Amusement Industry, Inc. v. Stern

• Decision Date: 01 March 2010
• Docket Number: No. 07 Civ. 11586(LAK).,07 Civ. 11586(LAK).
• Citation: 693 F. Supp.2d 327
• Parties: AMUSEMENT INDUSTRY, INC. dba Westland Industries; and Practical Finance Co., Inc., Plaintiffs, v. Moses STERN, aka Mark Stern; Joshua Safrin; Avery Egert; First Republic Group Realty LLC; Ephraim Frenkel; First Republic Group, Corp., and Land Title Associates Escrow, Defendants.
• Court: U.S. District Court — Southern District of New York

693 F. Supp.2d 327

AMUSEMENT INDUSTRY, INC. dba Westland Industries; and Practical Finance Co., Inc., Plaintiffs, v.Moses STERN, aka Mark Stern; Joshua Safrin; Avery Egert; First Republic Group Realty LLC; Ephraim Frenkel; First Republic Group, Corp., and Land Title Associates Escrow, Defendants.

No. 07 Civ. 11586(LAK).

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

March 1, 2010.

Allen Phillip Sragow, Sragow & Sragow, Long Beach, CA, Eugene R. Scheiman, Arent Fox LLP, Philip R. White, Sills Cummis & Gross, P.C., Marc David Youngelson, Sills Cummis & Gross, P.C., Mark Alan Bloom, Arent Fox LLP, New York, NY, David William Kiefer, Sills Cummis & Gross, P.C., Newark, NJ, for Plaintiffs.

Stephen R. Stern, Mark W. Geisler, Philip S. Ross, Hoffinger Stern & Ross LLP, Justin Y.K. Chu, Martin I. Kaminsky, McCarter & English, LLP, New York, NY, Nathan D. Adler, Neuberger, Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, MD, for Defendants.

CORRECTED ORDER

LEWIS A. KAPLAN, District Judge.

The motion of defendantsJoshua Safrin and Avery Egert to dismiss the amended complaint as against them DI 266, which has been made applicable to the second amended complaint, is granted to the extent that (1) the fraud claims based on the statements alleged in paragraphs 72, 74(g) and 75 of the amended complaint, (2) the negligent misrepresentation claim, (3) the claim for a constructive trust under Alabama law, (4) the claim for an equitable lien under Virginia law, and (5) the declaratory judgment claim all are dismissed.It is denied in all other respects.This ruling is made substantially for the reasons stated in Judge Gorenstein's report and recommendation DI 354 to which no objection has been filed.

SO ORDERED.

REPORT AND RECOMMENDATION

GABRIEL W. GORENSTEIN, United States Magistrate Judge.

PlaintiffsAmusement Industry, Inc. d/b/a Westland Industries, and Practical Finance Co., Inc.("Amusement") have sued defendantsMoses Stern; First Republic Group Realty LLC; First Republic Group, Corp.; Ephraim Frenkel; Land Title Associates Escrow; Joshua Safrin; and Avery Egert seeking damages arising out of their loss of $13 million in a real estate transaction.See Corrected First Amended Complaint, filed May 12, 2009(Docket # 285)("Compl.").¹Safrin and Egert have now moved to dismiss the claims against them.For the reasons stated below, their motion to dismiss should be granted in part and denied in part.

I.BACKGROUND

A.Plaintiffs' Allegations

Amusement alleges the following facts against Safrin and Egert, which are presumed true on a motion to dismiss.SeeSwierkiewicz 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, First Republic²—controlled solely by Moses Stern, Compl. ¶¶ 2, 12-13—entered into a written contract to purchase several shopping centers from Colonial Realty Limited Partnership(the "Portfolio"), id.¶ 2.In May 2007, Stern and First Republic authorized Bankers Capital Realty Advisors ("Bankers Capital") through its principal, Steven Alevy, to secure additional financing on their behalf.Id.¶¶ 21-22.Stern and First Republic also authorized an attorney, Stephen Friedman—who represented Stern, First Republic, and allegedly, Safrin and Egert—to approach Amusement regarding this same matter.Id.¶¶ 22-23.Amusement is controlled by its principal, third-party defendantAllen Alevy.Id.¶ 21.

2.Friedman's Representations

Friedman, then a partner at Buchanan, Ingersoll and Rooney ("BIR"), repeatedly represented to Amusement that he had been retained and was authorized to act as an agent by Stern, First Republic, Safrin, and Egert in connection with the acquisition of the Portfolio.Id.¶ 25.Amusement asserts that Friedman had either actual or apparent authority to bind Safrin and Egert as reflected in part by a retainer agreement dated October 26, 2006.Id.¶ 27; Retainer letter from Stephen Friedman to Avery Egert(Oct. 26, 2006)(annexed as Ex.A to Declaration of Thomas M. Wood, IV, filed Apr. 29, 2009)(Docket # 268)("Wood Decl.")("Retainer letter").On several occasions, Friedman represented to Steven Alevy that he had authority to act for Safrin, and Safrin permitted Friedman to disseminate his personal financial statements and tax returns to "interested parties" and to "procure his signature on legally significant documents."Compl.¶ 27.Egert, who is Safrin's son-in-law, personally assured Steven Alevy that Friedman could bind Egert and Safrin, and Egert instructed Steven Alevy to "negotiate with Friedman for a larger part of the equity in the Portfolio that would come from Safrin's share."Id.¶¶ 27, 74(j).In late May or early June 2007, Safrin himself told Steven Alevy that he was participating in the acquisition of the Portfolio.Id.¶ 74(b).

