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Island Two LLC v. Island One, Inc.

United States District Court, S.D. New York

March 9, 2015

ISLAND TWO LLC and SCOTT SOZIO, Plaintiffs,
v.
ISLAND ONE, INC. and DOUGLAS TEITELBAUM, Defendants. ISLAND ONE, INC., Counterclaimant,
v.
ISLAND TWO LLC and SCOTT SOZIO, Counterclaim Defendants.

OPINION AND ORDER

LORNA G. SCHOFIELD, District Judge.

This action arises out of a dispute between two business associates, Doug Teitelbaum and Scott Sozio, and a failed attempt to sell Island One Inc. ("Island One"), a Florida corporation in which they both had an interest. Island One develops and manages properties in Florida. Before the Court are the parties' motions for summary judgment and partial summary judgment on all but one of Plaintiffs' claims and all of Defendants' counterclaims. For the reasons that follow, the motions are granted in part and denied in part.

I. BACKGROUND

The facts below are taken from the parties' Rule 56.1 statements and submissions to the Court. The facts are either undisputed or read in the light most favorable to the non-moving parties. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

A. Initial Purchase and Management of Island One

In May 2011, Island One was purchased by Timeshare Acquisitions LLC ("TA"), a company that was formed by Teitelbaum, and in which Sozio's family has part ownership. TA is managed by TAC Sponsor LLC ("TAC"). TAC is owned 75% by Teitelbaum and 25% by Sozio. From the time TA purchased Island One, Teitelbaum and Sozio agreed that the plan would be to improve Island One's financial performance, and then resell it to a third party.

In May 2011, Island One entered into a Management Agreement with Homewood Capital, LLC ("Homewood") and Sozio's company, Island Two, LLC ("Island Two"). Homewood was owned by Teitelbaum and employed Sozio. Island Two is a limited liability company with Sozio as its sole owner and employee. Under the Management Agreement, Homewood was to serve as Island One's manager, and Island Two was to serve as its advisor. In exchange for these services, Island One agreed to pay an annual fee of $500, 000, with 75% or $375, 000 going to Homewood, and 25% or $125, 000 going to Island Two. The Management Agreement provided for an initial five-year term, through August 2016, but permitted earlier termination in certain circumstances, discussed in further detail below. The Management Agreement also provided for exculpation and indemnification of Homewood and Island Two in certain circumstances, also addressed below.

B. The Attempted Sale and Sozio's Role

In March 2012, Island One's CEO, Sterling Stoudenmire, advised Island One's Board of Directors, which included Teitelbaum and Sozio, that he wanted to buy Island One from TA through his company, Sterling Leisure Holdings ("SLH"). The parties initially planned to sell Island One and an Island One subsidiary, Crescent One LLC ("Crescent"), to SLH for $22 million (the "Attempted Sale"). According to Island One, the terms of the Attempted Sale were discussed, but were never set in stone.

To finance the Attempted Sale, Stoudenmire initially brought in two primary equity investors, and also invited Teitelbaum to invest in SLH, who declined. In addition, Stoudenmire offered Sozio's family the opportunity to roll over its existing interest in TA into SLH, and Sozio expressly sought and received permission from Teitelbaum to take that opportunity. The parties offer conflicting evidence about whether Stoudenmire's invitation, and Teitelbaum's consent, included Sozio's personal investment in SLH.

Throughout the Attempted Sale, Sozio was involved on both the seller's side (in his role as a Director on the Island One Board and advisor to Island One under the Management Agreement) and on the buyers' side (as a result of Stoudenmire's investment invitation to Sozio's family and, as Sozio claims, to him personally). Because of his dual roles, Sozio became a conduit for information between the seller's side and the buyers' side, although the parties dispute the extent of the information Sozio shared and Sozio's motivations in sharing and, in certain cases, failing to share information. There is no dispute that both parties were aware of Sozio's conflict of interest, but the parties disagree regarding the nature and extent of that conflict.

Plaintiffs contend that Teitelbaum was fully aware of Sozio's conflict of interest and consented verbally and in writing to Sozio's participation on both the seller's side and the buyers' side. Sozio presents evidence that Teitelbaum was approached by Stoudenmire and others to remove Sozio from his role on the seller's side in order to alleviate the conflict of interest, but declined to take action. According to evidence presented by Plaintiffs, Teitelbaum placed no restrictions on Sozio's ability to invest in SLH. Plaintiffs likewise present evidence, in the form of a declaration from Sozio, that Sozio was never asked by Island One to disclose information about the buyer or the financing of the transaction.

Island One asserts that Stoudenmire asked Sozio and his family to participate on the buyers' side as a passive, minority investor and that Sozio was granted permission by Teitelbaum and another Island One Director to participate on the buyers' side only in that limited capacity, and with the expectation that he would continue to play a substantial role on the seller's side in his capacity as a Director and an advisor to Island One. Island One maintains that Sozio took advantage of his dual roles, and attempted to force through the Attempted Sale, concealing problems on the buyers' side and intentionally withholding material information on the seller's side from the Island One Board of Directors. Island One adduces evidence of six such instances, all disputed by Plaintiffs.

First, Island One presents evidence that Sozio did not disclose to the Island One Board that he and Stoudenmire never reached a definitive agreement regarding Sozio's role as a minority investor in SLH, or that the two individuals were engaged in a dispute over the ownership of SLH. Island One also adduces evidence that, had the Island One Board known of the failure to reach agreement over the ownership of SLH, Island One would not have spent further time or resources on the Attempted Sale. Plaintiffs admit that Sozio and Stoudenmire did not reach a final agreement on the ownership structure of SLH, but deny that Sozio failed to disclose that fact to the Island One Board - noting that Stoudenmire was on the Island One Board and accordingly was aware of the lack of an agreement. Plaintiffs present evidence that SLH had the ability to complete the purchase of Island One with or without the Sozio family's equity contribution.

Second, Island One presents evidence that Sozio did not disclose to the Island One Board, or anyone else on the seller's side, that two prospective equity investors backed out of the Attempted Sale. According to Island One's evidence, the seller's side would not have moved forward with the Attempted Sale had it known of the loss of these prospective equity investors. Plaintiffs admit that Sozio knew that both prospective investors had dropped out, and did not disclose that information to anyone on the seller's side. Plaintiffs also submit evidence in the form of an email chain that Teitelbaum was told that equity investors were not "lined up yet, " and responded by stating "[y]up. Not much we can do, " evidencing both awareness and a lack of concern over the loss of the two prospective investors.

Third, Island One presents evidence that Sozio did not disclose to the Island One Board that, at Stoudenmire's suggestion, Island One was charged for buyers' side expenses consisting of fees charged by potential lenders to the buyers' group. Sozio denies being aware that the buyers' group charged the lenders' fees to Island One.

Fourth, Island One adduces evidence that Sozio failed to disclose a valuation of Crescent that was prepared by a third party for Island One at Sozio's request, for the purpose of selling Crescent after the acquisition of Island One by the buyers' group. Plaintiffs admit that Sozio received a valuation of the Crescent property, but adduce evidence that the valuation was prepared for Sozio, not for Island One, and that Sozio viewed the valuation as deficient (and therefore did not show the report to anyone), because it treated the property as a hotel or condominium, and not a timeshare resort. According to evidence adduced by Plaintiffs, Sozio told Stoudenmire about the report, although ...


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