Preview
FILED: NEW YORK COUNTY CLERK 06/04/2010 INDEX NO. 650159/2010
NYSCEF DOC. NO. 5 RECEIVED NYSCEF: 06/04/2010
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
--- - -- --- -- --- -- -- --- -- ----- -- --- - ------ - --- ---- ------------ ---- -- )(
HARVEY RUDMAN and HAROLD KUPLESKY, Inde)( No. 650159110
on Behalf of Each of Them Individually And
On Behalf Of Starrett City Preservation LLC,
Derivatively,
Plaintiffs, AMENDED
COMPLAINT
- against -
CAROL GRAM DEANE, DISQUE D. DEANE,
SAL T KETTLE LLC, ST. GERVAIS LLC and
STARRTT CITY PRESERVATION LLC,
Defendants.
- --- ------ ---------- - ------- -- - -- - ---- --- - -- ------- --- ---- ---- --- - )(
Plaintiffs Harvey Rudman and Harold Kuplesky, by their attorneys Golenbock
Eiseman Assor Bell & Peskoe LLP, for their 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 comple)( in Brooklyn, a regulated housing facility and one of the largest and most
successful federally-funded housing comple)(es in the nation. The Deanes, who are married, are
wealthy individuals who have amassed e)(tensive 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 e)(ercise control over Starett City.
2. For decades, Plaintiffs served as principal members of the management
team for Starrett City. Harvey Rudman served as par of management, including as President, for
more than 20 years, and Harold Kuplesky served as the President of the co-managing agent of
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Starrett City and the owner's representative for the comple)( for 10 years. Rudman and Kuplesky
brought decades of pertinent e)(perience to the management and operation of Starett City.
3. Several years ago, the limited partners in Starrett City Associates LP
("SCA"), the partnership that beneficially owns Starett 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 built up in the comple)( 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 Starrett City, and the Deanes would compensate
Plaintiffs out of the general parners' economic interest in SCA. SCA agreed to this arrangement,
and even increased the general parners' share of certain distributions under the SCA parnership
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
liabilty company called Starrett City Preservation LLC ("Preservation"). Each of the Plaintiffs
was given a membership interest in Preservation, and a series of agreements were signed under
which the general partners (Deane and a Deane-related entity, defendant Salt Kettle LLC ("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
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control have received cash and other benefits worth tens of milions of dollars from this
transaction. But rather than comply with their obligations, and pay the appro)(imately
$15,000,000 clearly owed to Plaintiffs, Defendants have chosen to breach the agreements, and
keep for themselves much of what rightfully belongs to Plaintiffs.
7. The Defendants' refusal 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 Starett City loyally and professionally for decades -- with no justification other than that they
have the economic muscle to strong-ar 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 Starett City, and is the beneficial owner of
Starrett City. Starrett City, Inc. ("SCI") is a Limited Profit Housing Corporation under Article 2
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 and
continued in that position until at or about the time of the refinancing in December 2009, when
Deane transferred his legal interest as Managing General Partner to a newly created entity, DD
Spring Creek LLC ("DD"). (Deane and DD as Managing General Partner are collectively referred
to herein as "MGP.") The other general parner of SCA is SKI. SKI has one member, a Deane-
family limited liability company known as defendant St. Gervais LLC ("St. Gervais"). There are
more than 200 limited parner interests in SCA. Appro)(imately one-third of the limited partner
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interests in SCA are held by Deane family members or entities controlled by them (including St.
Gervais, the largest limited parner in SCA).
10. 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 Starett City, including Plaintiffs.
The Parties
11. Plaintiff Harey Rudman ("Rudman") is an individual residing in the
County of New York, State of New York.
12. Plaintiff Harold Kuplesky ("Kuplesky") is an individual residing in the
State of Connecticut.
13. 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.
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 of SCI and the chairwoman of the Starrett Management Committee of
SCI, and an employee of SCA.
14. 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 has been the MGP ofSCA 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 parnership 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
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appro)(imately two-thirds of the membership interests in Preservation, and comprise nearly all of
the members of St. Gervais.
15. Defendant SKI is a limited liabilty 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 is a general partner ofSCA. The sole member of SKI is St. Gervais.
Carol Deane is the manager of SKI.
16. Defendant St. Gervais is a limited liabilty 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 Bo)( HM 1022, Hamilton, HM DX, Bermuda, and its
agent for service of process is The Prentice-Hall Corporation System, Inc., 1013 Centre Road,
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.
