Gramercy Equities Corp. v. Dumont

• Decision Date: 22 November 1988
• Citation: 534 N.Y.S.2d 908,72 N.Y.2d 560,531 N.E.2d 629
• Parties: , 531 N.E.2d 629 GRAMERCY EQUITIES CORP. et al., Plaintiffs, v. Paul DUMONT, Defendant and Third-Party Plaintiff-Respondent. Anthony P. Russo, Third-Party Defendant-Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 908

534 N.Y.S.2d 908

72 N.Y.2d 560, 531 N.E.2d 629

GRAMERCY EQUITIES CORP. et al., Plaintiffs, v. Paul DUMONT, Defendant and Third-Party Plaintiff-Respondent Anthony P. Russo, Third-Party Defendant-Appellant.

Court of Appeals of New York.

Nov. 22, 1988.

Alan D. Scheinkman, Yorktown Heights, and Miriam M. Robinson, New York City, for third-party defendant-appellant.

Aaron Gelbwaks and Laurence S. Margolin, New York City, for defendant and third-party plaintiff-respondent.

OPINION OF THE COURT

KAYE, Judge.

Where one joint venturer, managing the business of the joint venture, alone commits an intentional fraud against third parties resulting in the recovery of damages by them, he is not thereafter entitled to be indemnified by the other joint venturer.

This appeal--involving solely the allocation of damages between coventurers inter se--arises out of the conversion of a Manhattan building from commercial lofts to a residential cooperative. In early 1978, Paul Dumont (plaintiff) and Anthony Russo (defendant) entered into an oral agreement to sponsor conversion of the building. Russo, a hairdresser by trade, was not expected to take an active role, but only to provide the cash then needed to buy the building. Dumont, who had experience in cooperative conversions, was to contribute his expertise and do the actual work required to form a cooperative corporation and convey the building to it. The two agreed that after the conveyance was complete, Russo would receive the proprietary lease for the eighth floor of the building as well as half the net proceeds.

In 1979, a cooperative corporation known as Gramercy Equities Corporation was formed and acquired title to the property. Dumont, sponsor of the plan, began selling shares in the cooperative; Russo took no part in this activity. Dumont ultimately sold all other floors but two which he retained--the ground floor (intended for a commercial tenant) and the sixth floor. It was understood that proprietary leaseholders, including Dumont, each would renovate their own "raw" space, so that the apartments could meet New York City Building Code requirements. Until those renovations and certain other repairs were complete, no certificate of occupancy could be obtained for the building. Dumont represented to the purchasers that the cooperative corporation would undertake to secure a tax abatement pursuant to "J-51" of the Administrative Code of the City of New York.

After a number of floors had been sold, Russo brought suit against Dumont, alleging in essence that he had failed to accord him his rights as a joint venturer, and demanding that Dumont account to him for the profits of the joint venture. Dumont denied the existence of any joint venture, and claimed that Russo was a mere subscriber to the offering plan. In August 1981, judgment was rendered declaring Russo a joint venturer with Dumont in the cooperative conversion and therefore entitled to half the profits. The court found, moreover, that Russo was not expected to take an active role in the business, but only to contribute the cash required to take title to the building. Supreme Court ordered that the moneys received by Dumont from the sale of shares be held in trust, and that an accounting be rendered.

Meanwhile, trouble brewed between Dumont and the other cooperative tenants. In order to qualify for the "J-51" tax abatement, a certificate of occupancy for the building had to be issued no later than September 30, 1981; all renovations required to bring the building up to code standards had to be completed before that date. While work was well underway on other floors, Dumont had repaired none of the violations on the sixth floor, owned by Dumont but at the time occupied by a tenant-in-possession. Ultimately, the September deadline passed without a certificate of occupancy, and the cooperative failed to qualify for a "J-51" tax abatement.

The tenants sought damages against Dumont for loss of the tax abatement, alleging that he had breached his contract as proprietary leaseholder to complete his renovations in a timely fashion so that the building could qualify for the tax benefit. Additionally, they separately charged Dumont with fraud, contending that although he had promised to complete certain renovations in time to obtain the tax abatement, he never had any intention of doing so. Dumont in turn served a third-party complaint on Russo, alleging that if he were found liable to the tenants, Russo, as joint venturer, had to indemnify him for half the damages, as they arose directly out of the business of the joint venture.

Dumont and Russo agreed that, as between themselves, there were no facts in dispute--only the legal consequences of their relationship. Dumont's indemnification claim was therefore severed from the main action, to be later decided by the trial court.

At trial, the tenants' evidence of damages consisted of the testimony of their tax attorney as to the amount of the rebate they would have received had Dumont timely completed his renovation. At the conclusion of the evidence, a large portion of the court's instruction was devoted to the fraud charge, which was thereafter reread at the jury's request. The jury found Dumont guilty of both breach of contract and intentional fraud--specifically answering in the affirmative the question, "Did the Defendant Paul Dumont commit a fraud against the plaintiffs?" The court awarded damages to the cooperative tenant plaintiffs in the amount lost as a result of their failure to obtain the "J-51" tax abatement, and then allowed Dumont indemnification for half that judgment against Russo, based upon its interpretation of partnership law principles.

While the jury found that Dumont had defrauded the tenants by making a promise with no intention of fulfilling it, the court made no finding that Russo in any sense participated in that wrongdoing or that Dumont's fraud profited the joint venture. Noting that the earlier action had determined both that Russo was a joint venturer and that he was not intended to take an active role, Supreme Court simply rejected Russo's claim that his exclusion from management foreclosed Dumont's right of indemnification arising out of his unilateral management of the joint venture. Based upon its finding that the damages were liabilities incurred in the ordinary conduct of the joint venture, Supreme Court held that, pursuant to Partnership Law § 40(2), Dumont was entitled to be indemnified, and the Appellate Division affirmed, without opinion. 136 A.D.2d 975, 523 N.Y.S.2d 331. We now reverse.

Before reaching the merits of the dispute, we note Russo's procedural argument: that resolution of the indemnification claim must await a final accounting at the end of the joint...