Preview
FILED: NEW YORK COUNTY CLERK 10/06/2010 INDEX NO. 650159/2010
NYSCEF DOC. NO. 19 RECEIVED NYSCEF: 10/06/2010
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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HARVEY RUDMAN and HAROLD KUPLESKY, Index No. 650159110
on Behalf of Each of Them Individually And
On Behalf Of Starrett City Preservation LLC,
Derivatively,
Plaintiffs, SECOND AMENDED
COMPLAINT
against -
CAROL GRAM DEANE, DISQUE D. DEANE,
SALT KETTLE LLC, ST. GERVAIS LLC,
STARRETT CITY PRESERVATION LLC,
DD SPRING CREEK LLC, SK SPRING
CREEK LLC, SPRING CREEK PLAZA
LLC, DD SHOPPING CENTER LLC and
SK SHOPPING CENTER LLC,
Defendants.
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Plaintiffs Harvey Rudman and Harold Kuplesky, by their attorneys Golenbock
Eiseman Assor Bell & Peskoe LLP, for their second amended complaint, individually and
derivatively on behalf of Starrett City Preservation LLC, against the defendants, allege as
follows:
Preliminary Statement
1. This case arises from the wrongful and self-serving conduct of Carol
Deane and Disque Deane (the "Deanes") in connection with the recent refinancing of the Starrett
City housing complex in Brooklyn, a regulated housing facility and one of the largest and most
successful federally-funded housing complexes in the nation. The Deanes, who are married, are
wealthy individuals who have amassed extensive real estate and other holdings. Each of the
Deanes is highly sophisticated financially. . Through a web of limited partnerships and limited
liability companies, the Deanes exercise co~trol over Starett City.
2. For decades, Plaintiffs served as principal members of the management
team for Starrett City. Harvey Rudman served as part of management, including as President,
for more than 20 years, and Harold Kuplesky served as the President of the co-managing agent
of Starrett City and the owner's representative for the complex for 10 years. Rudman and
Kuplesky brought decades of pertinent experience to the management and operation of Starrett
City.
3. Several years ago, the limited partners in Starrett City Associates LP
("SCA"), the partnership that beneficially owns Starrett City, began to pressure the Deanes, and
in particular, Disque Deane, to relinquish his position as Managing General Partner of SCA.
Several key issues were facing SCA, including that SCA was in a position to try to sell or
refinance Starrett City, which would enable the limited and general partners of Starrett City to
enjoy the considerable equity that had buil~ up in the complex since its development decades
earlier.
4. To enlist Plaintiffs in their effort to retain the Managing General Partner
position, the Deanes offered them a management incentive agreement, pursuant to which
Plaintiffs would assist with efforts to sell or refinance Starett City, and the Deanes would
compensate Plaintiffs out of the general partners' economic interest in SCA. SCA agreed to this
arrangement, and even increased the general partners' share of certain distributions under the
SCA partnership agreement in order to fund the anticipated incentive payments to the Plaintiffs.
5. The vehicle that was set up to implement this arrangement was a limited
liability company called Starrett City Preservation LLC ("Preservation"). Each of the Plaintiffs
was given a membership interest in Preser\iation, and a series of agreements were signed under
which the general partners (Deane and a Deane-related entity, defendant Salt Kettle LLC
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("SKI")) assigned their economic interests in SCA to Preservation. The clear purpose of
the
agreements, all of which were prepared by the Deanes' lawyers and signed contemporaneously,
was to grant Plaintiffs the right to share in the upside created by such a sale or refinancing
transaction.
6. After years of effort, on December 17,2009, a $531.4 milion refinancing
of Starrett City was completed with much publicity and fanfare. The Deanes and the entities
they control have received cash and other benefits worth tens of millions of dollars from this
transaction. But rather than comply with their obligations, and pay the approximately
$15,000,000 clearly owed to Plaintiffs individually and far more to Preservation itself,
Defendants have chosen to breach the agreements, and keep for themselves much of what
rightfully belongs to Plaintiffs.
7. The Defendants' refiisal to pay the amounts plainly owing to Plaintiffs is a
clear breach of their contractual and fiduciary obligations to Plaintiffs. More than that, by
blatantly refusing to comply with their obligations to the management team that served the
Deanes and Starrett City loyally and profes:3ionally for decades -- with no justification other than
that they have the economic muscle to strong-arm others -- Plaintiffs demonstrate that their actions
all along have been in bad faith. Plaintiffs are entitled to the full amount owed to them under the
relevant agreements, plus punitive damages based on the Deanes' intentional and deliberate
misconduct.
Ownership Structure of Starrett City
8. SCA is a limited partnership that was organized for the purpose of
acquiring, developing, constructing and operating Starrett City, and is the beneficial owner of
Starrett City. Starett City, Inc. ("SCI") is a Limited Profit Housing Corporation under Article 2
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of the New York State Private Housing Finance Law, and it holds title to and operates Starrett
City on behalf of SCA.
9. Deane became the Managing General Partner of SCA in 1985 ("MGP")
and continued in that position until on or about December 15,2009, when Deane transferred his
interests and obligations as Managing General Partner to a newly-created affiiated entity,
defendant DO Spring Creek LLC ("DD/SCA").
1 O. The other general p~rtner of SCA commencing in or about 1985 was SKI.
On or about December 15,2009, SKI transferred its interests and obligations as general parner
of SCA to a new-created affiliated entity, defendant SK Spring Creek LLC ("SK/SCA"). SKI
has one member, a Deane-family limited liability company known as defendant St. Gervais LLC
("St. Gervais").
11. There are more than 200 limited partner interests in SCA. Approximately
one-third of the limited partner interests in SCA are held by Deane family members or entities
controlled by them (including St. Gervais, the largest limited partner in SCA).
12. Preservation is a separate entity that was established solely as a means of
enabling the general partners (the MGP and SKI) to share their economic interests in SCA with
the management team of Starrett City, including Plaintiffs.
The Parties
13. Plaintiff Harvey Rudman ("Rudman") is an individual residing in the
County of New York, State of New York.
14. Plaintiff Harold Kuplesky ("Kuplesky") is an individual residing in the
State of Connecticut.
15. Defendant Carol Gram Deane ("Carol Deane") is an individual residing at
14 Walnut Street, Boston, Massachusetts and 163-165 East 63rd Street, New York, New York.
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Carol Deane is Deane's wife and has served with him for years to fulfill his role as MGP,
including as co-chairperson of the MGP. Carol Deane is also the managing member of
Preservation; the manager of SKI; and the operating manager and a member of St. Gervais.
Carol Deane is also a director and officer of SCI and the chairwoman of the Starrett Management
Committee of SCI, and an offcer of SCA.
16. Defendant Disque D. Deane ("Deane") is an individual residing at the
same addresses as Carol Deane in the Commonwealth of Massachusetts and in the County of
New York, State of New York. Deane is (directly or indirectly) the managing general partner of
SCA and is the husband of Carol Deane. Deane, his family members, and entities owned and
controlled by them (including St. Gervais) own more than 32% of the limited partnership
interests in SCA. Deane gained such a substantial share of Starrett City by acquiring interests
from other limited partners after Deane was MGP, and for far less than the MGP's believed was
the value of such interests. The Deane family also owns approximately two-thirds of the
membership interests in Preservation, and c,mprise nearly all of the members of St. Gervais.
17. Defendant SKI is a Emited liability company formed under the laws of the
State of New York, with its principal place of business located at 150 East 58th Street, 23rd
Floor, New York NY 10155. SKI was a general partner ofSCA until December 15,2009, and is
an affiliate of SK/SCA. The sole member of SKI is St. Gervais. Carol Deane is the manager of
SKI.
18. Defendant St. Gervais is a limited liability company formed under the
laws of the State of Delaware, with its principal place of business located at c/o Westbroke Ltd.,
Richmond House, 12 Par-la-Vile Road, PO Box HM 1022, Hamilton, HM DX, Bermuda, and
its agent for service of process is The Prentice-Hall Corporation System, Inc., 1013 Centre Road,
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Wilmington, Delaware 19805. St. Gervais is the largest member of Preservation, is the sole
member of SKI and is the largest limited partner of SCA. Carol Deane (individually or on behalf
of their children) owns 92% of St. Gervais, and another 6% is owned by other Deane family
members. Carol Deane is the operating manager of St. Gervais.