17. 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 ta)( filings,
Preservation is listed as a limited partner of SCA (limited partner number 286) without a specified
percentage interest.
Jurisdiction and Venue
18. This Court has personal jurisdiction over the defendants pursuant to CPLR
§ 301 and/or § 302.
19. Venue is proper in New York County pursuant to CPLR § 503.
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Factual Background
20. The Starett City aparment comple)( (also known as Spring Creek Towers)
is a regulated, mi)(ed income housing development located in Brooklyn. This 46 building
comple)( houses 12,000 residents, sits on 140 acres and is the nation's largest federally-assisted
property. Starett City has its own power plant, armed security force, a shopping center including
medical offices, 8 parking garages, health and fitness facilities, and several schools, parks and
community centers. SCI employs more than 400 people. The majority of residents receive federal
or local housing assistance.
21. F or 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 e)(perience, but for his first hand e)(perience
gained from previously residing in another large regulated housing comple)(. Rudman served as
the President and Chief Operating Officer of SCI for 20 years, from 1989 through 2009.
22. Rudman assisted Deane with substantially every aspect of his tasks as MGP
of Starrett City, including financial, legal, 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 Starett 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 comple)(), (ii) supervising the management and operations of
Starett 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
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Starrett City, conducting major purchasing negotiations for Starrett City, and overseeing the
development of real estate adjacent to Starett City); (iii) supervising the activities of the
managing agent for Starrett City; (iv) reporting to, monitoring, and negotiating with federal and
state regulators to obtain and maintain three different and comple)( subsidy programs; 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 paricipated 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 comple)(.
23. 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 e)(perience 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 comple)( as well as Starrett City, and thereafter
focused primarily on Starrett City.
24. 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 familarity with governental agencies, e)(tensive e)(perience with the housing programs and
financing mechanisms, and e)(perience with tenant issues to, among other things, participate in the
strategic planing 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
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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 parners of such
projects. Kuplesky was also involved in day to day management issues at the Starrett City
comple)( itself, such as operational issues at the power plant.
25. Rudman and Kuplesky had such a high level of institutional knowledge
about the financing, regulation, legal structure, and facilties of Starett City that in connection
with the potential sales of the comple)( 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 waranties made in the sale contracts.
26. Each of Carol Deane and Deane is sophisticated and e)(perienced 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 York; Boston, Massachusetts; New Hampshire; and East Hampton, New
York. The Deanes also own parnership 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 comple)(es 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
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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 faring operations in South America, which
farms are held through entities Bolfar 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
appro)(imately $50 milion from off-shore accounts and foreign trusts, these faring operations
have generated off-shore profits aggregating more than $70 milion. The Deanes' net worth
(e)(cluding off-shore trusts worth nearly comparable amounts) e)(ceeds $200 milion; Carol
Deane's net worth alone e)(ceeds $100 milion.
27. 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 Starett City and other Deane-family entities, including in
connection with all ta)(, financial and compensation matters.
Background To The Management
Incentive Agreement At Issue
28. Beginning in or about 2000, when Deane was appro)(imately 80 years old,
limited partners of SCA began questioning his ability to remain as MGP. They e)(pressed 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 parners from a substantial anticipated increase of non-cash
ta)(able income, and also to e)(plore a sale of the comple)(, a refinancing, or another means of
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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.
29. 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 advantage.
For e)(ample, the Deanes use SCA and SCI funds and assets to pay certain of their personal
e)(penses (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 millon 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 office
operations of many Deane entities and to make cash payments to entities they control.
30. 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
Starett City. Unbeknownst to the Plaintiffs, they used the Plaintiffs as pawns in this scheme.
31. Carol Deane and Deane knew that Rudman and Kuplesky were well known
among the limited partners and other 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 parners ofSCA that if
Deane remained as
MGP, they would create -- and 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.
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32. Moreover, Carol Deane and Deane used Plaintiffs' reputation and unique
skil set, and the management incentive agreement 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
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.
33. It took a full two year effort -- from 2001 to 2003 -- for Carol Deane and
Deane to persuade the limited parners to consent to this proposaL. Carol Deane and Deane told
limited parners orally and in writing, for e)(ample, that agreeing to the proposed amendment to
the SCA parnership 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 parners that the amendment would "create() 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 entitled to share in the future sale or
refinancing proceeds." At least one limited parner in turn e)(pressed 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 of Starett," and that he was "interested in giving ma)(imum
motivation to (Rudman) and his colleagues rather than to (Deane)" with the proposed amendment.
