FILED: NEW YORK COUNTY CLERK 09/04/ :29 PM INDEX NO /2014 NYSCEF DOC. NO. 17 RECEIVED NYSCEF: 09/04/2014

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1 FILED NEW YORK COUNTY CLERK 09/04/ PM INDEX NO /2014 NYSCEF DOC. NO. 17 RECEIVED NYSCEF 09/04/2014 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK X GEMS NEW YORK 92 nd INC., Plaintiff, - against SECOND DEVELOPMENT, LLC and ABRAHAM MERCHANT, Defendants, OLD REPUBLIC NATIONAL TITLE INSURANCE COMPANY, Nominal Defendant X SECOND DEVELOPMENT, LLC and ABRAHAM MERCHANT, Counterclaim Plaintiffs/ Third-Party Plaintiffs, - against - GEMS NEW YORK 92 nd INC., Counterclaim Defendant, DENISE GALLUCCI and VENKATA SAIBABA TATA, Third-Party Defendants X Index No /2014 MEMORANDUM OF LAW IN SUPPORT OF COUNTERCLAIM DEFENDANT S AND THIRD-PARTY DEFENDANTS PARTIAL MOTION TO DISMISS PURSUANT TO CPLR 3211 (a)(7) AND 3211(a)(1) AND MOTION TO STRIKE PURSUANT TO CPLR 3024(b)

2 TABLE OF CONTENTS PRELIMINARY STATEMENT...1 A. Background...3 B. The Merchant Personal Guaranty...4 C. Topco s Financial Statements and the Sukuk Issuance...5 D. The Third Amendment and Fajr Transaction...6 STANDARD OF REVIEW...7 ARGUMENT...8 I. The Merchant Fraudulent Inducement Claim Fails to State a Cause of Action Against the Counterclaim Defendant and the Third-Party Defendants...8 II. Second Development s Fraudulent Inducement Claim Fails to State a Cause of Action and Contains Allegations that Are Directly Contradicted by Documentary Evidence...10 A. The Third-Party Complaint Is Devoid of the Requisite Particularity as to the Time, Place, and Manner in which Alleged Misrepresentations Were Made...10 B. The Allegations Regarding the Purported Misrepresentations of the Sukuk Issuance Amount to Bare Legal Conclusions and are Directly Contradicted by Documentary Evidence...12 C. The Allegations Regarding the Purported Misrepresentations of the Fajr Transaction are Directly Contradicted by Documentary Evidence...14 III. The Allegations in Paragraphs 89, 90, 91, 93 and 94 are Unnecessary, Scandalous, and Prejudicial and Should Be Stricken Pursuant to CPLR 3024(b)...14 CONCLUSION...17 i

3 TABLE OF AUTHORITIES Cases Page(s) Ark Bryant Park Corp. v. Bryant Park Restoration Corp., 285 A.D.2d 143 (1st Dep t 2001)...8 Baychester Shopping Ctr., Inc. v. Llorente, 175 Misc. 2d 739 (Sup. Ct. N.Y. Cnty. 1997)...16 In re Estate of Brandon, 55 N.Y.2d 206 (1982)...15 Bumbury v. City of New York, 62 A.D.3d 621 (1st Dep t 2009)...8 DDJ Mgmt. LLC v. Rhone Grp. LLC., 15 N.Y.3d 147 (2010)...9 Eastman Kodak Co. v. Roopak Enters., Ltd., 202 A.D.2d 220 (1st Dep t 1994)...10 Franklin v. Winard, 199 A.D. 220 (1st Dep t 1993)...13 HSH Nordbank AG v. UBS AG, 95 A.D.3d 185 (1st Dep t 2012)...9 Kaisman v. Hernandez, 61 A.D.3d 565 (1st Dep t 2009)...8 In re Merrill Lynch & Co., Research Reports Sec. Litig., 218 F.R.D. 76 (S.D.N.Y. 2003) O Dell v. Ginsberg, 253 A.D.2d 544 (2d Dep t 1998)...10 Pacnet Network Ltd. v. KDDI Corp., 78 A.D.3d 478 (1st Dep t 2010)...13 Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 A.D.3d 495 (1st Dep t 2011)...7 Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486 (2008)...10 Prichard v. 164 Ludlow Corp., 49 A.D.3d 408 (1st Dep't 2008)...13 ii

