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Exodus Partners, LLC v. Cooke

January 17, 2007

EXODUS PARTNERS, LLC, PLAINTIFF-COUNTER-DEFENDANT,
v.
WALLACE COOKE AND WALLACE & COREY REALTY CORP., DEFENDANTS-COUNTER-PLAINTIFFS.



The opinion of the court was delivered by: Gerard E. Lynch, District Judge

OPINION AND ORDER

Plaintiff-counter-defendant Exodus Partners, LLC ("plaintiff" or "Exodus") sued defendants-counter-plaintiffs Wallace Cooke and Wallace and Corey Realty Corporation ("defendants"), alleging breach of contract and breach of fiduciary duty. Defendants asserted counterclaims alleging breach of two contracts and a breach of fiduciary duty by plaintiff. After a seven-day trial, a jury returned a verdict rejecting both of plaintiff's claims and one of defendants' counterclaims for breach of contract. The jury found for defendants on the remaining counterclaims, however, awarding defendants $330,000 for plaintiff's breach of contract and $380,000 for plaintiff's breach of fiduciary duty. Plaintiff now moves for judgment as a matter of law on the counterclaims, for a new trial on the contract counterclaim, and for a new trial or for a remittitur on the fiduciary-duty counterclaim. Both parties move for sanctions.

Plaintiff's motion for judgment as a matter of law will be denied in its entirety, and plaintiff's motion for a new trial or remittitur will be denied with respect to the fiduciary-duty claim. Plaintiff's motion for a new trial with respect to the contract claim will be granted in part; the Court will sua sponte order a remittitur to $90,000 on that claim. Plaintiff's motion for sanctions will be granted, and defendants' motion for sanctions will be denied.

BACKGROUND

In May 2002, two young businessmen, Derrick Milam and John Cormier, created Exodus Partners, LLC, to provide consulting services to real estate investors who sought assistance in managing their assets. (P. Mem. in Support of Mot. for J. as Matter of Law ("P. Mem.") 2; Trial Transcript ("Tr.") 31.) At about that same time, a friend of Milam and Cormier, Sharon Joseph, introduced them to defendant-counter-plaintiff Wallace Cooke, a retired police officer who had experience in the real estate business and who owned four properties in the Bronx. In August 2002, after a series of informal business dealings, deciding it would be advantageous to combine Milam and Cormier's business-school training and investment-banking experience with Cooke's practical expertise in real estate management, Milam, Cormier and Cooke entered into a refinancing agreement (the "2002 Refinancing Agreement"), which set forth how they would together manage and invest the proceeds of a refinancing of Cooke's Bronx properties. (P. Mem. 3; P. Ex. 56.)*fn1

In November 2002, the parties entered into a second written agreement (the "Compensation Agreement"), which set forth the compensation Exodus, Milam and Cormier would receive for their services in connection with the refinancing and sale of the Bronx properties. (P. Ex. 6.) That agreement provided that Milam and Cormier would receive a flat fee of $100,000 for their services upon completion of the refinancing, and that Exodus would receive four percent of the proceeds from the sale of the properties. (Id. at 2.) According to plaintiff, the parties also entered an oral agreement during the fall of 2002, according to which Exodus would receive an additional $100,000 above and beyond the payments contemplated by the Compensation Agreement. (P. Mem. 5.) Defendants dispute the existence of the oral agreement. (Tr. 703.)

The closing on the refinancing took place in March 2003, and the proceeds from that transaction - about $1.4 million - were deposited into a Washington Mutual account. (Id. 92-93, 1014.) Milam and Cormier subsequently withdrew from the account the amount they believed they were owed in connection with the refinancing, that is, approximately $100,000 as contemplated by the Compensation Agreement, and $100,000 pursuant to the alleged oral agreement. (Id. 1015.)

The following month, Milam and Cormier presented defendants with a document, the "Proposed Opportunity," that detailed Milam and Cormier's plans for future business dealings with defendants. (D. Ex. K; Tr. 348-49.) The document proposed the creation of a "wealth management business" based on real estate, which would, among other things, grow Cooke's assets from approximately $3.5 million to more than approximately $14 million in a period of 8 years. (D. Ex. K at 3.) A primary component of the strategies proposed by Milam and Cormier involved real estate exchanges pursuant to 26 U.S.C. § 1031. (Id. at 9.) This section of the federal tax code allows a seller to defer payment of taxes on real estate that he or she exchanges for real estate "of like kind." 26 U.S.C. § 1031; see Liant Record, Inc. v. C. I. R., 303 F.2d 326, 329 (2d Cir. 1962). Milam and Cormier represented in the Proposed Opportunity that their § 1031 strategy posed "[n]o risk of loss for invested capital with Exodus Partners," adding, "you don't lose." (D. Ex. K. at 9.)

