Preview
FILED: NEW YORK COUNTY CLERK 09/16/2016 06:16 PM INDEX NO. 650159/2010
NYSCEF DOC. NO. 386 RECEIVED NYSCEF: 09/16/2016
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
HARVEY RUDMAN and HAROLD KUPLESKY, on
Behalf of Each of Them Individually And On Behalf Of
Starrett City Preservation LLC, Derivatively,
Index No. 650159/10
Plaintiffs,
Assigned to: Kornreich, J.
- against -
CAROL GRAM DEANE, THE ESTATE OF DISQUE
ORAL ARGUMENT REQUESTED
D. DEANE by CAROL G. DEANE,
as TEMPORARY EXECUTRIX, SALT KETTLE LLC,
ST. GERVAIS LLC, STARRETT CITY
Motion Sequence No. 009
PRESERVATION LLC, DD SPRING CREEK LLC,
SK SPRING CREEK LLC, SPRING CREEK PLAZA
LLC, DD SHOPPING CENTER LLC and SK
SHOPPING CENTER LLC,
Defendants.
DEFENDANTS’ MEMORANDUM OF LAW IN
SUPPORT OF THE MOTION OF ALL DEFENDANTS
(EXCEPT SPRING CREEK) TO DISMISS
RICHARD A. GREENBERG KENNETH E. WARNER
STEVEN Y. YUROWITZ WARNER PARTNERS, P.C.
WILLIAM J. DOBIE Attorneys for All Defendants
NEWMAN & GREENBERG LLP Except Carol Gram Deane
Attorneys for Defendant Carol Gram Deane and Spring Creek Plaza
Individually
950 Third Avenue
950 Third Avenue New York, New York 10022
New York, New York 10022 (212) 593-8000
(212) 308-7900
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ..................................................1
INTRODUCTION .............................................................1
STATEMENT OF FACTS ......................................................3
ARGUMENT ................................................................7
POINT I: THIS COURT’S JUDGMENT ON PLAINTIFFS’ NINTH CLAIM,
AS MODIFIED AND OTHERWISE AFFIRMED BY THE APPELLATE
DIVISION, REQUIRES THE DISMISSAL OF ALL OF PLAINTIFFS’
REMAINING CLAIMS EXCEPT FOR THE ISSUE OF KUPLESKY’S
PROPER SHARING RATIO ..............................................7
POINT II: THE THIRD, FOURTH AND SIXTH CLAIMS ALLEGING
BREACH OF OR CONVERSION UNDER THE OMNIBUS ASSIGNMENTS,
ALL OF THE REMAINING DERIVATIVE CLAIMS AND THE TENTH
CLAIM SEEKING A DECLARATORY JUDGMENT MUST BE DISMISSED
BASED ON THIS COURT’S PRIOR RULING ................................9
POINT III: THE REMAINING COUNTS ARE DEFECTIVELY PLEADED
AND MUST BE DISMISSED FOR THAT REASON AS WELL . . . . . . . . . . . . . . . . . 11
A. THE FIRST AND SECOND CLAIMS IMPERMISSIBLY
COMMINGLE INDIVIDUAL AND DERIVATIVE CLAIMS . . . . . . . . . . . . . 11
B. THE FIRST CLAIM MUST IN ANY EVENT BE
DISMISSED AS TO ST. GERVAIS BECAUSE IT DID NOT
HAVE A FIDUCIARY RELATIONSHIP WITH OR DUTY TO
ITS CO-MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
C. THE FIFTH CLAIM MUST BE DISMISSED AS TO
DEFENDANTS DISQUE AND SKI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
D. THE SIXTH CLAIM ALLEGING CONVERSION MUST BE
DISMISSED BECAUSE PRESERVATION DID NOT HAVE A
POSSESSORY RIGHT OR INTEREST IN THE ALLEGEDLY
CONVERTED ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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Page
E. THE SEVENTH AND EIGHTH CLAIMS FOR TORTIOUS
INTERFERENCE FAIL TO ALLEGE ESSENTIAL
ELEMENTS, INCLUDING THE INTENTIONAL
PROCUREMENT OF A BREACH AND THAT DEFENDANTS’
CONDUCT WAS THE PROXIMATE CAUSE OF THE
BREACH, REQUIRING THE DISMISSAL OF THESE CLAIMS . . . . . . . . . . 15
F. THE TENTH CLAIM SEEKING A DECLARATORY
JUDGMENT THAT DISQUE DEANE’S AND SKI’S
ASSIGNMENTS TO ENTITIES OTHER THAN
PRESERVATION WERE IMPROPER MUST BE DISMISSED
BECAUSE PLAINTIFFS HAVE AN ADEQUATE REMEDY, IF
ONE IS WARRANTED AT ALL, AT LAW FOR BREACH OF
CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
G. PLAINTIFFS’ REQUEST FOR PUNITIVE DAMAGES
SHOULD BE STRICKEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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TABLE OF AUTHORITIES
Page
Cases
Abrams v. Donati, 66 N.Y.2d 951 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Balk v. 125 West 92nd Street Corp., 24 A.D.3d 193 (1st Dep’t 2005) . . . . . . . . . . . . . . . . . . . . 12
Barbour v. Knecht, 296 A.D.2d 218 (1st Dep’t 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Beecher v. Feldstein, 8 A.D.3d 597 (2d Dep’t 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Brescia v. Silverman, 2009 WL 803426 (Sup. Ct., N.Y. Co. Mar. 16, 2009) . . . . . . . . . . . . . . . 12
Burrowes v. Combs, 25 A.D.3d 370 (1st Dep’t 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Coventry Real Estate Advisors, LLC v. Developers Diversified Realty Corporation,
84 A.D.3d 583 (1st Dep’t 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Greenberg v. Falco Constr. Corp., No. 4267/2010, 2010 WL 3781279
(Sup. Ct., Kings Co. 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Jones v. Citigroup, Inc., No. 570210/10, 2010 WL 2944224
(App. Term., 1st Dep’t July 27, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Kalikow v. Shalik, 2014 NY Slip Op 24099 (Sup Ct, Nassau County Feb. 26, 2014) . . . . . . . . 13
Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . 16
Putter v. Feldman, 13 A.D.3d 57 (1st Dep’t 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Ross v Louise Wise Serv., Inc., 8 N.Y.3d 478 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
RSM Prod. Corp. v. Fridman, 643 F. Supp. 2d 382 (S.D.N.Y. 2009) . . . . . . . . . . . . . . . . . . . . . 16
Turk v. Angel, 293 A.D.2d 284 (1st Dep’t 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker,
56 A.D.3d 1 (1st Dep’t 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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Other Authorities
NY Practice, New York Limited Liability Companies and Partnerships § 1:8 ............. 13
51 Am Jur 2d, Limited Liability Companies § 11 ................................... 13
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PRELIMINARY STATEMENT
This memorandum of law is submitted on behalf of all defendants (except Spring Creek)
in support of their motion, pursuant to CPLR 3211(a)(7), to dismiss the rest of the Second
Amended Complaint (“SAC”) as to plaintiff Harvey Rudman (“Rudman”), to dismiss all but one
of the claims of plaintiff Harold Kuplesky (“Kuplesky”), and to dismiss all claims brought
derivatively on behalf of Preservation.
INTRODUCTION
Plaintiffs began this litigation more than six years ago with a complaint premised on the
theory that a straightforward management incentive agreement giving plaintiffs the opportunity
to receive additional cash payments on top of their salaries actually elevated them to the status of
partners in Starrett City, the largest subsidized housing development in the country. This Court
(Exhibit B) and the Appellate Division (Exhibit A) rejected plaintiffs’ fanciful, overreaching
claims. Indeed, the Appellate Division’s rejection was reflected in a modification even more
favorable to defendants than this Court’s decision in defendants’ favor.1
Plaintiffs have argued from the beginning that, after a substantial Starrett City refinancing
in December 2009, the Preservation Agreement (Exhibit E-1), gave and assured plaintiffs (i) the
right to share, consistent with their allotted Sharing Ratios, in the refinancing’s cash proceeds
paid to Preservation, (ii) an ownership interest in Starrett City, (iii) an ownership interest in a
shopping center once part of Starrett City, i.e., Spring Creek, and (iv) a share of a certain
charitable tax deduction. In their Second Amended Complaint (“SAC”) (Exhibit E), plaintiffs
describe their claimed entitlements as “Due Distributions.” Exhibit E at ¶89.
