Preview
(FILED: NEW YORK COUNTY CLERK 0773072014 10:32 AM INDEX NO. 650159/2010
NYSCEF DOC. NO. 347 RECEIVED NYSCEF: 07/30/2014
SUPREME COURT OF THE STATE OF NEW YORK
NEW YORK COUNTY
PRESENT: SHIRLEY WERNER KORNREICH
PART 4
Justice
Index Number : 650159/2010
RUDMAN, HARVEY, INDIVIDUALLY INDEX NO.
vs.
MOTION 12 2% p
DEANE, CAROL GRAM
SEQUENCE NUMBER : 007
1 SUMMARY JUDGMENT
~ —-
The following papers, numbered 1 to » Were read on this motion to/for
Notice of Motion/Order to Show Cause — Affidavits — Exhibits [noie), 'S0-N44, Bas
Answering Affidavits — Exhibits
[noisy 231 233, a5~ 797
Replying Affidavits [ No(s). 318-326, 329-335
Upon the foregoing papers, it is ordered that this motion is 340
34\
MOTION IS DECIDED IN ACCORDANCE WiTH
ACCOMPANYING MEMORANDUM DECISION
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&
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1. CHECK ONE? sesssessccssssssssensessseee C CASE DISPOSED DX NON-FINAL DISPOSITION
2. CHECK AS APPROPRIATE: OTION IS: [_] GRANTED CIDENIED EXIGRANTED IN PART CoTHER
3. CHECK IF APPROPRIATE: (JSETTLE ORDER CI SUBMIT ORDER
[Do NoT Post CIFIDUCIARY APPOINTMENT CIREFERENCE
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: PART 54
To rrm ast ne nnn n nnn een annem nnn meneame een
HARVEY RUDMAN and HAROLD KUPLESKY,
on behalf of each of them individually and on behalf of
Starrett City Preservation, LLC, derivatively,
Index No.: 650159/2010
Plaintiffs,
DECISION, ORDER &
-against- JUDGMENT
CAROL GRAM DEANE, THE ESTATE OF DISQUE
D. DEANE by Carol G. Deane as Temporary Executrix,
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.
worn ene eee: -X
KORNREICH, SHIRLEY WERNER, J.:
Defendants Carol Deane (Carol), the Estate of Disque D. Deane (the Estate), St. Gervais
LLC (St. Gervais), Starrett City Preservation LLC (Preservation), DD Spring Creek LLC,
SK
Spring Creek LLC, Spring Creek Plaza LLC, DD Shopping Center LLC and SK Shopping
Center
LLC, move for partial summary judgment of the second amended complaint (SAC).
Plaintiffs
oppose. For the reasons stated below, the motion is granted in part and denied in part.
L Background
A Starrett City
Starrett City is a large, affordable housing complex in eastern Brooklyn, New York. It is
governed by New York’s Limited-Profit Housing Companies Law, more colloquially known
as
the Mitchell-Lama Law (Mitchell-Lama). Title to the complex is held by Starrett City, Inc.
(SCI), a New York corporation, for the benefit of Starrett City Associates, L.P. (SCA), a New
York limited partnership comprised of about 200 limited partners, a general partner and a
managing general partner. Prior to 2009, the managing general partner of SCA was Disque
Deane (Deane), and the general partner was defendant Salt Kettle, LLC (Salt Kettle), a New York
limited liability company almost entirely owned by Deane’s family through defendant St. Gervais
(undisputed facts, ff] 4-6). Plaintiff Harvey Rudman was hired in 1989 to serve as SCA’s
president (id. at 11), Plaintiff Harold Kuplesky was retained in 1999 and served as president of
one of the managing agents for the complex (id. at {| 12, 12 [b]-[c]).
Starrett City received various forms of aid from the local, state and federal governments.
The return on equity that could be enjoyed by the owners of Starrett City was limited by
Mitchell-Lama (see, e.g., Private Housing Finance Law § 28), and the rents were subject to
regulation by the New York State Division of Housing and Community Renewal (DHCR) (id. at
§ 31). In exchange, the complex was granted a significant teal property tax abatement (id. at §
33) and was eligible to receive (and did receive) mortgage loans from the New York Housing
Finance Agency (HFA) (id. at § 22; defendants’ supplemental brief, April 4, 2014, 3 [NYSCEF
Doc. No. 341]; plaintiffs’ supplemental brief, April 4, 2014, 1 [NYSCEF Doc. No. 340]). A
further subsidy was provided by the project’s participation in the interest reduction program set
forth in Section 236 of the National Housing Act of 1934, as amended by the Housing and Urban
Development Act of 1968 (12 USC § 1715z-1). Under this program, SCI paid only 1% interest
on its HFA mortgage. The United States Department of Housing and Urban Development
(HUD) paid the remainder of the loan’s interest payments.
Participation under Section 236 also allowed for participation in two federal rent subsidy
programs -- the Rental Assistance Program (RAP), effectuated by means of a contract between
HUD and the owners of the qualifying project (plaintiffs’ supplemental brief 3-4; defendants’
supplemental brief 3-4), and Section 8 assistance. Section 8 assistance was implemented
pursuant to a Housing Assistance Payments (HAP) Contract between the owners and HUD; HUD
paid the difference between the rent set forth in the contract and the tenant’s contribution, the
latter of which was generally capped at a certain percentage of the tenant’s income (plaintiffs’
supplemental brief 2-3; defendants’ supplemental brief 4).
To encourage landlords’ continued participation in the Section 8 program, Congress, in
1997, authorized HUD to implement an additional program known as “Mark-Up to Market” (the
MUTM Program). Under this program, rents are allowed to rise to a supposed market rate, as
determined by HUD-approved comparability studies (plaintiffs’ supplemental brief 3;
defendants’ supplemental brief 4-5), As with the standard Section 8 program, the tenant’s
contribution is capped at a percentage of his income and the remainder is paid by the federal
government. According to the law in place prior to 2008, Starrett City was not eligible to
participate in the MUTM Program.
B. The Preservation Agreement
As managing general partner, Deane and Salt Kettle held a 1% interest in SCA
(undisputed facts, 7). Originally, Deane’s and Salt Kettle’s interest in SCA was to increase to
9.9% in the event of a return to the partners of their capital plus 5% (id.). However, pursuant
to a
2003 amendment to the SCA partnership agreement, the “residual interest” of Deane and Salt
Kettle was increased to 19.9% and the requirement that the other partners’ receive a 5% return on
capital was eliminated (id. at 8). As a result, upon any return of capital to the SCA partners,
distribution would be 80.1% to the limited partners and 19.9% to the general and managin
g
partners — Deane and Salt Kettle.
