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November 11, 1992

THOMAS YOUNG, Individually and in His Official Capacity as Mayor of the City of Syracuse, C. FRANK HARRIGAN, Individually and in His Official Capacity as the Corporation Counsel of the City of Syracuse, CITY OF SYRACUSE INDUSTRIAL DEVELOPMENT AGENCY, SYRACUSE ECONOMIC DEVELOPMENT CORPORATION, THE CITY OF SYRACUSE, and DOES 1 through 50, Defendants.


The opinion of the court was delivered by: HOWARD G. MUNSON


 Presently before the court is defendants' motion to dismiss the complaint for (1) lack of subject matter jurisdiction, (2) failure to state a claim upon which relief can be granted, and (3) qualified immunity. Oral argument was heard on December 20, 1991 in Syracuse, New York. For the following reasons, the court grants defendants' motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted.


 This action is premised on defendants' alleged constitutional, statutory, and common law violations in supporting development of Syracuse's waterfront area at the expense of downtown Syracuse, and attempting to improperly evict plaintiffs from the Hotels at Syracuse Square. Plaintiff Joseph M. Murphy ("Murphy") is a resident of Florida. All other parties are residents of New York. Jurisdiction is alleged under 28 U.S.C. §§ 1331 (federal question), 1332(a)(1) (diversity of citizenship), and 1367(a) (supplemental).

 Plaintiffs' complaint provides an in-depth summary of the long and financially draining relationship Murphy has had with the Hotel Syracuse. Murphy first acquired an interest in the Hotel in or about 1971, and subsequently acquired 100% ownership of the Hotel sometime in the 1970s. His ownership of the Hotel is held through a corporation, Hotel Syracuse, Inc. ("HSI"), of which Murphy is the sole shareholder. Plaintiffs allege that the Murphy family has invested more than $ 12 million in the Hotel, including more than $ 7 million since 1984. Murphy's son, Joseph M. Murphy, Jr., has spent the last nine years as the General Manager of the Hotel, and is currently holding that position.

 Ownership of the Hotel was syndicated as a means to raise additional funds for expansion and refurbishment. HSI conveyed fee ownership of the Hotel's premises to a limited partnership, Ho-Syr, whose shares could be sold to investors. Ho-Syr held title to the premises and leased it to HSI, which continues to operate the Hotel.

 In 1981, plaintiffs' commitment to the Hotel's renovation and expansion was secured when Murphy, HSI, the City of Syracuse ("City"), and the Syracuse Industrial Development Agency ("SIDA") *fn1" agreed to create a financing package that would enable the Hotel to take advantage of statutorily-created tax benefits. Such benefits were to be reinvested in the Hotel, a new Hilton Hotel Tower, and the surrounding downtown area, to retard the economic decline of downtown Syracuse. Murphy allegedly agreed to make the commitment only after City officials assured him that they were committed to reestablishing the downtown area as an active commercial and retail center.

 The 1981 financing package included an agreement to convey fee title to the Hotel's premises from plaintiffs to SIDA in order to make SIDA's tax exempt status available to the Hotel. On May 2, 1981, SIDA leased the Hotel premises back to Ho-Syr for rent of one dollar per year. The term of the lease was for thirty years with an option to renew, exercisable by Ho-Syr, for an additional sixty years. The lease stipulated that Ho-Syr must repurchase the Hotel premises from SIDA when loans to finance the Hotel made by Manufacturers Hanover Trust Company, N.A. ("Manufacturers") and the Syracuse Economic Development Corporation ("SEDCO") are paid in full. Ho-Syr subsequently subleased the Hotel premises to HSI. In a later transaction, Ho-Syr conveyed the prime lease to HSI, and HSI continues to occupy and operate the Hotel today.

