation of the property by [Marlboro] Associates," and will " recommend a course of action to maximize the economic benefits to Associates" (emphasis supplied.) It further recommended that "the Supervisor be authorized to implement the business plan for [Marlboro] Associates which the Supervisor determines is appropriate for Associates after evaluating the Cushman Wakefield comparative report," and requested consents from the Marlboro joint venturers and participants for each aspect of the program.

Wien Malkin subsequently retained Cushman Wakefield to perform the analysis. Cushman Wakefield, led by Darcy Stacom, prepared an initial report, dated August 2002 (DX 271), which concluded that the net present value of extension of the existing leasehold was substantially lower than that of all other alternatives, and recommended sale of the property three to six months after expiration of the leasehold. By letter dated August 26, 2002 (DX 232), Wien Malkin transmitted the report to Marlboro joint venturers and participants, and requested their authorization to obtain 1359 Broadway's best lease renewal proposal by October 15, 2002. Mr. Schneider then submitted a second and final lease proposal, dated October 15, 2002 (PX 58), which was supported by a report of Deloitte Touche that analyzed Cushman Wakefield's August 2002 report and Mr. Schneider's lease proposal. Wien Malkin transmitted Mr. Schneider's October 15, 2002 proposal to Ms. Stacom at CB Richard Ellis, the firm with which she had become associated. The latter prepared a final report, dated March 26, 2003 (DX 42), which withdrew its prior recommendation of a sale of the property based on rapid changes in the market, and recommended that Marlboro not renew the existing leasehold and instead adopt a "self-operation strategy," with professional third party management and a program to address the physical condition of the building, financed by a $15 million mortgage. (DX 42 at 19-21.) By letter dated March 28, 2003 (PX 112), Wien Malkin recommended to Marlboro partners and participants that they consent to the direct operation of the building as recommended by the consultant. 1359 Broadway's lease was not extended. As the partnership agreement for 1359 Broadway (PX 233) provided that it would continue in existence only "as long as it shall own the said leasehold," 1359 Broadway is in the process of winding up its affairs.

This evidence as to Wien Malkin's role in the lease renewal process belies its contention that it merely acted as "bridge" between the partnerships, transmitting information about the proposals to them. ( See D.'s Brief at 13-14.) Rather, the evidence demonstrated that Wien Malkin left representation of 1359 Broadway's interests in the lease renewal process largely to its controlling partners, Mr. Schneider and Mrs. Helmsley, while itself taking an active role in Marlboro's evaluation of the lease renewal as well as other proposals. The court accordingly finds that there was an actual conflict of interest in connection with the lease renewal.

In so holding, the court rejects defendants' apparent contention that Cushman Wakefield was an independent consultant whose retention avoided any conflict of interest. (D.'s Brief at 14-16.) In the past, in certain instances in which Wien Malkin has represented both owning and leasing partnerships in connection with a sale or lease renewal, and thus faced a potential conflict of interest, Wien Malkin has apparently employed independent consultants to evaluate the proposals on behalf of both entities. ( See Koppel v. 4987 Corp., 2001 WL 47000 [SD NY 2001], affd sub nom Greenberg v. Malkin, 2002 WL 287782 [2d Cir 2002] [unpublished decision] [sale of property held fair and reasonable where, among other circumstances, proceeds of sale would be split between lessee and owning partnerships pursuant to allocation determined by two independent real estate experts which prepared consensus report]; Kahn v. Wien, 842 F Supp 667 [ED NY 1994], affd without opinion 41 F3d 150 [2d Cir] [solicitation of consent to lease modification held not to violate federal proxy solicitation requirements where, among other circumstances, independent real estate consultant reviewed lease modification and concluded transaction was "fair and reasonable"].)

Here, in contrast, Cushman Wakefield was not retained to review the lease proposal to determine whether it was "fair and reasonable" but, as found above, was retained for Marlboro to recommend a course of action to maximize economic benefits to Marlboro. It was therefore not an independent consultant in regard to 1359 Broadway.

