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DREXEL BURNHAM LAMBERT v. SAXONY HTS.

September 3, 1991

DREXEL BURNHAM LAMBERT INC., DONNA & CO., GERMANIA BANK, F.S.B., MAINE SAVINGS BANK, FIDELITY BANKERS LIFE INSURANCE COMPANY, THE BANK OF HARTFORD, INC., PIMA FEDERAL SAVINGS AND LOAN ASSOCIATION, FOOTHILL CAPITAL CORPORATION, AND RIVER VALLEY SAVINGS BANK, PLAINTIFFS,
v.
SAXONY HEIGHTS REALTY ASSOCIATES, ACROPOLIS ASSOCIATES, FRUCHTHANDLER BROTHERS ENTERPRISES, ARMAX ASSOCIATES, SAXONY TOWERS REALTY CORP., N.S. REALTY COMPANY, T.F.A. ASSOCIATES, SHEFFIELD GARDENS HOLDING CORP., ACROP GARDENS HOLDING CORP., MARSAR REALTY COMPANY, ACROPOLIS GARDENS REALTY CORP., SARA LEIFER, RUBIN SCHRON, MINA GLICK, MARTIN TEPPER, AND NACHMAN NACHAM, UNITED MUTUAL REALTY INC., ANTHONY BENNET, NKK ASSOC. INC., CHINOM REALTY, JANET GER, GLORIA ANDERSON, WALTER FRIERE, TED CARPLUK, JR., EVELYN LOTT, NESTOR ALVAREZ, ROBERT BASS, JEFFREY MONT, MARIE ARBOLEDA, GOLDNICK ASSOCIATES, ARNOLD BEREZ, STEVEN BERGER, MARK BOROSKY, ARLENE BURKE, JAY CONWAY, LUISA DEL VILLAR, LOUELLA DERERA, JEFF GRUEBEL, HENRY OBRITSCH, EARTHIA JENKINS, JORGE RIVERA, IMER LAJQI, AMZI NEBIJA, CAROLINE LUCERO, OSCAR MARIN, REINA NATALI, BERNARD OTTERMAN, JANET SERNAQUE, OSVALDO SERRET AND JAIRO ARREDONDO, DEFENDANTS.



The opinion of the court was delivered by: Kram, District Judge.

  MEMORANDUM OPINION AND ORDER

In this action involving bank loans for the refinancing and conversion of two apartment buildings into cooperative units, defendants have moved pursuant to Rules 12(b)(6), 12(b)(1) and 9(b) of the Federal Rules of Civil Procedure (hereinafter "Fed.R.Civ.P.") for an order dismissing the claims in plaintiffs' amended complaint ("Amended Complaint"). This motion follows the Court's denial of plaintiffs' motions for temporary injunctive relief and for appointment of receiver of rents. Drexel Burnham Lambert Inc. v. Saxony Heights Realty Associates, 90 Civ. 5785, Slip.Op. (available at 1990 WL 139027 (S.D.N.Y. Sept. 14, 1990)) ("Drexel I"); Drexel Burnham Lambert Inc. v. Saxony Heights Realty Associates, 90 Civ. 5785, Slip. Op. (available at 1990 WL 165707 (S.D.N.Y. Oct. 23, 1990)) ("Drexel II"). Familiarity with those opinions is assumed.

BACKGROUND*fn1

Plaintiffs (the "Banks") are nine institutional lenders who made non-recourse mortgage loans to several sponsors of two cooperative apartment complexes in Queens known as Saxony Towers and Acropolis Gardens (the "Complexes"). The defendants*fn2 fall into four categories: the sponsors of the buildings ("Sponsors"),*fn3 the principals ("Principals"),*fn4 the cooperative corporations of each of the complexes ("Coop Corporations"),*fn5 and the individual purchasers of the unsold units at the September 24, 1990 public auction ("Individual Purchasers")*fn6.

The plaintiffs lent a total of $27 million — $11 million to the Saxony Sponsor and $16 million to the Acropolis Sponsor — for construction work, rehabilitation, and cooperative conversion of the rental units in the Complexes (the "Loans"). The Loans were documented in two mortgage loan commitments dated June 19, 1987. Mortgage Loan Commitments, attached as Exhibit A to Amended Complaint. As security for the loans, the Banks received mortgages on the buildings and a security interest in other assets associated with the buildings until the implementation of the cooperative plan.

When the Complexes were converted to cooperatives in August and September of 1988, the Sponsors sold the buildings to the Coop Corporations. The Coop Corporations issued leases and shares of stock to purchasers. According to the Amended Complaint, a portion of the proceeds from the sale of cooperative units was paid to the Banks in partial satisfaction of the outstanding loans. The shares ("Unsold Shares") and leases ("Proprietary Leases") that remained unsold (the "Unsold Units") were issued back to the Sponsors.*fn7

During the conversion process, loan security agreements (the "Security Agreements" or "Agreements") were signed on August 16 and September 22, 1988 between the Banks and Sponsors. Security Agreements, attached as Exhibit B to Amended Complaint. They provide, inter alia, that the Banks would release their mortgages on the Complexes, and would accept as substitute collateral for the remaining $23 million loan an interest in the future proceeds from the sales of the Unsold Shares and Proprietary Leases in the Complexes and the rents of the statutory tenants in the occupied Unsold Units. According to the Amended Complaint, certain recognition agreements (the "Recognition Agreements") were signed concurrently with the Security Agreements in order to induce the Banks to enter into the Security Agreements by acknowledging the Banks' rights under the Security Agreements. Recognition Agreements, attached as Exhibit C to Amended Complaint. The loans were to be non-recourse, with certain exceptions, including personal liability for the Sponsors for willful damage to or destruction of the collateral.*fn8