4 Rosso v. Beer Garden, Inc., 12 A.D.3d 152 (1st Dep t 2004)...15 Ruffino v. N.Y.C. Trans. Auth., 55 A.D.3d 817 (2d Dep t 2008)...8 Simcuski v. Saeli, 44 N.Y.2d 442 (1978)...10 Soumayah v. Minnelli, 41 A.D.3d 390 (1st Dep t 2007)...15 Tex. Farm Bureau v. United States, 725 F.2d 307 (5th Cir. 1984)...13 Tourneau, LLC v. 53rd & Madison Tower Dev. LLC, 27 Misc. 3d 953 (Sup. Ct. N.Y. Cnty. 2010)...8, 9 Ventur Grp., LLC v. Finnerty, 68 A.D.3d 638 (1st Dep t 2009)...8 Wegman v. Dairylea Co-op., Inc., 50 A.D.2d 108 (4th Dep t 1975)...15 Zutty v. Rye Select Broad Mkt. Prime Fund, L.P., No /09, 2011 WL (Sup. Ct. N.Y. Cnty. Apr. 15, 2011)...10 Statutes N.Y. C.P.L.R. 3016(b) (McKinney 2010) ("CPLR")... passim CPLR 3024(b) (McKinney 2010)... passim CPLR 3211(a)(1) (McKinney 2010 & Supp. 2014)... passim CPLR 3211(a)(7) (McKinney 2010 & Supp. 2014)... passim Other Authorities Black's Law Dictionary 488, 657 (10 th ed. 2014)...13 iii

5 GEMS New York 92 nd Inc. ( GEMS NY or the Counterclaim Defendant ) together with Denise Gallucci ( Ms. Gallucci ) and Venkata Saibaba Tata ( Mr. Tata, together with Ms. Gallucci, the Third-Party Defendants ) (collectively with GEMS NY, the Defendants ), by and through their undersigned counsel, Schulte Roth & Zabel LLP, respectfully submit this Memorandum of Law in support of their motions against claims asserted by Second Development, LLC ( Second Development ), and Abraham Merchant ( Merchant or Mr. Merchant ) (collectively, the Counterclaim Plaintiffs ). Specifically, the Defendants move (i) to dismiss Merchant s Third Counterclaim & Second Third-Party Claim (the Merchant Fraudulent Inducement Claim ) pursuant to Rule 3211(a)(7) of the New York Civil Practice Law and Rules ( CPLR ); (ii) to dismiss Second Development s Second Counterclaim & First Third- Party Claim (the Second Development Fraudulent Inducement Claim ) pursuant to CPLR 3211(a)(1) and 3211(a)(7); and (iii) to strike Paragraphs 89, 90 and 91, as well as references to Nations Academy in Paragraphs 93 and 94 of the Counterclaims and Third-Party Complaint pursuant to CPLR 3024(b). PRELIMINARY STATEMENT This action is a dispute between two parties who entered into a written agreement to build and operate a private school in Manhattan. The Counterclaim Plaintiffs came to the table claiming to have the rights to acquire certain properties on the Upper East Side of Manhattan, and the Counterclaim Defendant is a member of a global group of companies that operate private schools around the world, but none in Manhattan. The written agreement between the two lapsed by its own terms. The Counterclaim Plaintiffs are aware that it was their own actions and multiple failures to act that caused the written agreement to lapse by its own terms. They are also aware that the 1

6 remedy for both parties is simply to walk away from the agreement except that the Counterclaim Plaintiffs are required to return the $10 million that they received from the Counterclaim Defendant as security under the written agreement. But in an attempt to keep the $10 million and to try and force the Counterclaim Defendant to pay even more, the Counterclaim Plaintiffs have drummed up two fraudulent inducement claims, both of which consist of unsubstantiated and conclusory allegations, and both of which are an attempt to escape from the clear and binding provisions of the written agreement. One claim is brought by Mr. Merchant, an experienced real estate professional, who professes to have been induced into providing a personal guaranty by certain purported misrepresentations made by the Defendants. Mr. Merchant alleges that he relied on these purported misrepresentations, but he does not provide any indication that, as a sophisticated party must, he conducted due diligence. The other claim is brought by Second Development against GEMS NY and two individuals, Ms. Gallucci and Mr. Tata, who never signed a guaranty and are not officers or directors of the guarantor. Second Development s claim does not provide any detail, much less when, where, how, by whom, and to whom GEMS NY, Ms. Gallucci, and Mr. Tata allegedly made the asserted misrepresentations. What the claim does instead is highlight a single representation by another GEMS company, Topco, which is a non-party to this particular case, and then attempt to attribute that alleged representation to the Defendants. The most natural reading of the Counterclaims is that they were brought simply because the Counterclaim Plaintiffs do not like the written agreement they entered into and are seeking an end run around its provisions. The Counterclaim Plaintiffs also allege that the Defendants and Topco failed to disclose aspects of Topco s financial condition, but this claim must fail for the simple fact that the 2

