Preview
FILED: NEW YORK COUNTY CLERK 08/23/2013 INDEX NO. 650159/2010
NYSCEF DOC. NO. 306 RECEIVED NYSCEF: 08/23/2013
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
HARVEY RUDMAN and HAROLD KUPLESKY, on
Index No. 650159/10
Behalf of Each of Them Individually And On Behalf Of
Starrett City Preservation LLC, Derivatively,.
Hon. Shirley Werner Kornreich
Plaintiffs,
Motion Seq. No. 7
- against -
CAROL GRAM DEANE, THE ESTATE OF DISQUE
D. DEANE by CAROL G. DEANE,
as TEMPORARY EXECUTRIX, SALT KETTLE LLC,
ST. GERVAIS LLC, STARRETT CITY
PRESERVATION LLC, DD SPRING CREEK LLC,
SK SPRING CREEK LLC, SPRING CREEK PLAZA
LLC, DD SHOPPING CENTER LLC and SK
SHOPPING CENTER LLC,
Defendants.
MEMORANDUM OF LAW IN OPPOSITION TO
DEFENDANTS' MOTION FOR PARTIAL SUMMARY JUDGMENT
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TABLE OF CONTENTS
Tableof Authorities ........................................................................................................................ ii
PreliminaryStatement......................................................................................................................1
Statementof Facts ............................................................................................................................3
The 16th Amendment, Preservation and the Agreement .....................................................3
Discussions That Resulted In The Refinancing ...................................................................5
ARGUMENT...................................................................................................................................7
I. THE EXISTENCE OF ISSUES REQUIRING TRIAL PRECLUDES
SUMMARY JUDGMENT ON THE NINTH CAUSE OF ACTION.................................7
A. There Is A Material Dispute As To Whether Section 3.3 Empowered
The Managing Member To Eliminate Plaintiffs' Sharing Ratios
Without First Making A Full Distribution Of All Refinancing Proceeds................?
B. There Is A Material Dispute As To Whether Defendants Made A "Full
Distribution From The Proceeds" Of The Refinancing .........................................12
II. ISSUES OF FACT EXIST AS TO WHETHER THE RECIPIENTS WERE
ENTITLED TO BONUSES FROM PRESERVATION AND THE
PROPRIETY OF THE BONUS RESERVE .....................................................................17
A. Issues of Fact Exist As to Whether Sutz, Deane, and Poll Were
Curt
"Office Staff of the Company or Affiliates (other than Members)" ......................17
B. Issues Of Fact Preclude Determination Of The Propriety of the "Bonus
Reserve" .................................................................................................................19
III. ISSUES OF FACT PRECLUDE A SUMMARY DETERMINATION OF
KUPLESKY' S SHARING RATIO ...................................................................................21
A. Issues of Fact Exist As to When Pertinent "Discussions Began" ..........................21
B. Even If Kuplesky's Full Sharing Ratio is Not Maintained, It Cannot be
Reducedby 70% ....................................................................................................24
CONCLUSION..............................................................................................................................25
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TABLE OF AUTHORITIES
Pages)
CASES'
Aramony v. United Way ofAmerica,
254 F.3d 403 (2d Cir. 2001).....................................................................................................11
BradH. v. City ofNew York,
17 N.Y.3d 180 (2011) ................................................................................................................8
E-Z Eating 41 Corp. v. H.E. Newport LLC,
84 A.D.3d 401 (1st Dept 2011) ..................................................................................11, 15, 20
Escobar v. Gonzalez,
277 A.D.2d 93 (1St Dept 2000) ...............................................................................................20
Federal Insurance Co. v. Americas Insurance Co.,
258 A.D.2d 39 (1st Dept 1999) ..............................................................................................11
Fiore v. Fiore,
61 A.D.2d 1004 (2d Dep't 1978) ..............................................................................................11
Harding v. Noble Taxi Corp.,
182 A.D.2d 365 (1st Dept 1992) ............................................................................................23
Jones Apparel Group, Inc. v. Polo Ralph Lauren Corp.,
16 A.D.3d 279 (lst Dept 2005) ..............................................................................................10
