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Edmonds v. Seavey

September 15, 2009

JOHN L. EDMONDS, INDIVIDUALLY AND AS A MANAGING GENERAL PARTNER OF FIFTH AND 106TH STREET HOUSING COMPANY, INC., LOGAN PLAZA ASSOCIATES, LP, CHARLES H. HILL ASSOCIATES A/K/A CHARLES H. HILL ASSOCIATES, LP, AND AS A LIMITED PARTNER OF CHURCH HOME ASSOCIATES, LP, PLAINTIFF,
v.
ROBERT W. SEAVEY, INDIVIDUALLY AND AS A GENERAL PARTNER OF FIFTH AND 106TH STREET ASSOCIATES, LP, LOGAN PLAZA ASSOCIATES, LP, CHARLES HILL ASSOCIATES, LP, AND AS A LIMITED PARTNER OF CHURCH HOME ASSOCIATES, LP; PHYLLIS M. SEAVEY, INDIVIDUALLY AND AS OWNER, MANAGER AND MEMBER OF DALTON MANAGEMENT COMPANY LLC; AVERY B. SEAVEY, INDIVIDUALLY AND AS GENERAL PARTNER OF LOGAN PLAZA ASSOCIATES, LP, CHURCH HOME ASSOCIATES AND OWNER OF DALTON MANAGEMENT COMPANY, LLC; NEALE B. SEAVEY, INDIVIDUALLY AND AS OWNER, MANAGER AND MEMBER OF DALTON MANAGEMENT COMPANY, LLC; RONALD DAWLEY AS CHIEF EXECUTIVE OFFICER OF DALTON MANAGEMENT COMPANY, LLC; DALTON MANAGEMENT COMPANY, LLC; THE SEAVEY ORGANIZATION; AND MARKS PANETH & SHRON, AUDITORS, DEFENDANTS.



The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge

OPINION & ORDER

This case concerns an alleged scheme to defraud Plaintiff John L. Edmonds ("Edmonds" or "Plaintiff") of his financial stake as partner in numerous government-assisted residential building projects in upper Manhattan. Followingsix months of inspection of the Partnerships' books and records, on June 23, 2008 Edmonds filed a $500 million lawsuit alleging various violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., as well as numerous state law claims that sound in fraud, breach of contract and breach of fiduciary duty against individuals and entities involved in the various Partnerships, who are Robert W. Seavey, Phyllis M. Seavey, Avery B. Seavey, Neale B. Seavey, Ronald Dawley, Dalton Management Company LLC ("Dalton") and the Seavey Organization (the "Seavey Defendants") as well as the Partnerships' auditors, the accounting firm Marks, Paneth & Shron ("MP&S") (collectively, "Defendants"). The Defendants have moved for summary judgment on all of Edmonds's claims;*fn1 the Seavey Defendants also move for summary judgment on their counterclaim for breach of fiduciary duty. For the reasons set forth below, Defendants' motion for summary judgment on Edmonds's RICO claim is granted, and the balance are state claims, and with respect to each I choose not to exercise supplemental jurisdiction and thus they must bedismissed.

I. FACTUAL BACKGROUND*fn2

A. Edmonds's Relationship with the Seaveys and the Partnerships

In approximately 1973, Edmonds entered into four limited partnerships with members of the Seavey family or entities owned by members of the Seavey family (the "Partnerships"). These Partnerships were: Fifth and 106th Street Associates, LP, a/k/a Lakeview Apartments ("Lakeview"), Logan Plaza Associates, LP ("Logan Plaza"), Charles H. Housing Associates, LP ("Charles Hill") and Church Home Associates, LP ("Church Home"). The Partnerships each owns and operates a different low- or middle-income residential real estate development. The projects togetherconsist of approximately 840 residential units, each of which is subsidized by the city, state or federal government, and each is overseen and regulated pursuant to statute, e.g., Mitchell- Lama and Section 8,*fn3 and agencies such as the New York State Division of Housing and Community Renewal ("DHCR"), HUD, the New York City Housing Preservation & Development ("HPD") and the New York City Housing Development Corp. ("HDC").

Throughout the years, the Partnerships have used different management companies to manage the day-to-day operations of the properties. After having determined that previous management companies had not successfully managed the properties, in 2000, with Edmonds's knowledge and consent, the Partnerships entered into management agreements with Dalton, a limited liability company with approximately eleven employees and owned by certain members of the Seavey family. Because each of the properties that Dalton manages is subject to city, state or federal programs, Dalton likewise is regulated and monitored by various government agencies, including DHCR, HUD, HDC and HPD.