19. Defendant Preservation is a limited liability company formed under the
laws of the State of New York, with its principal place of business located at 150 East 58th Street,
23rd Floor, New York NY 10155. As reflected in SCA's internal records and tax fiings,
Preservation is listed as a limited partner of SCA (limited partner number 286) without a
specified percentage interest.
20. Defendant DD/SCA, a Delaware limited liability company with its
principal place of business in New York, New York, has been the managing general partner of
SCA since on or about December 15, 2009, when Deane assigned his interests and obligations as
managing general partner of SCA to his affiiate, DD/SCA. Carol Deane is Vice President of
DD/SCA.
21. Defendant SK/SCA, a Delaware limited liability company with its
principal place of business in New York, New York, has been a general partner ofSCA since on
or about December 15,2009, when SKI as~igned its interests and obligations as general partner
to its affiliate, SK/SCA. Carol Deane is President of SK/SCA.
22. Defendant Spring Creek Plaza LLC ("Spring Creek") is a Delaware
limited liability company formed in or about November 2009 with its principal place of business
in New York, New York. As discussed below, in December 2009 as part of the Refinancing
transaction, SCA transferred certain parcels of land, including parcels referred to as the
"Shopping Center Parcel" and the "Vacant Land" parcels, to Spring Creek. In connection with
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that transfer, each of the general partners and limited partners of SCA received, and now holds,
directly or indirectly, the same ownership interests in Spring Creek that each holds in SCA. DO
Shopping Center LLC (described below) is the Managing Member of Spring Creek. Carol
Deane initially was the Vice-President, and is now the President, of Spring Creek.
23. Defendant DO Shopping Center LLC ("DD/Shopping") is a Delaware
limited liability company formed in or about November 2009 with its principal place of business
in New York, New York. DD/Shopping is the Managing Member of Spring Creek. Deane is the
sole member ofDD/Shopping. DD/Shopping holds a 1 % interest in Spring Creek which
corresponds to Deane's 1 % general partner interest in SCA (discussed further below).
24. Defendant SK Shopping Center LLC ("SK/Shopping") is a Delaware
limited liability company formed in or about November 2009 with its principal place of business
in New York, New York. SKI is the sole member of SK/Shopping. SK/Shopping holds an
18.9% interest in Spring Creek which corresponds to SKI's and, later, SK/SCA's, 18.9% interest
in SCA (discussed further below).
Jurisdiction and Venue
25. This Court has personal jurisdiction over the defendants pursuant to CPLR
§ 301 and/or § 302.
26. Venue is proper in New York County pursuant to CPLR § 503.
Factual Background
27. The Starrett City apartment complex (also known as Spring Creek
Towers) is a regulated, mixed income housing development located in Brooklyn. This 46
building complex houses 12,000 residents, sits on 140 acres and is the nation's largest federally-
assisted property. Starrett City has its own power plant, armed security force, a shopping center
including medical offces, 8 parking garages, health and fitness facilities, and several schools,
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parks and community centers. SCI employs more than 400 people. The majority of residents
receive federal or local housing assistance.
28. For decades, Plaintiffs served as key management personnel for Starrett
City. Harvey Rudman, a Certified Public Accountant and a Certified Management Accountant,
was recruited by Deane in 1982 to work for various Deane-related entities, and Rudman
provided services to Starrett City even before Deane was the MGP. Deane recruited him not
only for his financial background and real estate development experience, but for his first hand
experience gained from previously residing in another large regulated housing complex.
Rudman served as the President and Chief Operating Officer of SCI for 20 years, from 1989
through 2009.
29. Rudman assisted De'.ne with substantially every aspect of his tasks as
MGP of Starrett City, including financial, ;egal, and operational elements. Among other things,
for decades Rudman served as the point person and liaison for the MGP and SCA with limited
partners; attorneys and accountants for SCA, the MGP and SCI; insurance brokers; regulatory
agencies; actuaries; the managing agent for Starrett City; and more. Rudman was engaged in,
among other things, (i) strategic planning for Starrett City (including in connection with efforts
to privatize, refinance and/or sell the complex), (ii) supervising the management and operations
of Starrett City (including assisting accountants with the preparation of budgets, financial
statements and other financial matters for SCI and SCA, handling major issues affecting the
physical plant of Starrett City, conducting major purchasing negotiations for Starrett City, and
overseeing the development of real estate a.djacent to Starrett City); (iii) supervising the activities
of the managing agent for Starrett City; (ivy reporting to, monitoring, and negotiating with
federal and state regulators to obtain and maintain three different and complex subsidy programs;
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and (v) managing the affairs and business of SCA, including reporting to more than 200 limited
partnership interests, and negotiating and obtaining the anual statutory dividend for SCA.
Rudman also participated in the management of other regulated housing developments and real
estate ventures owned in whole or in part by Deane, including significant involvement in the
privatization and refinancing of the Phipps Plaza West complex.
30. Kuplesky spent 35 years working in affordable housing prior to being
recruited by Deane in 1999 to work for Starrett City and other affordable housing projects owned
in part by Deane. During his 25 years employed by governent agencies and 10 years in private
financial institutions, Kuplesky had gained considerable experience with New York state and
local housing programs and financing mechanisms. He served Deane in dual capacities at first,
assisting with the subsidized Phipps Plaza West complex as well as Starrett City, and thereafter
focused primarily on Starrett City.
31. Kuplesky served as the President and part owner of Cork Management
LLC, ("Cork") which was the Deane-controlled co-managing agent for Starrett City, and also
served as the Owner's Representative. For Starrett City (as well as Phipps Plaza), Kuplesky used
his familiarity with governental agencies, extensive experience with the housing programs and
financing mechanisms, and experience with tenant issues to, among other things, participate in
the strategic planning for the projects; assist with efforts to privatize, refinance, and sell the
projects; serve as a liaison between the owners and several regulatory agencies on financial and
other matters; serve as a liaison between the owners and tenants, including in connection with
privatization, sale and refinancing efforts; and serve as a liaison with the limited partners of such
projects. Kuplesky was also involved in day to day management issues at the Starrett City
complex itself, such as operational issues at the power plant.
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32. Rudman and Kuplesky had such a high level of institutional knowledge
about the financing, regulation, legal structure, and facilities of Starrett City that in connection
with the potential sales of the complex in 2007 and 2008 discussed below, they (and not Deane
or anyone else) were identified in draft sale contracts as the persons whose knowledge was
pertinent for purposes of the owner's representations and warranties made in the sale contracts.
33. Each of Carol Deane and Deane is sophisticated and experienced in
financial matters and real estate investments generally. They (directly and through domestic and
foreign trusts, joint ventures and corporations and other entities, such as foreign entities SCI
Maya and SCI St. Gervais and foreign trusts Patrick Deane Intervivos Trust (BVI), Deane
Family Discretionary Trust (BVI), and Peter Deane Trust (Guernsey)) own real estate in
Bermuda; Paris, France; Bolivia; New Y or.ì(; Boston, Massachusetts; New Hampshire; and East
Hampton, New York. The Deanes also ov.n partnership interests in many other real estate
ventures (including significant holdings in a gold mine in Ecuador), and a fleet of railway hopper
cars. Deane served as a senior general partner of an investment bank in New York for thirty
years, and as the Founder and Chairman of Corporate Property Investors, Inc. (now part of
Simon Property Group), both of which are multi-bilion dollar operations. He has invested in,
and aggregated other investors for, numerous real estate ventures, including other publicly
supported housing complexes like Starrett City. Carol Deane has acted on behalf of Deane in his
role as MGP for more than a decade, and increased her involvement since 2004 when Deane
suffered a stroke. She serves as a director for SCI, and serves on the board of directors or as the
manager of numerous other family-owned investment vehicles and businesses. Carol Deane is
an owner (together with St. Gervais) of various real estate ventures in the United States and
abroad, including one of the largest (over 160,000 acres) privately owned soybean and cattle
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farming operations in South America, which farms are held through entities Bolfarm S.R.L.,
Santa Anita de los Robles, S.A., Campos del Este S.R.L., Agropecuaria Carol, Estancia Carol,
Estancia M. Letticia and Estancia Carlanne. Since Carol Deane and various Deane entities
acquired ownership in the mid-1990's using approximately $50 million from off-shore accounts
and foreign trusts, these farming operations have generated off-shore profits aggregating more
than $70 milion. The Deanes' net worth (excluding off-shore trusts worth nearly comparable
amounts) exceeds $200 milion; Carol Deane's net worth alone exceeds $100 milion.