Kass v. Kass,
91 N.Y.2d 554 (1998) ................................................................................................................8
Musman v. Modern Deb, Inc.,
56 A.D.2d 752 (1st Dept 1977) ...............................................................................................11
Reape v. New York News, Inc.,
122 A.D.2d 29 (2d Dep't 1986) ...............................................................................................15
Riverside South Planning Corp. v. CRP/Extell Riverside L.P.,
13 N.Y.3d 398 (2009) ................................................................................................................8
Sengillo v. Valeo Electrical Systems, Inc.,
536 F.Supp.2d 310 (W.D.N.Y. 2008) ......................................................................................10
Taddeo v. Medallic Art Co., Ltd.,
40 A.D.3d 444 (1st Dept 2007) ................................................................................................8
Trump Village Section 3, Inc. v. New York State Housing Finance Agency,
292 A.D.2d 156 (lst Dept 2002) ............................................................................................10
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United States v. 3338 Bat Cave Road,
2013 WL 2317707 (W.D.N.C. May 28, 2013) ........................................................................12
United States v. Torres,
703 F.3d 194 (2d Cir. 2012).....................................................................................................12
V.C. Vitanza Sons, Inc. v. New York City Hous. Auth.,
7 A.D.3d 398 (1st Dept 2004) ..................................................................................................8
Wasil v. Realty Dealership Co.,
87 A.D.2d 931 (3d Dep't 1982) ................................................................................................11
Williams v. Barkley,
165 N.Y. 48 (1900) ............................................................................................................10, 11
STATUTES
18 U.S.C.A. § 981~a)C2)CA) ...........................................................................................................12
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Plaintiffs Harvey Rudman and Harold Kuplesky submit this Memorandum of Law,
together with the Affirmation of Jacqueline Veit, and the exhibits thereto, in opposition to
Defendants' Motion for Partial Summary Judgment (the "Motion").
Preliminary Statement
In this lawsuit Plaintiffs, long-time employees and members of the management team of
Starrett City-related entities, seek to recover amounts they were entitled to as members of
Starrett City Preservation LLC ("Preservation") and pursuant to Preservation's operating
agreement (the "Agreement"). Disque Deane ("Deane"), who was Managing General Partner
("MGP") of Starrett City Associates LP ("SCA"), which beneficially owned Starrett City,
agreed, under pressure from SCA's limited partners, and after long negotiations with Plaintiffs
and Martin Fell (another employee/manager), to give Plaintiffs and Fell an ownership stake in
SCA, as an incentive for them to assist in bringing about a sale or refinancing of Starrett City.
This was accomplished by creating Preservation, having Deane and his family-related entity Salt
Kettle LLC ("SKI") assign their "economic interests" in SCA to Preservation, and giving
Plaintiffs and Fell membership interests in Preservation.
The refinancing in December 2009 (the "Refinancing") provided an enormous return that
benefitted the Deane family (both through their limited partner interests and interests in
Preservation), who received more than $80 million in cash, tens of millions in tax deductions, as
well as substantial non-cash benefits. But with the Agreement having already served the
purposes of pacifying the SCA limited partners, and persuading the limited partners to give up a
portion of their own interests in SCA to incentivize management, the Deanes concluded that the
Agreement gave Plaintiffs too much. In efforts spearheaded by Deane's second wife, defendant
Carol Deane, who took over Deane's role, partially at first and then completely after he passed
away, Defendants resorted to tactic after tactic to deprive Plaintiffs of their due under the
rF:ir.T~~r~
Agreement. These efforts included firing Plaintiffs, trumping up claims of wrongdoing,
diverting millions of dollars away from Preservation, and outright failure to distribute any funds
to Plaintiffs until after this litigation was brought.
