| Frame v Maynard |
| 2011 NY Slip Op 03335 [83 AD3d 599] |
| April 28, 2011 |
| Appellate Division, First Department |
| Alexander M. Frame, Respondent, v Kenneth L. Maynardet al., Appellants. R.H. Guthrie et al., Respondents, and Caroline Paulson et al.,Respondents-Appellants, v Kenneth L. Maynard et al., Appellants. |
—[*1] William J. Dockery, New York, for respondents-appellants. Leslie Trager, New York, for Alexander M. Frame, respondent. B. Joseph Golub, P.C., New York (Benjamin J. Golub of counsel), for Guthrierespondents.
Judgment, Supreme Court, New York County (Paul G. Feinman, J.), entered October 27,2008, after a bench trial, inter alia, awarding the principal amounts of $421,220.80 to plaintiff,$325,598.54 to cross claimant Beatrice Guthrie and $162,799.27 to cross claimant Paulson, anddismissing the cross claims of cross claimant Hines, unanimously modified, on the law and thefacts, the amounts awarded to Guthrie and Paulson vacated, Hines's cross-claims for breach offiduciary duty and constructive fraud reinstated, and the matter remanded for further proceedingson damages in accordance with the opinion herein. Appeals from order, same court and Justice,entered on or about October 7, 2008, unanimously dismissed, without costs, as subsumed in theappeal from the judgment, and appeals from orders, same court and Justice, entered February 5,2009 and April 24, 2009, unanimously dismissed, without costs, as academic.[*2]
Plaintiff Frame and defendant Maynard were the twogeneral partners of a limited partnership (the partnership), formed in 1980, to acquire and operatea building at 5008 Broadway, and they acquired the underlying land as tenants in common. Theeight limited partnership shares were acquired by Maynard, Guthrie, Paulson, Hines and others.Under the limited partnership agreement (the agreement), the net proceeds of a sale orrefinancing of the "Project," defined as the building, were to be split 60-40 between the limitedpartners and the general partners. Following a settlement agreement entered into in 1986, Frameconveyed his one-half interest in the underlying land to the partnership and resigned as generalpartner. The agreement was amended to provide that Frame would receive 20% of the netproceeds of a sale or refinancing of the "real property in the Project," with the remainder to besplit 25% to the general partner and 75% to the limited partners.
In May 2001, Maynard offered to acquire the limited partners' interest in the partnershipproperty for $842,427. Maynard provided schedules to the limited partners representing that thevalue of the building, based on its cash flow as shown in historical profit and loss statements,was $665,074 or $842,427, depending on the capitalization rate used. A majority of the limitedpartners consented to Maynard's proposed acquisition of the property, i.e., the building and the50% ownership interest in the land owned by the partnership, on his own behalf or for a whollyowned entity.
However, Maynard did not disclose to the limited partners that, since March 2001, he hadbeen negotiating with the Community Preservation Corporation (CPC) to obtain a mortgage loanon the property at 5008 Broadway from the Federal Home Loan Mortgage Corporation (FreddieMac) in the proposed amount of $1,550,000. During those negotiations, Maynard provided CPCwith "adjusted" historical profit and loss numbers, which supported the proposed loan amount.An appraisal prepared by an independent appraiser in connection with Maynard's loan applicationvalued the building and land in the range of $2.2 million as of June 2001. In November 2001,Maynard sent checks in the amount of about $40,000 per share to the limited partners purportedlyrepresenting their share of the sale of the partnership property.
On February 7, 2002, Maynard assigned his right to acquire the partnership property todefendant 5008 Broadway Associates, LLC (5008 LLC) for nominal consideration, and a deedconveying the property to 5008 LLC was filed. On the same date, 5008 LLC received a mortgageloan from CPC in the amount of $1,485,000, leaving net proceeds of about $1 million. In lateFebruary, Maynard made an additional distribution to the limited partners of about $5,000 pershare, purportedly representing final distribution of the partnership's assets.