The court also rejects defendants' apparent further contention that a conflict of interest was avoided by Mr. Schneider's retention of independent legal counsel in connection with the lease renewal process. It is undisputed that as supervisor, Wien Malkin performed both legal and non-legal services. While Mr. Schneider retained his own legal counsel for the lease renewal, Wien Malkin in fact continued to provide 1359 Broadway with certain albeit, limited legal opinions that affected the lease renewal process. Indeed, even after Mr. Schneider retained counsel, Wien Malkin went so far as to advise the partners of 1359 Broadway that they were "under no obligation to propose any lease renewal," and "may instead allow the lease to expire." ( See Letter from Wien Malkin to 1359 Partners, dated Sept. 17, 2002, informing of Marlboro's consent to give 1359 Broadway until Oct. 15, 2002 to make a final renewal proposal [PX 61]. See also PX 56 [summarized supra at 22].) Wien Malkin also continued to provide other services for 1359 Broadway, such as transmitting Cushman Wakefield's reports to the partners, and soliciting their consent to submit a lease renewal proposal to Marlboro. ( See PX 119.) However, despite Mr. Malkin's acknowledgment that Mr. Helmsley and Mr. Wien's practice had been to consult on the formulation of lease renewal proposals for buildings operated on the two-tier model ( see Tr. at 282-283 [Malkin]), Wien Malkin did not, in connection with the subject lease renewal, advise Mrs. Helmsley's counsel or Mr. Schneider what terms might be acceptable to Marlboro. ( Id. at 286.) Most importantly, as held above, Wien Malkin advocated for Marlboro's interests and against 1359 Broadway's interests by, among other things, adopting Cushman Wakefield's recommendation to reject the lease proposal prepared by Mr. Schneider and consented to by 1359 Broadway.

Mr. Schneider's retention of independent counsel significantly ameliorated Wien Malkin's conflict of interest in representing both 1359 Broadway and Marlboro. However, it did not eliminate the conflict because the conflict involved not just legal representation of both partnerships, but Wien Malkin's continued performance of supervisory services for both partnerships, the most significant of which was Wien Malkin's recommendation to Marlboro of a course of action for the building that was opposed by 1359 Broadway.

As an actual conflict of interest thus existed, the adequacy of Wien Malkin's disclosure must be addressed. "[I]t is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and `inflexible' rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty." ( Birnbaum v. Birnbaum, 73 NY2d 461, 466 [internal citations omitted].) A fiduciary "is charged with a duty of loyalty and may not have interests adverse to those of his principal. Where a conflict of interest exists, nothing less than full and complete disclosure is required of the [fiduciary]." ( TPL Assocs. v. Helmsley-Spear, Inc., 146 AD2d 468, 470 [1st Dept 1989]. "If dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its stark significance." (Guice v. Charles Schwab Co., 89 NY2d 31, 45 [emphasis in original] [internal citation and quotation marks omitted], cert denied 520 US 1118.)

Wien Malkin does not deny that it did not expressly disclose a conflict or solicit consents from either partnership to remain as supervisor for both partnerships in connection with the lease renewal process. Rather, it apparently contends that this lack of disclosure is excused by the fact that its dual role as supervisor for both the owning and leasing partnerships was disclosed from the time of their formation. This contention is without merit.

There is authority that a breach of fiduciary duty claim may not be based on a conflict of interest or even self-dealing where the conflict was specifically disclosed in the partnership agreement or prospectus. ( See Riviera Congress Assocs. v. Yassky, 18 NY2d 540, 548 [plaintiff limited partners' summary judgment motion on breach of fiduciary duty claim against general partners denied, based on triable issues of fact as to whether general partners fully apprized limited partners in prospectus that general partners would engage in self-dealing by leasing premises to their own corporation, the court holding: "[I]f the asserted self-dealing was actually contemplated and authorized it would not, ipso facto, be impermissible and deemed wrongful"]; Seaford Funding Ltd. Partnership v. MM Assocs. II, L.P., 672 A2d 66, 72 [Del Ch 1995] ["A conflict of interest disclosed in a prospectus or partnership agreement and a plaintiff's acceptance of the terms of the prospectus or Partnership Agreement precludes the plaintiff bringing a derivative claim based on the facts disclosed in these documents"].)