486482.4 11
34. 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.
The Sixteenth Amendment
35. Deane, the other general parers and the requisite number of SCA limited
parners e)(ecuted the Si)(teenth Amendment to the Second Amended and Restated Agreement of
Limited Partnership for SCA (the "Si)(teenth Amendment") in or about 2003. Pursuant to the
Si)(teenth Amendment, the MGP's portion of the residual interest in SCA was increased from what
previously had been appro)(imately 10% to 19.9%. At the Deanes' request, and for what they
claimed was for estate-planing 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% to SKI.
36. 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 appro)(imately
$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.
37. 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 office for many years, and
staring in 2004, Mary Clarke and Curt Deane commenced working from that offce as welL. Curt
Deane and Clarke are both directors and offcers of SCI and managers of St. Gervais. Clarke is
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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.
38. 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
39. 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 Liabilty
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 E)(hibit 1.)
Preservation has si)( members: Rudman, Kuplesky, Carol Deane, Mary Clarke, St. Gervais, and
another member of the management team, G. Marin Fell ("Fell"). E)(hibit 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.
40. Carol Deane is the Managing Member of Preservation. Carol Deane
(individually and as the Operating Manager and member ofSt. Gervais) also controls the majority
of the membership interests in Preservation and the Board of Preservation.
41. The Preservation Agreement functions in the following maner: The
management team (Rudman, Kuplesky and Fell) owns appro)(imately 38% of Preservation, and
the Deane family owns the remaining appro)(imately 62%. The MGP and SKI e)(ecuted
assignments by which they assigned their economic interests in SCA to Preservation. They agreed
486482.4 13
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 would receive a
portion of the general parners' interests in SCA, Fell would get his portion, and the Deane family
would keep the rest.
42. Section 1.3 of the Preservation Agreement e)(plains the purpose of
Preservation, and provides in relevant par as follows:
"The initial purpose of the Company (Preservation) wil be to
provide its Members with a beneficial interest in all payments
payable by Starett City Associates L.P. or its successors ("SCA")
to its managing general partner ("MGP") and to Salt Kettle, LLC
("SKI"), in respect of the MGP's economic interest in SCA ("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."
43. Pursuant to the Preservation Agreement (including Section 1.7 thereof), and
concurrently with its e)(ecution, the MGP and SKI e)(ecuted Omnibus Assignments and delivered
them to Preservation (the "Omnibus Assignments"). (Copies of the Omnibus Assignments are
attached hereto as E)(hibits 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 SCA to the M GP 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
Company (Preservation) that they shall not transfer any amount of the MGP Interest or the SKI
Interest (or any part thereof) to a transferee."
44. 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 City Associates, a New
486482.4 14
York limited partnership ("SCA"), 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 Parner 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 City Associates, a New York limited parnership ("SCA"), including all right,
title and interest in any payments and distributions made or to be made to (SKI) in its capacity as
the General Parner of SCA . . ." (the "SKI Assigned Interest") (the Deane Assigned Interest and
the SKI Assigned Interest are collectively referred to herein as the "Assigned Interests").
45. At the same time, St. Gervais (the sole member of SKI) provided the
Plaintiffs with an Authorization and Consent (the "Authorization"), signed by Carol Deane as the
Operating Manager. In the Authorization, St. Gervais states that it "authorizes and directs Salt
Kettle to e)(ecute, deliver and enter into (1) the (Preservation Agreement), and (2) the (SKI
Assignment)" and that "St. Gervais hereby approves and consents to each of the (Preservation)
Agreement and the Assignment."
46. The Authorization was consistent with the terms of the Operating
Agreement of SKI, which provides in paragraph 8 that "The Manager(s) (Carol 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)"
47. 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
486482.4 15
Agreement. Distributions are to be made "as soon as practicable but at least in the same calendar
year" in which payments are received by Preservation from the MGP or SKI.
48. Section 5.5 of the Preservation Agreement provides that, subject to
e)(ceptions, the Sharing Ratio of a member is reduced by specified amounts (and he is subject to
removal from the Board of Preservation), ifhe 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 e)(ception applies, his Sharing
Ratio is reduced by 70%; ifhe ceases being actively engaged for Deane-related entities in calendar
year 2009 and no e)(ception applies, his Sharing Ratio is reduced by 60%.
