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FILED: NEW YORK COUNTY CLERK 10/03/2013 INDEX NO. 650159/2010
NYSCEF DOC. NO. 328 RECEIVED NYSCEF: 10/03/2013
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
HARVEY RUDMAN and HAROLD KUPLESKY, on TYPOGRAPHICAL ERROR
Behalf of Each of Them Individually And On Behalf Of CORRECTED VERSION
Starrett City Preservation LLC, Derivatively,
Index No. 650159/10
Plaintiffs,
Assigned to Kornreich, J.
- against -
CAROL GRAM DEANE, THE ESTATE OF DISQUE
Motion Seq. No. 7
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.
DEFENDANTS’ MEMORANDUM OF LAW
IN SUPPORT OF MOTION FOR
PARTIAL SUMMARY JUDGMENT
NEWMAN & GREENBERG WARNER PARTNERS, P.C.
Attorneys for Defendant Carol Gram Deane Attorneys for All Defendants
Except Carol Gram Deane
950 Third Avenue and Spring Creek Plaza
New York, New York 10022
(212) 308-7900 950 Third Avenue
New York, New York 10022
(212) 593-8000
FOLEY & LARDNER LLP
Attorneys for Defendant Spring Creek Plaza
90 Park Avenue
New York, NY 10016
( 212) 682-7474
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ................................................... iii
PRELIMINARY STATEMENT .................................................1
OVERVIEW .................................................................1
STATEMENT OF FACTS ......................................................3
A. Background. ........................................................3
B. Plaintiffs. ...........................................................4
C. Taking Equity Out Of Starrett City, and The Sixteenth Amendment to the
SCA Partnership Agreement .........................................4
D. Formation of Preservation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
E. Attempts to Sell Starrett City ...........................................6
F. The Focus Shifts to Refinancing. .........................................8
G. The Refinancing and Distribution of Proceeds. ..............................9
H. Preservation’s Payment of Bonuses and Creation of a Bonus Reserve from
the Proceeds it Received from SCA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Standards for Summary Judgment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
POINT I: DEFENDANTS ARE ENTITLED TO SUMMARY JUDGMENT ON
PLAINTIFFS’ NINTH CAUSE OF ACTION BECAUSE THE PLAIN
LANGUAGE OF SECTION 3.3 AUTHORIZED THE MANAGING MEMBER
TO REDUCE PLAINTIFFS’ SHARING RATIOS TO ZERO . . . . . . . . . . . . . . . . . . . . 13
POINT II: THE MANAGING MEMBER WAS AUTHORIZED BY SECTION
4.2(iii) TO PAY BONUSES TO OFFICE STAFF AND TO ESTABLISH A
RESERVE FOR FUTURE BONUSES FROM THE PROCEEDS OF THE
REFINANCING, AND THAT IS ALL SHE HAS DONE . . . . . . . . . . . . . . . . . . . . . . . 17
a) Office Staff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-i-
Page
b) Bonus Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
POINT III: BECAUSE KUPLESKY “CEASED TO BE ACTIVELY ENGAGED
ON A SUBSTANTIALLY FULL TIME BASIS WITH THE DEANE
INTERESTS” BEFORE “DISCUSSIONS BEGAN THAT RESULTED IN A
FUNDING EVENT,” HIS SHARING RATIO WAS PROPERLY REDUCED IN
ACCORDANCE WITH SECTION 5.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-ii-
TABLE OF AUTHORITIES
Page
CASES
Aramony v. United Way of America, 254 F.3d 403 (2d Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . 15
Greenfield v. Philles Records, 98 N.Y.2d 562 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Jones Apparel Group, Inc. v. Polo Ralph Lauren Corp., 16 A.D.3d 279 (1st Dep’t 2005) . . . . 15
Sengillo v. Valeo Elec. Sys., 536 F. Supp. 2d 310 (W.D.N.Y. 2008) . . . . . . . . . . . . . . . . . . . . . 15
Trump Vill. Section 3, Inc. v. N.Y. State Hous. Fin. Agency,
292 A.D.2d 156 (1st Dep’t 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Wald v. Marine Midland Bus. Loans, Inc., 270 A.D.2d 73 (1st Dep’t 2000) . . . . . . . . . . . . . . . 12
Williams v. Barkley, 165 N.Y. 48 (1900) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
OTHER AUTHORITIES
Dictionary.com. WordNet® 3.0. Princeton University,
http://dictionary.reference.com/browse/office_staff (accessed: March 6, 2013). . . . . . . . . . . . . 18
-iii-
PRELIMINARY STATEMENT
This memorandum of law is submitted in support of defendants’ motion for partial
summary judgment:
a. dismissing plaintiffs’ Ninth Cause of Action, which seeks a judgment declaring that the
Managing Member of Preservation cannot reduce plaintiffs’ Sharing Ratios pursuant to
Section 3.3 of the Preservation Agreement prior to what plaintiffs have characterized as a
“full distribution of the MGP/SKI’s share of the Refinancing Proceeds”;
b. ruling that the Managing Member of Preservation was authorized by Section 4.2(iii) of
the Preservation Agreement to award bonuses to three members of the office staff, as she
did, and to create a reserve for future office staff bonuses; and
c. ruling that plaintiff Kuplesky’s Sharing Ratio was properly reduced pursuant to Section
5.5 of the Preservation Agreement.
Hoping for a windfall to which they are not entitled, plaintiffs in their Complaint have
ignored or distorted the plain language and clear meaning of the Preservation Operating
Agreement, which governs this dispute. Their allegations of fraud and fiduciary breach are a
smoke screen designed to obscure the fact that at bottom their lawsuit is one for breach of
contract, a claim with no substance.
OVERVIEW
Plaintiffs are former employees of Deane-related entities, including Starrett City
Associates LP (“SCA”), whose claims are found in their Second Amended Complaint (“SAC”
or “the Complaint”). Plaintiffs worked from the office of SCA’s Managing General Partner
(“MGP”), defendant Disque D. Deane (“Disque”). The contract at issue in this lawsuit is the
Operating Agreement (“the Agreement”) of Starrett City Preservation LLC (“Preservation”).
Exhibit 1.
An excellent example of plaintiffs’ disregard of the Agreement’s language is reflected in
their Ninth Cause of Action regarding Section 3.3, which embodies the central, overreaching
1
goal of their lawsuit. If successful, that claim would transform plaintiffs from beneficiaries of a
generous employee incentive program into part owners of the sprawling Starrett City complex.
Section 3.3 of the Agreement unambiguously authorizes the Managing Member of
Preservation, defendant Carol Deane, to reduce even to zero the Sharing Ratio of any
Preservation Member upon the occurrence of a “Funding Event,” defined by the Agreement as
the aggregate distribution to Preservation members of at least $10 million. The Managing
Member can be more generous or delay exercising her reallocation power – as she did here – but
the Agreement does not require her to do either.
In December 2009, Starrett City undertook a $531 million refinancing. Thereafter, SCA,
the beneficial owner of Starrett City, distributed (net of expenses and other distributions) almost
$38 million from the refinancing proceeds to Preservation. Those funds represented
Preservation’s full (19.9%) entitlement to the net proceeds of the refinancing. Preservation in
turn distributed almost $32 million – the net proceeds from the distribution it received – to its
members, including $5.9 million collectively to plaintiffs, who had been senior managers in the
office of the MGP. Only then did the Managing Member reallocate their Sharing Ratios. As a
result, plaintiffs received millions of dollars more from the proceeds of the refinancing than the
Managing Member was required by the Agreement to pay them.1
Despite the Managing Member’s largesse, plaintiffs seek this Court’s declaration that
their Sharing Ratios cannot be reduced until Preservation makes additional distributions to them
of “no less than $28,000,000.” SAC ¶171. Plaintiffs’ claim is baseless, and ignores – indeed,
even attempts to conceal – the operative language of Section 3.3. For example, plaintiffs
1
Had the Managing Member limited plaintiffs to their actual Sharing Ratio percentages of the $10
million threshold, as she was entitled to do, Rudman would have received $1.5 million (based on his
15.01% Sharing Ratio) and Kuplesky would have received $349,000 (based on his reduced 3.49%
Sharing Ratio).
