Smith ex rel. 50 E. 69th St. Corp. v. Smith
| Decision Date | 19 April 2019 |
| Docket Number | 17 Civ. 6648 (PAE) |
| Parties | JUDITH SMITH, derivatively on behalf of 50 East 69th Street Corporation; DAVID EZEKIEL FAIRBANK, derivatively on behalf of 50 East 69th Street Corporation; and JUDITH SMITH as CO-TRUSTEE OF THE NANCY A. FAIRBANK, JOHN TAYLOR FAIRBANK AND NATHANIEL DAVID FAIRBANK TRUSTS, derivatively on behalf of 50 East 69th Street Corporation, Plaintiffs, v. JAMES W. SMITH, III; NANCY K. SMITH; LUCINDA SMITH HAY; and CENTER FOR SPECIALTY CARE, INC., Defendants, -and- 50 EAST 69th STREET CORPORATION, Nominal Defendant. |
| Court | U.S. District Court — Southern District of New York |
This intra-family dispute involves claims of a breach of fiduciary duty. The plaintiff family members allege that the defendant family members managed a family-owned East Side rental townhouse in a manner that brought them unfair personal advantage. The three plaintiffs are Dr. Judith Smith ("Judith"), her husband David Ezekiel Fairbank ("David"), and Judith in her capacity as co-trustee of her three children's trusts. They bring suit derivatively on behalf of the 50 East 69th Street Corporation, in which they are minority, non-voting shareholders. They sue Judith's mother, Nancy K. Smith ("Nancy"); her brother, James W. Smith, III ("James III"); her sister, Lucinda Hay ("Lucinda") (collectively, the "Individual Defendants"); the Center for Specialty Care ("CSC"); and nominal defendant 50 East 69th Street Corporation ("50 East"). Plaintiffs allege that the defendants breached their fiduciary duty to 50 East in connection with negotiating, renegotiating, and ultimately terminating the Lease Agreement with CSC. CSC was 50 East's sole tenant and an entity in which the Individual Defendants each had a direct or an indirect financial interest.
With discovery complete, defendants move for summary judgment. For the following reasons, the Court grants that motion in full as to plaintiffs' claims against CSC and in part as to their claims against the Individual Defendants and nominal defendant 50 East.
Plaintiffs' claims arise from a series of business decisions made by defendants on behalf of 50 East involving CSC. In particular, plaintiffs' claim that defendants caused 50 East's lease with CSC to be modified, and later terminated, on terms unfairly disadvantageous to 50 East.
In May 1979, Judith's father Dr. James W. Smith formed 50 East under New York law. Dkt. 59 ("JSF") ¶ 1. Until approximately November 2017, 50 East owned a townhouse located at 50 East 69th Street, New York, New York 10021 (the "Building"). Id. ¶ 3. At the time of 50 East's incorporation, Dr. James W. Smith was its sole shareholder. Id. ¶ 2. He died in August 2006. Id. ¶ 8.
At present, as at all relevant times, 50 East has 23 shareholders who collectively hold a total of 1,200 shares. Id. ¶ 17. Three are voting shareholders: the James W. Smith Family Trust, dated 8/16/2000, which owns 90 voting shares; the Nancy Smith Family Trust, which owns 90 voting shares; and the James W. Smith 2006 Family Trust, which owns 20 shares. Id. ¶ 18. The remaining 1,000 shares are non-voting and are spread across 20 shareholders, seven of whom are parties to this action. Id. ¶ 19. Judith, David, and the trusts of each of their three children, of which Judith serves as trustee, own six non-voting shares, for a total of 30 shares. Id. ¶¶ 20-24. Plaintiffs' collective share of 50 East is therefore 2.5%. Id. ¶ 25. James III and Lucinda each own six non-voting shares. Id. ¶¶ 26-27. Nancy does not own any shares. Id. ¶ 28. Defendants' collective share of 50 East is therefore 1.0%.
As to 50 East, Nancy is the president and a director, id. ¶ 9, James III is a vice president and a director, id. ¶ 10, and Lucinda is a vice president, secretary, and former director, id. ¶ 11.
In the early- to -mid-1980s, 50 East renovated the Building extensively "to house an ambulatory surgery center, with operating rooms, medical examination rooms, recovery rooms, doctors' offices and patient waiting areas." Dkt. 69 ("Pl. 56.1 Resp.") ¶ 1; see also JSF ¶ 4. The center was the first such facility of its kind in Manhattan. Pl. 56.1 Resp. ¶ 2.
On November 1, 1988, 50 East entered into a Lease Agreement (the "Lease") with CSC. JSF ¶ 31. The Lease initially "had a 20-year term, set a $900,000 annual rent, and required CSC to pay 'all costs, expenses, and obligations of every kind to the leased property.'" Id. ¶ 16 (quoting Dkt. 65-6 ("Lease") at 7). Dr. James W. Smith signed the Lease on behalf of both 50 East and its tenant CSC. See Lease at 4.
CSC is a corporation organized under New York law. JSF ¶ 5. At the time of CSC's incorporation, defendant Dr. James W. Smith was its sole shareholder. Id. ¶ 6. At present, Nancy owns 40% of CSC; James III, 15%; and Lucinda, 15%. Pl. 56.1 Resp. ¶ 5. The parties dispute the exact duration of Judith's affiliation with CSC, but, from either 2000 or 2001 until 2004, she served as an administrator of CSC, assisting her father. Id. ¶ 4.
