The opinion of the court was delivered by: Norman A. Mordue, Chief Judge
MEMORANDUM-DECISION AND ORDER
This Memorandum-Decision and Order addresses eight motions in this action under Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961, et seq. ("RICO") and New York common law. There are six motions for summary judgment by defendants as follows: motion by Robert J. Congel (Dkt. No. 323); motion by James A. Tuozzolo (Dkt. No. 324); motion by Robert Brvenik and Marc A. Malfitano (Dkt. No. 325); motion by Scott R. Congel (Dkt. No. 326); motion by Madeira Associates, Moselle Associates, Riesling Associates, and Woodchuck Hill Associates (Dkt. No. 327); and motion by EklecCo LLC and Pyramid Company of Onondaga (Dkt. No. 328). The Court also addresses herein an appeal/motion for reconsideration by Moselle Associates, Madeira Associates, Riesling Associates, Woodchuck Hill Associates, James A. Tuozzolo and Robert J. Congel (Dkt. No. 268), and a motion to amend the joint stipulation and order regarding dispositive motion deadlines by Robert Brvenik, Robert J. Congel, Scott R. Congel, EklecCo LLC, Madeira Associates, Marc A. Malfitano, Moselle Associates, Pyramid Company of Onondaga, Riesling Associates and James A. Tuozzolo (Dkt. No. 382).
The factual allegations in the Third Amended Complaint are as follows.*fn1 Partnerships Defendant Robert J. Congel ("R.J. Congel") and his various family entities conduct business under the business name "The Pyramid Companies" ("Pyramid"). Pyramid develops and operates shopping centers and has built up a portfolio of more than 20 regional shopping malls and community shopping centers (collectively the "Portfolio").
Plaintiffs are minority general partners ("Partners") in ten general partnerships ("Partnerships"); each Partnership developed and owns a regional shopping mall or community shopping center ("Partnership Property"). The majority interest in each Partnership is held by R.J. Congel individually and as general partner in one of the following four partnerships, all of which are controlled by R.J. Congel: Woodchuck Hill Associates ("WHA"), Riesling Associates, Madeira Associates and Moselle Associates (collectively, "Family Partnerships").
Each Partnership is governed by a Partnership Agreement, all of which are substantially similar. Each Partnership Agreement establishes a three-partner Executive Committee to manage the particular Partnership, but permits the partners to overrule or modify any action of the Executive Committee by a vote of at least 51% of the total Partnership percentages. According to the Third Amended Complaint, the Executive Committees have been completely inactive and the Partnerships have been managed exclusively by R.J. Congel.
Among other provisions, the Partnership Agreements require monthly distributions to all Partners of monthly income in excess of expenses, prohibit commingling of Partnership funds, and require that full and accurate financial reporting and accounting be available to every Partner. Plaintiffs claim that R.J. Congel, acting in concert with the other defendants, has intentionally, repeatedly and illegally violated the Partnership agreements. The Third Amended Complaint states:
The foundation of this action is the illegal and fraudulent scheme of Defendant Robert J. Congel to exploit and drain an otherwise profitable group of shopping malls, and to use the income generated by those malls as his own private checking account. As a result of that corrupt scheme, Defendants have defrauded Plaintiffs, and the other minority partners in those shopping malls, out of millions of dollars in profits, assets and financial opportunity. (Third Amended Compl. ¶ 1.)
Pyramid Management Group ("PMG")
Each Partnership's Partnership Agreement provides that the Partnership may hire a managing agent to lease and manage the Partnership Property. Each Partnership has entered into a Management Agreement with Pyramid Management Group ("PMG") whereby PMG manages the Partnership Properties. PMG is owned by the four Family Partnerships. The Partnership
Agreements require consent by 70% of all percentage interests of partners for a Partnership to enter into a contract with an "affiliated" company such as PMG, but consent has never been obtained. Nor has PMG complied with many provisions of the Management Agreements, such as reporting the financial condition of the Partnership Properties on a monthly basis, maintaining separate bank accounts for each Partnership Property, refraining from commingling each Partnership's funds with funds of other Partnerships or non-Partnership entities, and using Partnership funds for Partnership purposes only.
The Third Amended Complaint claims that PMG has regularly, intentionally, and continuously failed to provide financial reports to plaintiffs; intentionally provided -- via mail and/or wire -- false and misleading financial information to the Partners; intentionally, systematically and continuously commingled -- via mail and/or wire -- Partnership monies with funds of unrelated business entities controlled by R.J. Congel; and actively engaged in and permitted the conversion of Partnership funds for non-Partnership uses. Plaintiffs further claim that PMG has intentionally, systematically and repeatedly overcharged the Partnerships for management and leasing of Partnership Properties, and has concealed its wrongdoing by withholding financial reports from Partnerships and intentionally providing misleading financial information.