This Motion is another tactic to deprive Plaintiffs what is due to them, and it should be
denied. Section 3:3 of the Agreement did not, as Defendants claim, give Preservation's
managing member (Carol Deane) a right to take away Plaintiffs' sharing ratios in Preservation
("Sharing Ratios") as soon as $10 million in Refinancing cash proceeds were distributed to
Preservation. That interpretation requires ignoring entirely one-third of Section 3.3, and ignoring
the critical words "at least" in the second sentence of the provision. The plain meaning of the
Section, read in its entirety, is that Plaintiffs' Sharing Ratios can be reduced only after there has
been a "full distribution of the proceeds of a substantial refinancing," provided. that this full
distribution is at least $10 million. At most, Section 3.3 is ambiguous. Defendants' fallback
argument -- that there was a full distribution -- likewise rests on wording that is at a minimum
ambiguous and, in any event, there are numerous factual disputes as to what constitutes "proceeds"
of the Refinancing and whether they were fully distributed. Summary judgment dismissing the
Ninth Cause ofAction -- the first branch of Defendants' Motion -- must be denied.
Disputes as to the meaning of a Section 4.2(iii) of the Agreement and factual issues — in
particular, whether the recipients of millions of dollars of "bonuses" were "office staff of
Preservation or affiliated entities (other than Members)," within the meaning of the Agreement,
and whether the Agreement permitted Carol Deane to withhold from distribution $2.5 million as
a "bonus reserve" for future employees, which to date still has not been paid — likewise preclude
a ruling as a matter of law in Defendants' favor on the second branch of their Motion.
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Finally, the third branch of Defendants' Motion must be denied because the facts in the
record give rise to a dispute as to Defendants' contention that "discussions began that resulted
in" the Refinancing only in February 2009, thereby justifying a reduction of Kuplesky's Sharing
Ratio from 11.63% to 3.49%. Discussions with Government agencies which resulted in a
Memorandum of Understanding ("MOU") that provided the framework of the Refinancing — a
fact conceded by all parties -- are reasonably viewed as the beginning of discussions that resulted
in the Refinancing. Those discussions began no later than May 2008. Particularly in light of the
vagueness of the phrase "discussions began that resulted in" the Refinancing, factual issues
preclude granting summary judgment on this issue as well.
Statement Of Facts
The relevant facts are set out in the Affirmation of Jacqueline Veit ("Veit Aff."),
submitted herewith, and the numerous deposition excerpts and exhibits attached to it. Below is a
brief summary.
The 16th Amendment, Preservation and the Agreement
By the early 2000s, SCA was facing significant financial hurdles and opportunities,
which could be remedied by a sale or refinancing of the complex. Deane, then age 80, also faced
pressure from SCA's limited partners to relinquish his MGP position or provide a succession
plan. Veit Aff. ¶ 9.
The Deanes used their relationship with Plaintiffs, and the Plaintiffs' reputation among
the limited partners as being knowledgeable and reliable, to counter this pressure and benefit
themselves. Specifically, the Deanes offered Rudman, Kuplesky and others a management
incentive arrangement to encourage them to stay through any sale or refinancing. The Deanes
used this management incentive arrangement to obtain an increase in their own general partner
ownership shares in SCA through the passage of the 16th Amendment of the SCA partnership
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agreement. The Deanes agreed to provide Plaintiffs an incentive out of their general partner
interests in SCA and, in turn, convinced limited partners to increase the general partners' residual
ownership interest in SCA from 9.85% to 19.9% via passage of this amendment to enable them
to fund this incentive. Veit Aff. ¶¶ 10-16 and Exs. therein.
Preservation was the vehicle that was set up to implement this management incentive
arrangement. Rudman, Kuplesky and Fell were each given a membership interest in Preservation,
termed "Sharing Ratios," of 15.01%, 11.63%and 11.63%, respectively.. Deane family members
(directly or via entities) held the remaining interests in Preservation. The two general partners in
SCA (Deane and SKI) executed written assignments (the "Assignments") assigning to Preservation
their "economic interests" in SCA, which are broadly defined. Thus, through Preservation, the
management team received one-third of the assigned interests, and the Deane family retained the
rest -- including two-thirds of the significantly increased residual interest the general partners
obtained via the 16th Amendment. Veit Aff. ¶¶ 17, 18 and Ex. 17; Warner Aff. Exs. 8 and 9.1
Deane wanted to empower Carol Deane, as Managing Member of Preservation, to
eventually reallocate the Sharing Ratios. Early drags of the Agreement contained the concept of
a $10 million "cap" on what the management team members could receive from Preservation
before this reallocation power kicked in. The management team, however, objected to this, and
argued that they should share fully in the value of the assigned interest brought about by a sale or
refinancing. Deane eventually agreed, and the language was changed to eliminate this limitation
and allow them (or any member) to receive their full distributions from any substantial
refinancing before their shares could be reallocated. Veit Aff. ~¶ 25-33 and Exs. therein.
