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Shahab v. Eitan Wertheimer

August 21, 2012

SHAHAB KARMELY AND SK GREENWICH LLC, PLAINTIFFS,
v.
EITAN WERTHEIMER, EZRA DAGMI, 443 GREENWICH LLC, 443 GREENWICH PARTNERS LLC, W. FAMILY 1 LTD., W-D GROUP (2006) LP, W-D GROUP NY1, LLC, AND JOHN DOES 4-10, DEFENDANTS.



The opinion of the court was delivered by: Robert P. Patterson, Jr., U.S.D.J.

OPINION & ORDER

I. BACKGROUND

A. Procedural History*fn1

On August 19, 2011, Plaintiffs Shahab Karmely and SK Greenwich LLC (collectively, "Plaintiffs") filed an amended complaint (the "Amended Complaint") against Defendants Eitan Wertheimer, Ezra Dagmi, 443 Greenwich LLC, 443 Greenwich Partners, LLC, W. Family 1 Ltd., W-D Group (2006) LP, W-D Group NY1, LLC, and John Does 4-10 (collectively, "Defendants"). (Am. Compl. ¶¶ 2-11.) The Amended Complaint seeks monetary damages for claims of (1) breach of the Mezzanine Loan documents, (id. ¶¶ 79-83); (2) tortious interference with contract, (id. ¶¶ 84-88); (3) breach of the Operating Agreement, (id. ¶¶ 89-92); (4) account stated, (id. ¶¶ 93-99); (5) breach of fiduciary duty, (id. ¶¶ 100-01); and (6) promissory estoppel, (id. ¶¶ 102-106).

On October 3, 2011, Defendants filed a motion to dismiss the Amended Complaint for failure to state a claim for which relief can be granted pursuant to Federal Rule of Civil Procedure ("Fed. R. Civ. P.") 12(b)(6). On November 11, 2011, Plaintiffs filed a memorandum of law opposing Defendants' motion to dismiss, and on December 19, 2011, Defendants filed a reply memorandum of law in further support of their motion to dismiss. Oral argument in this matter was heard on February 10, 2012 at 9:30 a.m.

B. Facts Alleged in the Amended Complaint

Plaintiff SK Greenwich LLC (hereinafter "SKG") is a Delaware limited liability company controlled by its principal and sole owner, Shahab Karmely ("Karmely"), a New York City real estate developer. (Am. Compl. ¶¶ 2, 3, 18.) Defendant W-D Group (2006) LP (hereinafter "W-D Lender") is a Delaware limited liability company controlled by Eitan Wertheimer ("Wertheimer") and Ezra Dagmi ("Dagmi"), Israeli investors. (Id. ¶¶ 4-5, 10.)

In 2005, Wertheimer and Dagmi approached Karmely to solicit his involvement in developing a multi-billion dollar real estate portfolio. (Id. ¶ 19.) Wertheimer and Dagmi envisioned that Karmely would act as the developer or managing member of the venture, and that instead of being paid a customary development fee, SKG would receive a certain percentage of the profits on each development as compensation for its development services. (Id.) In September 2006, SKG agreed with W-D Group NY1, LLC (hereinafter "W-D Partner"), whose sole member is W-D Lender, to form 443 Greenwich Partners, LLC (hereinafter "443 Partners" or the "Company"), a Delaware limited liability company formed for the express purpose of purchasing, renovating, and redeveloping a building at 443-53 Greenwich Street, New York, NY 10013 ("the Property"). (Id. ¶¶ 7, 9.) Specifically, 443 Partners sought to purchase and develop the Property for the purpose of converting it into luxury condominiums, retail components, and a hotel. (Id. ¶¶ 9, 21, 32.)

1. The Purchase of 443-53 Greenwich Street

On September 7, 2006, 443 Partners purchased the Property for $113 million plus closing costs. (Id. ¶ 26.) In order to fund the purchase and redevelopment of the Property, 443 Partners obtained an $85 million mortgage loan from Anglo Irish Bank Corporation PLC ("Anglo Irish Bank") (the "Anglo Senior Loan"), which was to reach maturity on October 1, 2008, and a $20 million Mezzanine Loan from W-D Lender, which was to reach maturity on October 1, 2009. (Id. ¶¶ 21(b), 26.) As stated in the Operating Agreement of 443 Partners ("the Operating Agreement"), 443 Partners initially received capital contributions of $24.9 million of the purchase price, with W-D Partner funding approximately $19.9 million of this amount, and SKG supplying the other $5.0 million. (Id. ¶ 26; Decl. of Bradley R. Wilson dated October 3, 2011 ("Wilson Decl."), Ex. 1 (Operating Agreement) Schedule 1.1(b).) In exchange for W-D Partner's capital contribution, W-D Partner obtained an 80% membership interest in 443 Partners, and in exchange for SKG's contribution, SKG obtained a 20% membership interest in 443 Partners. (Wilson Decl., Ex. 1 Schedule 1.1(b).)

