from the purchase of land for the Limited Partnerships were fraudulent because Myers did not intend to abide by his representations. A person who induces another to enter a contract by making a representation of future conduct which he has no intention of fulfilling is liable in damages for fraud. DiRose v. PK Management Corp., 691 F.2d at 630; Aries Ventures, Ltd. v. Axa Finance S.A., 729 F. Supp. at 298 ("New York recognizes a cause of action for fraud in the inducement of a contract which is distinct from a claim that the defendant failed to perform the contractual obligations themselves."); Cauble v. Mabon Nugent & Co., 594 F. Supp. 985, 993 (S.D.N.Y. 1984); Channel Master Corp. v. Aluminum Ltd. Sales, 4 N.Y.2d at 406-08, 151 N.E.2d at 835-36, 176 N.Y.S.2d at 261-63; see also, Restatement (Second) of Torts § 530 (1977). Plaintiffs have proven the elements of falsity, scienter, deception and injury. See Conclusions of Law, supra.
Myers' false statements are also actionable as constructive fraud since the parties were in a relationship of trust and confidence, Brown v. Lockwood, 76 A.D.2d 721, 432 N.Y.S.2d 186, 195 (2d Dep't 1980), or where the statements were made as part of a larger fraudulent scheme. See, e.g., In re Garver, 26 Bankr. 552, 555 (Bankr. Vt. 1983).
E. The Myers Defendants' Breach of Fiduciary Duty.
The three limited partnership agreements entered into by the Myers Defendants and plaintiffs established a fiduciary relationship between the parties. The Myers Defendants breached their fiduciary duties to plaintiffs through their fraudulent scheme in conducting the affairs of the three limited partnerships. Myers and Myers Financial were general partners who secretly converted for their own use and diverted for non-partnership purposes monies obtained from plaintiffs which were partnership property.
Many years ago, Chief Judge Cardozo of the New York Court of Appeals condemned a managing partner's appropriation for himself of a partnership asset, writing that a partner owed his co-partners a duty of "the finest loyalty. . . . Not honesty alone, but the punctilio of an honor the most sensitive, is . . . the standard of behavior." Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).
That duty described by Chief Judge Cardozo was the duty which Myers owed to the plaintiff limited partners here. Lichtyger v. Franchard Corp., 18 N.Y.2d 528, 536, 223 N.E.2d 869, 873, 277 N.Y.S.2d 377, 383 (1966) ("There is no basis or warrant for distinguishing the fiduciary relationship of corporate director and shareholder from that of general partner and limited partner"); Riviera Congress Assocs. v. Yassky, 18 N.Y.2d 540, 547, 223 N.E.2d 876, 879, 277 N.Y.S.2d 386, 392 (1966) ("There can be no question that a managing or general partner of a limited partnership is bound in a fiduciary relationship with the limited partners"); Dymm v. Cahill, 730 F. Supp. 1245, 1264 (S.D.N.Y. 1990); Grierson v. Parker Energy Partners 1984-I, 737 S.W.2d 375, 377 (Tex. App. Houston 1987) ("general partner owes a fiduciary duty to the limited partners to act in accordance with the partnership agreement and not to misapply funds"); Crenshaw v. Swenson, 611 S.W.2d 886, 890 (Tex. Civ. App. Austin 1980) ("It is axiomatic that a managing partner in a general partnership, owes his co-partners the highest fiduciary duty recognized in the law. . . . In a limited partnership, the general partner acting in complete control stands in the same fiduciary capacity to the limited partners as a trustee stands to the beneficiaries of the trust" [citation omitted]).
It is fundamental that a general partner breaches his fiduciary duty to limited partners when he uses or obtains the benefit of partnership credit or assets for himself without the consent of the limited partners. Masterson v. Valley Nat'l Bank, 70 Misc. 2d 623, 625, 334 N.Y.S.2d 356, 359 (Sup. Ct. Nassau Co. 1972) (citing Union Nat'l Bank v. Underhill, 102 N.Y. 336, 340, 7 N.E. 293, 294 (1886)); Mason v. Public Nat'l Bank & Trust Co., 262 A.D. 249, 254, 28 N.Y.S.2d 416, 421, (1st Dep't 1941), aff'd, 287 N.Y. 809, 41 N.E.2d 91 (1942)). As the court said in Sandler v. Fishman, 157 A.D.2d 708, 549 N.Y.S.2d 808, 810 (2d Dep't 1990),
The Supreme Court also properly determined that the appellants-respondents' secret formation of M & F Associates, and their secret use of $ 110,000 of partnership funds to provide leased space to Commons . . . constituted a breach of their duties as partners and effective managing partners of C.B. Associates. . . .