However, while partners may consent to representation by a dual agent based on disclosure of the dual role in a partnership prospectus or other agreement, it must be shown that they were "fully informed of every fact material to their interests and that they consent[ed] freely in the presence of such knowledge." ( Hasbrouck v. Rymkevitch, 25 AD2d 187, 189 [3d Dept 1966]; TPL Assocs. v. Helmsley-Spear, Inc., 146 AD2d 468, supra.) Thus, in determining whether a partner consented to a dual agency, the issue is not merely whether the dual agency was disclosed, but whether the disclosure was sufficient to permit informed consent. ( See Alvin S. Schwartz, M.D., P.A. Employer/Employee Profit Sharing Plan v. O'Grady, 1990 WL 156274 [SD NY 1990]; TPL Assocs., 146 AD2d at 470.)

In the instant case, there can be no serious dispute that the partnership agreements disclosed that Wien Malkin would perform the dual role of supervisor for both the owning and leasing partnerships.⁸ The partnership agreement for 1359 Broadway also stated that the lease for its property was for a fixed term, and thus put investors on notice that there would be a potential conflict of interest at the time the lease expired if 1359 Broadway sought to renew its lease. However, this disclosure fell far short of a disclosure that Wien Malkin would, in such event, perform its dual role in the lopsided manner at issue in which it effectively failed to take action to promote the interest of the leasing partnership in renewing the lease, and instead solicited a program to promote the interests of the owning partnership.

8 Each partnership agreement disclosed that Wien Malkin would "maintain the books and records of the partnership and supervise the operation of this agreement." (1359 Broadway Partnership Agreement [PX 233]; Marlboro Partnership Agreement [PX 114].) Although the partnership agreements for 1359 Broadway and Marlboro did not cross-reference each other, they adequately disclosed Wien Malkin's dual role given that the partners were sophisticated investors, and had ownership interests in both partnerships and access to the "total mix" of information. ( See Kahn, 842 F Supp at 675-676.) Plaintiff's suggestion to the contrary (P.'s Brief at 25) is rejected.

It is noted that in some other cases involving dual representation in the context of a sale or lease renewal, Wien Malkin has expressly disclosed a potential conflict of interest. Thus, in Kahn v. Wien ( 842 F Supp at 678), a letter soliciting consent of the participants in the ownership partnership to a lease modification for the Fisk Building disclosed that a potential conflict of interest existed because of the agents' ownership interests in the net lessee, and "because the law firm of Wien, Malkin Bettex served as counsel to both the Joint Venture [i.e., ownership partnership] and the Net Lessee." In Koppel v. 4987 Corp. ( 2001 WL 47000 at 8), Wien Malkin's letter soliciting consent of participants of the owning partnership to the sale of 498 Seventh Avenue contained a "detailed section entitled `Potential Conflicts of Interest' "which disclosed the amounts Mr. Malkin would receive upon the sale. Indeed, in Koppel, which appears to be the only reported case to have considered the issue of whether Wien Malkin breached its fiduciary duties under state law where it had disclosed its dual role but failed to obtain consent to this conflict of interest, the court apparently found a breach but that plaintiffs had not established resulting injury. ( Id. at 11.)

Here, the need for disclosure of Wien Malkin's conflict of interest was, if anything, more compelling, in light of its ongoing litigation against Helmsley-Spear at the time of the lease renewal process, and the fact that 1359 Broadway was controlled by Leona Helmsley and Helmsley-Spear's principal, Mr. Schneider, while Mr. Malkin and his business associates served as agents for nearly 3/4 of the ownership interests in Marlboro.

The court accordingly concludes that the disclosures of Wien Malkin's dual role, whether in the partnership agreements or prospectus or subsequent documents, were not sufficient to establish the consent of the partners of 1359 Broadway to the actual conflict of interest that developed in the lease renewal process; and that Wien Malkin breached its fiduciary duty to 1359 Broadway by continuing to act as its supervisor without disclosing the conflict and seeking a waiver from the partners.⁹

9 In view of this holding that any consent by the partners of 1359 Broadway to a potential conflict of interest did not encompass the actual conflict of interest that developed, the court does not reach the further issue of whether the actual conflict was waivable under the ethical rules governing attorneys' continuing representation of clients with adverse interests. ( See generally Matter of Kelly, 23 NY2d 368 [1968] [holding that under certain circumstances a lawyer may not be permitted to represent parties with conflicting or adverse interests even where they consent to representation after full disclosure of an actual conflict]; 22 NYCRR § 1200.24[c] [DR 5-105].)

