United States District Court, Southern District of New York
September 14, 1993
SHORE PARKWAY ASSOCIATES,
UNITED ARTISTS THEATER CIRCUIT, INC.,
The opinion of the court was delivered by: Keenan, District Judge
OPINIION AND ORDER
Defendant United Artists Theater Circuit, Inc. has moved to dismiss the complaint for failure to state a claim, Fed.R.Civ.P. 12(b)(6). For the reasons set forth below, the motion is denied.*fn1
Shore Parkway Associates ("Shore"), a New York partnership, entered into an agreement with United Artists Theater Circuit, Inc. ("UA") in 1985, whereby a parcel of land owned by Shore would become the site of a new multiplex movie theater. Plaintiff asserts that the unwritten agreement included provisions for the demolition of an existing structure on the parcel, the costs of building the 2,600-seat, 35,000-square-foot theater, a minimal rent, the sharing of profits after the allocation of various expenses, and UA's preparation of quarterly financial reports for Shore.
In May 1985, the parties entered into a 20-year lease, with five five-year options. The theater became operational approximately two years later, and plaintiff claims that it began generating considerable profits.
The complaint alleges that two and one-half years after the theater opened, and immediately following a change in its management and ownership, UA unilaterally and without justification altered its method of allocating revenues against withholdings for these past construction costs. Shore alleges that, among other things, UA's unilateral recalculation of the formula by which it shared profits breached the parties' antecedent, unwritten joint venture agreement. The complaint further alleges that UA applied this reformulation retroactively, has refused to furnish further financial reports, and has improperly charged Shore for excessive and unrelated construction costs.
In moving to dismiss, UA argues that the existence of a joint venture has not been adequately alleged in the complaint. The failure of the complaint to assert adequately all the elements prerequisite to a joint venture agreement, UA insists, requires that the complaint be dismissed. UA further argues that Shore Parkway's correct claim is in fact for breach of contract, or reformation, and should be pleaded as such.*fn2
It is well-established that "a complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). The scope of the court's task is a limited one in that the likelihood of recovery on the face of the complaint cannot be considered in granting or denying the motion. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). In addition, the complaint must be viewed in the light most favorable to the non-moving party. Scheuer, 416 U.S. at 237; Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 562 (2d Cir.1985). The burden on the moving party is heavy because "the sanction of dismissal is harsh," Duncan v. AT & T Communications, Inc., 668 F.Supp. 232, 234 (S.D.N.Y.1987), and because "the purpose of pleading is to facilitate a proper decision on the merits." Conley, 355 U.S. at 48.
A. Joint-Venture Claim
Defendant argues that plaintiff has not properly pleaded the existence of the joint venture. In general, a joint venture represents more than "a simple contractual relation." Precision Testing Laboratories v. Kenyon Corp., 644 F.Supp. 1327, 1349 (S.D.N.Y.1946). Thus, joint ownership, a mere community of interest, or a joint interest in profitability alone are not deemed joint ventures. See United States v. Standard Oil Co., 155 F.Supp. 121 (S.D.N.Y.1957), aff'd, 270 F.2d 50 (2d Cir.1959); Stratford Group, Ltd. v. Interstate Bakeries Corp., 590 F.Supp. 859, 863 (S.D.N.Y.1984). To constitute a joint venture, an agreement must satisfy the following five elements: (1) the agreement must be between two or more parties to create an enterprise for profit, (2) the agreement must evidence the parties' mutual intent to be joint venturers, (3) each party must make a contribution of property, financing, skill, knowledge or effort, (4) each party must have some degree of joint management control over the venture, and (5) there must be a provision in the agreement for the sharing of both losses and profits. See ITEL Containers v. Atlanttrafik Exp. Services Ltd., 909 F.2d 698, 701 (2d Cir.1990); Flammia v. Mite Corp., 401 F.Supp. 1121, 1127 (E.D.N.Y.1975); Yanofsky v. Wernick, 362 F.Supp. 1005, 1031 (S.D.N.Y.1973); Precision, 644 F.Supp. at 1348.
