Blue Chip Emerald LLC v. Allied Partners Inc.

• Decision Date: 26 November 2002
• Citation: 750 N.Y.S.2d 291,299 A.D.2d 278
• Parties: BLUE CHIP EMERALD LLC et al., Appellants,<BR>v.<BR>ALLIED PARTNERS INC. et al., Respondents.
• Court: New York Supreme Court — Appellate Division

299 A.D.2d 278

750 N.Y.S.2d 291

BLUE CHIP EMERALD LLC et al., Appellants,

v.ALLIED PARTNERS INC. et al., Respondents.

Decided November 26, 2002.

Concur — Tom, J.P., Andrias, Rubin, Friedman and Marlow, JJ.

Plaintiff Blue Chip Emerald LLC, which is owned by the three other plaintiffs bringing this action (collectively BCE), held an interest of approximately 50% in a joint venture known as Ceppeto Enterprises LLC (the Venture). The remainder of the Venture was owned by its managing member, defendant Ceppeto Holding Enterprises LLC, the principals of which are defendants Eric Hadar and Richard Hadar (collectively with the other defendants controlled by the Hadars, the Hadar defendants). The Venture's sole substantial asset was the commercial building located at One East 57th Street in Manhattan (the Property). Eight months after the formation of the Venture and its purchase of the Property, BCE sold its interest therein to the Hadar defendants for a price based on an $80 million valuation of the Property. Two weeks later, the Hadar defendants entered into a contract to sell the Property to a third party (LVMH) for $200 million.

BCE's complaint, after giving effect to a stipulation withdrawing other claims, asserts causes of action for fraud and breach of fiduciary duty against the Hadar defendants, among others, seeking to recover the additional $60 million of profit BCE allegedly would have realized if it still had held its one-half interest in the Venture when the Property was sold. BCE alleges that it was induced to sell its interest in the Venture for an unfairly low price by the Hadar defendants' misrepresentations and omissions concerning the discussions they were then conducting with third parties for the purpose of bringing about a sale or lease of the Property. Most significantly, the Hadar defendants allegedly failed to disclose and misrepresented to BCE both the true price range in which they were negotiating with LVMH for a sale of the Property and the alleged existence, as of the date BCE sold its interest, of LVMH's oral agreement to purchase the Property for $200 million. The Hadar defendants also allegedly made other misrepresentations concerning the need for renovations that led BCE to seek a quick exit from the Venture.

Defendants moved to dismiss the complaint as barred by certain representations and disclaimers BCE made in the agreement governing the sale of its interest in the Venture (the buy-out agreement). BCE acknowledged that it was entering into the buy-out agreement without having received any "representations or warranties" from the Hadar defendants as to, inter alia, "the actual or projected value of the Property for sale or leasing or to any other matter affecting or related to the Property," with the sole exception of the disclosure that, as of the date of the agreement, the Hadar defendants had discussed the possible "operation, leasing, sale and/or valuation of the Property" with 16 third parties named on "Exhibit B" to the agreement, among whom LVMH, the ultimate purchaser, was included. BCE acknowledged that it had been "afforded an opportunity to conduct its own due diligence" with respect to the third parties listed on Exhibit B, and was "satisfied" with the information made available to it in conducting such due diligence. Further, BCE expressly disclaimed (1) all interest in any profit realized by the Hadar defendants on a future sale of the Property to any of the disclosed third parties, and (2) "any claim for fraud, breach of loyalty or fiduciary duty" arising out of their participation in the Venture, with the sole exception of a claim that the Hadar defendants sold or leased the Property to a third party not listed on Exhibit B to the extent such transaction arose from discussions held on or before the date of the buy-out agreement. The IAS court concluded that, in light of these contractual representations and disclaimers, it was required to dismiss the complaint in its entirety. We disagree.

The key fact overlooked by the IAS court is that the Hadar defendants, as coventurers and, in particular, as managing coventurers (see Birnbaum v Birnbaum, 73 NY2d 461, 465, citing Meinhard v Salmon, 249 NY 458, 468), were fiduciaries of BCE in matters relating to the Venture until the moment the buy-out transaction closed, and therefore "owe[d] [BCE] a duty of undivided and undiluted loyalty * * *" (Birnbaum v Birnbaum, 73 NY2d at 466, citing Matter of Rothko, 43 NY2d 305, 319, and Meinhard v Salmon, 249 NY at 463-464). Consistent with this stringent standard of conduct, which the courts have enforced with "[u]ncompromising rigidity" (Meinhard v Salmon, 249 NY at 464), it is well established that, when a fiduciary, in furtherance of its individual interests, deals with the beneficiary of the duty in a matter relating to the fiduciary relationship, the fiduciary...