The value of Starrett City increased, and SCA began efforts to sell the
complex or
otherwise realize its equity. Preservation was created on J: anuary 1, 2006, and by Omnibus
Assignments, dated January 1, 2006, Deane and Salt Kettle, as general and managing partners,
each transferred, “without recourse,” to Preservation
all right, title and interest of Assignor’s economic interest . . . in
[SCA] . . . including all right, title and interest in any payments and
distributions made or to be made to Assignor . . . (collectively, the
“Economic Interest”) and all of Assignor’s right, title and interest
in, to and under the instruments, documents, certificates, letters,
records and papers relating to the Economic Interest . . . (..
collectively referred to as the “Documents”), and all other
documents executed and/or delivered in connection with the
Documents, and such other instruments, documents, certificates,
letters, records and papers, including without limitation, rights to
condemnation awards and insurance proceeds, and all claims and
choses in action related to the Documents and all of Assignor’s
right, title and interest in, to and under such claims and choses in
action
(affirmation of Kenneth Warner, July 3, 2013 [Warner moving affirmation],
exhibits 8 & 9
[Omnibus Assignments]). Excepted from the assignment were the assigning partners’ interests
as limited partners in SCA, their rights to reimbursement for expenses incurred
as a general
partner, their authority as a general partner and any rights they might have as
a general partner,
assignor or limited partner to indemnification or contribution (id).
Preservation was organized as a New York LLC. Its initial stated purpose
was
to provide its Members with a beneficial interest in all payments
payable by [SCA] or its successors to [Deane,] its managing
general partner (“MGP”) [,] and to [Salt Kettle] in respect of the
MGP’s economic interest in SCA (the “MGP Interest”) and [Salt
Kettle]’s economic interest in SCA (the “[Salt Kettle] Interest”), or
all payments received by the MGP and [Salt Kettle] after the sale
of the MGP Interest, in each case on the terms and conditions, and
subject to the limitations, set forth herein
(affirmation of Jacqueline Veit, August 14, 2013, exhibit 17 [Preservation Agreement]
§ 1.3 [a]).
Deane and SKI “confirmfed] to [Preservation] that they shall not transfer any amount of [their
interests as managing partners] (or any part thereof) to a transferee” (id. at § 1.7). The initial
members of Preservation and their respective percentage interests were: St. Gervais
(45.10%),
Carol (11.63%), her sister Mary Clarke (2.5%), Kuplesky (11.63%), Rudman (15.01%) and
Martin Fell, another officer or employee of SCA, (11.63%) (undisputed facts,
{| 16; Preservation
Agreement, exhibit A).
Preservation’s operating agreement allocated profit from a capital transaction, first to
the
negative Capital Accounts of its members and, then, to the members in accordance with §4.2
(iv) (a) and (b) [Preservation Agreement, § 4.1 (B)]. Section 4.2 required all
“payments”
received by the company from SCA’s general partners to be distributed by the company, in
the
following order:
@) to the payment of all accrued expenses of [Preservation];
then
(ii) to the payment of all debts and liabilities of [Preservation]
then due. . > then
(iii) to the payment (or the establishment of additional reserves
to fund future payment, which would be structured to keep
the Members in a tax neutral position) of bonus awards to
office staff for [Preservation] and affiliated entities (other
than Members) up to a maximum of. . . fifteen (15%); then
(iv) -.. to the Members, in proportion to their Sharing Ratios.
“[D]istributions” to the members were to be made “as soon as practicable but at
least in the same
calendar year” (Preservation Agreement, § 4.2).
While the Members’ shares (“Sharing Ratios”) were initially fixed by their capital
contributions, the agreement allowed the shares to be reduced under certain circumstances.
Thus, the Managing Member of Preservation, Carol, at her discretion, could reallocate any
Member’s interest:
[a]t any time afier the Funding Event (as hereinafter defined),
in whatever amounts [she] deem[s] in [her] sole discretion to be
appropriate (including, without limitation, assigning a Member a
Sharing Ratio of zero). “Funding Event” shall mean the
distribution to Members, in accordance with their then current
Sharing Ratios . . . of at least $10,000,000 in aggregate
distributions pursuant to Section 4.2(iv). All Members
acknowledge and agree that the Managing Member’s reallocation
power pursuant to this Section 3.3 is intended to facilitate
providing a new management incentive program after the full
distribution from the proceeds of a substantial refinancing
pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement
[italics added]
(id. at § 3.3).
The referenced sections of the SCA partnership agreement set forth how SCA was to
disburse its cash. At least once for every fiscal year SCA’s “Cash Flow”! was to be
applied:
first in payment of the Management Fee . . . and then [was to] be
distributed in the following order of priority: (i) to the payment of
principal and interest on any outstanding Operating Loans . . .(ii)
to the payment of principal and interest on any outstanding
Subordinated Loans . . . (iii) the remainder . . . to the Managing
General Partners, . . . to the Special General Partners, and . . . to the
Limited Partners
' “Cash Flow” is defined there as a modified version of the partnership’s “Net
Profits and
Losses” for federal income tax purposes. However, it is clear from the record that SCA’s
income
for tax purposes was substantially more than the actual annual distributions it had been making,
as one of the stated justifications for selling or refinancing Starrett City was to remedy
“the
partner ‘phantom income’ tax burden that [was] grow[ing] worse every year”
(Warner moving
affirmation, exhibit 27, see also Veit affirmation, exhibit 18. » PwC 0225 & exhibit
20, D004208,
D020361).
(Warner moving affirmation, exhibit 38, § 3.02). In addition, the partner
ship agreement provided
that in the event of a refinancing or sale of Starrett City, the “net cash proceed
s” of such
transaction would be distributed and applied in the following order:
(i) to the payment of any debts or liabilities of the Partnership or
binding it or its properties . . . (ii) to the setting up of any reserve
which the Managing General Partners deem reasonably necessary,
or which may be required by the Regulations, to provide for any
contingent or unforeseen liabilities or obligations of the
Partnership . . . (iii) to the payment of principal and interest on any
outstanding Operating Loans . . . (iv) to the payment of principal
and interest on any outstanding Subordinated Loans .. , (v) to the
payment . . . to the Managing General Partners . . . to the Special
General Partners and . . . to the Limited Partners
(id. at § 3.03).
Additionally, Carol had the power to remove a Member from the Board “if
such Member
has resigned, been terminated from all or substantially all positions held
with SCA and/or other
enterprises owned or controlled by Disque Deane . . . or otherwise has
ceased to be actively
engaged on a substantially full time basis with the Deane Interests” (id,
at § 5.5 [a]).
“Notwithstanding Section 5.5(a), a Member who was removed due to
termination in (a) above
shall maintain his full Sharing Ration without reduction if termination
occurred afer discussions
began that resulted in a Funding Event” (emphasis added) (id. at § 5.5
[b]). As relevant here,
Member removed during the year 2008 would lose 70% of his Sharing Ratio,
and one removed
during 2009 would lose 60% (id. at § 5.5 [a]).
C. The Refinancing and the Distributions
Cashing out of Starrett City proved complicated due to the regulatory
oversight of New
York City (HPD), New York State (DHCR and HFA) and the United
States (HUD), all of which
were keenly interested in assuring that one of the largest affordable housing
complexes in the
country remained so. Asa result, in 2007, a $1.3 billion bid by an entity known
as Clipper
Equity was rejected by the authorities as overly likely to lead to the project’
s exit from the
various affordable housing programs (undisputed facts, {| 24; see Warner
moving affirmation,
exhibit 10). To achieve a sale of the property, SCA concluded it had to either
remove the
complex from Mitchell-Lama and the attendant governmental program
s, something that SCA
believed it could do as of right but felt was both economically and politically
risky, or keep
Starrett City as a Mitchell-Lama, in which case any sale would require the blessing
s of the
various governmental agencies, SCA conceived of a third option. It could
capture its built-up
equity by refinancing the property based on its then current market value in
an amount sufficient
to allow an attractive distribution to the partners. The one complication was the requirement that
a Mitchell-Lama project’s mortgages could not exceed the “actual project
cost,” i.e., the original
cost of development (Private Housing Finance Law § 21; see also id. at §
12 [6]).
