Preview
FILED: NEW YORK COUNTY CLERK 11/04/2016 04:32 PM INDEX NO. 650159/2010
NYSCEF DOC. NO. 401 RECEIVED NYSCEF: 11/04/2016
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
HARVEY RUDMAN and HAROLD KUPLESKY, on
Index No. 650159/10
Behalf of Each of Them Individually And On Behalf Of
Starrett City Preservation LLC, Derivatively,
Hon. Shirley Werner Kornreich
Plaintiffs,
Motion Seq. No. 10
- against -
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.
PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION
TO THE MOTION TO DISMISS FILED BY
ALL DEFENDANTS EXCEPT SPRING CREEK
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TABLE OF CONTENTS
Preliminary Statement .....................................................................................................................1
Statement of Facts ...........................................................................................................................2
ARGUMENT ..................................................................................................................................3
I. THE APPELLATE DIVISION DECISION DETERMINED NOTHING
MORE THAN THE CIRCUMSTANCES UNDER WHICH THE
MANAGING MEMBER IS EMPOWERED TO REALLOCATE MEMBERS’
SHARING RATIOS ............................................................................................................3
A. The Appellate Division Decision ............................................................................3
B. Nothing in the AD Decision Determines Whether Plaintiffs Received
What They Were Entitled To As Of The Date Of Reallocation..............................4
C. The Appellate Division Did Not Affirm This Court’s Conclusions
Regarding Non-Cash Assets....................................................................................5
II. TRIABLE ISSUES REMAIN AS TO WHETHER PLAINTIFFS RECEIVED
THE DISTRIBUTIONS THEY WERE ENTITLED TO AS OF THE
REALLOCATION ..............................................................................................................8
A. Plaintiffs Did Not Receive Their Full Share of Cash ..............................................8
B. Plaintiffs Did Not Receive Their Full Share Of Non-Cash Distributions .............10
1. Non-Cash Assets Were “Assets Subject To Distribution” Under
The SCA Partnership Agreement, And Were, In Fact,
Distributed .................................................................................................11
2. Non-Cash Assets Were “Assets Subject to Distribution” Under
the Preservation Agreement, and Were, In Fact, Distributed....................13
a. The Agreement Provides For Non-Cash Distributions .................13
b. Preservation Made Non-Cash Distributions To Members ............16
C. Non-Cash Assets, Like Cash Assets, Were Required To Be Distributed
Under The Preservation Agreement ......................................................................16
III. DEFENDANTS’ ARGUMENTS ADDRESSED TO THE PLEADINGS ARE
WITHOUT MERIT ...........................................................................................................17
A. There Is No Basis For Dismissing The First Or Second Causes Of
Action ....................................................................................................................17
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B. There is No Basis for Dismissing the Fifth Cause of Action ................................19
C. There is No Basis for Dismissing the Sixth Cause of Action................................20
D. There is No Basis for Dismissing the Seventh and Eighth Causes of
Action ....................................................................................................................21
E. There Is No Basis To Dismiss The Tenth Cause Of Action..................................24
Conclusion .....................................................................................................................................25
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TABLE OF AUTHORITIES
Page(s)
CASES
Beecher v. Feldstein,
8 A.D.3d 597 (2d Dep’t 2004).................................................................................................23
Coventry Real Estate Advisors LLC v. Developers Diversified Realty Corp.,
84 A.D.3d 583 (1st Dep’t 2011) ..............................................................................................18
Hoag v. Chancellor, Inc.,
246 A.D.2d 224 (1st Dep’t 1998) ............................................................................................22
Kalikow v. Shalik,
43 Misc.3d 817 (Sup. Ct. Nassau Cty. 2014) ..........................................................................18
Kronish Lieb Weiner & Hellman LLP v. Tahari, Ltd.,
35 A.D.3d 317 (1st Dep’t 2006) ...............................................................................................24
Lama Holding Co. v. Smith Barney Inc.,
88 N.Y.2d 413 (1996)..............................................................................................................22
Matter of Morgenthau v. Erlbaum,
59 N.Y.2d 143 (1983)..............................................................................................................25
NFL Enters. LLC v. Comcast Cable Commc’ns, LLC,
51 A.D.3d 52 (1st Dep’t 2008) ................................................................................................14
NY Medscan, LLC v. JC-Duggan Inc.,
40 A.D.3d 536 (1st Dep’t 2007) ..............................................................................................21
Thyroff v. Nationwide Mut. Ins. Co.,
8 N.Y.3d 283 (2007)................................................................................................................21
Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker,
56 A.D.3d 1 (1st Dep’t 2008) ..................................................................................................23
OTHER AUTHORITIES
Black’s Law Dictionary (10th Ed., 2014)...........................................................................12, 14, 15
Investopedia, http://www.investopedia.com/terms/d/distribution.asp ..........................................12
Investopedia, http://www.investopedia.com/terms/p/payment.asp ...............................................15
N.Y. Limited Liability Co. Law § 417(a) .......................................................................................19
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Plaintiffs Harvey Rudman and Harold Kuplesky submit this Memorandum of Law,
together with the Affirmation of Jacqueline Veit, dated November 4, 2016, and the exhibits
thereto, (“Veit Aff.”) in opposition to the Motion to Dismiss (the “MTD”) filed by all of the
defendants except Spring Creek Plaza LLC (“Spring Creek”).
Preliminary Statement
In the wake of the Appellate Division decision modifying this Court’s declaration on the
Ninth Cause of Action (the “AD Decision”), this Court permitted Defendants to file a motion
addressing that decision’s impact on the remaining claims. In typical fashion, Defendants try to
exploit that opening by parlaying the Appellate Division’s narrow decision into a dismissal of all
nine claims asserted by Plaintiff Rudman, and all claims asserted by Plaintiff Kuplesky, except
for the issue of Kuplesky’s Sharing Ratio.
There is no merit to Defendants’ motion. The Appellate Division decided one issue: the
circumstances under which the Managing Member of Preservation had the power to reallocate
member Sharing Ratios. Nothing more. Neither that decision nor this Court’s prior ruling
determined, or even considered, whether Plaintiffs received everything they were entitled to as
members of Preservation in accordance with their Sharing Ratios as of the date the Managing
Member actually exercised that power, November 8, 2010. The Second Amended Complaint
(“SAC”) alleges that Plaintiffs did not receive their share of the assets that were due to them as
of the reallocation. Those claims, which comprise a portion of every cause of action in the SAC,
need to be tried, in addition to the issue of Kuplesky’s Sharing Ratio.
To support their motion, Defendants give the AD Decision an overly broad reading that
expands its scope and imbues it with rulings and consequences that have no support in the actual
language of the decision. At the same time, Defendants give the SAC’s allegations short shrift,
so as to facilitate their argument that there is nothing left to try. But in fact, all of Plaintiffs’
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claims remain for trial, including claims for cash distributions prior to the reallocation that they
did not receive their full shares of; claims that Defendants wrongfully delayed making certain
cash distributions to them by diverting the funds, entitling Plaintiffs to the lost value for the
delay; claims for non-cash items that were in fact distributed to the general partners and should
therefore have been distributed to Preservation and then to its members, but were not; and claims
for non-cash items that were in fact distributed to Preservation and should have been distributed
to Plaintiffs, but were not. These claims survive following the AD Decision as described below.