The Third Amended Complaint avers that defendants perpetrated a fraudulent scheme upon plaintiffs and other minority partners by providing false and misleading information. Defendants provided only superficial financial reporting, which gave the appearance that the affairs of the Partnerships were reasonably well handled by defendants and that the Partnership Properties were reasonably well managed by PMG. In the 1990's, R.J. Congel incurred cost overruns in the construction of Carousel Mall ("Carousel"), owned by defendant Pyramid Company of Onondaga ("PCO"), which has no relationship to the Partnerships. These problems were compounded by debt relating to Palisades Center Mall ("Palisades"), owned by defendant EklecCo, which also has no relationship with the Partnerships. Other financial strains arose from a series of strip center projects developed by R.J. Congel and his son, defendant Scott Congel, through S&R Group, Inc. ("S&R").
Plaintiffs allege that R.J. Congel and the Family Partnerships used their majority interests in Pyramid Crossgates Company ("Crossgates") (owner of Crossgates Mall, in which plaintiffs Robert L. Ungerer and J. Daniel Lugosch, III are minority partners) and Pyramid Company of Buffalo ("Buffalo") (owner of Walden Galleria, in which plaintiffs Ungerer and Peter C. Steingraber are minority partners) to compel Crossgates and Buffalo to participate in forming a limited partnership, Bonwit Teller L.P. ("Bonwit") to fund the acquisition of the Bonwit Teller department store chain. The general partner in Bonwit is Bontel Corporation, which is owned and controlled by R.J. Congel and his family. The limited partner of Bonwit is Retail Distribution Enterprises ("RDE"), a general partnership comprising Crossgates, Buffalo and PCO. Monies were provided to RDE as a loan to Crossgates, Buffalo and PCO by defendant WHA, one of the Family Partnerships. The monies involved included the acquisition costs of Bonwit Teller and its operating losses. Plaintiffs claim that R.J. Congel shifted these losses onto Crossgates and Buffalo through misleading financial reporting.
Plaintiffs aver that defendants used PMG to drain the Partnerships in order to fund R.J. Congel's non-Partnership projects, including Carousel, Palisades, Bonwit Teller and S&R. As a result, minority general partner distributions all but ceased. Partnership Property payables fell into arrears, including in some instances real estate tax and mortgage payments. Defendants allegedly misappropriated funds, including monies paid by tenants to be held by the Partnerships in trust for the payment of real estate taxes, common area maintenance costs and promotion and marketing expenses. The unaudited year-end financial statements (referred to hereinafter as "financial statements"; also referred to in the record as "year-end statements," "compiled statements," or "tax statements") received by plaintiffs in mid-1997 referred to large sums of money due to the Partnerships from "related entities"; plaintiffs allege that these reflected unauthorized loans to non-Partnership projects. The financial statements also reflected significant sums due to the Partnerships from a "concentration account," which plaintiffs characterize as a fund in which various Partnerships' monies were improperly commingled with non-Partnership monies. Plaintiffs state that, although the financial statements showed Partnership Property cash flows sufficient to pay operating expenses and make distributions of profits to the Partners, they were more than offset by the unauthorized loans and amounts due from the concentration account.
In late 1997 and early 1998, R.J. Congel and Pyramid announced that they would attempt to sell the entire Portfolio of Pyramid properties. Chase Manhattan Bank ("Chase"), the investment banker for the marketing and anticipated sale, approved a $200 million loan to finance land acquisitions and to cover building expenses directly related to expansion efforts to increase the value of the existing Portfolio. According to plaintiffs, R.J. Congel quickly dissipated the proceeds on unauthorized projects such as Palisades and S&R. The costs of this loan, however, were shown as debts on the financial statements of the Partnerships. At a meeting in the summer of 1998, R.J. Congel stated that he was a "net lender" to Pyramid, leading plaintiffs to believe that he would use the purported "amounts due to related parties" to inflate the amount due to him and the Family Partnerships from the proceeds of the sale of the Portfolio, at the expense of plaintiffs and other minority partners.
Each Partnership maintains an operating account into which Partnership Property rental income and other receipts are deposited. The Partnership Agreements and Management Agreements require each Partnership's bills and expenses to be paid from its operating account. However, on a daily basis PMG has "swept" the receipts from each Partnership's account -- via mail and/or wire -- and deposited them in one bank account, called a concentration account, maintained by PMG, where they are commingled with funds of other Partnerships and other business entities controlled by R.J. Congel. PMG pays all of the Partnerships' disbursements from this account, including management fees and reimbursed expenses to PMG itself. PMG's cash summary reports, which were mailed and/or wired to the Partnerships monthly, reported the real estate tax escrow cash balances as zero or nominal, indicating that tax escrow monies were improperly diverted. Money from this account has been loaned to PMG and other Congel projects such as Palisades, Carousel, Bonwit Teller, and S&R, although there is no legitimate explanation for such loans. Funds from this account have also been used for debt service on loans to the Palisades project and on the Chase loan.