34. Since at least 1985, Deane has at all times retained control over SCA and
SCI, and in fact frequently bragged about his dictatorial control and methods. He has made all
financial decisions with regard to Starrett City and other Deane-family entities, including in
connection with all tax, financial and compensation matters.
Background To The Management
Incentive Agreement At Issue
35. Beginning in or about 2000, when Deane was approximately 80 years old,
limited partners of SCA began questioning his ability to remain as MGP. They expressed
concern about management stability and a succession plan for the MGP. At the same time, SCA
was facing significant financial and regulatory hurdles and opportunities. The MGP needed to
investigate ways to protect the limited partners from a substantial anticipated increase of non-
cash taxable income, and also to explore a sale of the complex, a refinancing, or another means
of allowing the limited and general partners of SCA to realize some of the equity that had built
up in Starrett City since its development in the 1970s.
36. Carol Deane and Deane, for their part, had no intention of relinquishing
control over Starrett City. In addition to maintaining control over Starrett City and receiving
annual dividends, the Deanes have utilized the MGP position to their personal financial
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advantage. For example, the Deanes use SeA and SCI funds and assets to pay certain of their
personal expenses (such as to acquire a new car and to pay hundreds of thousands of dollars
annually for drivers for family members), use SCA and SCI employees for their own residential
renovations, and receive annually over $1 milion in payments from the managing agent of SCI
(as a quid pro quo for allowing the agent's staff to be on SCI's payroll) that is used in part to
support the offce operations of many Deane entities and to make cash payments to entities they
control.
37. Faced with pressure from the limited partners, the Deanes came up with a
means not only to maintain control, but to gain a greater share of anticipated future proceeds
from Starrett City. Unbeknownst to the Plaintiffs, they used the Plaintiffs as pawns in this
scheme.
38. Carol Deane and Deane knew that Rudman and Kuplesky were well
known among the limited partners and oth,:r representatives and professionals of SCA and SCI,
and that they were viewed as fully competent and reliable. Moreover, the Plaintiffs were not
members of the Deane family, and thus were viewed as objective by these constituencies. Carol
Deane and Deane determined to use their relationship with the Plaintiffs to sell themselves to the
limited partners: they announced to the Plaintiffs and limited partners of SCA that if Deane
remained as MGP, they would create -- anò the general partners (MGP and SKI) would fund -- a
management incentive program for the Plaintiffs to ensure their continued service to the MGP
and their assistance with the upcoming sale and refinancing efforts.
39. Moreover, Carol Deane and Deane used Plaintiffs' reputation and unique
skill set, and the management incentive agr'eement with them, to persuade the limited partners of
SCA to support an increase in the MGP's and SKI's aggregate share of the residual interest in
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SCA from 10% to 19.9%. Specifically, Carol Deane and Deane told the limited partners that the
increased share would be used to fund the incentive compensation payments to the management
team.
40. It took a full two year effort -- from 2001 to 2003 -- for Carol Deane and
Deane to persuade the limited partners to consent to this proposal. Carol Deane and Deane told
limited partners orally and in writing, for example, that agreeing to the proposed amendment to
the SCA partnership agreement that would increase the general partners' share of the residual
interest in SCA "wil compensate my office management for the future very difficult period."
Deane also wrote to the limited partners that the amendment would "create(J a residual incentive
for the SCA staff' and is "in your interest because it incentivizes the SCA staff to develop
creative proposals for privatization." Deane authorized Rudman to advise other SCA partners
that Deane "wil not personally benefit from this amendment but it wil serve as the basis of
assuring continuity of management." Stil other partners were told by Carol Deane that "out of
the GP's (general partners') position, Rudman and his team would be entited to share in the
future sale or refinancing proceeds." At least one limited partner in turn expressed to Carol
Deane, Deane and Rudman his desire "for Harvey Rudman and his team to have a real incentive
to produce a profitable sale or refinancing .)f Starrett," and that he was "interested in giving
maximum motivation to (Rudman) and his' colleagues rather than to (Deane J" with the proposed
amendment.
41. Ultimately, SCA and the Plaintiffs agreed to the arrangement proposed by
Carol Deane and Deane. These agreements are reflected in several written documents, which are
discussed below.
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The Sixteenth Amendment
42. Deane, the other general parners and the requisite number of SCA limited
partners executed the Sixteenth Amendment to the Second Amended and Restated Agreement of
Limited Partnership for SCA (the "Sixteenth Amendment") in or about 2003. Pursuant to the
Sixteenth Amendment, the MGP's portion of the residual interest in SCA was increased from what
previously had been approximately 10% to 19.9%. At the Deanes' request, and for what they
claimed was for estate-planning purposes, the limited and general partners of SCA agreed that
the 19.9% residual interest would be divided as follows: 1 % of the MGP's residual interest
would be distributed to Deane and 18.9% t,) SKI.
43. The MGP was entitled to a 1 % interest in SCA (and SKI to a 0% interest)
until certain amounts -- primarily the parners' net equity contributions to SCA, totaling
approximately $30 milion -- were repaid. After such amounts were paid, the MGP and SKI's
residual interests would be triggered, and they would received 19.9% of the allocation of profits,
distribution of cash flow and sale/refinancing distribution from SCA thereafter.
44. In 2004, Deane suffered a stroke. Since that time, although Deane has
remained active in the business, Carol Deane and other Deane family members (including
nephew Curt Deane and Carol Deane's sister, Mary Clarke) have frequently taken actions on his
behalf, including in his performance of duties as MGP, and have been actively involved in the
operation of Starrett City. Carol Deane has worked out of Disque Deane's MGP offce for many
years, and starting in 2004, Mary Clarke and Curt Deane commenced working from that office as
welL. Curt Deane and Clarke are both directors and officers of SCI and managers of St. Gervais.
Clarke is also an employee of SCA (in at least one year, earning compensation of $250,000), a
member of Preservation and a member of St. Gervais.
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45. After Deane's stroke, pressure from the limited partners intensified on the
Deane family to confirm in writing its succession plan and the management incentive
arrangement that had been promised to the management team, including Plaintiffs. The Deanes'
attorneys commenced efforts to reduce the agreement with Plaintiffs to writing.
The Preservation Agreement and Assignments
46. Preservation was created as a vehicle through which the MGP and SKI
would share their economic interest in SCA with the Plaintiffs and others. The Limited Liability
Company Agreement of Starrett City Preservation LLC (the "Preservation Agreement") was
entered into as of January 1, 2006, and signed by all of the members of Preservation, by SKI and
by Deane as MGP. (A copy of the Preservation Agreement is attached hereto as Exhibit 1.)
Preservation has six members: Rudman, Kuplesky, Carol Deane, Mary Clarke, St. Gervais, and
another member of the management team, G. Martin Fell ("Fell"). Exhibit A to the Preservation
Agreement provides that Rudman has 15.01 % of the Membership Shares, Kuplesky and Fell
each have 11.63%, and the Deane family (St. Gervais (45.1%), Carol Deane (14.13%) and
Clarke (2.5%)) holds the remaining 61.73% of the Membership Shares.
47. Carol Deane is the Managing Member of Preservation. Carol Deane
(individually and as the Operating Manager and member of St. Gervais) also controls the
majority ofthe membership interests in Preservation and the Board of Preservation.
