Lichtyger v. Franchard Corp.

• Decision Date: 30 December 1966
• Citation: 18 N.Y.2d 528,277 N.Y.S.2d 377,223 N.E.2d 869
• Parties: , 223 N.E.2d 869 Irene LICHTYGER et al., Individually and as Limited Partners of River View Associates, a Limited Partnership, Suing on Behalf of Themselves and All Others Similarly Situated, Appellants, v. FRANCHARD CORPORATION et al., Defendants, and James Talcott, Inc., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 377

277 N.Y.S.2d 377

18 N.Y.2d 528, 223 N.E.2d 869

Irene LICHTYGER et al., Individually and as Limited Partners of River View Associates, a Limited Partnership Suing on Behalf of Themselves and All Others Similarly Situated, Appellants, v. FRANCHARD CORPORATION et al., Defendants, and James Talcott Inc., et al., Respondents.

Court of Appeals of New York.

Dec. 30, 1966.

Barry Golomb, New York City, for appellants.

Milton Kunen and Julius Berman, New York City, for respondents.

Louis J. Lefkowitz, Atty. Gen. (Samuel A. Hirshowitz, David Clurman, New York City, Stephen M. Leon, Yonkers, and Alan L. Kazlow, New York City, of counsel), amicus curiae.

FULD, Judge.

The plaintiffs-appellants, who sue 'on Behalf of Themselves and All Others Similarly Situated', are 31 limited partners with $202,500 invested in a real estate syndicate, River View Associates, of which the defendants Siegel and Young are the general partners. ¹ River View is the owner in fee of the Sheraton Motor Inn in New York City, a motel in whose financing and operation the corporate defendants were all involved. The gravamen of the amended complaint is that, 'in wanton disregard of the interests of the limited partners of River View, and in breach of their fiduciary obligations thereto, Siegel and Young conspired together with each other, and with others,' to renegotiate the lease and mortgage on the premises. These transactions, which are characterized 'mismanagement' and 'waste', had the effect of reducing the return upon the limited partners' investments from 11 to 8%. At this juncture in the litigation--which is still in the pleading stages--the primary issues are whether the plaintiffs are entitled to bring their suit as a class action and to seek equitable relief.

River View's interests are managed by the Franchard Corporation. In 1960 River View leased the land to Venada Corporation which built the motel and arranged to have the Sheraton Corporation manage it. Venada subsequently assigned its interest to Sherview Corporation, a wholly owned Venada subsidiary. It is alleged that the defendants Siegel and Young are 'officers and directors of, and in actual control' of Franchard, Venada and Sherview. In 1962 Venada and Sherview became insolvent, leaving $1,200,000 of mechanics' liens unpaid, owing nearly $1,000,000 to Franchard and defaulting on the leasehold mortgage held by James Talcott, Inc.

Keeping the limited partners abreast of developments by letter, Siegel and Young then negotiated with several of the corporate defendants, purportedly in an effort to save the enterprise and put it on a sound financial basis. In return for a new lease at reduced rental, Talcott foreclosed on its leasehold mortgage, successfully bid for the leasehold at the foreclosure sale, satisfied all of the outstanding mechanics' liens and unconditionally guaranteed to meet 'all obligations' as tenant or to find an acceptable substitute guarantor. Talcott thereafter sold its interest to Sheraton which, with River View's consent, took over the guarantee of the tenant's obligations. At about the same time, Penn Mutual Life Insurance Company, which held the mortgage on the fee, agreed to extend the term of the mortgage at a higher rate of interest. Thus, by these complicated transactions, the mortgage on the fee was refinanced and Sheraton replaced Sherview as River View's tenant under a new lease providing for reduced rental.

The limited partnership agreement allegedly provides that out of the fixed net annual rental derived from River View's property $12,500 was to be paid to Franchard as supervisory management fees and the balance was to be distributed to the limited partners. Under the old lease with Venada and Sherview, River View was entitled to a fixed net rental of $590,000 a year which produced a regular return of 11% Upon the investment of the limited partners and all of them actually received such return (of 11%) through December, 1963. Under the new lease with Sheraton the fixed net rental--which, incidentally, is 'guaranteed'--was reduced by approximately $157,000 a year. In addition, River View agreed to meet the new and more expensive carrying charges that had previously been paid by the tenant on the mortgage held by Penn Mutual. The cumulative effect was to generate only an 8% Return on the investments of the River View limited partners.

Shortly before the new lease and mortgage arrangements were consummated, the plaintiffs brought this suit to obtain compensatory and punitive damages as well as to enjoin all of the defendants from proceeding further with the arrangements and to rescind those already completed. It was alleged that the general partners, Siegel and Young, had conspired with the corporate defendants, Venada, Sherview and Franchard, to make it impossible for Venada and Sherview to meet their obligations. The same parties were then alleged to have conspired for the purpose of renegotiating the lease and fee mortgage. Talcott was charged, along with Franchard, Venada and Sherview, with having induced, participated in, or accepted the benefits of the wrongful acts of Siegel and Young. Although Sheraton, the present lessee, and Penn Mutual, the mortgagee, were also joined as parties defendant, they were not accused of having participated in the wrongdoing or having acted collusively with the alleged conspirators.

