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Knopf v. Phillips

United States District Court, S.D. New York

December 22, 2017


          For Norma Knopf and Michael Knopf: Eric W. Berry Berry Law PLLC.

          For Michael Phillips: Lorraine Nadel Adam Hanan Nadel & Ciarlo P.C.

          For Michael H. Sanford: Michael H. Sanford 23 McKinley Road Montauk.



         This is one of three actions before this Court arising from a loan repayment dispute between plaintiffs Norma and Michael Knopf (collectively, the “Knopfs”) and pro se defendant Michael Sanford (“Sanford”) and his company, Pursuit Holdings, LLC (“Pursuit”). In this action, the Knopfs also bring claims against defendant Michael Phillips (“Phillips”) for his purchase of residential property located at 44 East 67th Street (“PHC”) from Pursuit. Phillips moves for summary judgment on the sole remaining claim against him, a claim of actual and constructive fraudulent conveyance brought under the New York Debtor and Creditor Law (“DCL”). The Knopfs move for summary judgment on their breach of fiduciary duty and alter ego claims against Sanford and on their allegations of Pursuit's insolvency “at all relevant times” to this litigation. For the following reasons, Phillips' motion is granted and the Knopfs' motion is granted in part.


         The history of this litigation is described in several prior Opinions, with which familiarity is assumed. See Knopf v. Esposito, 17cv5833(DLC), 2017 WL 6210851 (S.D.N.Y. Dec. 7, 2017); Knopf v. Meister, Seelig & Fein, LLP, 15cv5090(DLC), 2017 WL 1449511 (S.D.N.Y. Apr. 21, 2017); Knopf v. Phillips, 16cv6601(DLC), 2016 WL 7192102 (S.D.N.Y. Dec. 12, 2016); Knopf v. Meister, Seelig & Fein, LLP, 15cv5090(DLC), 2016 WL 1166368 (S.D.N.Y. Mar. 22, 2016); Knopf v. Meister, Seelig & Fein, LLP, 15cv5090(DLC), 2015 WL 6116926 (S.D.N.Y. Oct. 16, 2015).[1] This Opinion recites only those facts relevant to the instant motions. The following facts are undisputed unless otherwise noted.

         A. The Knopfs' Loans to Sanford and Pursuit

         The Knopfs and Sanford had a business relationship before the Knopfs extended the loans which are at issue in this action. In 2000, Michael Knopf, through his IRA, and the Knopfs' company, Delphi Capital Management LLC (“Delphi”), invested in Sanford's hedge fund (“Hedge Fund”). Delphi and Michael I. Knopf IRA were limited partners in the Hedge Fund.[2] Sanford controlled the Hedge Fund's general partner.[3] The Hedge Fund was organized as a Delaware limited partnership.

         The loans from which this litigation arises were made in 2006, when the Knopfs made two loans to Sanford and Pursuit for the purpose of purchasing residential real estate located in Manhattan, New York. The first loan was for $1, 690, 860, which Pursuit used to purchase PHC. This loan was funded with funds withdrawn from holdings in the Hedge Fund.[4] The purchase price was $2, 050, 000. Pursuit closed on the purchase of PHC on January 31, 2006.

         On February 9, 2006, Sanford acknowledged the loan in a signed email to Michael Knopf:

As requested, I hereby acknowledge receipt of $1, 690, 860.00 from Michael and Norma Knopf (and/or from Delphi Capital Management LLC, or other entity which you may designate) which was loaned to Michael Hayden Sanford and Pursuit Holdings LLC on January 31, 2006 so that Pursuit Holdings could complete its purchase of condominium unit Penthouse C at 44 East 67th Street, New York, NY 10021.
As it is understood between you and I, Pursuit will execute an agreement evidencing this interest only loan, which will be for a duration of not more than 24 months from inception, and the interest rate for the first 12 months will be at 9% per annum. The entire loan, or any portion of it, may be repaid without penalty at any time. Pursuit will provide you with a mortgage on Penthouse C and, if you wish, I will provide the additional collateral of my property in Rhinebeck, New York, known as the “Wyndclyffe castle.” If you require that the mortgage on Penthouse C be recorded in NYC, I will be responsible for paying 50% of this expense.
I guarantee that until which time you and I execute agreements with respect to the loan for Penthouse C, I will not offer for sale, mortgage, hypothecate or otherwise encumber Penthouse C.
I understand that your attorney may require that I execute a more formal representation as to our understandings and or may have already completed a loan agreement for me to sign. I will cooperate with you in any way to provide the peace of mind you need so that you know your loan principal is properly protected.