Contrary to Wien Malkin's contention, a showing of Wien Malkin's deceitful intent was not required to establish its liability for breach of fiduciary duty based on its conflict in the lease renewal process. Nor, conversely, did Wien Malkin establish a defense to the breach based upon a showing of its good faith.

Deceitful intent is not an element of a cause of action for breach of fiduciary duty as it has consistently been articulated by the New York courts. ( See, e.g., Birnbaum, 73 NY2d at 466; Meinhard v. Salmon, 249 NY 458. See also PJI 3:59.)

Federal cases to the contrary on which defendants rely are based on a misreading of New York law. ( See, e.g., Flickinger v. Harold C. Brown Co., 947 F2d 595 [2d Cir 1991] [misreading Horn v. 440 E. 57th Co., 151 AD2d 112 [1st Dept 1989].) While this misreading has been persistent ( see Banco Espirito Santo De Investimento, S.A. v. Citibank, N.A., 2003 WL 23018888 [SD NY 2003] [citing Flickinger and Horn]), the weight of federal authority in this Circuit, including the most recent pronouncement on the issue, appears to recognize that New York law does not require proof of wrongful intent to establish a fiduciary duty claim. ( See Phansalkar v. Andersen Weinroth Co., L.P., 344 F3d 184, 204 [2d Cir 2003] [in case involving fee forfeiture claim against employee found to have breached fiduciary duty, court held that under New York law "specific intent to defraud [was not] necessary to render misconduct sufficient to warrant forfeiture"]. See also Nanopierce Technologies, Inc. v. Southridge Capital Mgt. LLC, 2003 WL 22052894 [SD NY 2003]; Koppel, 2001 WL 47000 at 11 [rejecting Flickinger].)

Finally, even assuming arguendo that good faith may be raised as a defense to this breach of fiduciary duty claim based on conflict of interest ( see Alpert v. 28 Williams St. Corp., 63 NY2d 557, rearg denied 64 NY2d 1041), the sole evidence of good faith that Wien Malkin offered at the trial related to its reasons for commencing the arbitration to remove Helmsley-Spear and not to its conduct in the 1359 Broadway lease renewal process. As a good faith defense therefore has not been established, the court turns to the law of damages.

Actual Damages

This Department has recognized that although lesser standards of causation and damages may be applied in calculating damages in a breach of fiduciary case, the plaintiff must demonstrate that the breach was a proximate cause of damages:

[B]reaches of a fiduciary relationship in any context comprise a special breed of cases that often loosen normally stringent requirements of causation and damages. This is because the purpose of this type of action is not merely to compensate the plaintiff for wrongs committed . . . [but also] to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates. However, the proponent of a claim for a breach of fiduciary duty must, at a minimum, establish that the offending parties' actions were "a substantial factor" in causing an identifiable loss.

( Gibbs v. Breed, Abbott Morgan, 271 AD2d 180, 188-189 [1st Dept 2000] [internal citations and quotation marks omitted] [emphasis in original]; Laub v. Faessel, 297 AD2d 28 [1st Dept 2002].)¹⁰

10 The more rigorous "but for" standard of causation will be applied where a breach of fiduciary claim against an attorney is premised on allegations of legal malpractice. ( See Weil, Gotshal Manges, LLP v. Fashion Boutique of Short Hills, Inc., 10 AD3d 267 [1st Dept 2004].) As there are no allegations of legal malpractice here, this standard is not applicable.

As plaintiff argues, Mr. Malkin's status as supervisor undoubtedly gave his recommendation on the lease renewal proposal "special credibility" with Marlboro. ( See P.'s Brief at 33.) However, taking into account all of the circumstances of this case, this court cannot find that this recommendation was a substantial factor in the loss of the lease renewal.