~ "Warner Af£" refers to the Affirmation of Kenneth Warner submitted by Defendants in support of the
Motion.
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Although on this Motion Defendants claim the Agreement unambiguously empowers Carol
Deane to reallocate Plaintiffs' Sharing Ratios upon distribution of $10 million to Preservation's
members, their actions are completely inconsistent with that position. Among other things, after
this lawsuit was filed Defendants paid Rudman more than three times what his share would be if it
were based on a $10 million distribution. Incredibly, Defendants attribute this "overpayment" to
Carol Deane's generosity, an explanation belied by evidence showing the Deanes' extensive efforts
to avoid any payment at all. Veit Aff. ¶¶ 52-54 and 56-59 and Exs. therein.
The Refinancing was a multifaceted transaction that created value for the SCA partners in
multiple ways, including but not limited to, the cash receipts from the loan, the spin-off of
properties out of regulation and into a new entity, Spring Creek Plaza LLC ("Plaza"), where they
could be sold or developed, and the government-approved increase in allowable distributions.
For the Deanes, and thus Preservation, the Refinancing also triggered the Participation Change
under the SCA Partnership Agreement which caused SKI's partnership interest to increase from
0% to 18.9%. Thus, as a result of the Refinancing, SKI gained an 18.9% partnership interest in
Starrett, in Plaza, and in all cash flow and distributions from the foregoing. All of the economic
interests of SKI, as general partner, and Deane, as MGP, flowed to Preservation, and thereby to
its members, via the Assignments. Veit Aff. ¶¶ 11-13, 17, 21, 43 and Exs. therein.
Discussions That ResultedIn The Refinancing
A sale or refinancing of Starrett City was a complicated endeavor due to the varied
interests of hundreds of limited partners and thousands of tenants, but the most significant hurdle
by far was governmental: three levels of government regulation through various subsidized
housing programs. At issue was not so much what the property was worth, but how to get the
government to go along so that the value could be extracted from this heavily regulated facility.
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After the first sale effort (generating a $1.3 billion offer) collapsed in August 2007 due to
government opposition, a new approach was adopted: the government and the owners launched
a coordinated effort to accomplish a "preservation transaction" -- which could be either a sale or
a refinancing -- in which the government's objective of maintaining the complex as a regulated,
subsidized facility, and the owner's objective of obtaining financial benefits for partners, could
both be accomplished. Veit Aff. ¶¶ 35-36.
The sale or refinancing options, in a preservation context, were analyzed and discussed
between August and October 2007 internally and with the involved government agencies. The
MGP planned to pursue a memorandum of understanding with the government agencies,
whichever option was selected. Carol Deane elected as the first option to pursue another sale
effort. Veit Aff. ¶¶ 36-37 and Exs. therein; Warner Aff. Ex. 15.
In May 2008, the Memorandum of Understanding ("MOU") was executed with the
owners and the involved government agencies. It outlined specific elements of value that the
government would cooperate or assist in achieving if the complex remained a subsidized facility
for 20 years or more, including many elements addressed in the fall of 2007 that applied to either
a sale and refinancing. The MOU provided the framework for a prospective sale, but then was
used as the framework for the Refinancing, with the government and SCA using the agreements
reached in the MOU for the Refinancing. Veit Aff. ¶¶ 38, 41 and Exs. therein.
In 2008 the economic crisis hit. Bids in the second sale effort received in September
2008 were disappointing, and the MGP again reconsidered its options. Analyses of all options,
including a refinancing, were undertaken and discussed by no later than October 2008. Indeed,
the New York Times reported the change to a $500 million refinancing on February 18, 2009, a
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week prior to when Defendants contend that "discussions began" that resulted in the
Refinancing. Veit Aff. ¶¶ 39, 40 and Exs. therein.