2
simply omit from their purported verbatim quotation of Section 3.3 any mention of the $10
million threshold, and replace that critically important limitation with a deceptive ellipsis (SAC
¶166), implying that this essential term is irrelevant.
The plain language of the Agreement is similarly dispositive on the two remaining issues
on which defendants seek summary judgment: the Managing Member’s right under Section
4.2(iii) to pay bonuses to three of the office staff, and to establish a bonus reserve, from the
proceeds of the refinancing (Point II); and the mandatory reduction in a pre-determined amount
of plaintiff Kuplesky’s Sharing Ratio pursuant to Section 5.5, because his employment ceased
before “discussions” began that “resulted in” the December 2009 refinancing (Point III).
STATEMENT OF FACTS
A. Background. Starrett City is a regulated mixed income affordable housing complex
located in Brooklyn, New York. Undisputed Fact #1. Starrett City, Inc. (“SCI”) holds title to
Starrett City for the benefit of SCA, a limited partnership with approximately 200 limited
partners. Undisputed Facts ##2, 3. Disque was integrally involved with Starrett City from its
inception in the 1970s until his death in November 2010. Exhibit 2 at p. 4.
From 1985 until his death, Disque (or a Single Purpose Entity (“SPE”) wholly owned by
him) was the MGP of SCA. Undisputed Fact #4. On or about December 15, 2009, at the request
of Wells Fargo, the lending bank for Starrett City’s refinancing, Disque assigned his MGP
“interests and obligations” in SCA to defendant DD Spring Creek LLC. Undisputed Fact #4(a);
Exhibit 3.2
Defendant SKI was a general partner (“GP”) of SCA. Undisputed Fact #5. On or about
2
On February 25, 2011, Disque’s estate (by Carol Deane, his executrix) was substituted as a party to this
action in place of Disque personally. Undisputed Fact #10.
3
December 15, 2009, SKI – at the request of Wells Fargo – assigned its GP “interests and
obligations” to an SPE, defendant SK Spring Creek LLC, in which SKI held a 100%
membership interest. Exhibit 3. Defendant Saint Gervais LLC holds a 100% membership
interest in SKI. Undisputed Fact #6. Saint Gervais, a Deane-family entity, was 93.49% owned
by Disque and Carol Deane (individually and as custodian for their two children).3 Undisputed
Fact #6(a). Carol is and always has been the Operating Manager of Saint Gervais. Undisputed
Fact #6(c). After Disque’s death, SK Spring Creek succeeded to the position of MGP of SCA.
Exhibit 4.
B. Plaintiffs. Plaintiff Harvey Rudman was hired by SCA in 1989 to be, inter alia,
President of SCA. Exhibit 5. Rudman’s employment at SCA was terminated on April 29, 2009.
Undisputed Fact #11.
In 1999, Disque hired plaintiff Harold Kuplesky, a lawyer knowledgeable about the
regulated housing industry. SAC ¶30; Exhibit 6. Kuplesky’s employment ended on December
15, 2008, by which point he held the position of President of Cork Management LLC.
Undisputed Fact #12(a) and (b). Cork and Grenadier Realty Corporation were at the time co-
managing agents of Starrett City. Undisputed Fact #12(c).
C. Taking Equity Out Of Starrett City, and The Sixteenth Amendment to
the SCA Partnership Agreement
Since its creation 40 years ago, Starrett City’s value increased, and with it the value of the
equity of SCA and its partners. Undisputed Fact #13; SCA ¶60. A sale of Starrett City would
have enabled SCA’s partners to realize the benefit of their increased equity. By contrast, prior to
July 2009, a refinancing would not have made such an equity takeout possible, because New
3
Saint Gervais’s other members are Carol Deane’s sister, Mary Clarke, and Mary’s immediate family
(3.9%); Disque’s nephew, Curt Deane (0.87%); Iris Sutz (0.87%); and Francis Hughes (0.87%)
Undisputed Fact #6(b).
4
York’s Mitchell-Lama law, which governed Starrett City, prohibited a refinancing for more than
a developer’s original investment. Exhibit 7. In July 2009, following an intense lobbying effort
by SCA representatives the law was amended to make an equity take-out possible. See, Point III,
infra.
In 2003, SCA’s partners approved the Sixteenth Amendment to SCA’s Partnership
Agreement. Undisputed Fact #7. The Sixteenth Amendment provided, inter alia, that Disque
and his family, through SKI, would receive additional compensation if the partners were able to
monetize their increased equity in Starrett City. Specifically, the Sixteenth Amendment
increased the combined MGP/SKI general partner interest and residual interest in SCA by 10%,
from 9.9% to 19.9%, an increased interest that would take effect only after the return of the
partners’ capital investment in Starrett City (a “Participation Change”). Undisputed Fact #8.
Since that capital investment totaled $30,750,000 (Undisputed Fact #19), as a practical matter it
could only be returned to the partners as a result of a sale (or, if the Mitchell-Lama law could be
changed, a refinancing) of Starrett City.
D. Formation of Preservation. Preservation’s Operating Agreement was signed
“effective as of January 1, 2006.” Exhibit 1. Also effective January 1, 2006, Disque, as MGP,
and SKI, as GP, executed Assignments of their “economic interests” in SCA to Preservation.
Exhibits 8 and 9, respectively. The members of Preservation and their original Sharing Ratios
were as follows: Saint Gervais (45.10%); Carol Deane (14.13%); Mary Clarke (2.5%); G. Martin
Fell, a senior manager at SCA (11.63%); Harold Kuplesky ($11.63%); and Harvey Rudman
(15.01%). Undisputed Fact #16. The nominal capital contribution of all of the Preservation
members totaled $1,000, and was paid in accordance with the Sharing Ratio of each (e.g., $451
from Saint Gervais, $141.30 from Carol Deane). Undisputed Fact #16.
5
Among other things, Preservation provided an incentive plan for the three senior
management personnel, including plaintiffs. SAC ¶4. The Preservation incentive plan was
limited by Section 3.3, which entitled the Managing Member, “in [her] sole discretion,” to
reduce the membership Sharing Ratios of any members, “including . . . assigning a Member a
Sharing Ratio of zero,” but only after Preservation distributed at least $10 million in aggregate to
its members. See Point I, infra. At all times the Managing Member was and continues to be
Carol Deane. Undisputed Fact #17.
E. Attempts to Sell Starrett City In 2006, the MGP began efforts to sell Starrett City.
SAC ¶61. In February 2007, a potential purchaser (Clipper Equity) made a $1.3 billion bid for
Starrett City (SAC ¶63), an offer regulators rejected in the belief that, inter alia, such a high
purchase price would jeopardize Starrett City’s continued existence as affordable housing.
Exhibit 10. In August 2007, regulators approached the MGP to explore the possibility of a
“preservation transaction,” i.e., a transaction that would preserve Starrett City’s affordable
housing status. Exhibit 11. On August 29, 2007, SCI notified regulators of its intent “to dissolve
or reconstitute as a business corporation not subject to the restrictions and limitations of the
[Mitchell-Lama] law.” Undisputed Fact #25; Exhibit 12. The next day, August 30, the MGP
informed SCA’s limited partners that he had begun the privatization process to “eliminate
governmental interference with our rights as owners of Starrett City.” Undisputed Fact #26;
Exhibit 13. The MGP also continued to meet with regulators to discuss the possibility of a
preservation transaction and in September 2007 he met with regulators for that purpose. Exhibit
14.
