Flatiron Acquisition Vehicle, LLC v. CSE Mortg. LLC

• Decision Date: 22 November 2020
• Docket Number: 1:17-cv-8987-GHW
• Citation: 502 F.Supp.3d 760
• Parties: FLATIRON ACQUISITION VEHICLE, LLC and CS Paradiso Holdings, LLC, Plaintiffs, v. CSE MORTGAGE LLC, CapitalSource Commercial Loan, 2006-2, CapitalSource Finance LLC, and CapitalSource Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

502 F.Supp.3d 760

FLATIRON ACQUISITION VEHICLE, LLC and CS Paradiso Holdings, LLC, Plaintiffs,

v.CSE MORTGAGE LLC, CapitalSource Commercial Loan, 2006-2, CapitalSource Finance LLC, and CapitalSource Inc., Defendants.

1:17-cv-8987-GHW

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

Signed November 22, 2020

Luke McGrath, Eva Adaszko, Kamanta Clintessia Kettle, Dunnington, Bartholow & Miller LLP, New York, NY, for Plaintiffs.

Brian Louis Beckerman, Carolina A. Fornos, Pillsbury Winthrop Shaw Pittman LLP, New York, NY, Eric Todd Presnell, Bradley Arant Boult Cummings LLP, Nashville, TN, for Defendant CSE Mortgage LLC.

Carolina A. Fornos, Pillsbury Winthrop Shaw Pittman LLP, New York, NY, Eric Todd Presnell, Bradley Arant Boult Cummings LLP, Nashville, TN, for Defendants CapitalSource Finance LLC, CapitalSource Inc.

MEMORANDUM OPINION AND ORDER

GREGORY H. WOODS, United States District Judge:

In November of 2012, Patrick McGrath expressed interest in acquiring Plaintiff CS Paradiso Holdings, LLC ("Paradiso"), a real estate company owned and controlled by Defendants CSE Mortgage LLC ("CSE") and CapitalSource Commercial Loan LLC ("CS Commercial"). Mr. McGrath created Flatiron Acquisition Vehicle, LLC ("Flatiron") for this purpose. Before Flatiron entered a contract to purchase Paradiso, however, Defendants informed Flatiron of unresolved litigation involving the Tellico Village Property Owners Association (the "TVPOA"), which managed properties that Paradiso owned in exchange for assessments from the owners of these properties. Flatiron wanted the litigation to be resolved before the acquisition.

On July 22, 2013, Joe Steinberg—counsel for CSE and CS Commercial—emailed Eric Diaz—counsel for Flatiron—and asserted that an agreement to settle that litigation (the "Settlement Agreement") was fully-compiled and fully-executed. This email is known in this litigation as "the JS Email." Under the Settlement Agreement, Paradiso and its owners assumed obligations to convey deeds or record documents to transfer ownership of certain lots in the Tellico Village from Paradiso back to the TVPOA. Although all of the parties had agreed to the Settlement Agreement and the Settlement Agreement was enforceable, the deal was "a little fast and loose." The parties never compiled finalized copies of the exhibits to the Settlement Agreement, and the JS Email attached exhibits scrawled with handwritten labels that were not exactly correct.

Because it was satisfied that the litigation was settled, Flatiron purchased Paradiso. Paradiso had continuing obligations under the Settlement Agreement after Flatiron acquired it. Flatiron and its counsel, Mr. Diaz—now also counsel for Paradiso—were aware of those obligations, but Paradiso failed to fulfill them within the agreed-upon timeline. Eventually, the TVPOA sued Paradiso and Defendants in Tennessee state court.

Plaintiffs now claim that Mr. Steinberg negligently misrepresented that the Settlement Agreement was final when it was not and that this was the cause of Paradiso's failure to meet its obligations under the Settlement Agreement. But Plaintiffs have failed to prove their negligent misrepresentation claim. The cause of Plaintiffs’ failure to perform was not faulty exhibits or Defendants’ alleged misrepresentation but, instead, poor management of Paradiso and poor lawyering on its behalf. For the reasons that follow, the Court finds for Defendants with respect to Plaintiffs’ negligent misrepresentation claim, and for Defendants with respect to their claim for attorneys’ fees.

I. BACKGROUND

This case has a long history; one that took several turns before it arrived at trial. On October 13, 2017, Flatiron and Paradiso commenced an action in New York state court against Defendants. Complaint, Ex. A to Notice of Removal, Dkt No. 1, at 2. Subsequently, Defendants removed the action to this Court. Notice of Removal at 1. Plaintiffs subsequently amended their complaint on December 22, 2017, Dkt No. 21, and again amended their complaint on February 12, 2018. Second Am. Compl. ("SAC"), Dkt No. 41. Defendants thereafter filed a motion to dismiss the SAC. Dkt No. 43.