ARGUMENT
I. THE EXISTENCE OF ISSUES REQUIRING TRIAL PRECLUDES SUMMARY
JUDGMENT ON THE NINTH CAUSE OF ACTION
Defendants argue that they are entitled to judgment as a matter of law on the Ninth Cause
of Action because under the plain language of Section 3.3 of the Preservation Agreement, Carol
Deane, as Managing Member, had the right to reduce Plaintiffs' Sharing Ratios to zero after
distributing $10 million in proceeds to Preservation's Members, even if — as Plaintiffs claim --
that was not a "full distribution" of Refinancing proceeds. They further argue that even if their
interpretation is wrong, they are entitled to summary judgment because there was in any event a
"full distribution" of Refinancing proceeds. The plain language of Section 3.3 does not support
Defendants' reading. At a minimum, that provision is ambiguous. Further, there are disputed
material issues of fact as to whether Defendants made a "full distribution from the proceeds" of
the Refinancing.2
A. There Is A Material Dispute As To Whether Section 3.3 Empowered The
Managing Member To Eliminate Plaintiffs' Sharing Ratios Without First
Making A Full Distribution Of All Refinancing Proceeds
Defendants argue that the plain meaning of Section 3.3 is that the Managing Member has
the right to reduce a member's sharing ratio to zero once $10 million has been distributed to
members. Defendants reach this interpretation only by improperly omitting the words "at least"
in the second sentence of the Section and ignoring the third sentence entirely. They likewise
Z Because Defendants have only moved for summary judgment with respect to the Ninth Cause of Action,
the other causes of action cannot be decided on this Motion and must be tried.
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ignore the fact that the parties expressly rejected the outcome Defendants now claim is the plain
meaning of the provision.3
Read in accordance with principles of contract interpretation, the plain meaning of
Section 3.3 is that the Managing Member has the power to reduce members' Sharing Ratios only
after there has been a "full distribution from the proceeds from" the Refinancing, and that had
not occurred as of the date Carol Deane eliminated Plaintiffs' Sharing Ratios. At a minimum,
Section 3.3 is ambiguous, precluding summary judgment. Any ambiguities must be interpreted
against Defendants since their outside counsel drafted the Agreement. See Taddeo v. Medallic
Art Co., Ltd., 40 A.D.3d 444 (1st Dept 2007).
In interpreting the meaning of an agreement, all provisions must be given meaning. V. C.
Vitanza Sons, Inc. v. New York City Hous. Auth., 7 A.D.3d 398 (lst Dept 2004). Additionally,
the provisions must be read as a whole -- not in isolation -- and in the context of the relationship
of the parties and the factual circumstances that gave rise to the agreement. See BradH. v. City
ofNew York, 17 N.Y.3d 180, 185 (2011) ("To determine whether a writing is unambiguous,
language should not be read in isolation because the contract must be considered as a whole");
Riverside South Planning Corp. v. CRP/Extell Riverside L.P., 13 N.Y.3d 398, 404 (2009); Kass
v. Kass, 91 N.Y.2d 554, 556 (1998) ("In deciding whether an agreement is ambiguous, the court
should examine the entire contract and consider the relation of the parties and the circumstances
under which it was executed")
3 The initial draft of Section 3.3 contained language that Defendants' attorney, who drafted the provision,
noted at the time would have given Carol Deane the right to reallocate Sharing Ratios after distributing
$10 million. That draft was rejected and the provision was redrafted to its current version after Plaintiffs
(and Martin Fell) objected and insisted that before any reallocation, they were entitled to receive their full
share of the proceeds of a sale or refinancing. After considering the issue, Deane agreed, and the
language was changed to reflect this concept. As the Deane's attorney explained, "Ibelieve the effect of
the proposed change is to make it clear that the total proceeds of a sale or refinancing of SCA ... ,and
not just the first $10 million of such proceeds, would be channeled through SCP [Preservation] and result
in payments to the SCP members." Veit Aff. Ex. 30. See also Veit Af£ ¶¶ 25-31 and Exs. therein.
reir~~a
The first sentence of Section 3.3 establishes that the Managing Member may only
reallocate Sharing Ratios after a "Funding Event." The second sentence defines Funding Event
as the distribution to Members of "at least $10 million" (emphasis added). Significantly, the
provision does not refer to a distribution of "$10 million," which is what it should have said if
Defendants' interpretation were correct. There is no reason for the sentence to refer to "at least
$10 million" if, as Defendants urge, the parties intended for the power to reallocate to
automatically trigger upon the distribution of $10 million.