SCA proceeded on two tracks. By letter to DHCR, dated August 29,
2007, Deane
informed the agency of SCI’s intent “to dissolve, or reconstitute
as a business corporation not
subject to the restrictions and limitations of the Private Housing Finance
Law” (Warner moving
affirmation, exhibit 12), Meantime, on October 23, 2007, it submitted to Priscilla Almodo
var,
the CEO of HFA, a proposal as to how Starrett City could be preserv
ed as an affordable housing
complex after a sale (Warner affirmation, exhibit 15). As an incenti
ve for purchasers to remain
in the Mitchell-Lama program, SCA proposed replacing the existing Section
236 RAP contract
and the standard Section 8 HAP contract with an MUTM contract, a progra
m for which Starrett
City was not eligible, thereby not affecting tenants’ payments but allowin
g the new owner to
collect higher rents subsidized by the federal government (id. at 3). For units not covered by
the MUTM contract, SCA urged the government to provide so-called “enhanced” Section
8
vouchers (also known as “sticky” vouchers) which would cap the recipients’ rent contribution at
30% of their income (id. at 44 5, 7). SCA also asked that the government “decouple”
the Section
236 interest reduction payments from the existing HFA mortgage, allowing the interest payment
subsidies to continue to apply to whatever new mortgage financing was put in place by the
purchaser (id. at 4). Finally, SCA asked that the government agencies, as part of the sale, allow
the removal of the non-residential parcels from the Mitchell-Lama program and the attendant
government supervision.
Discussions with HUD, HFA, DHCR and HPD eventually resulted in a memora
ndum of
understanding between those agencies, SCA and SCI (Warner moving affirmat
ion, exhibit 17
[the MOU]). The May 12, 2008 MOU contemplated a sale of Starrett City to outside bidders,
and the governmental agencies agreed? to expedite their review of the finalists
selected by SCA
and cooperate “to accomplish the desired sale”(id. at 9" A~B). The MOU evinced the
government’s inclination to approve much of the subsidy framework set forth in SCA’s
October
2007 proposal, including: the decoupling of the Section 236 interest reducti
on payments from the
existing HFA mortgage, which would be prepaid (MOU 4[C.3); the replacement
of the HAP and
RAP contracts with an MUTM contract that would cover 60% of Starrett City’s
units, provided
that Congress passed certain draft legislation? which would allow Starrett City
to participate in
2
The term is used loosely, as the MOU stated that it “i impose[d] no binding obligat
ion
on any of the parties” (MOU 4 E).
* This bill was ultimately enacted as Section 1603 of the Housing and Economic
Recovery Act of 2008. The statute authorizes HUD to enter into an MUTM contract
with “an
owner of a multifamily housing project that exceeds 5,000 units to which
a contract for project-
9
the MUTM program (MOU 4 C.4 [a]); the provision of “sticky” vouchers to those
tenants whose
units would not be covered under the MUTM contract, which would
continue to be regulated by
DHCR and HUD (MOU {[C.5 [c]); and the removal of the non-residential parcels
from the
Mitchell-Lama program (MOU 4 C.6).
In June 2008, having clarified the contours of what the continued operatio
n of Starrett
City as an affordable housing complex would entail (including the level to which future
rents
might rise), SCA solicited bids for a “preservation transaction”, in which Starrett
City would be
sold but would remain within Mitchell-Lama (Warner moving affirmation, exhibit 18).
The
deadline for final bids was December 15, 2008 (Warner moving affidavit,
exhibit 23). That same
day, Kuplesky’s employment at Starrett City was terminated (undisputed facts,
12 [a}).
Although the deadline was extended for another three days (Warner moving
affirmation, exhibit
24), SCA ultimately decided that it had “not received a proposal that... provide
[d] it with a
fair return” (Warner moving affirmation, exhibit 27).4 In a letter to the
limited partners, dated
February 19, 2009, the Deanes stated “that ending the formal sale process
and focusing our
efforts on operating [Starrett City] . . . is the best direction for [SCA] at this time.
As we go
forward, we will consider other options available to us, including the possibility
of a refinancing”
(id).
based rental assistance under section 8 of the United States Housing
Act of 1937... and a Rental
Assistance Payment contract is subject” (Pub L 110-289, 122 US Stat
2825), Starrett City met
the criteria of the new statute, which was enacted on July 30, 2008. Accordi
ng to a letter from
Deane to the limited partners, both this statute and the state legislat
ion discussed below “ ‘apply
only to Starrett City” (Veit affirmation, exhibit 57, D007263).
* On February 13, 2009, in Tesponse to the final offer they had managed
to receive, Curt
Deane, Disque’s nephew, wrote to SCA’s financial advisor: “This is chutzpa
h. God bless them
and may they be more successful in their future endeavors than th
€ non-starter they’ve placed
before us... . These guys must be on drugs” (Veit affirmation, exhibit 46).
10
On March 3, 2009, Todd Trehubenko of Recap Advisors, SCA’s financia
l advisor, wrote
to a contact at HUD seeking confirmation of HUD’s interest in allowing
a “long-term
preservation hold for [SCA]” as opposed to a sale (Veit affirmation, exhibit
53), Mr.
Trehubenko proposed that the structure for such a deal “should track the MOU
as much as
possible, including the IRP decoupling, parcel division, and a MU[T]M,
so that a preservation
solution for the property could be achieved as soon as practical and without
wiping away all of
the tremendous progress that was collectively made last year” (id). On March
18, 2009, Deane,
on behalf of SCA, executed a retainer agreement with Wachovia Multifamily
Capital Inc.
pursuant to which the bank agreed to assist SCA in obtaining a suitable refinan
cing commitment
(Warner moving affirmation, exhibit 30).
To overcome the legal hurdle imposed by the Mitchell-Lama Law on taking
out a
mortgage in excess of the “project cost,” SCA retained the services of the
law firm Wilson, Elser, >
Moskowitz, Edelman & Dicker LLP (Wilson Elser) as “government affairs
counsel” (Warner
moving affirmation, exhibit 32). On July 11, 2009, less than four
months later, the New York
State legislature passed a bill that became Section 22-b of the Private
Housing Finance Law. The
law provided a one-year window from its effective date in which DHCR
could approve a
mortgage “in excess of the actual project cost of a state-aided project
comprising more than five
thousand rental units,” a description that exclusively applied to Starrett
City. The Deanes, then,
informed their fellow investors that they could now “proceed with
[their] plan to refinance”
(Warner moving affirmation, exhibit 36).