48. The Preservation Agreement functions in the following manner: The
management team (Rudman, Kuplesky and Fell) owns approximately 38% of Preservation, and
the Deane family owns the remaining approximately 62%. The MGP and SKI executed
assignments by which they assigned their economic interests in SeA to Preservation. They
agreed to deliver such interests to Preservation, which in turn would make distributions to its
members in accordance with designated sharing ratios. Thus, via Preservation, the Plaintiffs
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would receive a portion of the general partners' interests in SeA, Fell would get his portion, and
the Deane family would keep the rest.
49. Section 1.3 of the Preservation Agreement explains the purpose of
Preservation, and provides in relevant part as follows:
"The initial purpose of the Company (Preservation) wil be to
provide its Members with a beneficial interest in all payments
payable by Starrett eity Associates L.P. or its successors ("SeA")
to its managing general partner ("MGP") and to Salt Kettle, LLe
("SKI"), in respect of the MGP's economic interest in seA ("the
"MGP Interest") and SKI's economic interest in SCA (the "SKI
Interest") . . . in each case on the terms and conditions, and subject
to the limitations, set forth herein."
50. Pursuant to the Preservation Agreement (including Section 1.7 thereof),
and concurrently with its execution, the MGP and SKI executed Omnibus Assignments and
delivered them to Preservation (the "Omnibus Assignments"). (eopies of the Omnibus
Assignments are attached hereto as Exhibits 2 and 3.) As set forth in Section 1.7 of the
Preservation Agreement, the MGP and SKI assigned to Preservation "the MGP Interest, the SKI
Interest and all payments payable by seA to the MGP and SKI in respect thereof. .." Section
1.7 further provides that "(e)ach such assignment is effective on the date hereof," and that "MGP
and SKI confirm to the eompany (Preservation) that they shall not transfer any amount of the
MGP Interest or the SKI Interest (or any part thereof) to a transferee."
51. The Omnibus Assignments accomplish the MGP's and SKI's assignment
of their economic interests in SCA to Preservation. The Omnibus Assignment provided by
Deane (the "Deane Assignment") thus states that he assigns to Preservation "all right, title and
interest of(Deane's) economic interest, as Managing General Partner, in Starrett eity Associates,
a New York limited partnership ("SeA"), including all right, title and interest in any payments
and distributions made or to be made to (Deane) in his capacity as the Managing General Partner
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of SCA ..." (the "Deane Assigned Interest"). The Omnibus Assignment provided by SKI (the
"SKI Assignment") similarly provides that SKI assigns to Preservation "all right, title and
interest that (SKI) may have or hereafter acquire in any economic interest (now or hereafter), as
the General Partner, in Starrett eity Associates, a New York limited partnership ("SeA"),
including all right, title and interest in any payments and distributions made or to be made to
(SKI) in its capacity as the General Partner of SCA . . ." (the "SKI Assigned Interest") (the
Deane Assigned Interest and the SKI Assigned Interest are collectively referred to herein as the
"Assigned Interests").
52. At the same time, St. Gervais (the sole member of SKI) provided the
Plaintiffs with an Authorization and Consent (the "Authorization"), signed by earol Deane as the
Operating Manager. In the Authorization, St. Gervais states that it "authorizes and directs Salt
Kettle to execute, deliver and enter into (1) the (Preservation Agreement), and (2) the (SKI
Assignment J" and that "St. Gervais hereby approves and consents to each of the (Preservation)
Agreement and the Assignment."
53. The Authorization was consistent with the terms of the Operating
Agreement of SKI, which provides in paragraph 8 that "The Manager(s) (earol Deane) is/are
hereby authorized to act on behalf of (SKI) and, by his/her/their act, to bind (SKI) Any person
or persons dealing with (SKI) shall not be required to inquire into the authority of the Manager(s)
to act for and bind (SKI)."
54. Upon the receipt of payments from the MGP or SKI, Preservation is
required to distribute them to members in accordance with Section 4.2 of the Preservation
Agreement. Distributions are to be made "as soon as practicable but at least in the same calendar
year" in which payments are received by Pæservation from the MGP or SKI.
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55. Section 5.5 of the Preservation Agreement provides that, subject to
exceptions, the Sharing Ratio of a member is reduced by specified amounts (and he is subject to
removal from the Board of Preservation), if he ceases to be actively engaged on a substantially
full time basis for a Deane-related entity. As set forth therein, if a member ceases being actively
engaged for Deane-related entities in calendar year 2008 and no exception applies, his Sharing
Ratio is reduced by 70%; if he ceases being actively engaged for Deane-related entities in
calendar year 2009 and no exception applies, his Sharing Ratio is reduced by 60%.
56. A pertinent exception to the reductions set forth in Section 5.5 is as
follows: a member maintains his full Sharing Ratio without reduction ifhe ceased to be actively
engaged on a substantially full time basis for a Deane-related entity "after discussions began that
resulted in a Funding Event." A "Funding Event" (as defined in paragraph 3.3 of the
Preservation Agreement) is "the distribution to Members, in accordance with their then current
Sharing Ratios (taking into account all prior changes in Sharing Ratios provided for in Section V
. . .) ofat least $10,000,000 in aggregate distributions pursuant to Section 4.2(iv)." As explained
in paragraph 3.3, a Funding Event includes, among other things, "the full distribution from the
proceeds of a substantial refinancing" of Starrett eity.
57. Commencing in 2006 and continuing each year thereafter, a footnote has
appeared in the audited SCA/SCI eonsolidated Financial Statements reflecting the existence of
the Preservation Agreement and the Omnibus Assignments. For example, footnote 1 to each of
the financial statements through 2008 stated: "In the event of a sale or refinancing of Sei, the
MGP and a general partner (Salt Kettle, LLe) that obtains an economic interest upon such an
event, are entitled to a 19.9% total residual economic interest. ... Salt Kettle, LLe is owned by
the MGP and parties related to the MGP. The MGP and Salt Kettle, LLe have assigned their
18
interests to Starrett eity Preservation LLe, an entity owned by parties related to the MGP and
certain members of the Partnership's management team." Iris Sutz, SeA's controller and a
member of St. Gervais, assisted with the preparation of these financial statements since 2006.
Each year, Deane executed letters on behalf of the managing general partner to SeA/SeI's
auditors representing that the Consolidated Financial Statements were complete and accurate.
58. The SeA/Sei eonsolidated Financial Statements are distributed annually
to all directors of SCI, including earol Deane, Disque Deane, Mary elarke and eurt Deane, and
to all limited and general partners of SCA, including SKI and St. Gervais. These financial
statements have also been distributed to, and relied upon by, governmental regulators, lenders
and limited partners, including in connection with the Refinancing, discussed below.
59. By operation of the Deane Assignment and the SKI Assignment, all of the
economic interest of the MGP and SKI in the 19.9% residual interest in seA was assigned to,
and thus belongs to, Preservation.
Efforts To Achieve A Sale or Reflnancingof Starrett City
60. Beginning in or about 2005, the Plaintiffs engaged in considerable efforts
to enable SCA to enter into a transaction that would allow SeA to access the equity that had built
up in the property since the 1970s. The sale or refinancing of Starrett eity, among other options,
were discussed between and among the MOP (including through Carol Deane, Mary Clarke, and
eurt Deane), Plaintiffs, governental agencies and officials, and others.
61. In 2006, the MGP, with Plaintiffs' assistance, undertook a significant sales
effort. Brokers were hired to assist with the sale process. The MGP and his agents prepared and
circulated a marketing prospectus; distributed solicitations to hundreds of prospective
purchasers; obtained multiple rounds of bids; and negotiated with potential buyers as well as
19
multiple city, state and federal regulatory bodies involved with Starrett eity. Plaintiffs assisted
and participated in substantially all aspects of these efforts.
62. During this time, Plaintiffs not only continued their usual management
responsibilities, but also provided extraordinary efforts in connection with the sale process.
Among other things, they provided advice and background information to the owners, their
attorneys and agents, potential buyers and their advisors, and bankers (including Wachovia);
gathered substantial materials to facilitate the due diligence process and created virtual data
rooms for same; conducted tours of the facility for potential buyers; and participated in meetings
with local, state and federal regulators. They also prepared and fied the necessary fiings with
governental agencies to remove Starrett City from housing regulations, and prepared and
circulated the required notices to tenants regarding same.