But the use of the words "at least" makes perfect sense in light of the third sentence of
Section. It provides that the reallocation power is intended to be used only "after the full
distribution from the proceeds of a substantial refinancing ...." It is this sentence that deals
with what the members are entitled to upon a "substantial refinancing." As it says, they are
entitled to a "full distribution from the proceeds."
Reading Section 3 as a whole, as is required, the plain meaning of Section 3.3 is clear:
When there is a substantial refinancing, the members are entitled to their full distribution of the
proceeds from the refinancing. Once there has been a full distribution to the members, if that
distribution equals or exceeds $10 million in the aggregate, then there has been a Funding Event,
which empowers the Managing Member to reallocate Sharing Ratios.
This meaning of Section 3.3 is confirmed by reading "the entire contract and
considering) the relation of the parties and the circumstances under which it was executed."
The Agreement gave Plaintiffs membership interests in Preservation. This, in turn, gave them an
ownership interest in the value of all of Preservation's assets, which, as a result of the
Participation Change included the general partners' 19.9% economic interest in Starrett City and
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in Plaza4 This was not a simple bonus contract. If, as Defendants maintain, the intention was
nothing more than for Plaintiffs to have the right to a fixed sum of money, there was no reason to
make them members of Preservation. On the other hand, Plaintiffs' interpretation makes perfect
sense. Plaintiffs were incentivized by giving them membership interests in Preservation that
would ensure they received a share of the proceeds of a sale or refinancing that they were being
incentivized to bring about.5
Defendants argue that the third sentence should be ignored because it is only "precatory,"
and not an operative provision. The third sentence is not precatory. As demonstrated by the
cases Defendants cite, courts typically use the term "precatory" to refer to "Whereas" clauses or
opening recitals of contracts that precede the terms of agreement.6 The third sentence of Section
3.3 is not a recital clause; by its terms, it contains the parties' agreement ("all Members
acknowledge and agree ....") as to when the Managing Member's reallocation power can be
used: "after the full distribution from the proceeds of a substantial refinancing."
In any event, even "precatory" language is properly considered in construing an
agreement, and will be ignored in favor of an operative provision only when the operative
provision is specific and clear and the precatory language is vague or inconsistent with it. See
Williams, 165 N.Y. at 57; Aramony v. United Way ofAmerica, 254 F.3d 403, 413 (2d Cir. 2001)
4 Being a member of a limited liability company means being an owner. Moreover, the Agreement
acknowledges that the Members are "owners" of Preservation. See, e.g.,Section 5.9 ("no Member has a
claim or entitlement whatsoever to any ownership interest in ...any of the Deane Interests relating to
SCA (other than the Company and/or SKI)." Emphasis added; Veit Af£, Ex. 17, 25.
5 Further, this interpretation is consistent with Deane's modus operandi, which was to incentivize his
management team not with bonuses, but with shares of entities whose value they help develop. Veit Aff.
¶¶ 7, 34; see also ¶ 19.
6 See Williams v. Barkley, 165 N.Y. 48 (1900) (recital clause); Jones Apparel Group, Inc. v. Polo Ralph
Lauren Corp., 16 A.D3d 279 (1st Dept 2005) (recital clause); Trump Village Section 3, Inc. v. New York
State Housing Finance Agency, 292 A.D.2d 156 (1st Dept 2002) (recital clause); Sengillo v. Yaleo
Electrical Systems, Inc., 536 F.Supp.2d 310 (W.D.N.Y. 2008) (Section of release entitled "premises," and
that concludes with the words "Employee and Employer agree as follows" are just introductory recitals).