Given that Plaintiffs’ claims include those based on the failure to distribute cash and the
failure to account for Kuplesky’s Sharing Ratio, this case is going to trial regardless of the outcome
of this motion. As we discuss below, the trial should encompass all of Plaintiffs’ claims, including
the portions of the claims that are based on non-cash assets actually distributed to the general
partners. This Court’s previous findings that non-cash assets were not “subject to distribution” by
SCA or Preservation is no longer binding in light of the Appellate Division’s modification of this
Court’s declaration based on that determination. Additionally, when it made these findings, this
Court did not have before it the parties’ arguments on the issue or a complete set of relevant
documents, because the parties had not raised the issue on the motion – the Court acted sua sponte.
As we show below, in the context of this motion, the Court should reach a different conclusion.
Despite the status of this case as essentially trial-ready, Defendants also seek dismissal of
seven out of the ten causes of action based on supposed pleading defects that should have been
raised, if at all, six years ago. There is no merit to any of Defendants’ arguments.
Defendants’ motion should be denied and the case set for trial.
Statement of Facts
The facts pertinent to this motion are known to the Court as a result of the Defendants’
prior motion for partial summary judgment, and are supplemented below as appropriate.
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ARGUMENT
I. THE APPELLATE DIVISION DECISION DETERMINED NOTHING MORE
THAN THE CIRCUMSTANCES UNDER WHICH THE MANAGING MEMBER
IS EMPOWERED TO REALLOCATE MEMBERS’ SHARING RATIOS
The AD Decision is brief and limited in scope.1 It modified this Court’s ruling on the
ninth cause of action by replacing this Court’s interpretation of Section 3.3 of the Preservation
Agreement (the “Agreement”) with the Appellate Division’s own interpretation. Specifically,
the appellate court interpreted Section 3.3 as giving “Preservation’s Managing Member . . . the
power to reallocate the Sharing Ratios of any Member once Preservation has distributed to its
Members, in accordance with Section 4.2, at least $10 million . . . .” (emphasis added).
The AD Decision does not go beyond that; nor was there any basis or reason to do so.
Contrary to Defendants’ efforts to widen the scope and import of the AD Decision, the Appellate
Division did not make any determination as to whether Plaintiffs received what they were
entitled to as of the reallocation of their Sharing Ratios on November 8, 2010 (MTD at 10); did
not find that Preservation was only required to pay, or that Rudman and Kuplesky were only
“entitled” to, their shares of $10 million (MTD at 3 n. 3; 9); and did not “affirm[] this court’s
rejection of plaintiff’s claim to non-cash assets of Starrett City” (MTD at 2). Defendants’
attempts to read these assertions into the Appellate Division’s short and spare ruling are
unsupported by the words of the Decision – a fact highlighted by Defendants’ failure to offer any
supporting quotes from the AD Decision – and must be rejected.
A. The Appellate Division Decision
The AD Decision begins with a full recitation of this Court’s declaration as to the
circumstances under which the Managing Member of Preservation has the power to reallocate the
1
The AD Decision is Exhibit A to the Affidavit of Steven Yurowitz (“Yurowitz Aff.”), submitted by
Defendants on this motion.
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Sharing Ratios of any member of Preservation.2 It then states that the Order is “unanimously
modified, on the law, to declare that Preservation’s Managing Member has the power to reallocate
the Sharing Ratios of any Member once Preservation has distributed to its Members, in accordance
with Section 4.2, at least $10 million, and otherwise affirmed, without costs.” AD Decision at 2.
The remaining page and one-half of the AD Decision consists, in toto, of the appellate
court’s explanation of how ambiguity is determined in a contract; a quote of Section 3.3 of the
Agreement; a statement that it cannot be disputed that Preservation distributed at least $10
million to its members; an acknowledgement that the issue of Kuplesky’s Sharing Ratio
reduction is not at issue on appeal; and the statement that the third sentence of Section 3.3 is
“merely a statement of intention; it does not actually require the full distribution of the
proceeds.” Id. at 4. The Court then concludes by saying “We have modified the IAS court’s
declaration accordingly.” Id.
B. Nothing in the AD Decision Determines Whether Plaintiffs Received What
They Were Entitled To As Of The Date Of Reallocation
As the Appellate Division’s words make clear, its ruling addresses only when
“Preservation’s Managing Member has the power to reallocate the Sharing Ratios of any
Member the Managing Member” (emphasis added). It is undisputed, however, that the
Managing Member did not invoke or exercise this “power” until November 8, 2010. The AD
Decision, therefore, does not determine, and indeed has no bearing on, whether Plaintiffs
received everything they were entitled as of the reallocation on November 8, 2010. Until that
2
The Appellate Division recites this Court’s ruling as “declaring that the managing member of
defendant/derivative plaintiff [Preservation] has the power to reallocate the Sharing Ratios of any member
of said company once (i) [SCA] or its successors has distributed to Preservation all the distributions that
SCA is required to make to its managing general partner and general partner under Sections 3.02 and 3.03
of the SCA partnership agreement; (ii) Preservation has distributed to its members, in accordance with
Section 4.2 of its LLC Agreement, any and all distributions it received from SCA; and (iii) such
distributions by Preservation are $10 million or more . . . .”
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time, Plaintiffs were members of Preservation, with their respective Sharing Ratios, and entitled
to the same rights as all other members. What distributions Plaintiffs were entitled to as of
November 8, 2010, but did not receive, are issues remaining to be tried.
Misreading the AD Decision, Defendants argue that under “the Appellate Division’s
modification, the most that Preservation was required to pay Rudman and Kuplesky before their
Sharing Ratios could be reduced,” and the most that Plaintiffs “had a right to demand,” was their
respective Sharing Ratios of $10 million. MTD at 3 n.3 and 9. Defendants’ reading ignores the
difference between the existence of the power to reallocate Sharing Ratios and the exercise of
that power. Until the Managing Member actually exercised the power to reallocate, Plaintiffs,
like all other members of Preservation, were entitled to their full Sharing Ratio of all amounts
Preservation actually distributed or which it was required to distribute.
C. The Appellate Division Did Not Affirm This Court’s Conclusions
Regarding Non-Cash Assets
In ruling on Defendants’ summary judgment motion, this Court undertook a general
analysis of the type of assets Preservation and SCA were required to distribute. It did so because
it determined, based on the third sentence of Section 3.3, that the reallocation power cannot arise
until SCA and Preservation have made all the distributions required to be made by their
respective governing agreements. Finding that “the purpose of Preservation was to serve as a
conduit, directing the distributions SCA was required to make to the general partners to the
Preservation members,” the Court concluded that “[t]he nature of such distributions was
naturally determined by the SCA partnership agreement . . . .” Yurowitz Aff. Ex. B (“Decision”)
at 21. The Court then sought to determine what distributions were “due” to the general partners
under the SCA partnership agreement. Id. at 22-23. Although the parties had not raised or
addressed that issue on that motion – and the Court did not seek input from the parties on that
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issue either through supplemental briefing or at oral argument – the Court, reviewing the limited
record before it, determined that SCA and Preservation were only “obliged to” distribute cash,
and that non-cash assets were “[a]ssets not subject to distribution.” Id. at 23.
In modifying the Decision, the Appellate Division struck this Court’s declaration,
including the portions relating to required distributions under the SCA and Preservation
Agreements. It did not consider what distributions those Agreements required -- there was no
reason to do so, because that issue was irrelevant to the Appellate Division’s analysis and
declaration. For the Appellate Division, the first sentence of Section 3.3 was clear that the
reallocation power arose once there was a “Funding Event,” which was defined in the second
sentence as “the distribution to Members, in accordance with their then current Sharing Ratios . .
