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COHEN v. REED

November 18, 1994

ROBERT COHEN, Trustee of the Robert Cohen Revocable Trust - 1987, on behalf of Simon Cohen Real Estate & Management Co., and SIMON COHEN REAL ESTATE & MANAGEMENT CO., Plaintiffs,
v.
ROBERT J. REED, Defendant. ROBERT J. REED, individually and derivatively on behalf of Simon Cohen Real Estate & Management Company, a Limited Partnership, Plaintiff, v. IRENE WOLFF et al., Defendants.



The opinion of the court was delivered by: JOANNA SEYBERT

 SEYBERT, District Judge:

 The referenced actions arise in connection with the administration of the Simon Cohen Real Estate & Management Company [hereinafter "SCREAM"], a New York limited partnership, of which Robert J. Reed is the sole general partner, *fn1" and the Estate of Simon Cohen is a limited partner holding approximately 56.75% *fn2" of the outstanding limited partnership units. SCREAM's principal assets are (i) a leasehold interest in certain property located in Bethpage, New York, which SCREAM in turn subleases to Mid-Island Hospital, Inc. [hereinafter "Mid-Island Hospital"], and (ii) a promissory note of Mid-Island Hospital evidencing an obligation of approximately $ 1.8 million.

 The earlier-filed of the referenced actions ["the 90-CV-2795 action"] is brought derivatively against Mr. Reed by Robert Cohen, the trustee for the holder of certain limited partnership units in SCREAM, and alleges, inter alia, a breach of fiduciary duty by Reed, and violations of the Racketeer Influenced and Corrupt Organizations Act ["RICO"]. The RICO counts allege predicate acts of mail fraud and securities fraud.

 Pending before the Court are three principal applications in connection with these actions; one comes from the 94-CV-241 action, while the other two come from the 90-CV-2795 action. First, Mr. Reed moves to remand the 94-CV-241 action to the State court from which it was removed. Second, Mr. Cohen seeks to supplement his complaint in the 90-CV-2795 action to allege a federal securities fraud claim in connection with the same conduct that is the subject of the 94-CV-241 action. Last, Mr. Reed cross-moves to dismiss or to stay the 90-CV-2795 action in deference to ongoing State-court proceedings involving the Estate of Simon Cohen, the largest unitholder in SCREAM.

 For the reasons that follow, the Court remands the 94-CV-241 action to the State court from which it was removed. With respect to the 90-CV-2795 action, the Court grants Cohen's motion to supplement his complaint to allege a federal securities fraud claim, and denies Reed's cross-motion to dismiss or to stay this case.

 BACKGROUND

 SCREAM is the holder of a leasehold interest in property that it subleases to Mid-Island Hospital. Under the sublease, Mid-Island Hospital initially was required to pay all of its profits as rent to SCREAM. This arrangement began in 1956 when Simon Cohen, a predecessor to SCREAM, acquired a failing hospital construction project from a group of promoters that included Dr. William B.F. Werner. *fn3" Mr. Cohen agreed to complete construction of the hospital and to lease it to the original promoters in return for the entire fee interest in the property, including the structures and improvements situated thereon. This arrangement was necessary because Dr. Werner held a license from the New York State Board of Health that authorized him to operate the Mid-Island Hospital. Later, Simon Cohen sold his fee interest in the hospital to the Hebrew Institute of Long Island and retained a leasehold interest in the property under which he paid a fixed annual rent. After the sale, Mid-Island Hospital subleased the property from Simon Cohen and continued to pay Mr. Cohen all of its profits as rent.

 Shortly thereafter, Mr. Cohen sold limited partnership interests in the leasehold to his family members and friends, including his son, Robert Cohen. The resulting limited partnership, SCREAM, became the holder of the leasehold.

 On January 1, 1987, Robert J. Reed, SCREAM'S general partner; acting on behalf of SCREAM, entered into a new sublease with Mid-Island Hospital, which required the hospital to pay SCREAM a fixed annual rent instead of an annual rental amount determined by reference to its profits. A little more than one year later, upon receiving authorization from the New York State Department of Health to transfer his license to a corporation that would operate the hospital, Dr. Werner began taking steps to incorporate Mid-Island Hospital. According to Robert Cohen, Reed and Werner entered into a "transfer agreement" in February 1988, which provided that (1) a corporation would be formed for the purposes of operating Mid-Island Hospital (the "Hospital Corporation"), and (2) Dr. Werner would transfer his license to operate the hospital to the corporation in exchange for 100 percent of its shares. Cohen alleges that, pursuant to the terms of this "transfer agreement," Dr. Werner was immediately required to sell back these shares to Reed, in his capacity as general partner of SCREAM, for $ 250,000.

 The hospital was incorporated in 1989, but Werner did not transfer his shares back to the limited partnership. Instead, Werner sold five percent of his interest in the Hospital Corporation to Reed, acting in an individual capacity, and entered into a new agreement with Reed, which provided that Werner would sell the remainder of his shares back to the corporation.

 The 90-CV-2795 action followed. In this action, plaintiff Robert Cohen, bringing suit derivatively on behalf of SCREAM, alleges that Reed's aforesaid conduct violated the Racketeer Influenced and Corrupt Organizations Act ["RICO"], 18 U.S.C. § 1962(a), (c). Cohen further asserts against Reed claims for fraud and breach of fiduciary duty. Cohen seeks an accounting and injunctive relief under his common-law claims, and money damages with respect to his RICO count.