In its decision on defendants’ motion for partial summary judgment, this Court ruled
unequivocally, based on the plain language of the Preservation Agreement and the Omnibus
1
Plaintiffs unsuccessfully sought leave to appeal to the Court of Appeals. Exhibit C.
1
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Assignments to Preservation from defendants Disque Deane (“Disque”) and Salt Kettle LLC
(“SKI”), that plaintiffs are not entitled to share in any of the foregoing non-cash assets.2
This Court’s ruling thus eliminated three of the four components of the “Due
Distributions” to which plaintiffs laid claim. On plaintiffs’ appeal, the Appellate Division
affirmed this Court’s rejection of plaintiffs’ claim to non-cash assets of Starrett City, so that part
of this Court’s ruling remains in full force and effect, and is the law of the case.
The only part of this Court’s decision that the Appellate Division modified was this
Court’s ruling that the Preservation Agreement required the distribution to Preservation’s
members, including plaintiffs, of all the net cash proceeds from the refinancing of the 2009
refinancing consistent with their then-applicable Sharing Ratios. The Appellate Division
disagreed, holding instead that plaintiffs’ Sharing Ratios, i.e., the percentage of cash proceeds
from the refinancing to which they were entitled, could be reduced to zero by Preservation’s
Managing Member, Carol Deane (“Carol”), pursuant to Section 3.3 of the Preservation
Agreement, immediately upon the distribution to Preservation’s members of at least $10 million
in the aggregate, whether or not additional cash proceeds were available for distribution.
According to the Appellate Division, “Section 3.3 [of the Agreement] is susceptible to only one
reasonable interpretation – the one advanced by defendants on the motion.” Exhibit A at 3. The
Appellate Division’s limited, but important, modification of this Court’s decision eliminated the
fourth component of the “Due Distributions” to which plaintiffs claimed entitlement.
Carol Deane reduced plaintiffs’ Sharing Ratios to zero on November 8, 2010, after she
had authorized the payment of millions of dollars more in distributions to plaintiffs than she was
2
Disque and SKI were the Managing General Partner (“MGP”) and a General Partner,
respectively, of Starrett City Associates (“SCA”), the beneficial owner of Starrett City.
2
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required to distribute under the Appellate Division’s decision.3 Notwithstanding their windfall,
plaintiffs have engaged and continue to engage in years of contentious litigation, including
offensive allegations directed against Carol Deane and others, in an unjustified and unworthy
effort to increase their windfall.
The time has come, if it has not long since passed, for this Court to call a halt to
plaintiffs’ baseless litigation, except for the issue of Kuplesky’s Sharing Ratio. This Court’s and
the Appellate Division’s decisions are compelling authority for this Court’s entitlement to do so.
As to Rudman, there is nothing left to litigate, and therefore all of his remaining claims should be
dismissed; Kuplesky’s claims must also be dismissed to the extent they overlap Rudman’s; and
the equally baseless derivative claims plaintiffs have asserted on behalf of Preservation should
also be dismissed. The sole remaining claim subject to trial is Kuplesky’s narrow challenge to
the validity of Carol Deane’s interim reduction of his Sharing Ratio to 3.49% on the way to
reducing his Sharing Ratio to zero.4
STATEMENT OF FACTS
SCA, the beneficial owner of Starrett City, has approximately 200 limited partners.
Exhibit B at 2. In 1985, Disque became the Managing General Partner (“MGP”) of SCA, and
continued in that role through his 100% membership interest in DD Spring Creek LLC until his
death in November 2010. Exhibit B at 13; Exhibit E at ¶9. After his death, his estate was
3
Based on the Appellate Division’s modification, the most that Preservation was required to pay
Rudman and Kuplesky before their Sharing Ratios could be reduced to zero was $1,501,000 to
Rudman and $349,000 to Kuplesky (subject to resolution of the issue of Kuplesky’s proper
Sharing Ratio).
4
Based on this Court’s ruling that disputed issues of fact remained as to Kuplesky’s proper
Sharing Ratio, Kuplesky’s challenge to the validity of the interim reduction of his Sharing Ratio
to 3.49% survived defendants’ motion for partial summary judgment. Exhibit B. We note,
however, that Kuplesky’s credibility and the huge amount of evidence at odds with Kuplesky’s
claim were not factors on summary judgment, as they will be at trial.
3
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substituted as a defendant. Exhibit B at 13 n. 6. Defendant Salt Kettle LLC (“SKI”) was a
general partner of SCA beginning in 1985, and continued in that status through its 100%
membership interest in SK Spring Creek LLC (“SK/SCA”). Exhibit E at ¶17. SKI is principally
owned by members of Disque’s immediate family through their membership in defendant St.
Gervais LLC, the owner of SKI. Id. at ¶¶17-18.
Plaintiff Rudman was hired in 1989 to work for SCA and Deane-related entities. Exhibit
B at 2. His employment was concededly terminated on April 29, 2009. Exhibit E at ¶93.
Plaintiff Kuplesky, a lawyer with experience in the regulated housing industry, was hired in or
about 1999, and his employment by any Deane-related entity ceased as of December 15, 2008.
Id. at 2 and 29. Both plaintiffs were salaried employees who worked closely with and under
Disque. Exhibit E at ¶¶29-30.
In 2006, Starrett City Preservation LLC (“Preservation”) was formed, with an operating
agreement effective “as of January 1, 2006” (the “Preservation Agreement” or the “Agreement”)
(Exhibit E-1). As this Court found, “Preservation’s purpose was to ‘provide its Members with a
beneficial interest in all payments payable by [SCA] to [Deane] and to Salt Kettle . . . in respect
of [Deane]’s . . . and [Salt Kettle]’s economic interest in SCA.” Exhibit B at 20 (quoting
Preservation Agreement §1.3). Disque and SKI executed the Omnibus Assignments (Exhibits
E-2 and E-3), also effective as of January 1, 2006, transferring to Preservation their “economic
interests” in SCA. Exhibit B at 4.5 As this Court correctly found, however, “[I]t was not
intended that Preservation would necessarily distribute the entirety of [the assigned] ‘economic
interests’ to its Members . . . [W]hat Preservation had to distribute to its Members [pursuant to
Section 4.2 of the Agreement] were the distributions it received from SCA by virtue of having
5
The MGP and SKI did not assign their interests as limited partners of SCA, their rights to
reimbursement for expenses, their authority as general partners, and any rights they may have
had as general partners, assignors or limited partners to indemnification or contribution. Id.
4
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been assigned the general partners’ ‘economic interest’ in that partnership, but not the economic
interest itself.” Exhibit B at 20-21. Section 4.2 of the Agreement, entitled “Distributions,”
likewise provides that the only distribution Preservation was required to make to its Members
was of the “payments received from the MGP, SKI or any successor or transferee.”
This Court rejected plaintiffs’ argument that “payments” under Section 4.2 referred not
only to cash, but also to non-cash, i.e., in kind, distributions. As this Court correctly perceived,
if plaintiffs’ interpretation were correct, Preservation would be forced to strip itself of its only
assets and close up shop virtually upon receiving those assets as a result of a sale or refinancing:
If its partnership interest in SCA was to be included under the
economic interests to be distributed, Preservation would have been
required to divest itself of all of its interest (its main or, even only,
asset) in the very same year in which it was formed, a result clearly
not contemplated by its LLC agreement.
Exhibit B at 21.
Defendant Carol Deane, Disque’s wife, was always and continues to be the Managing
Member of Preservation. Exhibit E at ¶15. Preservation was majority-owned by Disque’s
family members, although plaintiffs and one other salaried employee received minority
membership interests (“Sharing Ratios”) in Preservation. Exhibit E at ¶46. Rudman’s and
Kuplesky’s Sharing Ratios were initially fixed by the Agreement at 15.01% and 11.63%,
respectively. With the end of his employment in December 2008, Kuplesky’s Sharing Ratio was
reduced to 3.49%. Exhibit B at 30.