The plaintiffs subsequently amended their complaint so as to assert, as previously indicated, that they were suing 'on Behalf of Themselves and All Others Similarly Situated'. At least three of the other limited partners whom the plaintiffs purport to represent have indicated that they are in complete disagreement with the position taken by the plaintiffs and are satisfied with the new lease and its provision for reduced, but guaranteed, rental.

The defendants Sheraton and Talcott--and they are the only defendants before us--moved for summary judgment dismissing the complaint insofar as it seeks rescission of the new lease and mortgage arrangements (CPLR 3211(c)) as well as an order dismissing the complaint on the ground that it does not state a representative cause of action (CPLR 3211(a)(7)). The Supreme Court granted the motion and, on appeal, the Appellate Division affirmed the resulting order.

We hold that no action in equity (for rescission) has been stated and that, consequently, the order of the Appellate Division should be affirmed. However, assuming, as we must, that the allegations in the complaint are true and that the general partners of River View are guilty of wrongful conduct, it is our conclusion that the plaintiffs are privileged to bring a class action for damages on behalf of all the other River View limited partners. Such a class action is authorized by CPLR 1005(a) and nothing in the Partnership Law or in the nature of limited partnerships generally calls for a different determination.

Section 1005(a) provides for a class action where a 'question is one of a common or general interest of many persons' and, as we see it, this case does involve such questions affecting the rights of all of the River View limited partners. Under the terms of the partnership agreement, the limited partners are entitled to receive as a return on their investment the fixed rental less the Franchard management fee and other expenses. It is clear, then, that, if the fixed rental were wrongfully impaired, all of the limited partners would be injured in the same way and the matter would be of 'common or general interest' to them. Moreover, since the general partners receive their compensation from Franchard and the Franchard management fee to River View has remained constant, it is equally apparent that only the interests of the limited partners could have been prejudiced by the reduction of fixed rental in the new lease with Sheraton and by the increased expenses of the renegotiated mortgage with Penn Mutual. Accordingly, it is proper that the plaintiffs be permitted to sue on behalf of the other limited partners. (Cf. Leibert v. Clapp, 13 N.Y.2d 313, 247 N.Y.S.2d 102, 196 N.E.2d 540.)

This conclusion is not at odds with any of our decisions holding that a class action was unauthorized because 'separate wrongs' had been done to each member of the putative class. (Society Milion Athena v. National Bank of Greece, 281 N.Y. 282, 294, 22 N.E.2d 374, 377; see Coolidge v. Kaskel, 16 N.Y.2d 559, 260 N.Y.S.2d 835, 208 N.E.2d 780; Onofrio v. Playboy Club of N.Y., 15 N.Y.2d 740, 257 N.Y.S.2d 171, 205 N.E.2d 308; Gaynor v. Rockefeller, 15 N.Y.2d 120, 256 N.Y.S.2d 584, 204 N.E.2d 627; Kennerley v. New York Tel. Co., 299 N.Y. 623, 86 N.E.2d 180; Kahlmeyer v. Green-Wood Cemetery, 287 N.Y. 787, 40 N.E.2d 650; Brenner v. Title Guar. & Trust Co., 276 N.Y. 230, 11 N.E.2d 890, 114 A.L.R. 1010; Bouton v. Van Buren, 229 N.Y. 17, 127 N.E. 477.) The situations reflected in those cases are very different from the one before us where the 'common or general interest' among the limited partners (CPLR 1005(a)) is at least as substantial as the common interests which, in the past, have sustained class suits. (See, e.g., Leibert v. Clapp, 13 N.Y.2d 313, 247 N.Y.S.2d 102, 196 N.E.2d 540, supra; Case v. Indian Motorcycle Co., 300 N.Y. 513, 89 N.E.2d 246; Kovarsky v. Brooklyn Union Gas Co., 279 N.Y. 304, 18 N.E.2d 287; Tyndall v. Pinelawn Cemetery, 198 N.Y. 217, 91 N.E. 591; Guffanti v. National Sur. Co., 196 N.Y. 452, 90 N.E. 174; Pfohl v. Simpson, 74 N.Y. 137.) To be sure, many of these cases involved a fund with only a limited capacity to satisfy the claims asserted against it (see, e.g., Tyndall v. Pinelawn Cemetery, 198 N.Y. 217, 91 N.E. 591, supra; Guffanti v. National Sur. Co., 196 N.Y. 452, 90 N.E. 174, supra; Pfohl v. Simpson, 74 N.Y. 137, supra) but we have also permitted class actions for money damages or equitable relief to be brought in the absence of a 'common fund'. (See, e.g., Leibert v. Clapp, 13 N.Y.2d 313, 247...