In October 2007, plaintiffs Rudman and Kuplesky participated in the drafting of a
proposal, sent to Patricia Almodovar of HFA, who was designated to represent all relevant
6
government housing agencies in their negotiations with SCA, reaffirming that SCA’s “first
option” was “to sell Starrett City” in a preservation transaction. Undisputed Fact #27; Exhibits
11 and 15. In furtherance of that sales effort, SCA engaged Recap Advisors LLC (“Recap”) on
November 19, 2007, “to assist [SCA] in arranging and completing the successful sale of Starrett
City.” Undisputed Fact #28; Exhibit 16. Recap’s engagement letter, which plaintiff Rudman
signed for the MGP, expressly excluded a refinancing transaction from Recap’s advisory
responsibilities.4
On May 12, 2008, SCA and the housing agencies entered into a Memorandum of
Understanding (“MOU”) whose stated purpose was “to establish a framework under which SCA
may structure and complete a sale of Starrett City.” Undisputed Fact #29; Exhibit 17 (emphasis
added).5 On June 3, 2008, consistent with the MOU, Recap invited all potential purchasers of
Starrett City to submit bids. Undisputed Fact #31; Exhibit 18. On September 19, 2008, the
MGP retained the law firm of Bingham McCutchen LLP to represent SCA in connection with a
sale of Starrett City. Undisputed Fact #32; Exhibit 19. Like the agreement with Recap,
Bingham’s engagement letter, this one signed by plaintiff Kuplesky for the MGP, expressly
excluded legal representation in connection with any “new financing for the [Starrett City]
Development.” Exhibit 19 at 1. On September 23, 2008, HUD and DHCR issued written
approvals to two investment groups (Cogsville and Westbrook), authorizing them to proceed
with their bids for the purchase of Starrett City. Undisputed Fact #33; Exhibit 20. On October
30, 2008, with discussions with potential purchasers ongoing, SCA and the relevant
4
Recap’s engagement letter specified that “Recap will not provide the following services in connection
with this Agreement: . . . Refinancing.” Exhibit 16 at 3.
5
The governmental parties to the MOU included the United States Department of Housing and Urban
Development (“HUD”), the New York State Housing Finance Agency (“HFA”), the New York State
Division of Housing and Community Renewal (“DHCR”), and the City of New York’s Department of
Housing Preservation and Development (“HPD”). Undisputed Fact#30.
7
governmental housing agencies agreed to extend the MOU “until further notice.” Undisputed
Fact #34; Exhibit 21.
In a November 21, 2008 memorandum captioned “Analysis of Alternatives” (Exhibit 22),
sent to Disque and Carol Deane, plaintiffs and Fell analyzed SCA’s options in the then-current
economic market and identified three transactional alternatives: a preservation sale of Starrett
City, a privatization of Starrett City, or “do[ing] nothing.” Plaintiffs’ memorandum omitted any
mention of a refinancing, and urged the MGP “not [to] walk[] away from the negotiating table”
where a sale of Starrett City was still under active discussion. Exhibit 22 at 8.
On December 3, 2008, Recap invited potential purchasers of Starrett City to submit
updated bids by 3:00 p.m. on December 15, 2008. Undisputed Fact #36; Exhibit 23.6 On
December 18, 2008, Cogsville submitted its updated bid. Undisputed Fact #37; Exhibit 25;
Westbrook continued to express interest in purchasing Starrett City but failed to meet Recap’s
new deadline. Undisputed Fact #37. Negotiations between SCA and Cogsville for the sale of
Starrett City continued into 2009. Exhibit 26.
F. The Focus Shifts to Refinancing. On February 19, 2009, Disque and Carol
informed their limited partners of the MGP’s decision to abandon his efforts to sell Starrett City,
and to “consider other options available to us, including the possibility of refinancing the
property to help reduce the partners’ ‘phantom income’ tax burden that grows worse each year.”
Undisputed Fact #38; Exhibit 27. On February 26, 2009, MGP representatives, including
Recap’s president, Todd Trehubenko, met with regulators to present an “overview of concepts”
related to a refinancing. Undisputed Fact #39; Exhibit 28. On March 12, 2009, SCA
representatives met with Alan Wiener, a Wachovia banker with experience in financing
6
Recap later extended the deadline to December 18, 2008, at the request of one of the bidders. Exhibit
24.
8
affordable housing. Undisputed Fact #40; Exhibit 29. By engagement letter dated March 18,
2009 (Exhibit 30), signed by Disque as the MGP on March 19, 2009, SCA retained the
investment banking services of Mr. Wiener and Wachovia (which had recently been acquired by
Wells Fargo) to help SCA refinance Starrett City. Undisputed Fact #41; SAC ¶69. SCA paid
Wiener’s $150,000 initial retainer on or about April 25, 2009. Undisputed Fact #42; Exhibit 31.
At about the time Wachovia was retained, the MGP also retained the law firm of Wilson,
Elser, Moskowitz, Edelman & Dicker LLP to lobby the New York Legislature to amend the
Mitchell-Lama law to permit a refinancing of Starrett City in excess of the original investment in
the project. Undisputed Fact #45; Exhibits 32 and 33.7
On or about April 2, 2009, SCA representatives met with regulators to discuss the
Starrett City refinancing plan. Undisputed Fact #43; Exhibit 34. On June 11, 2009, Recap
amended its engagement letter to include for the first time refinancing advice as one of the
services it would provide. Undisputed Fact #44; Exhibit 35.
In July 2009, as a result of the efforts of the MGP and his lobbyists and lawyers, the New
York Legislature amended Mitchell-Lama, making it legally possible for the first time for SCA
to undertake and achieve a refinancing with an equity take out. See Private Housing Finance
Law § 22-b, L.2009, c.199 §1. On July 20, 2009, Disque informed SCA’s limited partners of the
new legislation, writing that it “will enable us to proceed with our plan to refinance.”
Undisputed Fact #46; Exhibit 36.
G. The Refinancing and Distribution of Proceeds. On December 17, 2009, Starrett
City closed on a $531,485,000 refinancing, with Wells Fargo as the lender. Undisputed Fact
7
Prior to the enactment of Private Housing Finance Law §22-b, Article 2 of the New York Private
Housing Finance Law (“Mitchell-Lama”) prohibited encumbering Mitchell-Lama projects by debt in
excess of the amount of the original project cost, except in circumstances not relevant here. See Private
Housing Finance Law §21.
9
#19. At the time of the closing, Disque held a 1% MGP interest in SCA through his SPE entity,
DD Spring Creek LLC, and the limited partners held a 99% interest
In the refinancing transaction, several non-residential properties that were part of Starrett
City, and which had been part of the collateral for the previous mortgage, were released as
collateral for the new loan. These properties included, inter alia, a shopping center, which on
December 17, 2009, after the closing, was transferred by SCA to a previously established limited
liability company, defendant Spring Creek Plaza LLC (“Plaza”). Exhibit 37 at Bates No.
D015632, D015654.
On December 23 or 24, 2009, the MGP sent to the SCA partners a return of their capital
in the total amount of $30,750,000, which constituted a Participation Change within the meaning
of the SCA Operating Agreement and the Sixteenth Amendment. Undisputed Fact ##7(c), 8(c)
and 20. That Participation Change triggered SKI’s increased residual interest in SCA of 18.9%
which together with Disque’s 1% MGP interest, totaled 19.9%. Undisputed Fact ##8, 8(a). SKI
also received at that time an 18.9% membership interest in Plaza. Exhibit 37 at Bates No.
D015632.
In February 2010, Iris Sutz, SCA’s controller and an accountant in the MGP’s office,
prepared a schedule of “Sources and Uses,” which itemized all of the combined distributions and
disbursements made from (a) the gross proceeds of the refinancing received by SCA from Wells
Fargo ($531,485,000) and (b) SCI’s excess cash on hand ($2,022,520.97), a total of
$533,507,520.97. Exhibit 37 at D015730. That schedule, which was sent to all of the limited
partners in SCA, reflects that SCA distributed to Preservation, pursuant to the Assignments from
the MGP and the GP, a total of $37,998,896.97 or 19.9% of the $190,949,231 distributed by
10
SCA to its partners. Id. The distribution by SCA to Preservation was in accordance with Section
3 of the SCA Partnership Agreement. Exhibit 38.
By letters dated November 8, 2010, Carol Deane as Managing Member notified plaintiffs
that she was reducing their Sharing Ratios to zero, effective immediately, pursuant to her
authority under the Preservation Agreement. Undisputed Fact #18; Exhibit 39.