The Court denied Defendants’ motion to dismiss Plaintiffs’ breach of contract claim and dismissed Plaintiffs’ claim for breach of the Purchase Agreement "against CapitalSource [Inc.] and CapitalSource Finance because they [were] not parties to the [PA]" and against CSE Mortgage and CS Commercial because Plaintiffs could not identify a contractual obligation that those defendants had violated. Flatiron Acquisition Vehicle, LLC v. CSE Mortg. LLC , No. 17-cv-8987-GHW, 2019 WL 1244294, at *12–13 (S.D.N.Y. Mar. 18, 2019). The Court denied Plaintiffs leave to replead this claim because it concluded that repleading would be futile. Id. at *13. The Court dismissed Plaintiffs’ claim for violation of Tennessee lien law and Plaintiffs’ negligent misrepresentation claim. Id. at *14, *17–18. The Court granted Plaintiffs leave to replead both of these claims. Id. at *14, *18.

Plaintiffs again amended their complaint on April 16, 2019. Third Am. Compl. ("TAC"), Dkt No. 83. The TAC asserted that "[t]his case has taken a turn" because "[d]iscovery has uncovered that [the Settlement Agreement] was executed before exhibits A, B and C to that document were finalized and agreed upon." Id. ¶ 1. In the TAC, Plaintiffs asserted three causes of action. First, Paradiso alleged a breach of the Settlement Agreement against Defendants CapitalSource Inc. ("CI") and CapitalSource Finance ("CF"). Id. ¶¶ 215–25. Second, Paradiso alleged a violation of Tennessee lien law against all Defendants. Id. ¶¶ 226–65. Third, Paradiso and Flatiron alleged a negligent misrepresentation claim against all Defendants. Id. ¶¶ 266–91.

Defendants subsequently filed an answer to the TAC with two counterclaims. Answer to Am. Compl. with Countercls., Dkt No. 87. Defendants’ first counterclaim was that Plaintiffs breached the Settlement Agreement. Id. at 49–50. Defendants’ second counterclaim was for a declaratory judgment that it be named the "prevailing party" because the Purchase Agreement contains a clause awarding attorneys’ fees to the prevailing party and the Court dismissed Plaintiffs’ claim under the Purchase Agreement with prejudice in its prior opinion. Id. at 50–51.

Defendants filed a motion for summary judgment on all claims asserted in the TAC and on both of Defendants’ counterclaims on June 28, 2019. Dkt Nos. 96–99, 103–05. The Court granted summary judgment for Defendants with respect to Plaintiffs’ claims under Tennessee lien law and for breach of the Settlement Agreement. Dkt No. 116 at 33. The Court also granted summary judgment for Defendants with respect to their counterclaims for breach of the Settlement Agreement and for a declaratory judgment that CSE and CS Commercial are prevailing parties under the Purchase Agreement. Id. The Court denied Defendants’ motion for summary judgment on Plaintiffs’ negligent misrepresentation claim. Id. This and the amount of damages Defendants are entitled to as a prevailing party were the only claims remaining for resolution at this trial.

II. FINDINGS OF FACT

In a bench trial, "[i]t is within the province of the district court as the trier of fact to decide whose testimony should be credited. And as the trier of fact, the Court is entitled, just as a jury would be, to believe some parts and disbelieve other parts of the testimony of any given witness." Krist v. Kolombos Rest. Inc. , 688 F.3d 89, 95 (2d Cir. 2012) (quotation omitted). The Court finds the following facts. For the avoidance of doubt, the Court has also found additional facts that are relevant to the analysis, which are not included in this section of the opinion, but are instead embedded in the discussion section.

A. The Entities and Assets Involved

Plaintiff Paradiso was formed in 2009 for the purpose of holding title to and managing real property, including the property in Tellico Village, a residential development in Tennessee. Paradiso is a Delaware limited liability company with a principal place of business in New York. Paradiso's sole member is Plaintiff Flatiron. Paradiso is a member-managed limited liability company, which has been managed by Flatiron since the date of its acquisition. It has neither a general counsel nor any employees. Plaintiff Flatiron is a Delaware limited liability company with a principal place of business in New York. Flatiron's sole member is Castlegrace Management LLC. Castlegrace Management LLC's sole member is Patrick McGrath, who is a citizen of New York.

Mr. McGrath also owns Aristone Holdings together with Todd Lippiatt—each owns 50% of the entity. Aristone Holdings is the owner of Aristone Realty Capital LLC. Mr. McGrath, with the assistance of his counsel at the Philadelphia-based law firm Jacoby Donner P.C. created Flatiron for the purpose of acquiring Paradiso. Eric Diaz was the lead partner for the Aristone relationship. Mr. McGrath and Mr. Diaz have been friends since high school. Mr. Diaz and his law firm provided legal services to Aristone, Flatiron, and, from the date of its acquisition, Paradiso. As the Court will describe in more detail, a number of associates at Jacoby Donner also represented Flatiron and Paradiso under Mr. Diaz's supervision. After the acquisition at issue in this lawsuit, Mr. Diaz left Jacoby Donner and started his own firm, LareDiaz. LareDiaz continued to represent Mr. McGrath's companies.

Defendant CSE is a Delaware limited liability company with its principal place of business in Maryland. CSE's sole member is PacWest Bancorp ("PacWest"). PacWest is a Delaware corporation with a principal place of business in California. Defendant CI is now known as PacWest and is a Delaware corporation with principal places of business in Maryland and California. Defendant CF is a Delaware limited liability company with a principal place of business in Maryland. CF's sole member is CapitalSource TRS LLC. CapitalSource TRS LLC is a ...