49. A pertinent e)(ception to the reductions set forth in Section 5.5 is as follows:
amember 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 . . . ) of at least
$10,000,000 in aggregate distributions pursuant to Section 4.2(iv)." As e)(plained in paragraph
3.3, a Funding Event includes, among other things, "the full distribution from the proceeds of a
substantial refinancing" of Starett City.
50. Commencing in 2006 and continuing each year thereafter, a footnote has
appeared in the audited SCAISCI Consolidated Financial Statements reflecting the e)(istence of the
Preservation Agreement and the Omnibus Assignments. Footnote 1 to each of the financial
statements states: "In the event of a sale or refinancing of SCI, the MGP and a general partner
(Salt Kettle, LLC) that obtains an economic interest upon such an event, are entitled to a 19.9%
486482.4 16
total residual economic interest. ... Salt Kettle, LLC is owned by the MGP and parties related to
the MGP. The MGP and Salt Kettle, LLC have assigned their interests to Starrett City
Preservation LLC, an entity owned by parties related to the MGP and certain members of the
Parnership's management team." Iris Sutz, SCA's controller and a member of St. Gervais,
assisted with the preparation of these financial statements since 2006. Each year, Deane as MGP
e)(ecuted letters to SCAlSCI's auditors representing that the Consolidated Financial Statements
were complete and accurate.
51. The SCAISCI Consolidated Financial Statements are distributed annually to
all directors of SCI, including Carol Deane, Disque Deane, Mary Clarke and Curt 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, governental regulators, lenders and
limited parners, including in connection with the Refinancing, discussed below.
52. By operation of the Deane Assignment and the SKI Assignment, all of the
economic interest ofthe MGP and SKI in the 19.9% residual interest in SCA was assigned to, and
thus belonged to, Preservation.
Efforts To Achieve A Sale or Refinancing of Starrett City
53. Beginning in or about 2005, the Plaintiffs engaged in considerable efforts to
enable SCA to enter into a transaction that would allow SCA to access the equity that had built up
in the property since the 1970s. The sale or refinancing of Starrett City, among other options,
were discussed between and among the MGP (including through Carol Deane, Mary Clarke, and
Curt Deane), Plaintiffs, governental agencies and officials, and others.
54. 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;
486482.4 17
obtained multiple rounds of bids; and negotiated with potential buyers as well as multiple city,
state and federal regulatory bodies involved with Starett City. Plaintiffs assisted and participated
in substantially all aspects of these efforts.
55. During this time, Plaintiffs not only continued their usual management
responsibilities, but also provided e)(traordinary 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 baners (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 paricipated 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.
56. As a result of this sales effort, in or about Februar 2007 the MGP accepted
an offer at a sale price of $1.3 bilion, 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 MGP (including by Plaintiffs and other representatives),
regulators, and agents for the potential buyer for many months. Ultimately, in or about August
2007, the proposed sale transaction was abandoned because certain required regulatory approvals
could not be obtained by the purchaser.
57. During the second half of 2007, the MGP (including through Carol Deane,
Mary Clarke and Curt Deane), the Plaintiffs, consultants retained by the MGP (including Recap
Advisors, now known as CAS Financial Advisory Services ("CAS")), and others continued to
486482.4 18
e)(plore available options for Starett City, including privatization, a sale and a refinancing. They
undertook various analyses to determine how best to proceed. Numerous discussions took place
internally and with counsel, and meetings were held with regulators at the city, state and federal
levels concerning these options. In or about September 2007, meetings were held with the
Commissioners of several governent agencies, at which refinancing of Starrett City was
e)(plored and discussed, and the restructuring plan approved by the Government that formed the
basis for the Refinancing (discussed below) was presented to SCA and SCI.
58. Throughout early 2008, negotiations continued between the MGP
(including by Plaintiffs) and the pertinent regulators to determine a mutually agreed-upon
structure for a sale or refinancing. These negotiations culminated in a Memorandum of
Understanding ("MOD") e)(ecuted in May 2008 by SCA, SCI and three governental regulators.
59. A second sales effort was undertaken shortly thereafter, under different
terms more palatable to regulators, as set forth in the MOU. As part ofthis process, the Plaintiffs
again launched into preparations for a sale and the sales effort: among other things, they updated
and recreated the due diligence data room for prospective buyers; provided information to
prospective purchasers and their advisors about the comple)(; conducted tours of the property for
prospective purchasers; provided CAS, the MGP and its attorneys and agents with assistance and
e)(pertise to further the effort; paricipated in meetings with regulators; and worked to put the
federal subsidies in place pursuant to the MOU for a sale or refinancing.
