BH Sutton Mezz LLC v. Sutton 58 Assocs. LLC (In re BH Sutton Mezz LLC)
| Decision Date | 01 December 2016 |
| Docket Number | Adv. Pro. No.: 16-01187 (SHL),Case No.: 16-10455 (SHL) |
| Parties | In re: BH SUTTON MEZZ LLC, et al., Debtors. BH SUTTON MEZZ LLC, a Delaware Limited Liability Company, SUTTON 58 OWNER LLC, a Delaware Limited Liability Company, and SUTTON 58 OWNER LLC, a New York Limited Liability Company, Plaintiffs, v. SUTTON 58 ASSOCIATES LLC, GAMMA LENDING S58 LP, GAMMA LENDING S58 II LP, GAMMA FUNDING LP, GAMMA FUNDING MANAGEMENT LP, GAMMA FUNDING, LLC and GAMMA REAL ESTATE LLC, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
(Jointly Administered)
POST-TRIAL MEMORANDUM OF DECISION
APPEARANCES:
LAZER, APTHEKER, ROSELLA & YEDID, P.C.
Special Litigation Counsel for the Plaintiffs
By: Russell L. Penzer, Esq.
Eric Horbey, Esq.
225 Old Country Road
Melville, New York 11747
LAMONICA HERBST & MANISCALCO, LLP
By: Joseph S. Maniscalco, Esq.
Holly R. Holecek, Esq.
3305 Jerusalem Avenue
Wantagh, New York 11793
By: P. Bradley O'Neill, Esq.
Adam C. Rogoff, Esq.
Gregory A. Horowitz Esq.
Ronald S. Greenberg, Esq.
Natan M. Hamerman, Esq.
Scott Ruskay-Kidd, Esq.
Priya K. Baranpuria, Esq.
1177 Avenue of the Americas
New York, New York 10036
Before the Court is the merits of this adversary proceeding filed by BH Sutton Mezz LLC, a Delaware Limited Liability Company ("Sutton Mezz DE"), Sutton 58 Owner LLC, a Delaware Limited Liability Company ("Sutton Owner DE"), and Sutton 58 Owner LLC, a New York Limited Liability Company ("Sutton Owner NY"). The Court will refer to these three entities collectively as the "Plaintiffs" or "Debtors". This adversary proceeding revolves around the Debtors' proposed development of a 950-foot residential tower in Midtown Manhattan (the "Project"), a project that was led by three principals of the Debtors, Joseph Beninati, Christopher Jones, and Daniel Lee. The Defendants are Sutton 58 Associates LLC, Gamma Lending S58 LP, Gamma Lending S58 II LP, Gamma Funding LP, Gamma Funding Management LP, Gamma Funding, LLC and Gamma Real Estate LLC, which the Court will refer to collectively as the "Defendants" or the "Lenders"). The Defendants provided financing to the Debtors for the Project in the form of two different set of secured financing transactions which we will refer to as Gamma 1 and Gamma 2. Plaintiffs seek to subordinate and reduce the amount they owe the Defendants on these loans by alleging improper conduct by the Defendants, through their principals, N. Richard Kalikow ("N.R. Kalikow") and Jonathan Kalikow ("J. Kalikow"). The alleged improper conduct includes more than a dozen specific claims—which the Court willoutline in more detail in a moment—and includes allegations that the Defendants breached the contracts between the parties, and also breached non-contractual duties owed by these Defendants to the Debtors. These duties are based upon an allegedly special relationship developed between the Debtors and the Defendants during the Project.
On July 13, 2016, Plaintiffs filed the complaint in this adversary proceeding asserting twenty-six claims for relief (the "Complaint" or "Compl."). Joint Pre-Trial Order ¶ 31 [Dkt. No. 57]. Plaintiffs subsequently abandoned half of these claims. See Dkt. No. 24 (). The Court notes that one of the main theories extensively focused on by the Debtors during their bankruptcy case was abandoned. This theory was that the Lenders' liens were invalid with respect to the Debtors' assets because a merger between Sutton Owner NY and Sutton Owner DE was ineffective and invalid due to, among other things, a lack of proper authority for the merger and the improper use of signatures with respect to the merger. This theory, and the related Counts 13, 14, 15 and 16 have been abandoned. The Court notes this as one example of how the theory of this case has evolved over time.
On November 1, 3, 7, 9, and 17, 2016, this Court held a trial on the remaining claims, which included but were not limited to claims for breach of fiduciary duty and breach of contract.1
The Defendants break the remaining thirteen counts down into seven different groupings. The Court agrees that this grouping is a useful and fair way to look at this case. The first of these seven categories is unconscionability, which includes counts 9 and 10. The secondcategory is lender liability, which includes counts 21, 22 and 23 of the Complaint. The third group of claims is for breach of contract, which includes counts 1, 2 and 3. A related fourth category is breach of implied covenant, which is count 5. The fifth is equitable subordination, which is count 17. The sixth category is fraudulent transfer, which is count 24. The seventh category alleges criminal usury in count 11 of the Complaint. In total, these seven categories cover twelve of the Plaintiffs' thirteen counts; the remaining surviving claim of the Complaint is count 18—entitled "claim objection"—which seeks to reclassify and reduce the Defendants claim consistent with the Debtors' other arguments. Prior to the trial, the parties prepared and submitted a joint pre-trial order that set forth the issues for trial, that order was approved by the Court. See Joint Pre-Trial Order.