7 pertinent information was disclosed. That is, the documentary evidence shows that in February 2013, prior to the execution of the Lease and Guaranty, Mr. Tata sent the Counterclaim Plaintiffs financial statements that disclosed Topco s financial condition and the aspects about which the Counterclaim Plaintiffs complain. Further, the Counterclaim Plaintiffs offer no support for their allegation that Topco had taken on undisclosed debt, and no support for their separate allegation that Ms. Gallucci and Mr. Tata falsely represented that the Fajr Transaction was about to close. In truth, the Fajr Transaction did close and was funded on or about July 26, Finally, the Court should strike the irrelevant, scandalous, and prejudicial allegations regarding Nations Academy in Paragraphs 89, 90, 91, 93, and 94. These allegations repeat unrelated assertions from a complaint to which the Counterclaim Defendants were not a party that dates back to 2008 approximately five years before the events at issue in the instant case. Moreover, the Nations Academy allegations were never proven and the case was settled and dismissed. The instant case is about a contract dispute in 2014; the regurgitated claims about Nations Academy are asserted only to create a false impression of scandal and prejudice the Counterclaim Defendants. STATEMENT OF FACTS 1 A. Background The Counterclaim Plaintiffs allege that in late 2013, representatives of GEMS NY approached Second Development regarding a proposal to construct a school on certain parcels of land located on Second Avenue in Manhattan (the Assemblage Site ). (Counterclaim 92, 96). Thereafter, and continuing through early 2014, GEMS NY and Second Development were engaged in negotiations for a lease of the property at the Assemblage Site. (Id. 96). On March 1 The Statement of Facts sets forth the allegations in the Counterclaims and Third-Party Complaint and does not constitute an admission of any particular fact by the Defendants. 3

8 9, 2014, Second Development and GEMS NY entered into a written agreement, a build-to-suit, triple-net lease, dated as of March 5, (the Lease ). (Id. 100.) Simultaneously with the execution of the Lease, Topco provided Second Development with a guaranty of GEMS NY s obligations under the Lease, also dated as of March 5, 2014 (the Guaranty ). Among other things, the Guaranty provided that Topco would maintain, at all times, a minimum Enterprise Valuation of $1 billion and Liquidity of $150 million, as those terms are defined in the Guaranty. (Id. 106.) The crux of the Merchant and Second Development Fraudulent Inducement Claims is that GEMS NY, Ms. Gallucci, and Mr. Tata made purported misrepresentations and material omissions about the financial condition of Topco. (Id. 190, 202.) The Counterclaim Plaintiffs allege that those purported misrepresentations and material omissions induced them into executing the Lease, the Guaranty, an amendment to the Lease, and, as to Mr. Merchant, a written, personal guaranty of certain of Second Development s obligations under the Lease. (Id. 192, 203.) B. The Merchant Personal Guaranty Pursuant to the Lease, GEMS NY delivered $500,000 in Initial Key Money to Second Development that was to be returned to GEMS NY in the event that the parties were unable to enter into an Architect Agreement by the Final Architect Outside Date, which would result in the automatic lapse of the Lease. Mr. Merchant provided GEMS NY with a personal guaranty of the return of this Initial Key Money, dated as of March 5, 2014 (the Personal Guaranty ). Mr. Merchant is the President of Merchants Hospitality Inc., which is the managing member of Second Development. (Id. 200.) Mr. Merchant alleges that he relied on the representations of the Defendants as to Topco s financial condition in agreeing to deliver the Personal Guaranty. 4