. , of at least $10,000,000 in aggregate distributions . . . .” Unlike this Court, the appellate court
determined that the third sentence of Section 3.3 did not impose an additional requirement that
there be a “full distribution of proceeds of a substantial refinancing . . . ;” rather, it held that the
third sentence was “merely a statement of intention” and thus did not “actually require the full
distribution of proceeds.” AD Decision at 4. Because its interpretation of Section 3.3 rendered
moot the issue of what distributions were required by the SCA and Preservation Agreements, the
appellate court had no reason to reach those issues.
In short, in modifying this Court’s Decision, the Appellate Division struck the portions of
this Court’s declaration referring to SCA’s and Preservation’s required distributions. This
Court’s pronouncement that non-cash assets were not “subject to distribution” by SCA and
Preservation does not, therefore, survive the AD Decision.
Defendants contend that the AD Decision “affirms” this Court’s determination that non-
cash assets are not subject to distribution and that Plaintiffs therefore had no right to share in
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them. No statements or findings in the AD Decision support this contention. Apparently,
Defendants rely on the words “and otherwise affirmed,” which appear at the end of the first
paragraph of the AD Decision. But reading those words as Defendants do offends both the
language and grammar of the paragraph, and the substance of the AD Decision.
The subject of the paragraph in which the words “and otherwise affirmed” appear is this
Court’s “Order.” Thus, the first words of the paragraph are: “Order, Supreme Court, New York
County (Shirley Werner Kornreich, J.), entered on or about July 30, 2014 . . . .” It is that Order
that is “unanimously modified, on the law . . . and otherwise affirmed . . . .” This Court’s 32
page Decision consists of three components, as the Court itself recognized in entitling it as a
“Decision, Order & Judgment.” Decision at 1. The Order portion – which is the portion that
was before the Appellate Division for review – is contained on the last two pages of the Decision
and consists of three paragraphs beginning with the word “Ordered” and one with the words
“Adjudged and Declared.” The latter paragraph, concerning to the Ninth Cause of Action, is the
Order that the Appellate Division modified, and it replaced this Court’s declaration in its
entirety. It is the other three “Ordered” paragraphs that are “otherwise affirmed.” 3 None of
these paragraphs has anything to do with this Court’s discussion of the cash and non-cash assets.
Moreover, as discussed supra at 6, Defendants’ contention that the Appellate Division
“affirmed” the non-cash holding does not make sense, given that it struck the portions of this
Court’s declaration as to required distributions under the SCA and Preservation Agreements.
3
The other decretal paragraphs are the following: i) Ordering that Defendants’ motion for partial
summary judgment is granted in part by dismissing the first through eighth causes of action to the extent
those claims asserted that amounts set aside for bonus payments were unauthorized under the Agreement;
ii) Ordering that the remaining causes of action are severed and shall continue; and iii) Ordering that
Defendants’ motion is otherwise denied.
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II. TRIABLE ISSUES REMAIN AS TO WHETHER PLAINTIFFS RECEIVED THE
DISTRIBUTIONS THEY WERE ENTITLED TO AS OF THE REALLOCATION
In addition to the issue of whether Kuplesky’s distributions should have been calculated
at a 11.69% Sharing Ratio rather than only 3.49% -- which even Defendants concede must be
tried -- issues remain for trial as to whether both Plaintiffs received their full shares of
distributions that they were entitled to as of November 8, 2010.
A. Plaintiffs Did Not Receive Their Full Share of Cash
Plaintiffs allege that they did not receive the full distribution of cash to which they were
entitled as of the reallocation of their Sharing Ratios. This includes Plaintiffs’ respective shares
of the Refinancing cash proceeds that were diverted to Spring Creek; Refinancing cash proceeds
that were paid to the managing general partner as a “return of capital” which, under the terms of
the Assignments, belonged to Preservation, but was never delivered to it; cash that was withheld
from distribution by Preservation to pay disputed “expenses;” and damages for Defendants’
failure to distribute cash “as soon as practicable,” as required by the Agreement. These claims
were not addressed on the partial summary judgment motion, and must be resolved at trial.
Defendants argue that this Court “found” that SCA distributed to Preservation 19.9% of
loan proceeds “available for distribution,” so that Preservation received everything it was entitled
to receive. MTD at 10. Actually, what this Court specifically “found” is that the issue whether
Plaintiffs received the cash they were entitled to before reallocation was “not explored on this
motion.” Decision at 31. Since the question of whether Plaintiffs received their share of cash
was not addressed by this Court, the Appellate Division did not address the issue either.
Further, as Defendants are well aware, their term proceeds “available for distribution” excludes
monies withheld from distribution.
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Defendants engage in a clumsy sleight of hand, pointing to the $10 million amount that
triggers a “Funding Event,” and then suggesting that the appellate court limited Plaintiffs to their
shares of that amount: they argue that Rudman already received more than “he had a right to
demand” and Kuplesky received more than he was “entitled” to and only $45,000 less than his
original Sharing Ratio would have entitled him to receive. As pointed out supra at 5, Plaintiffs
were not capped at their Sharing Ratio of $10 million, any more than other members of
Preservation were capped at their Sharing Ratio of $10 million simply because the Managing
Member had the power to reduce their Sharing Ratios. Until she exercised that power, Plaintiffs,
like other members, were entitled to distributions at their full Sharing Ratios.
The only cash dispute that Defendants address in their motion is the diversion to Spring
Creek of $3.5 million from the Refinancing cash proceeds. MTD at 10; SAC ¶81. SCA
distributed to its partners membership interests in Spring Creek, a new entity it set up in
connection with the Refinancing, and distributed $3.5 million to that entity, as well as vacant
parcels of land (the “Vacant Parcels”) and a shopping center (“Shopping Center”). Defendants
contend that Section 5.10 of the Agreement required Plaintiffs to support the Managing General
Partner Disque Deane’s (the “MGP”) decision to fund Spring Creek, and that the claim is
therefore prohibited. Defendants misread the section.
Section 5.10 provides:
The MGP shall from time to time propose transactions or plans for SCA
(including but not limited to merger, consolidation, conversion, financing,
recapitalization, liquidation or other business combination transaction) and in the
event that the MGP approves any such transaction or plan for SCA the Members
shall consent to, vote in favor of (if applicable) and raise no objections against
such transaction or plan.
Yurowitz Aff. Ex. E-1 (emphasis added). Section 5.10 does not apply here because the transfer
of $3.5 million to Spring Creek was not a transaction the MGP “proposed” for consent or a vote.
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He just unilaterally did it. Deane did not request the consent of Preservation’s members to the
transfer of the $3.5 million (or the Shopping Center or Vacant Parcels) to Spring Creek. Indeed,
Deane did not even request the consent of SCA’s limited partners to the $3.5 million transfer.
SCA’s partners were apprised of that transaction only after it occurred. Veit Aff. Ex. 3 at
D015639. Moreover, Section 5.10 seeks only to prevent conduct that would derail a transaction
proposed by the MGP. Thus, if requested, Preservation members must consent to, vote in favor
of and not raise objections to such transaction. But nothing in the section purports to prevent a
member from seeking his fair share of diverted assets once the transaction has been effectuated.
B. Plaintiffs Did Not Receive Their Full Share Of Non-Cash Distributions
An issue on this motion is whether Plaintiffs are entitled to non-cash assets that were
actually distributed by SCA or Spring Creek, but which were either diverted away from
Preservation, or were distributed to Preservation but were not properly distributed by
Preservation to Plaintiffs. We discuss these below. Before doing so, however, we address this
Court’s findings on non-cash assets.
