CIMEN v. HQ CAPITAL REAL ESTATE (2024)

Order, Supreme Court, New York County (Joel M. Cohen, J.), entered on or about March 14, 2023, which granted defendants' motion to dismiss the amended complaint pursuant to CPLR 3211(a)(1) and (7), unanimously affirmed, without costs.

“[E]xpressions of hope for the future do not constitute actionable representations of fact ․ [A] party does not make an actionable representation of fact when predicting a future event with no knowledge of whether or not the event may occur” (Albert Apt. Corp. v. Corbo Co., 182 A.D.2d 500, 501, 582 N.Y.S.2d 409 [1st Dept. 1992], lv dismissed 80 N.Y.2d 924, 589 N.Y.S.2d 311, 602 N.E.2d 1127 [1992]).  Thus, to the extent the first and second causes of action (fraud and negligent misrepresentation) were based on the investment memoranda's understatement of the expected vacancy losses, they were properly dismissed.

It is true that (1) the portfolio's natural turnover rate is a historical fact and (2) the average rent for a three-bedroom apartment near the properties is a present fact.  However, insofar as the fraud claim was based on the above, it was properly dismissed due to lack of scienter.  Although scienter is the element of fraud that is “most likely to be within the sole knowledge of the defendant and least amenable to direct proof, plaintiff is still required to allege facts from which it is possible to infer defendants' knowledge of the falsity of their statements when they were made” (MP Cool Invs. Ltd. v. Forkosh, 142 A.D.3d 286, 292, 40 N.Y.S.3d 1 [1st Dept. 2016] [brackets and internal quotation marks omitted], lv denied 28 N.Y.3d 911, 2016 WL 7400720 [2016]).  Plaintiffs allege no such facts;  instead, they merely allege, “Upon information and belief, HQ either knew that [the] statements [about turnover rate and average rent] ․ were false or made such statements with reckless disregard for determining the truth thereof.”  An allegation made “on information and belief ․ is insufficient to state [a fraud] claim” (Elmrock Opportunity Master Fund I, L.P. v. Citicorp N. Am., Inc., 155 A.D.3d 411, 412, 62 N.Y.S.3d 797 [1st Dept. 2017]).

To the extent that plaintiffs rely on the fact that the portfolio performed much worse than expected, that is insufficient (see MP Cool, 142 A.D.3d at 292, 40 N.Y.S.3d 1 [“Although the company may not have performed as plaintiff expected, this does not support a reasonable inference that defendants knew that (the company) would fall short of its business projections”]).

Plaintiffs allege, “Upon information and belief, HQ received significant benefits for obtaining Plaintiffs' investments.”  However – apart from the fact that this allegation is made on information and belief – an allegation of “pecuniary incentive ․ is insufficient to plead scienter” (Jonas v. National Life Ins. Co., 147 A.D.3d 610, 612, 48 N.Y.S.3d 77 [1st Dept. 2017] [internal quotation marks omitted]).

Relying on DaPuzzo v. Reznick Fedder & Silverman, 14 A.D.3d 302, 788 N.Y.S.2d 69 (1st Dept. 2005), plaintiffs contend that it is sufficient to plead gross negligence or recklessness.  However, DaPuzzo said, “In a fraud case against an auditor, a showing of gross negligence or recklessness will permit the trier of fact to draw the inference that a fraud was ․ perpetrated” (id.).  HQ is not an auditor.  None of the cases in which we have cited DaPuzzo have extended its statement about gross negligence/recklessness to non-auditors.  Furthermore, the allegations in DaPuzzo were more indicative of fraud than the ones in the instant action.

Reasonable reliance is an element of negligent misrepresentation (see Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104 [2011]).  This element is lacking with respect to the average market rent for a three-bedroom apartment near the properties because this is not “peculiarly within [HQ]'s knowledge” (Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322, 184 N.Y.S.2d 599, 157 N.E.2d 597 [1959] [internal quotation marks omitted]), and plaintiffs, “by the exercise of ordinary intelligence” (id. [internal quotation marks omitted]), could have ascertained this information.  Moreover, plaintiffs did not reasonably rely on information relating to the projected renovation and turnover rates.  Plaintiffs allege in conclusory terms that HQ had no reasonable basis to believe that 92% of available apartments “would be vacated and renovated during such period.”  However, defendants disclosed in the investment memorandum that the 52 apartment units subject to the HOME written agreement would not be candidates for upgrade until the program's expiration in 2018.  Further, plaintiffs acknowledged, in the limited partnership agreement, that each was a “sophisticated investor,” “thoroughly familiar with the terms of this Agreement and the Partnership's plans to enter into the Investment, and that it does not desire any further information or data relating to the Investment, the Partnership or the General Partner.”  Accordingly, the court properly dismissed plaintiffs' second cause of action for negligent misrepresentation.

The gross negligence claims (third, fifth, and seventh causes of action) were correctly dismissed.  Where, as here, a contract contains an exculpatory clause, gross negligence “is conduct that evinces a reckless disregard for the rights of others or smacks of intentional wrongdoing” (Colnaghi, U.S.A. v. Jewelers Protection Servs., 81 N.Y.2d 821, 823–824, 595 N.Y.S.2d 381, 611 N.E.2d 282 [1993] [internal quotation marks omitted]).  A conclusory assertion that a defendant acted “ ‘recklessly,’ unsupported by any factual allegations of conduct evincing a reckless disregard for the rights of others or smacking of intentional wrongdoing, [i]s insufficient to state a cause of action alleging gross negligence” (Mancuso v. Rubin, 52 A.D.3d 580, 583, 861 N.Y.S.2d 79 [2d Dept. 2008]).

The fiduciary duty claims (fourth, sixth, and eighth causes of action) were properly dismissed.  Before plaintiffs Hanna Cimen, Jan Borchers, Panse Vermogensverwaltung GmbH, Jurgen Neuhaus Beteiligungsgesellschaft mbH, and EMS Vejen ApS and double derivative plaintiff RECAP Clinton Hill Investors, LLC (in which plaintiffs Treagle Limited Group, Al Yasra Investment Co. Ltd., Redina Holdings Ltd., The RMH Trust, and TAS International Foundation invested indirectly) became limited partners of nonparty RECAP Clinton Hill Investment, L.P. (the Partnership), defendant RECAP Clinton Hill GP, LLC did not owe them a fiduciary duty (see generally MP Cool, 142 A.D.3d at 293, 40 N.Y.S.3d 1).

RECAP Clinton Hill GP owed the limited partners a fiduciary duty once they became limited partners.  However, the documentary evidence shows that the decision that the Partnership would invest in nonparty Clinton Hill Investment LP had already been made – and, presumably, any due diligence the Partnership conducted on Clinton Hill had already been performed – before plaintiffs became limited partners.