LEYTON v. SIEGEL (2022)

The following e-filed documents, listed by NYSCEF document number (Motion 001) 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77 were read on this motion for SUMMARY JUDGMENT.

This action arises from a dispute among partners in a project to develop land in Orange County, New York. Plaintiff, Scott Leyton, has contended that defendants, Glen Siegel and Adam Miller, caused him to be receive fewer profits on the development project than he was entitled to for his work furthering the land's development, and that defendants paid themselves fees to which they were not entitled under the governing operating agreements.

Plaintiff sued for breach of the implied covenant of good faith and fair dealing and for breach of contract. Defendants counterclaimed, seeking a declaratory judgment that plaintiff is not entitled to additional distributions on profits realized after his obligations to further the project had ceased under the operating agreement.

Defendants now move for summary judgment; plaintiff cross-moves for partial summary judgment and for leave to amend. Defendants' motion is granted; plaintiff's cross-motion is denied.

 BACKGROUND

Defendants manage Belvedere Capital Management LLC, a real-estate investment firm. In 2014, defendants determined that an underdeveloped, 272-acre property in Goshen, New York, (owned by nonparty Olivia Serdarevic) could be a lucrative investment if it were rezoned from single-family to commercial zoning.

To pursue this venture, defendants formed two LLCs. The first was Belvedere Goshen LLC. Defendants were members and managers of Belvedere Goshen. Another member of the LLC was plaintiff, whom defendants brought in as a (putative) expert in property rezoning. Belvedere Goshen's operating agreement provided that plaintiff was the LLC's “promote member,” obligated through December 31, 2017, to use his best efforts to obtain the land rights necessary to permit development of the property. As the promote member, plaintiff would receive 15% of the profits from any eventual sale of the land that remained following payment to the members (including plaintiff) of their respective ownership shares of the profits.

The second LLC was Goshen Land Owner LLC, which owned the property itself. Goshen Land had two members, Serdarevic and Belvedere Goshen; and it was managed by Belvedere Capital.

The Goshen town board rejected plaintiff's rezoning proposal in the spring of 2016. Goshen Land entered into negotiations later in 2016 with a company called Merlin Entertainments to sell Merlin the property for development as a LegoLand theme park. Plaintiff claims that in August 2017, before the sale to Merlin Entertainments closed, defendants told plaintiff that unless he gave up his 15% “promote” interest in any development profits realized after the sale, defendants would withhold Belvedere Goshen profit distributions from him.

Goshen Land's sale of the property to Merlin Entertainments closed in October 2017 for $8.25 million. As part of the sale, Goshen Land acquired a 10-year option to lease 10 acres of land on the property from Merlin for retail development. Goshen Land paid distributions from the sale proceeds to Serdarevic (approximately $1.9 million) and Belvedere Goshen (approximately $6 million). Belvedere Goshen, at defendants' direction, paid Belvedere Capital a “sales fee” on the transaction of two percent of its value, or $165,000. Shortly after the sale, defendant Miller wrote to the members of Belvedere Goshen, stating that given the likely capital requirements involved should Goshen Land exercise its lease option, Belvedere Goshen would not for the moment be making any profit distributions to its members.

In June 2018, plaintiff brought this action, asserting two claims: (i) defendants breached the implied duty of good faith and fair dealing under the Belvedere Goshen operating agreement by refusing to distribute some of the proceeds from the Merlin sale to plaintiff; (ii) defendants also breached the Belvedere Goshen operating agreement by directing Belvedere Goshen to pay to Belvedere Capital the two-percent fee on the Merlin sale. Defendants counterclaimed, seeking among other things a declaratory judgment that plaintiff is not entitled to receive a 15% promote-based share of profits in connection with Belvedere Goshen business activities occurring after December 31, 2017.

Defendants now move for summary judgment dismissing plaintiff's complaint and awarding defendants their requested declaratory judgment about post-2017 profit distributions. Plaintiff cross-moves for summary judgment on his second cause of action about the sales fee paid by Belvedere Goshen to Belvedere Capital and for leave to amend to add another breach-of-contract cause of action.

