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CARRUTHERS v. FLAUM

September 21, 2005.

D. SCOTT CARRUTHERS, SPRINGHAWK, LLC, and SUMMERHAWK, LLC, Plaintiffs,
v.
DAVID FLAUM, FLAUM MANAGEMENT COMPANY, INC., 3D ASSOCIATES, LLC, ABC PACIFIC REALTY, LLC, A.P. EQUITY, INC., ANCESTRAL RECLAMATION, LLC, ALAN H. YOUNG, individually, d/b/a LINDENBAUM AND YOUNG, LINDENBAUM AND YOUNG, CHARLES PETRI, GENE BARBANTI, individually and d/b/a THE BARBANTI GROUP REAL ESTATE, JAMES F. SIMERMEYER, HARRY B. WALLACE AND SIMERMEYER & WALLACE, Defendants.



The opinion of the court was delivered by: COLLEEN McMAHON, District Judge

MEMORANDUM DECISION AND ORDER GRANTING DEFENDANT ABC PACIFIC'S MOTION TO DISMISS AND GRANTING IN PART AND DENYING IN PART SIMERMEYER DEFENDANTS' MOTION TO DISMISS AND DENYING SIMERMEYER DEFENDANTS' MOTION FOR RULE 11 SANCTIONS
In this action, plaintiffs D. Scott Carruthers ("Carruthers"), Springhawk, LLC ("Springhawk") and Summerhawk, LLC ("Summerhawk") seek to recover damages and for equitable relief against various attorneys, individuals, and entities for their roles in (I) allegedly fraudulently inducing Plaintiffs to provide $550,000 in funds for the purchase of real property, and to incur other out-of-pocket expenses, in connection with certain business ventures in Sullivan and Suffolk Counties, and (ii) allegedly misappropriating, diverting and/or converting those funds to other, undisclosed uses in breach of various contractual, common law and/or fiduciary obligations to plaintiffs. This action also seeks to recover from the current owners of the real property, whom plaintiffs allege have been unjustly enriched as a result of the above.

Two motions are before the court. The first is by defendant ABC Pacific Realty, LLC ("ABC Pacific"), the current owner of the property, to dismiss the Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6), or in the alternative, for summary judgment pursuant to Rule 56. The only claim asserted against ABC Pacific, Count XI, is for unjust enrichment. It is dismissed.

  The second motion is by defendants James F. Simermeyer ("Simermeyer"), Harry B. Wallace ("Wallace"), and Simermeyer & Wallace (collectively, "the Simermeyer defendants") to dismiss the Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(2), (4), (5), and (6) (Counts I-IV).*fn1

  Counts I & II allege legal malpractice and conflict of interest by Simermeyer, with Wallace and Simermeyer & Wallace jointly liable for Simermeyer's purported defalcation. In Counts III and IV, Simermeyer is charged with self-dealing and breach of the duties of loyalty and fiduciary duty. The motion is granted as to Count III, and granted in part and denied in part as to Counts I, II, and IV.

  The Simermeyer defendants also ask that Rule 11 sanctions be imposed against plaintiffs' counsel. Because their motion is procedurally defective, their request is denied.

  Facts According to the Amended Complaint,*fn2 in late 2001, Carruthers was approached by Simermeyer and solicited to participate in a business venture with the Unkechaug Indian Nation to develop real estate and casino gaming facilities on ancestral land of the Unkechaug in Sullivan and Suffolk Counties in the State of New York (the "joint venture"). Amended Complaint, filed May 11, 2005 ("Cplt.") ¶ 19. Simermeyer introduced Carruthers to members of the Unkechaug Indian Nation ("the Unkechaugs"), including its Chief, Harry Wallace, who also solicited Carruthers' involvement in the joint venture with the Unkechaugs. Cplt. ¶ 20.

  The Unkechaugs desired to develop real property and open gaming facilities at one or more sites in Sullivan County and sought land of suitable geographic location and ancestral connection for that purpose. Cplt. ¶ 29. Based on representations by Simermeyer and Wallace, Carruthers decided to participate in the joint venture with the Unkechaugs. Cplt. ¶ 21.