9 (Id. 115.) But Mr. Merchant, a sophisticated real estate investor, does not claim that he did anything to check the alleged representations. C. Topco s Financial Statements and the Sukuk Issuance The Counterclaim Plaintiffs claim that Ms. Gallucci, Mr. Tata, and GEMS NY falsely represented that Topco s audited financials dated as of March 31, 2013 (the March 2013 financials ) reflected the current financial condition of [Topco], and that there had been no material adverse changes since the issuance of the 2013 Financial Statements. (Id. 108, 111, 114.) The allegation regarding the financial statements has three parts. First, the Counterclaim Plaintiffs allege that, in late 2013, while the parties were negotiating the Lease, Ms. Gallucci and Mr. Tata provided Second Development with the March 2013 Financial Statements. (Id. 107.) Second, the Counterclaim Plaintiffs allege that Topco (but not Ms. Gallucci, Mr. Tata, or GEMS NY) represented and warranted in the Guaranty that [t]here had been no material adverse change in the business or condition, financial or otherwise, of [Topco] since the date of the [March] 2013 financial statements. (Id. 109.) Third, the Counterclaim Plaintiffs allege that Topco s financial condition had materially worsened due to events that Ms. Gallucci, Mr. Tata, and GEMS NY failed to disclose an issuance of approximately $193 million in financial instruments referred to as the Sukuk issuance (the Sukuk Issuance ), and two intercompany loans from Topco s subsidiaries that were issued in October 2013 and January 2014 as part of the Sukuk Issuance (the Intercompany Loans ). (Id. 112, 113.) In sum, the Counterclaim Plaintiffs leverage an alleged representation by Topco against Ms. Gallucci, Mr. Tata, and GEMS NY. Topco is not a party to the litigation in which these Third-Party claims are asserted, however, and the Counterclaim Plaintiffs do not allege that Ms. Gallucci and Mr. Tata are 5

10 officers, principals, or directors of Topco. Rather, the Counterclaim Plaintiffs claim that the Third-Party Defendants are officers only of GEMS NY. (Id. 85.) Further, the Counterclaim Plaintiffs do not disclose that, prior to the execution of the Lease, the Guaranty, amendments to the Lease, and the Personal Guaranty, Mr. Tata also provided Second Development with Topco s unaudited financial statements, dated as of December 31, 2013 (the December 2013 Financial Statements ), which expressly disclose the Sukuk Issuance about which the Counterclaim Plaintiffs complain. (Yaeger Aff. Ex. 1.) 2 The Intercompany Loans were part and parcel of the Sukuk Issuance. (Id.) In addition, Second Development and Mr. Merchant do not allege that they were unaware of the Sukuk Issuance prior to the execution of the Lease and Guaranty. Rather, the Counterclaim Plaintiffs claim, without elucidation, that these facts were not properly disclosed, because, they assert, the Sukuk Issuance was debt, not equity. (Counterclaim 111, 113, 190.) In fact, as shown in an opinion by Ernst & Young dated October 21, 2013, it is equity. (Yaeger Aff. Ex. 2.) The Counterclaim Plaintiffs do not allege any steps they took to determine if the Sukuk Issuance, which was disclosed prior to their executing the Lease and Guaranty, was equity or debt. D. The Third Amendment and Fajr Transaction As part of the Lease, GEMS NY was to post a $15 million letter of credit within 90 days of March 5, 2014, the Commencement Date. (Id. 116.) Then, upon Commencement of Construction of the Building, GEMS NY was to increase that letter of credit to $30 million. (Id. 117.) But prior to the 90-day deadline, because Second Development had not yet acquired any of the parcels of land located at the Assemblage Site, GEMS NY negotiated for, and Second 2 Yaeger Aff. refers to the Affirmation of Michael L. Yaeger in Support of Counterclaim Defendant s and Third-Party Defendants Partial Motion to Dismiss and Motion to Strike, dated September 4, 2014 and filed concurrently herewith. 6

11 Development agreed to, a reduction in the amount of security from a $15 million letter of credit to a $7.5 million cash deposit. The reduced security deposit was memorialized in an amendment to the Lease dated as of June 6, 2014 (the Third Amendment ). Second Development alleges that it agreed to the Third Amendment because Ms. Gallucci and Mr. Tata represented that Topco was about to close a transaction with Fajr Capital that would inject additional liquidity into Topco (the Fajr Transaction ). (Id. 124.) Second Development claims that these representations were false because Ms. Gallucci and Mr. Tata knew that the Fajr Transaction was not about to close imminently. (Id. 127.) In addition, according to the Counterclaims, the Fajr Transaction has still not funded as of August 15, (Id.) In fact, the Fajr Transaction did close, and was funded on July 26, (Yaeger Aff. Ex. 3.) STANDARD OF REVIEW A complaint must be dismissed when the defendant establishes that a defense is founded upon documentary evidence, or when the pleading fails to state a cause of action. CPLR 3211 (a)(1), (a)(7) (McKinney 2005 & Supp. 2014). To establish a cause of action for fraudulent inducement, a plaintiff must allege that (i) defendant made a material misrepresentation or omission; (ii) the misrepresentation or omission was made for the purpose of inducing the plaintiff to act on it; (iiii) the plaintiff justifiably relied on the misrepresentation; and (iv) damages resulted. Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 A.D.3d 495, 498 (1st Dep t 2011). In addition, for claims rooted in fraud, CPLR 3016(b) requires that the circumstances constituting the wrong shall be stated in detail. Although the Court is to accept as true all well-pled factual allegations in considering a motion to dismiss pursuant to CPLR 3211, the Court need not accept as true bare legal 7