(Emphasis supplied.)

         The second loan was for $3, 250, 000, which Pursuit used to purchase three condominiums located at 10 Bedford Street (the “Townhouse, ” with PHC, the “Properties”). An agreement between Sanford and the Knopfs executed on May 30, 2006 and “dated May 31, 2006” provided:

Michael Hayden Sanford (“Sanford”) is hereby authorized by Michael I. Knopf, Norma Knopf and Delphi Capital Management, LLC (collectively “Knopf”) to withdraw $3, 250, 000 from Knopf's limited partnership interests in the Sanford Partners Voyager Fund, LP on or about May 30, 2006 so that Sanford may complete its purchase of 3 condominium units located at 10 Bedford Street, New York, NY through Pursuit Holdings LLC, a Delaware incorporated single member LLC established and fully owned by Sanford.
It is anticipated that Sanford and Knopf will execute a long form document memorializing both the $1, 690, 860 loan and the $3, 250, 000 loan. Until which time such agreement is executed by both parties, Sanford shall not sell, hypothecate or otherwise encumber the real property he owns at either 44 East 67th Street or 10 Bedford Street without the express written permission of Knopf.

(Emphasis supplied.) On May 30, 2006, Sanford and the Knopfs executed a second agreement granting the Knopfs and Delphi a 20% interest in the net profits of the Hedge Fund. Pursuit closed on the Townhouse in June 2006.

         B. The Sale of PHC

         In 2009, the Knopfs sued Sanford and Pursuit in the Supreme Court of the State of New York, New York County (the “State Court Action”) for repayment of the loans. The complaint asserted claims for breach of contract and breach of fiduciary duty and sought the imposition of a constructive trust on the Properties. At the outset of the litigation, the Knopfs filed notices of pendency against the Properties. On October 15, 2013, the New York State Appellate Division (“Appellate Division”) extended the notices of pendency for a second three-year term. Knopf v. Sanford, 972 N.Y.S.2d 893 (1st Dep't 2013).

         While the State Court Action was ongoing, PHC was marketed for sale through public listings and advertisements with an asking price between $2.7 and $3 million. One listing for PHC stated, “REDUCED BY $1 MILLION FOR QUICK SALE. MUST BE SOLD BY MONTH'S END.”[5]

         In 2013, Phillips learned that PHC was being marketed for sale. At the time, Phillips was in the process of purchasing a different unit -- Apartment 11A -- in the same building as PHC. In July 2013, Phillips purchased Apartment 11A for $4, 750, 000. Phillips' spouse was unhappy with Apartment 11A and Phillips continued looking for another apartment.[6]

         In May 2013, Phillips made an unsolicited offer to Sanford to purchase PHC for approximately $2.25 million. Phillips did not know Sanford prior to learning that PHC was being marketed for sale. In July 2013, Phillips made a second offer to Sanford to purchase PHC for approximately $2.8 million, which Sanford rejected. In December 2013, Phillips made a third offer to Sanford to purchase PHC for $2.9 million, which Sanford accepted.

         On December 23, 2013, Phillips and Pursuit signed a contract for the sale of PHC for $2, 900, 000.[7] Phillips paid a down payment of $150, 000 as a deposit on the sale, which was placed into escrow. Sanford disclosed to Phillips in 2013 that a notice of pendency had been placed against PHC by the Knopfs, and that he and Pursuit were actively seeking to vacate it. Sanford also indicated that he intended to sell PHC to pay attorneys to defend himself in litigation with the Knopfs. In response, Phillips told Sanford that he would not close on the sale of PHC while a notice of pendency remained in place.

