Amusement Indus. Inc. v. Stern

• Decision Date: 11 March 2011
• Docket Number: No. 07 Civ. 11586(LAK).,07 Civ. 11586(LAK).
• Parties: AMUSEMENT INDUSTRY, INC., etc., at ano., Plaintiffs,v.Moses STERN, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

786 F.Supp.2d 758

AMUSEMENT INDUSTRY, INC., etc., at ano., Plaintiffs,

v.Moses STERN, et al., Defendants.

No. 07 Civ. 11586(LAK).

United States District Court, S.D. New York.

March 11, 2011.

Allen Phillip Sragow, Sragow & Sragow, Craig Harry Missakian, Westland Industries, Inc., Long Beach, CA, John Werner Hofsaess, Jr., S. Tito Sinha, P.C., Kew Gardens, NY, Elissa E. Koolyk, Elissa E. Koolyk, Esq., New York, NY, for Plaintiffs.Lon J. Seidman, Silverman Acampora L.L.P., Stephen R. Stern, Mark W. Geisler, Philip S. Ross, Hoffinger Stern & Ross LLP, Michael C. Rakower, Law Office of Michael C. Rakower, New York, NY, Thomas Moss Wood, Nathan D. Adler, Nichole M. Galvin, Neuberger, Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, MD, for Defendants.

ORDER

LEWIS A. KAPLAN, District Judge.

This matter is before the Court on the motion [DI 448] of defendants Stern, FRG Corp., Frenkel and LTA to dismiss the third amended complaint. Magistrate Judge Gabriel W. Gorenstein, in an extensive Report and Recommendation [DI 551] recommended that the motion be granted in part and denied in part. The only objection is by plaintiffs, who object only with part of the last sentence of footnote 5 in the report which they concede is not necessary to the conclusion reached.

Accordingly, I adopt the report and recommendation without passing on plaintiffs' point with respect to the portion of footnote 5 with which they take issue. The motion before me is granted to the extent set forth in the Conclusion of the report and recommendation and otherwise denied.

SO ORDERED.

REPORT AND RECOMMENDATION

GABRIEL W. GORENSTEIN, United States Magistrate Judge.

Plaintiffs Amusement Industry, Inc. and Practical Finance Co., Inc. (collectively, “Amusement”) have sued defendants Mark Stern, First Republic Group Realty, LLC (“FRG LLC”),¹ First Republic Group Corp. (“FRG Corp.”), Ephraim Frenkel, Land Title Associates (“LTA”), Joshua Safrin, and Avery Egert, seeking damages arising out of their loss of $13 million in a real estate transaction. See Third Amended Complaint, filed Apr. 27, 2010 (Docket # 405) (“TAC”). Stern, FRG Corp., Frenkel, and LTA (collectively, “the defendants”) have now moved to dismiss the claims against them.² For the reasons stated below, the motion to dismiss should be granted in part and denied in part.

I. BACKGROUNDA. Plaintiffs' Allegations

Amusement alleges the following facts, which are presumed true on this motion to dismiss. See Swierkiewicz v. Sorema N.A., 534 U.S. 506, 508 n. 1, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002).

1. The Deal

In April 2007, FRG Corp.—controlled solely by Stern, see TAC ¶¶ 2, 12—entered into a written contract to purchase several shopping centers (the “Portfolio”) from Colonial Realty Limited Partnership (“Colonial”), with a closing date set for late June 2007, id. ¶ 2. In May 2007, Stern and FRG Corp. authorized Bankers Capital Realty Advisors (“Bankers Capital”), through its principal, Steven Alevy, to secure additional financing on their behalf. See id. ¶¶ 21–22. A new entity, FRG LLC—also controlled solely by Stern—was formed on or about June 23, 2007, id. ¶ 2, and some time before the closing date, which was “on or about July 13, 2007,” FRG Corp. “assigned its interest in the purchase contract to FRG LLC,” id. ¶¶ 2, 21. In addition to authorizing Bankers Capital to obtain additional financing, Stern, FRG Corp. and/or FRG LLC authorized an attorney, Stephen Friedman—who represented Stern, FRG Corp., FRG LLC, and allegedly, Safrin and Egert—to approach Amusement regarding this same matter. See id. ¶¶ 22–23. Amusement is controlled by Allen Alevy. Id. ¶ 21.

2. Friedman's Representations

Stephen Friedman, then a partner at Buchanan Ingersol and Rooney (“BIR”), repeatedly represented to Amusement that he had been retained by Stern, FRG Corp. and/or FRG LLC, Safrin, and Egert, and that he was authorized to act as an agent for them in connection with the acquisition of the Portfolio. Id. ¶ 25. The defendants were aware of those representations and “did not contradict them.” Id. ¶ 26. Friedman had either actual or apparent authority to bind Stern and FRG Corp. Id. At this time, Friedman was “already representing an Alevy family entity in an unrelated transaction ... and had been a close family friend for many years.” Id. ¶ 28.

