Appeal by Citibank, N.A. from a judgment of the Southern District of New York, Constance Baker Motley, Chief Judge, awarding compensatory and punitive damages against it after a non-jury trial of a diversity action claiming inducement of and knowing participation in a breach of fiduciary duty on the party of defendants Berger and Timpone.
Before: FRIENDLY, MANSFIELD and PRATT, Circuit Judges.
MANSFIELD, Circuit Judge:
Citibank, N.A. appeals from a judgment of the Southern District of New York, entered after a bench trial before Chief Judge Constance Baker Motley, awarding compensatory and punitive damages against it in this diversity action based on its inducement of and knowing participation in a breach of fiduciary duty on the part of co-defendants Carl Berger and Richard Timpone. The amended complaint also asserted claims of fraud, civil conspiracy, commercial bribery and negligent misrepresentation against Citibank, based on the same core of facts as that forming the basis of the breach of fiduciary duty claim. Having found in plaintiff's favor on the breach of fiduciary duty claim and that the defendants had acted pursuant to a common understanding between them, Judge Motley declined to consider the other claims, from which holding plaintiff cross-appeals. We affirm.
The material facts are either undisputed or embodied in findings of the district court supported by substantial record evidence. On October 20, 1977, plaintiff Robert B. Whitney, a real estate entrepreneur residing in California, formed a New York general partnership known as Urban Recycle One Associates (URO) with Carl Berger, an architect, and Richard Timpone, a carpenter, both of whom are residents of New Jersey. The purpose of the partnership was to purchase and develop for residential apartment use approximately 11 acres of land with an abandoned factory on it, located in Edgewater, New Jersey, and known as the Alcoa property. The three partners initially made the following capital contributions to the partnership:
(1) Whitney: $183,700, in the form of an option to purchase the property from its then owner, Tri-Terminal Corporation (Tri-Terminal), and investments made by him in a site analysis, architectural drawings, work product of legal counsel and consultants, zoning applications and a land survey.
(2) Berger: $5,000 in architectural-services.
(3) Timpone: $50,000 in the form of part ownership of the option to purchase the property from Tri-Terminal and $11,871 in legal work product.
Under the partnership agreement Whitney and Timpone committed themselves to make additional capital contributions of $11,300 and $13,128 respectively.*fn1 Profits and distributions of assets of the partnership other than return of capital contributions were to be allocated 40% to Whitney, 40% to Berger and 20% to Timpone. The parties' written partnership agreement (§ 2.01) provided that all "Major Decisions" of the partnership (which are defined*fn2) should be made by a majority vote of the partners. The agreement also established the position of Manager of the Venture, whose function would be to implement those decisions and to conduct the ordinary and usual business of the partnership. Whitney was designated as Manager. By letter dated April 11, 1979, the partners agreed that each would inform the others of "matters relating to URO action pursuant to the URO partnership agreement."
In December 1977 URO's option to acquire the Alcoa property expired. In June 1978 Tri-Terminal, having defaulted on its mortgage of the property to Citibank, conveyed the property by deed in lieu of foreclosure to 700 River Road Realty, Inc. (RRR), a paper entity formed by Citibank to hold title to the property. URO then obtained a mortgage commitment in the sum of $2,065,000 from Citibank with a view to buying the property once Citibank acquired title. A limited partnership, Edgewater Associates (Edgewater), was then formed for the purpose of acquiring the Alcoa property. It consisted of URO as the sole Limited Partner with a 25% interest and Kenneth Gladstone as the General Partner. Edgewater purchased the property on October 4, 1978, from RRR for $2,090,000, $25,000 in cash and $2,065,000 by notes from Edgewater to Citibank, secured by two mortgages to Citibank. Pursuant to extensions the notes became due on April 1, 1980.
On April 1, 1980, Edgewater defaulted on the mortgage loan, which by that date had been reduced to $2 million. Citibank thereupon began foreclosure proceedings against Edgewater and URO. However, Citibank preferred to obtain from Edgewater a deed in lieu of foreclosure, which would enable the bank, upon sale of the Alcoa property to a third party, to avoid lengthy foreclosure proceedings and to pocket for itself any proceeds over the mortgage debt. Gladstone was willing to give such a deed and toward that end sought URO's written consent as a limited partner because Citibank was concerned that without URO's consent Gladstone might not be able to convey clear title. Art. X, Par. 10.2 of the Edgewater limited partnership agreement provided that, although the General Partner (Gladstone) had broad powers with respect to the management of the Edgewater partnership, including sale of Partnership property, the limited partner (URO) could object in writing to a proposed sale on the ground that it was not fair and equitable. An officer of the Pioneer Title insurance Company testified at trial that when substantially the entire assets of a limited partnership are sold (which was the case here), the limited partner's consent is required for title insurance. Cf. N.Y. Partnership Law, § 98.*fn3 Since the consent of URO partners to a sale of the Alcoa property in lieu of foreclosure would amount to a "Major Decision" as defined in § 2.01 of the URO partnership agreement, for which a majority vote of the three partners was required, each partner was entitled, after being informed of the essential facts, to cast his vote on the question of whether the URO consent should be given.