Plaintiffs’ membership in Preservation was intended in part to give plaintiffs an incentive
to assist the MGP’s efforts to sell or refinance Starrett City, so that the general and limited
partners of SCA could realize the increase in the value of their equity in Starrett City since their
original investments. Exhibit E at ¶4. The members’ capital contributions to Preservation were
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minimal (equal to $10 for each percentage point), which meant that Rudman’s capital
contribution was about $150 and Kuplesky’s was less than $120. Exhibit E-1. Moreover, the
Preservation Agreement provided that no further capital calls could be made on any of the
Preservation members. Exhibit E-1 at §3.2.
After the MGP’s efforts to sell Starrett City proved unsuccessful, SCA closed on a $530
million refinancing of Starrett City in December 2009. Exhibit B at 10, 12. At the time of the
refinancing, the complex’s shopping center was spun off as Spring Creek Plaza, LLC (“Spring
Creek”), a new entity owned by the SCA partners in the same proportion as their interests in
SCA, i.e., the combined MGP/SKI interest in Spring Creek was 19.9%. Exhibit E-4. The MGP
and SKI continue to hold their respective membership interests in Spring Creek through two
Single Purpose Entities, defendants DD Shopping Center LLC and SK Shopping Center LLC.
Exhibit E-4. To finance Spring Creek, SCA directed the transfer to Spring Creek of
approximately $3.2 million, based on the recommendation of the MGP, whose recommendations
the Agreement required Preservation’s members not to oppose. Exhibit E at ¶81; Exhibit E-1 at
§5.10.6
As a result of the Omnibus Assignments, Preservation received about $38 million from
the net cash proceeds of the refinancing. Exhibit B at 12. From that amount, Carol Deane as
Managing Member distributed to Preservation’s members, including plaintiffs, an aggregate
6
Section 5.10 of the Preservation Agreement provides, in relevant part:
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.
6
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amount of nearly $32 million in two tranches, representing all of the distributable cash that
remained after deducting for staff bonuses and reserves and paying expenses.7 Id. Plaintiff
Rudman received about $4.8 million and Kuplesky received about $1.1 million of the Managing
Member’s $32 million aggregate distribution. Id.
Preservation’s first distribution to its members in May 2010 was in the aggregate amount
of about $20 million. From that amount, Rudman received about $3 million and Kuplesky,
based on his reduced Sharing Ratio of 3.49%, received about $700,000. Preservation’s second
distribution to its members in November 2010, was in the aggregate amount of about $11.7
million. From that second tranche, Rudman received approximately $1.8 million and Kuplesky
received about $410,000. Exhibit B at 12; Exhibit E at ¶91. On November 8, 2010, after the
cash distribution were completed the Managing Member of Preservation reduced plaintiffs’
Sharing Ratios to zero, as the Appellate Division held she had long been entitled to do pursuant
to Section 3.3 of the Agreement. Exhibit B at 12-13.
ARGUMENT
POINT I: THIS COURT’S JUDGMENT ON PLAINTIFFS’
NINTH CLAIM, AS MODIFIED AND OTHERWISE
AFFIRMED BY THE APPELLATE DIVISION, REQUIRES
THE DISMISSAL OF ALL OF PLAINTIFFS’ REMAINING
CLAIMS EXCEPT FOR THE ISSUE OF KUPLESKY’S
PROPER SHARING RATIO
Every one of Rudman’s and Kuplesky’s individual claims is premised on their
entitlement to and failure to receive what they call their “Due Distributions.” In granting partial
summary judgment on plaintiffs’ Ninth Claim, however, this Court has already determined that
Rudman and Kuplesky are not entitled to three of their four enumerated categories of “Due
7
This Court rejected plaintiffs’ argument on the summary judgment motions that the payment of
those staff bonuses and reserves were improper under the Agreement, and granted defendants
summary judgment on that issue (Exhibit B at 31), a ruling that plaintiffs did not appeal.
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Distributions,” i.e., the non-cash assets or benefits flowing from Starrett City’s refinancing in
which plaintiffs seek to share as though they were general partners. According to this Court,
although the Omnibus Assignments assigned to Preservation the general partners’ entire
“economic interests” in SCA, “it was not intended that Preservation would necessarily distribute
the entire of these economic interest” to its members. Exhibit B at 20. Instead, Sections 1.3,
which provided that the initial purpose of the Company was to provide its members with a
beneficial interest “in all payments,” and Section 4.2, which likewise limited distributions to
“payments received from” the MGP and SKI, limited the need to transfer only cash to
Preservation This Court noted that the last sentence of Section 4.2 “requires the distribution
[under this section] to be made ‘at least in the same calendar year in which Payments are
received by the Company,’” and “if its partnership interest in SCA was to be included under the
economic interests to be distributed, Preservation would have been required to divest itself of all
its interest (its main or, even only, asset) in the very same year in which it was formed, a result
clearly not contemplated by the LLC Agreement.” Id. at 21.
This Court concluded that plaintiffs could claim nothing other than a share of the cash
distributions Preservation received from SCA, and that “Preservation’s membership in SCA,
Spring Creek (which remained an asset of the SCA Partners), and the charitable deduction
allocated among the SCA partners for income tax purposes” were not “payments” within the
meaning of the Agreement. Id. at 23. Thus, all that is even arguably left to plaintiffs’ lawsuit is
their claim to entitlement to more cash than they already received from the cash proceeds of the
refinancing.
But the Appellate Division has ruled that the Managing Member was entitled to reduce or
reallocate plaintiffs’ Sharing Ratios to zero as soon as she distributed at least $10 million in the
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aggregate from the cash proceeds of the refinancing. Rudman does not dispute his Sharing Ratio
and, as a result, by the time that the Managing Member reduced Rudman’s Sharing Ratio to
zero, he had already received millions of dollars more than he had a right to demand. As for
Kuplesky, he has received far more than he was entitled to demand under his reduced Sharing
Ratio of 3.49%, and he has received only about $45,000 less than his original Sharing Ratio of
11.63% would have entitled him to receive. Only the dispute over Kuplesky’s Sharing Ratio is
preserved as a claim to be tried.
POINT II: THE THIRD, FOURTH AND SIXTH CLAIMS
ALLEGING BREACH OF OR CONVERSION UNDER THE
OMNIBUS ASSIGNMENTS, ALL OF THE REMAINING
DERIVATIVE CLAIMS AND THE TENTH CLAIM
SEEKING A DECLARATORY JUDGMENT MUST BE
DISMISSED BASED ON THIS COURT’S PRIOR RULING
The gravamen of the Third and Fourth Claims, alleging a breach of the Omnibus
Assignments by Disque and SKI, and the Sixth Claim, alleging conversion against several
defendants, is that the defendants failed to deliver or ensure the delivery of assigned non-cash
assets to Preservation. Likewise, the Tenth Claim seeks a declaratory judgment invalidating the
transfer of those assets to any entity other than Preservation. Finally, the theory of plaintiffs’
derivative claims on behalf of Preservation, i.e., the First, Second, Third, Sixth and Eighth
Claims, is that Preservation has been deprived of those same non-cash assets.
This Court has already determined that all of those non-cash assets, which consist of
“Preservation’s membership in SCA, Spring Creek (which remained an asset of the SCA
partners), and the charitable deduction allocated among the SCA partners for income tax
purposes” (compare Exhibit E ¶87 with Exhibit B at 23) “were not ‘payments’ that needed to be
transferred to Preservation.” Exhibit B at 23. As this Court correctly understood and ruled, and
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was affirmed on appeal, the general partners assigned to Preservation only their “economic
interests” in SCA, i.e., their rights to receive “payments or distributions” from SCA, not their
rights, duties and obligations as partners in SCA. Exhibit B at 4, 21.
As to the cash assets, this Court also found that, as a result of the refinancing, “SCA
distributed approximately $38 million to Preservation, representing 19.9% of the loan proceeds
available for distribution.” Id. at 12. In other words, Preservation received its full and entire
share of the “MGP/SKI’s Share of Refinancing Proceeds,” i.e., the net cash proceeds of the
refinancing.