Dalton maintains the books and records of the Partnerships and retains MP&S to provide accounting and auditing services for the partnerships.*fn4 Periodically and at the end of each business year, MP&S conducts an audit of the Partnerships' books and records and offers recommendations to Dalton for the maintenance of its books and records. MP&S also provides tax return preparation services to the Partnerships and assists in dealing with the Internal Revenue Service and handling any audits conducted by the taxing authorities. All other bookkeeping services for the Partnerships are performed by Dalton, for example processing accounts payable and receivable, and handling and recording rent bills and receipts.

Throughout the years, Edmonds has often complained that he has not received income from his interest in the Partnerships to which he believes he is entitled, althoughhe did receive partnership distributions in excess of $20,000 monthly in 2007 and 2008. Edmonds has varying interests in each of the Partnerships.*fn5 On numerous occasions Edmonds has threatened to file a RICO action against the Seavey Defendants if he did not receive the money from Dalton and/or the Partnerships that he deemed due to him. The Seavey Defendant repeatedly reminded Edmonds that the properties are low- to middle-income government-subsidized housing projects and as such do not generate significant profit. However, since the time that Dalton took over management of the Partnerships' properties, their income streams have increased. By contrast, before Dalton was retained as the management company in 2000, the partners in Logan Plaza, Charles Hill and Church Home had never received a distribution payment. As a partner in each of the Partnerships, Edmonds has the right to inspect the books and records of the Properties and Dalton; in addition, Dalton monthly provides copies of dispersed checks, financial statements and payroll documents for the Partnerships to Edmonds at his request.

B. Edmonds's 2007 Review of Dalton's Books and Records

The crux of Edmonds's complaint in this matter, once the myriad of cobwebs are cast aside, is his belief that Dalton is misappropriating the Partnerships' funds by using Partnership proceeds to pay its own employees and entering into below-market contracts with vendors, among other things, and that the financial statements that he receives from Dalton through the mails are therefore fraudulent. To amass fodder for an anticipated RICO lawsuit, in March 2007 Edmonds retained the accounting firm Cameron, Griffiths & Pryce ("CG&P") to review the books and records of the Partnerships. For approximately six months, CG&P came to Dalton's offices to review these records. WhileCG&P never complained that any information was not providedto them, at the conclusion of their review they claimed that the documentation to support certain accounting entries was unavailable. CG&P sent several requests for information, none of which specified the information they sought. MP&S offered to sit down with CG&P to review any issues with any of the accounting documents, but CG&P never accepted the invitation.

On December 12, 2007, CG&P submitted its only written report that summarized its conclusions and recommendations based on its six-month inspection of the Partnerships' books and records. See Declaration of Robert Seavey ("Seavey Decl.") Ex. 12. Although the report notes several problems with the accounting methodology used by Dalton, the report nowhere states that any of the financial statements contained any false or misleading financial information. See id. Further, they failed to findany additional distributions were due to Edmonds or the other partners.*fn6 See id. The majority of the issues identified by CG&P relate to classifications of certain fees; that is, CG&P concluded that the amounts were reflected accurately in the financial statements, but that it would have been better accounting practice if they were classified differently. See id. The report also concludes that Dalton misappropriated funds from Logan Plaza to pay its salaries and other expenses and states that these payments are "contrary to the management contract." Id. However, the management contracts expressly permit Dalton to use Partnership funds to pay employee salaries. See Declaration of Robert Seavey ("Seavey Decl.") Ex. 6 at ¶ 13(b). Despite these"issues," one of the named partners in the accounting firm testified at his deposition that the actual numbers and calculations in each of these entries were accurate and that all supporting documentation, such as the underlying invoices, matched the amounts contained in the books and ledgers. See Deposition of Orley George Cameron ("Cameron Dep.") 121:17-123:11.

C. Edmonds's Agreements with T-WOL Leasing Corporation

The Partnership Agreement of the Lakeview property sets forth the agreement and relationship among the general partners and limited partners with respect to the management and operation of that property. Under the Partnership Agreement, the managing partners are required to "act unanimously at all times; otherwise their actions shall be null and void." From 1996 through 1998, Edmonds, at the time a general partner of Lakeview, entered into a series of agreements with an unrelated company called T-WOL Leasing Corporation ("T-WOL") that culminated in a document entitled "Confidential Negotiated Settlement and Release of All Claims" (the "Confidential Agreement"). In the Confidential Agreement, Edmonds, purporting to act on behalf of Lakeview, agreed to pay T-WOL the sum of $100,000 in exchange for subleasing T-WOL's leased commercialspace to a subtenant. The Confidential Agreement was entered into without the consent of Lakeview's other general partner, Robert Seavey. T-WOL has now commenced litigation against Lakeview in ...


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