More particularly, defendants presented credible evidence that plaintiff's lease renewal was not viable. Although Ms. Stacom was not an independent consultant in relation to 1359 Broadway, the court is persuaded that this highly experienced real estate consultant acted in accordance with professional standards in preparing the reports analyzing Mr. Schneider's lease renewal proposals and the other options for the building. Ms. Stacom testified credibly that she used her independent judgment in issuing the reports and was not told what recommendations to make. (Tr. at 730, 770.)¹¹ The March 26, 2003 report concluded that the $60 million mortgage, which was provided for in Mr. Schneider's second lease proposal, was "not a prudent course of action for this property, particularly in a weak market." (DX 42 at 20.)¹² At the trial, Ms. Stacom explained the report, credibly testifying as to why the second proposal was not viable based, among other things, on the size of the mortgage and the absence of any proposal to address a rapidly declining occupancy. Notably, plaintiff did not produce any witness to challenge Ms. Stacom's opinion.¹³

11 Wien Malkin had input on drafts of the reports and on the questions to be put to 1359 Broadway at a meeting Ms. Stacom had scheduled to review the second proposal. At the time of the first report, they also arguably sought to exert influence on whether the rating of the lease renewal proposal should be reduced due to the disputes between Mr. Schneider and Wien Malkin over the operation of the properties. (Tr. at 794-795; PX 266). However, Ms. Stacom credibly testified that she rejected Wien Malkin's suggestions if she did not agree with them. (Tr. at 728.) She also plausibly explained that the deteriorated relationship between the parties was a legitimate concern in evaluating the lease proposal because "your faith in how somebody is going to operate the real estate" is a portion of the leasehold. (Tr. at 795-796.)

12 Plaintiff now suggests that Ms. Stacom's concern about the $60 million mortgage was not bona fide because, shortly after taking over direct operation of the lease, Wien Malkin itself projected a refinancing of the mortgage at $40 to 50 million to fund a comprehensive development plan. ( See P.'s Brief at 29; Minutes of Marlboro Staff Operating Meeting, dated July 24, 2003 [PX 270].) Plaintiff fails, however, to make any showing that the mortgage contemplated in the second lease renewal proposal was to be obtained on the same terms or used for the same purposes as the $40 to $50 million mortgage proposed by Marlboro.

13 Nor did the Deloitte report cure this omission. The Deloitte report was submitted in support of the second proposal and thus addressed the concerns raised in the first Cushman Wakefield report, not the second. It also employed technical jargon that was not self-explanatory.

Perhaps more importantly, 1359 Broadway did not have an option to renew the lease. It is highly unlikely that the partners and participants of Marlboro would under any circumstances have consented to the lease renewal proposal given that it called for Helmsley-Spear to continue as managing agent; that Mr. Malkin and his associates represented 72.2% of the ownership interests in Marlboro; and that Mr. Malkin had the avowed intention of removing Helmsley-Spear as managing agent for all of the Helmsley-Wien partnerships.

The court accordingly holds that plaintiff failed to show that Wien Malkin's conflict of interest was a substantial factor in causing 1359 Broadway to lose the renewal lease and thereby to sustain actual damages.

Forfeiture

In the alternative, plaintiff argues that even in the absence of proof of actual damages, the partnership is entitled, under the "faithless servant" doctrine, to recover all compensation paid to Wien Malkin during the period of its infidelity. (P.'s Brief at 5.) It has long been held that "[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation" even if the principal "suffered no provable damage as a result of the breach." ( Feiger v. Iral Jewelry, Ltd., 41 NY2d 928, 928-929.) Compensation paid to an agent during a period of disloyalty is also subject to forfeiture. ( E.g., Kenneth D. Laub Co. v. Bear Stearns Cos., Inc., 278 AD2d 121 [1st Dept 2000], lv denied 96 NY2d 709; Soam Corp. v. Trane Co., 202 AD2d 162 [1st Dept 1994], lv denied 83 NY2d 758; Bon Temps Agency, Ltd. v. Greenfield, 212 AD2d 427 [1st Dept 1995].) Although defendants suggest otherwise ( see D.'s Reply Brief at 9), the doctrine thus applies by its terms to an agent who breaches a fiduciary duty, and is not limited to cases involving an employer/employee relationship. ( See, e.g., Kenneth D. Laub Co., 278 AD2d at 122 [forfeiture of broker's commissions]; GRG Group, Inc. v. Ravenal, 247 AD2d 201 [1st Dept 1998] [forfeiture of management fees and brokerage commissions].)