Moreover, the limited partnership agreements in this case explicitly address the issue of the Myers Defendants' entitlement to fees. The Durham and Sacramento Limited Partnership Agreements provide in Section 3.3 ("Expenses of Partnership") that "the General Partner may not charge the Partnership for any services performed by the General Partner or an affiliate of the General Partner. . . ." The Durham and Sacramento Limited Partnership Agreements also provide in Section 3.7 ("Compensation of Partners") that "no Partner shall receive any compensation or salary for services to the Partnership." Similarly, the Chicago Limited Partnership Agreement provides in Section 2.3 ("Use of Capital") that "all capital contributed to the Partnership shall be used and employed in and about the business and for the benefit and advantage of the Partnership and for no other purpose whatsoever." Section 3.7 ("Compensation of Partners") of the Chicago Limited Partnership Agreement provides that "no partner shall receive any compensation or salary for services due the Partnership." The only compensation which Myers Financial was allowed under the Chicago Limited Partnership Agreement was the expenses set forth in Section 3.3 ("Expenses of Partnership"): an annual partnership fee of $ 13,000 and an annual land management fee of $ 52,000. Myers Financial had to obtain the approval of the limited partners for expenses over $ 65,000 a year. There is no provision in the Chicago Limited Partnership agreement which allows Myers Financial a commission on the purchase of the Partnership's land. Thus, the Myers Defendants' actions in taking funds from the limited partnerships, without the consent of the limited partner plaintiffs, constituted a breach of the Myers Defendants' fiduciary duties.
Myers also violated his fiduciary duties by failing to make mortgage payments on the mortgage of the Durham Parcel which would have led to a non-curable default causing the entire mortgage debt (approximately $ 500,000) to be immediately due and payable had the limited partner not made the payment. Myers also failed to make tax payments on the Durham Parcel and failed to pay water assessments for two years. These failures by Myers were in violation of his duties under the Durham Limited Partnership Agreement (Plf. Ex. 1, Section 3.1(d)), under which the general partner had the duty to pay all claims against the Limited Partnership, including tax assessments. The Myers Defendants also breached their fiduciary duties by failing to advise the limited partners of offers to buy the Durham and Chicago Parcels, by blocking the sale of the Sacramento Parcel and by abdicating their responsibilities as general partner without consent of the limited partner by delegating their general partner duties to Landvest.
The burden was on the Myers Defendants to demonstrate that they fulfilled their fiduciary duties to plaintiffs. Once it is shown that a general partner, like Myers and Myers Financial here, has obtained the benefit of partnership assets, it is the general partner's burden to demonstrate that he did not violate his fiduciary duty. Gordon v. Bialystoker Center and Bikur Cholim, Inc., 45 N.Y.2d 692, 699, 385 N.E.2d 285, 288-89, 412 N.Y.S.2d 593, 597 (1978). Myers and Myers Financial failed to carry that burden.
The court notes that plaintiffs' breach of contract claims are based on the same facts and circumstances and allege the same breaches of the limited partnership agreements as their breach of fiduciary duty claims. Thus, the court bases its holdings on the fiduciary duty claims and ignores the duplicative contract claims.
F. Removal of Myers and Myers Financial as General Partners.
This Court has the power to remove Myers and Myers Financial as general partners of the Limited Partnerships in issue and elevate a limited partner to the position of managing partner in order to preserve the partnership and to stop the fraud. Homburger v. Levitin, 130 A.D.2d 715, 718, 515 N.Y.S.2d 825, 827-28 (2d Dep't 1987), appeal dismissed without op., 70 N.Y.2d 795, 516 N.E.2d 1225, 522 N.Y.S.2d 112 (1987). Additionally, both the Durham and Sacramento Limited Partnership Agreements expressly provide (§ 5.4) for the removal of the general partner for his "failure to comply with the terms" of the Partnership Agreement.