12 conclusions or factual claims, especially those that are inherently incredible or that are flatly contradicted by the record. Kaisman v. Hernandez, 61 A.D.3d 565, 566 (1st Dep t 2009); Bumbury v. City of New York, 62 A.D.3d 621, 624 (1st Dep t 2009). When a moving party offers evidentiary material on a motion to dismiss, the court must determine whether the proponent of the pleading has a cause of action, not whether he has stated one. Ruffino v. N.Y.C. Trans. Auth., 55 A.D.3d 817, 819 (2d Dep t 2008); Ark Bryant Park Corp. v. Bryant Park Restoration Corp., 285 A.D.2d 143, 150 (1st Dep t 2001). ARGUMENT The Counterclaims contain two causes of action for fraudulent inducement that should both be dismissed. The Merchant Fraudulent Inducement Claim fails to state a cause of action as against all Defendants. The Second Development Fraudulent Inducement Claim consists of allegations that are directly contradicted by documentary evidence and also fail to state a cause of action as against all Defendants. Thus, neither cause of action can survive a motion to dismiss. In addition, the Third-Party Complaint unnecessarily contains prejudicial and scandalous allegations that should be stricken pursuant to CPLR 3024(b). I. The Merchant Fraudulent Inducement Claim Fails to State a Cause of Action Against the Counterclaim Defendant and the Third-Party Defendants In New York, as a matter of law a sophisticated plaintiff cannot establish that it entered into an arm s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification available to it. Tourneau, LLC v. 53rd & Madison Tower Dev. LLC, 27 Misc. 3d 953, (Sup. Ct. N.Y. Cnty. 2010); see also Ventur Grp., LLC v. Finnerty, 68 A.D.3d 638, 639 (1st Dep t 2009) ( Having failed to make any effort to verify [defendant s] representations plaintiff cannot demonstrate justifiable reliance. ). In Tourneau, Justice Fried dismissed a claim for fraudulent inducement, noting that, 8

13 [i]n the absence of any allegations that [plaintiff] attempted to verify the representations by which it was allegedly misled during the negotiations of the lease, the claim for fraudulent inducement fails to adequately allege justifiable reliance, as a matter of law, and must be dismissed. Tourneau, 27 Misc. 3d at 961. In support of the Merchant Fraudulent Inducement Claim, Mr. Merchant alleges that he relied upon the Defendants alleged fraudulent misrepresentations when he approved and executed the Lease and the Personal Guaranty. (Counterclaims 204.) Mr. Merchant is unquestionably a sophisticated and experienced real estate professional who was represented by counsel during the negotiations of the Personal Guaranty, and thus, to survive a motion to dismiss, his Claim must contain sufficient allegations to establish justifiable reliance. But Mr. Merchant s claim fails to make any such allegations. As in Tourneau, Mr. Merchant s pleading is entirely void of any allegations that he attempted to verify the alleged representations of GEMS NY, Ms. Gallucci, or Mr. Tata, or that he took any other measures to guard against the possibility of false representations made during the negotiations. Contra DDJ Mgmt. LLC v. Rhone Grp. LLC., 15 N.Y.3d 147, 156 (2010) (holding that plaintiffs established justifiable reliance for a fraudulent inducement claim because they made a significant effort to protect themselves against the possibility of false financial statements[.] ). Further, unlike in the Guaranty signed by Topco, the Personal Guaranty does not contain any representations and warranties by Topco (or GEMS NY) regarding the accuracy of the March 2013 Financial Statements. Accordingly, the Merchant Fraudulent Inducement Claim should be dismissed as against all Defendants. See HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 198 n.9 (1st Dep t 2012) (dismissing a fraudulent inducement claim where plaintiff, a sophisticated party, did not 9