The Proposed Opportunity did not itself become a contract, but it led to the parties' third written agreement, signed on June 5, 2003. This contract, known as the Asset Management Agreement ("AMA"), set forth how the parties would invest the proceeds from the sale of Cooke's four Bronx properties. (P. Ex. 51.) Though the agreement refers to one of the parties as "Wallace and Corey, Inc.," the parties agree that this was a typographical error, and that the contract was between Exodus and one of Cooke's corporations, the Wallace and Corey Realty Corporation (the "Realty Corporation").*fn2 (Tr. 1286.) At the time the parties signed the AMA, they also amended the 2002 Refinancing Agreement, thereby creating the Amended Refinancing Agreement (collectively with the 2002 Refinancing Agreement, the "Refinancing Agreements"). The parties agree that their contracts created a joint venture, which gave rise to mutual fiduciary duties. (Id. 1294-95.)

Under the AMA, defendants agreed to invest the majority of the proceeds from the sale of their Bronx properties to acquire, with Exodus's assistance, "like kind" properties through a series of exchanges pursuant to 26 U.S.C. § 1031. (P. Mem. 3; P. Ex. 51.) Exodus, in turn, agreed to serve as asset manager for any new properties purchased by defendants with those proceeds. More specifically, the AMA required Exodus, inter alia, "to perform business development based on discussions with [the Realty Corporation,] such as finding, acquiring, financial packaging and marketing of 1031 Property"; and to adopt "a general oversight role to achieve asset preservation and wealth management, including legal, accounting, tax management, and financial planning, responsibilities for [the Realty Corporation's] Invested Amount [sic]." (Id. at 3.) Though plaintiff claimed at trial that Milam and Cormier were not property managers (Tr. 1244), the AMA expressly requires Exodus to assume "responsib[ility] for the daily management and performance of the 1031 Property, including all decisions concerning the day-to-day operation of each 1031 Property." (P. Ex. 51 at 3.) The agreement provided a minimum compensation to Exodus of $250,000 per year upon the acquisition of the § 1031 property. (Id. at 5.) The AMA also entitled Exodus, "during the term of the Agreement," to a "40% Carried Interest in the appraised value of the 1031 Property to be paid only upon exit." (Id.)

At the end of September 2003, the parties completed the sale of the four Bronx properties (P. Mem. 3; Tr. 92-93, 228), and Exodus received $320,000, representing four percent of the proceeds as contemplated by the Compensation Agreement. (P. Mem. 5; P. Ex. 6; Tr. 93, 167, 1050.) According to plaintiff, Exodus transferred those funds into the Washington Mutual account that held the proceeds from the refinancing completed in March 2003. (P. Mem. 5; Tr. 167, 1019.) Cormier testified that Exodus deposited the funds into that account to ensure that all of the parties would "have more money to pursue opportunities together" in their joint real estate venture. (Id. 1020.) Milam and Cormier also withdrew funds from that account, however. Having already removed approximately $200,000 in connection with the Compensation Agreement and oral agreement, see supra, Milam and Cormier also removed, on behalf of Exodus, an additional $200,000, which they transferred to an account held by a property management business they had established, namely, Exodus Property Management. According to Cormier and Milam, they were entitled to remove this additional $200,000 from the refinancing proceeds for their new business - indeed, they claim they could have withdrawn even more - because they had successfully completed a § 1031 exchange for Cooke, and were thus entitled to $250,000 in compensation pursuant to the AMA. (P. Mem. 15-16; Tr. 167-68, 1015, 1021, 1140, 1148, 1169, 1259-60.)

The AMA led to the purchase of two properties. In October 2003, Cooke purchased, with Exodus's assistance, a property known as the Caribbean Park Apartments in Plant City, Florida. (P. Mem. 4; Tr. 116.) Some five months later, Cooke purchased - again with Exodus's assistance - the Regency Square Apartments in Odessa, Texas.*fn3 At approximately the same time, the parties failed to close a third § 1031 exchange on a property known as South Dade in Homestead, Florida. (P. Mem. 4; Tr. 134-36; see also P. Ex. 25.) Because the transaction failed, Cooke was unable to reap the full tax benefits available under § 1031. (Tr. 1247.) The parties dispute the reasons for the transaction's failure, as well as the consequences. (See D. Mem. in Opp. to P. Mot. and in Support of Cross Mot. for Sanctions ("D. Mem.") 4, 7-8; P. Mem. 10-12.) According to defendants, the failure of the South Dade transaction resulted in a tax liability of $500,000. (D. Mem. 7-8.)