DISCUSSION

To obtain summary judgment, the movant must establish a cause of action or defense sufficient to “warrant the court as a matter of law in directing judgment” in the movant's favor. CPLR 3212. The movant “must make prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact.” (Alvarez v. Prospect Hosp., 68 NY2d 320, 324 [1986].) Once the prima facie showing has been made, “the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action.” (Id.)

I. Plaintiff's Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing in the Belvedere Goshen Operating Agreement

Plaintiff's first claim is that defendants' decision to refrain from distributing profits earned on the sale of the Goshen property to the members of Belvedere Goshen breached the implied covenant of good faith and fair dealing in the Belvedere Goshen operating agreement. In moving for summary judgment dismissing this claim, defendants contend that they acted reasonably and consistently with the Belvedere Goshen operating agreement, and thus could not have violated the implied covenant of good faith and fair dealing in that agreement.¹ Defendants' argument is persuasive.

A covenant of good faith and fair dealing is implicit in every contract. (Glaxo Group Ltd. v DRIT LP, 248 A3d 911, 919 [Del 2021].² ) But this “implied covenant can only be used conservatively,” to “ensure the parties’ ‘reasonable expectations’ are fulfilled.” (Kuroda v SPJS Holdings, L.LC., 971 A2d 872, 888 [Del Ch 2009].) A plaintiff claiming a breach of the implied covenant of good faith and fair dealing “must allege a specific implied contractual obligation, a breach of that obligation, and resulting damage to the plaintiff.” (Id. [emphasis added; internal quotation marks omitted].)

A. Plaintiff's Claim that Defendants Breached the Implied Covenant by Pressuring Him to Relinquish Part of His Promote Interest

Plaintiff claims, relying on a conversation between himself and defendant Siegel, that defendants' exercise of their discretion to refrain from Belvedere Goshen distributions is an improper attempt to pressure him into relinquishing his 15% promote interest in any future profits from retail development of the premises leased back from Merlin. (See NYSCEF No. 57 at ¶¶ 9, 39, 58 [plaintiff's affidavit]; see also NYSCEF No. 65 [plaintiff's email to file]; NYSCEF No. 30 at ¶¶ 48-49 [defendant Miller's affidavit].) But a claim for breach of the implied covenant of good faith and fair dealing is available only when the parties “would have agreed to proscribe the act later complained of had they thought to negotiate with respect to that matter” at the time that the contract was entered into. (Katz v. Oak Indus., Inc., 508 A2d 873, 880 [Del. Ch. 1986].) Here, there is no evidence that the parties would have agreed to proscribe pressuring plaintiff to relinquish his additional 15% promote-based share of post-sale development profits, because the record indicates that the agreement never conferred a right to that profit share to begin with.

The Belvedere Goshen operating agreement requires plaintiff, as “Promote Member,” to “work diligently to obtain the Property Entitlements” for the Goshen parcel of land (NYSCEF No. 31 at 23 [§ 6.8]—i.e., “the entitlements for the Property necessary to enable the Property to be developed in the manner determined by the Managers” (i.e., defendants) (id. at 7 [§ 1.1]). Plaintiff's ceasing to perform this contractual obligation before January 1, 2018, would constitute a default that would, if not cured, lead to plaintiff's forfeiting his promote interest. (See id. [definition of “Promote Forfeiture Event”].) Conversely, therefore, the contract did not require plaintiff to continue his diligent efforts to obtain the “Property Entitlements” for the Goshen parcel after December 31, 2017. Even an uncured ceasing-performance default occurring between January 1, 2017, and December 31, 2017, would result in plaintiff forfeiting only one-third of his promote interest. (See id. at 15 [§ 4.3 [2] [c]].)

Plaintiff's reading of the operating agreement, then, is that although his promote-member obligations under the contract ceased as of December 31, 2017, he is entitled to an added promote-based share of profits realized by Belvedere Goshen after December 31, 2017—apparently in perpetuity. Indeed, given that plaintiff concededly played no role in the negotiations with Merlin that led to Goshen Land receiving a ten-year leaseback option as part of the sale of the property (see NYSCEF No. 42 at Tr. 113-116 [transcript of plaintiff's deposition]), plaintiff's position is that the operating agreement entitles him to an added 15% share of profits even if he played no role in realizing those profits for Belvedere Goshen. This interpretation makes no sense.