63. As a result of this saies effort, in or about February 2007 the MGP
accepted an offer at a sale price of $1.3 billion, subject, among other things, to obtaining
regulatory approval for the sale. In the draft sale contract, Plaintiffs were identified as the
persons whose knowledge was relevant for purposes of the owner's representations and
warranties. Negotiations proceeded among and between the
Preview
FILED: NEW YORK COUNTY CLERK 10/06/2010 INDEX NO. 650159/2010 NYSCEF DOC. NO. 19 RECEIVED NYSCEF: 10/06/2010 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK --- - ---- --- -- - ---- - -- -- - -- - - -- -- -- -- - - - - - - - -- - -- - -- -- - --- - - - -- - - -- x HARVEY RUDMAN and HAROLD KUPLESKY, Index No. 650159110 on Behalf of Each of Them Individually And On Behalf Of Starrett City Preservation LLC, Derivatively, Plaintiffs, SECOND AMENDED COMPLAINT against - CAROL GRAM DEANE, DISQUE D. DEANE, SALT KETTLE LLC, ST. GERVAIS LLC, STARRETT CITY PRESERVATION LLC, DD SPRING CREEK LLC, SK SPRING CREEK LLC, SPRING CREEK PLAZA LLC, DD SHOPPING CENTER LLC and SK SHOPPING CENTER LLC, Defendants. -- - - -- - - --- - -- - -- - - -- -- - - - - - -- -- - - -- - - - - - - - - - - - - -- - - - - - --- - - --- - - - x Plaintiffs Harvey Rudman and Harold Kuplesky, by their attorneys Golenbock Eiseman Assor Bell & Peskoe LLP, for their second amended complaint, individually and derivatively on behalf of Starrett City Preservation LLC, against the defendants, allege as follows: Preliminary Statement 1. This case arises from the wrongful and self-serving conduct of Carol Deane and Disque Deane (the "Deanes") in connection with the recent refinancing of the Starrett City housing complex in Brooklyn, a regulated housing facility and one of the largest and most successful federally-funded housing complexes in the nation. The Deanes, who are married, are wealthy individuals who have amassed extensive real estate and other holdings. Each of the Deanes is highly sophisticated financially. . Through a web of limited partnerships and limited liability companies, the Deanes exercise co~trol over Starett City. 2. For decades, Plaintiffs served as principal members of the management team for Starrett City. Harvey Rudman served as part of management, including as President, for more than 20 years, and Harold Kuplesky served as the President of the co-managing agent of Starrett City and the owner's representative for the complex for 10 years. Rudman and Kuplesky brought decades of pertinent experience to the management and operation of Starrett City. 3. Several years ago, the limited partners in Starrett City Associates LP ("SCA"), the partnership that beneficially owns Starrett City, began to pressure the Deanes, and in particular, Disque Deane, to relinquish his position as Managing General Partner of SCA. Several key issues were facing SCA, including that SCA was in a position to try to sell or refinance Starrett City, which would enable the limited and general partners of Starrett City to enjoy the considerable equity that had buil~ up in the complex since its development decades earlier. 4. To enlist Plaintiffs in their effort to retain the Managing General Partner position, the Deanes offered them a management incentive agreement, pursuant to which Plaintiffs would assist with efforts to sell or refinance Starett City, and the Deanes would compensate Plaintiffs out of the general partners' economic interest in SCA. SCA agreed to this arrangement, and even increased the general partners' share of certain distributions under the SCA partnership agreement in order to fund the anticipated incentive payments to the Plaintiffs. 5. The vehicle that was set up to implement this arrangement was a limited liability company called Starrett City Preservation LLC ("Preservation"). Each of the Plaintiffs was given a membership interest in Preser\iation, and a series of agreements were signed under which the general partners (Deane and a Deane-related entity, defendant Salt Kettle LLC 2 ("SKI")) assigned their economic interests in SCA to Preservation. The clear purpose of the agreements, all of which were prepared by the Deanes' lawyers and signed contemporaneously, was to grant Plaintiffs the right to share in the upside created by such a sale or refinancing transaction. 6. After years of effort, on December 17,2009, a $531.4 milion refinancing of Starrett City was completed with much publicity and fanfare. The Deanes and the entities they control have received cash and other benefits worth tens of millions of dollars from this transaction. But rather than comply with their obligations, and pay the approximately $15,000,000 clearly owed to Plaintiffs individually and far more to Preservation itself, Defendants have chosen to breach the agreements, and keep for themselves much of what rightfully belongs to Plaintiffs. 7. The Defendants' refiisal to pay the amounts plainly owing to Plaintiffs is a clear breach of their contractual and fiduciary obligations to Plaintiffs. More than that, by blatantly refusing to comply with their obligations to the management team that served the Deanes and Starrett City loyally and profes:3ionally for decades -- with no justification other than that they have the economic muscle to strong-arm others -- Plaintiffs demonstrate that their actions all along have been in bad faith. Plaintiffs are entitled to the full amount owed to them under the relevant agreements, plus punitive damages based on the Deanes' intentional and deliberate misconduct. Ownership Structure of Starrett City 8. SCA is a limited partnership that was organized for the purpose of acquiring, developing, constructing and operating Starrett City, and is the beneficial owner of Starrett City. Starett City, Inc. ("SCI") is a Limited Profit Housing Corporation under Article 2 3 of the New York State Private Housing Finance Law, and it holds title to and operates Starrett City on behalf of SCA. 9. Deane became the Managing General Partner of SCA in 1985 ("MGP") and continued in that position until on or about December 15,2009, when Deane transferred his interests and obligations as Managing General Partner to a newly-created affiiated entity, defendant DO Spring Creek LLC ("DD/SCA"). 1 O. The other general p~rtner of SCA commencing in or about 1985 was SKI. On or about December 15,2009, SKI transferred its interests and obligations as general parner of SCA to a new-created affiliated entity, defendant SK Spring Creek LLC ("SK/SCA"). SKI has one member, a Deane-family limited liability company known as defendant St. Gervais LLC ("St. Gervais"). 11. There are more than 200 limited partner interests in SCA. Approximately one-third of the limited partner interests in SCA are held by Deane family members or entities controlled by them (including St. Gervais, the largest limited partner in SCA). 12. Preservation is a separate entity that was established solely as a means of enabling the general partners (the MGP and SKI) to share their economic interests in SCA with the management team of Starrett City, including Plaintiffs. The Parties 13. Plaintiff Harvey Rudman ("Rudman") is an individual residing in the County of New York, State of New York. 14. Plaintiff Harold Kuplesky ("Kuplesky") is an individual residing in the State of Connecticut. 15. Defendant Carol Gram Deane ("Carol Deane") is an individual residing at 14 Walnut Street, Boston, Massachusetts and 163-165 East 63rd Street, New York, New York. 4 Carol Deane is Deane's wife and has served with him for years to fulfill his role as MGP, including as co-chairperson of the MGP. Carol Deane is also the managing member of Preservation; the manager of SKI; and the operating manager and a member of St. Gervais. Carol Deane is also a director and officer of SCI and the chairwoman of the Starrett Management Committee of SCI, and an offcer of SCA. 16. Defendant Disque D. Deane ("Deane") is an individual residing at the same addresses as Carol Deane in the Commonwealth of Massachusetts and in the County of New York, State of New York. Deane is (directly or indirectly) the managing general partner of SCA and is the husband of Carol Deane. Deane, his family members, and entities owned and controlled by them (including St. Gervais) own more than 32% of the limited partnership interests in SCA. Deane gained such a substantial share of Starrett City by acquiring interests from other limited partners after Deane was MGP, and for far less than the MGP's believed was the value of such interests. The Deane family also owns approximately two-thirds of the membership interests in Preservation, and c,mprise nearly all of the members of St. Gervais. 17. Defendant SKI is a Emited liability company formed under the laws of the State of New York, with its principal place of business located at 150 East 58th Street, 23rd Floor, New York NY 10155. SKI was a general partner ofSCA until December 15,2009, and is an affiliate of SK/SCA. The sole member of SKI is St. Gervais. Carol Deane is the manager of SKI. 18. Defendant St. Gervais is a limited liability company formed under the laws of the State of Delaware, with its principal place of business located at c/o Westbroke Ltd., Richmond House, 12 Par-la-Vile Road, PO Box HM 1022, Hamilton, HM DX, Bermuda, and its agent for service of process is The Prentice-Hall Corporation System, Inc., 1013 Centre Road, 5 Wilmington, Delaware 19805. St. Gervais is the largest member of Preservation, is the sole member of SKI and is the largest limited partner of SCA. Carol Deane (individually or on behalf of their children) owns 92% of St. Gervais, and another 6% is owned by other Deane family members. Carol Deane is the operating manager of St. Gervais. 