H. Preservation’s Payment of Bonuses and its Creation of a Bonus Reserve from
the Proceeds it Received from SCA. In 2010, from the almost $38 million distributed by SCA
to Preservation, Preservation expensed approximately $6.1 million, and distributed to its
members the balance of $31,899,544.77 (“Net Proceeds”), as follows: 1) a credit of $1,000
reflecting a return to the members of their initial $1000 capital contribution; 2) a distribution in
May 2010 in the aggregate amount of $20,157,060.60, including distributions to plaintiffs
Rudman and Kuplesky of $3,025,574.80 and $703,481.41, respectively; and 3) a distribution on
November 1, 2010 in the aggregate amount of $11,741,484.17, including distributions to
plaintiffs of $1,762,396.77 and $409,777.80, respectively. Exhibit 40. Pursuant to Section 5.5
of the Preservation Agreement, the distributions to Kuplesky were based on his reduced Sharing
Ratio of 3.49%. See Point III, infra.
The expenses deducted by Preservation before distribution of proceeds to members
included a total of $5,699,835, or 15% of $37,998,896.97, for office staff bonuses, part of which
was paid out and part of which was reserved for future office staff bonuses. Exhibit 40. More
than half of the bonus amount ($3.1 million) was given as bonus awards to individual office
staff: Iris Sutz ($814,320), Curt Deane ($800,000), and Robert Poll (who had succeeded
Rudman as SCA president) ($1,526,850). Undisputed Fact #21; Exhibits 41 and 45. The
balance ($2.6 million) was reserved for future staff bonuses. Exhibit 41.
11
ARGUMENT
Standards for Summary Judgment. It is firmly established in contract disputes like
this one that the plain language of a contract controls, making parol evidence irrelevant if the
contract language is clear and its meaning unambiguous. Greenfield v. Philles Records, 98
N.Y.2d 562, 569 (2002).
The interpretation of an unambiguous contract presents a question of law that a court can
properly resolve on a motion for summary judgment. Wald v. Marine Midland Bus. Loans, Inc.,
270 A.D.2d 73 (1st Dep’t 2000). A “written agreement that is complete, clear and unambiguous
on its face must be enforced according to the plain meaning of its terms.” Greenfield, 98 N.Y.2d
at 569. Thus, a court cannot consider extrinsic evidence to construe an unambiguous contract
provision. Id. The Court of Appeals has explained the test for determining whether contract
language is unambiguous:
A contract is unambiguous if the language it uses has a definite and
precise meaning, unattended by danger of misconception in the
purport of the agreement itself, and concerning which there is no
reasonable basis for a difference of opinion. Thus, if the
agreement on its face is reasonably susceptible of only one
meaning, a court is not free to alter the contract . . .
Id. at 569-70 (internal quotation marks and citations omitted). These fundamental principles
control and dispose of the dispute between the parties over the meaning of Section 3.3, which is
at the heart of this litigation.
12
POINT I: DEFENDANTS ARE ENTITLED TO SUMMARY JUDGMENT
ON PLAINTIFFS’ NINTH CAUSE OF ACTION BECAUSE THE PLAIN
LANGUAGE OF SECTION 3.3 AUTHORIZED THE MANAGING
MEMBER TO REDUCE PLAINTIFFS’ SHARING RATIOS TO ZERO
Summary judgment on plaintiffs’ Ninth Cause of Action, the heart of their lawsuit, is
compelled by the plain language and unambiguous meaning of Section 3.3 of the Preservation
Agreement. That section, captioned “Reallocation of Sharing Ratios,” provides as follows:
At any time after the Funding Event (as hereinafter defined), the
Managing Member may, in its sole discretion, reallocate the
Sharing Ratios of all Members in whatever amounts it deems in its
sole discretion to be appropriate (including, without limitation,
assigning a Member a Sharing Ratio of zero).
“Funding Event” shall mean the distribution to Members, in
accordance with their then current Sharing Ratios (taking into
account all prior changes in Sharing Ratios provided for in Article
V but before any reallocation pursuant to this Section 3.3), of at
least $10,000,000 in aggregate distributions pursuant to Section
4.2(iv).
All Members acknowledge and agree that the Managing Member’s
reallocation power pursuant to this Section 3.3 is intended to
facilitate providing a new management incentive program after the
full distribution from the proceeds of a substantial refinancing
pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement.
Exhibit 1 at 3 (emphasis added).8
Thus, Section 3.3 is straightforward. The first two sentences, which constitute the only
operative language of the Section, set forth the power and authority of the Managing Member
(i.e., Carol Deane) to reallocate Sharing Ratios. The first sentence makes crystal clear that the
Managing Member can 1) reallocate the Sharing Ratios of all members of Preservation; 2)
decide to do so to “whatever amounts [she] deems . . . to be appropriate”; 3) even assign a
member “a Sharing Ratio of zero” if she so chooses; 4) make the choice in her “sole discretion”;
8
The three sentences comprising Section 3.3 have been separated here for clarity.
13
and 5) the only restriction on her reallocation power involves its timing, i.e., the reallocation
must await the occurrence of a “Funding Event,” but it can be made “[a]t any time” thereafter.
The equally clear second sentence of Section 3.3 addresses the only remaining open
issue: the definition of a “Funding Event.” In clear and unambiguous language, this sentence
defines a Funding Event as the distribution to Preservation members “of at least $10,000,000 in
aggregate distributions.” That sentence also references Article V and Section 4.2(iv) of the
Preservation Agreement.
Article V of the Preservation Agreement provides for the automatic reduction in a
member’s Sharing Ratio under Section 5.5, depending on the effective date the member ceases
employment with the various Deane entities and is removed from the Preservation Board of
Members. Kuplesky’s Sharing Ratio was reduced to 3.49% pursuant to that Section. See Point
III, infra. Section 4.2(iv) is simply the provision under which distributions are made to members
after payment of Company expenses, debts and liabilities, and bonuses and bonus reserves. See
Point II, infra.
On November 8, 2010, when Carol Deane reduced plaintiffs’ Sharing Ratios to zero, she
was indisputably entitled to do so pursuant to the first two sentences of Section 3.3 because a
Funding Event (i.e., the aggregate distribution to members of at least $10 million) had taken
place.
The only conceivable question is whether the third sentence of Section 3.3, which is not
mentioned or referred to in the first two sentences, alters the plain language and unambiguous
meaning of those two sentences, or mandates a different outcome, as plaintiffs claim it does.
SAC ¶¶169, 171. It does not.
14
The third sentence is merely precatory. It does not command any action or inaction, but
simply reflects the members’ understanding that one of the purposes of the Managing Member’s
reallocation power was “to facilitate providing a new management incentive program after the
full distribution from the proceeds of a substantial refinancing pursuant to Section 3.02 or 3.03 of
SCA’s partnership agreement.”
Where the parties’ rights and obligations are expressed in unambiguous operative
language, as they are in the first two sentences of Section 3.3, a recital suggesting a purpose for
the operative language, like the last sentence of Section 3.3, has no effect on the operative
language. Williams v. Barkley, 165 N.Y. 48, 57 (1900) (“the covenant or promise . . . must
prevail [over a conflicting recital], because it is the most important. The promise is what the
parties agreed to do, and hence is the operative part of the instrument, while the recital states
what led up to the promise and gives the inducement for making it. When the explanation of the
reason for the promise is at variance with the promise itself, the latter, if clear and unambiguous,
must prevail . . .”); Jones Apparel Group, Inc. v. Polo Ralph Lauren Corp., 16 A.D.3d 279, 279
(1st Dep’t 2005) (recitals are not part of operative agreement, and there is no need to refer to
recitals where operative agreement is unambiguous); Trump Vill. Section 3, Inc. v. N.Y. State
Hous. Fin. Agency, 292 A.D.2d 156, 158 (1st Dep’t 2002) (recital clause of contract did not
impose contractual obligations beyond those specifically set forth in contract’s operative
language); Sengillo v. Valeo Elec. Sys., 536 F. Supp. 2d 310, 312 (W.D.N.Y. 2008) (contract
provision that is “functionally a recital” “serve[s] no operative purpose” and does not “comprise
an enforceable contractual term”); see also Aramony v. United Way of America, 254 F.3d 403,
413 (2d Cir. 2001) (district court erred in finding ambiguity based on stated purpose of written
agreement where operative language was unambiguous; although statement of purpose “may be
15
useful in interpreting an ambiguous operative clause in a contract, it cannot create any right
beyond those arising from the operative terms of the document”).
Even if the third sentence could somehow be read as imposing a condition on or limiting
the operation of the first two sentences – which it cannot be – the result would be the same.