For a variety of reasons - not the least of which was the failure of the South Dade transaction - Cooke became displeased with Cormier and Milam's performance under the contracts. In addition to blaming Milam and Cormier for the failed South Dade transaction, Cooke believed that Milam and Cormier were not properly managing the acquired properties.

At trial, Cooke and an employee of Caribbean Park Apartments testified that Milam and Cormier neglected the properties' physical condition, hired irresponsible employees, mistreated employees, related poorly to tenants, and failed to take steps to address unacceptably high vacancy rates. Cooke explained that he felt forced under the circumstances to attend to the properties himself - physically and financially - despite Milam and Cormier's attempts to exclude him from the properties' management. (See, e.g., Tr. 488-93, 506-10, 652-57.)

Additional trouble arose out of the parties' conflicting understandings regarding the ownership of Exodus. Cooke believed that the parties had agreed that he would hold a one-third share in Exodus and be one of its three principals. (See Tr. 476, 589, 706.) Thus, he believed he was entitled to one third of the $320,000 payment to Exodus in connection with the sale of his Bronx properties. (See id. 589, 609.) Cooke also believed that he was a one-third owner of Exodus Property Management, and that he was entitled to half of that company's profits. (See id. 1169, 1176.)

Suspicious and dissatisfied, Cooke began an audit of Exodus in Spring 2004 and asked Exodus to stop performing its asset management services in connection with the Caribbean Park and Regency Square properties. (P. Mem. 4.) In July 2004, defendants formally terminated the parties' agreements with the assistance of counsel. (P. Mem. 4; P. Ex. 40.) Upon termination of the parties' relationship, Exodus removed $250,000 that remained in the venture's Washington Mutual account. (P. Mem. 17.)

Exodus filed suit against defendants on December 27, 2004, and amended its complaint on May 4, 2005, and on July 27, 2005.*fn4 The Second Amended Complaint ("Complaint") alleged breach of a partnership agreement, breach of contract, and breach of fiduciary duty, all premised on, inter alia, the termination by defendants of the parties' agreements, the exclusion of Exodus from the parties' business and joint properties, and defendants' refusal to provide Exodus with a full and formal accounting of the partnership dealings. Plaintiff also claimed that defendants had failed to provide plaintiff with the 40% interest in the Texas and Florida properties to which it was allegedly entitled under the AMA. (Complaint ¶¶ 47-71.) In response to the complaint, defendants asserted counterclaims, alleging that Exodus had breached its fiduciary duties, and that Exodus had breached both the AMA and the Refinancing Agreements. (Answer to Second Amended Complaint at 2-6; D. Portion of Joint Pre-Trial Order at III.)*fn5

At trial, plaintiff focused on defendants' alleged breach of the AMA, which according to plaintiff also constituted a breach of fiduciary duty. In her summation, plaintiff's counsel asked the jury to award plaintiff $600,000 in damages, which she claimed would provide appropriate compensation for defendants' failure to provide plaintiff with the 40% interest in the § 1031 properties. (Tr. 1263-64.)

Defendants asked the jury to find a breach by plaintiff of both the AMA and the Refinancing Agreements, in addition to a breach of fiduciary duty. During summation, defense counsel argued that defendants were entitled to $106,666.67, or one third, of the $320,000 payment paid to Exodus in connection with the sale of the Bronx properties; $100,000 to compensate them for the funds Exodus had taken under the alleged oral agreement, which defendants claimed did not exist; $250,000 in damages for Exodus's unauthorized removal of funds from the Washington Mutual account upon termination of the parties' relationship; $500,000 as compensation for the failure of the South Dade transaction; $90,000 in damages for unauthorized salaries taken by Milam and Cormier from the property management company; and $30,000 for a gift or loan that Milam and Cormier had provided to Sharon Joseph with Cooke's funds, without his consent. (Id. 1230-31.) The combined amount, $1,076,666.67, represented what defense counsel referred to as the "identifiable" or "know[n]" damages. (Id.)

In addition to the "identifiable" damages, defense counsel asked the jury to return a portion of the funds paid by defendants in connection with the refinancing and sale of the Bronx properties. According to defense counsel, Milam and Cormier had not properly done the work that would have entitled them (or Exodus) to their compensation for the work on the Bronx properties, and the jury should accordingly award defendants "whatever" portion of this money that would fairly compensate defendants for plaintiff's failure to properly perform its obligations. (Id. 1230.) Finally, defense counsel noted to the jury that defendants would later seek an accounting from the Court to ensure that they received compensation for any other damages that they could not calculate at that time. (Id. 1030.)