Plaintiffs also claim that SCA diverted cash proceeds of the refinancing, 19.9% of which
should properly have gone to Preservation, when it funded the bank account of the newly spun-
off Spring Creek, based on Disque’s recommendation. Exhibit E at ¶81.8 The claim is
frivolous. Plaintiffs are barred by Section 5.10 of the Preservation Agreement from second-
guessing the MGP’s decision, on behalf of SCA, to fund Spring Creek, the newly spun-off
shopping center. Under §5.10, plaintiffs are required to support the MGP’s decision to fund
Spring Creek, and certainly not oppose it. Thus, plaintiffs’ claim to these monies is prohibited
by the plain terms of the Preservation Agreement.
Because defendants did not improperly fail or refuse to deliver the “Due Distributions” or
“Assigned Assets” to Preservation, these claims must be dismissed.
8
According to plaintiffs “on or about December 17, 2009, $3,273,307 of the cash proceeds of the
Refinancing was transferred to Spring Creek to fund that new entity. In addition, a $250,000
reserve was set aside from the cash proceeds for the shopping center.” SAC ¶81.
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POINT III: THE REMAINING COUNTS ARE
DEFECTIVELY PLEADED AND MUST BE DISMISSED
FOR THAT REASON AS WELL
As argued in Points I and II, supra, the decisions of this Court and the Appellate Division
granting defendants’ summary judgment on the Ninth Claim require the remaining nine claims to
fall, because those decisions vitiate plaintiffs’ theory of liability (except for the determination of
Kuplesky’s Sharing Ratio). But fatal pleading defects in the remaining claims provide this Court
with an additional basis for dismissing nearly the entire SAC, leaving only the Fifth Claim
against Carol and Preservation for allegedly breaching the Preservation Agreement as to
Kuplesky’s Sharing Ratio.
A. THE FIRST AND SECOND CLAIMS IMPERMISSIBLY
COMMINGLE INDIVIDUAL AND DERIVATIVE CLAIMS
In their First Claim (Exhibit E at ¶112), in which they allege they are “acting individually
[to vindicate their own purported rights] and derivatively” to vindicate Preservation’s interests,
plaintiffs claim that Carol Deane, as MGP of SCA and Managing Member of Preservation, and
St. Gervais, as a member of Preservation, breached their fiduciary duty to Preservation and to
plaintiffs by failing to cause SCA to deliver to Preservation, and Preservation in turn to deliver to
plaintiffs, all of the “Due Distributions” to which both Preservation and plaintiffs were entitled
from the proceeds of the Starrett City refinancing. In their Second Claim (Exhibit E at ¶119),
again alleging that plaintiffs are “acting individually and derivatively,” plaintiffs allege that the
codefendants aided and abetted Carol Deane’s and St. Gervais’s fiduciary breach. In other
words, both claims allege and combine individual and derivative claims in the same cause of
action, an impermissible and defective pleading.
It is well-settled that commingling individual and derivate claims in the same cause of
action is improper and provides an independent basis to dismiss the offending claim. Barbour v.
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Knecht, 296 A.D.2d 218, 228 (1st Dep’t 2002) (“The mingling of derivative claims and
individual claims requires dismissal of the causes of action so affected”); Greenberg v. Falco
Constr. Corp., No. 4267/2010, 2010 WL 3781279, at *3 (Sup. Ct., Kings Co. 2010) (“Although
a complaint may contain both derivative claims, brought on behalf of a corporation, and
individual claims, the two claims must not be intermingled within the same causes of action, but
instead must be pleaded separately,” and the failure to separate the two claims requires dismissal
of the count containing the commingled claims) (emphasis added); see also Balk v. 125 West
92nd Street Corp., 24 A.D.3d 193, 194 (1st Dep’t 2005) (“[plaintiff’s] breach of contract and
breach of fiduciary duty claims, which intermingled derivative and individual claims, were
properly dismissed”); Jones v. Citigroup, Inc., No. 570210/10, 2010 WL 2944224, at *1 (App.
Term., 1st Dep’t July 27, 2010) (holding that “the intermingling of derivative and individual
claims requires dismissal of the entire complaint”).
In opposing defendant Spring Creek’s motion to dismiss on the same “commingling”
ground, plaintiffs argued that “the practice is permissible as long as plaintiffs have not confused
the action.” Plaintiffs’ Opposition to Spring Creek’s Motion to Dismiss (Doc#50) at 17 n. 9. As
support for that argument, plaintiffs cited Abrams v. Donati, 66 N.Y.2d 951, 953 (1985), and
Brescia v. Silverman, 2009 WL 803426, at *4 (Sup. Ct., N.Y. Co. Mar. 16, 2009).9
Neither case supports plaintiffs’ commingled pleading against the remaining defendants.
The opposite is true. These cases support defendants’ argument for the dismissal of the First and
Second Claims. In Abrams, the Court of Appeals upheld the dismissal of a derivative claim that
plaintiff brought in his individual capacity. Abrams says nothing favorable to plaintiffs about the
9
This Court had no need to and did not decide the issue in the context of defendant Spring
Creek’s motion because this Court dismissed the Second Claim as to Spring Creek on another
independent ground, i.e, that the SAC failed to demonstrate that Spring Creek substantially
assisted in any alleged breach.
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propriety of commingling individual and derivative claims in a single count. Indeed, in Brescia,
the court permitted individual and derivative claims to stand only because, unlike in this
case, they were not alleged in the same cause of action. In short, both Abrams and Brescia, the
authority on which plaintiffs relied in unsuccessfully attempting to defeat defendant Spring
Creek’s motion to dismiss, squarely support the remaining defendants’ contention that the First
and Second Claims are defective, and must be dismissed.
B. THE FIRST CLAIM MUST IN ANY EVENT BE DISMISSED
AS TO ST. GERVAIS BECAUSE IT DID NOT HAVE A
FIDUCIARY RELATIONSHIP WITH OR DUTY TO ITS CO-
MEMBERS
Plaintiffs allege that “St. Gervais (as a member) [had] fiduciary duties to Preservation and
to the other members of Preservation.” Exhibit E at ¶113. Where, as here, an LLC’s operating
agreement designates a managing member, i.e., Carol Deane, the other members of the LLC do
not owe each other a fiduciary duty. Coventry Real Estate Advisors, LLC v. Developers
Diversified Realty Corporation, 84 A.D.3d 583, 584 (1st Dep’t 2011) (“under Delaware law,
fiduciary duties are imposed ‘only on managers and those designated as controlling members of
an LLC,’ and not on nonmanaging minority members”) (original emphasis). While Coventry
was decided under Delaware law, New York’s LLC law is to the same effect. See, e.g., Kalikow
v. Shalik, 2014 NY Slip Op 24099 (Sup Ct, Nassau County Feb. 26, 2014).10 In Kalikow, the
court dismissed a claim for breach of fiduciary duty against a non-managing member based on
its holding that New York’s Limited Liability Company Law §409(a)’s imposition of a fiduciary
10
See also 1 NY Practice, New York Limited Liability Companies and Partnerships § 1:8 (“a
member who is not a manager does not owe a duty to the LLC or its members except to the
extent he or it participates in the management of the LLC”); 51 Am Jur 2d, Limited Liability
Companies § 11 (“members of a limited liability company are like shareholders in a corporation
in that they do not owe a fiduciary duty to each other or to the company, and that as long as
members of a limited liability company are not acting in a managerial capacity, they do not have
fiduciary duties to one another unless such fiduciary duties are set forth in the operating
agreement”).
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duty only on the managing member of the LLC demonstrates a legislative intent not to impose
such a duty on non-managing members.
Accordingly, the SAC must be dismissed as to defendant St. Gervais which, as a non-
managing member, had no fiduciary duty it could breach.