Plaintiff's complaint, read in the most favorable light, adequately asserts all five elements. First, the focal point of the enterprise was the construction and operation of a nine-screen movie theater complex in Brooklyn. Plaintiff alleges that the parties agreed that: they would be 50-50 partners in the enterprise; they would share equally the costs of demolishing an existing structure on the proposed site; UA would advance the cost of constructing the theater; the parties would share profits from the enterprise equally, after UA first received a separate allocation for recouping its construction expenses; and UA would pay Shore a minimal rental. The substance of the alleged agreement, which anticipates an ongoing relationship based on mutual effort and shared goals, exceeds the type of simple "arms length purchase and sale" or landlord-tenant relationship that falls outside the definition of a joint venture. Stratford, 590 F.Supp. at 864.
As to the element of intent, the absence of the use of the term "joint venture" to describe an agreement may indicate a lack of intent to enter a joint venture. Id. at 864. The absence of the term is not fatal, however, as the intent of the parties can be express or implied. See McGhan v. Ebersol, 608 F.Supp. 277, 282 (S.D.N.Y.1985); Sherrier v. Richard, 564 F.Supp. 448, 457 (S.D.N.Y.1983).
Intent is crucial because a joint venture 'is a voluntary relationship, the origin of which is wholly ex contractu, i.e., it is not a status created by law.' This manifestation of intent need not be explicit, but the parties must be clear that they intend to form a joint venture, which is a fiduciary relationship, and not a simple contract.
Precision, 644 F.Supp. at 1349 ( citing Yanofsky, 362 F.Supp. at 1031, 1037); see also Chromalloy American Corp. v. Universal Housing Systems of America, 495 F.Supp. 544, 549 (S.D.N.Y.1980), aff'd, 697 F.2d 289 (2d Cir.1982). The relationship of the parties as pleaded in Shore's complaint adequately shows an intent to enter into something more than a simple contractual relationship. Further, the fact that the alleged joint venture, as opposed to the lease, was entered into orally does not jeopardize its status as a joint venture. See Yanofsky, 362 F.Supp. at 1030; Halloran v. Ohlmeyer Communications Co., 618 F.Supp. 1214, 1218 (S.D.N.Y.1985).
The third requirement, that each party make a contribution of "property, financial resources, effort, skill or knowledge," Yanofsky, 362 F.Supp. at 1031, has also been met. It is undisputed that Shore provided the land on which the theater was developed and that it split with UA the costs of removing a pre-existing structure from the site. UA, for its part, contributed the full amount of the construction costs, recoverable from future proceeds, as well as its expertise in the design and operation of such theaters.
The joint venture test for control, the fourth element, requires that the parties have "the right to direct and control the affairs of the venture." Stratford, 590 F.Supp. at 863. There is no requirement that this right be shared equally by the parties, however; responsibilities can be divided unevenly as parties defer to each other's areas of expertise. Halloran, 618 F.Supp. at 1219. Thus, the fact that UA alone oversaw the day-to-day operation of the theater is not dispositive. The terms of the agreement as alleged in the complaint provide for significant sharing of the profits derived from the theater; towards this end, the agreement allegedly called for UA to send quarterly reports on losses and profits to Shore. Because the terms of their agreement provide a specific formula for the calculation and sharing of revenues, it is presumable that the joint responsibility for the venture exceeds the daily operation of the theater itself, and that Shore shares at least in part-or has "the right to direct and control"-the accounting and distribution of those revenues.
The final element is the provision that losses and profits be shared. "An indispensable essential of a contract of partnership or joint venture ... is a mutual promise or undertaking of the parties to share in the profits of the business and submit to the burden of making good the losses." Steinbeck v. Gerosa, 4 N.Y.2d 302, 317, 151 N.E.2d 170, 178, 175 N.Y.S.2d 1, 13, 39 (1958). UA argues that Shore bears no risk of loss under their agreement. The allegations of the complaint, which must be taken as true, refute this argument, however.
Under the terms of the lease, Shore was entitled to a minimal monthly rent, as well as an "Additional Rent" calibrated on the proceeds of the theater. Both parties certainly hoped for a successful enterprise: UA to recoup its demolition and construction costs and turn a profit, and Shore to recoup its demolition costs and secure a dividend beyond the minimal rent charged to UA. It is unlikely that Shore would have charged a minimal rent were additional revenues not anticipated. Both parties stood to lose if the venture was unsuccessful, and both agreed to a formula that exposed them to considerable risks and liabilities. The agreement clearly anticipated a sharing of the profits; and, under established law, a sharing of losses is implied, absent fixed terms, in the same proportion as the sharing of profits. Mariani v. Summers, 3 Misc.2d 534, 538, 52 N.Y.S.2d 750, 754 (Sup.Ct.1944). Thus, UA's contention that the sole relationship between the parties was that of a landlord collecting rent from a tenant is unpersuasive.