Plaintiff Lugosch states that his requests for information and explanations have been largely unsuccessful, although he did receive a "package" of financial information concerning certain Partnership Properties. Lugosch claims that the information provided in the package was false and misleading and included entries reflecting unauthorized transactions, such as a $19 million "payable" due to Bonwit. He also states that PMG defaulted in payments on Berkshire Mall Group's $60 million mortgage loan with Prudential Insurance Co.
Self-dealing and Fee Overcharging
Plaintiffs further claim that R.J. Congel and other defendants have used PMG in a "systematic, repeated and intentional pattern of overcharging" the Partnerships for services provided in connection with PMG's management of Partnership Properties. PMG has paid itself millions of dollars in excess management fees beyond the 3% of gross project revenues authorized in the Management Agreements with each Partnership. The Management Agreements also provide for reimbursement by the Partnerships to PMG for the cost of on-site management personnel; plaintiffs claim that PMG has overcharged the Partnerships for these services and has included improper costs. R.J. Congel also allegedly used PMG to pass through to the Partnerships his personal travel, entertainment and living expenses, which are "wholly unrelated to the conduct of the Partnerships' business."
Other Fraudulent Acts in Furtherance of the Scheme
Plaintiffs also claim that defendants have repeatedly failed to report to them and other minority partners on Partnership affairs as required by each Partnership Agreement. On the occasions when defendants did provide financial reports, they were falsified and misleading. R.J.
Congel and/or Pyramid have submitted falsified or misleading reports to banks such as Chase in order to obtain loans.
According to plaintiffs, PMG has improperly discharged its duties, including its duties to lease space in the Partnership Properties, to pay project vendors and to pay mortgage lenders. When, in the course of disputes with tenants, tenant billing overcharges became evident, PMG settled the cases at great expense and detriment to the Partnerships, sometimes releasing tenants from their leases.
Plaintiffs claim that R.J Congel conspired with Scott Congel to misappropriate Partnership business opportunities, including the acquisition of land adjacent to Partnership Properties and the development thereon of abutting strip center projects to the detriment of the Partnerships. R.J.
Congel personally caused various Partnerships to enter into contracts or transactions with S&R or an affiliate without the requisite 70% approval required for transactions with affiliated entities.
According to plaintiffs, due to the commingling of monies and siphoning of funds, R.J. Congel has made unilateral demands for capital calls in both Berkshire Mall Group ("Berkshire"), in which plaintiffs Lugosch and John A. Bersani and defendant WHA are partners, and Independence Mall Group ("Independence"), in which plaintiffs Lugosch, Bersani, John C. Charters, Richard K. Askin, and William Tapella, and defendant Riesling Associates are partners. During the summer of 2001, R.J. Congel took the position that cash flow was not available to service the capital calls. The disputes have resulted in the ouster of these plaintiffs from the Partnerships, allegedly in violation of the Partnership Agreements. Similarly, plaintiff Peter C. Steingraber has been improperly ousted from Buffalo.
Plaintiffs state that defendants continue to commingle funds in the concentration account in order to divert funds from one Partnership to another Partnership or to a non-Partnership entity; continue to make claims for repayment of improper intercompany borrowings including the repayment of RDE for the Bonwit Teller loan, some of which has been repaid by Crossgates; and continue to overcharge the Partnerships for management fees.
The Third Amended Complaint sets forth ten causes of action.
Plaintiffs claim that R.J Congel and the Family Partnerships violated 18 U.S.C. § 1962(a)-(d), and that the remaining defendants violated 18 U.S.C. § 1962(c), (d). Plaintiffs base these claims on allegations that defendants engaged in racketeering activity consisting of multiple acts of mail and wire fraud in furtherance of a scheme to defraud plaintiffs and others. Plaintiffs claim that through PMG, a RICO enterprise, defendants repeatedly, systematically and intentionally overcharged the Partnerships for the management and leasing of the Partnership Properties, commingled Partnership monies with funds of unrelated business entities controlled by R.J. Congel, converted Partnership funds for non-Partnership uses, misappropriated Partnership opportunities, and concealed and perpetuated the scheme by failing to provide financial information and providing false and misleading financial information to the Partners.
Plaintiffs assert a common-law fraud cause of action based on defendants' alleged conduct in providing false and misleading financial information to plaintiffs concerning, inter alia, PMG's management of the Partnership Properties, payment of real estate taxes on the Properties, and the transfer of Partnerships' assets to non-Partnership entities.
Plaintiffs claim that the Partnerships legally own the funds misappropriated by defendants and that defendants have ...