 Financing for the Hotel refurbishment and expansion was arranged by SIDA and HSI from a consortium of lenders led by Manufacturers, SEDCO, and Security Savings & Loan Association ("Security"). On May 2, 1981, Manufacturers, on behalf of the consortium, contracted with SIDA and HSI to lend up to $ 7.5 million. To secure the loan, SIDA, Ho-Syr, and HSI gave Manufacturers a promissory note, a first mortgage on the new Hotels at Syracuse Square ("Hotels"), *fn2" and a conditional assignment of rents and leases. In another financial arrangement, SEDCO entered into a building loan with SIDA, HSI, and Ho-Syr to provide an additional $ 4 million for the Hotels' redevelopment. That loan was secured by a second mortgage on the Hotels and a promissory note. The SEDCO loan and corresponding security were later conveyed to the Manufacturers-led consortium, thus establishing Manufacturers as the prime lender. The second mortgage securing the SEDCO loan was merged with the first mortgage securing the existing Manufacturers loan.

 On September 22, 1982, HSI obtained an additional $ 1 million loan from Manufacturers. This loan was secured by a note and mortgage that was merged with Manufacturers' first mortgage. Subsequently, SEDCO lent an additional $ 3.5 million to Ho-Syr and SIDA, which was secured by a new second mortgage and note. In yet another transaction, Security agreed to lend SIDA and HSI an additional $ 5 million on December 15, 1983. The loan was secured by a note, an assignment of leases and rents, and a mortgage junior to the first mortgage held by Manufacturers. SEDCO subordinated its second mortgage to the mortgage held by Security, thus making SEDCO's mortgage a third mortgage. The entire $ 5 million loan from Security was personally guaranteed by Murphy. Subsequently, Security's loan and its security were conveyed to an individual named Howard Curd, who later conveyed the loan and security to the Apple Bank for Savings ("Apple"). Apple currently retains the loan and security. This series of transactions representing the financial package for refurbishing the Hotels was rounded out by an agreement between SIDA, HSI, and the City which provided for periodic payments in lieu of taxes ("PILOTs"), that compensated the City for real estate tax revenues that it lost by virtue of SIDA's holding paper title to the Hotels. The entire loan package exceeded $ 21 million.

 By the spring of 1987, the promised redevelopment of downtown Syracuse had not yet occurred, allegedly forcing plaintiffs and their lenders to enter into a comprehensive debt refinancing. The refinancing provided new terms for the payment of arrears on the HSI's loans, and Murphy conveyed to both the Manufacturers-led consortium and the City an interest in the proceeds of any sale of the Hotels. Additionally, Murphy restated his undertaking to guarantee a portion of the Hotel's debt personally. The scheduling and amount of restructured payments were based on the Hotels' anticipated income to be generated by the City's promised downtown redevelopment efforts.

 Shortly after entering into the restructuring arrangements, the City, SEDCO, SIDA, Young, and Harrigan ("City Group") announced that they would provide public financing, tax benefits, and improvements for the development of Carousel Center Shopping Mall ("Carousel Center"). Plaintiffs allege that defendants were aware that development of the Carousel Center threatened revitalization attempts in the downtown commercial district. Despite this knowledge, defendants did not mention the plans to HSI or Murphy while they were negotiating the 1987 debt restructuring and equity interest transfer. Moreover, plaintiffs contend that in financing Carousel Center, SIDA, SEDCO, and the City financed the creation of banquet facilities that are made available to the public free of charge, thereby directly taking business from the Hotels. Plaintiffs allege that after having benefitted from HSI's and Murphy's efforts to refurbish and expand the Hotels, the City Group through its actions caused the adverse economic conditions that led to HSI's declaration of bankruptcy in October 1990. Plaintiffs further allege that the City Group destroyed the ability of HSI to meet its debt obligations, which forced the Murphy guarantees to be called.

 In 1990, plaintiffs entered into a second debt restructuring with the City. The intention was to allow the Hotels to participate in the development of a convention center and hotel complex in the downtown area. The restructuring was conditioned in part on Onondaga County naming HSI the preferred developer of the hotel portion of the proposed downtown convention center complex. An agreement among Onondaga County, HSI, and the New York Urban Development Corporation ("UDC") was executed on May 7, 1990, providing in part that HSI would undertake to construct a new hotel as part of the convention center project. In addition, HSI agreed to further refurbish and expand the Hotels. HSI was to provide an irrevocable letter of credit for $ 1 million that Onondaga County could draw on if HSI breached the agreement to build the new hotel.