Plaintiffs acknowledge that this Court previously ruled that non-cash assets were “assets
not subject to distribution” by either SCA or Preservation. That ruling, however, is no longer
binding now that the Appellate Division has modified the Order that was based on that
determination. In ruling on Defendants’ present motion – and thereby deciding what claims will
be presented to the jury – the Court should not simply repeat the analysis that underlay the
modified Order.
When the Court previously ruled, it did not have the benefit of the parties’ arguments, or
a complete set of documents, on the issue of whether the SCA and Preservation Agreements
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provided for the distribution of both cash and non-cash assets.4 Indeed, the parties had not raised
or addressed that issue on that motion. The parties argued whether non-cash assets were “proceeds
of a substantial Refinancing” in the third sentence of Section 3.3, but no party addressed whether
required distributions under the SCA Partnership Agreement and the Agreement included non-
cash assets. An analysis of that issue on this motion necessarily leads to the conclusion that non-
cash assets were “assets subject to distribution” under both agreements.
1. Non-Cash Assets Were “Assets Subject To Distribution” Under The
SCA Partnership Agreement, And Were, In Fact, Distributed
There can be no dispute that (i) the SCA Partnership Agreement provides for non-cash
distributions, and (ii) SCA in fact distributed non-cash assets, including as part of the
Refinanancing. The Court’s finding in the Decision that non-cash assets were “[a]ssets not
subject to distribution” should not, therefore, be followed on this motion.
Section 13.02 of the SCA Partnership Agreement provides as follows:
Section 13.02. Distribution in Kind. In the event it becomes necessary to make a
distribution of Partnership property in kind, such property shall be transferred and
conveyed to the Partners other than the Housing Company or their assignees so as
to vest in each of them as a tenant in common an undivided interest in the whole
of said property equal to his interest in the distribution of Sale/Refinancing
Proceeds in accordance with Section 3.03 hereof.
Veit Aff. Ex. 1 at 123. Thus, the SCA Partnership Agreement allows for the distribution of non-
cash assets, and provides that they are to be distributed just like net cash proceeds from a sale or
refinancing of the property as set forth in Section 3.03 of that agreement.
SCA exercised this power by making non-cash distributions to its general and limited
partners as part of the Refinancing. First, SCA distributed to its partners membership interests in
Spring Creek, and thereby the Shopping Center and the Vacant Parcels that were put into Spring
4
With respect to the SCA Partnership Agreement, the court’s interpretation was based on only a handful
of pages of the 130-page Partnership Agreement (plus many amendments), not on the entire document.
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Creek, in connection with the Refinancing. The documentation in connection with that
transaction confirms that SCA’s transfer of membership interests in Spring Creek, and its
transfer of the Shopping Center and Vacant Parcels, were “distributions” by SCA.5 Spring
Creek’s Limited Liability Company Agreement describes the transaction as follows: SCA
“conveyed title [to the Shopping Center and Vacant Parcels] to the Company [Spring Creek] in
exchange for the distribution to the partners of [SCA] of interests in the Company . . . .” Veit
Aff. Ex. 3 at D015654; emphasis added. In the summary of the Refinancing sent to the SCA
limited partners, the MGP explained that the transaction included a “distribution of the Shopping
Center to a new entity.” Id. at D015641.6
Second, SCA distributed charitable deductions to its partners arising from its donation of
a Yeshiva to charity as part of the Refinancing. This Court characterized charitable deductions
as “non-cash” assets, which it determined were not subject to distribution. Decision at 23. Yet,
this donation gave rise to a $7.7 million charitable deduction (the “Yeshiva Deduction”), and this
deduction was in fact distributed to all partners, including Preservation. For 2009, SCA issued a
K-1 to Preservation, which reflects its share ($29,387) of the Yeshiva Deduction. Veit Aff. Ex.
4; Ex. 5 at 203-06.
In addition, in December 2010, Spring Creek donated the Vacant Parcels to charity, giving
rise to a $53 million charitable tax deduction (the “Vacant Parcel Deduction”). As reflected in tax
documentation (and other documents), that deduction too was distributed by Spring Creek to its
5
The word “distribution” refers to a transfer of any type of property. Black’s Law Dictionary (10th Ed.,
2014) defines a “corporate distribution” as a “direct or indirect transfer of money or other property, or
incurring indebtedness to or for the benefit of its shareholders.” See also Investopedia,
http://www.investopedia.com/terms/d/distribution.asp (“distribution” means “[a] company payment of
cash, stock or physical products to its shareholders”).
6
This Court’s statement in the Decision that Spring Creek “remained an asset of the SCA partners” is not
accurate because Spring Creek was not held by those individuals and entities in their capacity as SCA
partners, and the underlying assets had been transferred from SCA to Spring Creek. Decision at 23.
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members, including Preservation (which received 19.9%, a $10,726,100 deduction). Veit Aff. Ex.
6; Ex. 7.
In short, SCA Partnership Agreement unquestionably provides for non-cash distributions,
and such distributions were in fact made as part of and following the Refinancing.
2. Non-Cash Assets Were “Assets Subject to Distribution” Under the
Preservation Agreement, and Were, In Fact, Distributed
Just as non-cash assets were subject to distribution under the SCA partnership agreement,
and were in fact distributed, so too were non-cash assets subject to distribution under the
Preservation Agreement, and in fact distributed to Preservation’s members – though not fully to
all members. Plaintiffs are entitled to present their claim for their share of the Vacant Parcel
Deduction at trial, and their claim for the membership interests in Spring Creek that were
distributed to the general partners and should have been distributed to Preservation and its
members, but were not.
a. The Agreement Provides For Non-Cash Distributions
A reading of the Preservation Agreement leaves no doubt that it contemplates that
Preservation will distribute non-cash assets and, moreover, that it will do so via the waterfall
provision of Section 4.2 – the provision this Court interpreted as applying only to cash payments,
based on its view that “payments” refers to cash.7 Section 4.8A of the Agreement states that in
the event of a liquidation, “the assets of the Company shall be distributed to the Members in
accordance with the balances in their respective Capital Account, after taking into account . . .
distributions, if any, of cash or property, if any, pursuant to Section 4.2.” Yurowitz Aff. Ex. E-1
7
The Court stated in the Decision that Plaintiffs did not “dispute” that charitable deductions and other
non-cash assets received by Preservation fall outside the meaning of “payments.” Decision at 23.
Because neither Plaintiffs nor Defendants raised the interpretation of “payments” as an issue on the
summary judgment motion – but, rather, focused on the word “proceeds” in Section 3.3 – there was no
reason to make that argument.
13
2618192.2
17 of 29
(emphasis added). This provision makes no sense if, as the Court previously found – and
Defendants urge on the current motion to dismiss – non-cash assets were not distributable
pursuant to Section 4.2. Similarly, in Section 4.9A the Agreement uses the word “distribution”
to encompass transfers of property, providing that “[i]f any assets of the Company are distributed
in kind to the Members . . . any Member entitled to any interest in those assets shall receive that
interest as a tenant in common with all other Members so entitled.” Id.
