FILED: NEW YORK COUNTY CLERK 10/23/ :19 PM INDEX NO /2014 NYSCEF DOC. NO. 34 RECEIVED NYSCEF: 10/23/2014

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1 FILED NEW YORK COUNTY CLERK 10/23/ PM INDEX NO /2014 NYSCEF DOC. NO. 34 RECEIVED NYSCEF 10/23/2014 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 REPLY MEMORANDUM OF LAW IN FURTHER 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 ARGUMENT...3 I. The Merchant Fraudulent Inducement Claim Fails to State a Cause of Action...3 II. Second Development s Fraudulent Inducement Claim Should Be Dismissed...7 A. The Counterclaim Plaintiffs have failed to adequately plead fraud claims against Ms. Gallucci and Mr. Tata....7 B. The allegations regarding the Sukuk issuance and the Fajr Transaction are contradicted by documentary evidence....8 III. The Allegations Concerning Nations Academy are Unnecessary, Scandalous, and Prejudicial and Should Be Stricken...12 A. The allegations regarding Nations Academy substantially prejudice the Defendants and would require significant expenditures of time and money on unrelated issues B. The allegations concerning Nations Academy are wholly irrelevant to this dispute CONCLUSION...15 i

3 TABLE OF AUTHORITIES Page(s) Cases Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., 120 A.D.3d 431 (1st Dep t 2014)...9, 10 Baychester Shopping Ctr., Inc. v. Llorente, 175 Misc. 2d 739 (Sup. Ct. N.Y. Cnty. 1997)...12 Matter of Brandon s Estate, 55 N.Y.2d 206 (1982)...15 DDJ Mgmt., LLC v. Rhone Group LLC, 15 N.Y.3d 147 (2010)...4, 5, 6 Great Eagle Int l Trade, Ltd. v. Corp. Funding Partners, LLC, 104 A.D.3d 731 (2d Dep t 2013)...8 Greenberg v. Nusbaum s Dep t Store, 35 Misc. 2d 326 (Sup. Ct. Monroe Cnty. 1962)...13 HSH Nordbank AG v. UBS AB, 95 A.D.3d 185 (1st Dep t 2012)...3, 4 Mulder v. Donaldson, Lufkin & Jenrette, 208 A.D.2d 301 (1st Dep t 1995)...14 Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 A.D.3d 495 (1st Dep t 2011)...11 Pludeman v. Northern Leasing Sys, Inc., 10 N.Y.3d 486 (2008)...7, 8 Rocanova v. Equit. Life Assur. Soc y of the United States, 83 N.Y.2d 603 (1994)...14 Soumayah v. Minnelli, 41 A.D.3d 390 (1st Dep t 2007)...14 Tartaro v. Allstate Indem. Co., 56 A.D.3d 758 (2d Dep t 2008)...14 Tourneau, LLC v. 53rd & Madison Tower Dev. LLC, 27 Misc. 3d 953 (Sup. Ct. N.Y. Cnty. 2010)...6 ii

4 Ventur Grp., LLC v. Finnerty, 68 A.D.3d 638 (1st Dep t 2009)...4, 6 VisionChina Media Inc. v. Shareholder Representative Services, 109 A.D.3d 49 (1st Dep t 2013)...3 Wegman v. Dairylea Co-op., Inc., 50 A.D.2d 108 (4th Dep t 1975)...14 Zutty v. Rye Select Broad Market Prime Fund, L.P., No /2009, 2011 WL (Sup. Ct. N.Y. Cnty. April 15, 2011)...7, 8, 10 Statutes and Rules CPLR , 8 CPLR 3024(b)...1, 11, 14, 15 CPLR iii