Wien Malkin's conflict of interest in the lease renewal process extended over a period commencing at least as of November 2000 and continuing through March and April 2003, when Wien Malkin recommended to Marlboro partners that they accept a program of direct operation and in effect reject Mr. Schneider's second lease renewal proposal. ( See PX 112, PX 111, PX 110.) This case thus involves not an isolated incident but a "persistent pattern of disloyalty" which warrants application of the fee forfeiture doctrine. ( See Bon Temps Agency, 212 AD2d at 428.)

The remaining issue is the extent to which the fees must be forfeited and, in particular, whether these fees should be limited or, in the language of the case law, apportioned to fees paid for services as to which there was disloyalty. As articulated in its earliest formulation and repeated in modern cases, the faithless servant doctrine provides for a disloyal employee to "forfeit any right to compensation for services." ( Murray v. Beard, 102 NY 505, 508; Kenneth D. Laub Co., 278 AD2d at 122; Soam Corp., 202 AD2d at 163.) While this formulation is broad enough to be construed as mandating forfeiture by a disloyal employee of all compensation, New York cases have repeatedly limited forfeiture to the period of the disloyalty. ( See Musico v. Champion Credit Corp., 764 F2d 102, 113 [2d Cir 1985] [citing New York cases].) It does not appear that any New York case has addressed the issue of whether forfeiture should also be apportioned to fees received by the employee for the specific tasks as to which the employee was disloyal. However, federal courts applying New York law have held that forfeiture should be thus limited where the following test is met: "(1) the parties had agreed that the agent will be paid on a task-by-task basis * * *, (2) the agent engaged in no misconduct at all with respect to certain tasks, and (3) the agent's disloyalty with respect to other tasks `neither tainted nor interfered with the completion of' the tasks as to which the agent was loyal." ( Phansalkar, 344 F3d at 205 [adhering to test formulated in Musico, 764 F2d at 114].)

Although no reported New York decision has considered the Musico test,¹⁴ this Department has not rejected limitation or apportionment of the fees to be forfeited to fees for services involving disloyalty. On the contrary, recent cases leave open the possibility of such apportionment. ( See GRG Group, 247 AD2d at 202 [upholding award for management fees and brokerage commissions over two year period "where the evidence demonstrated disloyalty during those years and there is no basis in the record for apportionment"]; Bon Temps Agency, 212 AD2d at 428 [reversing award of summary judgment to employer for all commissions paid to disloyal employee over period of employment, where triable issues of fact existed as to whether two transactions involving disloyalty for which employee earned commissions "were isolated incidents or part of such a `persistent pattern of disloyalty' so as to warrant forfeiture of all commissions earned by" employee while working for employer] [internal citation omitted].)

14 Phansalkar noted that the Musico test is "tenuous" because it has not been endorsed by any New York court, but adhered to the test because it also has not been rejected. The court also reasoned that the test is in conformity with the persuasive position taken on apportionment in the Restatement [Second] of Agency. ( 344 F3d at 206-207.)

This court accordingly rejects the contention that the faithless servant doctrine rules out limitation or apportionment of the fees to be forfeited to fees for particular tasks or services that were performed disloyally. The court further holds that the Musico test is consistent with New York law, and sets forth viable criteria for determining whether apportionment should be made.

Under this test, plaintiff's recovery should be limited to the full supervisory fees paid to Wien Malkin during the period of the disloyalty. The supervisory fees were aggregate monthly fees for all supervisory services, without any breakdown for specific tasks. There is accordingly no basis for apportioning the supervisory fees to services in connection with the lease renewal process. In contrast, the other fees (e.g., the 1% and 10% fees) which Wien Malkin received during the period of the lease renewal process, were separate and discrete from the supervisory fees, and authorized by separate agreements. These other fees, moreover, were paid for services as to which there was no disloyalty. The record in this case thus provides a clear basis for apportioning fees as between supervisory fees, which included services as to which there was disloyalty, and other fees as to which there was not.

