Kaufman v. Cohen

• Decision Date: 27 May 2003
• Citation: 307 A.D.2d 113,760 N.Y.S.2d 157
• Court: New York Supreme Court — Appellate Division
• Parties: GERALD S. KAUFMAN et al., Appellants,<BR>v.<BR>IRWIN B. COHEN et al., Respondents, et al., Defendants.

307 A.D.2d 113

760 N.Y.S.2d 157

GERALD S. KAUFMAN et al., Appellants,

v.IRWIN B. COHEN et al., Respondents, et al., Defendants.

GONZALEZ, J.

May 27, 2003.

Peter A. Mahler of counsel (David P. Gillett on the brief; Derfner & Mahler, LLP, attorneys), for appellants.

Martin Flumenbaum of counsel (Robyn Sorid on the brief; Paul, Weiss, Rifkind, Wharton & Garrison, attorneys), for Irwin B. Cohen, respondent.

Alan D. Zuckerbrod of counsel (Siller Wilk LLP, attorneys), for Falchi Building Co., L.P., and others, respondents.

BUCKLEY, P.J., NARDELLI, MAZZARELLI and WILLIAMS, JJ., concur.

OPINION OF THE COURT

GONZALEZ, J.

This appeal requires us to determine whether a three-year or six-year statute of limitations applies to a cause of action by two partners against a third partner for breach of fiduciary duty arising from the misappropriation of a partnership business opportunity where the complaint alleges, inter alia, actual fraud by the third partner and seeks both legal and equitable relief. As we find that a six-year statute of limitations and a discovery accrual rule applies to plaintiffs' breach of fiduciary duty claim, we find that cause of action to be timely. We further modify to reinstate plaintiffs' causes of action for fraud and an accounting.

On September 19, 1985 plaintiffs Gerald Kaufman and Stuart Seigel (plaintiffs) formed a partnership named SIG Partners (SIG) with defendant Irwin Cohen (Cohen). According to the written partnership agreement, SIG's purpose was to engage in business for profit, including but not limited to the development of a commercial property known as the Falchi Building, located at 31-02 47th Avenue, Long Island City, New York. SIG and a subsidiary of its financing partner, East River Savings Bank (East River), formed a limited partnership known as 31-02 47th Avenue Associates, L.P. (31-02). On December 22, 1986, 31-02 purchased the Falchi Building with a $15 million mortgage from East River.

Despite multiple refinancings, 31-02 was unable to make a commercial success of the building. In early 1992, 31-02 defaulted on its outstanding $30,250,000 mortgage, held at the time by Equitable Life Assurance Society of the United States (Equitable). In May 1992, Equitable commenced a foreclosure action, and 31-02 failed to answer the complaint or raise any objection to the foreclosure proceeding. Following entry of judgment of foreclosure, the sale of the Falchi Building was publicly noticed for October 27, 1993.

Plaintiffs allege that "at or about the time of the foreclosure action," Cohen represented to them that SIG's partnership interest in 31-02 could not be salvaged, was not worth salvaging and that they should let the interest lapse. Plaintiffs further allege that Cohen's representation was false, was known by Cohen to be false when made and that plaintiffs reasonably relied on Cohen's representation as a partner and fiduciary.^[1] Plaintiffs claim that the falsity of Cohen's representation is demonstrated by the fact that, at the same time he made the representation, he was secretly agreeing with new financial partners to reacquire the Falchi Building out of foreclosure at a substantial discount, and to the exclusion of plaintiffs.

On April 28, 1994, prior to the foreclosure sale, LIC Mortgage Corporation (LIC) purchased Equitable's mortgage for $14,500,000, with funds supplied by defendant CMC Falchi Holding Co., L.L.C. (CMC), an entity in which Cohen allegedly has a direct or beneficial interest. On December 8, 1994, the Falchi Building was sold to LIC at public auction for $14,500,000. On March 10, 1995, LIC's fee interest in the Falchi Building was transferred by referee's deed to an affiliated entity, defendant Falchi Building Co., L.P. (Falchi L.P.).

In the ensuing six years, ownership of the Falchi Building was conveyed three more times. In July 1995, Falchi L.P. transferred its fee interest to its affiliate, defendant CMC.^[2] In November 1998, CMC conveyed its interest to AG Scogbell ATC Acquisition L.L.C., which in turn assigned its interest to CFG/AGSCB Falchi L.L.C. (CFG), another entity in which Cohen is alleged to have an interest. In April 2001, CFG sold the Falchi Building to an unnamed third party for $55 million. Plaintiffs maintain that they first became aware of Cohen's continuing partnership interest in the Falchi Building when this last sale was reported in the newspapers in January 2001.