In addition to being inconsistent with these provisions, the Court’s prior conclusion that
the use of the word “payments” in Section 4.2 limits its application to cash cannot be reconciled
with the use of the term “cash” in the Agreement. When the intention is to limit the reference to
cash assets, the Agreement uses the word “cash.” Indeed, the word “cash” is used multiple
times. Section 4.3, which deals with “Special Allocations,” refers to the situation where there is
“cash available from sale or refinancing for that period.” Id. Section 4.8A provides that, upon
liquidation, assets of Company are to be distributed after taking into account “distributions, if
any, of cash or property, if any, pursuant to Section 4.2.” Id. (emphasis added). See a
Preview
FILED: NEW YORK COUNTY CLERK 11/04/2016 04:32 PM INDEX NO. 650159/2010 NYSCEF DOC. NO. 401 RECEIVED NYSCEF: 11/04/2016 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK HARVEY RUDMAN and HAROLD KUPLESKY, on Index No. 650159/10 Behalf of Each of Them Individually And On Behalf Of Starrett City Preservation LLC, Derivatively, Hon. Shirley Werner Kornreich Plaintiffs, Motion Seq. No. 10 - against - 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. PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO THE MOTION TO DISMISS FILED BY ALL DEFENDANTS EXCEPT SPRING CREEK 2618192.2 1 of 29 TABLE OF CONTENTS Preliminary Statement .....................................................................................................................1 Statement of Facts ...........................................................................................................................2 ARGUMENT ..................................................................................................................................3 I. THE APPELLATE DIVISION DECISION DETERMINED NOTHING MORE THAN THE CIRCUMSTANCES UNDER WHICH THE MANAGING MEMBER IS EMPOWERED TO REALLOCATE MEMBERS’ SHARING RATIOS ............................................................................................................3 A. The Appellate Division Decision ............................................................................3 B. Nothing in the AD Decision Determines Whether Plaintiffs Received What They Were Entitled To As Of The Date Of Reallocation..............................4 C. The Appellate Division Did Not Affirm This Court’s Conclusions Regarding Non-Cash Assets....................................................................................5 II. TRIABLE ISSUES REMAIN AS TO WHETHER PLAINTIFFS RECEIVED THE DISTRIBUTIONS THEY WERE ENTITLED TO AS OF THE REALLOCATION ..............................................................................................................8 A. Plaintiffs Did Not Receive Their Full Share of Cash ..............................................8 B. Plaintiffs Did Not Receive Their Full Share Of Non-Cash Distributions .............10 1. Non-Cash Assets Were “Assets Subject To Distribution” Under The SCA Partnership Agreement, And Were, In Fact, Distributed .................................................................................................11 2. Non-Cash Assets Were “Assets Subject to Distribution” Under the Preservation Agreement, and Were, In Fact, Distributed....................13 a. The Agreement Provides For Non-Cash Distributions .................13 b. Preservation Made Non-Cash Distributions To Members ............16 C. Non-Cash Assets, Like Cash Assets, Were Required To Be Distributed Under The Preservation Agreement ......................................................................16 III. DEFENDANTS’ ARGUMENTS ADDRESSED TO THE PLEADINGS ARE WITHOUT MERIT ...........................................................................................................17 A. There Is No Basis For Dismissing The First Or Second Causes Of Action ....................................................................................................................17 i 2618192.2 2 of 29 B. There is No Basis for Dismissing the Fifth Cause of Action ................................19 C. There is No Basis for Dismissing the Sixth Cause of Action................................20 D. There is No Basis for Dismissing the Seventh and Eighth Causes of Action ....................................................................................................................21 E. There Is No Basis To Dismiss The Tenth Cause Of Action..................................24 Conclusion .....................................................................................................................................25 ii 2618192.2 3 of 29 TABLE OF AUTHORITIES Page(s) CASES Beecher v. Feldstein, 8 A.D.3d 597 (2d Dep’t 2004).................................................................................................23 Coventry Real Estate Advisors LLC v. Developers Diversified Realty Corp., 84 A.D.3d 583 (1st Dep’t 2011) ..............................................................................................18 Hoag v. Chancellor, Inc., 246 A.D.2d 224 (1st Dep’t 1998) ............................................................................................22 Kalikow v. Shalik, 43 Misc.3d 817 (Sup. Ct. Nassau Cty. 2014) ..........................................................................18 Kronish Lieb Weiner & Hellman LLP v. Tahari, Ltd., 35 A.D.3d 317 (1st Dep’t 2006) ...............................................................................................24 Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (1996)..............................................................................................................22 Matter of Morgenthau v. Erlbaum, 59 N.Y.2d 143 (1983)..............................................................................................................25 NFL Enters. LLC v. Comcast Cable Commc’ns, LLC, 51 A.D.3d 52 (1st Dep’t 2008) ................................................................................................14 NY Medscan, LLC v. JC-Duggan Inc., 40 A.D.3d 536 (1st Dep’t 2007) ..............................................................................................21 Thyroff v. Nationwide Mut. Ins. Co., 8 N.Y.3d 283 (2007)................................................................................................................21 Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 56 A.D.3d 1 (1st Dep’t 2008) ..................................................................................................23 OTHER AUTHORITIES Black’s Law Dictionary (10th Ed., 2014)...........................................................................12, 14, 15 Investopedia, http://www.investopedia.com/terms/d/distribution.asp ..........................................12 Investopedia, http://www.investopedia.com/terms/p/payment.asp ...............................................15 N.Y. Limited Liability Co. Law § 417(a) .......................................................................................19 iii 2618192.2 4 of 29 Plaintiffs Harvey Rudman and Harold Kuplesky submit this Memorandum of Law, together with the Affirmation of Jacqueline Veit, dated November 4, 2016, and the exhibits thereto, (“Veit Aff.”) in opposition to the Motion to Dismiss (the “MTD”) filed by all of the defendants except Spring Creek Plaza LLC (“Spring Creek”). Preliminary Statement In the wake of the Appellate Division decision modifying this Court’s declaration on the Ninth Cause of Action (the “AD Decision”), this Court permitted Defendants to file a motion addressing that decision’s impact on the remaining claims. In typical fashion, Defendants try to exploit that opening by parlaying the Appellate Division’s narrow decision into a dismissal of all nine claims asserted by Plaintiff Rudman, and all claims asserted by Plaintiff Kuplesky, except for the issue of Kuplesky’s Sharing Ratio. There is no merit to Defendants’ motion. The Appellate Division decided one issue: the circumstances under which the Managing Member of Preservation had the power to reallocate member Sharing Ratios. Nothing more. Neither that decision nor this Court’s prior ruling determined, or even considered, whether Plaintiffs received everything they were entitled to as members of Preservation in accordance with their Sharing Ratios as of the date the Managing Member actually exercised that power, November 8, 2010. The Second Amended Complaint (“SAC”) alleges that Plaintiffs did not receive their share of the assets that were due to them as of the reallocation. Those claims, which comprise a portion of every cause of action in the SAC, need to be tried, in addition to the issue of Kuplesky’s Sharing Ratio. To support their motion, Defendants give the AD Decision an overly broad reading that expands its scope and imbues it with rulings and consequences that have no support in the actual language of the decision. At the same time, Defendants give the SAC’s allegations short shrift, so as to facilitate their argument that there is nothing left to try. But