C. THE FIFTH CLAIM MUST BE DISMISSED AS TO DEFENDANTS DISQUE
AND SKI
The Fifth Claim asserts a claim for breach of the Preservation Agreement against
Preservation, Carol Deane, Disque Deane and SKI. According to plaintiffs, Preservation and
Carol Deane breached the Agreement by failing to make the Due Distributions. Exhibit E at
¶145. For the reasons set forth above (Point I, supra), that claim must be limited to Kuplesky’s
Sharing Ratio. By contrast, plaintiffs allege that Disque and SKI breached the Agreement by
failing to transfer the MGP/SKI’s Share of the Refinancing Proceeds to Preservati
Preview
FILED: NEW YORK COUNTY CLERK 09/16/2016 06:16 PM INDEX NO. 650159/2010 NYSCEF DOC. NO. 386 RECEIVED NYSCEF: 09/16/2016 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK HARVEY RUDMAN and HAROLD KUPLESKY, on Behalf of Each of Them Individually And On Behalf Of Starrett City Preservation LLC, Derivatively, Index No. 650159/10 Plaintiffs, Assigned to: Kornreich, J. - against - CAROL GRAM DEANE, THE ESTATE OF DISQUE ORAL ARGUMENT REQUESTED D. DEANE by CAROL G. DEANE, as TEMPORARY EXECUTRIX, SALT KETTLE LLC, ST. GERVAIS LLC, STARRETT CITY Motion Sequence No. 009 PRESERVATION LLC, DD SPRING CREEK LLC, SK SPRING CREEK LLC, SPRING CREEK PLAZA LLC, DD SHOPPING CENTER LLC and SK SHOPPING CENTER LLC, Defendants. DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF THE MOTION OF ALL DEFENDANTS (EXCEPT SPRING CREEK) TO DISMISS RICHARD A. GREENBERG KENNETH E. WARNER STEVEN Y. YUROWITZ WARNER PARTNERS, P.C. WILLIAM J. DOBIE Attorneys for All Defendants NEWMAN & GREENBERG LLP Except Carol Gram Deane Attorneys for Defendant Carol Gram Deane and Spring Creek Plaza Individually 950 Third Avenue 950 Third Avenue New York, New York 10022 New York, New York 10022 (212) 593-8000 (212) 308-7900 1 of 25 TABLE OF CONTENTS Page PRELIMINARY STATEMENT ..................................................1 INTRODUCTION .............................................................1 STATEMENT OF FACTS ......................................................3 ARGUMENT ................................................................7 POINT I: THIS COURT’S JUDGMENT ON PLAINTIFFS’ NINTH CLAIM, AS MODIFIED AND OTHERWISE AFFIRMED BY THE APPELLATE DIVISION, REQUIRES THE DISMISSAL OF ALL OF PLAINTIFFS’ REMAINING CLAIMS EXCEPT FOR THE ISSUE OF KUPLESKY’S PROPER SHARING RATIO ..............................................7 POINT II: THE THIRD, FOURTH AND SIXTH CLAIMS ALLEGING BREACH OF OR CONVERSION UNDER THE OMNIBUS ASSIGNMENTS, ALL OF THE REMAINING DERIVATIVE CLAIMS AND THE TENTH CLAIM SEEKING A DECLARATORY JUDGMENT MUST BE DISMISSED BASED ON THIS COURT’S PRIOR RULING ................................9 POINT III: THE REMAINING COUNTS ARE DEFECTIVELY PLEADED AND MUST BE DISMISSED FOR THAT REASON AS WELL . . . . . . . . . . . . . . . . . 11 A. THE FIRST AND SECOND CLAIMS IMPERMISSIBLY COMMINGLE INDIVIDUAL AND DERIVATIVE CLAIMS . . . . . . . . . . . . . 11 B. THE FIRST CLAIM MUST IN ANY EVENT BE DISMISSED AS TO ST. GERVAIS BECAUSE IT DID NOT HAVE A FIDUCIARY RELATIONSHIP WITH OR DUTY TO ITS CO-MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 C. THE FIFTH CLAIM MUST BE DISMISSED AS TO DEFENDANTS DISQUE AND SKI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 D. THE SIXTH CLAIM ALLEGING CONVERSION MUST BE DISMISSED BECAUSE PRESERVATION DID NOT HAVE A POSSESSORY RIGHT OR INTEREST IN THE ALLEGEDLY CONVERTED ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 -i- 2 of 25 Page E. THE SEVENTH AND EIGHTH CLAIMS FOR TORTIOUS INTERFERENCE FAIL TO ALLEGE ESSENTIAL ELEMENTS, INCLUDING THE INTENTIONAL PROCUREMENT OF A BREACH AND THAT DEFENDANTS’ CONDUCT WAS THE PROXIMATE CAUSE OF THE BREACH, REQUIRING THE DISMISSAL OF THESE CLAIMS . . . . . . . . . . 15 F. THE TENTH CLAIM SEEKING A DECLARATORY JUDGMENT THAT DISQUE DEANE’S AND SKI’S ASSIGNMENTS TO ENTITIES OTHER THAN PRESERVATION WERE IMPROPER MUST BE DISMISSED BECAUSE PLAINTIFFS HAVE AN ADEQUATE REMEDY, IF ONE IS WARRANTED AT ALL, AT LAW FOR BREACH OF CONTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 G. PLAINTIFFS’ REQUEST FOR PUNITIVE DAMAGES SHOULD BE STRICKEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 -ii- 3 of 25 TABLE OF AUTHORITIES Page Cases Abrams v. Donati, 66 N.Y.2d 951 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Balk v. 125 West 92nd Street Corp., 24 A.D.3d 193 (1st Dep’t 2005) . . . . . . . . . . . . . . . . . . . . 12 Barbour v. Knecht, 296 A.D.2d 218 (1st Dep’t 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Beecher v. Feldstein, 8 A.D.3d 597 (2d Dep’t 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Brescia v. Silverman, 2009 WL 803426 (Sup. Ct., N.Y. Co. Mar. 16, 2009) . . . . . . . . . . . . . . . 12 Burrowes v. Combs, 25 A.D.3d 370 (1st Dep’t 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Coventry Real Estate Advisors, LLC v. Developers Diversified Realty Corporation, 84 A.D.3d 583 (1st Dep’t 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Greenberg v. Falco Constr. Corp., No. 4267/2010, 2010 WL 3781279 (Sup. Ct., Kings Co. 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Jones v. Citigroup, Inc., No. 570210/10, 2010 WL 2944224 (App. Term., 1st Dep’t July 27, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Kalikow v. Shalik, 2014 NY Slip Op 24099 (Sup Ct, Nassau County Feb. 26, 2014) . . . . . . . . 13 Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . 16 Putter v. Feldman, 13 A.D.3d 57 (1st Dep’t 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Ross v Louise Wise Serv., Inc., 8 N.Y.3d 478 (2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 RSM Prod. Corp. v. Fridman, 643 F. Supp. 2d 382 (S.D.N.Y. 2009) . . . . . . . . . . . . . . . . . . . . . 16 Turk v. Angel, 293 A.D.2d 284 (1st Dep’t 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 56 A.D.3d 1 (1st Dep’t 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 -iii- 4 of 25 Page Other Authorities NY Practice, New York Limited Liability Companies and Partnerships § 1:8 ............. 13 51 Am Jur 2d, Limited Liability Companies § 11 ................................... 13 -iv- 5 of 25 PRELIMINARY STATEMENT This memorandum of law is submitted on behalf of all defendants (except Spring Creek) in support of their motion, pursuant to CPLR 3211(a)(7), to dismiss the rest of the Second Amended Complaint (“SAC”) as to plaintiff Harvey Rudman (“Rudman”), to dismiss all but one of the claims of plaintiff Harold Kuplesky (“Kuplesky”), and to dismiss all claims brought derivatively on behalf of Preservation. INTRODUCTION Plaintiffs began this litigation more than six years ago with a complaint premised on the theory that a straightforward management incentive agreement giving plaintiffs the opportunity to receive additional cash payments on top of their salaries actually elevated them to the status of partners in Starrett City, the largest subsidized housing development in the country. This Court (Exhibit B) and the Appellate Division (Exhibit A) rejected plaintiffs’ fanciful, overreaching claims. Indeed, the Appellate Division’s rejection was reflected in a modification even more favorable to defendants than this Court’s decision in defendants’ favor.1 Plaintiffs have argued from the beginning that, after a substantial Starrett City refinancing in December 2009, the Preservation Agreement (Exhibit E-1), gave and assured plaintiffs (i) the right to share, consistent with their allotted Sharing Ratios, in the refinancing’s cash proceeds paid to Preservation, (ii) an ownership interest in Starrett City, (iii) an ownership interest in a shopping center once part of Starrett City, i.e., Spring Creek, and (iv) a share of a certain charitable tax deduction. In their Second Amended Complaint (“SAC”) (Exhibit E), plaintiffs describe their claimed entitlements as “Due Distributions.” Exhibit E at ¶89. In its decision on defendants’ motion for partial summary judgment, this Court ruled unequivocally, based on the plain language of the Preservation Agreement and the Omnibus 1 Plaintiffs unsuccessfully sought leave to appeal to the Court of Appeals. Exhibit C. 1 6 of 25 Assignments to Preservation from defendants Disque Deane (“Disque”) and Salt Kettle LLC (“SKI”), that plaintiffs are not entitled to share in any of the foregoing non-cash assets.2 This Court’s ruling thus eliminated three of the four