It is undisputed that Wien Malkin's supervisory fee for 1359 Broadway was increased to $24,000 per year in 1983 ( see DX 64), and remained at that rate through April 2003. ( See PX 100, PX 76, PX 106.) The court accordingly holds that the supervisory fees to be forfeited by Wien Malkin for the period of the disloyalty November 2000 through April 2003 total $60,000.

Wien Malkin's Counterclaims

Wien Malkin's counterclaims allege that Mr. Schneider and Helmsley-Spear, Inc. tortiously interfered with an agreement (DX 82), dated December 16, 1997, by which Leona Helmsley and Wien Malkin settled the 1997 arbitration. In particular, Wien Malkin alleges that Mr. Schneider induced Leona Helmsley to breach this agreement in two respects: by voting to retain Helmsley Spear as the managing agent for 501 Seventh Avenue; and by commencing an action to remove Wien Malkin as the supervisor for the Empire State building. (D.'s Brief at 30.) Mr. Schneider does not dispute that the settlement agreement prohibited these acts, but argues that any breaches of the settlement agreement by Mrs. Helmsley were initiated by her, and that there is no evidence that Mr. Schneider or Helmsley-Spear induced any breach. In the alternative, he argues that defendants have failed to prove damages as a result of a breach.¹⁵

15 As a threshold matter, it is noted that although Helmsley-Spear is not a plaintiff to the instant actions, Wien Malkin named Helmsley-Spear as well as Mr. Schneider as counterclaim defendants. In addition, Wien Malkin claimed at the trial and in its post-trial submissions that Mrs. Helmsley's commencement of the Empire State building action constituted a breach of the 1997 settlement agreement, whereas the counterclaims pleaded that the commencement of the instant actions on behalf of 112 W. 34 and 1333 Broadway were the actions that Mrs. Helmsley brought in violation of the settlement agreement. Plaintiff does not, however, rely on these procedural issues in opposing the counterclaims.

In claiming that plaintiff induced Mrs. Helmsley's breach of the settlement agreement, defendants rely chiefly on evidence that Helmsley-Spear not only agreed to indemnify Mrs. Helmsley for any claims against her by Wien Malkin for breach of the settlement agreement, but also paid her litigation expenses in connection with three actions to remove Wien Malkin as supervisor namely, the instant actions, brought on behalf of 112 W. 34 and 1333 Broadway in which Mrs. Helmsley was a co-plaintiff with Mr. Schneider, and the Empire State building action in which she was the sole party.

By letter dated May 17, 2002 (DX 175) written to Mrs. Helmsley by Mr. Schneider, acting on behalf of Helmsley-Spear, Helmsley-Spear agreed to indemnify Mrs. Helmsley for claims based on the 501 Seventh Avenue vote and any other claims arising out of her breaches of the settlement agreement. This letter was written as if in anticipation of a claim for tortious interference. It thus recited Mr. Schneider's understanding that Mrs. Helmsley had informed him that she did not wish to remove Helmsley-Spear as managing agent but had been "threatened" by Wien Malkin that she would be in breach of the settlement agreement if she did not vote to remove Helmsley-Spear. The letter then concluded that in order to "allay" Mrs. Helmsley's concern "about exercising [her] judgment in view of Wien Malkin's threat," Helmsley-Spear agreed to indemnify Mrs. Helmsley against all claims "arising out of [her] obligation (if any) under paragraphs 6 and 11 of the aforementioned agreement of December 16, 1997." Mrs. Helmsley subsequently voted to retain Helmsley-Spear as managing agent at 501 Seventh Avenue. (Tr. at 502-503 [Malkin].)