Given that plaintiff is not entitled under the express terms of the operating agreement to receive an added promote share of Belvedere Goshen's post-2017 profits, it did not violate an implied covenant of the agreement for defendant Siegel to attempt to pressure plaintiff to relinquish any claim to that post-2017 promote share short of litigation.

B. Plaintiff's Claim that Defendants Breached the Implied Covenant by Refusing to Make Profit Distributions Out of Self-Interest

Plaintiff also asserts that defendants have refrained from making any profit distributions because delaying distributions will increase the share that ultimately goes to members (while also reducing the amount paid to plaintiff as his added promote share); and he claims that this conduct is a bad-faith violation of the implied covenant of good faith and fair dealing. (See NYSCEF No. 57 at ¶ 33.) Defendants explain the decision to refrain from distributing profits as based on the need to reserve capital to cover the substantial anticipated costs of retail development on the portion of the Goshen property leased back from Merlin (assuming that Goshen Land exercises the lease option). (See NYSCEF No. 46 at 15 [opening mem. of law]; NYSCEF No. 76 at 3-4, 6 [reply mem. of law]; NYSCEF No. 30 at ¶¶ 39-43 [aff. of defendant Miller].) Plaintiff's affidavit (although not his memorandum of law) contends this justification is merely pretextual. This court disagrees with plaintiff.

Goshen Land's operating agreement undisputedly permits profit distributions only if sufficient “Available Cash” exists to make them. (See NYSCEF No. 32 at bates-stamp 072 [§ 7.1].) Plaintiff argues, therefore, that because Goshen Land distributed profits from the sale to Serdarevic and Belvedere Goshen, it thereby acknowledged that “that no reserves are required for the development and construction of the retail space,” contrary to defendants' justification. (NYSCEF No. 57 at ¶¶ 25-28, 32.) This contention isgood unpersuasive.

The Goshen Land operating agreement defines “Available Cash” as “cash” (presumably liquid funds) left over after deducting funds needed to cover (i) current operating expenses, (ii) any currently payable third-party debt service and similar expenses, and “an amount equal to the Working Capital Reserve.” (Goshen Land Operating Agreement Schedule B, NYSCEF No. 32 at 41.) The agreement defines “Working Capital Reserve” as “a reserve for the working capital and other needs of the Company as is determined by the Manager.” (Id., NYSCEF No. 32 at 48.) Plaintiff does not identify any evidence that “working capital,” for these purposes, would include capital required for anticipated medium-term investment, such as retail development on premises leased back from Merlin.

In other words, plaintiff has not provided a basis for a reasonable fact-finder to conclude that Goshen Land's decision to make profit distributions necessarily rested on a conclusion that there would be no need to retain capital for developing any leased premises. Absent that evidence, the fact of the Goshen Land distributions alone does not discredit defendants' explanation for their decision to refrain from making Belvedere Goshen profit distributions.

Plaintiff also argues that defendants' decision cannot be legitimately related to anticipated retail-development costs. Belvedere Goshen's business is expressly limited to “the acquisition, ownership, sale or other disposition of membership interests in [Goshen Land] and the taking of such actions as are required of the Company in its capacity as a member of [Goshen Land].” (NYSCEF No. 57 at ¶ 31 [quoting Belvedere Goshen Operating Agreement § 1.1, NYSCEF No. 31 at 2] [alterations in original].) Thus, plaintiff asserts, Belvedere Goshen “is not authorized to perform construction or development on or to the Property,” such that it has no need and no basis to reserve funds to cover expenses to be incurred by Goshen Land. (See id.) As defendants point out, however (see NYSCEF No. 76 at 6-7), § 5.1.2 of the Goshen Land operating agreement makes Belvedere Goshen the only member of Goshen Land responsible for making additional capital contributions on demand “for any purposes related to [Goshen Land] ․ and/or the Property” that Goshen Land sold to Merlin. (NYSCEF No. 32 at 4.) Plaintiff does not explain why it would be pretextual or contrary to Belvedere Goshen's purposes to retain its share of the profits from the land sale in anticipation of a future capital call from Goshen Land for retail-development purposes.

The branch of defendants' motion seeking summary judgment dismissing plaintiff's first cause of action is granted.