At trial, Maynard testified that he never disclosed any facts concerning his negotiations withCPC for the proposed $1.5 million loan to the limited partners because he "simply didn't see anyconnection." He denied knowing that any appraisal had been prepared in connection with hismortgage application, and insisted that the representations he made to the limited partnersconcerning value were true, while CPC and Freddie Mac were overvaluing the property.Regarding Frame's interest under the agreement, Maynard testified that he did not distribute anyamounts to Frame because, after deducting the value of the one-half interest in the land, therewere no sales proceeds to distribute to him.
It is well established that the decision of the fact-finding court should not be disturbed unlessit is obvious that the court's conclusions could not be reached under any fair interpretation of theevidence (Thoreson v Penthouse Intl., 80 NY2d 490, 495 [1992]). Here, we defer to thetrial court's findings that Maynard was not a credible witness, and that the limited partners, the[*3]loan mortgage officer from CPC and the appraiser whoappraised the property generally were credible. We note as well that Maynard's testimony was atodds with common sense in important respects and was undermined by documentary evidence,including contemporaneous documents tending to establish what can scarcely be doubted in anyevent, i.e., that Maynard well knew of the appraisal.
The record amply supports the trial court's conclusion that Maynard breached his fiduciaryduty. As a general partner, Maynard owed a fiduciary duty to the limited partners that continued"until the moment the buy-out transaction closed" (Blue Chip Emerald v Allied Partners,299 AD2d 278, 279 [2002]; seeMadison Hudson Assoc. LLC v Neumann, 44 AD3d 473, 483 [2007]). That dutyimposes a stringent standard of conduct that requires a fiduciary to act with " 'undivided andundiluted loyalty' " (Blue Chip Emerald at 279, quoting Birnbaum v Birnbaum,73 NY2d 461, 466 [1989], citing Meinhard v Salmon, 249 NY 458, 463-464 [1928])."Consistent with this stringent standard of conduct, . . . when a fiduciary. . . deals with the beneficiary of the duty in a matter relating to the fiduciaryrelationship, the fiduciary is strictly obligated to make 'full disclosure' of all material facts,"meaning those " 'that could reasonably bear on [the beneficiary's] consideration of [thefiduciary's] offer' " (id., quoting Dubbs v Stribling & Assoc., 96 NY2d 337, 341[2001]). It is beyond dispute that the facts relating to Maynard's negotiation of a mortgage loan ofabout $1.5 million, which required that the property be valued at over $2 million, had a bearingon the limited partners' consideration of Maynard's offer to acquire the property based on avaluation of $842,427 (see Littman vMagee, 54 AD3d 14, 17-18 [2008]; Blue Chip Emerald, 299 AD2d at 280).Since the consents were revocable and the partnership was not dissolved, Maynard had acontinuing duty to inform the limited partners of material facts.
The trial court correctly found that Paulson and Guthrie, as beneficiaries of this fiduciaryrelationship, were entitled to rely on Maynard's "representations and his complete, undividedloyalty" (TPL Assoc. v Helmsley-Spear, Inc., 146 AD2d 468, 471 [1989]), and were notrequired to perform "independent inquiries" in order to reasonably rely on their fiduciary'srepresentations (id.; see alsoAndersen v Weinroth, 48 AD3d 121, 136 [2007]). Guthrie was entitled to rely on herhusband's assessment of the offer letter, and Paulson could rely on Maynard's affirmative duty todisclose material information when she questioned him about the "amazingly low" price. Neitherwas aware of any information that rendered their reliance unreasonable, or would cause them toquestion Maynard's representations (see Littman, 54 AD3d at 17; cf. Global Mins. & Metals Corp. vHolme, 35 AD3d 93, 98-101 [2006], lv denied 8 NY3d 804 [2007]). Even ifthey had investigated further, there is no basis for finding that they would have uncovered theconcealed facts (see Andersen, 48 AD3d at 136).