14 establish justifiable reliance because it failed to investigate and also did not insist on a warranty concerning the matters it claims were misrepresented). II. Second Development s Fraudulent Inducement Claim Fails to State a Cause of Action and Contains Allegations that Are Directly Contradicted by Documentary Evidence A. The Third-Party Complaint Is Devoid of the Requisite Particularity as to the Time, Place, and Manner in which Alleged Misrepresentations Were Made To set forth a fraud claim against the Defendants with sufficient particularity to satisfy CPLR 3016(b), the Counterclaim Plaintiffs must set forth in detail when, where, how, by whom, and to whom the alleged misrepresentations were made. Eastman Kodak Co. v. Roopak Enters., Ltd., 202 A.D.2d 220, 222 (1st Dep t 1994) ( Dismissal is also required. [because] defendant alleged neither the time nor place of the purported misrepresentations. ); Zutty v. Rye Select Broad Mkt. Prime Fund, L.P., No /09, 2011 WL , at *9 (Sup. Ct. N.Y. Cnty. Apr. 15, 2011) (dismissing a fraud claim for lack of specificity as to when and by whom the alleged misstatements were made). This heightened particularity requirement for fraud claims serves to inform a defendant with respect to the incidents complained of and prevents proliferating litigation of baseless claims. Simcuski v. Saeli, 44 N.Y.2d 442, 453 (1978) (particularity serves to inform defendants); Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008) (particularity prevents the litigation of baseless claims). For fraudulent inducement claims, the time in which the statements were made is particularly important because a party clearly cannot be induced into entering into a contract by a statement made after its execution. O Dell v. Ginsberg, 253 A.D.2d 544, 544 (2d Dep t 1998). Here, the Counterclaim Plaintiffs seemingly refer to a number of purported misrepresentations made by various individuals, but other than as to specific representations made by Topco a non-party to this litigation the allegations fail to provide any details as to 10

15 when, where, how, and to whom the representations were made. (Compare Counterclaim 108, (alluding to alleged representations by Ms. Gallucci, Mr. Tata, and GEMS NY without indicating when, where, how, and to whom the representations were made) with (quoting express representations made by Topco that are contained in the written Guaranty).) The Counterclaim Plaintiffs allege that Topco represented and warranted in the Guaranty that the 2013 Financial Statements present[ed] fairly and accurately, in all material respects Topco s Enterprise Valuation as of the Date of the 2013 Financial Statements [and] that [t]here has been no material adverse change in the business or condition, financial or otherwise, of [Topco] since the date of the 2013 Financial Statements. (Id ) But these allegations regarding Topco s express representations in the Guaranty, even if pled with the requisite particularity, cannot serve as the basis for a fraudulent inducement claim against Ms. Gallucci, Mr. Tata, or GEMS NY. Under certain circumstances, corporate officers and directors can be personally liable for torts committed by the corporation, but Second Development does not allege that Ms. Gallucci and Mr. Tata are officers or directors of Topco. Instead, Second Development claims that Ms. Gallucci and Mr. Tata are officers only of GEMS NY and that GEMS NY is an affiliate of Topco. (Counterclaim 85.) In an attempt to improperly attribute the express representations by Topco to all of the Defendants, the Counterclaim Plaintiffs juxtapose the purported representations by Ms. Gallucci and Mr. Tata with the express representations and warranties contained in the Guaranty. (Id ) However, the Counterclaim Plaintiffs allegation as to Ms. Gallucci and Mr. Tata s purported representation, which appears immediately prior to the allegation regarding the representation by Topco in the Guaranty, lacks any of the details required to satisfy the particularity requirement of CPLR 3016(b). Specifically, the Counterclaim Plaintiffs allege 11

16 merely that Ms. Gallucci and Mr. Tata represented that the 2013 Financial Statements accurately reflect the current condition of [Topco], and that there had been no material adverse changes since the issuance of the 2013 Financial Statements. (Id. 108.) This allegation provides no indication as to when, where, how, to whom and on behalf of whom this purported representation was made. Notwithstanding the fact that the Counterclaim Plaintiffs only reference a single representation by Ms. Gallucci and Mr. Tata, the Counterclaim Plaintiffs repeatedly allege in the paragraphs that follow, that Ms. Gallucci, Mr. Tata and GEMS NY made multiple express representations and false assurances regarding the financial condition of Topco. (Id ) The Counterclaim Plaintiffs cannot achieve through juxtaposition, and improper attribution, the level of detail required to meet the heightened pleading standard of CPLR 3016(b). Thus, because the Counterclaim Plaintiffs allegations lack the specific details as to when, where, how, by whom and to whom the Defendants alleged representations were made, the Second Development Fraudulent Inducement Claim fails to state a claim and should be dismissed. B. The Allegations Regarding the Purported Misrepresentations of the Sukuk Issuance Amount to Bare Legal Conclusions and are Directly Contradicted by Documentary Evidence The Counterclaim Plaintiffs allege that the Defendants and Topco (a non-party) failed to properly disclose the Sukuk Issuance and related Intercompany Loans. (Id. 111, 113, 190.) This allegation is directly refuted by documentary evidence, which shows that the Sukuk Issuance was disclosed in the December 2013 Financial Statements that were provided to Second Development by Mr. Tata in February 2013, prior to the execution of the Lease and Guaranty. (Yaeger Aff. Ex. 1.) Specifically, the December 2013 Financial Statements contain an item titled GEMS MEA Sukuk, which is listed under Equity in the amount of $194,394 as of December 31, (Id.) 12