Prior to the reduction of plaintiffs’ Sharing Ratios on November 8, 2010, there had already been
a “full distribution” by SCA “pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement”
of the “proceeds” of a “substantial refinancing.” More specifically, 1) a “substantial
refinancing” in the amount of approximately $531 million occurred in December 2009; 2)
pursuant to Section 3.03 of SCA’s partnership agreement, (captioned “Sale/Refinancing Proceeds”),
the distributable proceeds of that refinancing
Preview
FILED: NEW YORK COUNTY CLERK 10/03/2013 INDEX NO. 650159/2010 NYSCEF DOC. NO. 328 RECEIVED NYSCEF: 10/03/2013 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK HARVEY RUDMAN and HAROLD KUPLESKY, on TYPOGRAPHICAL ERROR Behalf of Each of Them Individually And On Behalf Of CORRECTED VERSION Starrett City Preservation LLC, Derivatively, Index No. 650159/10 Plaintiffs, Assigned to Kornreich, J. - against - CAROL GRAM DEANE, THE ESTATE OF DISQUE Motion Seq. No. 7 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. DEFENDANTS’ MEMORANDUM OF LAW IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT NEWMAN & GREENBERG WARNER PARTNERS, P.C. Attorneys for Defendant Carol Gram Deane Attorneys for All Defendants Except Carol Gram Deane 950 Third Avenue and Spring Creek Plaza New York, New York 10022 (212) 308-7900 950 Third Avenue New York, New York 10022 (212) 593-8000 FOLEY & LARDNER LLP Attorneys for Defendant Spring Creek Plaza 90 Park Avenue New York, NY 10016 ( 212) 682-7474 TABLE OF CONTENTS Page TABLE OF AUTHORITIES ................................................... iii PRELIMINARY STATEMENT .................................................1 OVERVIEW .................................................................1 STATEMENT OF FACTS ......................................................3 A. Background. ........................................................3 B. Plaintiffs. ...........................................................4 C. Taking Equity Out Of Starrett City, and The Sixteenth Amendment to the SCA Partnership Agreement .........................................4 D. Formation of Preservation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 E. Attempts to Sell Starrett City ...........................................6 F. The Focus Shifts to Refinancing. .........................................8 G. The Refinancing and Distribution of Proceeds. ..............................9 H. Preservation’s Payment of Bonuses and Creation of a Bonus Reserve from the Proceeds it Received from SCA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Standards for Summary Judgment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 POINT I: DEFENDANTS ARE ENTITLED TO SUMMARY JUDGMENT ON PLAINTIFFS’ NINTH CAUSE OF ACTION BECAUSE THE PLAIN LANGUAGE OF SECTION 3.3 AUTHORIZED THE MANAGING MEMBER TO REDUCE PLAINTIFFS’ SHARING RATIOS TO ZERO . . . . . . . . . . . . . . . . . . . . 13 POINT II: THE MANAGING MEMBER WAS AUTHORIZED BY SECTION 4.2(iii) TO PAY BONUSES TO OFFICE STAFF AND TO ESTABLISH A RESERVE FOR FUTURE BONUSES FROM THE PROCEEDS OF THE REFINANCING, AND THAT IS ALL SHE HAS DONE . . . . . . . . . . . . . . . . . . . . . . . 17 a) Office Staff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 -i- Page b) Bonus Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 POINT III: BECAUSE KUPLESKY “CEASED TO BE ACTIVELY ENGAGED ON A SUBSTANTIALLY FULL TIME BASIS WITH THE DEANE INTERESTS” BEFORE “DISCUSSIONS BEGAN THAT RESULTED IN A FUNDING EVENT,” HIS SHARING RATIO WAS PROPERLY REDUCED IN ACCORDANCE WITH SECTION 5.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 -ii- TABLE OF AUTHORITIES Page CASES Aramony v. United Way of America, 254 F.3d 403 (2d Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . 15 Greenfield v. Philles Records, 98 N.Y.2d 562 (2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Jones Apparel Group, Inc. v. Polo Ralph Lauren Corp., 16 A.D.3d 279 (1st Dep’t 2005) . . . . 15 Sengillo v. Valeo Elec. Sys., 536 F. Supp. 2d 310 (W.D.N.Y. 2008) . . . . . . . . . . . . . . . . . . . . . 15 Trump Vill. Section 3, Inc. v. N.Y. State Hous. Fin. Agency, 292 A.D.2d 156 (1st Dep’t 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Wald v. Marine Midland Bus. Loans, Inc., 270 A.D.2d 73 (1st Dep’t 2000) . . . . . . . . . . . . . . . 12 Williams v. Barkley, 165 N.Y. 48 (1900) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 OTHER AUTHORITIES Dictionary.com. WordNet® 3.0. Princeton University, http://dictionary.reference.com/browse/office_staff (accessed: March 6, 2013). . . . . . . . . . . . . 18 -iii- PRELIMINARY STATEMENT This memorandum of law is submitted in support of defendants’ motion for partial summary judgment: a. dismissing plaintiffs’ Ninth Cause of Action, which seeks a judgment declaring that the Managing Member of Preservation cannot reduce plaintiffs’ Sharing Ratios pursuant to Section 3.3 of the Preservation Agreement prior to what plaintiffs have characterized as a “full distribution of the MGP/SKI’s share of the Refinancing Proceeds”; b. ruling that the Managing Member of Preservation was authorized by Section 4.2(iii) of the Preservation Agreement to award bonuses to three members of the office staff, as she did, and to create a reserve for future office staff bonuses; and c. ruling that plaintiff Kuplesky’s Sharing Ratio was properly reduced pursuant to Section 5.5 of the Preservation Agreement. Hoping for a windfall to which they are not entitled, plaintiffs in their Complaint have ignored or distorted the plain language and clear meaning of the Preservation Operating Agreement, which governs this dispute. Their allegations of fraud and fiduciary breach are a smoke screen designed to obscure the fact that at bottom their lawsuit is one for breach of contract, a claim with no substance. OVERVIEW Plaintiffs are former employees of Deane-related entities, including Starrett City Associates LP (“SCA”), whose claims are found in their Second Amended Complaint (“SAC” or “the Complaint”). Plaintiffs worked from the office of SCA’s Managing General Partner (“MGP”), defendant Disque D. Deane (“Disque”). The contract at issue in this lawsuit is the Operating Agreement (“the Agreement”) of Starrett City Preservation LLC (“Preservation”). Exhibit 1. An excellent example of plaintiffs’ disregard of the Agreement’s language is reflected in their Ninth Cause of Action regarding Section 3.3, which embodies the central, overreaching 1 goal of their lawsuit. If successful, that claim would transform plaintiffs from beneficiaries of a generous employee incentive program into part owners of the sprawling Starrett City complex. Section 3.3 of the Agreement unambiguously authorizes the Managing Member of Preservation, defendant Carol Deane, to reduce even to zero the Sharing Ratio of any Preservation Member upon the occurrence of a “Funding Event,” defined by the Agreement as the aggregate distribution to Preservation members of at least $10 million. The Managing Member can be more generous or delay exercising her reallocation power – as she did here – but the Agreement does not require her to do either. In December 2009, Starrett City undertook a $531 million refinancing. Thereafter, SCA, the beneficial owner of Starrett City, distributed (net of expenses and other distributions) almost $38 million from the refinancing proceeds to Preservation. Those funds represented Preservation’s full (19.9%) entitlement to the net proceeds of the refinancing. Preservation in turn distributed almost $32 million – the net proceeds from the distribution it received – to its members, including $5.9 million collectively to plaintiffs, who had been senior managers in the office of the MGP. Only then did the Managing Member reallocate their Sharing Ratios. As a result, plaintiffs received millions of dollars more from the proceeds of the refinancing than the Managing Member was required by the Agreement to pay them.1 Despite the Managing Member’s largesse, plaintiffs seek this Court’s declaration that their Sharing Ratios cannot be reduced until Preservation makes additional distributions to them of “no less than $28,000,000.” SAC ¶171. Plaintiffs’ claim is baseless, and ignores – indeed, even attempts to conceal – the operative language of Section 3.3. For example, plaintiffs 1 Had the Managing Member limited plaintiffs to their actual Sharing Ratio percentages of the $10 million threshold, as she was entitled to do, Rudman would have received $1.5 million (based on his 15.01% Sharing Ratio) and Kuplesky would have received $349,000 (based on his reduced 3.49% Sharing Ratio). 