For the same reasons, we conclude that Hines justifiably relied on Maynard's oral and writtenrepresentations concerning the value of the partnership property. Hines lived in South Carolinaand, as an investor in three limited partnerships managed by Maynard, had relied on him for 20years. Although he had doubts about aspects of the offer letter and had questioned Maynard overthe years about expenses, it was only in hindsight, after he learned that Maynard had createdadjusted historical figures that supported a property valuation of over $2 million, that he realizedthat the offer letter was full of falsehoods. Under these circumstances, Hines's impressiveeducational and professional credentials do not warrant a finding that he did not justifiably relyon Maynard's material misrepresentations and omissions. Even if he had inquired [*4]further, there is no basis for finding that he could have discoveredthe concealed information, since Maynard testified he saw no reason to disclose it and did notknow of the appraisal himself.
Regarding Frame's claim that Maynard breached the agreement, we agree with the trialcourt's finding that Maynard's interpretation of the agreement to exclude Frame from anydistribution of net proceeds resulting from a sale of the partnership's property is neither crediblenor comprehensible. To accept Maynard's argument would render meaningless the provisionrequiring distribution of the first 20% of proceeds of a sale or refinancing of the "Project" toFrame, and also would require interpreting the same term differently within the same section ofthe contract. The court properly accorded the words of the contract their "fair and reasonablemeaning" consistent with the parties' "reasonable expectations" (Sutton v East Riv. Sav.Bank, 55 NY2d 550, 555 [1982] [internal quotation marks and citations omitted]).
The general rule is that the measure of damages when a fiduciary has sold property for aninadequate price is the difference between what was received and what should have beenreceived, so that the beneficiary of the fiduciary duty is placed in the same position he or shewould have been in absent the breach (3 Scott, Trusts § 208.3, at 1687 [3d ed 1967]).Matter of Rothko (43 NY2d 305 [1977]), however, established an exception to thisgeneral rule. In that case, the trustees of the artist Mark Rothko's estate engaged in self-dealing.Specifically, they sold paintings to galleries with which they were affiliated and the galleriespromptly resold the paintings for up to 10 times the amounts paid to the estate. The Surrogateawarded damages in the amount of the difference between the sale price and the value of thepaintings at the time of the trial. The Court of Appeals upheld the award, holding that thisincreased measure of damages is appropriate "where the breach of trust consists of a seriousconflict of interest—which is more than merely selling for too little" (Rothko, 43NY2d at 321). The Rothko Court specified that the "serious conflict of interest" was theself-dealing of the trustees who sought to profit from the low sales prices to the detriment of theestate. Subsequent cases have upheld the Rothko rule in both estate and other fiduciarysituations, awarding appreciation damages when a fiduciary has engaged in self-dealing (e.g. Matter of Witherill, 37 AD3d879, 881 [2007]; Scalp & Blade v Advest, Inc., 309 AD2d 219, 232 [2003]).
This case cannot be distinguished from Rothko. In both cases, the trial court found abreach of fiduciary duty as well as both constructive and actual fraud resulting from self-dealingby the fiduciaries. The Rothko Court described the conduct of the estate trustees as"manifestly wrongful and indeed shocking" (Rothko, 43 NY2d at 314). Maynard'sconduct in the present case is no less improper, especially given that he repeatedly assured thelimited partners that the price he was offering was generous while simultaneously negotiating fora mortgage that presupposed a far higher valuation for the partnership property.
However, the trial court's determination to exclude Maynard's limited partnership share fromthe calculation of the limited partners' damages was improper. While a faithless servant forfeitshis right to compensation, Maynard did not acquire his interest as a result of fraud or breach ofduty, and is not receiving any compensation on account of his share. Disregarding his share incalculating damages leads to an unwarranted windfall for the litigating limited partners, who areentitled only to their fair share of net proceeds received from the sale of partnership property atfair market value (see Rothko, 43 NY2d at 321-322). We have previously held thatremoval of Maynard as general partner is not an appropriate remedy in light of the dissolution ofthe partnership (Frame v Maynard,39 AD3d 328 [2007]). Concur—Gonzalez, P.J., Saxe, McGuire, Manzanet-Danielsand RomÁn, JJ.
The decision and order of this Court entered[*5] herein onNovember 18, 2010 (78 AD3d 508 [2010]) is hereby recalled and vacated (see 2011 NYSlip Op 71122 [2011] [decided simultaneously herewith]).