  Both Wallace and Simermeyer are attorneys licensed to practice law in New York State and practice as a partnership called Simermeyer & Wallace (which is also a defendant in this case). Cplt. ¶ 16-18. Carruthers retained Simermeyer to represent him personally and also to form and represent the two Plaintiff LLCs, Springhawk and Summerhawk. Cplt. ¶ 22.

  Springhawk and Summerhawk were both established in January 2002, and, at inception, were both made up of Carruthers, Simermeyer and Mitchell Stanley ("Stanley"). Cplt. ¶¶ 23, 25. Carruthers was to be the controlling member of both Springhawk and Summerhawk with a 56.25% ownership interest. Cplt. ¶¶ 24, 26. Simermeyer and Stanley were to be minority owners in both LLCs, with 25% and 19.25% membership interests, respectively. Cplt. ¶¶ 24, 26.*fn3

  Springhawk and Summerhawk are Delaware limited liability companies. See Complaint filed in the State Court Action, on August 12, 2003 ("State Action Cplt."), ¶ 13.*fn4 They were established for the purpose of developing and operating high stakes Bingo, other gaming activities, gasoline sales, and tobacco sales in Sullivan County and Long Island, New York, on ancestral land of the Unkechaug Indian Nation. Id. Upon the formation of Springhawk and Summerhawk, the members entered into operating agreements and became contractually bound to each other pursuant to those agreements (the "operating agreements"). Id. at 16-17;Cplt. ¶ 112.*fn5

  Simermeyer allegedly served as attorney for Carruthers, Springhawk, and Summerhawk in connection with certain business matters relating to Springhawk and Summerhawk. Cplt. ¶ 27. Throughout the course of his representation of Carruthers, Springhawk, and Summerhawk, Simermeyer was paid some $75,000 in fees in connection with the joint venture, including but not limited to the failed real property estate deals that are the subject of this lawsuit. Cplt. ¶ 28.

  Springhawk and Summerhawk entered into various agreements with the Unkechaug Indian Nation. Cplt. ¶ 22. The agreements granted Springhawk the exclusive right to operate and manage gaming facilities and other economic development projects opened by the Unkechaug Indian Nation in Sullivan County, and granted Summerhawk the same rights in Nassau and Suffolk Counties. State Action Cplt. ¶¶ 18, 19.*fn6

  In the spring of 2002, Simermeyer and/or Wallace introduced Carruthers to defendants Petri, Young, and Barbanti. Cplt. ¶ 30. Petri, Young, and Barbanti sought to convince Carruthers and the Unkechaug Indian Nation that they could identify the necessary land and assist in the financing for the joint venture. Cplt. ¶ 30. Simermeyer took no steps to verify any of the information or assurances given by Petri, Young, and Barbanti, but represented to Carruthers that these individuals were reliable and credible. Cplt. ¶ 31.

  After the initial introduction of Petri, Young, and Barbanti to Carruthers, Simermeyer and Wallace exerted pressure upon Carruthers and Springhawk to enter into a variety of contracts and agreements with Young and Petri for the acquisition and development of real estate in Sullivan County. Cplt. ¶ 32.

  Simermeyer's Alleged Malpractice and the Failed Sullivan County Real Estate Deals

  The specific parcels of real estate that were discussed in various meetings between Simermeyer, Wallace, Petri, Young, Carruthers and others included the Apollo Mall Plaza, located in the Town of Thompson, New York, and the 3D Industrial Park, also situated in the Town of Thompson. Cplt. ¶ 34. The Unkechaug Indian Nation ultimately decided to acquire the Apollo Mall Plaza and 3D Industrial Park after determining that it held ancestral land claims to both properties. Cplt. ¶ 35.

  Simermeyer led Carruthers to believe that the proposed real estate acquisitions would proceed smoothly and that clear title to the properties would be obtained. Cplt. ¶ 36. Carruthers had previously been given assurances by Petri, Young, and Barbanti that the two properties were owned and/or controlled by Ancestral, and/or its principals. Cplt. ¶ 37. Petri told Carruthers that he and his wife owned the 3D Industrial Park, as well as a number of other properties. Id. Carruthers allegedly relied on all of these representations. Id.

  Carruthers allegedly assumed that Simermeyer, in his capacity as attorney for Carruthers and Springhawk, would verify all necessary legal aspects of the transaction, as well as the bona fides of Petri, Young and Barbanti. Cplt. ¶ 38. Carruthers alleges that Simermeyer repeatedly failed to do so. Id.