17 Second Development further claims that the Sukuk Issuance was misleading because it was characterized as equity beneficial to Topco, when in fact the Sukuk bonds were debt. (Counterclaim 190.) But the Counterclaims contain no support for the charge that the Sukuk Issuance was debt rather than equity. 3 Causes of action that are based on bare legal conclusions are not entitled to the presumption of truth or favorable inference typically afforded to plaintiffs on a motion to dismiss. See, e.g., Franklin v. Winard, 199 A.D. 220, 220 (1st Dep t 1993) (affirming a trial court s dismissal of a cause of action that was pled in conclusory fashion). The question of whether a financing instrument is properly characterized as debt or equity can have significant implications across a wide variety of matters, and thus is carefully scrutinized by courts. In fact, courts across the country have developed a list of specific factors that are commonly relevant to debt-equity determinations. See, e.g., Texas Farm Bureau v. United States., 725 F.2d 307, 311 (5th Cir. 1984) (citing such factors as the right to enforce interest payments and the presence or absence of a fixed maturity date). Generally, debt has been defined as liability on a claim; a specific sum of money due by agreement or otherwise. Black s Law Dictionary 488(West 10th ed. 2014). And equity has been defined as an ownership interest in property. Id. at 657. Due to the complexities imbedded in these terms, Second Development should be required to provide a basis for their allegation that the Sukuk Issuance was mischaracterized by the Defendants as equity, especially where Ernst & Young opined that the Sukuk Issuance is equity. By failing to do so, Second Development s allegations constitute the sort of bare legal conclusions that courts routinely find insufficient to sustain a cause of action. See, e.g., Pacnet Network Ltd. v. KDDI Corp., 78 A.D.3d 478, 479 (1st Dep t 3 In fact, Ernst & Young issued an opinion on October 21, 2013, at the time of the preparation for the Sukuk Issuance, in which it concluded that the Sukuk Issuance would be accounted for as an equity instrument in the consolidated financial statements of Topco under International Financing Reporting Standards ( IFRS ) (Yaeger Aff. Ex. 2 at 2.) IFRS is recognized as an Approved Accounting Standard in the Lease. And, as set forth in the Ernst & Young opinion, the Sukuk Issuance is perpetual with no requirement to repay principal. (Id.) 13

18 2010) (conclusory allegations are not actionable); Prichard v. 164 Ludlow Corp., 49 A.D.3d 408, 409 (1st Dep't 2008) (conclusory allegations regarding corporate control and the alter ego s principal were insufficient to justify piercing the corporate veil in a breach of contract action, warranting dismissal). C. The Allegations Regarding the Purported Misrepresentations of the Fajr Transaction are Directly Contradicted by Documentary Evidence Second Development s Fraudulent Inducement Claim also alleges that Ms. Gallucci and Mr. Tata falsely represented that the Fajr Transaction was about to close, and that this representation induced Second Development into entering into the Third Amendment. (Counterclaim 124, 128.) According to Second Development, Ms. Gallucci and Mr. Tata knew that the Fajr Transaction was not about to close imminently and that the Transaction still has not funded as of the date of [the Answer and Counterclaims]. (Id. 127.) As shown by the relevant documentary evidence, these allegations are simply unfounded, as the Fajr Transaction did close and was funded on July 26, (Yaeger Aff. Ex. 3.) III. The Allegations in Paragraphs 89, 90, 91, 93 and 94 are Unnecessary, Scandalous, and Prejudicial and Should Be Stricken Pursuant to CPLR 3024(b) In any event, this Court should strike the irrelevant, scandalous, and prejudicial allegations regarding Nations Academy. Specifically, the Counterclaim Plaintiffs allege that GEMS NY engaged in a fraudulent scheme in 2008 to defraud investors in a planned enormous for-profit school called Nations Academy. (Counterclaim ) The Counterclaim Plaintiffs further allege that GEMS NY accepted investments for Nations Academy and used them for lavish expenses, yet never took concrete steps to build Nations Academy. (Id. 90.) These allegations are both false and irrelevant. The Counterclaim Plaintiffs had no involvement whatsoever with any of these claims and, in fact, Counterclaim Plaintiffs base these charges solely on unproven allegations from a complaint in a lawsuit that 14