60. Given the downturn in the economy and the change in the terms and
conditions of the sale, the first round
Preview
FILED: NEW YORK COUNTY CLERK 06/04/2010 INDEX NO. 650159/2010 NYSCEF DOC. NO. 5 RECEIVED NYSCEF: 06/04/2010 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK --- - -- --- -- --- -- -- --- -- ----- -- --- - ------ - --- ---- ------------ ---- -- )( HARVEY RUDMAN and HAROLD KUPLESKY, Inde)( No. 650159110 on Behalf of Each of Them Individually And On Behalf Of Starrett City Preservation LLC, Derivatively, Plaintiffs, AMENDED COMPLAINT - against - CAROL GRAM DEANE, DISQUE D. DEANE, SAL T KETTLE LLC, ST. GERVAIS LLC and STARRTT CITY PRESERVATION LLC, Defendants. - --- ------ ---------- - ------- -- - -- - ---- --- - -- ------- --- ---- ---- --- - )( Plaintiffs Harvey Rudman and Harold Kuplesky, by their attorneys Golenbock Eiseman Assor Bell & Peskoe LLP, for their 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 comple)( in Brooklyn, a regulated housing facility and one of the largest and most successful federally-funded housing comple)(es in the nation. The Deanes, who are married, are wealthy individuals who have amassed e)(tensive 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 e)(ercise control over Starett City. 2. For decades, Plaintiffs served as principal members of the management team for Starrett City. Harvey Rudman served as par of management, including as President, for more than 20 years, and Harold Kuplesky served as the President of the co-managing agent of 486482.4 Starrett City and the owner's representative for the comple)( for 10 years. Rudman and Kuplesky brought decades of pertinent e)(perience to the management and operation of Starett City. 3. Several years ago, the limited partners in Starrett City Associates LP ("SCA"), the partnership that beneficially owns Starett 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 built up in the comple)( 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 Starrett City, and the Deanes would compensate Plaintiffs out of the general parners' economic interest in SCA. SCA agreed to this arrangement, and even increased the general parners' share of certain distributions under the SCA parnership 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 liabilty company called Starrett City Preservation LLC ("Preservation"). Each of the Plaintiffs was given a membership interest in Preservation, and a series of agreements were signed under which the general partners (Deane and a Deane-related entity, defendant Salt Kettle LLC ("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 486482.4 2 control have received cash and other benefits worth tens of milions of dollars from this transaction. But rather than comply with their obligations, and pay the appro)(imately $15,000,000 clearly owed to Plaintiffs, Defendants have chosen to breach the agreements, and keep for themselves much of what rightfully belongs to Plaintiffs. 7. The Defendants' refusal 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 Starett City loyally and professionally for decades -- with no justification other than that they have the economic muscle to strong-ar 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 Starett City, and is the beneficial owner of Starrett City. Starrett City, Inc. ("SCI") is a Limited Profit Housing Corporation under Article 2 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 and continued in that position until at or about the time of the refinancing in December 2009, when Deane transferred his legal interest as Managing General Partner to a newly created entity, DD Spring Creek LLC ("DD"). (Deane and DD as Managing General Partner are collectively referred to herein as "MGP.") The other general parner of SCA is SKI. SKI has one member, a Deane- family limited liability company known as defendant St. Gervais LLC ("St. Gervais"). There are more than 200 limited parner interests in SCA. Appro)(imately one-third of the limited partner 486482.4 3 interests in SCA are held by Deane family members or entities controlled by them (including St. Gervais, the largest limited parner in SCA). 10. 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 Starett City, including Plaintiffs. The Parties 11. Plaintiff Harey Rudman ("Rudman") is an individual residing in the County of New York, State of New York. 12. Plaintiff Harold Kuplesky ("Kuplesky") is an individual residing in the State of Connecticut. 13. 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. 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 of SCI and the chairwoman of the Starrett Management Committee of SCI, and an employee of SCA. 14. 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 has been the MGP ofSCA 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 parnership 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 486482.4 4 appro)(imately two-thirds of the membership interests in Preservation, and comprise nearly all of the members of St. Gervais. 15. Defendant SKI is a limited liabilty 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 is a general partner ofSCA. The sole member of SKI is St. Gervais. Carol Deane is the manager of SKI. 16. Defendant St. Gervais is a limited liabilty 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 Bo)( HM 1022, Hamilton, HM DX, Bermuda, and its agent for service of process is The Prentice-Hall Corporation System, Inc., 1013 Centre Road, 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. 17. 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 ta)( filings, Preservation is listed as a limited partner of SCA (limited partner number 286) without a specified percentage interest. Jurisdiction and Venue 18. This Court has personal jurisdiction over the defendants pursuant to CPLR § 301 and/or § 302. 