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
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.
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.
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
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. ¶
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.
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 ...