By letter dated July 30, 2009, the Deanes sent a consent solicitation
to SCA’s limited
partners asking that they authorize Disque to enter into a refinancing subject
to certain terms
11
(Veit affirmation, exhibit 57), As envisioned by the MOU and Mr. Trehubenko’s March
proposal, the consent solicitation represented that the HAP and RAP contracts would be replaced
by an MUTM contract, the interest reduction payments would continue even after the HFA
mortgage was replaced, and the non-residential components of Starrett City would be released
from government regulation (id. at D007264-65). Consequently, the non-residential land would
belong to SCA free of government regulation. As agreed to in the MOU, it was represented that
the rents of units not subject to the MUTM contract would remain subject to HUD
and DHCR
restrictions and that SCA would “facilitate the delivery of governmental rental assistance for
qualifying residents” (id. at D002764).> The plan was approved by the limited partners, and on
December 17, 2009, SCA closed on a loan from Wells Fargo for $531,485,000 (undispu
ted facts,
719).
After capital was returned to the SCA partners, SCA distributed approximately $38
million to Preservation, representing 19.9% of the loan proceeds available for distribution.
Preservation set aside 15% of this distribution, paying a total of $3,141,170 to Iris
Sutz, Robert
Poll and Curt Deane (Deane’s nephew) as office staff, and retaining the balance as
a reserve for
future bonuses. After deducting for other expenses, Preservation distributed $31,899,544.77 to
its Members, Of this amount, Rudman (who was fired in April 2009) got 15.01%, or
$4,787,971.57, consistent with his interest in Preservation. Kuplesky, on the other hand,
received 30% of his original 11.63% interest, or $1,113,259.21, because
he had left Starrett City
in 2008. By letter dated November 8, 2010, Carol reduced the interest of Rudman and
Kuplesky
* SCl later represented to DHCR that residents of such units would be able to apply
for
“sticky” vouchers (Veit affirmation, exhibit 56, Recap093016).
12
in Preservation to zero, “effective immediately” (Warner affirmation,
exhibit 39). Disque passed
away that same day (undisputed facts, 9 9).
D. The Instant Action and Procedural Background
Plaintiffs commenced this action on March 9, 2010. An amended complaint was filed on
June 4, 2010, and the SAC on October 6, 2010. The SAC claimed that, as a result of the
refinancing, Preservation should have received, in addition to 19.9% of the
cash proceeds of the
refinancing, 1) an 18.9% partnership interest in SCA; 2) a 19.9% interest in Spring
Creek Plaza
LLC (Spring Creek), the entity to which SCA conveyed certain of the non-res
idential properties
(including a shopping center) that had been released from government regulat
ion but in which the
members of SCA remained as members; 3) a share of the charitable deductions
taken by SCA
and Spring Creek as a result of the refinancing and donations; and 4) “the
value of the [general
partners’] increased equity in SCA resulting from cash reserves set aside
from the cash proceeds
for capital improvements and other purposes and any dividends and distrib
utions made in respect
thereof” (SAC 4 87). The SAC further contended that, under the Preserv
ation Agreement,
Preservation was obligated to distribute to each Member his proportionate
share of the above
interests.
Based on the failure to transfer and distribute the above interests,
the SAC asserted the
following causes of action: 1) breach of fiduciary duty by Carol and St. Gervais
to Preservation
and its Members; 2) aiding and abetting Carol’s aforesaid breach by
the other defendants; 3) and
4) breach of the assignment agreements by Deane’ and Salt Kettle, thereby
harming both
° As noted, Deane passed away soon after the second amended complaint
was filed. His
estate has been substituted as a party in his place.
13
Preservation and plaintiffs; 5) breach of the Preservation Agreement
by Carol, Deane and Salt
Kettle; 6) conversion against all of defendants except Salt Kettle
and St. Gervais; 7) and 8)
tortious interference with the Preservation Agreement and the general
partners’ assignments; 9) a
declaratory judgment that Section 3.3 of the Preservation Agreem
ent could not be used to reduce
plaintiffs’ shares to zero until they receive their share of the general partner
s’ distribution of the
refinancing proceeds; and 10) a declaratory judgment that any transfe
rs by the general partners of
their interests to any entity other than Preservation are ineffective,
Defendants, in their motion, now seek a ruling that the distribution
to plaintiffs’ was
correct and that, as of November 8, 2010, Carol was authorized to
reallocate plaintiffs’ interests
to zero. They further ask the court to declare that Preservation was authori
zed to distribute the
“office staff’ bonuses as it did and to retain a reserve for future bonuses, and
that Kuplesky’s
Sharing Ratio was correctly reduced by 70% because of his departu
re in late 2008. The motion
turns on the Preservation and SCA agreements,
il. Defendants’ Submissions
In support of their position that Kuplesky’s shares were rightfully
reduced, defendants
submitted an August 30, 2007 letter to the limited partners of SCA
from Deane, written soon
after the government’s final rejection of Clipper Equity’s bid (Warme
r moving affirmation,
exhibit 13), Deane wrote that management had been considering
a number of options since the
expiration of the purchase contract, including “the privatization process
, reopening] the bidding
process, privately negotiat{ing] with a strong buyer or just wait[ing] and
do[ing] nothing” (id,).
The letter does not mention a refinancing. Also, submitted is an
excerpt from Curt Deane’s
deposition in which he testified that, at a meeting between the
various government agencies and
14
SCA management on September 5, 2007, “the intent was we, [SCA]
.. . wanted to find a basis
where we could work cooperatively with government to affect a sales
process” (Warner moving
affirmation, exhibit 14, 134). Defendants note that SCA’s October 2007 proposal to
the
government opened by stating that “SCA, as its first option, desires to sell
Starrett City” (Warner
moving affirmation, exhibit 15); neither that document nor the May
2008 MOU mentions a
refinancing option.
Moreover, defendants note that the original Recap retainer agreement, dated
November
19, 2007, stated that Recap would assist SCA “in arranging and completing the
successful sale of
Starrett City” (Warner moving affirmation, exhibit 16). The agreement states
that “Recap will
not provide the following services in connection with this agreement: ...g. Refinan
cing or
resident subsidy services (interviewing prospective lenders, negotiating and
closing new
financing) .. . associated with a refinancing/dissolution transaction
whereby the Property is not
sold” (id. at | 3). It provides for a breakup fee of $400,000 “[iJn the unlikel
y event, not currently
contemplated, that [SCA] declines to complete an Affordability Transaction
in favor of a
Dissolution/Refinancing transaction” (id. atn 1). Also in evidence is
the second amendment to
the retainer agreement, dated June 11, 2009, some time after
SCA had given up on the sales
process (Warner moving affirmation, exhibit 35). This amendment
changed the prior agreement
to provide that Recap would offer advisory services relating to a refinan
cing and replaced the
breakup fee provision with a simple statement that “[SCA] may elect to refinan
ce the Property as
an alternative to sale” (id. at § 4).
The September 19, 2008 retainer agreement with the law firm Bingham McCutc
hen
(Bingham) (Warner moving affirmation, exhibit 19) states that SCA
was retaining Bingham for
15
representation “in connection with government regulatory matters involvi
ng [HUD] and [DHCR}
as may be required by you in connection with the sale of [Starrett City] . .