During CSC's tenancy, it negotiated nine amendments to the Lease with 50 East. As with the original Lease, Dr. James W. Smith signed the first three amendments on behalf of both 50 East and CSC. See Dkts. 65-7 ("First Amendment); 65-8 ("Second Amendment"); 65-9 ("Third Amendment"). The final six amendments, however, were signed by James III and Lucinda, with one signing on behalf of 50 East and the other signing on behalf of CSC. See Dkt. 65-10 ("Fourth Amendment") at 5-6; Dkt. 65-11 ("Fifth Amendment") at 4; Dkt. 65-12 ("Sixth Amendment") at 3; Dkt. 65-13 ("Seventh Amendment") at 4; Dkt. 65-14 ("Eighth Amendment") at 3; Dkt. 65-15 ("Ninth Amendment") at 3. The Court summarizes the pertinent terms of these amendments below, as plaintiffs centrally claim the negotiated rental terms to have been unfair to 50 East.
The First Amendment to the Lease is dated December 1, 1993. JSF ¶ 32. It provided that the total amount of annual rent was to increase, to $1,251,000. First Amendment at 1. It alsoprovided that CSC must pay "'costs, expenses[,] and obligations of the Building 'except insofar as the Landlord, at its sole discretion, may elect to bear such costs, expenses[,] and obligations from any Supplemental Rent payable by Tenant.'" Id. at 2.
The Second Amendment to the Lease is dated January 1, 2002. JSF ¶ 34. It extended the term of the Lease to September 1, 2012. Second Amendment at 1. It provided that CSC, if not in default, could extend the Lease for five years (i.e., until December 31, 2007). Id. The annual rent for this first period was $640,000, a little more than half of that set by the First Amendment. Id.; see also Pl. 56.1 Resp. ¶ 20. Under the Second Amendment to the Lease, if CSC were not in default at the end of that first extended period, then CSC had the option to renew the Lease for a second five-year-period (i.e., until September 1, 2012). Second Amendment at 1; Pl. 56.1 Resp. ¶ 19. The annual rent for this second period was $765,000. Second Amendment at 1; see also Pl. 56.1 Resp. ¶ 20.
Judith was an administrator of CSC at the time the Second Amendment was executed. Pl. 56.1 Resp. ¶ 4. She testified that the rent reduction provided by the Second Amendment had been designed to "help breathe some life" into CSC. Id. ¶ 21 (quoting Dkt. 65-2 ("Judith Dep.") at 102).
The Third Amendment to the Lease is dated December 11, 2003. JSF ¶ 35; Third Amendment at 1. It provided, inter alia, that 50 East "shall have the right, at its election and in its sole and absolute discretion, to terminate the Lease by providing Tenant at least ninety (90) days prior written notice of its intent to exercise such right." Third Amendment at 1.
The Fourth Amendment to the Lease is dated October 30, 2007 and was retroactively effective to June 1, 2007. JSF ¶ 36; Fourth Amendment at 1. It provided that, from June 1, 2007 to December 31, 2007, CSC's annual rent would be $602,000; from January 1, 2008 to December 31, 2008, its annual rent would be $1.1 million; from January 1, 2009 to December 31, 2009, its annual rent would be $1.4 million; from January 1, 2010 to December 31, 2010, its annual rent would be $1,449,000; from January 1, 2011 to December 31, 2011, its annual rent would be $1,499,715; from January 1, 2012 to December 31, 2012, its annual rent would be $1,552,205; and from January 1, 2013 to July 31, 2013, its annual rent would be $937,143.69. Fourth Amendment at 1
The Fifth Amendment to the Lease is dated February 24, 2010 and was retroactively effective to December 31, 2008. JSF ¶ 37; Fifth Amendment at 1. It provided that, from January 1, 2009 to December 31, 2009, CSC's annual rent would be $900,000; and, from January 1, 2010 to December 31, 2010, its annual rent would be $999,996. Fifth Amendment at 2.
The Sixth Amendment to the Lease is dated October 15, 2011 and was retroactively effective to January 1, 2011. JSF ¶ 38; Sixth Amendment at 1. It provided that, from January 1, 2011 to December 31, 2011, CSC's annual rent would be $1.2 million; from January 1, 2012 to December 31, 2012, CSC's annual rent would be $1.3 million; and from January 1, 2013 to December 31, 2013, CSC's annual rent would be $758,331. Sixth Amendment at 2.
The Seventh Amendment to the Lease is dated April 16, 2012 and was retroactively effective to January 1, 2012. JSF ¶ 39; Seventh Amendment at 1. It provided that, from January 1, 2012 to December 31, 2012, CSC's annual rent would be $1,299,999.96. See Seventh Amendment at 1. It set the following ensuing annual rents for CSC: from January 1, 2013 to December 31, 2013, $1,338,999.96; from January 1, 2014 to December 31, 2014, $1,379,169.96; from January 1, 2015 to December 31, 2015, $1,420,545.00; from January 1,...
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