In this case, the general partners, Myers and Myers Financial, have demonstrated their consistent disregard for the interests of the limited partnerships and the limited partners. They have conducted the affairs of the limited partnerships for their own benefit and engaged in self-dealing. Myers secretly obtained $ 230,000 of Durham Limited Partnership funds for his own benefit in connection with the Kent Land Option transaction. Myers obtained the benefit of $ 114,425.50 in connection with the purchase of the Sacramento Parcel when another limited partnership in which he had a financial interest, Stanford-Placer County Industrial Park Limited Partnership, obtained a reduction in the price it paid for land at the expense of the Sacramento Limited Partnership. Myers took a $ 308,000 commission in connection with the purchase of the Chicago Parcel in contravention of his representations to plaintiffs' representative that he would take no commission. Myers secretly failed to make his $ 32,828 capital contribution to the Chicago Limited Partnership. Myers secretly absconded with $ 108,000 of Chicago Limited Partnership funds. And Myers has improperly charged the Chicago Limited Partnership with $ 236,000 of expenses. Myers failed to make timely mortgage, tax and water assessment payments for the Durham Parcel. Myers wrongfully blocked the sale of the Sacramento Parcel. Myers has refused to provide financial information for the limited partner of the Sacramento Limited Partnership.
Under all these circumstances, removal of Myers and Myers Financial as general partners is warranted in this case for their failure to deal in good faith and fairly with the limited partnerships and the limited partners. Curley v. Brignoli Curley & Roberts Assocs., 746 F. Supp. 1208, 1221 (S.D.N.Y. 1989), aff'd, 915 F.2d 81 (2d Cir. 1990), cert. denied, 113 L. Ed. 2d 484, 111 S. Ct. 1430 (1991).
Defendants argue that the court does not have jurisdiction to remove Myers Financial as general partner of the Chicago Limited Partnership because the Mehtas, the 65% limited partners, are not a party to this lawsuit. However, plaintiff Miltland Chicago-Santa Fe brought a derivative claim seeking Myers Financial's removal on behalf of the partnership (Amended Complaint, Eighteenth Claim). Thus, the court may remove Myers Financial as general partner pursuant to the court's inherent powers. Curley v. Brignoli Curley & Roberts Assocs., 746 F. Supp. at 1219-21; see Goodwin v. Mac Resources, Inc., 149 A.D.2d 666, 667, 540 N.Y.S.2d 477, 478 (2d Dep't 1989).
G. Liability for the Fraud of His Agent Mudie.
At trial, it was undisputed that Mudie put up the $ 5,000 earnest money deposit when Redwood and Pettigrew bought the Durham Parcel from Thelma Wynne in August 1984. Mudie had an undisclosed 25% equity interest in the Durham Parcel. Mudie shared with Pettigrew and Redwood the profits of the sale of the Durham Parcel to the Durham Limited Partnership.
At trial, the evidence showed that Mudie committed a fraud on plaintiffs. Mudie was represented to plaintiffs as acting on their behalf. Stark testified, without dispute from Myers, that Mudie was represented to be Myers' agent in the purchase of the Durham Parcel. As such, Mudie owed a fiduciary duty to Miltland Raleigh-Durham. Mudie committed fraud and breached that duty by his non-disclosure of his 25% equity interest in the Durham Parcel.
In Sanders v. Spaulding & Perkins, Ltd., 82 N.C. App. 680, 681, 347 S.E.2d 866, 867 (1986), a broker selling property to plaintiffs failed to disclose his ownership interest in the property. The Court held he had committed fraud on the purchasers by failing to "fully account for the equity proceeds received from the sale". Id. In this case, Mudie received at least $ 153,962 from the sale of the Durham Parcel to the Durham Limited Partnership. As Mudie's principal, Myers is liable for Mudie's fraud committed in the course of his agency. Citibank, N.A. v. Nyland (CF8) Ltd., 878 F.2d 620, 624 (2d Cir. 1989); see also Restatement (Second) of Agency § 261 (1958).
H. Myers is Not Relieved from Liability Because He Entered Into Business Dealings With His Lawyers.
Myers argues that he cannot be liable for fraudulent conduct because the majority of investors in the plaintiff investment partnerships were also attorneys at Milbank which had done legal work for him on an initial public offering on another venture. One partner, Blattmachr, was also doing estate work for him. Myers argues that this created a conflict of interest which relieves him of liability for his own fraud and breach of fiduciary duty.
Myers has failed to prove a factual basis for his argument. The plaintiff investment partnerships which are asserting claims against Myers are distinct entities from Milbank. While many members of the plaintiff partnerships are also attorneys with Milbank, some members of the plaintiff partnerships are not.
The uncontested evidence at trial established that Milbank did not act as counsel for Myers in the transactions at issue. Stark testified that Myers was expressly told that Milbank could not act as his lawyers in connection with these transactions, that Myers had to retain other counsel and that Myers expressly acknowledged that he understood that statement. In his testimony at trial, Myers did not contest the foregoing facts. Milbank did not act as Myers counsel; therefore, there was no conflict of interest.