. and/or the exit of the
Development from the Mitchell Lama program . . , including, but not limited
to, reviewing
submissions for government approval made by any potential purchaser”
(id. at 1). Here, too, the
agreement provides that Bingham’s “representation [would] not include represe
ntation of [SCA]
in connection with new financing for the Development” (id).
Lastly, defendants submit a letter from SCA’s attorney to Kuplesky, dated Februar
y 13,
2009 (Warner moving affirmation, exhibit 47). The letter encloses a
document bearing the
letterhead of “Starrett City Preservation LLC,” and is entitled “Record of an
Action Pursuant to
Section 5.5(a)” (id.). The document, signed by Carol and dated “as of December 15, 2008,”
states that it is a record of the fact
Preview
(FILED: NEW YORK COUNTY CLERK 0773072014 10:32 AM INDEX NO. 650159/2010 NYSCEF DOC. NO. 347 RECEIVED NYSCEF: 07/30/2014 SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY PRESENT: SHIRLEY WERNER KORNREICH PART 4 Justice Index Number : 650159/2010 RUDMAN, HARVEY, INDIVIDUALLY INDEX NO. vs. MOTION 12 2% p DEANE, CAROL GRAM SEQUENCE NUMBER : 007 1 SUMMARY JUDGMENT ~ —- The following papers, numbered 1 to » Were read on this motion to/for Notice of Motion/Order to Show Cause — Affidavits — Exhibits [noie), 'S0-N44, Bas Answering Affidavits — Exhibits [noisy 231 233, a5~ 797 Replying Affidavits [ No(s). 318-326, 329-335 Upon the foregoing papers, it is ordered that this motion is 340 34\ MOTION IS DECIDED IN ACCORDANCE WiTH ACCOMPANYING MEMORANDUM DECISION ,i fet & AY OW] JS.C. 1. CHECK ONE? sesssessccssssssssensessseee C CASE DISPOSED DX NON-FINAL DISPOSITION 2. CHECK AS APPROPRIATE: OTION IS: [_] GRANTED CIDENIED EXIGRANTED IN PART CoTHER 3. CHECK IF APPROPRIATE: (JSETTLE ORDER CI SUBMIT ORDER [Do NoT Post CIFIDUCIARY APPOINTMENT CIREFERENCE SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: PART 54 To rrm ast ne nnn n nnn een annem nnn meneame een HARVEY RUDMAN and HAROLD KUPLESKY, on behalf of each of them individually and on behalf of Starrett City Preservation, LLC, derivatively, Index No.: 650159/2010 Plaintiffs, DECISION, ORDER & -against- JUDGMENT CAROL GRAM DEANE, THE ESTATE OF DISQUE D. DEANE by Carol G. Deane as Temporary Executrix, 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. worn ene eee: -X KORNREICH, SHIRLEY WERNER, J.: Defendants Carol Deane (Carol), the Estate of Disque D. Deane (the Estate), St. Gervais LLC (St. Gervais), Starrett City Preservation LLC (Preservation), DD Spring Creek LLC, SK Spring Creek LLC, Spring Creek Plaza LLC, DD Shopping Center LLC and SK Shopping Center LLC, move for partial summary judgment of the second amended complaint (SAC). Plaintiffs oppose. For the reasons stated below, the motion is granted in part and denied in part. L Background A Starrett City Starrett City is a large, affordable housing complex in eastern Brooklyn, New York. It is governed by New York’s Limited-Profit Housing Companies Law, more colloquially known as the Mitchell-Lama Law (Mitchell-Lama). Title to the complex is held by Starrett City, Inc. (SCI), a New York corporation, for the benefit of Starrett City Associates, L.P. (SCA), a New York limited partnership comprised of about 200 limited partners, a general partner and a managing general partner. Prior to 2009, the managing general partner of SCA was Disque Deane (Deane), and the general partner was defendant Salt Kettle, LLC (Salt Kettle), a New York limited liability company almost entirely owned by Deane’s family through defendant St. Gervais (undisputed facts, ff] 4-6). Plaintiff Harvey Rudman was hired in 1989 to serve as SCA’s president (id. at 11), Plaintiff Harold Kuplesky was retained in 1999 and served as president of one of the managing agents for the complex (id. at {| 12, 12 [b]-[c]). Starrett City received various forms of aid from the local, state and federal governments. The return on equity that could be enjoyed by the owners of Starrett City was limited by Mitchell-Lama (see, e.g., Private Housing Finance Law § 28), and the rents were subject to regulation by the New York State Division of Housing and Community Renewal (DHCR) (id. at § 31). In exchange, the complex was granted a significant teal property tax abatement (id. at § 33) and was eligible to receive (and did receive) mortgage loans from the New York Housing Finance Agency (HFA) (id. at § 22; defendants’ supplemental brief, April 4, 2014, 3 [NYSCEF Doc. No. 341]; plaintiffs’ supplemental brief, April 4, 2014, 1 [NYSCEF Doc. No. 340]). A further subsidy was provided by the project’s participation in the interest reduction program set forth in Section 236 of the National Housing Act of 1934, as amended by the Housing and Urban Development Act of 1968 (12 USC § 1715z-1). Under this program, SCI paid only 1% interest on its HFA mortgage. The United States Department of Housing and Urban Development (HUD) paid the remainder of the loan’s interest payments. Participation under Section 236 also allowed for participation in two federal rent subsidy programs -- the Rental Assistance Program (RAP), effectuated by means of a contract between HUD and the owners of the qualifying project (plaintiffs’ supplemental brief 3-4; defendants’ supplemental brief 3-4), and Section 8 assistance. Section 8 assistance was implemented pursuant to a Housing Assistance Payments (HAP) Contract between the owners and HUD; HUD paid the difference between the rent set forth in the contract and the tenant’s contribution, the latter of which was generally capped at a certain percentage of the tenant’s income (plaintiffs’ supplemental brief 2-3; defendants’ supplemental brief 4). To encourage landlords’ continued participation in the Section 8 program, Congress, in 1997, authorized HUD to implement an additional program known as “Mark-Up to Market” (the MUTM Program). Under this program, rents are allowed to rise to a supposed market rate, as determined by HUD-approved comparability studies (plaintiffs’ supplemental brief 3; defendants’ supplemental brief 4-5), As with the standard Section 8 program, the tenant’s contribution is capped at a percentage of his income and the remainder is paid by the federal government. According to the law in place prior to 2008, Starrett City was not eligible to participate in the MUTM Program. B. The Preservation Agreement As managing general partner, Deane and Salt Kettle held a 1% interest in SCA (undisputed facts, 7). Originally, Deane’s and Salt Kettle’s interest in SCA was to increase to 9.9% in the event of a return to the partners of their capital plus 5% (id.). However, pursuant to a 2003 amendment to the SCA partnership agreement, the “residual interest” of Deane and Salt Kettle was increased to 19.9% and the requirement that the other partners’ receive a 5% return on capital was eliminated (id. at 8). As a result, upon any return of capital to the SCA partners, distribution would be 80.1% to the limited partners and 19.9% to the general and managin g partners — Deane and Salt Kettle. The value of Starrett City increased, and SCA began efforts to sell the complex or otherwise realize its equity. Preservation was created on J: anuary 1, 2006, and by Omnibus Assignments, dated January 1, 2006, Deane and Salt Kettle, as general and managing partners, each transferred, “without recourse,” to Preservation all right, title and interest of Assignor’s economic interest . . . in [SCA] . . . including all right, title and interest in any payments and distributions made or to be made to Assignor . . . (collectively, the “Economic Interest”) and all of Assignor’s right, title and interest in, to and under the instruments, documents, certificates, letters, records and papers relating to the Economic Interest . . . (.. collectively referred to as the “Documents”), and all other documents executed and/or delivered in connection with the Documents, and such other instruments, documents, certificates, letters, records