2 simply omit from their purported verbatim quotation of Section 3.3 any mention of the $10 million threshold, and replace that critically important limitation with a deceptive ellipsis (SAC ¶166), implying that this essential term is irrelevant. The plain language of the Agreement is similarly dispositive on the two remaining issues on which defendants seek summary judgment: the Managing Member’s right under Section 4.2(iii) to pay bonuses to three of the office staff, and to establish a bonus reserve, from the proceeds of the refinancing (Point II); and the mandatory reduction in a pre-determined amount of plaintiff Kuplesky’s Sharing Ratio pursuant to Section 5.5, because his employment ceased before “discussions” began that “resulted in” the December 2009 refinancing (Point III). STATEMENT OF FACTS A. Background. Starrett City is a regulated mixed income affordable housing complex located in Brooklyn, New York. Undisputed Fact #1. Starrett City, Inc. (“SCI”) holds title to Starrett City for the benefit of SCA, a limited partnership with approximately 200 limited partners. Undisputed Facts ##2, 3. Disque was integrally involved with Starrett City from its inception in the 1970s until his death in November 2010. Exhibit 2 at p. 4. From 1985 until his death, Disque (or a Single Purpose Entity (“SPE”) wholly owned by him) was the MGP of SCA. Undisputed Fact #4. On or about December 15, 2009, at the request of Wells Fargo, the lending bank for Starrett City’s refinancing, Disque assigned his MGP “interests and obligations” in SCA to defendant DD Spring Creek LLC. Undisputed Fact #4(a); Exhibit 3.2 Defendant SKI was a general partner (“GP”) of SCA. Undisputed Fact #5. On or about 2 On February 25, 2011, Disque’s estate (by Carol Deane, his executrix) was substituted as a party to this action in place of Disque personally. Undisputed Fact #10. 3 December 15, 2009, SKI – at the request of Wells Fargo – assigned its GP “interests and obligations” to an SPE, defendant SK Spring Creek LLC, in which SKI held a 100% membership interest. Exhibit 3. Defendant Saint Gervais LLC holds a 100% membership interest in SKI. Undisputed Fact #6. Saint Gervais, a Deane-family entity, was 93.49% owned by Disque and Carol Deane (individually and as custodian for their two children).3 Undisputed Fact #6(a). Carol is and always has been the Operating Manager of Saint Gervais. Undisputed Fact #6(c). After Disque’s death, SK Spring Creek succeeded to the position of MGP of SCA. Exhibit 4. B. Plaintiffs. Plaintiff Harvey Rudman was hired by SCA in 1989 to be, inter alia, President of SCA. Exhibit 5. Rudman’s employment at SCA was terminated on April 29, 2009. Undisputed Fact #11. In 1999, Disque hired plaintiff Harold Kuplesky, a lawyer knowledgeable about the regulated housing industry. SAC ¶30; Exhibit 6. Kuplesky’s employment ended on December 15, 2008, by which point he held the position of President of Cork Management LLC. Undisputed Fact #12(a) and (b). Cork and Grenadier Realty Corporation were at the time co- managing agents of Starrett City. Undisputed Fact #12(c). C. Taking Equity Out Of Starrett City, and The Sixteenth Amendment to the SCA Partnership Agreement Since its creation 40 years ago, Starrett City’s value increased, and with it the value of the equity of SCA and its partners. Undisputed Fact #13; SCA ¶60. A sale of Starrett City would have enabled SCA’s partners to realize the benefit of their increased equity. By contrast, prior to July 2009, a refinancing would not have made such an equity takeout possible, because New 3 Saint Gervais’s other members are Carol Deane’s sister, Mary Clarke, and Mary’s immediate family (3.9%); Disque’s nephew, Curt Deane (0.87%); Iris Sutz (0.87%); and Francis Hughes (0.87%) Undisputed Fact #6(b). 4 York’s Mitchell-Lama law, which governed Starrett City, prohibited a refinancing for more than a developer’s original investment. Exhibit 7. In July 2009, following an intense lobbying effort by SCA representatives the law was amended to make an equity take-out possible. See, Point III, infra. In 2003, SCA’s partners approved the Sixteenth Amendment to SCA’s Partnership Agreement. Undisputed Fact #7. The Sixteenth Amendment provided, inter alia, that Disque and his family, through SKI, would receive additional compensation if the partners were able to monetize their increased equity in Starrett City. Specifically, the Sixteenth Amendment increased the combined MGP/SKI general partner interest and residual interest in SCA by 10%, from 9.9% to 19.9%, an increased interest that would take effect only after the return of the partners’ capital investment in Starrett City (a “Participation Change”). Undisputed Fact #8. Since that capital investment totaled $30,750,000 (Undisputed Fact #19), as a practical matter it could only be returned to the partners as a result of a sale (or, if the Mitchell-Lama law could be changed, a refinancing) of Starrett City. D. Formation of Preservation. Preservation’s Operating Agreement was signed “effective as of January 1, 2006.” Exhibit 1. Also effective January 1, 2006, Disque, as MGP, and SKI, as GP, executed Assignments of their “economic interests” in SCA to Preservation. Exhibits 8 and 9, respectively. The members of Preservation and their original Sharing Ratios were as follows: Saint Gervais (45.10%); Carol Deane (14.13%); Mary Clarke (2.5%); G. Martin Fell, a senior manager at SCA (11.63%); Harold Kuplesky ($11.63%); and Harvey Rudman (15.01%). Undisputed Fact #16. The nominal capital contribution of all of the Preservation members totaled $1,000, and was paid in accordance with the Sharing Ratio of each (e.g., $451 from Saint Gervais, $141.30 from Carol Deane). Undisputed Fact #16. 5 Among other things, Preservation provided an incentive plan for the three senior management personnel, including plaintiffs. SAC ¶4. The Preservation incentive plan was limited by Section 3.3, which entitled the Managing Member, “in [her] sole discretion,” to reduce the membership Sharing Ratios of any members, “including . . . assigning a Member a Sharing Ratio of zero,” but only after Preservation distributed at least $10 million in aggregate to its members. See Point I, infra. At all times the Managing Member was and continues to be Carol Deane. Undisputed Fact #17. E. Attempts to Sell Starrett City In 2006, the MGP began efforts to sell Starrett City. SAC ¶61. In February 2007, a potential purchaser (Clipper Equity) made a $1.3 billion bid for Starrett City (SAC ¶63), an offer regulators rejected in the belief that, inter alia, such a high purchase price would jeopardize Starrett City’s continued existence as affordable housing. Exhibit 10. In August 2007, regulators approached the MGP to explore the possibility of a “preservation transaction,” i.e., a transaction that would preserve Starrett City’s affordable housing status. Exhibit 11. On August 29, 2007, SCI notified regulators of its intent “to dissolve or reconstitute as a business corporation not subject to the restrictions and limitations of the [Mitchell-Lama] law.” Undisputed Fact #25; Exhibit 12. The next day, August 30, the MGP informed SCA’s limited partners that he had begun the privatization process to “eliminate governmental interference with our rights as owners of Starrett City.” Undisputed Fact #26; Exhibit 13. The MGP also continued to meet with regulators to discuss the possibility of a preservation transaction and in September 2007 he met with regulators for that purpose. Exhibit 14. In October 2007, plaintiffs Rudman and Kuplesky participated in the drafting of a proposal, sent to Patricia Almodovar of HFA, who was designated to represent all relevant 6 government housing agencies in their negotiations with SCA, reaffirming that SCA’s “first option” was “to sell Starrett City” in a preservation transaction. Undisputed Fact #27; Exhibits 11 and 15. In furtherance of that sales effort, SCA engaged Recap Advisors LLC (“Recap”) on November 19, 2007, “to assist [SCA] in arranging and completing the successful sale of Starrett City.” Undisputed Fact #28; Exhibit 16. Recap’s engagement letter, which plaintiff Rudman signed for the MGP, expressly excluded a refinancing transaction from Recap’s advisory responsibilities.4 On May 12, 2008, SCA and the housing agencies entered into a Memorandum of Understanding (“MOU”) whose stated purpose was “to establish a framework under which SCA may structure and complete a sale of Starrett City.” Undisputed Fact #29; Exhibit 17 (emphasis added).5 On June 3, 2008, consistent with the MOU, Recap invited all potential purchasers of Starrett City to submit bids. Undisputed Fact #31; Exhibit 18. On September 19, 2008, the MGP retained the law firm of Bingham McCutchen LLP to represent SCA in connection with a sale of Starrett City. Undisputed Fact #32; Exhibit 19. Like the agreement with Recap, Bingham’s engagement letter, this one signed by plaintiff Kuplesky for the MGP, expressly excluded legal representation in connection with any “new financing for the [Starrett City] Development.” Exhibit 19 at 1. On September 23, 2008, HUD and DHCR issued written approvals to two investment groups (Cogsville and Westbrook), authorizing them to proceed with their bids for the purchase of Starrett City. Undisputed Fact #33; Exhibit 20. On October 30, 2008, with discussions with potential purchasers ongoing, SCA and the relevant 4 Recap’s engagement letter specified that “Recap will not provide the following services in connection with this Agreement: . . . Refinancing.” Exhibit 16 at 3. 