The uncontested evidence at trial also established that Myers in fact did have other counsel in the transactions at issue. Three witnesses, Stark, Ashton-Blair and Spielberg, testified that Myers had his own lawyers working on the Durham and Sacramento transactions. Myers himself wrote to Nelson (Plf. Ex. 54) that "Jay Vogelson in our Dallas law firm" was going to review the Chicago Limited Partnership Agreement "to insure that the agreement which we are using for the purposes of closing the transaction with Milbank, Tweed and U.S. Trust is satisfactory to both of you." Although Myers testified for the better part of three days, he never contradicted the testimony of Stark, Ashton-Blair and Spielberg that Myers had his own counsel on the transactions. Three days before the trial began, Myers' counsel wrote plaintiffs' counsel admitting that Jay Vogelson had been Myers' counsel during the relevant period (Plf. Ex. 259).
A client cannot urge that he can defraud his lawyer just because the two enter into a business relationship. That was recognized in Greene v. Greene, 56 N.Y.2d 86, 92, 436 N.E.2d 496, 499, 451 N.Y.S.2d 46, 49 (1982). This is not a case, as in Greene, of a lawyer obtaining an unwarranted benefit from a transaction with his client in which the client did not have independent counsel. It is undisputed that it was plaintiffs who put up 99% of the capital for the three limited partnerships at issue. Plaintiffs are not accused of taking Myers' money; plaintiffs' funds were taken by Myers. Myers, not plaintiffs, was the knowledgeable person. Myers was the real estate expert; plaintiffs were the investors. Myers may not defend his actions by urging that plaintiffs are barred from recovery because there was a lawyer-client relationship on matters other than the transactions at issue here.
In arguing that Milbank, as Myers' retained counsel on other matters, breached its fiduciary duty to him, defendants misstate holdings in Rode v. Branca, 481 F. Supp. 808 (E.D.N.Y. 1979) (does not hold that non-attorney must have independent counsel in transaction with attorney); Shaw v. Manufacturers Hanover Trust Co., 68 N.Y.2d 172, 499 N.E.2d 864, 507 N.Y.S.2d 610 (1986) (does not stand for the proposition that the fact that Myers had his own counsel here is immaterial; the issue was not even raised in Shaw since the client did not have separate counsel); and In re James, 452 A.2d 163 (D.C. App. 1982), cert. denied, 460 U.S. 1038, 75 L. Ed. 2d 789, 103 S. Ct. 1429 (1983) (does not require that advice to obtain separate counsel must be in writing).
It is true that Myers, as a clients Milbank, confided on other matters with some Milbank attorneys who later became plaintiff limited partners. However, the court sees no basis to conclude that any Milbank attorney put any of the confidences to an unreasonable use, acted with fraudulent intent, or behaved unethically with respect to any of the matters raised in this lawsuit. See Rode v. Branca, 481 F. Supp. 808, 811 (E.D.N.Y. 1979).
I. Punitive Damages.
In this case arising, inter alia, under the Federal securities laws, this court has jurisdiction to award punitive damages on plaintiffs' pendant state law claims. Aldrich v. Thomson McKinnon Sec., Inc., 756 F.2d 243, 246-47 n.3 (2d Cir. 1985). Thus, under Texas law, which governs the Durham and Sacramento Limited Partnerships, the court may consider punitive damage awards on plaintiffs' common law fraud and breach of fiduciary duty claims. Boelens v. Redman Homes, Inc., 748 F.2d 1058, 1070 (5th Cir. 1984) (punitive damages properly allowed in tort actions); Murphy v. Canion, 797 S.W.2d 944, 949 (Tex. App. Houston 1990) (exemplary or punitive damages are proper when a fiduciary has engaged in self-dealing).
"The purpose of punitive damages is to punish defendant for his wilful or malicious conduct and to deter others from similar behavior." Memphis Community School Dist. v. Stachura, 477 U.S. 299, 306, 91 L. Ed. 2d 249, 106 S. Ct. 2537 n.9 (1986). "If the damage award is to serve its intended objective of punishment for wrongful conduct and deterrence against repetition of a like offense, it must be sufficient to 'smart' the offender which permits a consideration of the wealth of the malefactor." Brink's, Inc. v. City of New York, 546 F. Supp. 403, 413 (S.D.N.Y. 1982) (Weinfeld, J.), aff'd, 717 F.2d 700 (2d Cir. 1983); Schoenholtz v. Doniger, 657 F. Supp. 899, 916 (S.D.N.Y. 1987) (court must consider "the relative wealth of the particular defendants," among other things, in determining amount of punitive damages).