19 has long since been dismissed. (See id ( according to a federal securities complaint and according to that lawsuit ) (emphasis added).) The Court should therefore strike from the Counterclaims all references to Nations Academy. CPLR 3024 permits this Court to strike any scandalous or prejudicial matter unnecessarily inserted in a pleading. In reviewing a motion pursuant to CPLR 3024(b), the inquiry is whether the purportedly scandalous or prejudicial allegations are relevant to a cause of action. Soumayah v. Minnelli, 41 A.D.3d 390, 392 (1st Dep t 2007); see also Wegman v. Dairylea Co-op., Inc., 50 A.D.2d 108, 111 (4th Dep t 1975) (noting that it is generally held that the test under CPLR 3024(b) is whether the allegation is relevant, in an evidentiary sense, to the controversy and, therefore, admissible at trial ). The alleged fraudulent representations of which the Counterclaim Plaintiffs complain occurred in late 2013 and early Yet to advance the fraudulent inducement claims, the Counterclaim Plaintiffs have chosen to parrot unproven allegations made regarding an alleged fraud that occurred in 2008 years before any of the events at issue in this case and further, in which they were not involved. (See Counterclaim ) These regurgitated claims serve only to create a false impression of scandal and are made to unfairly prejudice the Counterclaim Defendant and the Third-Party Defendants. Indeed, it is clear that the Counterclaim Plaintiffs are improperly attempting to have an inference drawn that, because unproven allegations of fraud were made against GEMS NY in the past, they must have acted fraudulently here as well. (See, e.g., id. 91 ( Just a few years removed from this prior fraudulent scheme, the GEMS group is now trying to pull a similar scheme, this time attempting to use Second Development as its pawn. ); and 94 ( But GEMS Academy turned out to be just another scam like Nations Academy ).) Such an inference is clearly impermissible. [I]t is well established that evidence 15

20 of a person s acts on any particular occasion is not admissible to show that such person acted in a similar fashion on a different, unrelated occasion. Rosso v. Beer Garden, Inc., 12 A.D.3d 152, 154 (1st Dep t 2004) (citing In re Estate of Brandon, 55 N.Y.2d 206, (1982)); cf. In re Merrill Lynch & Co. Research Reports Sec. Litig., 218 F.R.D. 76 (S.D.N.Y. 2003) (striking from a complaint immaterial references to administrative proceedings or other litigation). Furthermore, the allegations regarding Nations Academy bear no relationship to the dispute at issue here. The Counterclaim Plaintiffs were not involved at all in the Nations Academy dispute; the Nations Academy dispute arose from events that occurred at least five years prior to the events at issue here (Counterclaims 89); and the Counterclaim Plaintiffs are not seeking recovery for any alleged misrepresentations made in connection with Nations Academy. The allegations regarding Nations Academy are therefore patently impermissible and inadmissible and should be stricken. See, e.g., Baychester Shopping Ctr., Inc. v. Llorente, 175 Misc. 2d 739, 740 (Sup. Ct. N.Y. Cnty. 1997) (granting counterclaim defendant s motion to strike references to several negative newspaper articles where [n]one of the articles mention [counterclaim plaintiff] or the alleged treatment of him and the articles dated from before the dispute at issue). 16

21 CONCLUSION For all of the foregoing reasons, the Defendants respectfully request that the Court (i) dismiss Merchant s Third Counterclaim and Second Third-Party Claim pursuant to CPLR 3211(a)(7); (ii) dismiss Second Development s Second Counterclaim and First Third-Party Claim pursuant to CPLR 3211(a)(1) and 3211(a)(7); and (iii) strike Paragraphs 89, 90 and 91 in their entirety, as well as all references to Nations Academy in Paragraphs 93 and 94 of the Counterclaims and Third-Party Complaint pursuant to CPLR 3024(b). Dated New York, New York September 4, 2014 SCHULTE ROTH & ZABEL LLP By /s/ Robert J. Ward Robert J. Ward Michael L. Yaeger Alan D. Schindler Frank W. Olander 919 Third Avenue New York, NY Telephone Attorneys for Counterclaim Defendant and Third-Party Defendants 17