in fact, all of Plaintiffs’ 5 of 29 claims remain for trial, including claims for cash distributions prior to the reallocation that they did not receive their full shares of; claims that Defendants wrongfully delayed making certain cash distributions to them by diverting the funds, entitling Plaintiffs to the lost value for the delay; claims for non-cash items that were in fact distributed to the general partners and should therefore have been distributed to Preservation and then to its members, but were not; and claims for non-cash items that were in fact distributed to Preservation and should have been distributed to Plaintiffs, but were not. These claims survive following the AD Decision as described below. Given that Plaintiffs’ claims include those based on the failure to distribute cash and the failure to account for Kuplesky’s Sharing Ratio, this case is going to trial regardless of the outcome of this motion. As we discuss below, the trial should encompass all of Plaintiffs’ claims, including the portions of the claims that are based on non-cash assets actually distributed to the general partners. This Court’s previous findings that non-cash assets were not “subject to distribution” by SCA or Preservation is no longer binding in light of the Appellate Division’s modification of this Court’s declaration based on that determination. Additionally, when it made these findings, this Court did not have before it the parties’ arguments on the issue or a complete set of relevant documents, because the parties had not raised the issue on the motion – the Court acted sua sponte. As we show below, in the context of this motion, the Court should reach a different conclusion. Despite the status of this case as essentially trial-ready, Defendants also seek dismissal of seven out of the ten causes of action based on supposed pleading defects that should have been raised, if at all, six years ago. There is no merit to any of Defendants’ arguments. Defendants’ motion should be denied and the case set for trial. Statement of Facts The facts pertinent to this motion are known to the Court as a result of the Defendants’ prior motion for partial summary judgment, and are supplemented below as appropriate. 2 2618192.2 6 of 29 ARGUMENT I. THE APPELLATE DIVISION DECISION DETERMINED NOTHING MORE THAN THE CIRCUMSTANCES UNDER WHICH THE MANAGING MEMBER IS EMPOWERED TO REALLOCATE MEMBERS’ SHARING RATIOS The AD Decision is brief and limited in scope.1 It modified this Court’s ruling on the ninth cause of action by replacing this Court’s interpretation of Section 3.3 of the Preservation Agreement (the “Agreement”) with the Appellate Division’s own interpretation. Specifically, the appellate court interpreted Section 3.3 as giving “Preservation’s Managing Member . . . the power to reallocate the Sharing Ratios of any Member once Preservation has distributed to its Members, in accordance with Section 4.2, at least $10 million . . . .” (emphasis added). The AD Decision does not go beyond that; nor was there any basis or reason to do so. Contrary to Defendants’ efforts to widen the scope and import of the AD Decision, the Appellate Division did not make any determination as to whether Plaintiffs received what they were entitled to as of the reallocation of their Sharing Ratios on November 8, 2010 (MTD at 10); did not find that Preservation was only required to pay, or that Rudman and Kuplesky were only “entitled” to, their shares of $10 million (MTD at 3 n. 3; 9); and did not “affirm[] this court’s rejection of plaintiff’s claim to non-cash assets of Starrett City” (MTD at 2). Defendants’ attempts to read these assertions into the Appellate Division’s short and spare ruling are unsupported by the words of the Decision – a fact highlighted by Defendants’ failure to offer any supporting quotes from the AD Decision – and must be rejected. A. The Appellate Division Decision The AD Decision begins with a full recitation of this Court’s declaration as to the circumstances under which the Managing Member of Preservation has the power to reallocate the 1 The AD Decision is Exhibit A to the Affidavit of Steven Yurowitz (“Yurowitz Aff.”), submitted by Defendants on this motion. 3 2618192.2 7 of 29 Sharing Ratios of any member of Preservation.2 It then states that the Order is “unanimously modified, on the law, to declare that Preservation’s Managing Member has the power to reallocate the Sharing Ratios of any Member once Preservation has distributed to its Members, in accordance with Section 4.2, at least $10 million, and otherwise affirmed, without costs.” AD Decision at 2. The remaining page and one-half of the AD Decision consists, in toto, of the appellate court’s explanation of how ambiguity is determined in a contract; a quote of Section 3.3 of the Agreement; a statement that it cannot be disputed that Preservation distributed at least $10 million to its members; an acknowledgement that the issue of Kuplesky’s Sharing Ratio reduction is not at issue on appeal; and the statement that the third sentence of Section 3.3 is “merely a statement of intention; it does not actually require the full distribution of the proceeds.” Id. at 4. The Court then concludes by saying “We have modified the IAS court’s declaration accordingly.” Id. B. Nothing in the AD Decision Determines Whether Plaintiffs Received What They Were Entitled To As Of The Date Of Reallocation As the Appellate Division’s words make clear, its ruling addresses only when “Preservation’s Managing Member has the power to reallocate the Sharing Ratios of any Member the Managing Member” (emphasis added). It is undisputed, however, that the Managing Member did not invoke or exercise this “power” until November 8, 2010. The AD Decision, therefore, does not determine, and indeed has no bearing on, whether Plaintiffs received everything they were entitled as of the reallocation on November 8, 2010. Until that 2 The Appellate Division recites this Court’s ruling as “declaring that the managing member of defendant/derivative plaintiff [Preservation] has the power to reallocate the Sharing Ratios of any member of said company once (i) [SCA] or its successors has distributed to Preservation all the distributions that SCA is required to make to its managing general partner and general partner under Sections 3.02 and 3.03 of the SCA partnership agreement; (ii) Preservation has distributed to its members, in accordance with Section 4.2 of its LLC Agreement, any and all distributions it received from SCA; and (iii) such distributions by Preservation are $10 million or more . . . .” 4 2618192.2 8 of 29 time, Plaintiffs were members of Preservation, with their respective Sharing Ratios, and entitled to the same rights as all other members. What distributions Plaintiffs were entitled to as of November 8, 2010, but did not receive, are issues remaining to be tried. Misreading the AD Decision, Defendants argue that under “the Appellate Division’s modification, the most that Preservation was required to pay Rudman and Kuplesky before their Sharing Ratios could be reduced,” and the most that Plaintiffs “had a right to demand,” was their respective Sharing Ratios of $10 million. MTD at 3 n.3 and 9. Defendants’ reading ignores the difference between the existence of the power to reallocate Sharing Ratios and the exercise of that power. Until the Managing Member actually exercised the power to reallocate, Plaintiffs, like all other members of Preservation, were entitled to their full Sharing Ratio of all amounts Preservation actually distributed or which it was required to distribute. C. The Appellate Division Did Not Affirm This Court’s Conclusions Regarding Non-Cash Assets In ruling on Defendants’ summary judgment motion, this Court undertook a general analysis of the type of assets Preservation and SCA were required to distribute. It did so because it determined, based on the third sentence of Section 3.3, that the reallocation power cannot arise until SCA and Preservation have made all the distributions required to be made by their respective governing agreements. Finding that “the purpose of Preservation was to serve as a conduit, directing the distributions SCA was required to make to the general partners to the Preservation members,” the Court concluded that “[t]he nature of such distributions was naturally determined by the SCA partnership agreement . . . .” Yurowitz Aff. Ex. B (“Decision”) at 21. The Court then sought to determine what distributions were “due” to the general partners under the SCA partnership agreement. Id. at 22-23. Although the parties had not raised or addressed that issue on that motion – and the Court did not seek input from the parties on that 5 2618192.2 9 of 29 issue either through supplemental briefing or at oral argument – the Court, reviewing the limited record before it, determined that SCA and Preservation were only “obliged to” distribute cash, and that non-cash assets were “[a]ssets not subject to distribution.” Id. at 23. In modifying the Decision, the Appellate Division struck this Court’s declaration, including