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, who is also the son of Amusement's Allen Alevy, id.¶ 21, also confirmed that Stern had represented that "Safrin and Egert were supplying most of the equity for the acquisition,"id.¶ 24.Steven Alevy represented that, during a walk on West End Avenue in New York in late May or early June of 2007, "Safrin had expressed his pleasure at participating jointly with the Alevy family in acquiring the Portfolio."Id.On June 4, 2007, Friedman told Steven Alevy that Egert was to be placed on the advisory board of the entity acquiring the Portfolio, id.¶ 74(d), and that Safrin had already been placed on the same advisory board, id.¶ 74(e).On June 4-5, 2007, "Stern told Bankers Capital that Safrin was a sponsor" of the transaction, with $15-18 million liquidity and that Safrin would sign the "`carve-outs' on the financing package."Id.¶¶ 74(f)-(g).Finally, 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.¶ 74(k).

3.The Letter of Understanding and the Escrow Account

On June 29, 2007, Amusement, relying in part on representations by Safrin and Egert with respect to their participation in the acquisition, executed a written letter of understanding ("LOU") with Stern on behalf of First Republic, seeid.¶¶ 29, 31; Exhibit 2 to Compl., which set forth the proposed terms of Amusement's investment, and Amusement then wired $13 million into an escrow account with Land Title Associates Escrow ("LTA") at North Fork Bank, Compl.¶¶ 2, 31-32.Amusement assented to the escrow agreement with the understanding that the money was to be released only if Amusement so instructed.Id.¶ 34.As consideration for placing the $13 million into escrow, Amusement was to hold in escrow "100% of the equity and voting interest in the Portfolio" in Amusement's favor while the parties negotiated their final agreement.Id.¶ 31(c).Stern, Friedman, LTA, and LTA's principal, Ephraim Frenkel, "acknowledged" the terms of this arrangement.Id.¶ 34.

Safrin, Egert, Stern, and First Republic represented that time was of the essence, and failed to inform Amusement until "later" that Colonial had agreed to an extension of the closing date.Id.¶ 30.This led Amusement to enter into the LOU relying on the defendants' representations and without conducting "proper due diligence."Id.¶ 29.

4.Continuing Negotiations

The primary financing for the acquisition was based on an agreement between First Republic and Citigroup, under which Citigroup was to provide approximately $126 million to acquire the Portfolio.Id.¶ 42.Amusement did not know that First Republic could not perform its obligations under the LOU "because those obligations conflicted with the terms" of the financing agreement that Stern and First Republic had with Citigroup.Id.¶ 42.Between June 29 and July 14, 2007, Amusement attempted to negotiate a final agreement, but no agreement was reached.Id.¶ 35.Amusement also insisted that it would not finalize the transaction without reviewing the Citigroup documents, but those documents were not provided to it.Id.¶ 42.The failure of Stern, Safrin, Egert, and First Republic to supply copies of the Citigroup documents "gave Amusement false confidence that its money was safely in escrow."Id.

5.Transfer of the Funds

Without Amusement's knowledge or consent, the $13 million was transferred on July 3, 2007, from the escrow account to a separate North Fork Bank account owned by First Republic.Id.¶¶ 2, 40.On July 12, 2007, with knowledge of the transfer, Stern, Safrin, Egert, and First Republic sent Amusement a set of partially executed transaction documents; however, Amusement continued to negotiate and refused to release the $13 million, which it believed was still in the escrow account.Id.¶¶ 22, 44.That same day, without Amusement's knowledge, and despite the fact that no agreement had been reached, Stern, Safrin, Egert, and First Republic used the $13 million to close the purchase of the Portfolio.Id.¶¶ 48, 58.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.Id.¶ 75.Amusement alleges that Stern, Safrin, Egert, First Republic, Frenkel, and LTA had a duty to disclose this information, and that it relied on these omissions in continuing to negotiate a final agreement.Id.¶¶ 75-77.

In an effort to get Amusement to ratify the unauthorized use of the escrow funds, Stern, on behalf of First Republic, executed and delivered to Amusement "grant deeds conveying ownership of the individual properties in the Portfolio," and assignments of Stern's and Safrin's "membership interests" in First Republic and other entities connected with the acquisition.Id.¶¶ 4, 44, 45(b)-(c).These items were placed in escrow pursuant to an escrow...