5 The governmental parties to the MOU included the United States Department of Housing and Urban Development (“HUD”), the New York State Housing Finance Agency (“HFA”), the New York State Division of Housing and Community Renewal (“DHCR”), and the City of New York’s Department of Housing Preservation and Development (“HPD”). Undisputed Fact#30. 7 governmental housing agencies agreed to extend the MOU “until further notice.” Undisputed Fact #34; Exhibit 21. In a November 21, 2008 memorandum captioned “Analysis of Alternatives” (Exhibit 22), sent to Disque and Carol Deane, plaintiffs and Fell analyzed SCA’s options in the then-current economic market and identified three transactional alternatives: a preservation sale of Starrett City, a privatization of Starrett City, or “do[ing] nothing.” Plaintiffs’ memorandum omitted any mention of a refinancing, and urged the MGP “not [to] walk[] away from the negotiating table” where a sale of Starrett City was still under active discussion. Exhibit 22 at 8. On December 3, 2008, Recap invited potential purchasers of Starrett City to submit updated bids by 3:00 p.m. on December 15, 2008. Undisputed Fact #36; Exhibit 23.6 On December 18, 2008, Cogsville submitted its updated bid. Undisputed Fact #37; Exhibit 25; Westbrook continued to express interest in purchasing Starrett City but failed to meet Recap’s new deadline. Undisputed Fact #37. Negotiations between SCA and Cogsville for the sale of Starrett City continued into 2009. Exhibit 26. F. The Focus Shifts to Refinancing. On February 19, 2009, Disque and Carol informed their limited partners of the MGP’s decision to abandon his efforts to sell Starrett City, and to “consider other options available to us, including the possibility of refinancing the property to help reduce the partners’ ‘phantom income’ tax burden that grows worse each year.” Undisputed Fact #38; Exhibit 27. On February 26, 2009, MGP representatives, including Recap’s president, Todd Trehubenko, met with regulators to present an “overview of concepts” related to a refinancing. Undisputed Fact #39; Exhibit 28. On March 12, 2009, SCA representatives met with Alan Wiener, a Wachovia banker with experience in financing 6 Recap later extended the deadline to December 18, 2008, at the request of one of the bidders. Exhibit 24. 8 affordable housing. Undisputed Fact #40; Exhibit 29. By engagement letter dated March 18, 2009 (Exhibit 30), signed by Disque as the MGP on March 19, 2009, SCA retained the investment banking services of Mr. Wiener and Wachovia (which had recently been acquired by Wells Fargo) to help SCA refinance Starrett City. Undisputed Fact #41; SAC ¶69. SCA paid Wiener’s $150,000 initial retainer on or about April 25, 2009. Undisputed Fact #42; Exhibit 31. At about the time Wachovia was retained, the MGP also retained the law firm of Wilson, Elser, Moskowitz, Edelman & Dicker LLP to lobby the New York Legislature to amend the Mitchell-Lama law to permit a refinancing of Starrett City in excess of the original investment in the project. Undisputed Fact #45; Exhibits 32 and 33.7 On or about April 2, 2009, SCA representatives met with regulators to discuss the Starrett City refinancing plan. Undisputed Fact #43; Exhibit 34. On June 11, 2009, Recap amended its engagement letter to include for the first time refinancing advice as one of the services it would provide. Undisputed Fact #44; Exhibit 35. In July 2009, as a result of the efforts of the MGP and his lobbyists and lawyers, the New York Legislature amended Mitchell-Lama, making it legally possible for the first time for SCA to undertake and achieve a refinancing with an equity take out. See Private Housing Finance Law § 22-b, L.2009, c.199 §1. On July 20, 2009, Disque informed SCA’s limited partners of the new legislation, writing that it “will enable us to proceed with our plan to refinance.” Undisputed Fact #46; Exhibit 36. G. The Refinancing and Distribution of Proceeds. On December 17, 2009, Starrett City closed on a $531,485,000 refinancing, with Wells Fargo as the lender. Undisputed Fact 7 Prior to the enactment of Private Housing Finance Law §22-b, Article 2 of the New York Private Housing Finance Law (“Mitchell-Lama”) prohibited encumbering Mitchell-Lama projects by debt in excess of the amount of the original project cost, except in circumstances not relevant here. See Private Housing Finance Law §21. 9 #19. At the time of the closing, Disque held a 1% MGP interest in SCA through his SPE entity, DD Spring Creek LLC, and the limited partners held a 99% interest In the refinancing transaction, several non-residential properties that were part of Starrett City, and which had been part of the collateral for the previous mortgage, were released as collateral for the new loan. These properties included, inter alia, a shopping center, which on December 17, 2009, after the closing, was transferred by SCA to a previously established limited liability company, defendant Spring Creek Plaza LLC (“Plaza”). Exhibit 37 at Bates No. D015632, D015654. On December 23 or 24, 2009, the MGP sent to the SCA partners a return of their capital in the total amount of $30,750,000, which constituted a Participation Change within the meaning of the SCA Operating Agreement and the Sixteenth Amendment. Undisputed Fact ##7(c), 8(c) and 20. That Participation Change triggered SKI’s increased residual interest in SCA of 18.9% which together with Disque’s 1% MGP interest, totaled 19.9%. Undisputed Fact ##8, 8(a). SKI also received at that time an 18.9% membership interest in Plaza. Exhibit 37 at Bates No. D015632. In February 2010, Iris Sutz, SCA’s controller and an accountant in the MGP’s office, prepared a schedule of “Sources and Uses,” which itemized all of the combined distributions and disbursements made from (a) the gross proceeds of the refinancing received by SCA from Wells Fargo ($531,485,000) and (b) SCI’s excess cash on hand ($2,022,520.97), a total of $533,507,520.97. Exhibit 37 at D015730. That schedule, which was sent to all of the limited partners in SCA, reflects that SCA distributed to Preservation, pursuant to the Assignments from the MGP and the GP, a total of $37,998,896.97 or 19.9% of the $190,949,231 distributed by 10 SCA to its partners. Id. The distribution by SCA to Preservation was in accordance with Section 3 of the SCA Partnership Agreement. Exhibit 38. By letters dated November 8, 2010, Carol Deane as Managing Member notified plaintiffs that she was reducing their Sharing Ratios to zero, effective immediately, pursuant to her authority under the Preservation Agreement. Undisputed Fact #18; Exhibit 39. H. Preservation’s Payment of Bonuses and its Creation of a Bonus Reserve from the Proceeds it Received from SCA. In 2010, from the almost $38 million distributed by SCA to Preservation, Preservation expensed approximately $6.1 million, and distributed to its members the balance of $31,899,544.77 (“Net Proceeds”), as follows: 1) a credit of $1,000 reflecting a return to the members of their initial $1000 capital contribution; 2) a distribution in May 2010 in the aggregate amount of $20,157,060.60, including distributions to plaintiffs Rudman and Kuplesky of $3,025,574.80 and $703,481.41, respectively; and 3) a distribution on November 1, 2010 in the aggregate amount of $11,741,484.17, including distributions to plaintiffs of $1,762,396.77 and $409,777.80, respectively. Exhibit 40. Pursuant to Section 5.5 of the Preservation Agreement, the distributions to Kuplesky were based on his reduced Sharing Ratio of 3.49%. See Point III, infra. The expenses deducted by Preservation before distribution of proceeds to members included a total of $5,699,835, or 15% of $37,998,896.97, for office staff bonuses, part of which was paid out and part of which was reserved for future office staff bonuses. Exhibit 40. More than half of the bonus amount ($3.1 million) was given as bonus awards to individual office staff: Iris Sutz ($814,320), Curt Deane ($800,000), and Robert Poll (who had succeeded Rudman as SCA president) ($1,526,850). Undisputed Fact #21; Exhibits 41 and 45. The balance ($2.6 million) was reserved for future staff bonuses. Exhibit 41. 