The opinion of the court was delivered by: RAYMOND J. DEARIE
Plaintiff, a record and beneficial holder of participation interests in a real estate joint venture, alleges that defendants' letter soliciting consent to a modification of the net lease on a building owned by the joint venture contained material omissions and misrepresentations in violation of section 14(a) of the Securities Exchange Act of 1934
and Rule 14a-9 promulgated thereunder.
Plaintiff also claims that defendants, as agents and attorneys for the joint venture, breached their fiduciary duties under state law.
Defendants move for judgment on the pleadings or alternatively for summary judgment. Because discovery has been conducted and because both sides have largely gone outside of the pleadings with regard to this motion, defendants' application is viewed by the Court as one for summary judgment. For the reasons below, the Court grants defendants' motion for summary judgment with respect to the federal securities claim. The state law claim of breach of fiduciary duty is dismissed for lack of subject matter jurisdiction.
Two Hundred Fifty West 57th Street Associates was organized by ten individuals as a joint venture ("Joint Venture") pursuant to an agreement of May 25, 1953. The ten joint venture partners made a public offering of their interests on or about September 30, 1953. Following the public offering, the ten individuals retained a nominal ownership of the participation interests held by their respective investor groups and served as agents for the participation holders. As of 1985, the ten original joint venturers had all either died or resigned, and the Joint Venture has since been represented by three agents, defendants Lawrence A. Wien,
Peter L. Malkin, and Alvin Silverman (collectively, "the Agents"). Plaintiff is one of 478 individuals ("Investors") who hold participation units in the Joint Venture.
The net lease provided that the Net Lessee was to pay the Joint Venture three levels of rent: (1) annual basic rent (consisting of mortgage, charges and a supervisory fees); (2) primary overage rent (consisting of the net operating profit of the Building after deducting annual basic rent, and up to a maximum of $ 414,000); and (3) secondary overage rent (consisting of one-half of the net operating profit of the Building after deducting annual basic rent and primary overage rent). The other one-half of secondary overage rent was payable to the Net Lessee.
Under the net lease, the Net Lessee had the responsibility to "keep in good repair and . . . renew, rebuild and replace, as necessary" the property. At the end of the lease, the Net Lessee was required to surrender the property "in good condition and repair, with due allowance for reasonable wear and tear." In addition, the net lease provided that the Net Lessee "may make alternations, additions and improvements to the demised premises, without the written consent of the Landlord," unless a substantial portion of the building would be demolished or unless any single alteration, addition, or improvement, would cost more than $ 100,000.
Substantive modifications to the net lease could be made only with the approval of at least 75% of the ownership of the Fisk Building. The net lease has been modified three times. The first modification agreement, dated June 12, 1961, provided for an increase in the mortgage to finance certain improvements. The second modification agreement, dated June 10, 1965, provided for additional improvements, to be financed equally by the Joint Venture and the Net Lessee. The third modification agreement, dated May 1, 1975, financed another program of improvements by another increase in the mortgage.
By letter of April 22, 1985 ("Consent Letter"), defendants solicited consent to a fourth modification of the net lease.
The Consent Letter advised that major improvements needed to be made to the Building in order to maintain its competitive value and profitability, but that the Net Lessee did not find it "economically justifiable" to undertake those improvements unless it was granted an extension of the net lease. Defendants solicited the Investors' consent to modify the net lease to Provide for four additional renewal options of 25 years each, in exchange for an increase in the ceiling of primary overage rent to $ 752,000, thereby increasing the investors' maximum investment return from 11.5% to 20%, and in return for the Net Lessee's agreement to complete at least $ 2,500,000 of improvements. The improvements would be financed out of operating cash flow.
The Consent Letter also disclosed that because the defendant Agents owned 3.33% of the participations of the Joint Venture and because two of the Agents together also owned 55% of the interests in the Net Lessee, a potential conflict of interest existed. In addition, the Consent Letter noted that because the law firm of Wien, Malkin & Bettex served as counsel to both the Joint Venture and the Net Lessee, it also could be deemed to have a conflict of interest. For these reasons, the Consent Letter explained, the Agents retained the independent real estate firm of Cushman & Wakefield to review the proposed modification of the net lease. The Consent Letter reported that Cushman & Wakefield had concluded that the transaction was "fair and reasonable." Recent financial statements of the Joint Venture were attached to and referenced in the Consent Letter.
Plaintiff alleges that the Consent Letter was materially misleading in violation of section 14(a) and Rule 14a-9 of the Securities Exchange Act of 1934. While plaintiff does not contest that the proposed improvements were necessary to maintain the competitive value and profitability of the Building, plaintiff alleges that because certain material information was omitted from it, the Consent Letter disguised the unfairness of the proposed modification. Specifically, in paragraph 41 of the Complaint, plaintiff claims essentially that the Consent Letter omitted to state:
(1) the amount of defendants' investment in the Net Lessee (which was "completely nominal relative to the $ 3,600,000 in outstanding participation interests in the Joint Venture"); (Complaint, P 41(a));
(2) that the Net Lessee was obligated under the net lease to make repairs and improvements to maintain the Building's competitive position and thus was not entitled to additional consideration to do the same; (Complaint, P 41(b));
(3) that the value of the extension to the Net Lessee substantially exceeded the present value of the potential increase in primary overage rent to the Investors; (Complaint, P 41(c));
(4) that if the Building or the air rights on that realty were sold, millions of dollars of the Joint Venture's interest in the property would be transferred to the Net Lessee due to the extension; (Complaint, P 41(d));
(5) that by agreeing to the extension, the Joint Venture was surrendering the present value of the millions of dollars that its ownership of the Building would have been worth had the net lease terminated in 2003; (Complaint, P 41(e));
(6) that the extension increased the value of the net lease to the Net Lessee with no corresponding value to the Joint Venture; (Complaint, P 41(f));
(7) that alternative ways of financing the improvements which were more financially advantageous to the Joint Venture existed, and what those alternatives were; (Complaint, P 41(h));
(8) that it was the fiduciary duty of defendants, both the Agents and the law firm of Wien, Malkin, & Bettex, to negotiate on behalf of the Joint Venture; (Complaint, P 41(i));
(9) that the value of the Building, including the underlying property and air rights, had and could reasonably be anticipated to increase substantially, and that by granting the extension, the Joint Venture surrendered a substantial part of that value; (Complaint, P 41(j));
(10) that the Net Lessee had great financial incentive to improve the Building to maintain its competitive position independent of the extension; (Complaint, P 41(k));
(11) that the secondary overage rent for the Joint Venture's fiscal year ending September 30, 1984 was $ 2,493,969 instead of the erroneous amount given in the Consent ...