  In negotiating the land deals on behalf of Ancestral, Petri, Young and Barbanti represented to all parties to the deal that the Apollo Mall Plaza was encumbered by approximately $500,000 in tax and other government liens, as well as a mortgage in favor of the Bank of Kuwait in the amount of approximately $3,500,000. Cplt. ¶ 39. Simermeyer, though acting as attorney for Springhawk and Carruthers, took no steps to verify the existence or amounts of these or other encumbrances on the Apollo Mall property. Cplt. ¶ 40. Petri, Young and Barbanti further falsely represented that the Bank of Kuwait mortgage would be settled for approximately $1,500,000. Cplt. ¶ 41. Simermeyer likewise took no steps to verify this claim. Cplt. ¶ 42.

  In reliance upon various assurances made by Simermeyer, Wallace, Petri, Young and Barbanti, one or more written memoranda of agreement was signed by the Unkechaug Indian Nation (as purchaser), Springhawk (as co-developer of the two properties) and Ancestral Reclamation (as seller). Cplt. ¶ 43. Pursuant to these agreements, Ancestral was to transfer both the Apollo Mall Plaza and the 3D Industrial Park to the Unkechaug Indian Nation. Cplt. ¶ 44.

  The $550,000 Cash Advance

  To get the deal done, however, Ancestral, through Petri, Young and Barbanti, insisted on a $550,000 purchase deposit. Cplt. ¶ 45. Although not legally required to do so under the agreements with the Unkechaug Indian Nation, Carruthers and Springhawk, relying on the assurances and perceived good faith of Simermeyer, Wallace, Petri, Young and Barbanti, agreed to advance the initial deposit of $550,000 to acquire the two parcels on the Unkechaug Indian Nation's behalf. Cplt. ¶ 46.

  This payment of $550,000 was on top of more than $1,000,000 previously advanced by Springhawk and Carruthers for various other project development costs. Cplt. ¶ 47. Because of the considerable advances already made, Carruthers was reluctant to advance the $550,000 purchase deposit. Cplt. ¶ 48. However, under considerable pressure from his attorney and business partner, Simermeyer, as well as Wallace, Carruthers ultimately agreed to do so. Cplt. ¶ 49.

  In making the decision to advance funds, Carruthers and Springhawk allegedly relied upon the legal advice of Simermeyer, who had an ongoing attorney/client relationship with Springhawk and Carruthers. Cplt. ¶ 50. At Simermeyer's direction, Carruthers forwarded the $550,000 to Simermeyer, as attorney for Carruthers and Springhawk. Cplt. ¶ 51. These funds were advanced by Carruthers in a trust capacity. Id.

  In turn, Simermeyer delivered all of the funds advanced by Carruthers directly to Young, without any instructions as to the manner in which they were to be released or used in connection with the real estate deal. Cplt. ¶ 52. Young, himself a licensed New York attorney, represented that he would hold the $550,000 in escrow pending a formal court settlement of the Bank of Kuwait mortgage. Cplt. ¶ 53.

  Simermeyer released to Young the $550,000 he held in trust for Carruthers and Springhawk. Cplt. ¶ 58. Young received the $550,000 advanced from Simermeyer during the first week of May 2002. Cplt. ¶ 162.

  Alleged Misrepresentations

  Carruthers alleges that various representations made by Petri, Young and Barbanti regarding the ownership of and liens against the Apollo Mall Plaza and 3D Industrial Park were almost all untrue. Cplt. ¶ 54.

  Carruthers alleges that "the most basic due diligence" by Simermeyer would have uncovered the following three facts (Cplt. ¶ 55):
1. The ownership of the Apollo Mall Plaza property was not held by Ancestral, as Petri, Young, Barbanti had maintained, but rather by the Sullivan County Industrial Development Agency ("IDA") (id.);
2. The ownership of the Apollo Mall Plaza ground lease was not held by Ancestral, as Petri, Young, Barbanti had maintained, but rather by a company known as A.P. Equity, which had recently been dismissed from a Chapter 11 bankruptcy proceeding (id.); and
3. The mortgage against both the property and the ground lease was not owned by the Bank of Kuwait, but rather by a company known as ABC Pacific Realty, LLC, which had taken an assignment of the mortgage in May 2001 (id.).
  Simermeyer allegedly failed to do the necessary due diligence with respect to discovering these facts as the attorney for Springhawk and Carruthers. Cplt. ¶ 56. Other than assisting in the drafting of the initial "purchase contract" for the Sullivan County properties, Simermeyer took none of the "customary and reasonable legal steps" to competently represent Carruthers and Springhawk in closing the real estate transaction. Cplt. ¶ 57.