11 ARGUMENT Standards for Summary Judgment. It is firmly established in contract disputes like this one that the plain language of a contract controls, making parol evidence irrelevant if the contract language is clear and its meaning unambiguous. Greenfield v. Philles Records, 98 N.Y.2d 562, 569 (2002). The interpretation of an unambiguous contract presents a question of law that a court can properly resolve on a motion for summary judgment. Wald v. Marine Midland Bus. Loans, Inc., 270 A.D.2d 73 (1st Dep’t 2000). A “written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” Greenfield, 98 N.Y.2d at 569. Thus, a court cannot consider extrinsic evidence to construe an unambiguous contract provision. Id. The Court of Appeals has explained the test for determining whether contract language is unambiguous: A contract is unambiguous if the language it uses has a definite and precise meaning, unattended by danger of misconception in the purport of the agreement itself, and concerning which there is no reasonable basis for a difference of opinion. Thus, if the agreement on its face is reasonably susceptible of only one meaning, a court is not free to alter the contract . . . Id. at 569-70 (internal quotation marks and citations omitted). These fundamental principles control and dispose of the dispute between the parties over the meaning of Section 3.3, which is at the heart of this litigation. 12 POINT I: DEFENDANTS ARE ENTITLED TO SUMMARY JUDGMENT ON PLAINTIFFS’ NINTH CAUSE OF ACTION BECAUSE THE PLAIN LANGUAGE OF SECTION 3.3 AUTHORIZED THE MANAGING MEMBER TO REDUCE PLAINTIFFS’ SHARING RATIOS TO ZERO Summary judgment on plaintiffs’ Ninth Cause of Action, the heart of their lawsuit, is compelled by the plain language and unambiguous meaning of Section 3.3 of the Preservation Agreement. That section, captioned “Reallocation of Sharing Ratios,” provides as follows: At any time after the Funding Event (as hereinafter defined), the Managing Member may, in its sole discretion, reallocate the Sharing Ratios of all Members in whatever amounts it deems in its sole discretion to be appropriate (including, without limitation, assigning a Member a Sharing Ratio of zero). “Funding Event” shall mean the distribution to Members, in accordance with their then current Sharing Ratios (taking into account all prior changes in Sharing Ratios provided for in Article V but before any reallocation pursuant to this Section 3.3), of at least $10,000,000 in aggregate distributions pursuant to Section 4.2(iv). All Members acknowledge and agree that the Managing Member’s reallocation power pursuant to this Section 3.3 is intended to facilitate providing a new management incentive program after the full distribution from the proceeds of a substantial refinancing pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement. Exhibit 1 at 3 (emphasis added).8 Thus, Section 3.3 is straightforward. The first two sentences, which constitute the only operative language of the Section, set forth the power and authority of the Managing Member (i.e., Carol Deane) to reallocate Sharing Ratios. The first sentence makes crystal clear that the Managing Member can 1) reallocate the Sharing Ratios of all members of Preservation; 2) decide to do so to “whatever amounts [she] deems . . . to be appropriate”; 3) even assign a member “a Sharing Ratio of zero” if she so chooses; 4) make the choice in her “sole discretion”; 8 The three sentences comprising Section 3.3 have been separated here for clarity. 13 and 5) the only restriction on her reallocation power involves its timing, i.e., the reallocation must await the occurrence of a “Funding Event,” but it can be made “[a]t any time” thereafter. The equally clear second sentence of Section 3.3 addresses the only remaining open issue: the definition of a “Funding Event.” In clear and unambiguous language, this sentence defines a Funding Event as the distribution to Preservation members “of at least $10,000,000 in aggregate distributions.” That sentence also references Article V and Section 4.2(iv) of the Preservation Agreement. Article V of the Preservation Agreement provides for the automatic reduction in a member’s Sharing Ratio under Section 5.5, depending on the effective date the member ceases employment with the various Deane entities and is removed from the Preservation Board of Members. Kuplesky’s Sharing Ratio was reduced to 3.49% pursuant to that Section. See Point III, infra. Section 4.2(iv) is simply the provision under which distributions are made to members after payment of Company expenses, debts and liabilities, and bonuses and bonus reserves. See Point II, infra. On November 8, 2010, when Carol Deane reduced plaintiffs’ Sharing Ratios to zero, she was indisputably entitled to do so pursuant to the first two sentences of Section 3.3 because a Funding Event (i.e., the aggregate distribution to members of at least $10 million) had taken place. The only conceivable question is whether the third sentence of Section 3.3, which is not mentioned or referred to in the first two sentences, alters the plain language and unambiguous meaning of those two sentences, or mandates a different outcome, as plaintiffs claim it does. SAC ¶¶169, 171. It does not. 14 The third sentence is merely precatory. It does not command any action or inaction, but simply reflects the members’ understanding that one of the purposes of the Managing Member’s reallocation power was “to facilitate providing a new management incentive program after the full distribution from the proceeds of a substantial refinancing pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement.” Where the parties’ rights and obligations are expressed in unambiguous operative language, as they are in the first two sentences of Section 3.3, a recital suggesting a purpose for the operative language, like the last sentence of Section 3.3, has no effect on the operative language. Williams v. Barkley, 165 N.Y. 48, 57 (1900) (“the covenant or promise . . . must prevail [over a conflicting recital], because it is the most important. The promise is what the parties agreed to do, and hence is the operative part of the instrument, while the recital states what led up to the promise and gives the inducement for making it. When the explanation of the reason for the promise is at variance with the promise itself, the latter, if clear and unambiguous, must prevail . . .”); Jones Apparel Group, Inc. v. Polo Ralph Lauren Corp., 16 A.D.3d 279, 279 (1st Dep’t 2005) (recitals are not part of operative agreement, and there is no need to refer to recitals where operative agreement is unambiguous); Trump Vill. Section 3, Inc. v. N.Y. State Hous. Fin. Agency, 292 A.D.2d 156, 158 (1st Dep’t 2002) (recital clause of contract did not impose contractual obligations beyond those specifically set forth in contract’s operative language); Sengillo v. Valeo Elec. Sys., 536 F. Supp. 2d 310, 312 (W.D.N.Y. 2008) (contract provision that is “functionally a recital” “serve[s] no operative purpose” and does not “comprise an enforceable contractual term”); see also Aramony v. United Way of America, 254 F.3d 403, 413 (2d Cir. 2001) (district court erred in finding ambiguity based on stated purpose of written agreement where operative language was unambiguous; although statement of purpose “may be 15 useful in interpreting an ambiguous operative clause in a contract, it cannot create any right beyond those arising from the operative terms of the document”). Even if the third sentence could somehow be read as imposing a condition on or limiting the operation of the first two sentences – which it cannot be – the result would be the same. Prior to the reduction of plaintiffs’ Sharing Ratios on November 8, 2010, there had already been a “full distribution” by SCA “pursuant to Section 3.02 or 3.03 of SCA’s partnership agreement” of the “proceeds” of a “substantial refinancing.” More specifically, 1) a “substantial refinancing” in the amount of approximately $531 million occurred in December 2009; 2) pursuant to Section 3.03 of SCA’s partnership agreement, (captioned “Sale/Refinancing Proceeds”), the distributable proceeds of that refinancing