components of the “Due Distributions” to which plaintiffs laid claim. On plaintiffs’ appeal, the Appellate Division affirmed this Court’s rejection of plaintiffs’ claim to non-cash assets of Starrett City, so that part of this Court’s ruling remains in full force and effect, and is the law of the case. The only part of this Court’s decision that the Appellate Division modified was this Court’s ruling that the Preservation Agreement required the distribution to Preservation’s members, including plaintiffs, of all the net cash proceeds from the refinancing of the 2009 refinancing consistent with their then-applicable Sharing Ratios. The Appellate Division disagreed, holding instead that plaintiffs’ Sharing Ratios, i.e., the percentage of cash proceeds from the refinancing to which they were entitled, could be reduced to zero by Preservation’s Managing Member, Carol Deane (“Carol”), pursuant to Section 3.3 of the Preservation Agreement, immediately upon the distribution to Preservation’s members of at least $10 million in the aggregate, whether or not additional cash proceeds were available for distribution. According to the Appellate Division, “Section 3.3 [of the Agreement] is susceptible to only one reasonable interpretation – the one advanced by defendants on the motion.” Exhibit A at 3. The Appellate Division’s limited, but important, modification of this Court’s decision eliminated the fourth component of the “Due Distributions” to which plaintiffs claimed entitlement. Carol Deane reduced plaintiffs’ Sharing Ratios to zero on November 8, 2010, after she had authorized the payment of millions of dollars more in distributions to plaintiffs than she was 2 Disque and SKI were the Managing General Partner (“MGP”) and a General Partner, respectively, of Starrett City Associates (“SCA”), the beneficial owner of Starrett City. 2 7 of 25 required to distribute under the Appellate Division’s decision.3 Notwithstanding their windfall, plaintiffs have engaged and continue to engage in years of contentious litigation, including offensive allegations directed against Carol Deane and others, in an unjustified and unworthy effort to increase their windfall. The time has come, if it has not long since passed, for this Court to call a halt to plaintiffs’ baseless litigation, except for the issue of Kuplesky’s Sharing Ratio. This Court’s and the Appellate Division’s decisions are compelling authority for this Court’s entitlement to do so. As to Rudman, there is nothing left to litigate, and therefore all of his remaining claims should be dismissed; Kuplesky’s claims must also be dismissed to the extent they overlap Rudman’s; and the equally baseless derivative claims plaintiffs have asserted on behalf of Preservation should also be dismissed. The sole remaining claim subject to trial is Kuplesky’s narrow challenge to the validity of Carol Deane’s interim reduction of his Sharing Ratio to 3.49% on the way to reducing his Sharing Ratio to zero.4 STATEMENT OF FACTS SCA, the beneficial owner of Starrett City, has approximately 200 limited partners. Exhibit B at 2. In 1985, Disque became the Managing General Partner (“MGP”) of SCA, and continued in that role through his 100% membership interest in DD Spring Creek LLC until his death in November 2010. Exhibit B at 13; Exhibit E at ¶9. After his death, his estate was 3 Based on the Appellate Division’s modification, the most that Preservation was required to pay Rudman and Kuplesky before their Sharing Ratios could be reduced to zero was $1,501,000 to Rudman and $349,000 to Kuplesky (subject to resolution of the issue of Kuplesky’s proper Sharing Ratio). 4 Based on this Court’s ruling that disputed issues of fact remained as to Kuplesky’s proper Sharing Ratio, Kuplesky’s challenge to the validity of the interim reduction of his Sharing Ratio to 3.49% survived defendants’ motion for partial summary judgment. Exhibit B. We note, however, that Kuplesky’s credibility and the huge amount of evidence at odds with Kuplesky’s claim were not factors on summary judgment, as they will be at trial. 3 8 of 25 substituted as a defendant. Exhibit B at 13 n. 6. Defendant Salt Kettle LLC (“SKI”) was a general partner of SCA beginning in 1985, and continued in that status through its 100% membership interest in SK Spring Creek LLC (“SK/SCA”). Exhibit E at ¶17. SKI is principally owned by members of Disque’s immediate family through their membership in defendant St. Gervais LLC, the owner of SKI. Id. at ¶¶17-18. Plaintiff Rudman was hired in 1989 to work for SCA and Deane-related entities. Exhibit B at 2. His employment was concededly terminated on April 29, 2009. Exhibit E at ¶93. Plaintiff Kuplesky, a lawyer with experience in the regulated housing industry, was hired in or about 1999, and his employment by any Deane-related entity ceased as of December 15, 2008. Id. at 2 and 29. Both plaintiffs were salaried employees who worked closely with and under Disque. Exhibit E at ¶¶29-30. In 2006, Starrett City Preservation LLC (“Preservation”) was formed, with an operating agreement effective “as of January 1, 2006” (the “Preservation Agreement” or the “Agreement”) (Exhibit E-1). As this Court found, “Preservation’s purpose was to ‘provide its Members with a beneficial interest in all payments payable by [SCA] to [Deane] and to Salt Kettle . . . in respect of [Deane]’s . . . and [Salt Kettle]’s economic interest in SCA.” Exhibit B at 20 (quoting Preservation Agreement §1.3). Disque and SKI executed the Omnibus Assignments (Exhibits E-2 and E-3), also effective as of January 1, 2006, transferring to Preservation their “economic interests” in SCA. Exhibit B at 4.5 As this Court correctly found, however, “[I]t was not intended that Preservation would necessarily distribute the entirety of [the assigned] ‘economic interests’ to its Members . . . [W]hat Preservation had to distribute to its Members [pursuant to Section 4.2 of the Agreement] were the distributions it received from SCA by virtue of having 5 The MGP and SKI did not assign their interests as limited partners of SCA, their rights to reimbursement for expenses, their authority as general partners, and any rights they may have had as general partners, assignors or limited partners to indemnification or contribution. Id. 4 9 of 25 been assigned the general partners’ ‘economic interest’ in that partnership, but not the economic interest itself.” Exhibit B at 20-21. Section 4.2 of the Agreement, entitled “Distributions,” likewise provides that the only distribution Preservation was required to make to its Members was of the “payments received from the MGP, SKI or any successor or transferee.” This Court rejected plaintiffs’ argument that “payments” under Section 4.2 referred not only to cash, but also to non-cash, i.e., in kind, distributions. As this Court correctly perceived, if plaintiffs’ interpretation were correct, Preservation would be forced to strip itself of its only assets and close up shop virtually upon receiving those assets as a result of a sale or refinancing: If its partnership interest in SCA was to be included under the economic interests to be distributed, Preservation would have been required to divest itself of all of its interest (its main or, even only, asset) in the very same year in which it was formed, a result clearly not contemplated by its LLC agreement. Exhibit B at 21. Defendant Carol Deane, Disque’s wife, was always and continues to be the Managing Member of Preservation. Exhibit E at ¶15. Preservation was majority-owned by Disque’s family members, although plaintiffs and one other salaried employee received minority membership interests (“Sharing Ratios”) in Preservation. Exhibit E at ¶46. Rudman’s and Kuplesky’s Sharing Ratios were initially fixed by the Agreement at 15.01% and 11.63%, respectively. With the end of his employment in December 2008, Kuplesky’s Sharing Ratio was reduced to 3.49%. Exhibit B at 30. Plaintiffs’ membership in Preservation was intended in part to give plaintiffs an incentive to assist the MGP’s efforts to sell or refinance Starrett City, so that the general and limited partners of SCA could realize the increase in the value of their equity in Starrett City since their original investments. Exhibit E at ¶4. The members’ capital contributions to Preservation were 5 10 of 25 minimal (equal to $10 for each percentage