Helmsley-Spear also paid Mrs. Helmsley's attorney's fees to her then counsel, Stroock Stroock Lavan ("Stroock"), for their representation of Mrs. Helmsley in the three actions to remove Wien Malkin as supervisor. The three actions were filed on April 9, 2002. A memorandum (PX 148), dated April 19, 2002, by Charles Moerdler, Mrs. Helmsley's lawyer at Stroock, memorialized the agreement, stating: "Pursuant to agreement reached last week between Mrs. Helmsley and Irving Schneider, the invoices that we render to Mrs. Helmsley on the Malkin litigation and related matters will be * * * paid by Helmsley-Spear.") The evidence showed that Helmsley-Spear made payments to Strook for this litigation of over $500,000, and incurred fees totaling nearly $1 million. ( See DX 182.) However, Stroock billed Mrs. Helmsley, not Helmsley-Spear, for legal fees for services in connection with Mrs. Helmsley's consideration as to whether to discontinue the actions. ( See DX 162.) (She ultimately discontinued or was dismissed as a party to all three actions.)

Plaintiff raises questions about the timing of these agreements. He also points to evidence that Mr. Moerdler drafted the indemnification agreement ( see PX 141), and testified that he himself recommended to Mrs. Helmsley that Mr. Schneider assume the costs of the litigation to remove Wien Malkin, and asked her for authority to approach Mr. Schneider in that regard. (Tr. at 594 [Moerdler].) Even if this evidence is considered,¹⁶ it does not eliminate the substantial question as to whether Helmsley-Spear's (or Mr. Schneider's) agreements to indemnify Mrs. Helmsley and pay her legal expenses were a contributing cause of her breach of the 1997 settlement agreement.¹⁷

16 Although the court overruled defendants' objection to this testimony, Mr. Moerdler repeatedly invoked the attorney client privilege, and defendants were therefore unable to cross-examine effectively on Mr. Moerdler's knowledge of the circumstances under which the indemnification agreement was reached or payment for Mrs. Helmsley's litigation expenses undertaken. His testimony on his role in bringing about these agreements is therefore accorded limited weight.

17 Although the indemnification and litigation payments were in the name of Helmsley-Spear, neither party addresses the basis, whether as alter ego or otherwise, on which Mr. Schneider would be liable for Helmsley-Spear's acts. Rather, both parties appear to treat Mr. Schneider and Helmsley-Spear as indistinguishable for liability purposes.

The court does not reach the issue, however, as Wien Malkin wholly failed to prove damages on the counterclaims. Wien Malkin's claim for damages is limited to attorney's fees allegedly incurred as a result of Mrs. Helmsley's breaches of the settlement agreement. (Tr. at 516-517.) Assuming, without deciding, that attorney's fees are recoverable for tortious interference with contract ( see Schindler v. Lamb, 25 Misc 2d 810 [Sup Ct, New York County 1959], affd 10 AD2d 826 [1st Dept 1960], affd 9 NY2d 621), Wien Malkin's evidence failed to establish the amount of such fees. Mr. Malkin testified, without elaboration, that the partnerships incurred over $250,000 in legal fees as a result of Mrs. Helmsley's vote on the removal of Helmsley-Spear from 501 Seventh Avenue and the Empire State building litigation to remove Wien Malkin. (Tr. at 540-541.) Defendants did not support this testimony with any documentary evidence regarding the amount of legal fees expended on the litigation. The only documentary evidence submitted on the fees incurred as a result of Mrs. Helmsley's 501 Seventh Avenue vote was a financial statement for that partnership (DX 292.) The statement showed total fees for the removal of Helmsley-Spear, without any breakdown for fees attributable to Mrs. Helmsley's breach of the settlement agreement. Based on this failure of proof, the counterclaims must be dismissed.

Conclusion

Having considered the multiplicity of claims and the voluminous evidence in these actions, this court has concluded that Wien Malkin breached its fiduciary duty solely on the basis of its failure to disclose its conflict of interest in the 1359 Broadway lease renewal. As this breach will not recur and other breaches have not been shown, the court finds no grounds for granting plaintiff's request for an injunction generally enjoining future breaches of Wien Malkin's fiduciary duties. If there is a lesson to be learned from this case, however, it is that the old and often informal ways of doing business that apparently worked so well for Mr. Wien and Mr. Helmsley are not workable for their successors. If the parties are to have any chance of avoiding further battles in the massive litigation campaigns on which they have both embarked, they must both adhere to the highest ethical and professional standards governing their work for the partnerships.

The accounting claims will be the subject of a separate decision.

This constitutes the decision and order of the court.

Settle judgment.