2. Relevant Documents

a. The Operating Agreement

On September 7, 2006, SKG and W-D Partner entered into the Operating Agreement of 443 Partners which, inter alia, governed the management and operation of the project, and provided for a three-person board of managers. (Am. Compl. ¶ 21; Wilson Decl., Ex. 1 § 6.1(a).) W-D Partner, as the 80% interest holder, had the right to appoint two of the three board members, and SKG, as the 20% interest holder, had the right to appoint the third. (Wilson Decl., Ex. 1 § 6.1(a).) The Operating Agreement also provided that SKG would act as the Operations Member of 443 Partners, responsible for the day-to-day operations of the Property. (Id., Ex. 1 § 6.1(c).) The Operating Agreement provided that SKG, as Operations Member, would perform "all phases of the development of the Property consistent with the intent of the Members and the Budget."*fn2 (Id.) In that role, SKG stood to receive additional fees if the project succeeded, subject to the restrictions imposed by a lender and the rights of W-D Lender under the Mezzanine Loan Documents.*fn3 (Id., Ex. 1 § 6.1(c)(ii).)

b. The Mezzanine Loan Agreement

On or about September 7, 2006, the members of 443 Partners (SKG and W-D Partner), also entered into a Mezzanine Loan Agreement with W-D Lender dated September 7, 2006, pursuant to which W-D Lender loaned $20 million to SKG and W-D Partner (collectively, the "Borrower") (the "Mezzanine Loan"). (Am. Compl. ¶¶ 21, 26.) The Mezzanine Loan was subordinate to the Anglo Senior Loan, (Wilson Decl., Ex. 2 (The Subordination and Intercreditor Agreement) ¶ 4(d)), but senior to the equity investments of SKG and W-D Partner (id., Ex. 1 § 5.1(c)(i)). The terms of the Mezzanine Loan and the remedies available to W-D Lender in the event of default by the Borrower were established by the Mezzanine Loan Promissory Note (the "Note") dated September 7, 2006, (id., Ex. 4 (Promissory Note)), and the Pledge and Security Agreement also dated September 7, 2006, (id., Ex. 5 (Pledge and Security Agreement)) (Collectively, the "Mezzanine Loan Documents"). Under the terms of the Mezzanine Loan Documents, W-D Partner and SKG each pledged 100% of their ownership interests in 443 Partners as collateral for the Mezzanine Loan. (Id., Ex. 4 at 1, Ex. 4 ¶ 8, Ex. 3 ¶ 1.2.) Upon an "Event of Default," SKG and W-D Partner (collectively, as the "Borrower") were jointly and severally liable for the entire balance of the Mezzanine Loan, (id., Ex. 3 ¶ 4.26(h)), and W-D Lender would have the right to foreclose on 100% of either or both SKG's and W-D Partner's equity interests in 443 Partners, (id., Ex. 5 ¶ 6(a), Ex. 2 ¶ 7(b); Am. Compl. ¶ 29). The Promissory Note states that interest of twelve percent per annum shall accrue quarterly until October 1, 2009 (the "maturity date"), when "the balance of principal, and the accrued and unpaid interest then remaining unpaid shall become due and payable." (Wilson Decl., Ex. 4 at 1; Am Compl. ¶ 21.) Furthermore, under the terms of the Pledge and Security Agreement, the Borrower covenanted to "pay or satisfy all of the Obligations" which were defined to include "the punctual payment of the full amount of the Note when due (whether at stated maturity, by acceleration or otherwise) and all interest thereon . . . ." (Wilson Decl., Ex. 5 ¶¶ 1, 4.)

c. The Intercreditor Agreement

W-D Lender and Anglo Irish Bank also entered into a Subordination and Intercreditor Agreement ("Intercreditor Agreement") dated September 7, 2006 which expressly defined the rights of both parties. (Id., Ex. 2 ¶ 4(d).) The Intercreditor Agreement provided that Anglo Irish Bank's rights were superior to those of the Mezzanine Lender, W-D Lender. Specifically, the Intercreditor Agreement stated that [u]ntil all of Borrower's obligations under the Anglo Senior Loan Documents have been paid and performed in full, no payment whatsoever shall be made to Mezzanine Lender by or on behalf of Borrower, Mezzanine Borrower, or any Guarantor for or on account of any amount due under the Mezzanine Loan Documents. (Id.) Furthermore, any payments received by W-D Lender from the Mezzanine Loan Borrower prior to full satisfaction of the Anglo Senior Loan, were required to be held in trust and remitted to Anglo Irish Bank. (Id.)