and papers, including without limitation, rights to condemnation awards and insurance proceeds, and all claims and choses in action related to the Documents and all of Assignor’s right, title and interest in, to and under such claims and choses in action (affirmation of Kenneth Warner, July 3, 2013 [Warner moving affirmation], exhibits 8 & 9 [Omnibus Assignments]). Excepted from the assignment were the assigning partners’ interests as limited partners in SCA, their rights to reimbursement for expenses incurred as a general partner, their authority as a general partner and any rights they might have as a general partner, assignor or limited partner to indemnification or contribution (id). Preservation was organized as a New York LLC. Its initial stated purpose was to provide its Members with a beneficial interest in all payments payable by [SCA] or its successors to [Deane,] its managing general partner (“MGP”) [,] and to [Salt Kettle] in respect of the MGP’s economic interest in SCA (the “MGP Interest”) and [Salt Kettle]’s economic interest in SCA (the “[Salt Kettle] Interest”), or all payments received by the MGP and [Salt Kettle] after the sale of the MGP Interest, in each case on the terms and conditions, and subject to the limitations, set forth herein (affirmation of Jacqueline Veit, August 14, 2013, exhibit 17 [Preservation Agreement] § 1.3 [a]). Deane and SKI “confirmfed] to [Preservation] that they shall not transfer any amount of [their interests as managing partners] (or any part thereof) to a transferee” (id. at § 1.7). The initial members of Preservation and their respective percentage interests were: St. Gervais (45.10%), Carol (11.63%), her sister Mary Clarke (2.5%), Kuplesky (11.63%), Rudman (15.01%) and Martin Fell, another officer or employee of SCA, (11.63%) (undisputed facts, {| 16; Preservation Agreement, exhibit A). Preservation’s operating agreement allocated profit from a capital transaction, first to the negative Capital Accounts of its members and, then, to the members in accordance with §4.2 (iv) (a) and (b) [Preservation Agreement, § 4.1 (B)]. Section 4.2 required all “payments” received by the company from SCA’s general partners to be distributed by the company, in the following order: @) to the payment of all accrued expenses of [Preservation]; then (ii) to the payment of all debts and liabilities of [Preservation] then due. . > then (iii) to the payment (or the establishment of additional reserves to fund future payment, which would be structured to keep the Members in a tax neutral position) of bonus awards to office staff for [Preservation] and affiliated entities (other than Members) up to a maximum of. . . fifteen (15%); then (iv) -.. to the Members, in proportion to their Sharing Ratios. “[D]istributions” to the members were to be made “as soon as practicable but at least in the same calendar year” (Preservation Agreement, § 4.2). While the Members’ shares (“Sharing Ratios”) were initially fixed by their capital contributions, the agreement allowed the shares to be reduced under certain circumstances. Thus, the Managing Member of Preservation, Carol, at her discretion, could reallocate any Member’s interest: [a]t any time afier the Funding Event (as hereinafter defined), in whatever amounts [she] deem[s] in [her] sole discretion to be appropriate (including, without limitation, assigning a Member a Sharing Ratio of zero). “Funding Event” shall mean the distribution to Members, in accordance with their then current Sharing Ratios . . . of at least $10,000,000 in aggregate distributions pursuant to Section 4.2(iv). All Members acknowledge and agree that the Managing Member’s reallocation power pursuant to this Section 3.3 is intended to facilitate providing a new management incentive program after the full distribution from the proceeds of a substantial refinancing pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement [italics added] (id. at § 3.3). The referenced sections of the SCA partnership agreement set forth how SCA was to disburse its cash. At least once for every fiscal year SCA’s “Cash Flow”! was to be applied: first in payment of the Management Fee . . . and then [was to] be distributed in the following order of priority: (i) to the payment of principal and interest on any outstanding Operating Loans . . .(ii) to the payment of principal and interest on any outstanding Subordinated Loans . . . (iii) the remainder . . . to the Managing General Partners, . . . to the Special General Partners, and . . . to the Limited Partners ' “Cash Flow” is defined there as a modified version of the partnership’s “Net Profits and Losses” for federal income tax purposes. However, it is clear from the record that SCA’s income for tax purposes was substantially more than the actual annual distributions it had been making, as one of the stated justifications for selling or refinancing Starrett City was to remedy “the partner ‘phantom income’ tax burden that [was] grow[ing] worse every year” (Warner moving affirmation, exhibit 27, see also Veit affirmation, exhibit 18. » PwC 0225 & exhibit 20, D004208, D020361). (Warner moving affirmation, exhibit 38, § 3.02). In addition, the partner ship agreement provided that in the event of a refinancing or sale of Starrett City, the “net cash proceed s” of such transaction would be distributed and applied in the following order: (i) to the payment of any debts or liabilities of the Partnership or binding it or its properties . . . (ii) to the setting up of any reserve which the Managing General Partners deem reasonably necessary, or which may be required by the Regulations, to provide for any contingent or unforeseen liabilities or obligations of the Partnership . . . (iii) to the payment of principal and interest on any outstanding Operating Loans . . . (iv) to the payment of principal and interest on any outstanding Subordinated Loans .. , (v) to the payment . . . to the Managing General Partners . . . to the Special General Partners and . . . to the Limited Partners (id. at § 3.03). Additionally, Carol had the power to remove a Member from the Board “if such Member has resigned, been terminated from all or substantially all positions held with SCA and/or other enterprises owned or controlled by Disque Deane . . . or otherwise has ceased to be actively engaged on a substantially full time basis with the Deane Interests” (id, at § 5.5 [a]). “Notwithstanding Section 5.5(a), a Member who was removed due to termination in (a) above shall maintain his full Sharing Ration without reduction if termination occurred afer discussions began that resulted in a Funding Event” (emphasis added) (id. at § 5.5 [b]). As relevant here, Member removed during the year 2008 would lose 70% of his Sharing Ratio, and one removed during 2009 would lose 60% (id. at § 5.5 [a]). C. The Refinancing and the Distributions Cashing out of Starrett City proved complicated due to the regulatory oversight of New York City (HPD), New York State (DHCR and HFA) and the United States (HUD), all of which were keenly interested in assuring that one of the largest affordable housing complexes in the country remained so. Asa result, in 2007, a $1.3 billion bid by an entity known as Clipper Equity was rejected by the authorities as overly likely to lead to the project’ s exit from the various affordable housing programs (undisputed facts, {| 24; see Warner moving affirmation, exhibit 10). To achieve a sale of the property, SCA concluded it had to either remove the complex from Mitchell-Lama and the attendant governmental program s, something that SCA believed it could do as of right but felt was both economically and politically risky, or keep Starrett City as a Mitchell-Lama, in which case any sale would require the blessing s of the various governmental agencies, SCA conceived of a third option. It could capture its built-up equity by refinancing the property based on its