Additionally, given this court's conclusion that plaintiff's claims of bad faith and pretext are unsupported by the Belvedere Goshen operating agreement, plaintiff's request for leave to amend his complaint to assert a breach of a putative express contractual obligation to refrain from acting in bad faith (see NYSCEF Nos. 54 at ¶ 4, 56) is denied as wholly without merit.³

II. Plaintiff's Claim that the $165,000 Sales Fee Paid to Belvedere Capital Breached the Goshen Land and Belvedere Goshen Operating Agreements

Plaintiff's second claim is that Belvedere Goshen's paying a $165,000 sales fee to Belvedere Capital violated the Belvedere Goshen operating agreement, and that Belvedere Capital must return that payment. Defendants move for summary judgment dismissing this claim; plaintiff cross-moves for summary judgment finding defendants liable. Defendants' motion is granted; plaintiff's cross-motion is denied.⁴

As an initial matter, it is unclear that plaintiff properly preserved all his summary-judgment arguments about the sales fee. Plaintiff's complaint asserted that defendants' payment of the sales fee breached § 6.3 (b) of the Belvedere Goshen operating agreement. (See NYSCEF No. 1 at ¶¶ 35-38.) At summary judgment, plaintiff adds a materially different argument: The sales fee violated § 8.5 of the Goshen Land operating agreement. (See NYSCEF No. 51 at 7-8.)

Even assuming that plaintiff's sales-fee arguments based on the Goshen Land operating agreement are properly before this court, defendants have shown as a matter of law that they are entitled to summary judgment on this claim.⁵

First, the relief plaintiff seeks is an order granting summary judgment and “directing Defendants to return to Belvedere Goshen LLC the $165,000 that Defendants paid to themselves.” (NYSCEF No. 50 [notice of cross-motion].) But defendants did not pay the $165,000 to themselves. They directed that Belvedere Goshen pay that sum to nonparty Belvedere Capital Management LLC. Granting plaintiff relief on this claim would require this court to disregard Belvedere Capital's corporate form. But plaintiff has neither alleged nor provided evidence that Belvedere Capital is an alter ego of defendants to such an extent that this court may properly pierce the corporate veil.

Second, defendants are not parties to the Goshen Land operating agreement, which was made among Belvedere Capital (as manager), Belvedere Goshen, and Serdarevic. (See NYSCEF No. 32 at 1, 2, and 42 [Schedule B].) Defendants therefore could not have breached that operating agreement through actions taken in their individual capacity. To the extent plaintiff claims that Belvedere Goshen breached the Goshen Land operating agreement through actions taken by Belvedere Goshen's managers (i.e., defendants), the proper defendant would be Belvedere Goshen—not its managers individually. Plaintiff has not sued Belvedere Goshen.

Third, § 8.5 of the Goshen Land operating agreement prohibits Belvedere Capital from receiving “fees or other remuneration for its services as Manager of the company.” (NYSCEF No. 32 at 13.) But Goshen Land did not pay Belvedere Capital the sales fee—Belvedere Goshen did. Additionally, the management services described by the Goshen Land operating agreement are limited in scope: They consist chiefly of acting on behalf of Goshen Land in executing contracts, loans, and other legal agreements, and engaging in financial transactions such as opening bank accounts and writing checks. (See NYSCEF No. 32 at 10-11 [§§ 8.1—8.3].) These services are quite different from the substantive negotiations with Merlin over the terms of the sale of the Goshen property for which Belvedere Goshen paid Belvedere Capital the sales fee.

Fourth, § 6.3 of the Belvedere Goshen operating agreement permits the LLC's managers to make payments to affiliated entities for services rendered to Belvedere Goshen, as long as the payments represent an arms-length amount at a customary rate. (NYSCEF No. 31 at 21 [§ 6.3 [b]].) Plaintiff argues only that the payment here was impermissible because it was for services rendered to Goshen Land, not Belvedere Goshen. (See NYSCEF No. 51 at 8.) This court disagrees. Belvedere Goshen, as the majority member of Goshen Land, received 75% of the profits from Goshen Land's sale of the Goshen property to Merlin. Belvedere Capital's actions in helping to bring about the sale thus benefitted both LLCs—belying the distinction that plaintiff seeks to draw between services rendered to one and services rendered to the other.