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(finding that the interpretation of an ERISA pension plan was governed by the "highly detailed
provisions in Article V, specifying with precision how replacement benefits are calculated," and
was not rendered ambiguous by a "vague" and "general" provision entitled "Purpose of the
Plan"). Moreover, "[i]f the recitals are clear and the operative part is ambiguous, the recitals
govern construction." Williams, 165 N.Y. at 57. Precatory language is likewise considered to
determine the purpose of the contract. Here, given the phrase "at least $10 million," the
operative provision is certainly not specific and clear. Even if the third sentence were precatory,
it would have to be considered in construing the Agreement.
At a minimum, Plaintiffs' interpretation of Section 3.3 is a reasonable one. Contractual
language is ambiguous if "at least two reasonable interpretations of it are possible." E-Z Eating
41 Corp. v. H.E. NewportLLC, 84 A.D.3d 401, 410 (lst Dept 2011). Section 3.3's ambiguity as
to whether the Managing Member was entitled to reduce Members' Sharing Ratios to zero
without first fully distributing the cash and non-cash Refinancing proceeds precludes summary
judgment dismissing the Ninth Cause of Action.$
See Fiore v. Fiore, 61 A.D.2d 1004, 1006 (2d Dep't 1978) (reversing stuninary judgment; lower court's
interpretation of contract "eviscerated the apparent purpose of the agreement" as reflected in the recitals);
Wasil v. Realty Dealership Co., 87 A.D.2d 931, 932 (3d Dep't 1982) (intent is evidenced from a reading of
the whole instrument, and reading the operative clause and the recitals together conveys the intent of the
parties); Musman v. Modern Deb, Inc., 56 A.D.2d 752, 753 (1st Dept 1977) (where the recital and operative
clauses "are so intertwined that the ambiguity of the operative clause permeates the basic aspects of the
agreement and the intent of the parties cannot be gleaned from the instrument," a question of fact is
presented, precluding summary judgment).
8 In addition, Defendants' conduct inconsistent with its allegedly unambiguous interpretation precludes
summary judgment. See Federal Insurance Co. v. Americas Insurance Co., 258 A.D.2d 39 (lst Dept
1999) ("the parties' course of performance under the contract is considered to be the most persuasive
evidence of the agreed intention of the parties"). Defendants never applied the $10 million number in
calculating the payments they actually made to Plaintiffs from the cash proceeds of the Refinancing and
in fact paid them several times more than that amount. Veit Aff. ¶¶ 53-54 and Ex. 14 at Ex. B. Further,
Defendants' controller (now CFO) never applied the $10 million number when, atDeane's request, she
prepared numerous spreadsheets from 2007 through 2009 showing the amounts Preservation members
would receive under different purchase and refinancing scenarios, and no one ever suggested that she
should. Veit Aff. ¶ 59 and Exs. 70-73. The same was true for a calculation that Curt and Carol Deane
reviewed. Veit Af£ ¶ 58 and Ex. 69.
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B. There Is A Material Dispute As To Whether Defendants Made A "Full
Distribution From The Proceeds" Of The Refinancing
Defendants contend they are entitled to summary judgment even if they are wrong in
ignoring the third sentence of Section 3.3, because there was a full distribution of the proceeds of
the Refinancing. This argument rests on three legs, each of which must be established as a
matter of law for Defendants to succeed on this portion of their. motion. They cannot establish
any of them.
The first leg of Defendants' argument is that the distributable proceeds of the
Refinancing must be considered limited to "net cash proceeds" because Section 3.03 of the SCA
Agreement -- which is referenced at the end of the third sentence of Section 3.3 of the
Preservation Agreement -- addresses how the "net cash proceeds" resulting from a refinancing
are to be distributed to SCA partners. Unlike the SCA Agreement, however, Section 3.3 of the
Preservation Agreement does not use the term "net cash proceeds." It uses the broader term
"proceeds," which is reasonably interpreted as including both cash and non-cash proceeds.9
The purpose and language of the Agreement supports interpreting "proceeds" as
including non-cash, as well as cash, distributions. The Agreement was entered into to implement
the management incentive arrangement by providing a vehicle for the management team to share
in the entire "economic interest" of SCA's General Partners —not just cash items -- as reflected
in the broad scope of the Assignments the General Partners made to Preservation. Reading the
term "proceeds" in Section 3.3 as limited to cash items would enable the General Partners to
9 For example, the term "proceeds" is used in criminal forfeiture statutes to refer not only to cash, but to
"property of any kind obtained directly or indirectly, as the result of the commission of the offense giving
rise to forfeiture, and any property traceable thereto, and is not limited to the net gain or profit realized
from the offense." 18 U.S.C.A. § 981(a)(2)(A). See also United States v. 3338 Bat Cave Road, 2013 WL
2317707 at *1 (W.D.N.C. May 28, 2013) (real estate constitutes "proceeds"); United States v. Torres, 703
F.3d 194, 200-01 (2d Cir. 2012) (value of free apartment received from defendant's offense is
"proceeds").