  Title Transfer of the Apollo Mall Plaza

  Despite the fact that it did not at the time own the property, A.P. Equity — through its president, Barbanti, whose signature was notarized by Young — executed and delivered a deed for the Apollo Mall Plaza to the Unkechaug Indian Nation on April 26, 2002. Cplt. ¶ 60.

  On or about May 3, 2002, A.P. Equity used all or substantially all of the funds advanced by Carruthers and Springhawk to purchase the Apollo Mall Plaza property from the Sullivan County IDA. Cplt. ¶ 61.

  Approximately $300,000 of the $550,000 advanced by Carruthers and Springhawk was received by the Sullivan County IDA from A.P. Equity and/or Ancestral and was applied to outstanding real estate taxes or other similar obligations (collectively, the "tax liens") then outstanding against the Apollo Mall property. Id. at ¶ 171. The tax liens constituted a first lien against the Apollo Mall property entitled to priority ahead of the mortgage held by ABC Pacific. Id. at ¶ 172. Carruthers and Springhawk believed that the payment would be applied to the tax liens, but that Springhawk would obtain the benefit of such payment by obtaining a release of the tax lien when the property was transferred to the Unkechaug Indian Nation. Id. at ¶ 174.

  Ultimately, title to the Apollo Mall Plaza was transferred to the Unkechaug Indian Nation, but none of the promised steps to settle the mortgage owned by ABC Realty was ever taken. Cplt. ¶ 62

  Foreclosure on the Apollo Mall Plaza The mortgage claim of ABC Pacific remained a lien against the Apollo Mall Plaza notwithstanding the transfer of title to the Unkechaug Indian Nation. Cplt. ¶ 63. And, unbeknownst to Carruthers, Springhawk or the Nation, by that time, the mortgage was in the late stages of foreclosure. Id.

  Because Petri, Young and Barbanti failed to resolve the mortgage claim on the Apollo Mall Plaza — as they had promised to do — the foreclosure action was ultimately concluded. Cplt. ¶ 64. The property was purchased by the mortgage holder — ABC Pacific — at the foreclosure auction and the Unkechaug Indian Nation was left with nothing. Id.

  ABC Pacific now holds unencumbered title to the Apollo Mall property. Cplt. ¶ 176.

  3D Industrial Park

  A portion of the funds advanced by Carruthers and Springhawk was used to purchase the 3D Industrial Park, however, the 3D Industrial Park was never transferred to the Unkechaug Indian Nation. Cpl. ¶ 65. Instead, the 3D Industrial Park is now owned by 3D Associates and/or Barbanti or companies owned or controlled by him. Id.

  Simermeyer's Alleged Conflict of Interest

  "At all times relevant to this action, Carruthers was under the reasonable belief that Simermeyer was serving as his personal attorney, as well as attorney for Springhawk." Cplt. ¶ 66. Accordingly, Carruthers expected Simermeyer to use reasonable care and diligence to ensure that funds advanced by Carruthers and Springhawk would be safeguarded. Id.

  Additionally, at all relevant times, Carruthers reasonably believed that any dealings between Simermeyer, on the one hand, and Petri, Young, Barbanti, Ancestral, etc., on the other, were conducted by Simermeyer with the best interests of Carruthers, Springhawk, and Summerhawk kept paramount. Cplt. ¶ 67. However, at the same time Simermeyer was representing Carruthers, Springhawk, and Summerhawk, Simermeyer was allegedly also representing the differing interests of the Unkechaug Indian Nation. Cplt. ¶ 68. Simermeyer did not disclose to Carruthers any conflicts of interest created by Simermeyer's simultaneous representation of Carruthers, Springhawk, and Summerhawk, as well as by Simermeyer's ownership interest in Springhawk and his representation of the Unkechaug ...


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