The Amended Complaint contends that the Banks entered into the Security and Recognition Agreements based on defendants' representations which were given to ensure the value of the Banks' collateral. Amended Complaint, ¶ 29. The Amended Complaint alleges the Security Agreements provided that Sponsors were to pay maintenance for the units that remained unsold for seven years.*fn9 Id. Sponsors allegedly represented that they were financially sound. Id. The Security Agreements also set a minimum sales price for the Unsold Units and set forth a "best efforts" clause obligating Sponsors to sell the units at their best price.*fn10 Id. According to the Amended Complaint, Sponsors agreed not to assign or transfer any of the Unsold Shares except upon notice and consent of plaintiffs' loan servicing agent, Dorman & Wilson, and the Coop Corporations agreed not to accept any termination or transfer as long as the Loans were outstanding. Id. Plaintiffs further allege that the Security Agreements provided that Sponsors, insofar as they controlled the Coop Corporations as majority shareholders, would not impair the value of the Banks' security in the Unsold Units. Id. In the case of default, the Banks contend, they were entitled to the rent from the statutory tenants until their loan was repaid. Id.

In November 1989, the Sponsors ceased paying interest on the mortgage loans. Amended Complaint, ¶ 30. The Sponsors sent the Banks a letter on March 16, 1990, representing the value of the Unsold Units at $45 million. Id. "Lulled by this valuation into a false sense of security," the Amended Complaint alleges, the Banks were fraudulently induced by the Sponsors not to take any action to enforce their security interest when the Sponsors defaulted on their interest payments. Id. In April 1990 the Sponsors approached the Banks for relief from paying further interest payments on the Loans due to the downturn in the real estate market. Id. On May 31, 1990, the Sponsors allegedly stated in amendments to the Cooperative Offering Plans that they intended to continue to pay maintenance charges and principal and interest on the Loans from such sources of funding as rent from the tenants in the Unsold Units. Twelfth and Thirteenth Amendments to the Cooperative Offering Plans, attached as Exhibit E to Amended Complaint.

On June 15, 1990, Sponsors announced at a meeting that they could not meet their maintenance obligations. Amended Complaint, ¶ 32. According to the Amended Complaint, defendants misappropriated the rental payments by not paying them to the Banks. Id. The Banks contend it was at this point that the defendants' alleged fraudulent scheme became obvious. Id.

On July 5, 1990, the Banks received letters from the Coop Corporations, which the Banks allege were still controlled by the Sponsors' interest, advising them that the Unsold Shares and Proprietary Leases had been assigned to the Holding Corporations (to which the plaintiffs refer throughout as "dummy corporations"), and new proprietary leases and shares had been issued. Letters from Coop Corporations to Dorman & Wilson, dated June 20, 1990, attached as Exhibit D to Amended Complaint.

On August 1, 1990 the Coop Corporations notified the Banks by letter that the Holding Corporations had failed to make their July maintenance payments and threatened to terminate the Proprietary Leases and sell the Unsold Shares if the Banks themselves did not cure the default. Letters from Coop Corporations to Dorman & Wilson, attached as Exhibit F to Amended Complaint. On August 15, 1990, the Coop Corporations notified the Banks that the Holding Corporations had also failed to make their August maintenance payments and made the same threat as in their August 1 letters. Letters from Coop Corporations to Dorman & Wilson, attached as Exhibit G to Amended Complaint. On September 17, 1990, the Banks were notified by letter from the Coop Corporations that the Proprietary Leases had been cancelled and the new ones would be sold at a public auction on September 24, 1990. Letters from Coop Corporations to Dorman & Wilson, attached as Exhibit H to Amended Complaint.

The Banks then applied to the Court for injunctive relief halting the auction of the Unsold Shares. On September 24, 1990, the Court denied plaintiffs' motion, finding that there was no irreparable harm in light of the Banks' inaction in failing to pursue available contract remedies. Drexel I, Slip Op. at 6-7. The Coop Corporations auctioned the apartments on September 24, 1990. The Banks then moved the Court to appoint a receiver of rents to protect the stream of income generated by the rent-stabilized tenants of the previously unsold shares. The Court denied the motion because the order for equitable relief would have affected persons not party to the action and might have increased the negative cash flow position of the previously unsold units. Drexel II, Slip Op. at 4.

In their Amended Complaint*fn11 the Banks assert claims for securities fraud, RICO, fraudulent conveyance and other state law claims sounding in tort and contract. In sum the Amended Complaint alleges that defendants intended to obtain from the Banks financing through fraudulent misrepresentations, and that they never intended to fulfill their obligations to the Banks, the statutory tenants and the owners of the units. Id., ¶¶ 78-79.

Sponsors deny that the Security Agreements prohibited them from transferring Unsold Units. They moreover contend that even if they were prohibited from doing so, the Banks' remedy for breaching the contract was to foreclose on the loans and looked to the collateral for damages. They accuse plaintiffs of attempting to reach past their non-recourse agreement and involving the Sponsors in the default problem, which should be strictly between the Coop Corporation and the Banks.

Defendants now move for dismissal of the Amended Complaint. Defendants contend that the Banks have failed to state a claim upon which relief may be granted for the securities fraud and RICO claims; that they have not pled securities fraud or a RICO violation with the requisite particularity; and that the Court lacks subject matter jurisdiction over the state-law claims once the federal question claims are dismissed.

DISCUSSION

I. The Securities Fraud ...


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