 It was later determined by Onondaga County and UDC that the construction of a new hotel was unnecessary to the proposed convention center complex. Allegedly, as a result, HSI declined to provide the letter of credit. Thereafter, Onondaga County cancelled the May 7, 1990 agreement, thus terminating the preferred developer status of HSI. Plaintiffs allege that this decision, in addition to defendant Young's need for a campaign issue for the Mayoral election, led SIDA, the City, Young, and Harrigan to terminate the part of their agreement with HSI to restructure the Hotels' PILOT payments.

 On July 27, 1990, plaintiffs were served with a notice of default, stating that HSI would be evicted from the Hotels within 30 days unless its arrears were paid. Plaintiffs allege that when defendant Harrigan served the default notice, he told Murphy that the notice was motivated by politics, not economics. Plaintiffs also allege that the lease with SIDA required SIDA to obtain the express authorization of Manufacturers to have plaintiffs evicted, and that authorization was never obtained.

 Plaintiffs filed the present complaint on October 4, 1991, stating eight causes of action. The first alleges that Young and Harrigan, by reason of the aforesaid events and circumstances, deprived plaintiffs of their property without due process of law in violation of the Fourteenth Amendment of the United States Constitution and 28 U.S.C. §§ 1983 and 1988. Second, plaintiffs allege that the City, SIDA, and SEDCO breached the implied covenant of good faith and fair dealing in the lease, the PILOTs, and the SEDCO note. Third, plaintiffs allege that SIDA, by its actions, breached the express covenant of quiet enjoyment in the lease. Plaintiff's fourth claim is for fraudulent omission based on the City's and SIDA's failure to reveal material facts about the proposed Carousel Center project. The fifth cause of action alleges that defendants' conduct in facilitating and promoting the Carousel Center, hindering plaintiffs' commercial efforts, and forcing the Hotels into bankruptcy, constitutes a "taking" within the meaning of the Fifth and Fourteenth Amendments of the United States Constitution. Plaintiffs' sixth cause of action alleges that SIDA, the holder of title to the Hotels, breached its fiduciary duty to HSI, the beneficial owner of the Hotels, by the aforementioned actions and circumstances. The seventh cause of action alleges that defendants' statements questioning the viability of the Hotels, which allegedly prevented plaintiffs from obtaining new financing, represented a tortious interference with business advantage. Plaintiffs' final cause of action seeks punitive damages for defendants' reckless and malicious conduct.

 Defendants brought the present motion to dismiss on November 12, 1991, seeking dismissal on the following three grounds:

 A. Lack of Subject Matter Jurisdiction

 1. Failure to allege violation of federal constitutional or statutory rights

 Defendants initially contend that plaintiffs' § 1983 claim is "wholly insubstantial" because it fails to allege any violation of federal constitutional or statutory rights, and as such it should be dismissed pursuant to Fed.R.Civ.P. 12(b)(1). More specifically, defendants contend that plaintiffs fail to demonstrate that they had a property interest in the contracts and related agreements which formed the basis of plaintiffs' involvement with the Hotels. According to defendants, such contractual rights do not raise to the level of property rights protected by the Fourteenth Amendment. In the alternative, defendants seek dismissal of plaintiffs' § 1983 claim on the ground that it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6).

 In response, plaintiffs argue that the financing contracts and related agreements and undertakings between plaintiffs and defendants created constitutionally protected property rights in the Hotels and their operation. Further, plaintiffs contend that they have sufficiently alleged deprivation of their property rights by defendants' illegal and malicious scheme to remove plaintiffs from owning and operating the Hotels.

 Defendants assert that plaintiffs lack standing under Article III of the United States Constitution to challenge the alleged wrongful implementation of municipal planning and policy-making because these are matters of purely local governmental concern. According to defendants, it is inappropriate for the court to act as a local planning board.

 Plaintiffs, on the other hand, argue that they have standing based on their asserted claim that they were deprived of property and thus suffered injuries personally because of defendants' allegedly illegal activities. Plaintiff Murphy also argues that he has standing based on the allegations contained in the complaint that he was a ...

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