Nelson v. Stahl, 00CIV.4435 (LTS)(FM).
| Decision Date | 26 November 2001 |
| Docket Number | No. 00CIV.4435 (LTS)(FM).,00CIV.4435 (LTS)(FM). |
| Citation | 173 F.Supp.2d 153 |
| Parties | Daniel Z. NELSON, Lloyd Zeiderman and Harold Greenberg, Plaintiff(s), v. Rosalie STAHL, Scott G. Savastano, NewVest Capital Corp., NewVest Portfolio 96-A, L.L.C., NewVest Portfolio 96-B, L.L.C., Han Kook, L.L.C, Marks Paneth & Shron LLP, Steven Eliach, Timothy E. Andrews, Thelen Reid & Priest LLP and Harry G. Heching, Defendant(s). |
| Court | U.S. District Court — Southern District of New York |
Friedman Kaplan Seiler & Adelman LLP, by Bruce S. Kaplan, Robert S. Loigman, New York City, for Plaintiffs.
Warshaw, Burstein, Cohen, Schlesinger & Kuhn, LLP, by Alan S. Liebman, New York City, Ganfer & Shore, LLP, by Allen L. Finkelstein, New York City, for Defendants Stahl, Savastano, NewVest Capital Corp., NewVest Portfolio 96-A, L.L.C., NewVest Portfolio 96-B, L.L.C. and Han Kook, L.L.C.
Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, by Mary T. Hart, New York City, for Defendants Marks Paneth & Shron LLP, Eliach and Andrews.
Plaintiffs Daniel Z. Nelson, Lloyd Zeiderman and Harold Greenberg, former shareholders, officers and directors of NewVest Capital Corporation ("Plaintiffs"), bring this action against Rosalie Stahl, Scott G. Savastano, NewVest Capital Corporation ("NewVest"), NewVest Portfolio 96-A, L.L.C., NewVest Portfolio 96-B, L.L.C., Han Kook, L.L.C. (the "LLCs"), Marks Paneth & Shron LLP., Steven Eliach, Thelen, Reid & Priest LLP, Timothy E. Andrews, and Harry G. Heching ("Defendants"), alleging fraud in connection with the assignment of their stock in NewVest, as well as their interests in the LLCs, to defendant Stahl. The complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"),1 and Rule 10b-5 promulgated thereunder2 (First Cause of Action), as well as a variety of state law claims (Second through Eleventh Causes of Action) as to which Plaintiffs assert the Court should exercise supplemental jurisdiction pursuant to 28 U.S.C. section 1367. Before the Court are motions to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) and Federal Rule of Civil Procedure 9(b) for lack of subject matter jurisdiction, failure to state a claim upon which relief may be granted, and failure to plead fraud with particularity.3
For the reasons set forth below, Defendants' motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure is granted insofar as the complaint asserts federal securities law claims based on the transfer of interests in the LLCs. The Court will exercise supplemental jurisdiction with respect to Plaintiffs' claims asserted in the Second through Fifth Causes of Action, and declines to exercise supplemental jurisdiction with respect to the claims asserted in the Sixth through Eleventh Causes of Action. Defendants' motion is denied on all grounds with respect to Plaintiffs' federal securities law claims relating to the transfer of Plaintiffs' shares of NewVest stock.
In evaluating a motion to dismiss, the Court is obliged to take as true the facts as alleged in the complaint and draw all reasonable inferences in favor of the plaintiff. Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir.1998). The Court is also permitted to take into account the contents of documents attached to or incorporated in the complaint, Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989), as well as those documents which are "integral" to the complaint. San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir.1996). Here, the complaint refers in material respects to a certain Stockholders Agreement, dated April 1, 1994 ("Stockholders Agreement" or "St. Agrmt."), (Compl.¶¶ 27-28) and to the creation of the LLCs (Id. ¶¶ 18-20), all of which exist pursuant to limited liability company agreements ("LLC Agreements"). The Court finds that the Stockholders Agreement and the LLC Agreements are integral to the complaint and, accordingly, has considered their contents in evaluating the sufficiency of the complaint. The following factual recitation draws on the contents of those documents as well as that of the complaint.4
In 1994 Plaintiffs, along with defendants Stahl and Savastano, established NewVest. (Compl.¶¶ 1, 17, 27.) NewVest was organized for the purpose of engaging in real estate activities and the acquisition of low cost mortgages and other mortgage-related investments. (Id. ¶ 17.) In accordance with the Stockholders Agreement, NewVest, which was a New York corporation, issued twenty per cent of its stock to each of Plaintiffs, and defendants Stahl and Savastano. (St. Agrmt. at 1.) The Stockholders Agreement provided that Plaintiffs and defendant Stahl would make additional investments by way of loans to other entities that would in turn invest in real estate. (Id. at 2-3.) The other entities were ultimately organized as LLCs. (Compl.¶¶ 34, 35.) The Stockholders Agreement provided that, upon the sale of investments, any net profit earned by the LLCs would be channeled through NewVest for distribution to stockholders. (St. Agrmt. at 2.) NewVest was entitled to receive a fee for acquiring mortgages and a servicing fee payable from income earned by the LLCs. (Id. at 3.)