The jury rejected all of plaintiff's claims, and further rejected defendants' claim that plaintiff had breached the Refinancing Agreements. The jury found, however, that plaintiff had breached the AMA, as well as its fiduciary duty to defendants. The jury awarded $330,000 in damages for the contract breach, and $380,000 for the breach of fiduciary duty.

DISCUSSION

I. Judgment as a Matter of Law Under Rule 50(a)

Exodus asks the Court to grant judgment as a matter of law on defendants' breach-of- contract and breach-of-fiduciary-duty claims, arguing that there was a complete absence of evidence supporting the verdict against plaintiff on these issues. The motion is completely lacking in merit, and will be denied.

Federal Rule of Civil Procedure 50(a) provides that where there is no "legally sufficient evidentiary basis" for a reasonable jury to find for a party on a particular issue, the court may resolve the issue against that party and may "grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue." A jury verdict should be set aside under Rule 50(a) only where there is "such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture," or where there is "such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded [jurors] could not arrive at a verdict against him." Kosmynka v. Polaris Indus., Inc., 462 F.3d 74, 79 (2d Cir. 2006) (citation and internal quotation marks omitted). In applying this standard, a court must not make credibility assessments and must view the evidence in the light most favorable to the nonmoving party. See Gordon v. Matthew Bender & Co., 186 F.3d 183, 184 (2d Cir. 1999).

This standard is not met here, as the jury had ample evidence on which to base a preference for Cooke's version of the events in question.

A. Breach of the AMA

1. The $500,000 Tax Liability

Defendants argued at trial that due to Exodus's inadequate performance of its contractual duties under the AMA, Exodus failed to close the South Dade transaction. As a result of the transaction's failure, defendants claimed, they were ineligible for the benefits available under 26 U.S.C. § 1031, and were forced to pay $500,000 in taxes. Courts in New York and elsewhere have permitted damages awards based on similar theories, see, e.g., Alexsey v. Kelly, 205 A.D.2d 650, 651 (2d Dep't 1994); see also Logan v. D.W. Sivers Co., 141 P.3d 589, 596-97 (Or. App. 2006); Talerico v. Olivarri, 796 N.E.2d 1083, 1086-87 (Ill. App. 2003), and there was sufficient evidence in the instant case to support defendants' South Dade claim.

Cooke testified, for example, that Cormier and Milam failed to consult him regarding the specific criteria he would have to meet to buy the South Dade property (Tr. 516); that they delayed unnecessarily in completing the tasks necessary to close the deal before the deadline imposed by § 1031 (id. 518); that they failed to keep him informed - and in fact affirmatively misled him - regarding problems they were experiencing with the bank and the reason for the transaction's ultimate failure (id. 518-19); that they failed to prepare appropriate contingency plans (id. 519-21); that, without Cooke's knowledge or consent, they used Cooke's money to work on separate business dealings at the very same time they were supposed to be ensuring the closure of the South Dade transaction (id. 521-24); and that they ignored the advice of at least one attorney by pursuing the transaction (id. 515).*fn6 The jury was entitled to credit all of this testimony, to conclude on that basis that Exodus failed to perform its duties under the AMA in good faith, and to find that plaintiff's breach caused the $500,000 in damages. Plaintiff's claim that Cooke was not a credible witness is irrelevant for purposes of the Rule 50 motion. See Gordon, 186 F.3d at 184.

None of plaintiff's arguments attacking defendants' South Dade claim warrant judgment as a matter of law for Exodus. As an initial matter, plaintiff's arguments rely heavily on Cormier and Milam's testimony. The jury was entitled, however, to find those witnesses not credible and to disregard anything or everything they said.

Plaintiff also relies heavily on a letter from Wachovia Securities informing Milam that Wachovia had denied an application for a loan assumption. (P. Mem. 10.) The loan assumption was, at least according to Milam, necessary for the completion of the South Dade transaction. (See id., citing, inter alia, Tr. 132-37.) In plaintiff's view, the letter clearly indicates that the denial resulted from issues surrounding Cooke's creditworthiness, financial strength and experience; therefore, plaintiff argues, "[t]here is no possible way in which a jury could find that Exodus was to blame for the failure to close South Dade." (Id. 23.)

The letter is much more vague and ambiguous than plaintiff claims. After noting various factors considered by the "Master Servicer" in making a loan-assumption decision, including not only creditworthiness and financial strength but also any "condition[] as Master Servicer shall determine in its reasonable discretion to be in the interest of the Trust," the letter concludes that "these requirements have not been met." (P. Ex. 25 at 1-2.) The jury need not have adopted plaintiff's interpretation of the letter, and ...


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