Lawson v. Affirmative Equities Co., L.P.

Decision Date27 October 2004
Docket NumberNo. CIV.A.02-12172-RGS.,CIV.A.02-12172-RGS.
Citation341 F.Supp.2d 51
PartiesCharles R. LAWSON, as he is Trustee of Trust 55547-90, Trust 12572 and Trust 9932-90 v. AFFIRMATIVE EQUITIES COMPANY, L.P., Affirmative Equities, Inc., Patrick Henry Hotel Associates, L.P., Patrick Henry Hotel Investment Associates, L.P., Andrew D. Jubelt, and Lawrence Bishop
CourtU.S. District Court — District of Massachusetts

Heather V. Baer, Sally & Fitch, Boston, MA, for Lawrence A. Bishop, Defendant.

Peter E. Ball, Sally & Fitch LLP, Boston, MA, for Lawrence A. Bishop, Defendant.

David S. Friedman, Hill & Barlow, PC, Boston, MA, for Affirmative Equities, Patrick Henry Hotel Associates, LP, Andrew D. Jubelt, Defendants.

Ann Pauly, Griesinger, Tighe & Maffei, LLP, Boston, MA, for Charles R. Lawson, Plaintiff.

Richard M. Resnik, Mandel Resnik & Kaiser P.C., New York, NY, for Affirmative Equities, Patrick Henry Hotel Associates, LP, Andrew D. Jubelt, Defendants.

C. Dylan Sanders, Piper Rudnick LLP, Boston, MA, for Affirmative Equities, Patrick Henry Hotel Associates, LP, Andrew D. Jubelt, Defendants.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTIONS TO DISMISS THE SECOND AMENDED COMPLAINT

STEARNS, District Judge.

This action arises from an Agreement of Guaranty executed by defendant Affirmative Equities Company, L.P. (AEC) in favor of the plaintiff, Charles Lawson, as the Trustee of three Massachusetts Trusts that guaranteed a Letter of Credit extended to AEC by the Republic National Bank of New York, later known as HSBC Bank USA (HSBC). The Letter of Credit was intended to finance the renovation of The Patrick Henry Hotel (the Hotel), a property in Roanoke, Virginia, owned by AEC and its affiliates. Lawson's Second Amended Complaint alleges breach of contract, fraud and deceit, breach of the covenant of good faith and fair dealing, unjust enrichment, negligent misrepresentation, promissory and equitable estoppel, violations of the Massachusetts Consumer Protection Act, and breach of fiduciary duty (as against defendant Lawrence Bishop).1 The issues are complicated by the bewildering web of legal relationships that connect the Patrick Henry Hotel defendants. These defendants, Affirmative Equities, Inc. (AEI), Patrick Henry Hotel Associates, L.P. (PHHA), Patrick Henry Hotel Investment Associates (PHHIA), and Andrew D. Jubelt, joined by Bishop, move to dismiss the Second Amended Complaint, principally on the ground that the court lacks personal jurisdiction. The Patrick Henry Hotel defendants also claim that AEC (which is insolvent) is the only entity liable on the Agreement of Guaranty.2

BACKGROUND

The following facts, viewed in the light most favorable to the plaintiff, are drawn for the most part from the Second Amended Complaint, supplemented by those facts that either appear not to be in dispute, or are among the facts that were developed during the jurisdictional discovery authorized by the court. AEC is a Delaware limited partnership.3 AEC is the general partner of PHHIA, a New York general partnership, which in turn is the general partner of PHHA, a Delaware limited partnership. PHHA is the record owner of The Patrick Henry Hotel. AEI, a New York corporation, is the general partner of AEC. Jubelt is the sole officer and shareholder of AEI. Jubelt owns and manages Patrick Henry Hotel Investors, Inc. (PHHI), which has a 99 percent ownership interest in PHHIA. Jubelt also owns 75 percent of AEC's one percent general partner's interest in PHHIA. Jubelt and Bishop constitute the board of directors of AEI, while Bishop also serves as a director of AEC. Until the summer of 2001, Bishop was a part owner and an investment advisor at Gray Seifert, a New York capital management firm. Lawson and the Trusts had become clients of Bishop in 1988.

According to the Complaint, Bishop regularly financed the activities of AEC and Jubelt with client funds in the custody of Gray Seifert.

When Jubelt asked Bishop for money, defendant Bishop would cause those Gray Seifert clients' funds to be transferred to AEC, purportedly as an investment in, or loan to, AEC or one of its projects or affiliates.... AEC, with Bishop's knowledge, used those funds, in whole or in part, to pay for AEC operating expenses, including the payment of substantial salaries and benefits to, inter alia, defendant Jubelt.