19. Defendant Preservation is a limited liability company formed under the laws of the State of New York, with its principal place of business located at 150 East 58th Street, 23rd Floor, New York NY 10155. As reflected in SCA's internal records and tax fiings, Preservation is listed as a limited partner of SCA (limited partner number 286) without a specified percentage interest. 20. Defendant DD/SCA, a Delaware limited liability company with its principal place of business in New York, New York, has been the managing general partner of SCA since on or about December 15, 2009, when Deane assigned his interests and obligations as managing general partner of SCA to his affiiate, DD/SCA. Carol Deane is Vice President of DD/SCA. 21. Defendant SK/SCA, a Delaware limited liability company with its principal place of business in New York, New York, has been a general partner ofSCA since on or about December 15,2009, when SKI as~igned its interests and obligations as general partner to its affiliate, SK/SCA. Carol Deane is President of SK/SCA. 22. Defendant Spring Creek Plaza LLC ("Spring Creek") is a Delaware limited liability company formed in or about November 2009 with its principal place of business in New York, New York. As discussed below, in December 2009 as part of the Refinancing transaction, SCA transferred certain parcels of land, including parcels referred to as the "Shopping Center Parcel" and the "Vacant Land" parcels, to Spring Creek. In connection with 6 that transfer, each of the general partners and limited partners of SCA received, and now holds, directly or indirectly, the same ownership interests in Spring Creek that each holds in SCA. DO Shopping Center LLC (described below) is the Managing Member of Spring Creek. Carol Deane initially was the Vice-President, and is now the President, of Spring Creek. 23. Defendant DO Shopping Center LLC ("DD/Shopping") is a Delaware limited liability company formed in or about November 2009 with its principal place of business in New York, New York. DD/Shopping is the Managing Member of Spring Creek. Deane is the sole member ofDD/Shopping. DD/Shopping holds a 1 % interest in Spring Creek which corresponds to Deane's 1 % general partner interest in SCA (discussed further below). 24. Defendant SK Shopping Center LLC ("SK/Shopping") is a Delaware limited liability company formed in or about November 2009 with its principal place of business in New York, New York. SKI is the sole member of SK/Shopping. SK/Shopping holds an 18.9% interest in Spring Creek which corresponds to SKI's and, later, SK/SCA's, 18.9% interest in SCA (discussed further below). Jurisdiction and Venue 25. This Court has personal jurisdiction over the defendants pursuant to CPLR § 301 and/or § 302. 26. Venue is proper in New York County pursuant to CPLR § 503. Factual Background 27. The Starrett City apartment complex (also known as Spring Creek Towers) is a regulated, mixed income housing development located in Brooklyn. This 46 building complex houses 12,000 residents, sits on 140 acres and is the nation's largest federally- assisted property. Starrett City has its own power plant, armed security force, a shopping center including medical offces, 8 parking garages, health and fitness facilities, and several schools, 7 parks and community centers. SCI employs more than 400 people. The majority of residents receive federal or local housing assistance. 28. For decades, Plaintiffs served as key management personnel for Starrett City. Harvey Rudman, a Certified Public Accountant and a Certified Management Accountant, was recruited by Deane in 1982 to work for various Deane-related entities, and Rudman provided services to Starrett City even before Deane was the MGP. Deane recruited him not only for his financial background and real estate development experience, but for his first hand experience gained from previously residing in another large regulated housing complex. Rudman served as the President and Chief Operating Officer of SCI for 20 years, from 1989 through 2009. 29. Rudman assisted De'.ne with substantially every aspect of his tasks as MGP of Starrett City, including financial, ;egal, and operational elements. Among other things, for decades Rudman served as the point person and liaison for the MGP and SCA with limited partners; attorneys and accountants for SCA, the MGP and SCI; insurance brokers; regulatory agencies; actuaries; the managing agent for Starrett City; and more. Rudman was engaged in, among other things, (i) strategic planning for Starrett City (including in connection with efforts to privatize, refinance and/or sell the complex), (ii) supervising the management and operations of Starrett City (including assisting accountants with the preparation of budgets, financial statements and other financial matters for SCI and SCA, handling major issues affecting the physical plant of Starrett City, conducting major purchasing negotiations for Starrett City, and overseeing the development of real estate a.djacent to Starrett City); (iii) supervising the activities of the managing agent for Starrett City; (ivy reporting to, monitoring, and negotiating with federal and state regulators to obtain and maintain three different and complex subsidy programs; 8 and (v) managing the affairs and business of SCA, including reporting to more than 200 limited partnership interests, and negotiating and obtaining the anual statutory dividend for SCA. Rudman also participated in the management of other regulated housing developments and real estate ventures owned in whole or in part by Deane, including significant involvement in the privatization and refinancing of the Phipps Plaza West complex. 30. Kuplesky spent 35 years working in affordable housing prior to being recruited by Deane in 1999 to work for Starrett City and other affordable housing projects owned in part by Deane. During his 25 years employed by governent agencies and 10 years in private financial institutions, Kuplesky had gained considerable experience with New York state and local housing programs and financing mechanisms. He served Deane in dual capacities at first, assisting with the subsidized Phipps Plaza West complex as well as Starrett City, and thereafter focused primarily on Starrett City. 31. Kuplesky served as the President and part owner of Cork Management LLC, ("Cork") which was the Deane-controlled co-managing agent for Starrett City, and also served as the Owner's Representative. For Starrett City (as well as Phipps Plaza), Kuplesky used his familiarity with governental agencies, extensive experience with the housing programs and financing mechanisms, and experience with tenant issues to, among other things, participate in the strategic planning for the projects; assist with efforts to privatize, refinance, and sell the projects; serve as a liaison between the owners and several regulatory agencies on financial and other matters; serve as a liaison between the owners and tenants, including in connection with privatization, sale and refinancing efforts; and serve as a liaison with the limited partners of such projects. Kuplesky was also involved in day to day management issues at the Starrett City complex itself, such as operational issues at the power plant. 9 32. Rudman and Kuplesky had such a high level of institutional knowledge about the financing, regulation, legal structure, and facilities of Starrett City that in connection with the potential sales of the complex in 2007 and 2008 discussed below, they (and not Deane or anyone else) were identified in draft sale contracts as the persons whose knowledge was pertinent for purposes of the owner's representations and warranties made in the sale contracts. 33. Each of Carol Deane and Deane is sophisticated and experienced in financial matters and real estate investments generally. They (directly and through domestic and foreign trusts, joint ventures and corporations and other entities, such as foreign entities SCI Maya and SCI St. Gervais and foreign trusts Patrick Deane Intervivos Trust (BVI), Deane Family Discretionary Trust (BVI), and Peter Deane Trust (Guernsey)) own real estate in Bermuda; Paris, France; Bolivia; New Y or.ì(; Boston, Massachusetts; New Hampshire; and East Hampton, New York. The Deanes also ov.n partnership interests in many other real estate ventures (including significant holdings in a gold mine in Ecuador), and a fleet of railway hopper cars. Deane served as a senior general partner of an investment bank in New York for thirty years, and as the Founder and Chairman of Corporate Property Investors, Inc. (now part of Simon Property Group), both of which are multi-bilion dollar operations. He has invested in, and aggregated other investors for, numerous real estate ventures, including other publicly supported housing complexes like Starrett City. Carol Deane has acted on behalf of Deane in his role as MGP for more than a decade, and increased her involvement since 2004 when Deane suffered a stroke. She serves as a director for SCI, and serves on the board of directors or as the manager of numerous other family-owned investment vehicles and businesses. Carol Deane is an owner (together with St. Gervais) of various real estate ventures in the United States and abroad, including one of the largest (over 160,000 acres) privately owned soybean and cattle 10 farming operations in South America, which farms are held through entities Bolfarm S.R.L., Santa Anita de los Robles, S.A., Campos del Este S.R.L., Agropecuaria Carol, Estancia Carol, Estancia M. Letticia and Estancia Carlanne. Since Carol Deane and various Deane entities acquired ownership in the mid-1990's using approximately $50 million from off-shore accounts and foreign trusts, these farming operations have generated off-shore profits aggregating more than $70 milion. The Deanes' net worth (excluding off-shore trusts worth nearly comparable amounts) exceeds $200 milion; Carol Deane's net worth alone exceeds $100 milion. 