point), which meant that Rudman’s capital contribution was about $150 and Kuplesky’s was less than $120. Exhibit E-1. Moreover, the Preservation Agreement provided that no further capital calls could be made on any of the Preservation members. Exhibit E-1 at §3.2. After the MGP’s efforts to sell Starrett City proved unsuccessful, SCA closed on a $530 million refinancing of Starrett City in December 2009. Exhibit B at 10, 12. At the time of the refinancing, the complex’s shopping center was spun off as Spring Creek Plaza, LLC (“Spring Creek”), a new entity owned by the SCA partners in the same proportion as their interests in SCA, i.e., the combined MGP/SKI interest in Spring Creek was 19.9%. Exhibit E-4. The MGP and SKI continue to hold their respective membership interests in Spring Creek through two Single Purpose Entities, defendants DD Shopping Center LLC and SK Shopping Center LLC. Exhibit E-4. To finance Spring Creek, SCA directed the transfer to Spring Creek of approximately $3.2 million, based on the recommendation of the MGP, whose recommendations the Agreement required Preservation’s members not to oppose. Exhibit E at ¶81; Exhibit E-1 at §5.10.6 As a result of the Omnibus Assignments, Preservation received about $38 million from the net cash proceeds of the refinancing. Exhibit B at 12. From that amount, Carol Deane as Managing Member distributed to Preservation’s members, including plaintiffs, an aggregate 6 Section 5.10 of the Preservation Agreement provides, in relevant part: 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. 6 11 of 25 amount of nearly $32 million in two tranches, representing all of the distributable cash that remained after deducting for staff bonuses and reserves and paying expenses.7 Id. Plaintiff Rudman received about $4.8 million and Kuplesky received about $1.1 million of the Managing Member’s $32 million aggregate distribution. Id. Preservation’s first distribution to its members in May 2010 was in the aggregate amount of about $20 million. From that amount, Rudman received about $3 million and Kuplesky, based on his reduced Sharing Ratio of 3.49%, received about $700,000. Preservation’s second distribution to its members in November 2010, was in the aggregate amount of about $11.7 million. From that second tranche, Rudman received approximately $1.8 million and Kuplesky received about $410,000. Exhibit B at 12; Exhibit E at ¶91. On November 8, 2010, after the cash distribution were completed the Managing Member of Preservation reduced plaintiffs’ Sharing Ratios to zero, as the Appellate Division held she had long been entitled to do pursuant to Section 3.3 of the Agreement. Exhibit B at 12-13. ARGUMENT POINT I: THIS COURT’S JUDGMENT ON PLAINTIFFS’ NINTH CLAIM, AS MODIFIED AND OTHERWISE AFFIRMED BY THE APPELLATE DIVISION, REQUIRES THE DISMISSAL OF ALL OF PLAINTIFFS’ REMAINING CLAIMS EXCEPT FOR THE ISSUE OF KUPLESKY’S PROPER SHARING RATIO Every one of Rudman’s and Kuplesky’s individual claims is premised on their entitlement to and failure to receive what they call their “Due Distributions.” In granting partial summary judgment on plaintiffs’ Ninth Claim, however, this Court has already determined that Rudman and Kuplesky are not entitled to three of their four enumerated categories of “Due 7 This Court rejected plaintiffs’ argument on the summary judgment motions that the payment of those staff bonuses and reserves were improper under the Agreement, and granted defendants summary judgment on that issue (Exhibit B at 31), a ruling that plaintiffs did not appeal. 7 12 of 25 Distributions,” i.e., the non-cash assets or benefits flowing from Starrett City’s refinancing in which plaintiffs seek to share as though they were general partners. According to this Court, although the Omnibus Assignments assigned to Preservation the general partners’ entire “economic interests” in SCA, “it was not intended that Preservation would necessarily distribute the entire of these economic interest” to its members. Exhibit B at 20. Instead, Sections 1.3, which provided that the initial purpose of the Company was to provide its members with a beneficial interest “in all payments,” and Section 4.2, which likewise limited distributions to “payments received from” the MGP and SKI, limited the need to transfer only cash to Preservation This Court noted that the last sentence of Section 4.2 “requires the distribution [under this section] to be made ‘at least in the same calendar year in which Payments are received by the Company,’” and “if its partnership interest in SCA was to be included under the economic interests to be distributed, Preservation would have been required to divest itself of all its interest (its main or, even only, asset) in the very same year in which it was formed, a result clearly not contemplated by the LLC Agreement.” Id. at 21. This Court concluded that plaintiffs could claim nothing other than a share of the cash distributions Preservation received from SCA, and that “Preservation’s membership in SCA, Spring Creek (which remained an asset of the SCA Partners), and the charitable deduction allocated among the SCA partners for income tax purposes” were not “payments” within the meaning of the Agreement. Id. at 23. Thus, all that is even arguably left to plaintiffs’ lawsuit is their claim to entitlement to more cash than they already received from the cash proceeds of the refinancing. But the Appellate Division has ruled that the Managing Member was entitled to reduce or reallocate plaintiffs’ Sharing Ratios to zero as soon as she distributed at least $10 million in the 8 13 of 25 aggregate from the cash proceeds of the refinancing. Rudman does not dispute his Sharing Ratio and, as a result, by the time that the Managing Member reduced Rudman’s Sharing Ratio to zero, he had already received millions of dollars more than he had a right to demand. As for Kuplesky, he has received far more than he was entitled to demand under his reduced Sharing Ratio of 3.49%, and he has received only about $45,000 less than his original Sharing Ratio of 11.63% would have entitled him to receive. Only the dispute over Kuplesky’s Sharing Ratio is preserved as a claim to be tried. POINT II: THE THIRD, FOURTH AND SIXTH CLAIMS ALLEGING BREACH OF OR CONVERSION UNDER THE OMNIBUS ASSIGNMENTS, ALL OF THE REMAINING DERIVATIVE CLAIMS AND THE TENTH CLAIM SEEKING A DECLARATORY JUDGMENT MUST BE DISMISSED BASED ON THIS COURT’S PRIOR RULING The gravamen of the Third and Fourth Claims, alleging a breach of the Omnibus Assignments by Disque and SKI, and the Sixth Claim, alleging conversion against several defendants, is that the defendants failed to deliver or ensure the delivery of assigned non-cash assets to Preservation. Likewise, the Tenth Claim seeks a declaratory judgment invalidating the transfer of those assets to any entity other than Preservation. Finally, the theory of plaintiffs’ derivative claims on behalf of Preservation, i.e., the First, Second, Third, Sixth and Eighth Claims, is that Preservation has been deprived of those same non-cash assets. This Court has already determined that all of those non-cash assets, which consist of “Preservation’s membership in SCA, Spring Creek (which remained an asset of the SCA partners), and the charitable deduction allocated among the SCA partners for income tax purposes” (compare Exhibit E ¶87 with Exhibit B at 23) “were not ‘payments’ that needed to be transferred to Preservation.” Exhibit B at 23. As this Court correctly understood and ruled, and 9 14 of 25 was affirmed on appeal, the general partners assigned to Preservation only their “economic interests” in SCA, i.e., their rights to receive “payments or distributions” from SCA, not their rights, duties and obligations as partners in SCA. Exhibit B at 4, 21. As to the cash assets, this Court also found that, as a result of the refinancing, “SCA distributed approximately $38 million to Preservation, representing 19.9% of the loan proceeds available for distribution.” Id. at 12. In other words, Preservation received its full and entire share of the “MGP/SKI’s Share of Refinancing Proceeds,” i.e., the net cash proceeds of the refinancing. Plaintiffs also claim that SCA diverted cash proceeds of the refinancing, 19.9% of which should properly have gone to Preservation, when it funded the bank account of the newly spun- off Spring Creek, based on Disque’s recommendation. Exhibit E at ¶81.8 The claim is frivolous. Plaintiffs are barred by Section 5.10 of the Preservation Agreement from second- guessing the MGP’s decision, on behalf of SCA, to fund Spring Creek, the newly spun-off shopping center. Under §5.10, plaintiffs are required to support the MGP’s decision to fund Spring Creek, and certainly not oppose it. Thus, plaintiffs’ claim to these monies is prohibited by the plain terms of the Preservation Agreement. Because defendants did not improperly fail or refuse to deliver the “Due Distributions” or “Assigned Assets” to Preservation, these claims must be dismissed. 