then current market value in an amount sufficient to allow an attractive distribution to the partners. The one complication was the requirement that a Mitchell-Lama project’s mortgages could not exceed the “actual project cost,” i.e., the original cost of development (Private Housing Finance Law § 21; see also id. at § 12 [6]). SCA proceeded on two tracks. By letter to DHCR, dated August 29, 2007, Deane informed the agency of SCI’s intent “to dissolve, or reconstitute as a business corporation not subject to the restrictions and limitations of the Private Housing Finance Law” (Warner moving affirmation, exhibit 12), Meantime, on October 23, 2007, it submitted to Priscilla Almodo var, the CEO of HFA, a proposal as to how Starrett City could be preserv ed as an affordable housing complex after a sale (Warner affirmation, exhibit 15). As an incenti ve for purchasers to remain in the Mitchell-Lama program, SCA proposed replacing the existing Section 236 RAP contract and the standard Section 8 HAP contract with an MUTM contract, a progra m for which Starrett City was not eligible, thereby not affecting tenants’ payments but allowin g the new owner to collect higher rents subsidized by the federal government (id. at 3). For units not covered by the MUTM contract, SCA urged the government to provide so-called “enhanced” Section 8 vouchers (also known as “sticky” vouchers) which would cap the recipients’ rent contribution at 30% of their income (id. at 44 5, 7). SCA also asked that the government “decouple” the Section 236 interest reduction payments from the existing HFA mortgage, allowing the interest payment subsidies to continue to apply to whatever new mortgage financing was put in place by the purchaser (id. at 4). Finally, SCA asked that the government agencies, as part of the sale, allow the removal of the non-residential parcels from the Mitchell-Lama program and the attendant government supervision. Discussions with HUD, HFA, DHCR and HPD eventually resulted in a memora ndum of understanding between those agencies, SCA and SCI (Warner moving affirmat ion, exhibit 17 [the MOU]). The May 12, 2008 MOU contemplated a sale of Starrett City to outside bidders, and the governmental agencies agreed? to expedite their review of the finalists selected by SCA and cooperate “to accomplish the desired sale”(id. at 9" A~B). The MOU evinced the government’s inclination to approve much of the subsidy framework set forth in SCA’s October 2007 proposal, including: the decoupling of the Section 236 interest reducti on payments from the existing HFA mortgage, which would be prepaid (MOU 4[C.3); the replacement of the HAP and RAP contracts with an MUTM contract that would cover 60% of Starrett City’s units, provided that Congress passed certain draft legislation? which would allow Starrett City to participate in 2 The term is used loosely, as the MOU stated that it “i impose[d] no binding obligat ion on any of the parties” (MOU 4 E). * This bill was ultimately enacted as Section 1603 of the Housing and Economic Recovery Act of 2008. The statute authorizes HUD to enter into an MUTM contract with “an owner of a multifamily housing project that exceeds 5,000 units to which a contract for project- 9 the MUTM program (MOU 4 C.4 [a]); the provision of “sticky” vouchers to those tenants whose units would not be covered under the MUTM contract, which would continue to be regulated by DHCR and HUD (MOU {[C.5 [c]); and the removal of the non-residential parcels from the Mitchell-Lama program (MOU 4 C.6). In June 2008, having clarified the contours of what the continued operatio n of Starrett City as an affordable housing complex would entail (including the level to which future rents might rise), SCA solicited bids for a “preservation transaction”, in which Starrett City would be sold but would remain within Mitchell-Lama (Warner moving affirmation, exhibit 18). The deadline for final bids was December 15, 2008 (Warner moving affidavit, exhibit 23). That same day, Kuplesky’s employment at Starrett City was terminated (undisputed facts, 12 [a}). Although the deadline was extended for another three days (Warner moving affirmation, exhibit 24), SCA ultimately decided that it had “not received a proposal that... provide [d] it with a fair return” (Warner moving affirmation, exhibit 27).4 In a letter to the limited partners, dated February 19, 2009, the Deanes stated “that ending the formal sale process and focusing our efforts on operating [Starrett City] . . . is the best direction for [SCA] at this time. As we go forward, we will consider other options available to us, including the possibility of a refinancing” (id). based rental assistance under section 8 of the United States Housing Act of 1937... and a Rental Assistance Payment contract is subject” (Pub L 110-289, 122 US Stat 2825), Starrett City met the criteria of the new statute, which was enacted on July 30, 2008. Accordi ng to a letter from Deane to the limited partners, both this statute and the state legislat ion discussed below “ ‘apply only to Starrett City” (Veit affirmation, exhibit 57, D007263). * On February 13, 2009, in Tesponse to the final offer they had managed to receive, Curt Deane, Disque’s nephew, wrote to SCA’s financial advisor: “This is chutzpa h. God bless them and may they be more successful in their future endeavors than th € non-starter they’ve placed before us... . These guys must be on drugs” (Veit affirmation, exhibit 46). 10 On March 3, 2009, Todd Trehubenko of Recap Advisors, SCA’s financia l advisor, wrote to a contact at HUD seeking confirmation of HUD’s interest in allowing a “long-term preservation hold for [SCA]” as opposed to a sale (Veit affirmation, exhibit 53), Mr. Trehubenko proposed that the structure for such a deal “should track the MOU as much as possible, including the IRP decoupling, parcel division, and a MU[T]M, so that a preservation solution for the property could be achieved as soon as practical and without wiping away all of the tremendous progress that was collectively made last year” (id). On March 18, 2009, Deane, on behalf of SCA, executed a retainer agreement with Wachovia Multifamily Capital Inc. pursuant to which the bank agreed to assist SCA in obtaining a suitable refinan cing commitment (Warner moving affirmation, exhibit 30). To overcome the legal hurdle imposed by the Mitchell-Lama Law on taking out a mortgage in excess of the “project cost,” SCA retained the services of the law firm Wilson, Elser, > Moskowitz, Edelman & Dicker LLP (Wilson Elser) as “government affairs counsel” (Warner moving affirmation, exhibit 32). On July 11, 2009, less than four months later, the New York State legislature passed a bill that became Section 22-b of the Private Housing Finance Law. The law provided a one-year window from its effective date in which DHCR could approve a mortgage “in excess of the actual project cost of a state-aided project comprising more than five thousand rental units,” a description that exclusively applied to Starrett City. The Deanes, then, informed their fellow investors that they could now “proceed with [their] plan to refinance” (Warner moving affirmation, exhibit 36). By letter dated July 30, 2009, the Deanes sent a consent solicitation to SCA’s limited partners asking that they authorize Disque to enter into a refinancing subject to certain terms 11 (Veit affirmation, exhibit 57), As envisioned by the MOU and Mr. Trehubenko’s March proposal, the consent solicitation represented that the HAP and RAP contracts would be replaced by an MUTM contract, the interest reduction payments would continue even after the HFA mortgage was replaced, and the non-residential components of Starrett City would be released from government regulation (id. at D007264-65). Consequently, the non-residential land would belong to SCA free of government regulation. As agreed to in the MOU, it was represented that the rents of units not subject to the MUTM contract would remain subject to HUD and DHCR restrictions and that SCA would “facilitate the delivery of governmental rental assistance for qualifying residents” (id. at D002764).