Amusement was “enticed by Friedman's representation that Safrin, a respected New York real estate investor, was supplying much of the equity needed for the acquisition.” Id. ¶ 23. Steven Alevy of Bankers Capital, the son of Amusement's Allen Alevy, id. ¶ 21, confirmed that Stern had represented that “Safrin and Egert were supplying most of the equity for the acquisition,” id. ¶ 24. Additionally, on June 4 and 5, 2007, “Stern told Bankers [Capital] that Safrin was a sponsor” of the transaction, with $15 to $18 million in liquidity, and that Safrin would sign the “ ‘carve-outs' on the financing package.” Id. ¶ 78(f)-(g). Between June 20 and June 29, 2007, Friedman told Bankers Capital and Amusement that the Citigroup financing agreement permitted a “50/50 equity split” between Amusement and Stern–Safrin–Egert. Id. ¶ 78(k).

3. The Letter of Understanding and the Escrow Account

On June 29, 2007, Amusement, relying on representations made by Friedman, Stern, and FRG Corp. and/or FRG LLC, entered into a letter of understanding (“LOU”) with Stern on behalf of FRG Corp. and/or FRG LLC, setting forth a proposal for Amusement's investment. See id. ¶¶ 29, 31, 78; Letter of Understanding (annexed as Ex. 2 to TAC) (“LOU Ex.”). On or about June 29, 2007, Amusement wired $13 million to a bank account maintained by Land Title Associates Escrow (“LTA”) at North Fork Bank in accordance with Stern and FRG Corp. and/or FRG LLC's instructions. Id. ¶¶ 2, 32. Friedman told Amusement that the account was the escrow account being used by FRG Corp. and/or FRG LLC “to accumulate the funds needed to acquire the Portfolio.” See id. ¶ 32. Amusement later learned that this account was not the escrow account being used by FRG Corp. and/or FRG LLC to acquire the Portfolio. Id. ¶ 42. Rather, it was Frenkel's general escrow account which contained only the $13 million wired there by Amusement. Id.

The LOU set forth the following proposed terms: Amusement would receive 50% equity and voting interest in the Portfolio and a 12% annual preferred return on its investment; “First Republic” was to be responsible for “major decisions” including refinancing, sales and operations; and the parties would have seven days to negotiate a binding agreement, during which time 100% of the equity and voting interest in the Portfolio was to be held in escrow for Amusement's benefit. See id. ¶ 31(a)-(c); LOU Ex. As a condition of sending the $13 million, Amusement directed that the money was to be held in escrow by LTA and Frenkel, and was to be released only if Amusement so instructed. Id. ¶ 34. Stern, Friedman, LTA, and LTA's principal, Ephraim Frenkel, “acknowledged” the terms of this arrangement. Id.

Safrin, Egert, Stern, and FRG Corp. and/or FRG LLC represented that time was of the essence and did not inform Amusement until later that Colonial had agreed to an extension of the closing date. Id. ¶ 30. Because of this representation, “Amusement lacked sufficient time for proper due diligence and, therefore, had to decide how to proceed based on the available information.” Id. ¶ 29.

4. Continuing Negotiations

Citigroup had committed to provide approximately $126 million to acquire the Portfolio. Id. ¶ 43. Amusement did not know that FRG Corp. and/or FRG LLC could not perform their obligations under the LOU “because those obligations conflicted with the terms of Citigroup's financing commitment.” Id. ¶ 43. Between June 29 and July 14, 2007, Amusement attempted to negotiate a final agreement with Stern, Safrin, Egert, and FRG Corp. and/or FRG LLC, but no agreement was reached, and Amusement notified Stern, Safrin, Egert, and FRG Corp. and/or FRG LLC that it did not regard itself as bound by the LOU in light of the expiration of the seven-day negotiating period it contemplated. Id. ¶¶ 3, 35. During these negotiations, Amusement “repeatedly communicated to Friedman, LTA and Frenkel that its money was not to be released from escrow.” Id. ¶ 36. Amusement also insisted that it would not finalize the transaction without reviewing the Citigroup documents, but those documents were not provided to it. Id. ¶ 43. The failure of Stern, Safrin, Egert, and FRG Corp. and/or FRG LLC to supply copies of the Citigroup documents “gave Amusement false confidence that its money was safely in escrow.” Id.

5. Transfer of the Funds

On July 3, 2007, without Amusement's knowledge or consent, the $13 million was transferred from the escrow account to a separate North Fork Bank account owned by FRG Corp. Id. ¶¶ 3, 40. This account was used for “various expenses” in connection with the acquisition of the Portfolio, as well as for unrelated expenses. Id. ¶ 40. One day before the closing, “which occurred on or about July 12, 2007,” Stern, Safrin, Egert, and FRG Corp. and/or FRG LLC sent Amusement a set of partially executed transaction documents at a time they knew the $13 million had been moved out of the escrow account. See id. ¶¶ 3–4, 45. However, Amusement continued to negotiate and refused to release the $13 million, which it believed was still in the escrow account. See id. ¶¶ 3, 45. On July 12, 2007, without Amusement's knowledge and despite the fact that no agreement had been reached, Stern, Safrin, Egert, and FRG Corp. and/or FRG LLC used the $13 million to close the purchase of the Portfolio. Id. ¶¶ 49, 59. The defendants concealed the fact that the money had been removed from the escrow account and continued negotiations with Amusement notwithstanding their knowledge of this fact. See id. ¶¶ 76, 79.

In an effort to have Amusement ratify the unauthorized use of the escrow funds, defendants “delivered” a promissory note signed by Stern for...