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The Najjar Group, LLC v. West 56Th Hotel LLC

United States District Court, S.D. New York

March 1, 2017



          RONNIE ABRAMS, United States District Judge.

         Plaintiff Najjar Group, LLC brings this diversity action against Defendant West 56th Street Hotel, LLC ("West 56th") for breaching the terms of an agreement to operate a New York hotel. Plaintiff moves for leave to file a third amended complaint. For the reasons set forth below, Plaintiffs motion is denied.


         A. Factual Background

         On December 15, 1997, Plaintiffs predecessor-in-interest, the Najjar Group, Ltd., sold and conveyed to Defendant its right to purchase a parcel of property located at 15 West 56th Street in New York, New York. TAC ¶ 14. In exchange, Defendant granted the Najjar Group, Ltd. a twenty percent membership interest in BDC 56 LLC ("BDC"), the remaining eighty percent of which was owned by Defendant. TAC ¶ 14. Najjar Group, Ltd. and Defendant also entered into an operating agreement (the "Operating Agreement") to own and operate a hotel on the property. TAC ¶ 14; see SAC Ex. A § 2.6. Defendant thereafter constructed and opened the Chambers Hotel, which has been operating and open to the public since 2002. TAC ¶ 15. In or around April 2005, Defendant amended and restated the Operating Agreement. TAC ¶ 21.[2]

         The Operating Agreement contains several terms relevant to this dispute. First, additional members may not be added to BDC without the prior written consent of Najjar Group, Ltd., if their admission would dilute Najjar Group Ltd.'s interest in BDC or adversely affect its distributions from BDC. TAC ¶ 19. Second, BDC must deliver financial statements to each of its members as soon as practicable after the close of each fiscal year. TAC ¶23; Operating Agreement § 4.1.1. Third, Defendant, as manager of BDC, is responsible for securing funds necessary to pay for startup expenses, estimated to be four million dollars. TAC ¶ 29; Operating Agreement §§ 6.1-6.2. Defendant must arrange third-party financing to cover these expenses to the extent that it is able to do so, but it may not dilute Najjar's interest in BDC through either third-party financing or any of its own capital contributions to cover start-up expenses. TAC ¶ 29; Operating Agreement §§ 6.1-6.2. Fourth, net cash flow from operations is to be distributed on a monthly basis in the following order of priority: (1) to each member of BDC in an amount that provides the member a ten percent rate of return, compounded annually, on its outstanding capital contributions, and (2) to the members in accordance with their equity interests. See TAC ¶¶27, 31-32; Operating Agreement § 7.1.1.

         Plaintiff raises several objections to Defendant's management of BDC. Plaintiff primarily challenges Defendant's decision to contribute fifteen million dollars-far greater than the four million dollars estimated in the Operating Agreement-as additional capital contributions for startup expenses, rather than borrowing these funds from banks or other lenders at a lower rate of interest. See TAC ¶¶ 38-39. Plaintiff also alleges that Defendant misclassified funds as its own capital contributions or additional capital contributions, when in fact those funds were provided by non-members. See TAC ¶ 45. In effect, Plaintiff claims that Defendant has admitted additional members to BDC-thus diluting Plaintiffs interest-without Plaintiffs consent. See TAC ¶ 46. In addition, Plaintiff claims that Defendant violated "the explicit terms" of the Operating Agreement by misclassifying repayments of capital as returns on capital, failing to deduct repayments of capital from the applicable capital accounts, and improperly accruing interest on capital contributions and additional capital contributions. See TAC ¶ 48.

         B. Procedural Background

         This action follows Plaintiffs pursuit of two similar actions against Defendant in New York state court. In 2007, Plaintiff brought an action against Defendant and three of its members in the Supreme Court of New York. See Aff of Steven G. Sonet in Opp'n to PL's Mot. ("Sonet Aff") ¶ 4, Ex. B (ECF No. 64). In 2012, the Supreme Court granted summary judgment in favor of the defendants and dismissed Plaintiffs amended complaint. See Sonet Aff. ¶ 6, Ex. D. In 2013, the Appellate Division of the Supreme Court, First Judicial Department, affirmed. See Sonet Aff. ¶ 7, Ex. E. In 2011, Plaintiff brought a derivative action against Defendant, its individual members, and other entities in the Supreme Court of New York. See Sonet Aff. ¶ 8, Ex. F. The Supreme Court dismissed Plaintiffs complaint in 2012, see Sonet Aff. ¶ 9, Ex. G, and the First Department affirmed the following year, see Sonet Aff. ¶ 10, Ex. H.

         On September 4, 2014, Plaintiff filed a complaint in this action against Defendant and three of its individual members. See Compl. (ECF No. 1). On September 15, 2014, the Court ordered Plaintiff to amend the complaint to allege the citizenship of each party and to specify whether Defendant had any members other than the individual defendants. See Order (Sept. 15, 2014) (ECF No. 3).

         On September 29, 2014, Plaintiff filed its First Amended Complaint. See First Am. Compl. ("FAC") (ECF No. 5). The First Amended Complaint added the jurisdictional allegations the Court requested and asserted eight causes of action: (1) breach of contract, (2) breach of fiduciary duty, (3) breach of the implied covenant of good faith and fair dealing, (4) common law fraud, (5) deceptive acts or practices, (6) tortious interference, (7) accounting, and (8) involuntary judicial dissolution. See FAC ¶¶ 83-156. Plaintiff requested damages and equitable relief. See FAC ¶¶(aMg).

         On October 21, 2014, West 56th and the individual defendants moved to dismiss all claims except Plaintiffs claim for breach of contract. See Mot. to Dismiss (ECF No. 10). On November 5, 2014, Plaintiff voluntarily dismissed, without prejudice, all its claims against the individual defendants and all but its breach of contract claim against West 56th under Federal Rule of Civil Procedure 41(a)(1). See ECF No. 16.

         On November 9, 2014, Plaintiff filed a Second Amended Complaint ("SAC") against West 56th. See SAC (ECF No. 22). The Second Amended Complaint asserted only a breach of contract claim. See SAC ¶¶ 79-115. West 56th filed an answer on December 1, 2014. See Answer (ECF No. 23). Over the course of the next year, the parties engaged in fact and expert discovery. See generally Joint Letter of Jan. 22, 2016 (ECF No. 39); Tr. of May 13, 2016 Conf (ECF No. 62).

         On June 21, 2016, Plaintiff moved for leave to file a Third Amended Complaint ("TAC"). ECF No. 51. Plaintiffs proposed Third Amended Complaint adds three claims to the breach of contact claim asserted in the Second Amended Complaint: (1) accounting, (2) breach of fiduciary duty, and (3) breach of the implied covenant of good faith and fair dealing. See TAC ¶¶ 50-67, 73-76.[3] The proposed Third Amended Complaint also adds two new factual allegations: (1) an accounting discrepancy, alleged in support of Plaintiff s claim for accounting, see TAC ¶ 55, and (2) the assignment to Plaintiff of all causes of action, claims, or other rights arising from its membership in BDC from Plaintiffs predecessor, Najjar Group Ltd., see TAC ΒΆ 11. On June 27, 2016, the ...

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