         In March 2014, Sanford informed Phillips that he lacked sufficient funds to pay for attorneys to vacate the notice of pendency on PHC. Phillips agreed to release $100, 000 of the $150, 000 down payment to Sanford to enable him to engage attorneys to vacate the notice of pendency. In exchange, Pursuit granted Phillips a mortgage against PHC in the amount of $100, 000. In June 2014, Phillips released the remaining $50, 000 of the down payment to Sanford and the mortgage was amended to reflect that fact.

         On December 11, 2014, the Appellate Division, reversing the lower court, granted summary judgment in favor of the Knopfs on their breach of contract claims. Knopf v. Sanford, 1 N.Y.S.3d 18 (1st Dep't 2014). The Appellate Division also held that the Knopfs had failed to establish their entitlement to summary judgment on their constructive trust claim because they had not made an evidentiary showing that money damages would be inadequate. Id. The Appellate Division, however, did not assess damages. The Knopfs have not obtained a final judgment.

         On December 23, 2014, New York County Supreme Court Justice Milton Tingling issued an order cancelling the notices of pendency. On or around April 15, 2015, Phillips and Pursuit executed an agreement that revised the purchase price of PHC from $2.9 million to $3 million. On July 2, 2015, the Appellate Division affirmed the cancellation.[8]

         Following the cancellation of the notices of pendency, the Knopfs took a variety of actions aimed at preventing the sale of PHC. In connection with this activity, on October 22, 2015, an Appellate Division Justice issued an order that permitted the sale of PHC but required the proceeds to be placed in escrow (“October 2015 Order”). The October 2015 Order reads in relevant part: “1 bedroom property may be sold -- proceeds to be placed in escrow pending further court order.” Subsequent orders issued by the Appellate Division in late 2015 lifted any restraints placed on the sale of PHC, including the escrow requirement imposed by the October 2015 Order. See Knopf v. Esposito, 2017 WL 6210851.

         In late 2015, Phillips agreed to advance Sanford an additional $400, 000 in purchase money to enable him to pay his attorneys and agreed to accept another mortgage on PHC for that same amount. This mortgage was not recorded but was satisfied at the closing of the sale of PHC.

         Phillips' and Sanford's relationship soured at times during this period. In a November 10, 2015 email, Sanford indicated that Phillips was “a pathological liar and beyond unstable.” That day, Phillips responded:

I will take this email as a notice you will seek financing elsewhere. I am truly sorry you are in this spot, but I cannot continue to fund your legal costs with knop[f] it has just broken me. You are correct that I do not have anything or own anything in nyc and the money was borrowed. I am going to return the balance to jamestown and pay off what I am short out of my earnings []. I truly do hope you prevail in your pursuits, and will think good thoughts on your behalf.

         On February 1, 2016, Phillips and Pursuit closed on the sale of PHC at a price of $3 million. None of the proceeds of that sale were placed in escrow.

         On February 8, 2016, Judicial Hearing Officer Ira Gammerman issued a report finding that the Knopfs were entitled to damages against Sanford in the State Court Action in the amount of $10, 937, 850, and that Pursuit was jointly liable for $8, 336, 488 of that amount. The report has not yet been confirmed.

         C. Post-Sale Litigation

         On February 25, 2016, the Knopfs obtained an interim order from an Appellate Division Justice requiring any proceeds remaining from the sale of PHC to be placed in escrow. Pursuit and Sanford have since paid $436, 227.32 of the sale proceeds into an escrow account. On March 24, 2016, the Appellate Division issued a preliminary injunction against any further dissipation of the real estate assets that Pursuit had acquired with loans from the Knopfs. Knopf v. Sanford, 26 N.Y.S.3d 866 (1st Dep't. 2016).

         In June 2017, the Knopfs, Sanford, Pursuit, and other Sanford-related entities entered into a consent order in the State Court Action in which the parties agreed that “[n]o party hereto shall further contend that any other party hereto has heretofore acted in contempt of any court order in connection with this action.” This resolved any claim by the Knopfs in the State ...

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