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Devinsky v. Kingsford

March 31, 2008


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge


Plaintiff Orrin Devinsky is a neurologist of note, who invested in real estate on the side with Robert K. Marceca, a real estate entrepreneur with a dubious background. Marceca and Devinsky met during the course of Devinsky's medical treatment of Marceca's daughter. In Summer, 2000, Marceca, assisted by his business associates, Daniel Kingsford and Goldie Rotenberg, started soliciting Devinsky to make investments and loans, with the usual blandishments that the investments were safe and that Devinsky would make money. These proved to be convincing arguments and over the seven months between September 2000 and March 2001, Devinsky made investments and/or loans totaling $4.45 million dollars to Marceca and his sprawling real estate enterprise. The investments failed, and to complicate matters, Marceca died in December 2000, leaving behind what is commonly known as a "mess."

Devinsky made the following real estate investments:

1. 13 East 32nd

On September 28, 2000, Devinsky signed the Third Amended and Restated Operating Agreement of 13 East 32nd Units LLC ("32nd Units Operating Agreement"), in which he agreed to invest $1,000,000 for a 21% membership interest in a new entity called 13 East 32nd Units LLC ("32nd Units").*fn1 (Stipulated Joint Exhibit ("JE") 9.) The remaining 79% of 32nd Units was held by 32nd St. Member, a Marceca-affiliated entity that, per the 32nd Units Operating Agreement, was designated to manage the new entity. (See 32nd Units Operating Agreement § 3.12.) Section 6.01 of the agreement governs the members' capital contributions, stating, "Each Member shall be deemed to have contributed . . . such amount (in cash or property) as is set forth opposite such Member's name in Schedule A." Schedule A lists Devinsky's contribution as $1,000,000. The contribution of 32nd St. Member is valued at $2,500,000, which, according to the Estate Defendants, represents the value of the underlying property. (EESOF ¶ 31.) 32nd Units was sold in December 2001. Shortly thereafter, in January 2002, Plaintiff received a return of his principal investment of $1 million. After the sale, Kingsford told Devinsky that there had not been any profits from the sale of 32nd Units and showed him a calculation purportedly to that effect. However, Devinsky testified that the Executor Defendants told him in October 2002 that he was owed "substantial" profits relating to the sale of 32nd Units, though they did not give a specific amount nor documentation. (EED SOF Response ¶ 37; July 28, 2006 Deposition of Orrin Devinsky ("7/28/06 Devinsky Dep.")*fn2 at 119:18-120:13.)

2. 233 East 77th Street

On November 10, 2000, Devinsky paid Marceca $150,000 for an option to purchase a 35% interest in 233 East 77th LLC, which owned real property located at the same address. The option agreement expired by its terms on December 31, 2000. Devinsky is not pursuing any claims based on this option. (See EED Opp'n at 1 n.1.)

3. 3 East 75 Corp.

In November 2000, Devinsky signed a loan agreement ("75th St. Loan Agreement") in which he agreed to loan Marceca $1,000,000. (JE 12.) The loan was to be repaid solely from so-called "Distributable Profits," profits Marceca earned on stock he owned in an entity called 3 East 75 Corp. ("75 Corp."), on the earlier of (i) the date of final distribution of the Distributable Profits or (ii) November 2, 2010. (JE 12, at 1-2.) At the time Devinsky and Marceca entered into the 75th St. Loan Agreement, Marceca owned 50% of the stock of 75 Corp.

In 2003, after Marceca's death, the Estate sold its 50% share to the corporation's co-owner, the Rinzler Group, for $1,900,000. The Estate claims that the sale did not trigger the Distributable Profits clause because the money came from a third party and not from the 75 Corp. entity itself. According to the Estate, Plaintiff's claim based on his 75th Street loan is premature, because (1) there has not been a final distribution of the Distributable Profits and (2) the maturity date-November 2, 2010-has not been reached. Devinsky claims that the sale of 75 Corp. was intentionally structured in violation of the covenant of good faith to avoid triggering repayment under the 75th St. Loan Agreement.*fn3

4. 142 East 49th Street

Shortly before his death, Marceca convinced Devinsky to invest $600,000 to obtain an equity interest in a property located at 142 East 49th Street. Devinsky made the investment in two stages: (1) on October 19, 2000, in the amount of $500,000 of which $350,000 related to 49th Street and $150,000 related to 77th Street*fn4 ; and (2) on January 12, 2001 (after Marceca's death), in the amount of $250,000. Devinsky testified that he made the latter investment based on representations from Kingsford. (EED SOF Response ¶¶ 61-63.) Devinsky did not receive any transaction document, such as a contract or membership agreement, concerning any investment relating to the 49th Street property.

By March 2001, Kingsford reported in a letter to Devinsky, that the entire building was about to come under the control of a Marceca-related entity.*fn5 He later testified that the Estate could not put the financing together for the project as originally intended due to Marceca's intervening death. (See October 10, 2006 Deposition of Daniel Kingsford ("10/10/06 Kingsford Dep.")*fn6 at 194:3-12.) As a result, Kingsford arranged for a "flip sale" of the 49th Street entity to a purchaser named Bob Heller in June 2001. (Id. at 193:13-16.) Devinsky was never paid any proceeds from this sale, though Kingsford testified that he "[p]robably should have been," and that 49th Street was a "mystery" to him. (Id. at 194:3-6.) He suggested that the absence of a signed agreement documenting Devinsky's interest in the property might have precluded repayment. (Id. at 194:15-18.) Devinsky testified that, subsequent to the June 2001 "flip sale," Kingsford falsely stated to him in several conversations, both on the phone and in person, that the sale did not go through and that he was still working on the sale.*fn7 (EED Response ¶¶ 68-69.)

The ledger for Kensington, a holding corporation for Marceca's properties, reflects a $600,000 loan and exchange with Devinsky. (JE 26.) The Estate concedes that "someone" owes Devinsky $600,000, but does not expressly concede that this someone is either Kensington or the Estate.*fn8 (EED Mem. at 9.) On the assumption that the Estate owed Plaintiff this money, the Executor Defendants considered repaying Plaintiff in 2002 but were advised by counsel that such a payment, at a time of insolvency, would be a ...

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