19. Venue is proper in New York County pursuant to CPLR § 503. 486482.4 5 Factual Background 20. The Starett City aparment comple)( (also known as Spring Creek Towers) is a regulated, mi)(ed income housing development located in Brooklyn. This 46 building comple)( houses 12,000 residents, sits on 140 acres and is the nation's largest federally-assisted property. Starett City has its own power plant, armed security force, a shopping center including medical offices, 8 parking garages, health and fitness facilities, and several schools, parks and community centers. SCI employs more than 400 people. The majority of residents receive federal or local housing assistance. 21. F or 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 e)(perience, but for his first hand e)(perience gained from previously residing in another large regulated housing comple)(. Rudman served as the President and Chief Operating Officer of SCI for 20 years, from 1989 through 2009. 22. Rudman assisted Deane with substantially every aspect of his tasks as MGP of Starrett City, including financial, legal, 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 Starett 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 comple)(), (ii) supervising the management and operations of Starett 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 486482.4 6 ~'l;r' Starrett City, conducting major purchasing negotiations for Starrett City, and overseeing the development of real estate adjacent to Starett City); (iii) supervising the activities of the managing agent for Starrett City; (iv) reporting to, monitoring, and negotiating with federal and state regulators to obtain and maintain three different and comple)( subsidy programs; 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 paricipated 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 comple)(. 23. 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 e)(perience 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 comple)( as well as Starrett City, and thereafter focused primarily on Starrett City. 24. 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 familarity with governental agencies, e)(tensive e)(perience with the housing programs and financing mechanisms, and e)(perience with tenant issues to, among other things, participate in the strategic planing 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 486482.4 7 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 parners of such projects. Kuplesky was also involved in day to day management issues at the Starrett City comple)( itself, such as operational issues at the power plant. 25. Rudman and Kuplesky had such a high level of institutional knowledge about the financing, regulation, legal structure, and facilties of Starett City that in connection with the potential sales of the comple)( 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 waranties made in the sale contracts. 26. Each of Carol Deane and Deane is sophisticated and e)(perienced 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 York; Boston, Massachusetts; New Hampshire; and East Hampton, New York. The Deanes also own parnership 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 comple)(es 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 486482.4 8 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 faring operations in South America, which farms are held through entities Bolfar 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 appro)(imately $50 milion from off-shore accounts and foreign trusts, these faring operations have generated off-shore profits aggregating more than $70 milion. The Deanes' net worth (e)(cluding off-shore trusts worth nearly comparable amounts) e)(ceeds $200 milion; Carol Deane's net worth alone e)(ceeds $100 milion. 27. 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 Starett City and other Deane-family entities, including in connection with all ta)(, financial and compensation matters. Background To The Management Incentive Agreement At Issue 28. Beginning in or about 2000, when Deane was appro)(imately 80 years old, limited partners of SCA began questioning his ability to remain as MGP. They e)(pressed 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 parners from a substantial anticipated increase of non-cash ta)(able income, and also to e)(plore a sale of the comple)(, a refinancing, or another means of 486482.4 9 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. 29. 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 advantage. For e)(ample, the Deanes use SCA and SCI funds and assets to pay certain of their personal e)(penses (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 millon 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 office operations of many Deane entities and to make cash payments to entities they control. 30. 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 Starett City. Unbeknownst to the Plaintiffs, they used the Plaintiffs as pawns in this scheme. 31. Carol Deane and Deane knew that Rudman and Kuplesky were well known among the limited partners and other 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 parners ofSCA that if Deane remained as MGP, they would create -- and 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. 486482.4 10 32. Moreover, Carol Deane and Deane used Plaintiffs' reputation and unique skil set, and the management incentive agreement 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 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. 