the portions relating to required distributions under the SCA and Preservation Agreements. It did not consider what distributions those Agreements required -- there was no reason to do so, because that issue was irrelevant to the Appellate Division’s analysis and declaration. For the Appellate Division, the first sentence of Section 3.3 was clear that the reallocation power arose once there was a “Funding Event,” which was defined in the second sentence as “the distribution to Members, in accordance with their then current Sharing Ratios . . . , of at least $10,000,000 in aggregate distributions . . . .” Unlike this Court, the appellate court determined that the third sentence of Section 3.3 did not impose an additional requirement that there be a “full distribution of proceeds of a substantial refinancing . . . ;” rather, it held that the third sentence was “merely a statement of intention” and thus did not “actually require the full distribution of proceeds.” AD Decision at 4. Because its interpretation of Section 3.3 rendered moot the issue of what distributions were required by the SCA and Preservation Agreements, the appellate court had no reason to reach those issues. In short, in modifying this Court’s Decision, the Appellate Division struck the portions of this Court’s declaration referring to SCA’s and Preservation’s required distributions. This Court’s pronouncement that non-cash assets were not “subject to distribution” by SCA and Preservation does not, therefore, survive the AD Decision. Defendants contend that the AD Decision “affirms” this Court’s determination that non- cash assets are not subject to distribution and that Plaintiffs therefore had no right to share in 6 2618192.2 10 of 29 them. No statements or findings in the AD Decision support this contention. Apparently, Defendants rely on the words “and otherwise affirmed,” which appear at the end of the first paragraph of the AD Decision. But reading those words as Defendants do offends both the language and grammar of the paragraph, and the substance of the AD Decision. The subject of the paragraph in which the words “and otherwise affirmed” appear is this Court’s “Order.” Thus, the first words of the paragraph are: “Order, Supreme Court, New York County (Shirley Werner Kornreich, J.), entered on or about July 30, 2014 . . . .” It is that Order that is “unanimously modified, on the law . . . and otherwise affirmed . . . .” This Court’s 32 page Decision consists of three components, as the Court itself recognized in entitling it as a “Decision, Order & Judgment.” Decision at 1. The Order portion – which is the portion that was before the Appellate Division for review – is contained on the last two pages of the Decision and consists of three paragraphs beginning with the word “Ordered” and one with the words “Adjudged and Declared.” The latter paragraph, concerning to the Ninth Cause of Action, is the Order that the Appellate Division modified, and it replaced this Court’s declaration in its entirety. It is the other three “Ordered” paragraphs that are “otherwise affirmed.” 3 None of these paragraphs has anything to do with this Court’s discussion of the cash and non-cash assets. Moreover, as discussed supra at 6, Defendants’ contention that the Appellate Division “affirmed” the non-cash holding does not make sense, given that it struck the portions of this Court’s declaration as to required distributions under the SCA and Preservation Agreements. 3 The other decretal paragraphs are the following: i) Ordering that Defendants’ motion for partial summary judgment is granted in part by dismissing the first through eighth causes of action to the extent those claims asserted that amounts set aside for bonus payments were unauthorized under the Agreement; ii) Ordering that the remaining causes of action are severed and shall continue; and iii) Ordering that Defendants’ motion is otherwise denied. 7 2618192.2 11 of 29 II. TRIABLE ISSUES REMAIN AS TO WHETHER PLAINTIFFS RECEIVED THE DISTRIBUTIONS THEY WERE ENTITLED TO AS OF THE REALLOCATION In addition to the issue of whether Kuplesky’s distributions should have been calculated at a 11.69% Sharing Ratio rather than only 3.49% -- which even Defendants concede must be tried -- issues remain for trial as to whether both Plaintiffs received their full shares of distributions that they were entitled to as of November 8, 2010. A. Plaintiffs Did Not Receive Their Full Share of Cash Plaintiffs allege that they did not receive the full distribution of cash to which they were entitled as of the reallocation of their Sharing Ratios. This includes Plaintiffs’ respective shares of the Refinancing cash proceeds that were diverted to Spring Creek; Refinancing cash proceeds that were paid to the managing general partner as a “return of capital” which, under the terms of the Assignments, belonged to Preservation, but was never delivered to it; cash that was withheld from distribution by Preservation to pay disputed “expenses;” and damages for Defendants’ failure to distribute cash “as soon as practicable,” as required by the Agreement. These claims were not addressed on the partial summary judgment motion, and must be resolved at trial. Defendants argue that this Court “found” that SCA distributed to Preservation 19.9% of loan proceeds “available for distribution,” so that Preservation received everything it was entitled to receive. MTD at 10. Actually, what this Court specifically “found” is that the issue whether Plaintiffs received the cash they were entitled to before reallocation was “not explored on this motion.” Decision at 31. Since the question of whether Plaintiffs received their share of cash was not addressed by this Court, the Appellate Division did not address the issue either. Further, as Defendants are well aware, their term proceeds “available for distribution” excludes monies withheld from distribution. 8 2618192.2 12 of 29 Defendants engage in a clumsy sleight of hand, pointing to the $10 million amount that triggers a “Funding Event,” and then suggesting that the appellate court limited Plaintiffs to their shares of that amount: they argue that Rudman already received more than “he had a right to demand” and Kuplesky received more than he was “entitled” to and only $45,000 less than his original Sharing Ratio would have entitled him to receive. As pointed out supra at 5, Plaintiffs were not capped at their Sharing Ratio of $10 million, any more than other members of Preservation were capped at their Sharing Ratio of $10 million simply because the Managing Member had the power to reduce their Sharing Ratios. Until she exercised that power, Plaintiffs, like other members, were entitled to distributions at their full Sharing Ratios. The only cash dispute that Defendants address in their motion is the diversion to Spring Creek of $3.5 million from the Refinancing cash proceeds. MTD at 10; SAC ¶81. SCA distributed to its partners membership interests in Spring Creek, a new entity it set up in connection with the Refinancing, and distributed $3.5 million to that entity, as well as vacant parcels of land (the “Vacant Parcels”) and a shopping center (“Shopping Center”). Defendants contend that Section 5.10 of the Agreement required Plaintiffs to support the Managing General Partner Disque Deane’s (the “MGP”) decision to fund Spring Creek, and that the claim is therefore prohibited. Defendants misread the section. Section 5.10 provides: The MGP shall from time to time propose transactions or plans for SCA (including but not limited to merger, consolidation, conversion, financing, recapitalization, liquidation or other business combination transaction) and in the event that the MGP approves any such transaction or plan for SCA the Members shall consent to, vote in favor of (if applicable) and raise no objections against such transaction or plan. Yurowitz Aff. Ex. E-1 (emphasis added). Section 5.10 does not apply here because the transfer of $3.5 million to Spring Creek was not a transaction the MGP “proposed” for consent or a vote. 9 2618192.2 13 of 29 He just unilaterally did it. Deane did not request the consent of Preservation’s members to the transfer of the $3.5 million (or the Shopping Center or Vacant Parcels) to Spring Creek. Indeed, Deane did not even request the consent of SCA’s limited partners to the $3.5 million transfer. SCA’s partners were apprised of that transaction only after it occurred. Veit Aff. Ex. 3 at D015639. Moreover, Section 5.10 seeks only to prevent conduct that would derail a transaction proposed by the MGP. Thus, if requested, Preservation members must consent to, vote in favor of and not raise objections to such transaction. But nothing in the section purports to prevent a member from seeking his fair share of diverted assets once the transaction has been effectuated. B. Plaintiffs Did Not Receive Their Full Share Of Non-Cash Distributions An issue on this motion is whether Plaintiffs are entitled to non-cash assets that were actually distributed by SCA or Spring Creek, but which were either diverted away