5 PRELIMINARY STATEMENT As this Court is aware, Counterclaim Plaintiff Second Development 1 is the Plaintiff in a related action bearing Index Number /2014, filed nearly simultaneously with but just prior to the instant action. In that other action, Second Development, as Plaintiff, only sued Topco and did not sue GEMS NY, Denise Gallucci or Sai Tata, against whom it now seeks to assert claims in this action. Thus, left to its own devices, Second Development did not believe it had claims against the GEMS NY, Ms. Gallucci, or Mr. Tata Only upon being sued by GEMS NY in the instant action did Second Development apparently come to the realization that it had claims against GEMS NY and the aforesaid individuals. Movants say this tongue in cheek because obviously Second Development would have sued GEMS NY, Ms. Gallucci and Mr. Tata in the first action if it believed it had claims against them. However, now, in an attempt to obtain leverage over GEMS NY and the aforesaid individuals (collectively Defendants ), Second Development sues them. 2 In doing so, Second Development asserts claims for fraud when this is nothing more than a contract dispute among sophisticated parties. 3 Further, Second Development unearths an unrelated lawsuit from 2010, to which it was not even a party, and seeks to use it to bolster the fraud claims. The Counterclaim Plaintiffs allegations regarding the 2010 lawsuit have no bearing on the issues in this litigation and certainly do not, as Counterclaim Plaintiffs suggest, demonstrate a pattern of behavior by GEMS NY. To the contrary, the Nations Academy lawsuit concerned a single incident that 1 Capitalized terms not otherwise defined shall have the meaning ascribed to them in the Memorandum of Law in Support of Counterclaims 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), dated September 4, Reading the Counterclaims and Third-Party Claim makes clear that Second Development realizes that, in fact, it only has claims against Topco, the sole defendant it chose to sue in the prior action. For example at of the Answer and Counterclaims, Second Development speaks only about representations made by Topco. Even in 111 and 113, Second Development speaks of representations made by Topco, rather than GEMS NY. It is clear that the claims at issue on this motion were an afterthought to the real claims Second Development asserts against Topco in the prior case and were only brought because GEMS NY sued Second Development and Merchant to recover the $10 million in security GEMS NY posted. 3 The two individuals, Ms. Gallucci and Mr. Tata, are not parties to the contracts and should have never been sued. 1

6 occurred more than six years ago, involved none of the parties to this action, and was settled without any adjudication on the merits. Further, the prior claims are not symmetrical to the claims at issue as they were brought by disgruntled investors; here, the Counterclaim Plaintiffs are not investors in GEMS but the landlord under a Lease, who did not invest with GEMS. To the contrary, rather than investing any money with GEMS, the landlord still holds and is preventing the return of approximately $10 million which was invested by GEMS. In addition, the Nations Academy suit was settled without trial, substantive motions, findings of fact or depositions, and thus to allow these allegations to remain in this action would have the clear prejudicial effect of requiring GEMS NY to litigate that prior, settled dispute at substantial cost, to disprove the alleged fraud, even assuming the material parties to that litigation, including the plaintiff therein, who is not a party to the instant suit, could even be found at this time. Similarly, the Counterclaim Plaintiffs allegations of fraud should be dismissed. In fact, the two fraudulent inducement claims are just more examples of the Counterclaim Plaintiffs overreaching. This is particularly evident with respect to their actions concerning the Fajr Transaction. Earlier in the prior action, Second Development sought a temporary restraining order ( TRO ) to enjoin the Fajr Transaction from closing while also seeking an attachment in the amount of $940 million, again in an attempt to delay or stop the Fajr Transaction. When this Court denied both applications, Second Development sought a TRO from the First Department to stop the Fajr Transaction. The First Department denied the application for a TRO. But now, after doing everything it could to delay the closing of the Fajr Transaction, Second Development in this action argues that Defendants perpetrated a fraud because the Fajr Transaction did not close fast enough; clearly, the irony of this assertion escapes Second Development. In short, the Counterclaim Plaintiffs are overreaching, and their fraud claims lack the details required to satisfy New York s heightened pleading standard for fraud. When they cannot provide sufficient details regarding purported misrepresentations by GEMS NY, Ms. Gallucci or Mr. Tata, the 2