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circumvent the purpose of the Agreement simply by structuring the refinancing transaction so
that the benefits of the refinancing are received as non-cash items, such as interests in real estate,
partnerships, or equity securities. Further, the Agreement itself makes clear that distributions,
including under Section 4.2, can include non-cash as well as cash assets. See Veit Aff. Ex. 17,
Sections 4.8(A) and 4.9(A).
In addition, the last clause of Section 3.3 refers not only to Section 3.03 of the SCA
Agreement, on which Defendants rely; it refers as well to Section 3.02, which addresses the
"Distribution of Cash Flow." Section 3.02 provides that "Cash Flow" means "the Net Profits
and Losses as determined in accordance with Section 3.01(a)," with certain exclusions and
additions. The inclusion in Section 3.3 of a reference to Section 3.02 of the SCA Agreement
thus reflects the parties' intention — again, supported by the breadth of the Assignments -- to
include in "proceeds" the increased value of the general partners' interest in SCA's cash flow
resulting from the "Participation Change" triggered by a substantial refinancing.
Excluding non-cash items from the meaning of "proceeds" in the last sentence of Section
3.3 would also be inconsistent with the fact that Preservation's books and records reflect and
account for the non-cash proceeds of the Refinancing. Organizational charts. prepared by Sutz
show Preservation holding an interest in Starrett and in Plaza as a result of the Refinancing. Veit
Aff. Ex. 19. After the Refinancing, SCA and Plaza each issued K-1's to Preservation as a
partner or member. Following the Refinancing, Defendants' accountants used 19.9% of the
market value of Starrett City and Plaza to establish Preservation's basis in its assets and then
allocated that basis among Preservation's members for use in connection with their tax filings.
Veit Aff. ¶¶ 47-49 and Exs. 60, 62-64. There is no explanation for how Preservation, and its
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members, obtained an interest in these non-cash items if, as Defendants contend, they were not
proceeds of the Refinancing.
Defendants cannot show that as a matter of law, the term "proceeds," as used in the third
sentence of Section 3.3, means only "net cash proceeds."
In the second leg of their argument, Defendants contend that the reference to "full
distribution" in the third sentence of Section 3.3 means a full distribution by SCA to its partners,
and not by Preservation to its Members. The provision, however, does not state who is to make
or receive the distributions. At a minimum, it is ambiguous.
Defendants argue that because the sentence concludes with the phrase "pursuant to
Section 3.02 or 3.03 of SCA's partnership agreement," it must be referring to SCA's
distributions to its partners. But a far more sensible reading is that the phrase was inserted to tie
the "full distribution" reference in Section 3.3 to the description of the general partners' "residual
interest," as set out in the 16th Amendment. The 16th Amendment provides in its third
WHEREAS clause that "the General Partners are entitled to receive, subsequent to the
Participation Change, a residual interest ("the Residual Interest") in Cash Flow and
Sale/Refinancing Proceeds, as more fully set forth in Sections 3.02 and 3.03 of the Partnership
Agreement ...." Veit Aff. Ex. 21; emphasis added. Section 3.3 uses this same reference to
Section 3.02 and 3.03 of SCA's partnership agreement to manifest the intention that a "full
distribution" to Preservation Members under Section 3.3 requires a distribution of the general
partners' entire Residual Interest arising under the 16th Amendment, and which was assigned to
Preservation.lo
to The record evidence is in accord. See Veit Aff., Ex. 32, a February 1, 2006 email from Kuplesky to
SCA attorney John Kelly, which shows that the phr