On June 7, 2001, plaintiffs commenced the instant action alleging that defendant Cohen had misappropriated SIG's opportunity to reacquire the Falchi Building, thereby breaching his fiduciary duty to the SIG partnership and unjustly enriching himself and his new associates. Plaintiffs sought compensatory and punitive damages in the amount of $5 million, an accounting and the imposition of a constructive trust on all proceeds from the ownership, operation and sale of the Falchi Building that could be traced to Cohen's participation in these activities. Plaintiffs sought to hold the remaining defendants liable for aiding and abetting Cohen's breach of fiduciary duty. Subsequent to defendants' motions to dismiss, plaintiffs served an amended complaint adding an eleventh cause of action for fraud against Cohen.

Defendants moved to dismiss the complaint on the grounds that the causes of action were barred by the statute of limitations and were substantively flawed. Plaintiffs opposed the motion.

The IAS court granted defendants' motions and dismissed the amended complaint in its entirety. The court held that the breach of fiduciary duty claims were barred by the three-year statute of limitations for injury to property in CPLR 214 (4), since these causes of action demanded $5 million in money damages. It held that the six-year statute of limitations in CPLR 213 (1) only applies to breach of fiduciary duty claims seeking equitable relief.

Alternatively, the court ruled that even if a six-year statute of limitations applied, plaintiffs' breach of fiduciary duty claims would still be time-barred because those claims accrued, at the latest, in December 1994, when LIC purchased the Falchi Building at public auction, and plaintiffs' action was commenced more than six years later. The court also rejected plaintiffs' equitable estoppel argument on the grounds that they had failed to show an affirmative wrong committed by defendants that was intended to delay plaintiffs from commencing timely action, and further, that they failed to allege wrongful conduct independent of that which formed the basis of the underlying claim.

The court dismissed plaintiffs' fraud claim, finding the allegations of an affirmative misrepresentation and active concealment insufficient to satisfy the exacting pleading requirements of CPLR 3016 (b). It further held that the fraud claim was untimely, ruling that it was merely "incidental" to the breach of fiduciary duty claim, and was apparently added solely to avoid the three-year statute of limitations. However, even if the six-year statute of limitations for fraud actions, as well as the discovery accrual rule in CPLR 213 (8) and 203 (g), applied, the court ruled that the fraud claim was untimely since a letter sent to plaintiffs in April 1994, indicating that Cohen's daughter was employed by the management company for LIC, the purchaser of Equitable's mortgage, triggered a duty to investigate which would have led them to discover Cohen's involvement. The court also found the equitable estoppel doctrine inapplicable to the fraud claim.

The court also dismissed the unjust enrichment cause of action as ancillary to the breach of fiduciary duty claim, and therefore subject to the three-year statute of limitations. It dismissed the accounting claim for failure to make a demand prior to commencing suit. As to the other defendants, the court dismissed the aiding and abetting claims on the grounds that the direct breach of fiduciary duty claim against Cohen had been dismissed, and because they were insufficiently pleaded.

It further dismissed the constructive trust claim for failure to plead the elements of that cause of action, particularly the requirement of a fiduciary relationship.

On appeal, plaintiffs first argue that the IAS court erred in dismissing the breach of fiduciary duty claim as time-barred. They argue that the six-year statute of limitations in CPLR 213 (1), not the three-year statute of limitations in CPLR 214 (4), applies to their breach of fiduciary duty claim. They further contend that, in any event, defendants should be equitably estopped from asserting the statute of limitations defense due to their active concealment of Cohen's role in misappropriating SIG's opportunity to reacquire an interest in the Falchi Building. As we conclude that plaintiffs' breach of fiduciary duty claims were timely, we modify to reinstate the first and second causes of action.

New York law does not provide any single limitations period for breach of fiduciary duty claims (Whitney Holdings, Ltd. v Givotovsky, 988 F Supp 732, 741 [SD NY 1997]). Generally, the applicable statute of limitations for breach of fiduciary claims depends upon the substantive remedy sought (Loengard v Santa Fe Indus., 70 NY2d 262, 267 [1987]; Yatter v William Morris Agency, 256 AD2d 260, 261 [1998]; see also Dunlop-McCullen v Pascarella, 2002 WL 31521012, 2002 US Dist LEXIS 21854 [SD NY, Nov. 13, 2002]; Green v Doukas, 2001 WL 767069, 2001 US Dist LEXIS 8861 [SD NY, June 22, 2001]). Where the relief sought is equitable in nature, the six-year limitations period of CPLR 213 (1) applies (see Loengard v Santa Fe Indus., 70 NY2d 262, 267 [1987]; Whitney Holdings, Ltd. v Givotovsky, 988 F Supp at 741). On the other hand, where suits alleging a breach of fiduciary duty seek only money damages, courts have viewed such actions as alleging "injury to property," to which a three-year statute of limitations applies (see CPLR 214 [4]; Yatter v William Morris Agency, 256 AD2d at 261; Whitney Holdings,...