7 Counterclaim Plaintiffs point to a single written representation by Topco, a non-party to this action, and attempt to attribute that statement to Defendants to satisfy their burden. Similarly, in the opposition brief, Mr. Merchant for the first time attempts to base his claim on Topco s representation in the Topco Guaranty, to which he was not a party, even though Mr. Merchant makes no mention whatsoever of the Topco Guaranty in his Counterclaim. Mr. Merchant makes this argument in the brief because there are no representations in the Merchant Guaranty upon which to base a claim and he cannot thereby show justifiable reliance. The instant action is about a contract dispute. 4 The Court should dismiss the two fraudulent inducement claims and strike the irrelevant and prejudicial allegations regarding Nations Academy. ARGUMENT I. The Merchant Fraudulent Inducement Claim Fails to State a Cause of Action Merchant effectively admits that his claim cannot withstand a motion to dismiss addressed to his lack of justifiable reliance by attempting to argue for the first time that he relied on the Topco Guaranty. There are several problems with this after the fact theory. First, the Topco Guaranty is nowhere mentioned in his fraud claim. Second, he is not a party to the Topco Guaranty, and thereby is not entitled to rely upon the representations therein, nor does the Merchant Guaranty even mention the Topco Guaranty. Thus, contrary to Merchant s argument, his fraud claim should be dismissed. The First Department has left no doubt that the issue of justifiable reliance can be decided on a motion to dismiss. See VisionChina Media Inc. v. Shareholder Representative Services, 109 A.D.3d 49, 57 (1st Dep t 2013) (holding that a fraudulent inducement claim was properly dismissed for failure to adequately plead justifiable reliance); HSH Nordbank AG v. UBS AB, 95 A.D.3d 185, (1st Dep t 4 The Counterclaim Plaintiffs recognize as much, devoting substantial portions of their statement of facts to contract issues, such as the Architect s Agreement, that are wholly irrelevant to their fraud claims. (See e.g. Opp. at 7-8.) In fact, of the Answer and Counterclaims (which are adopted at 189 and 199 as the bases for the fraud Counterclaim and Third Party Claim) assert facts which solely underpin a breach of contract claim, not fraud. 3

8 2012); Ventur Group, LLC v. Finnerty, 68 AD.3d 638, 639 (1st Dep t 2009)). In fact, Counterclaim Plaintiffs cite a First Department case where the court stated that the issue is generally one of fact. (Opp. at 9 (citing Braddock v. Braddock, 60 A.D.3d 84, 88 (1st Dep t 2009) (emphasis added).) The use of the qualifier generally necessarily implies that there are circumstances in which the issue can be decided as a matter of law. And as described below, such circumstances exist here to warrant dismissal of the Merchant claim. It is well-settled that to adequately plead justifiable reliance in a fraudulent inducement claim, sophisticated investors must plead facts sufficient to establish that they took steps upon which to justify their alleged reliance. See HSH Nordbank AG, 95 A.D.3d at 195 ( New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations... ) (quoting Global Minerals & Metals Corp. v. Holme, 35 A.D.3d 93, 100 (1st Dep t 2006)). Such steps may include either the exercise of due diligence or, as the Court of Appeals has acknowledged, the insistence on written representations that certain facts are true. See HSH Nordbank AG, 95 A.D.3d at 195 (duty to exercise due diligence); DDJ Mgmt., LLC v. Rhone Group LLC, 15 N.Y.3d 147, 154 (2010) (insistence on written representations). Here, Merchant does not allege either that he conducted any due diligence or that he insisted on written representations regarding Topco s finances in the Merchant Guaranty, the only document to which Merchant is a party. In the face of this case law, Merchant argues that he was not required to plead due diligence because there were written representations (Opp. at 10); however, Merchant does not and cannot point to any representations regarding Topco s financial condition (or in fact any representations at all) in the Merchant Guaranty. Rather, Merchant asks the Court to rely on language in the Merchant Guaranty that he argues states that Merchant provided his guaranty on the terms and conditions contained in the Lease. (Opp. at 11.) First, the Lease does not contain representations as to Topco s financials. However, 4