33. It took a full two year effort -- from 2001 to 2003 -- for Carol Deane and Deane to persuade the limited parners to consent to this proposaL. Carol Deane and Deane told limited parners orally and in writing, for e)(ample, that agreeing to the proposed amendment to the SCA parnership 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 parners that the amendment would "create() 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 entitled to share in the future sale or refinancing proceeds." At least one limited parner in turn e)(pressed 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 of Starett," and that he was "interested in giving ma)(imum motivation to (Rudman) and his colleagues rather than to (Deane)" with the proposed amendment. 486482.4 11 34. 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. The Sixteenth Amendment 35. Deane, the other general parers and the requisite number of SCA limited parners e)(ecuted the Si)(teenth Amendment to the Second Amended and Restated Agreement of Limited Partnership for SCA (the "Si)(teenth Amendment") in or about 2003. Pursuant to the Si)(teenth Amendment, the MGP's portion of the residual interest in SCA was increased from what previously had been appro)(imately 10% to 19.9%. At the Deanes' request, and for what they claimed was for estate-planing 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% to SKI. 36. 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 appro)(imately $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. 37. 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 office for many years, and staring in 2004, Mary Clarke and Curt Deane commenced working from that offce as welL. Curt Deane and Clarke are both directors and offcers of SCI and managers of St. Gervais. Clarke is 486482.4 12 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. 38. 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 39. 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 Liabilty 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 E)(hibit 1.) Preservation has si)( members: Rudman, Kuplesky, Carol Deane, Mary Clarke, St. Gervais, and another member of the management team, G. Marin Fell ("Fell"). E)(hibit 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. 40. Carol Deane is the Managing Member of Preservation. Carol Deane (individually and as the Operating Manager and member ofSt. Gervais) also controls the majority of the membership interests in Preservation and the Board of Preservation. 41. The Preservation Agreement functions in the following maner: The management team (Rudman, Kuplesky and Fell) owns appro)(imately 38% of Preservation, and the Deane family owns the remaining appro)(imately 62%. The MGP and SKI e)(ecuted assignments by which they assigned their economic interests in SCA to Preservation. They agreed 486482.4 13 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 would receive a portion of the general parners' interests in SCA, Fell would get his portion, and the Deane family would keep the rest. 42. Section 1.3 of the Preservation Agreement e)(plains the purpose of Preservation, and provides in relevant par as follows: "The initial purpose of the Company (Preservation) wil be to provide its Members with a beneficial interest in all payments payable by Starett City Associates L.P. or its successors ("SCA") to its managing general partner ("MGP") and to Salt Kettle, LLC ("SKI"), in respect of the MGP's economic interest in SCA ("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." 43. Pursuant to the Preservation Agreement (including Section 1.7 thereof), and concurrently with its e)(ecution, the MGP and SKI e)(ecuted Omnibus Assignments and delivered them to Preservation (the "Omnibus Assignments"). (Copies of the Omnibus Assignments are attached hereto as E)(hibits 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 SCA to the M GP 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 Company (Preservation) that they shall not transfer any amount of the MGP Interest or the SKI Interest (or any part thereof) to a transferee." 44. 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 City Associates, a New 486482.4 14 York limited partnership ("SCA"), 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 Parner 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 City Associates, a New York limited parnership ("SCA"), including all right, title and interest in any payments and distributions made or to be made to (SKI) in its capacity as the General Parner of SCA . . ." (the "SKI Assigned Interest") (the Deane Assigned Interest and the SKI Assigned Interest are collectively referred to herein as the "Assigned Interests"). 45. At the same time, St. Gervais (the sole member of SKI) provided the Plaintiffs with an Authorization and Consent (the "Authorization"), signed by Carol Deane as the Operating Manager. In the Authorization, St. Gervais states that it "authorizes and directs Salt Kettle to e)(ecute, deliver and enter into (1) the (Preservation Agreement), and (2) the (SKI Assignment)" and that "St. Gervais hereby approves and consents to each of the (Preservation) Agreement and the Assignment." 46. The Authorization was consistent with the terms of the Operating Agreement of SKI, which provides in paragraph 8 that "The Manager(s) (Carol 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)" 47. 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 486482.4 15 Agreement. Distributions are to be made "as soon as practicable but at least in the same calendar year" in which payments are received by Preservation from the MGP or SKI. 48. Section 5.5 of the Preservation Agreement provides that, subject to e)(ceptions, the Sharing Ratio of a member is reduced by specified amounts (and he is subject to removal from the Board of Preservation), ifhe 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 e)(ception applies, his Sharing Ratio is reduced by 70%; ifhe ceases being actively engaged for Deane-related entities in calendar year 2009 and no e)(ception applies, his Sharing Ratio is reduced by 60%. 