34. Since at least 1985, Deane has at all times retained control over SCA and SCI, and in fact frequently bragged about his dictatorial control and methods. He has made all financial decisions with regard to Starrett City and other Deane-family entities, including in connection with all tax, financial and compensation matters. Background To The Management Incentive Agreement At Issue 35. Beginning in or about 2000, when Deane was approximately 80 years old, limited partners of SCA began questioning his ability to remain as MGP. They expressed concern about management stability and a succession plan for the MGP. At the same time, SCA was facing significant financial and regulatory hurdles and opportunities. The MGP needed to investigate ways to protect the limited partners from a substantial anticipated increase of non- cash taxable income, and also to explore a sale of the complex, a refinancing, or another means of allowing the limited and general partners of SCA to realize some of the equity that had built up in Starrett City since its development in the 1970s. 36. Carol Deane and Deane, for their part, had no intention of relinquishing control over Starrett City. In addition to maintaining control over Starrett City and receiving annual dividends, the Deanes have utilized the MGP position to their personal financial 11 advantage. For example, the Deanes use SeA and SCI funds and assets to pay certain of their personal expenses (such as to acquire a new car and to pay hundreds of thousands of dollars annually for drivers for family members), use SCA and SCI employees for their own residential renovations, and receive annually over $1 milion in payments from the managing agent of SCI (as a quid pro quo for allowing the agent's staff to be on SCI's payroll) that is used in part to support the offce operations of many Deane entities and to make cash payments to entities they control. 37. Faced with pressure from the limited partners, the Deanes came up with a means not only to maintain control, but to gain a greater share of anticipated future proceeds from Starrett City. Unbeknownst to the Plaintiffs, they used the Plaintiffs as pawns in this scheme. 38. Carol Deane and Deane knew that Rudman and Kuplesky were well known among the limited partners and oth,:r representatives and professionals of SCA and SCI, and that they were viewed as fully competent and reliable. Moreover, the Plaintiffs were not members of the Deane family, and thus were viewed as objective by these constituencies. Carol Deane and Deane determined to use their relationship with the Plaintiffs to sell themselves to the limited partners: they announced to the Plaintiffs and limited partners of SCA that if Deane remained as MGP, they would create -- anò the general partners (MGP and SKI) would fund -- a management incentive program for the Plaintiffs to ensure their continued service to the MGP and their assistance with the upcoming sale and refinancing efforts. 39. Moreover, Carol Deane and Deane used Plaintiffs' reputation and unique skill set, and the management incentive agr'eement with them, to persuade the limited partners of SCA to support an increase in the MGP's and SKI's aggregate share of the residual interest in 12 SCA from 10% to 19.9%. Specifically, Carol Deane and Deane told the limited partners that the increased share would be used to fund the incentive compensation payments to the management team. 40. It took a full two year effort -- from 2001 to 2003 -- for Carol Deane and Deane to persuade the limited partners to consent to this proposal. Carol Deane and Deane told limited partners orally and in writing, for example, that agreeing to the proposed amendment to the SCA partnership agreement that would increase the general partners' share of the residual interest in SCA "wil compensate my office management for the future very difficult period." Deane also wrote to the limited partners that the amendment would "create(J a residual incentive for the SCA staff' and is "in your interest because it incentivizes the SCA staff to develop creative proposals for privatization." Deane authorized Rudman to advise other SCA partners that Deane "wil not personally benefit from this amendment but it wil serve as the basis of assuring continuity of management." Stil other partners were told by Carol Deane that "out of the GP's (general partners') position, Rudman and his team would be entited to share in the future sale or refinancing proceeds." At least one limited partner in turn expressed to Carol Deane, Deane and Rudman his desire "for Harvey Rudman and his team to have a real incentive to produce a profitable sale or refinancing .)f Starrett," and that he was "interested in giving maximum motivation to (Rudman) and his' colleagues rather than to (Deane J" with the proposed amendment. 41. Ultimately, SCA and the Plaintiffs agreed to the arrangement proposed by Carol Deane and Deane. These agreements are reflected in several written documents, which are discussed below. 13 The Sixteenth Amendment 42. Deane, the other general parners and the requisite number of SCA limited partners executed the Sixteenth Amendment to the Second Amended and Restated Agreement of Limited Partnership for SCA (the "Sixteenth Amendment") in or about 2003. Pursuant to the Sixteenth Amendment, the MGP's portion of the residual interest in SCA was increased from what previously had been approximately 10% to 19.9%. At the Deanes' request, and for what they claimed was for estate-planning purposes, the limited and general partners of SCA agreed that the 19.9% residual interest would be divided as follows: 1 % of the MGP's residual interest would be distributed to Deane and 18.9% t,) SKI. 43. The MGP was entitled to a 1 % interest in SCA (and SKI to a 0% interest) until certain amounts -- primarily the parners' net equity contributions to SCA, totaling approximately $30 milion -- were repaid. After such amounts were paid, the MGP and SKI's residual interests would be triggered, and they would received 19.9% of the allocation of profits, distribution of cash flow and sale/refinancing distribution from SCA thereafter. 44. In 2004, Deane suffered a stroke. Since that time, although Deane has remained active in the business, Carol Deane and other Deane family members (including nephew Curt Deane and Carol Deane's sister, Mary Clarke) have frequently taken actions on his behalf, including in his performance of duties as MGP, and have been actively involved in the operation of Starrett City. Carol Deane has worked out of Disque Deane's MGP offce for many years, and starting in 2004, Mary Clarke and Curt Deane commenced working from that office as welL. Curt Deane and Clarke are both directors and officers of SCI and managers of St. Gervais. Clarke is also an employee of SCA (in at least one year, earning compensation of $250,000), a member of Preservation and a member of St. Gervais. 14 45. After Deane's stroke, pressure from the limited partners intensified on the Deane family to confirm in writing its succession plan and the management incentive arrangement that had been promised to the management team, including Plaintiffs. The Deanes' attorneys commenced efforts to reduce the agreement with Plaintiffs to writing. The Preservation Agreement and Assignments 46. Preservation was created as a vehicle through which the MGP and SKI would share their economic interest in SCA with the Plaintiffs and others. The Limited Liability Company Agreement of Starrett City Preservation LLC (the "Preservation Agreement") was entered into as of January 1, 2006, and signed by all of the members of Preservation, by SKI and by Deane as MGP. (A copy of the Preservation Agreement is attached hereto as Exhibit 1.) Preservation has six members: Rudman, Kuplesky, Carol Deane, Mary Clarke, St. Gervais, and another member of the management team, G. Martin Fell ("Fell"). Exhibit A to the Preservation Agreement provides that Rudman has 15.01 % of the Membership Shares, Kuplesky and Fell each have 11.63%, and the Deane family (St. Gervais (45.1%), Carol Deane (14.13%) and Clarke (2.5%)) holds the remaining 61.73% of the Membership Shares. 47. Carol Deane is the Managing Member of Preservation. Carol Deane (individually and as the Operating Manager and member of St. Gervais) also controls the majority ofthe membership interests in Preservation and the Board of Preservation. 