 This, however, does not end the controversy between the parties concerning Reed's conduct with respect to SCREAM. By document dated October 19, 1993, Reed amended SCREAM's Articles of Limited Partnership to authorize the general partner, with the consent of limited partners holding at least 25% of the capital of the partnership, to sell and to convey title to any and all assets of the partnership, including a leasehold interest. This amendment would serve to expedite the proposed sale of SCREAM's leasehold interest in the property occupied by Mid-Island Hospital, and the note held by SCREAM in connection therewith. Reed alleges that he properly executed this amendment with the written concurrence of limited partners holding in excess of 25% of the capital of the partnership contributed by limited partners, and with his own concurrence, in his capacity as "Designated Voting Limited Partner" on behalf of all limited partners.

 In the furtherance of this plan, SCREAM mailed to each of its limited partners a "Memorandum of Sale," dated September 30, 1993, reporting an agreement for the sale of the leasehold and note to Preferred Health Network [hereinafter "PHN"] for $ 2,600,000. This Memorandum of Sale reported that closing would occur as soon as practicable upon completion of the partnership amendment, approval of the sale, and the procurement of a court order.

 Robert Cohen then sought to enjoin the foregoing proposed transaction by moving before the Honorable Edward R. Korman, United States District Judge for the Eastern District of New York, for a temporary restraining order and a preliminary injunction. In response to Cohen's application, counsel for Reed appeared ex parte on November 18, 1993 before the Honorable C. Raymond Radigan, the Nassau County Surrogate presiding over the Estate of Simon Cohen. In connection with this appearance, Surrogate Radigan made the following statement for the record:

 
Let the record then indicate that the Court does not want to interfere with any Federal action but at the same time we do have a procedure under the Surrogate's Court Procedure Act dealing with transfers of action from the Supreme Court over to the Surrogate's Court where the Surrogates give some guidance to a Judge regarding the status of proceedings pending in our court and pursuant to Matter of Suchoff the Court is able to advise the other courts of the status of proceedings within our court and whether or not matters ought to be stayed or whether or not matters should [sic] be transferred, etc. But it is merely as guidance and by way of guidance there is presently before this court a proceeding for the sale of the estate's interest in SCREAM and the fiduciaries have before the Court an application for the Court to consider a sale not only of the estate's interest but they have found that it's in the best interests of the estate and all parties concerned that the sale include all of the entities, SCREAM and hospital's interest. The Court has indicated to all parties concerned that this Court only has jurisdiction over the portion of SCREAM that is owned by the estate. The Court has been advised that the attorneys are going to commence an action in the Supreme Court in order to get the global relief so that there will be jurisdiction over those parties that the Court presently doesn't have jurisdiction over because they do not have an interest in the estate. That is, the other limited partners and other interested parties in the overall sale of the entity. The Court has advised counsel that if that action is commenced that I will send to have the matter transferred over to me as a Supreme Court Justice and then I would have jurisdiction over all of the necessary parties, subject, of course, to any motions that the parties may make once they are made parties to the proceedings.

 Sullivan Aff., Ex. D, at 3-4 (94-CV-241 docket #4, E.D.N.Y. Feb. 15, 1994). Citing the foregoing transcript excerpt, Judge Korman denied Robert Cohen's application on the condition that Surrogate Radigan undertake the indicated procedure. Cohen v. Reed, 868 F. Supp. 489 (E.D.N.Y. Nov. 19, 1993) (order denying preliminary injunction).

 On November 19, 1993, Reed, acting both on his own behalf, and derivatively on behalf of SCREAM, commenced a declaratory judgment action in the New York State Supreme Court, County of Nassau. This action seeks a declaration of the validity of the Amendment to SCREAM's Articles of Limited Partnership, dated October 19, 1993, and the proposed sale of SCREAM's principal assets. The action also requests a declaration of the propriety of Reed's entrance into the proposed contract for the sale of SCREAM's principal assets. Finally, the action seeks a declaration (i) dissolving SCREAM pursuant to New York State partnership law, (ii) authorizing the proposed sale in question, and (iii) directing the subsequent liquidation of the partnership.

 On January 17, 1994, Robert Cohen filed a notice of removal to relocate this Nassau County Supreme Court action to this Court, where it was assigned the case number 94-CV-241. *fn4"

 Finally, on February 7, 1994, Robert Cohen *fn5" moved for leave to serve a supplemental complaint in the 90-CV-2795 action. The proposed supplemental complaint assails the same conduct that is the subject matter of the 94-CV-241 action. Specifically, Cohen now alleges that Reed failed to disclose certain material facts to the limited partners in connection with the proposed sale to PHN of the leasehold and note, and that said conduct violates section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder.

 DISCUSSION

 I. 94-CV-241 Action: Motion to Remand to State Court

 Reed moves to remand the 94-CV-241 action to the State court from which it was removed, and sets forth several arguments in support of his application. First, he contends that the declaratory judgment complaint at issue fails to raise a federal question. Second, he asserts that Cohen failed to bring his notice of removal within the applicable statutory period. Finally, he contends that the Court should decline to exercise supplemental jurisdiction over this action in view of the integrated proceedings to be held before the Surrogate, acting as a justice of the State supreme court.

 Because the proposed sale of SCREAM's principal assets involves many of the same factual intricacies that are before this Court in the 90-CV-2795 action, the Court may properly assert supplemental jurisdiction over the declaratory judgment complaint. See 28 U.S.C. § 1367(a). *fn6" Nevertheless, in accordance with the federal removal ...


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