49. A pertinent e)(ception to the reductions set forth in Section 5.5 is as follows: amember 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 . . . ) of at least $10,000,000 in aggregate distributions pursuant to Section 4.2(iv)." As e)(plained in paragraph 3.3, a Funding Event includes, among other things, "the full distribution from the proceeds of a substantial refinancing" of Starett City. 50. Commencing in 2006 and continuing each year thereafter, a footnote has appeared in the audited SCAISCI Consolidated Financial Statements reflecting the e)(istence of the Preservation Agreement and the Omnibus Assignments. Footnote 1 to each of the financial statements states: "In the event of a sale or refinancing of SCI, the MGP and a general partner (Salt Kettle, LLC) that obtains an economic interest upon such an event, are entitled to a 19.9% 486482.4 16 total residual economic interest. ... Salt Kettle, LLC is owned by the MGP and parties related to the MGP. The MGP and Salt Kettle, LLC have assigned their interests to Starrett City Preservation LLC, an entity owned by parties related to the MGP and certain members of the Parnership's management team." Iris Sutz, SCA's controller and a member of St. Gervais, assisted with the preparation of these financial statements since 2006. Each year, Deane as MGP e)(ecuted letters to SCAlSCI's auditors representing that the Consolidated Financial Statements were complete and accurate. 51. The SCAISCI Consolidated Financial Statements are distributed annually to all directors of SCI, including Carol Deane, Disque Deane, Mary Clarke and Curt 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, governental regulators, lenders and limited parners, including in connection with the Refinancing, discussed below. 52. By operation of the Deane Assignment and the SKI Assignment, all of the economic interest ofthe MGP and SKI in the 19.9% residual interest in SCA was assigned to, and thus belonged to, Preservation. Efforts To Achieve A Sale or Refinancing of Starrett City 53. Beginning in or about 2005, the Plaintiffs engaged in considerable efforts to enable SCA to enter into a transaction that would allow SCA to access the equity that had built up in the property since the 1970s. The sale or refinancing of Starrett City, among other options, were discussed between and among the MGP (including through Carol Deane, Mary Clarke, and Curt Deane), Plaintiffs, governental agencies and officials, and others. 54. 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; 486482.4 17 obtained multiple rounds of bids; and negotiated with potential buyers as well as multiple city, state and federal regulatory bodies involved with Starett City. Plaintiffs assisted and participated in substantially all aspects of these efforts. 55. During this time, Plaintiffs not only continued their usual management responsibilities, but also provided e)(traordinary 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 baners (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 paricipated 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. 56. As a result of this sales effort, in or about Februar 2007 the MGP accepted an offer at a sale price of $1.3 bilion, 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 MGP (including by Plaintiffs and other representatives), regulators, and agents for the potential buyer for many months. Ultimately, in or about August 2007, the proposed sale transaction was abandoned because certain required regulatory approvals could not be obtained by the purchaser. 57. During the second half of 2007, the MGP (including through Carol Deane, Mary Clarke and Curt Deane), the Plaintiffs, consultants retained by the MGP (including Recap Advisors, now known as CAS Financial Advisory Services ("CAS")), and others continued to 486482.4 18 e)(plore available options for Starett City, including privatization, a sale and a refinancing. They undertook various analyses to determine how best to proceed. Numerous discussions took place internally and with counsel, and meetings were held with regulators at the city, state and federal levels concerning these options. In or about September 2007, meetings were held with the Commissioners of several governent agencies, at which refinancing of Starrett City was e)(plored and discussed, and the restructuring plan approved by the Government that formed the basis for the Refinancing (discussed below) was presented to SCA and SCI. 58. Throughout early 2008, negotiations continued between the MGP (including by Plaintiffs) and the pertinent regulators to determine a mutually agreed-upon structure for a sale or refinancing. These negotiations culminated in a Memorandum of Understanding ("MOD") e)(ecuted in May 2008 by SCA, SCI and three governental regulators. 59. A second sales effort was undertaken shortly thereafter, under different terms more palatable to regulators, as set forth in the MOU. As part ofthis process, the Plaintiffs again launched into preparations for a sale and the sales effort: among other things, they updated and recreated the due diligence data room for prospective buyers; provided information to prospective purchasers and their advisors about the comple)(; conducted tours of the property for prospective purchasers; provided CAS, the MGP and its attorneys and agents with assistance and e)(pertise to further the effort; paricipated in meetings with regulators; and worked to put the federal subsidies in place pursuant to the MOU for a sale or refinancing. 60. Given the downturn in the economy and the change in the terms and conditions of the sale, the first round