After NewVest's5 initial investments in June 1995, defendant Savastano was responsible for all of NewVest's operations and investments. (Compl.¶ 38.) In February of 1998, defendant Savastano presented NewVest's 1997 consolidated financial statements, which had been prepared under his supervision, to the corporation's shareholders. (Id. ¶ 39.) According to the financial statements, NewVest had a positive net worth of approximately $11,000,000, which included $5,000,000 in investment loans owed to defendant Stahl and Plaintiffs, at that time. (Id.) At approximately the same time, defendant Savastano prepared for plaintiff Zeiderman a financial report indicating that NewVest had a net worth (including repayment of investment loans) of approximately $10,000,000. (Id. ¶ 40.) In early 1998, defendant Stahl asked defendant Savastano to prepare a schedule comparing her rate of return to that of the other NewVest shareholders. (Id. ¶ 41.) In March 1998, Savastano produced schedules showing that Plaintiffs had achieved a higher rate of return than defendant Stahl. (Id.)
Shortly after defendant Savastano had produced the schedules for Stahl, Savastano began indicating to NewVest's stockholders that NewVest was facing substantial financial difficulties, including a significant cash shortfall. (Id. ¶ 42.) In April 1998, Savastano delivered a schedule concerning a hypothetical sale that would leave an insufficient cash flow to continue NewVest's operations. (Id. ¶ 43.) On May 19, 1998, Savastano informed the board that an asset sale over 180 days would generate $4,000,000, not enough to repay the investors' loans, and leaving no profits. (Id. ¶ 45.) On May 19, 1998, Savastano made a capital call for $30,000 from each shareholder, which was followed up with a call on June 4, 1998, for $10,000 from each shareholder and a subsequent call on July 8, 1998, for $30,000 from each shareholder. (Id. ¶¶ 45-46.) Defendant Savastano faxed one of the capital call memoranda to plaintiff Greenberg. (Id. ¶ 45.)
At a July 8, 1998 board meeting, defendant Savastano painted a very bleak picture of NewVest's finances. (Id. ¶ 48.) Savastano did not disclose to Plaintiffs the fact that he had negotiated, or was in the process of negotiating, or had had a dialogue with respect to, the payment of NewVest's mortgage on a "Los Alamitos" property in California. (Id.) Although defendants Savastano and Stahl both knew that such a payoff would produce a substantial cash inflow to NewVest, and although Savastano was obligated to report to the stockholders concerning the status of NewVest's portfolio, defendants Savastano and Stahl withheld this information from Plaintiffs. (Id.)
A few weeks after the July 8, 1998, board meeting, plaintiff Greenberg spoke by telephone to Stahl's senior advisor and attorney who informed him that, unless Plaintiffs conveyed their interest in NewVest to defendant Stahl for no consideration, Stahl's lawyers would sue Plaintiffs. (Id. ¶ 49.) Based on the false information provided to Plaintiffs concerning NewVest's finances, and unaware of the pending payoff of the Los Alamitos mortgage, Plaintiffs, on July 28, 1998, assigned their interests in NewVest and its related LLCs to defendant Stahl for no consideration. (Id. ¶ 51.) On or about July 28, 1998, Plaintiffs executed a final Assignment Agreement, dated as of July 1, 1998 (the "Assignment Agreement"), pursuant to which the transfer was completed. (Id.) The Assignment Agreement also included a broad general release running between defendant Stahl, on the one hand, and Plaintiffs, on the other hand. (Id. ¶ 52.) The general release covered claims in connection with NewVest, the LLCs, and their business activities. (Id.)
On August 5, 1998, the Los Alamitos mortgage was paid off and NewVest received more than $800,000 in cash, which NewVest then distributed directly to defendants Stahl and Savastano. (Id. ¶ 58.) By late July 1999, Plaintiffs had not received their 1998 K-1 income tax schedules for NewVest and the related LLCs. (Id. ¶ 71.) Defendants engaged in a pattern of delay, repeatedly refusing to provide essential tax and financial information to Plaintiffs. (Id. ¶ 72, 74-77, 84.) Further, the Schedules K-1 ultimately received by Plaintiffs were flawed, in that they reported and allocated income improperly. (Id. ¶¶ 81, 84.) The improper allocation of ordinary income in NewVest's Schedules K-1 was designed specifically to transfer tax liability from Defendants to Plaintiffs. (Id. ¶ 84.) When Plaintiffs discovered the impermissible and erroneous allocations, they...
To continue reading
Request your trial
-
G-I Holdings, Inc. v. Baron & Budd
...to engage in due diligence cannot be granted unless the "undisputed facts" show a lack of reasonable diligence. E.g., Nelson v. Stahl, 173 F.Supp.2d 153, 166 (S.D.N.Y.2001) (rejecting defendants' argument that plaintiffs' claim was barred by statute of limitations because plaintiffs were on......
-
Ledford v. Peeples
...Exchange Act, as codified in 15 U.S.C. § 78c(a)(10), does not include an interest in a limited liability company. See Nelson v. Stahl, 173 F.Supp.2d 153, 164 (S.D.N.Y.2001) (“The Exchange Act's definition of security does not refer to membership interests in limited liability companies.”). ......
-
Zohar CDO 2003-1, Ltd. v. Patriarch Partners, LLC
...as common stock, preferred stock, and LLC membership interests,7 were governed by the federal securities laws. Nelson v. Stahl, 173 F.Supp.2d 153, 164 (S.D.N.Y. 2001) ("[S]tock, whether in a publicly held company or [ ] in a closely held corporation, constitutes a security governed by the f......
-
Ledford v. Peeples
...Exchange Act, as codified in 15 U.S.C. § 78c(a)(10), does not include an interest in a limited liability company. See Nelson v. Stahl, 173 F.Supp.2d 153, 164 (S.D.N.Y.2001) ("The Exchange Act's definition of security does not refer to membership interests in limited liability companies."). ......