Whitney, still the manager of URO in June 1980, believed that its residual 25% interest in the Alcoa property after satisfaction of the mortgage debt was worth as much as $900,000. However, rather than refuse to give URO's consent, a course which would probably have led to a foreclosure sale, he was agreeable to a sale by Citibank in lieu of foreclosure provided he could obtain from Citibank a commitment that would enable him to refinance the $2 million debt to it or, in the event of a sale in lieu of foreclosure to a third party, to share in the proceeds over and above the $2 million debt. Accordingly, he and his URO partner Berger negotiated with Randall G. Frisk, Vice-President in Citibank's Real Estate Industries Division, for such a "proceeds-sharing" arrangement.
In August 1980 Frisk told Whitney that Citibank was unwilling to provide URO with a written agreement for such a "proceeds-sharing" agreement during the pendency of the foreclosure proceedings but that the bank would offer the property for sale at $5 million in lieu of foreclosure, which Frisk characterized as a "cheap" price, and distribute to Edgewater any proceeds in excess of the mortgage debt.*fn4 Relying on this oral representation Whitney had URO's attorney, Donald G. Glascoff of Cadwalader, Wickersham and Taft, prepare a URO consent, which Whitney executed, and turned over to Edgewater's counsel to be held in escrow pending receipt of consents from URO partners Berger and Timpone. However, Berger and Timpone were unwilling to rely on Frisk's oral word and wanted either prompt payment by the bank to URO of an agreed sum or a written commitment from Citibank before turning over URO's consent. The consent signed by Whitney was then retrieved from Edgewater's counsel by URO's lawyer Glascoff. Gladstone of Edgewater then threatened suit against URO because of its refusal to give a deed in lieu of foreclosure, which he wanted in order to avoid having Edgewater's record include a foreclosure based on its failure to pay its debt to Citibank.
In view of the disagreement that thus developed between Whitney and his two URO partners regarding the best method of dealing with Gladstone and Citibank, Whitney on September 9, 1980, resigned as URO Manager. That role then passed to Berger. In his resignation letter Whitney advised Berger and Timpone, among other things, "the two of you are on your own." As his letter made clear, however, this statement referred to preparation of "a defense to Gladstone's court action," not to the management of URO's business generally, as Whitney emphasized in a September 16, 1980, letter to them stating, "I am also holding you responsible for upholding the URO partnership agreement with respect to my rights." On October 7, 1980, Edgewater and Gladstone brought suit in the Supreme Court, New York County, against URO, Berger, Timpone and Whitney, claiming that URO's refusal to give its consent to a deed in lieu of foreclosure violated the terms of the Edgewater limited partnership agreement and that the defendants owed $72,895 to Edgewater as an additional capital contribution. The plaintiffs sought specific performance and compensatory and punitive damages.
In the meantime Whitney sought either refinancing of the Alcoa property project with the aid of their parties or a "proceeds-sharing" arrangement with Citibank. In doing so Whitney believed that if he should success in these negotiations a suitable arrangement would be worked out with Berger and Timpone pursuant to their URO partnership agreement or a mutual modification of it. In a letter to Berger and Timpone dated October 28, 1980, Whitney suggested alternative plans for operating URO in a way that would promote the Alcoa property to the profit of the three partners.
Within a few weeks after Whitney's resignation as Manger of URO, Frisk, who was aware of the schism between Whitney and his URO partners, initiated negotiations with Berger and Timpone for their individual consents. As a result, on September 30, 1980, they executed such consents, which were drafted by the bank and placed in escrow with Berger's attorney, Floyd W. Tomkins, pending the conclusion of a satisfactory agreement between the two partners and Citibank. On November 7, 1980, Frisk then had Citibank's attorney, John Gutheil, draft and deliver to Tomkins, the negotiator for Berger and Timpone, an agreement whereby the latter, in return for their consents, would receive 50% of all proceeds over $2.5 million up to $2.5 million realized from the sale of the Alcoa property and 25% of all proceeds received in excess of $3.5 million. Berger and Timpone executed the agreement, which was returned on December 8, 1980, to Citibank for execution. Neither the executed consents nor the draft agreement with Citibank made any mention of Whitney's rights individually or as a partner of URO. The agreement did not mention URO's consent, but referred only to the consents of Berger and Timpone. The consents themselves were signed "individually, and as a partner of [URO]." On November 21, 1980, Citibank obtained a final foreclosure judgment against Edgewater in the sum of $2,264,994.21 with interest, counsel fees and costs.
While negotiating with Berger and Timpone for their consents, Citibank, through Michael Palin as broker, simultaneously negotiated an agreement with one of its substantial customers, Olympia and York (O&Y), for sales of the Alcoa property to American Landmarks Associates (ALA), an enterprise owned by O&Y and a real estate investor, for $3.5 million, a price substantially below its market value. Citibank's records show that in November 1980 Citibank considered an asking price of $5 million to be reasonable. The property was later appraised in December 1981 as worth $5,784,000.
Under the arrangement negotiated with Berger and Timpone in November 1980 Citibank, upon consummation of sale of the Alcoa property to ALA for $3.5 million, would own them $500,000 for their consents. However, in January 1981, Citibank, knowing that Berger and Timpone were unaware of its proposed agreement with ALA for the sale of the property, revised its "proceeds-sharing" offer to a new proposal drafted by Gutheil (Citibank's lawyer) offering them $200,000 for their consents and that of URO, payable within 90 days of Citibank's execution of a contract for sale of the property. Berger and Timpone accepted the new terms. There was no mention of Whitney in the agreement, which was executed by RRR (Citibank's title holder), Berger and Timpone and witnessed by Tomkins, Berger's counsel, on January 13, ...