8 According to plaintiffs “on or about December 17, 2009, $3,273,307 of the cash proceeds of the Refinancing was transferred to Spring Creek to fund that new entity. In addition, a $250,000 reserve was set aside from the cash proceeds for the shopping center.” SAC ¶81. 10 15 of 25 POINT III: THE REMAINING COUNTS ARE DEFECTIVELY PLEADED AND MUST BE DISMISSED FOR THAT REASON AS WELL As argued in Points I and II, supra, the decisions of this Court and the Appellate Division granting defendants’ summary judgment on the Ninth Claim require the remaining nine claims to fall, because those decisions vitiate plaintiffs’ theory of liability (except for the determination of Kuplesky’s Sharing Ratio). But fatal pleading defects in the remaining claims provide this Court with an additional basis for dismissing nearly the entire SAC, leaving only the Fifth Claim against Carol and Preservation for allegedly breaching the Preservation Agreement as to Kuplesky’s Sharing Ratio. A. THE FIRST AND SECOND CLAIMS IMPERMISSIBLY COMMINGLE INDIVIDUAL AND DERIVATIVE CLAIMS In their First Claim (Exhibit E at ¶112), in which they allege they are “acting individually [to vindicate their own purported rights] and derivatively” to vindicate Preservation’s interests, plaintiffs claim that Carol Deane, as MGP of SCA and Managing Member of Preservation, and St. Gervais, as a member of Preservation, breached their fiduciary duty to Preservation and to plaintiffs by failing to cause SCA to deliver to Preservation, and Preservation in turn to deliver to plaintiffs, all of the “Due Distributions” to which both Preservation and plaintiffs were entitled from the proceeds of the Starrett City refinancing. In their Second Claim (Exhibit E at ¶119), again alleging that plaintiffs are “acting individually and derivatively,” plaintiffs allege that the codefendants aided and abetted Carol Deane’s and St. Gervais’s fiduciary breach. In other words, both claims allege and combine individual and derivative claims in the same cause of action, an impermissible and defective pleading. It is well-settled that commingling individual and derivate claims in the same cause of action is improper and provides an independent basis to dismiss the offending claim. Barbour v. 11 16 of 25 Knecht, 296 A.D.2d 218, 228 (1st Dep’t 2002) (“The mingling of derivative claims and individual claims requires dismissal of the causes of action so affected”); Greenberg v. Falco Constr. Corp., No. 4267/2010, 2010 WL 3781279, at *3 (Sup. Ct., Kings Co. 2010) (“Although a complaint may contain both derivative claims, brought on behalf of a corporation, and individual claims, the two claims must not be intermingled within the same causes of action, but instead must be pleaded separately,” and the failure to separate the two claims requires dismissal of the count containing the commingled claims) (emphasis added); see also Balk v. 125 West 92nd Street Corp., 24 A.D.3d 193, 194 (1st Dep’t 2005) (“[plaintiff’s] breach of contract and breach of fiduciary duty claims, which intermingled derivative and individual claims, were properly dismissed”); Jones v. Citigroup, Inc., No. 570210/10, 2010 WL 2944224, at *1 (App. Term., 1st Dep’t July 27, 2010) (holding that “the intermingling of derivative and individual claims requires dismissal of the entire complaint”). In opposing defendant Spring Creek’s motion to dismiss on the same “commingling” ground, plaintiffs argued that “the practice is permissible as long as plaintiffs have not confused the action.” Plaintiffs’ Opposition to Spring Creek’s Motion to Dismiss (Doc#50) at 17 n. 9. As support for that argument, plaintiffs cited Abrams v. Donati, 66 N.Y.2d 951, 953 (1985), and Brescia v. Silverman, 2009 WL 803426, at *4 (Sup. Ct., N.Y. Co. Mar. 16, 2009).9 Neither case supports plaintiffs’ commingled pleading against the remaining defendants. The opposite is true. These cases support defendants’ argument for the dismissal of the First and Second Claims. In Abrams, the Court of Appeals upheld the dismissal of a derivative claim that plaintiff brought in his individual capacity. Abrams says nothing favorable to plaintiffs about the 9 This Court had no need to and did not decide the issue in the context of defendant Spring Creek’s motion because this Court dismissed the Second Claim as to Spring Creek on another independent ground, i.e, that the SAC failed to demonstrate that Spring Creek substantially assisted in any alleged breach. 12 17 of 25 propriety of commingling individual and derivative claims in a single count. Indeed, in Brescia, the court permitted individual and derivative claims to stand only because, unlike in this case, they were not alleged in the same cause of action. In short, both Abrams and Brescia, the authority on which plaintiffs relied in unsuccessfully attempting to defeat defendant Spring Creek’s motion to dismiss, squarely support the remaining defendants’ contention that the First and Second Claims are defective, and must be dismissed. B. THE FIRST CLAIM MUST IN ANY EVENT BE DISMISSED AS TO ST. GERVAIS BECAUSE IT DID NOT HAVE A FIDUCIARY RELATIONSHIP WITH OR DUTY TO ITS CO- MEMBERS Plaintiffs allege that “St. Gervais (as a member) [had] fiduciary duties to Preservation and to the other members of Preservation.” Exhibit E at ¶113. Where, as here, an LLC’s operating agreement designates a managing member, i.e., Carol Deane, the other members of the LLC do not owe each other a fiduciary duty. Coventry Real Estate Advisors, LLC v. Developers Diversified Realty Corporation, 84 A.D.3d 583, 584 (1st Dep’t 2011) (“under Delaware law, fiduciary duties are imposed ‘only on managers and those designated as controlling members of an LLC,’ and not on nonmanaging minority members”) (original emphasis). While Coventry was decided under Delaware law, New York’s LLC law is to the same effect. See, e.g., Kalikow v. Shalik, 2014 NY Slip Op 24099 (Sup Ct, Nassau County Feb. 26, 2014).10 In Kalikow, the court dismissed a claim for breach of fiduciary duty against a non-managing member based on its holding that New York’s Limited Liability Company Law §409(a)’s imposition of a fiduciary 10 See also 1 NY Practice, New York Limited Liability Companies and Partnerships § 1:8 (“a member who is not a manager does not owe a duty to the LLC or its members except to the extent he or it participates in the management of the LLC”); 51 Am Jur 2d, Limited Liability Companies § 11 (“members of a limited liability company are like shareholders in a corporation in that they do not owe a fiduciary duty to each other or to the company, and that as long as members of a limited liability company are not acting in a managerial capacity, they do not have fiduciary duties to one another unless such fiduciary duties are set forth in the operating agreement”). 13 18 of 25 duty only on the managing member of the LLC demonstrates a legislative intent not to impose such a duty on non-managing members. Accordingly, the SAC must be dismissed as to defendant St. Gervais which, as a non- managing member, had no fiduciary duty it could breach. C. THE FIFTH CLAIM MUST BE DISMISSED AS TO DEFENDANTS DISQUE AND SKI The Fifth Claim asserts a claim for breach of the Preservation Agreement against Preservation, Carol Deane, Disque Deane and SKI. According to plaintiffs, Preservation and Carol Deane breached the Agreement by failing to make the Due Distributions. Exhibit E at ¶145. For the reasons set forth above (Point I, supra), that claim must be limited to Kuplesky’s Sharing Ratio. By contrast, plaintiffs allege that Disque and SKI breached the Agreement by failing to transfer the MGP/SKI’s Share of the Refinancing Proceeds to Preservati