At trial, the Court heard testimony from ten live witnesses. Plaintiffs filed declarations in lieu of direct testimony for three witnesses: Joseph Beninati, Kevin J. DeLuise, and Gary M. Tenzer, and presented the live direct testimony of one witness, Christopher Jones. Defendants filed declarations in lieu of direct testimony for six witnesses, J. Kalikow, N.R. Kalikow, Van Nguyen ("Nguyen"), David Eyzenberg ("Eyzenberg"), Richard R. Kalikow ("R. Kalikow or Kalikow Attorney"), and Keith Kurland ("Kurland"). The parties had the opportunity to elicit live cross-examination and redirect testimony from all ten witnesses. The parties also submitted deposition designations of two witnesses who did not provide live testimony, David Shapiro ("Shapiro") and Foster + Partners Architects New York, Inc. ("F+P") (by its corporate representative James Barnes ("Barnes")).
Based on all the evidence introduced at trial, the Court concludes that the Debtors have failed to establish a basis for relief on twelve of the thirteen counts. The remaining count is criminal usury, where the Court concludes that one of the loans at issue had a rate in excess ofthe New York statute. This bench ruling constitutes the Court's findings of fact and conclusions of law after trial in this adversary proceeding.2
Joseph Beninati ("Beninati"), Christopher Jones ("Jones"), and Daniel Lee ("Lee") (together, the "Sutton Principals") are the principals of Bauhouse Group, LLC ("Bauhouse"), which planned the development of the Project, a 950-foot residential tower in midtown Manhattan. Beninati Decl. at 1, ¶ 7.3 The Sutton Principals indirectly own 100% of the membership interests in Sutton Mezz DE, which owns 100% of the membership interests in Sutton Owner NY and Sutton Owner DE. Joint Pre-Trial Order at 4, ¶ 4.
While the Plaintiffs have not developed real estate in New York City nor dealt with the acquisition of air rights and extensive vertical development, 11/1 Tr. 155:13-156:20, they possess considerable experience in real estate development and real estate financing using both debt and equity financing. R. Kalikow Decl. ¶ 17; 11/1 Tr. 32:5-36:11; 11/3 Tr. 14:3-15:24. Bauhouse's principals Beninati, Jones, and Lee collectively have developed, owned, and managed more than ten million square feet of real estate projects. 11/3 Tr. 11:13-12:4. Beninati is a real estate developer who has completed billions of dollars in acquisitions, development, construction and real estate finance, including debt and equity financings. 11/1 Tr. 38:18-25.
Beninati came to the Project already familiar with the complex nature of real estate development and project structuring, including finance, legal, contract, design, zoning, management, construction, marketing, and sales issues. R. Kalikow Decl. ¶ 17; 11/1 Tr. 38:24-39:15, 60:19-61:16; 11/3 Tr. 15:20-16:15. Beninati began his career as an investment banker at Dean Witter before serving as the CFO of a SEC reporting company with 2,000 employees. 11/1 Tr. at 31:10-13, 31:14-24. Beninati co-founded a company called Antares that, beginning in 2002, participated in substantial real estate development projects. Id. at 31:25-32:11, 36:8-11, 37:21-38:17. Beninati has experience with multiple large real estate projects that involved raising hundreds of millions of dollars in financing. Id. at 32:24-33:25, 34:1-36:7. His partner, Mr. Jones, has "a lot of real estate development experience," and is a twenty-five-year real estate veteran who has overseen numerous large-scale development projects totaling over $4 billion. 11/3 Tr. 8:10-11:5; 9:3-19; and 10:6.
To complete the Project, the Plaintiffs planned to acquire: (a) the property on which the tower would be constructed; (b) approximately 267,000 square feet of zoning development rights (the "Development Rights") from neighboring properties; and (c) surrender agreements from the tenants of the existing buildings such that those buildings can be demolished. Beninati Decl. at 1-2, ¶ 8; PX-83 at 3, 5, 14. Plaintiffs determined with their architects and engineers that a tower with the assembled square footage of 267,950 of floor area would yield the highest rate of return for the Project. See PX-83 at 5.
Beninati put together an "all-star team of professionals" to advise Plaintiffs in connection with the Project. Beninati Decl. ¶ 14. Plaintiffs hired Jones Lang LaSalle Americas, Inc. ("JLL"), which served as its debt and equity adviser for the Project and helped it source and evaluate financing for the project. Beninati Decl. ¶ 18; PX-3; 11/1 Tr. 40:3-14; Kurland Decl....
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