48. The Preservation Agreement functions in the following manner: The management team (Rudman, Kuplesky and Fell) owns approximately 38% of Preservation, and the Deane family owns the remaining approximately 62%. The MGP and SKI executed assignments by which they assigned their economic interests in SeA to Preservation. They agreed to deliver such interests to Preservation, which in turn would make distributions to its members in accordance with designated sharing ratios. Thus, via Preservation, the Plaintiffs 15 would receive a portion of the general partners' interests in SeA, Fell would get his portion, and the Deane family would keep the rest. 49. Section 1.3 of the Preservation Agreement explains the purpose of Preservation, and provides in relevant part as follows: "The initial purpose of the Company (Preservation) wil be to provide its Members with a beneficial interest in all payments payable by Starrett eity Associates L.P. or its successors ("SeA") to its managing general partner ("MGP") and to Salt Kettle, LLe ("SKI"), in respect of the MGP's economic interest in seA ("the "MGP Interest") and SKI's economic interest in SCA (the "SKI Interest") . . . in each case on the terms and conditions, and subject to the limitations, set forth herein." 50. Pursuant to the Preservation Agreement (including Section 1.7 thereof), and concurrently with its execution, the MGP and SKI executed Omnibus Assignments and delivered them to Preservation (the "Omnibus Assignments"). (eopies of the Omnibus Assignments are attached hereto as Exhibits 2 and 3.) As set forth in Section 1.7 of the Preservation Agreement, the MGP and SKI assigned to Preservation "the MGP Interest, the SKI Interest and all payments payable by seA to the MGP and SKI in respect thereof. .." Section 1.7 further provides that "(e)ach such assignment is effective on the date hereof," and that "MGP and SKI confirm to the eompany (Preservation) that they shall not transfer any amount of the MGP Interest or the SKI Interest (or any part thereof) to a transferee." 51. The Omnibus Assignments accomplish the MGP's and SKI's assignment of their economic interests in SCA to Preservation. The Omnibus Assignment provided by Deane (the "Deane Assignment") thus states that he assigns to Preservation "all right, title and interest of(Deane's) economic interest, as Managing General Partner, in Starrett eity Associates, a New York limited partnership ("SeA"), including all right, title and interest in any payments and distributions made or to be made to (Deane) in his capacity as the Managing General Partner 16 of SCA ..." (the "Deane Assigned Interest"). The Omnibus Assignment provided by SKI (the "SKI Assignment") similarly provides that SKI assigns to Preservation "all right, title and interest that (SKI) may have or hereafter acquire in any economic interest (now or hereafter), as the General Partner, in Starrett eity Associates, a New York limited partnership ("SeA"), including all right, title and interest in any payments and distributions made or to be made to (SKI) in its capacity as the General Partner of SCA . . ." (the "SKI Assigned Interest") (the Deane Assigned Interest and the SKI Assigned Interest are collectively referred to herein as the "Assigned Interests"). 52. At the same time, St. Gervais (the sole member of SKI) provided the Plaintiffs with an Authorization and Consent (the "Authorization"), signed by earol Deane as the Operating Manager. In the Authorization, St. Gervais states that it "authorizes and directs Salt Kettle to execute, deliver and enter into (1) the (Preservation Agreement), and (2) the (SKI Assignment J" and that "St. Gervais hereby approves and consents to each of the (Preservation) Agreement and the Assignment." 53. The Authorization was consistent with the terms of the Operating Agreement of SKI, which provides in paragraph 8 that "The Manager(s) (earol Deane) is/are hereby authorized to act on behalf of (SKI) and, by his/her/their act, to bind (SKI) Any person or persons dealing with (SKI) shall not be required to inquire into the authority of the Manager(s) to act for and bind (SKI)." 54. Upon the receipt of payments from the MGP or SKI, Preservation is required to distribute them to members in accordance with Section 4.2 of the Preservation Agreement. Distributions are to be made "as soon as practicable but at least in the same calendar year" in which payments are received by Pæservation from the MGP or SKI. 17 55. Section 5.5 of the Preservation Agreement provides that, subject to exceptions, the Sharing Ratio of a member is reduced by specified amounts (and he is subject to removal from the Board of Preservation), if he ceases to be actively engaged on a substantially full time basis for a Deane-related entity. As set forth therein, if a member ceases being actively engaged for Deane-related entities in calendar year 2008 and no exception applies, his Sharing Ratio is reduced by 70%; if he ceases being actively engaged for Deane-related entities in calendar year 2009 and no exception applies, his Sharing Ratio is reduced by 60%. 56. A pertinent exception to the reductions set forth in Section 5.5 is as follows: a member maintains his full Sharing Ratio without reduction ifhe ceased to be actively engaged on a substantially full time basis for a Deane-related entity "after discussions began that resulted in a Funding Event." A "Funding Event" (as defined in paragraph 3.3 of the Preservation Agreement) is "the distribution to Members, in accordance with their then current Sharing Ratios (taking into account all prior changes in Sharing Ratios provided for in Section V . . .) ofat least $10,000,000 in aggregate distributions pursuant to Section 4.2(iv)." As explained in paragraph 3.3, a Funding Event includes, among other things, "the full distribution from the proceeds of a substantial refinancing" of Starrett eity. 57. Commencing in 2006 and continuing each year thereafter, a footnote has appeared in the audited SCA/SCI eonsolidated Financial Statements reflecting the existence of the Preservation Agreement and the Omnibus Assignments. For example, footnote 1 to each of the financial statements through 2008 stated: "In the event of a sale or refinancing of Sei, the MGP and a general partner (Salt Kettle, LLe) that obtains an economic interest upon such an event, are entitled to a 19.9% total residual economic interest. ... Salt Kettle, LLe is owned by the MGP and parties related to the MGP. The MGP and Salt Kettle, LLe have assigned their 18 interests to Starrett eity Preservation LLe, an entity owned by parties related to the MGP and certain members of the Partnership's management team." Iris Sutz, SeA's controller and a member of St. Gervais, assisted with the preparation of these financial statements since 2006. Each year, Deane executed letters on behalf of the managing general partner to SeA/SeI's auditors representing that the Consolidated Financial Statements were complete and accurate. 58. The SeA/Sei eonsolidated Financial Statements are distributed annually to all directors of SCI, including earol Deane, Disque Deane, Mary elarke and eurt Deane, and to all limited and general partners of SCA, including SKI and St. Gervais. These financial statements have also been distributed to, and relied upon by, governmental regulators, lenders and limited partners, including in connection with the Refinancing, discussed below. 59. By operation of the Deane Assignment and the SKI Assignment, all of the economic interest of the MGP and SKI in the 19.9% residual interest in seA was assigned to, and thus belongs to, Preservation. Efforts To Achieve A Sale or Reflnancingof Starrett City 60. Beginning in or about 2005, the Plaintiffs engaged in considerable efforts to enable SCA to enter into a transaction that would allow SeA to access the equity that had built up in the property since the 1970s. The sale or refinancing of Starrett eity, among other options, were discussed between and among the MOP (including through Carol Deane, Mary Clarke, and eurt Deane), Plaintiffs, governental agencies and officials, and others. 61. In 2006, the MGP, with Plaintiffs' assistance, undertook a significant sales effort. Brokers were hired to assist with the sale process. The MGP and his agents prepared and circulated a marketing prospectus; distributed solicitations to hundreds of prospective purchasers; obtained multiple rounds of bids; and negotiated with potential buyers as well as 19 multiple city, state and federal regulatory bodies involved with Starrett eity. Plaintiffs assisted and participated in substantially all aspects of these efforts. 62. During this time, Plaintiffs not only continued their usual management responsibilities, but also provided extraordinary efforts in connection with the sale process. Among other things, they provided advice and background information to the owners, their attorneys and agents, potential buyers and their advisors, and bankers (including Wachovia); gathered substantial materials to facilitate the due diligence process and created virtual data rooms for same; conducted tours of the facility for potential buyers; and participated in meetings with local, state and federal regulators. They also prepared and fied the necessary fiings with governental agencies to remove Starrett City from housing regulations, and prepared and circulated the required notices to tenants regarding same. 63. As a result of this saies effort, in or about February 2007 the MGP accepted an offer at a sale price of $1.3 billion, subject, among other things, to obtaining regulatory approval for the sale. In the draft sale contract, Plaintiffs were identified as the persons whose knowledge was relevant for purposes of the owner's representations and warranties. Negotiations proceeded among and between the