III. Defendant's Counterclaim for a Declaratory Judgment that Plaintiff is Not Entitled to an Added Promote Share of post-2017 Belvedere Goshen Profit Distributions

Defendant also moves for summary judgment on its third counterclaim, which seeks a declaratory judgment that plaintiff is not entitled to a 15% promote-based share of Belvedere Goshen profit distributions based on transactions occurring after December 31, 2017—e.g., any profits from developing the premises leased back from Merlin.⁶ (See NYSCEF No. 4 at ¶¶ 75-80 [counterclaim]; NYSCEF No. 46 at 17-20 [defendants' opening memorandum of law].)

For the reasons discussed above in Section I.A, this court concludes that defendants are entitled to summary judgment on their third counterclaim.

Accordingly, for the foregoing reasons, it is hereby

ORDERED that the branch of defendants' motion under CPLR 3212 seeking dismissal of plaintiff's complaint is granted, and the complaint is dismissed, with costs and disbursements to be awarded upon submission of an appropriate bill of costs; and it is further

ORDERED that the branch of defendants' motion under CPLR 3212 seeking a declaratory judgment that Leyton is not entitled to receive a promote-based share of profit distributions in connection with the activities of Belvedere Goshen after December 31, 2017, is granted; and it is further

ORDERED that the branch of plaintiff's cross-motion under CPLR 3212 seeking summary judgment in plaintiff's favor on his second cause of action is denied; and it is further

ORDERED that the branch of plaintiff's cross-motion under CPLR 3025 seeking leave to amend his complaint to add an additional cause of action is denied.

FOOTNOTES

1.   Defendants contend that plaintiff's claim is also barred by § 6.4 (a) of the Belvedere Goshen operating agreement. (See NYSCEF No. 46 at 14.) But this contractual term does not extend that far. Section 6.4 (a) provides that no manager of Belvedere Goshen “shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of ․ acting as a manager” of the LLC. (NYSCEF No. 31 at 22 [emphasis added].) Here, though, plaintiff is not seeking to hold defendants liable for Belvedere Goshen's asserted obligation to have made profit distributions solely because they are Belvedere Goshen's managers. Rather, he is making the materially different claim that as managers, defendants made specific, bad-faith decisions regarding profit distributions that injured plaintiff. Section 6.4 (a) does not bar that claim.

2.   This court's analysis relies on Delaware precedents because the Belvedere Goshen operating agreement provides that it “shall be governed by, construed, interpreted and enforced in accordance with the laws of the State of Delaware.” (NYSCEF No. 31 at 30 [§ 11.6].)

3.   Additionally, as defendants argue (see NYSCEF No. 76 at 5 n 2), § 6.4 (b) of the operating agreement, on which plaintiff relies, does not itself impose a freestanding obligation on defendants to act in good faith—it provides instead only that defendants are immune from suits by other Belvedere Goshen members absent a showing of bad faith, intentional criminal conduct, or the like (see NYSCEF No. 31 at 22 [§ 6.4 [b]]).

4.   Defendants contend that plaintiff's cross-motion on his second cause of action should be denied at the threshold as untimely. (See NYSCEF No. 76 at 8 n 7.) But a dispositive cross-motion is not subject to denial on timeliness grounds where—as here—it addresses issues identical (or nearly so) to the original timely motion. (See Maggio v 24 W. 57 APF, LLC., 134 AD3d 621, 628 [1st Dept 2015].)

5.   This branch of plaintiff's cross-motion also seeks attorney fees. (See NYSCEF No. 50 at 1.) Even if plaintiff were entitled to summary judgment on his second cause of action—which he is not—plaintiff does not identify any basis in statute or contract for the award of attorney fees in relation to that claim.

6.   Plaintiff appears to understand defendants to be seeking summary judgment on their second counterclaim, which seeks a declaratory judgment that plaintiff forfeited his right to a promote share of profit distributions for transactions occurring before December 31, 2017. (See NYSCEF No. 51 at 4-6 [plaintiff's memorandum of law].) That understanding is incorrect: Defendants' opening motion papers do not request summary judgment on the second counterclaim (see NYSCEF No. 46 at 1, 5, 17-20), and defendants' reply papers expressly disclaim that request (see NYSCEF No. 76 at 2).

Gerald Lebovits, J.