Second Amended Complaint ¶ 12. In 1993, defendants AEI, AEC, PHHA, PHHIA and Jubelt sought a $2,500,000 Letter of Credit from HSBC. The requested funds were to be advanced to PHHIA and PHHA, ostensibly to pay for the remodeling of the Hotel. HSBC refused to issue the Letter of Credit without a guaranty from a third party unaffiliated with the defendants. As a result, the Patrick Henry Hotel defendants, through Bishop, contacted Lawson to solicit a guaranty from the Trusts. Jubelt and Bishop proposed that Lawson pledge Trust assets to secure the Letter of Credit, in exchange for the payment by PHHA and PHHIA of commissions and monthly service fees (interest) to the Trusts.

As alleged in the Complaint, the proposal was embellished by a number of representations that later proved false. Jubelt and Bishop told Lawson that: (1) the Letter of Credit and the Trusts' guarantees would be in force for only a few months; (2) that the Letter of Credit would be secured by The Patrick Henry Hotel and the assets of AEC and its affiliates; (3) that AEC and AEI had sufficient assets to pay off the Letter of Credit when it came due; (4) that PHHA would maintain an escrow account with a balance sufficient at all times to pay three months of the interest owing to HSBC; and (5) that AEC would provide Lawson (and the Trusts) with an enforceable Agreement of Guaranty that would ensure the payment of all sums drawn against the Letter of Credit. On July 13, 1993, PHHA executed a Letter Agreement, which was forwarded to Lawson in Massachusetts. See Second Amended Complaint, Ex. A. In the Letter Agreement, PHHA promised: (1) to pay each of the Trusts the sum of $6,000 upon the issuance of the Letter of Credit; (2) to use its best efforts to find substitute financing within six weeks (thereby discharging the Trusts from the guarantees); (3) to pay each Trust the sum of $25,000 upon the receipt of refinancing; and (4) in the event that refinancing was not in place by August 31, 1993, to pay each Trust, on the first day of each succeeding month in which refinancing had not been obtained, the sum of $2,000. The Letter Agreement was signed on behalf of PHHA by an officer of its general partner, PHHIA.

Immediately after HSBC issued the Letter of Credit, the full $2,500,000 was drawn down by the defendants. In mid-1994, after making sporadic interest payments to the Trusts with checks signed by the Chief Financial Officer (CFO) of AEC and PHHA, the Patrick Henry Hotel defendants ceased making payments. The defendants persuaded HSBC to grant a series of extensions on the repayment of the Letter of Credit, and in 1997, agreed with HSBC to convert the Letter of Credit into a Demand Note. The defendants also sought funding from third party sources, including Titan Management, L.P. (Titan), to pay off a Department of Housing and Urban Development (HUD) mortgage on the Hotel. (Lawson had not been told of the prior mortgage nor that HUD had twice threatened to foreclose on the Hotel because the mortgage was in arrears).

AEC from time to time revised the Agreement of Guaranty to reflect the accrued interest owed to the Trusts. The last such revision occurred in July of 1998.4 Lawson alleges that when Jubelt signed the revised Agreement of Guaranty on July 10, 1998, he knew, but fraudulently concealed the fact that AEC, AEI, PHHA, and PHHIA were insolvent. Bishop, for his part, told Lawson that he "should not be concerned with the payments owed to the trusts since the hotel will probably be sold by the end of this year. At that time, accrued interest would be paid to the trusts." Third Pauly Aff., Ex. 5.

In August of 2001, Lawson received a letter from Gray Seifert announcing Bishop's resignation from the firm. The following month, Lawson was told by Gray Seifert that it was no longer offering "private investment deals," and that it was in the process of reviewing its underperforming private equity holdings. (Lawson believes that Gray Seifert's sudden retrenchment was prompted by the faltering investments Bishop had placed in AEC and its affiliates). In early October of 2001, Jubelt and Bishop separately assured Lawson that AEC had sufficient assets to cover the Agreement of Guaranty and to repay the Demand Note upon the impending sale of The Patrick Henry Hotel. Lawson asked Jubelt to forward copies of the closing documents to verify that the interest and fees owed to the Trusts would be paid from the proceeds. Lawson never received the requested documents.

On November 30, 2001, HSBC sent defendants AEI, AEC, PHHA, PHHIA, and Jubelt a letter demanding payment in full of the principal and interest due under the Demand Note. Lawson immediately wrote to Jubelt and AEC invoking the Trusts' rights under the Agreement of Guaranty. Defendants responded by insisting that the Trusts assume the interest payments on the Demand Note. Lawson in turn sought a written acknowledgment from the defendants that the Demand Note, and the accrued interest and fees, would be paid in full on the sale of The Patrick Henry Hotel (ostensibly to occur on February 28, 2002). The Patrick Henry Hotel defendants refused to sign the acknowledgment. However, as late as December of 2001, Bishop reassured Lawson that the February date for the sale of the Hotel was firm, and that the Demand Note and the interest and fees owed to the Trusts would be paid in full.5

On January 3, 2002, Jubelt and John Hrvatin, the CFO of AEC and PHHA, met with Lawson in Boston. During the meeting, Jubelt and Hrvatin informed Lawson that AEC was having difficulty meeting its day-to-day financial obligations, and that The Patrick Henry...

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