For the foregoing reasons, the Court finds that Shore has stated a claim, and therefore denies UA's motion to dismiss the breach-of-fiduciary-duty claim.
B. Co-venturer's Remedies
Defendant next argues that three of the plaintiff's four causes of action must be dismissed because the sole remedy available to a co-venturer plaintiff is an accounting. Plaintiff claims breach of the alleged joint venture agreement and breach of fiduciary duty, and he seeks the impression of a constructive trust agreement and an accounting of the enterprise. Because there is no challenge to the fourth claim, only the first three are addressed.
1. Breach of the Joint-Venture Claim
The Second Circuit has not conclusively resolved whether a joint venture action must initially be limited to an accounting. See Ebker v. Tan Jay International, Ltd., 739 F.2d 812, 828 (2d Cir.1984). In assessing an "at-will" joint venture claim, the Second Circuit has noted that the remedy issue "is far from clear," id., citing four New York cases on the issue. As in the present case, two of those four cases involved fixed-term joint-venture agreements. In Crownshield Trading Corp. v. Earle, 200 A.D. 10, 192 N.Y.S. 304 (1st Dept.1922), the court held that a partner who prematurely dissolved a partnership, or disaffirmed a partnership contract prior to commencement of the partnership or joint venture, was liable for damages in an action at law. Crownshield, 192 N.Y.S. at 309. In Lafleur v. Montgomery, 70 A.D.2d 545, 416 N.Y.S.2d 602 (1st Dept.1979), the defendant allegedly breached a joint venture agreement by wrongful termination and was held liable under a cause of action for profits lost as a consequence of the breach. The court held that "under such circumstances an action at law to recover for loss of profits may be maintained independent of seeking the equitable remedy of an accounting." Lafleur, 416 N.Y.S.2d at 603-04.
Because case law is unsettled on the question of at-law relief for joint-venture claims, and because plaintiff's complaint sounds in part in "unjust enrichment"-giving the Court broad discretion in sculpting appropriate equitable relief, Precision, 644 F.Supp. at 1350-Shore's first cause of action for breach of the joint venture agreement will not be dismissed.
2. Breach of Fiduciary Duty Claim
The principles of partnership law control analysis of joint venture agreements. Ebker v. Tan Jay International, Ltd., 741 F.Supp. 448, 468 (S.D.N.Y.1990). Like co-partners, coventurers owe each other "the finest loyalty" throughout the course of their enterprise. Ebker, 741 F.Supp at 468 ( citing Meinhard v. Salmon, 249 N.Y. 458, 463-64, 164 N.E. 545, 546 (1928)). "Strict adherence to the rules of undivided loyalty has been insisted upon by the Courts without exception." Ebker, 741 F.Supp. at 468. Co-venturers also owe one another "a fiduciary duty of the utmost good faith." Id. A breach of this duty will be taken into consideration in an accounting, with the breaching party liable for any damages caused thereby. Id. at 469. Plaintiff's second cause of action, for breach of fiduciary duty, therefore properly states a claim.
3. Impression of Constructive Trust Claim
Partnership law makes an important distinction between actions in equity and actions at law: whereas co-partners are barred from bringing an action at law against the partnership until after an accounting has been made, no such prerequisite impedes an action in equity. Id. at 467, 470; Basset v. American Meter Co., 20 A.D.2d 956, 957, 249 N.Y.S.2d 815, 816 (4th Dept.1964); Pace v. Perk, 81 A.D.2d 444, 453, 440 N.Y.S.2d 710, 715 (2d Dept.1981). Thus, there is no bar to plaintiff's third cause of action seeking the impression of a constructive trust, which is an equitable claim. Ebker, 741 F.Supp. at 467; Mariani, 52 N.Y.S.2d at 756.
For the reasons set forth above, the motion to dismiss is denied. The parties are given a discovery cutoff of November 29, 1993; a status conference has been scheduled for November 30, 1993 at 10 a.m.