from Preservation, or were distributed to Preservation but were not properly distributed by Preservation to Plaintiffs. We discuss these below. Before doing so, however, we address this Court’s findings on non-cash assets. Plaintiffs acknowledge that this Court previously ruled that non-cash assets were “assets not subject to distribution” by either SCA or Preservation. That ruling, however, is no longer binding now that the Appellate Division has modified the Order that was based on that determination. In ruling on Defendants’ present motion – and thereby deciding what claims will be presented to the jury – the Court should not simply repeat the analysis that underlay the modified Order. When the Court previously ruled, it did not have the benefit of the parties’ arguments, or a complete set of documents, on the issue of whether the SCA and Preservation Agreements 10 2618192.2 14 of 29 provided for the distribution of both cash and non-cash assets.4 Indeed, the parties had not raised or addressed that issue on that motion. The parties argued whether non-cash assets were “proceeds of a substantial Refinancing” in the third sentence of Section 3.3, but no party addressed whether required distributions under the SCA Partnership Agreement and the Agreement included non- cash assets. An analysis of that issue on this motion necessarily leads to the conclusion that non- cash assets were “assets subject to distribution” under both agreements. 1. Non-Cash Assets Were “Assets Subject To Distribution” Under The SCA Partnership Agreement, And Were, In Fact, Distributed There can be no dispute that (i) the SCA Partnership Agreement provides for non-cash distributions, and (ii) SCA in fact distributed non-cash assets, including as part of the Refinanancing. The Court’s finding in the Decision that non-cash assets were “[a]ssets not subject to distribution” should not, therefore, be followed on this motion. Section 13.02 of the SCA Partnership Agreement provides as follows: Section 13.02. Distribution in Kind. In the event it becomes necessary to make a distribution of Partnership property in kind, such property shall be transferred and conveyed to the Partners other than the Housing Company or their assignees so as to vest in each of them as a tenant in common an undivided interest in the whole of said property equal to his interest in the distribution of Sale/Refinancing Proceeds in accordance with Section 3.03 hereof. Veit Aff. Ex. 1 at 123. Thus, the SCA Partnership Agreement allows for the distribution of non- cash assets, and provides that they are to be distributed just like net cash proceeds from a sale or refinancing of the property as set forth in Section 3.03 of that agreement. SCA exercised this power by making non-cash distributions to its general and limited partners as part of the Refinancing. First, SCA distributed to its partners membership interests in Spring Creek, and thereby the Shopping Center and the Vacant Parcels that were put into Spring 4 With respect to the SCA Partnership Agreement, the court’s interpretation was based on only a handful of pages of the 130-page Partnership Agreement (plus many amendments), not on the entire document. 11 2618192.2 15 of 29 Creek, in connection with the Refinancing. The documentation in connection with that transaction confirms that SCA’s transfer of membership interests in Spring Creek, and its transfer of the Shopping Center and Vacant Parcels, were “distributions” by SCA.5 Spring Creek’s Limited Liability Company Agreement describes the transaction as follows: SCA “conveyed title [to the Shopping Center and Vacant Parcels] to the Company [Spring Creek] in exchange for the distribution to the partners of [SCA] of interests in the Company . . . .” Veit Aff. Ex. 3 at D015654; emphasis added. In the summary of the Refinancing sent to the SCA limited partners, the MGP explained that the transaction included a “distribution of the Shopping Center to a new entity.” Id. at D015641.6 Second, SCA distributed charitable deductions to its partners arising from its donation of a Yeshiva to charity as part of the Refinancing. This Court characterized charitable deductions as “non-cash” assets, which it determined were not subject to distribution. Decision at 23. Yet, this donation gave rise to a $7.7 million charitable deduction (the “Yeshiva Deduction”), and this deduction was in fact distributed to all partners, including Preservation. For 2009, SCA issued a K-1 to Preservation, which reflects its share ($29,387) of the Yeshiva Deduction. Veit Aff. Ex. 4; Ex. 5 at 203-06. In addition, in December 2010, Spring Creek donated the Vacant Parcels to charity, giving rise to a $53 million charitable tax deduction (the “Vacant Parcel Deduction”). As reflected in tax documentation (and other documents), that deduction too was distributed by Spring Creek to its 5 The word “distribution” refers to a transfer of any type of property. Black’s Law Dictionary (10th Ed., 2014) defines a “corporate distribution” as a “direct or indirect transfer of money or other property, or incurring indebtedness to or for the benefit of its shareholders.” See also Investopedia, http://www.investopedia.com/terms/d/distribution.asp (“distribution” means “[a] company payment of cash, stock or physical products to its shareholders”). 6 This Court’s statement in the Decision that Spring Creek “remained an asset of the SCA partners” is not accurate because Spring Creek was not held by those individuals and entities in their capacity as SCA partners, and the underlying assets had been transferred from SCA to Spring Creek. Decision at 23. 12 2618192.2 16 of 29 members, including Preservation (which received 19.9%, a $10,726,100 deduction). Veit Aff. Ex. 6; Ex. 7. In short, SCA Partnership Agreement unquestionably provides for non-cash distributions, and such distributions were in fact made as part of and following the Refinancing. 2. Non-Cash Assets Were “Assets Subject to Distribution” Under the Preservation Agreement, and Were, In Fact, Distributed Just as non-cash assets were subject to distribution under the SCA partnership agreement, and were in fact distributed, so too were non-cash assets subject to distribution under the Preservation Agreement, and in fact distributed to Preservation’s members – though not fully to all members. Plaintiffs are entitled to present their claim for their share of the Vacant Parcel Deduction at trial, and their claim for the membership interests in Spring Creek that were distributed to the general partners and should have been distributed to Preservation and its members, but were not. a. The Agreement Provides For Non-Cash Distributions A reading of the Preservation Agreement leaves no doubt that it contemplates that Preservation will distribute non-cash assets and, moreover, that it will do so via the waterfall provision of Section 4.2 – the provision this Court interpreted as applying only to cash payments, based on its view that “payments” refers to cash.7 Section 4.8A of the Agreement states that in the event of a liquidation, “the assets of the Company shall be distributed to the Members in accordance with the balances in their respective Capital Account, after taking into account . . . distributions, if any, of cash or property, if any, pursuant to Section 4.2.” Yurowitz Aff. Ex. E-1 7 The Court stated in the Decision that Plaintiffs did not “dispute” that charitable deductions and other non-cash assets received by Preservation fall outside the meaning of “payments.” Decision at 23. Because neither Plaintiffs nor Defendants raised the interpretation of “payments” as an issue on the summary judgment motion – but, rather, focused on the word “proceeds” in Section 3.3 – there was no reason to make that argument. 13 2618192.2 17 of 29 (emphasis added). This provision makes no sense if, as the Court previously found – and Defendants urge on the current motion to dismiss – non-cash assets were not distributable pursuant to Section 4.2. Similarly, in Section 4.9A the Agreement uses the word “distribution” to encompass transfers of property, providing that “[i]f any assets of the Company are distributed in kind to the Members . . . any Member entitled to any interest in those assets shall receive that interest as a tenant in common with all other Members so entitled.” Id. In addition to being inconsistent with these provisions, the Court’s prior conclusion that the use of the word “payments” in Section 4.2 limits its application to cash cannot be reconciled with the use of the term “cash” in the Agreement. When the intention is to limit the reference to cash assets, the Agreement uses the word “cash.” Indeed, the word “cash” is used multiple times. Section 4.3, which deals with “Special Allocations,” refers to the situation where there is “cash available from sale or refinancing for that period.” Id. Section 4.8A provides that, upon liquidation, assets of Company are to be distributed after taking into account “distributions, if any, of cash or property, if any, pursuant to Section 4.2.” Id. (emphasis added). See a