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Cardinale v. 267 Sixth Street LLC

United States District Court, S.D. New York

September 26, 2014

VITO F. CARDINALE, NICK PONZIO, CARDINALE 363 4TH AVENUE ASSOCIATES, LLC, and PONZIO 363 4TH AVENUE ASSOCIATES, LLC, individually and as members of 267 SIXTH STREET LLC, Petitioners,
v.
267 SIXTH STREET LLC, 363 DEVELOPERS LLC, NOREAST DEVELOPMENT CORP., ISAAC KATAN a/k/a ITZHAK KATAN, RONALD FATATO, DOMINICK J. TONACCHIO, SCOTT ROTHSTEIN, D&S MANAGEMENT INVESTMENT, LLC, D&D MANAGEMENT AND INVESTMENT, LLC, T & L INVESTORS CORP., TONA DEVELOPMENT AND CONSTRUCTION LLC, D&S DEVELOPERS GROUP, LLC, and JOHN DOE #1 TO JOHN DOE #10, Respondents.

RICHARD S. BONFIGLIO, for Petitioners.

SPATA & ASSOCIATES P.C. Vincent F. Spata, MILLER LAW OFFICES, PLLC, Jeffrey H. Miller, Scott J. Farrell, for Respondents.

OPINION & ORDER

JOHN F. KEENAN, District Judge.

Before the Court are cross-motions to vacate, modify, or confirm the arbitration award of Martin S. Tackel ("Arbitrator") dated February 5, 2013 ("Arbitration Award" or "Award"). Petitioners Vito F. Cardinale; Nick Ponzio; Cardinale 363 4th Avenue Associates, LLC; and Ponzio 363 4th Avenue Associates, LLC (collectively, "Petitioners") have moved to vacate or modify the Arbitration Award. Respondents 267 Sixth Street LLC; 363 Developers LLC; Noreast Development Corp; Isaac Katan a/k/a Itzhak Katan; and Ronaldo Fatato (collectively, "267 Sixth Street Respondents"); and Domenick Tonacchio; D&S Management and Investment, LLC; D&D Management and Investment, LLC; T&L Investors Corp.; Tona Development and Construction, LLC; and D&S Developers Group, LLC (collectively, "Tonacchio Respondents") oppose that motion and cross-move to confirm the Award. For the reasons that follow, the Court grants Respondents' motion to confirm the Award and denies Petitioners' motion to vacate or modify the Award.

I. Background

A. The Parties and Their Operating Agreement

Petitioners Cardinale and Ponzio entered into an Operating Agreement with Respondent Katan, in his capacity as president of Respondent Noreast Development Corp., on February 13, 2008 to form Respondent 267 Sixth Street LLC. (Arb. Record 221-49.) On February 20, 2008, Cardinale formed Petitioner Cardinale 363 4th Avenue Associates, LLC, and Ponzio formed Petitioner Ponzio 363 4th Avenue Associates, LLC. (Arb. Record 330-40.) On September 15, 2008, Respondent 363 Developers LLC replaced Noreast Development Corp. as a member. (Arb. Record 525-29.) On December 1, 2008, Respondents Fatato, Tonacchio, and Rothstein were admitted as members of 267 Sixth Street LLC. (Arb. Record 559-62.) Tonacchio managed Respondent D&S Developers Group, LLC. (Arb. Record 583-90.)

There are several provisions of the Operating Agreement that touch upon distribution of assets, which are relevant to the Arbitration Award. Section 15 of the Operating Agreement provides: "The Company's profits and losses shall be allocated to the Members as provided in Schedule C hereto." In turn, section 1.1 of Schedule C defines "Capital Account" as "the account established and maintained for the Member on the books of the Company in compliance with Treasury Regulation §§ 1.704-1(b)(2)(iv) and 1.704.2, as amended." It goes on to say that section 1.1 "shall be interpreted and applied in a manner consistent with such Treasury Regulations." Section 16 of the Operating Agreement sets forth:

Distributions shall be made to the Members at the times and in the aggregate amounts determined by the Manager, to the extent permitted by the Loan Documents as long as any Obligation remains outstanding. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not be required to make a distribution to the Members on account of its interest in the Company if such distribution would violate the Act or any other applicable law or any Basic Document.

Section 24(d) states:

In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, set forth in Section 704 of the [N.Y. Limited Liability Company Law].

There is no arbitration clause in the Operating Agreement.

B. Prior Litigation and the Arbitration Award

The Arbitration Award here arises out of an earlier action before Judge Jack B. Weinstein in the Eastern District of New York ("Eastern District Action"). There, Petitioners alleged, inter alia, that the 267 Sixth Street Respondents and the Tonacchio Respondents breached the Operating Agreement and committed securities fraud and RICO violations. To resolve the Eastern District Action, all parties entered into a Settlement Stipulation, which provided for the creation of a "Disputed Fund" upon the closing of a contract for sale of the premises at 267 Sixth Street in Brooklyn. (Arb. Record 1177-89.) Pursuant to the Settlement Stipulation, once the contract for sale became firm, Petitioners were to dismiss the Eastern District Action with prejudice and the parties agreed to an interim distribution of the net proceeds from the sale. The parties would then arbitrate (1) Petitioners' breach of the Operating Agreement claims; (2) any counter or cross-claims; (3) the distribution of the Disputed Fund; and (4) re-allocation of the interim distributions. The parties' recovery was limited to the amount of the Disputed Fund. (Arb. Record 1185.) The Settlement Stipulation also contained provisions for the Eastern District of New York to retain jurisdiction in the event that (a) the purchaser (a third party) canceled the contract of sale; or (b) there was a breach of the Settlement Stipulation. (Arb. Record 1186.) Judge Weinstein "so ordered" the Settlement Stipulation and terminated the case.

During the arbitration, the parties disagreed about how the proceeds of the sale should be distributed. Respondents and their expert argued that the proceeds should be distributed in proportion to the ownership percentages of each member in accord with New York law. (Arb. Record 58; 1637-39; 2066-70; 2095-97.) Both sides stipulated to the membership interests and capital contributions made by the parties. (Arb. Record 1963-64.)

Petitioners originally argued in their statement of claim that distributions should be made on the "first-in, first-out basis... required by the provisions of the Operating Agreement and the New York Limited Liability Company Law which governs same." (Arb. Record 34.) Petitioners' expert later took the position that Schedule C of the Operating Agreement "requires adjustment of members capital accounts in conformity with the provisions of Treasury Regulation §§ 1.704-1(b)(2)(iv) and 1.704-2 as amended, the former of which require certain allocations of gain and loss to have substantial economic effect' which, in accounting parlance, would require adjustments to the capital accounts of the existing members to reflect their fair market value at the time of admission of new members." (Arb. Record 1715.) Petitioners' expert also set forth several distribution scenarios. The scenarios provided two broad hypotheses. The first hypothesis assumes that 26 ...


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