3. 443 Partners' Efforts to Develop the Property and the Extensions of the Anglo Senior Loan

The Amended Complaint alleges that prior to the redevelopment of the Property, 443 Partners needed to remove existing tenants, develop architectural and design plans, determine appropriate branding and partnership opportunities, obtain clearance from various New York City agencies and community boards, secure zoning and construction permits, and secure construction financing. (Am. Compl. ¶ 33.) As the Operations Member of 443 Partners, SKG was responsible for the completion of these tasks, and to that end, prepared a development budget of approximately $100 million that 443 Partners approved. (Id. ¶ 34.)

The Amended Complaint alleges that by May 5, 2008, SKG had obtained a loan term sheet for construction loan financing from Pacific National Bank. (Id. ¶ 36.) The Amended Complaint further alleges that Dagmi, on behalf of W-D Partner, directed SKG not to pursue the Pacific National Bank loan, but rather to explore construction financing with UBS, a bank at which Wertheimer had many personal contacts. (Id. ¶ 37.) In June 2008, UBS offered construction loan financing terms which were less favorable than those offered by Pacific National Bank. (Id. ¶ 38.) The Amended Complaint further alleges that "notwithstanding Wertheimer's contacts at the upper reaches of UBS, the W-D Defendants summarily rejected UBS's terms" and declined further negotiation with the bank. (Id. ¶ 39.) By this time, however, the Pacific National Bank loan term sheet had expired, and the Property was still without construction financing. Nonetheless, the Amended Complaint alleges that W-D Partner and WD Lender "repeatedly told Plaintiffs, Anglo Irish Bank, and others, that they would provide all necessary funds to develop the 443 Property." (Id. ¶ 40.)

The Amended Complaint also alleges that early in the summer of 2008, a few months prior to the Anglo Senior Loan maturity date of October 1, 2008, 443 Partners was preparing to spend more than $500,000 in furtherance of redeveloping the Property. (Id. ¶ 42.) Prior to releasing the payments, Karmely sought and received assurances from both Dagmi and Dagmi's daughter*fn4 that "they had spoken to, and met with, Wertheimer, and that Wertheimer was funding 100% of the 443 Property development" and that Karmely should "deliver the payments without delay." (Id. ¶ 43.) In reliance on these promises, SKG sent the payments to further redevelop the property, and ceased discussions with other institutional lenders about the possibility of providing construction financing. (Id. ¶ 44.)

443 Partners, by Karmely and Dagmi, entered into negotiations to extend the Anglo Senior Loan, which was scheduled to mature on October 1, 2008. (Id. ¶ 45.) The Anglo Senior Loan was ultimately extended to December 31, 2009. (Id. ¶ 49.) In consideration of this extension, Anglo Irish Bank insisted that the principals of 443 Partners (1) pre-pay an interest and carry reserve of several million dollars; (2) provide $20 million in personal security for the loan; and (3) give a $10 million personal completion guaranty. (Id. ¶ 46.) The Amended Complaint alleges that Plaintiffs would not have agreed to these terms were it not for their reliance on Dagmi's affirmative statements that the W-D Defendants would fund the construction to completion without "punitively diluting Plaintiffs as allowed in the Operating Agreement." (Id. ¶ 47.) On November 19 and 21, 2008, in reliance on the W-D Defendants' promises and assurances, SKG posted $4.3 million in cash, "representing its share of the additional capital contribution required by the bank, and Karmely signed the completion and other guarantees" required by Anglo Irish Bank to extend the Anglo Senior Loan maturity date to December 31, 2009. (Id. ¶ 49.) Although W-D Lender, as the Mezzanine Loan Lender, expressly agreed to the Anglo Senior Loan maturity date extension, there was no "discussion at this time, or indeed any time," about extending the Mezzanine Loan maturity date past October 1, 2009. (Id. ¶ 51.)

In a meeting on December 9, 2008, after the Anglo Senior Loan was extended, the W-D Defendants once again reaffirmed Dagmi's affirmative statements to fund the project to completion. (Id. ¶ 52.) At this meeting, however, Plaintiff alleges that "the [W-D Defendants] raised the possibility that [the W-D Defendants] might invoke the punitive dilution provisions of the Operating Agreement." (Id.) On December 24, 2008, Dagmi, on behalf of the W-D Defendants confirmed the continued funding of the redevelopment of the project by instructing Karmely to inform Anglo Irish Bank "that in 2009 we intend to spend approximately 20 [million dollars] and the rest in 2010/11." (Id. ¶ 53.)

The Amended Complaint alleges that throughout 2009, Karmely and SKG continued their efforts to redevelop the 443 property by meeting with hotel designers, architects, and contractors.*fn5 (Id. ΒΆ 55.) Karmely and SKG also put in place a "Site Safety Plan" for the ...


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