The court finds that punitive damages are appropriate in this case. Myers' dealings with plaintiffs were marked by his total contempt for honesty and fair dealing, which was compounded by his flagrant disregard for truth in this court. In order to determine the appropriate quantum of punitive damages, the court requires an evidentiary hearing, at which time the parties will be permitted to present any relevant evidence on the quantum of punitive damages. The hearing will not be an opportunity to relitigate the threshold question of the Myers Defendants' liability for punitive damages.
J. Attorney's Fees.
In addition to RICO's provision requiring the award of attorney's fees, 18 U.S.C. § 1964(c), plaintiffs are entitled to their attorney's fees based on the following authorities.
(1) This court has inherent equitable powers to award attorney's fees when the interests of justice so require. Hall v. Cole, 412 U.S. 1, 5, 36 L. Ed. 2d 702, 93 S. Ct. 1943 (1973) ("a federal court may award counsel fees to a successful party when his opponent has acted 'in bad faith, vexatiously, wantonly, or for oppressive reasons.'").
(2) New York law provides that a fiduciary is liable for attorney's fees and other expenses incurred by an estate in exposing a trustee's misconduct. Birnbaum v. Birnbaum, 157 A.D.2d 177, 191, 555 N.Y.S.2d 982, 991 (4th Dep't 1990). See also, Public Service Co. v. Chase Manhattan Bank, N.A., 577 F. Supp. 92, 110 (S.D.N.Y. 1983) (under New York law, attorney's fees have been assessed not only against trustees who have engaged in self-dealing, but against negligent trustees).
(3) The Texas Revised Limited Partnership Act, Tex. Rev. Civ. Stat. art. 6132a-1, § 11.01 (1992) (governing the Durham and Sacramento Limited Partnerships) and the Illinois Revised Uniform Limited Partnership Act, Ill. Rev. Stat. ch. 106-1/2, P 160-4 (1991) (governing the Chicago Limited Partnerships) provide for the award of attorney's fees in successful derivative actions.
Plaintiffs are directed to file an affidavit with respect to the quantum of their attorney's fees. There will then be a hearing as to same.
Plaintiffs are entitled to the following monetary awards.
(1) Plaintiff Miltland Raleigh-Durham will be awarded judgment against Myers in the amount of $ 383,962, which is composed of $ 230,000 from the purchase of the Kent Land Option and $ 153,962 from Mudie's fraudulent receipt on his undisclosed interest in the Durham Parcel;
(2) Plaintiff Miltland Sacramento will be awarded judgment against Myers in the amount of $ 114,425.50 for damages suffered in connection with the Sacramento transaction;
(3) Because the Chicago Limited Partnership should have judgment in the amount of $ 308,014.92 as a result of the commission which Myers fraudulently obtained on the purchase of the Chicago Parcel, plaintiff Miltland Chicago-Santa Fe will be awarded judgment against Myers in the amount of $ 104,725.07 as its 34% share of the $ 308,014.92 commission;
(4) Because the Chicago Limited Partnership should have judgment in the amount of $ 108,569 as a result of the Myers Defendants' fraud and breach of fiduciary duty in their diversion of partnership funds, Miltland Chicago-Santa Fe will be awarded judgment against the Myers Defendants in the amount of $ 36,913.46 as its 34% share of the $ 108,569 in diverted funds;
(5) Because the Chicago Limited Partnership should have judgment in the amount of $ 32,828 for the wrongful failure of Myers Financial to make a contribution in that amount, Miltland Chicago-Santa Fe will be awarded judgment against the Myers Defendants in the amount of $ 11,168.32 as its 34% share of the $ 32,828 which Myers Financial failed to contribute.
(6) Because the Chicago Limited Partnership should have judgment in the amount of $ 236,000 for the Myers Defendants' wrongful charges relating to the Grant Suit -- namely, $ 145,000 in settlement costs, $ 50,000 in consulting fees to Heritage and $ 41,000 in legal fees to Golub -- where such charges to the partnership were solely for the benefit of the Myers Defendants, Miltland Chicago-Santa Fe will be awarded judgment against the Myers Defendants in the amount of $ 80,240 as its 34% share of the $ 236,000 in wrongful charges.
Plaintiffs are entitled to interest on the foregoing sums. In addition, the foregoing damages are to be trebled under RICO, 18 U.S.C. § 1964(c). Plaintiffs will also be awarded the costs of this action, their attorneys' fees and punitive damages in amounts to be determined.
Plaintiffs are also entitled to their requested equitable relief, including injunction and removal of general partners. Submit order on fifteen days notice from the date of this Opinion.
Dated: August 26, 1992
New York, New York
Constance Baker Motley
United States District Judge
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