> The plan was approved by the limited partners, and on December 17, 2009, SCA closed on a loan from Wells Fargo for $531,485,000 (undispu ted facts, 719). After capital was returned to the SCA partners, SCA distributed approximately $38 million to Preservation, representing 19.9% of the loan proceeds available for distribution. Preservation set aside 15% of this distribution, paying a total of $3,141,170 to Iris Sutz, Robert Poll and Curt Deane (Deane’s nephew) as office staff, and retaining the balance as a reserve for future bonuses. After deducting for other expenses, Preservation distributed $31,899,544.77 to its Members, Of this amount, Rudman (who was fired in April 2009) got 15.01%, or $4,787,971.57, consistent with his interest in Preservation. Kuplesky, on the other hand, received 30% of his original 11.63% interest, or $1,113,259.21, because he had left Starrett City in 2008. By letter dated November 8, 2010, Carol reduced the interest of Rudman and Kuplesky * SCl later represented to DHCR that residents of such units would be able to apply for “sticky” vouchers (Veit affirmation, exhibit 56, Recap093016). 12 in Preservation to zero, “effective immediately” (Warner affirmation, exhibit 39). Disque passed away that same day (undisputed facts, 9 9). D. The Instant Action and Procedural Background Plaintiffs commenced this action on March 9, 2010. An amended complaint was filed on June 4, 2010, and the SAC on October 6, 2010. The SAC claimed that, as a result of the refinancing, Preservation should have received, in addition to 19.9% of the cash proceeds of the refinancing, 1) an 18.9% partnership interest in SCA; 2) a 19.9% interest in Spring Creek Plaza LLC (Spring Creek), the entity to which SCA conveyed certain of the non-res idential properties (including a shopping center) that had been released from government regulat ion but in which the members of SCA remained as members; 3) a share of the charitable deductions taken by SCA and Spring Creek as a result of the refinancing and donations; and 4) “the value of the [general partners’] increased equity in SCA resulting from cash reserves set aside from the cash proceeds for capital improvements and other purposes and any dividends and distrib utions made in respect thereof” (SAC 4 87). The SAC further contended that, under the Preserv ation Agreement, Preservation was obligated to distribute to each Member his proportionate share of the above interests. Based on the failure to transfer and distribute the above interests, the SAC asserted the following causes of action: 1) breach of fiduciary duty by Carol and St. Gervais to Preservation and its Members; 2) aiding and abetting Carol’s aforesaid breach by the other defendants; 3) and 4) breach of the assignment agreements by Deane’ and Salt Kettle, thereby harming both ° As noted, Deane passed away soon after the second amended complaint was filed. His estate has been substituted as a party in his place. 13 Preservation and plaintiffs; 5) breach of the Preservation Agreement by Carol, Deane and Salt Kettle; 6) conversion against all of defendants except Salt Kettle and St. Gervais; 7) and 8) tortious interference with the Preservation Agreement and the general partners’ assignments; 9) a declaratory judgment that Section 3.3 of the Preservation Agreem ent could not be used to reduce plaintiffs’ shares to zero until they receive their share of the general partner s’ distribution of the refinancing proceeds; and 10) a declaratory judgment that any transfe rs by the general partners of their interests to any entity other than Preservation are ineffective, Defendants, in their motion, now seek a ruling that the distribution to plaintiffs’ was correct and that, as of November 8, 2010, Carol was authorized to reallocate plaintiffs’ interests to zero. They further ask the court to declare that Preservation was authori zed to distribute the “office staff’ bonuses as it did and to retain a reserve for future bonuses, and that Kuplesky’s Sharing Ratio was correctly reduced by 70% because of his departu re in late 2008. The motion turns on the Preservation and SCA agreements, il. Defendants’ Submissions In support of their position that Kuplesky’s shares were rightfully reduced, defendants submitted an August 30, 2007 letter to the limited partners of SCA from Deane, written soon after the government’s final rejection of Clipper Equity’s bid (Warme r moving affirmation, exhibit 13), Deane wrote that management had been considering a number of options since the expiration of the purchase contract, including “the privatization process , reopening] the bidding process, privately negotiat{ing] with a strong buyer or just wait[ing] and do[ing] nothing” (id,). The letter does not mention a refinancing. Also, submitted is an excerpt from Curt Deane’s deposition in which he testified that, at a meeting between the various government agencies and 14 SCA management on September 5, 2007, “the intent was we, [SCA] .. . wanted to find a basis where we could work cooperatively with government to affect a sales process” (Warner moving affirmation, exhibit 14, 134). Defendants note that SCA’s October 2007 proposal to the government opened by stating that “SCA, as its first option, desires to sell Starrett City” (Warner moving affirmation, exhibit 15); neither that document nor the May 2008 MOU mentions a refinancing option. Moreover, defendants note that the original Recap retainer agreement, dated November 19, 2007, stated that Recap would assist SCA “in arranging and completing the successful sale of Starrett City” (Warner moving affirmation, exhibit 16). The agreement states that “Recap will not provide the following services in connection with this agreement: ...g. Refinan cing or resident subsidy services (interviewing prospective lenders, negotiating and closing new financing) .. . associated with a refinancing/dissolution transaction whereby the Property is not sold” (id. at | 3). It provides for a breakup fee of $400,000 “[iJn the unlikel y event, not currently contemplated, that [SCA] declines to complete an Affordability Transaction in favor of a Dissolution/Refinancing transaction” (id. atn 1). Also in evidence is the second amendment to the retainer agreement, dated June 11, 2009, some time after SCA had given up on the sales process (Warner moving affirmation, exhibit 35). This amendment changed the prior agreement to provide that Recap would offer advisory services relating to a refinan cing and replaced the breakup fee provision with a simple statement that “[SCA] may elect to refinan ce the Property as an alternative to sale” (id. at § 4). The September 19, 2008 retainer agreement with the law firm Bingham McCutc hen (Bingham) (Warner moving affirmation, exhibit 19) states that SCA was retaining Bingham for 15 representation “in connection with government regulatory matters involvi ng [HUD] and [DHCR} as may be required by you in connection with the sale of [Starrett City] . . . and/or the exit of the Development from the Mitchell Lama program . . , including, but not limited to, reviewing submissions for government approval made by any potential purchaser” (id. at 1). Here, too, the agreement provides that Bingham’s “representation [would] not include represe ntation of [SCA] in connection with new financing for the Development” (id). Lastly, defendants submit a letter from SCA’s attorney to Kuplesky, dated Februar y 13, 2009 (Warner moving affirmation, exhibit 47). The letter encloses a document bearing the letterhead of “Starrett City Preservation LLC,” and is entitled “Record of an Action Pursuant to Section 5.5(a)” (id.). The document, signed by Carol and dated “as of December 15, 2008,” states that it is a record of the fact