9 even on a more basic level, Merchant misstates the meaning of the language he cites in the Merchant Guaranty. What this language says, in relevant part, is that In consideration of Tenant entering into that certain Lease... on the terms and conditions therein contained, and for such other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged... Guarantor irrevocably and unconditionally personally guarantees.... (Scharf Aff., Ex. D at 1.) Thus, it is clear that the terms and conditions of the Lease are not being adopted into the Merchant Guaranty but that the reference to terms and conditions is simply part of the recitation of the consideration for the Merchant Guaranty, that based on the Tenant entering into the Lease on its terms and conditions, Merchant is agreeing to the Merchant Guaranty. Even if the quoted language meant what Merchant says, Merchant is the sole signatory to the Merchant Guaranty; thus, neither GEMS NY nor Topco agreed that the Merchant Guaranty is subject to any terms and conditions. 5 That alone is reason enough to dismiss Merchant s claim. Nevertheless, Merchant presses on, attempting to connect the Merchant Guaranty to the Topco Guaranty. (Id.) This attempt fails. For Merchant s argument to work, the Lease would have had to expressly incorporate the particular representations in the Topco Guaranty, which the Lease does not do. In any case, even Merchant knew he could not rely on the Topco Guaranty because he does not cite to, or even mention, the Topco Guaranty in his Counterclaim. It is only upon Defendants making this motion that Merchant now turns to the Topco Guaranty in the hope of saving his claim. Merchant s reliance on DDJ Management is misplaced. There, in connection with loans they provided to defendants, the plaintiffs alleged that they relied upon the defendants representations concerning their financial position. 15 N.Y.3d at To protect themselves, the plaintiffs in DDJ 5 Further, the Merchant Guaranty also expressly provides that Merchant s liability is not conditioned or contingent upon the genuineness, validity, regularity or enforceability of the Lease. (Id. at 2.) If the guaranty is not conditioned on the enforceability of the Lease, then it could not be conditioned on the enforceability of the terms and conditions of the Lease. 5

10 Management had insisted that the defendants make express representations and warranties as to the accuracy of their financial statements in the loan agreements negotiated between the parties. Id. at 153. As a result, the defendants in DDJ Management expressly provided representations to plaintiffs. Here, in contrast, Topco provided only Second Development, not Merchant, with representations as to the accuracy of its financial statements. (Scharf Aff. Ex. C 7.) Merchant argues that Defendants cases are distinguishable because the investor in each case failed to obtain written, protective representations and warranties concerning the representations at issue. (Opp. at ) However, Merchant is in the same position because he neither insisted on representations in his guaranty nor incorporated the representations made in the Topco Guaranty into his guaranty. In the absence of any allegation that Merchant obtained representations or made any effort to verify the purported misrepresentations, his fraudulent inducement claim should be dismissed. See 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. ); Tourneau, LLC v. 53rd & Madison Tower Dev. LLC, 27 Misc. 3d 953, (Sup. Ct. N.Y. Cnty. 2010) (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 ). Even if the Court were to accept the argument that the Merchant Guaranty incorporated Topco s representations in the Topco Guaranty despite the fact that Merchant did not plead reliance on the Topco Guaranty in his claim, the representations in the Topco Guaranty are not attributable to the individuals, Ms. Gallucci or Mr. Tata. As discussed below, neither Ms. Gallucci nor Mr. Tata are officers or directors of Topco and the Counterclaims do not adequately attribute the statements by Topco to either Ms. Gallucci or Mr. Tata. 6

11 II. Second Development s Fraudulent Inducement Claim Should Be Dismissed A. The Counterclaim Plaintiffs have failed to adequately plead fraud claims against Ms. Gallucci and Mr. Tata. Counterclaim Plaintiffs argument in opposition to dismissal of Second Development s fraudulent inducement claim rests upon the assertion that CPLR 3016(b) is essentially meaningless. (Opp. at 13.) This assertion is obviously wrong. While courts have held that CPLR 3016(b) may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct, Pludeman v. Northern Leasing Sys, Inc., 10 N.Y.3d 486, 492 (2008), a complaint must still state the facts constituting the wrong in sufficient detail to clearly inform each defendant of what their roles were in the incidents complained of. Zutty v. Rye Select Broad Market Prime Fund, L.P., No /2009, 2011 WL , at *9 (Sup. Ct. N.Y. Cnty. April 15, 2011). It is not enough to simply say that a defendant made a misrepresentation; plaintiff must allege the contents of the misrepresentation in sufficient detail to permit a reasonable inference of the alleged fraud. See, e.g., Pludeman, 10 N.Y.3d at 492. The Counterclaim Plaintiffs rest their fraud claims on written representations made by Topco in the Topco Guaranty regarding its financial condition. (Counterclaims ) But Topco s representations are not the representations of Ms. Gallucci or Mr. Tata. As the Counterclaim Plaintiffs admit, Ms. Gallucci and Mr. Tata are not officers of Topco. (See Counterclaims 85 ( Additional Third- Party Defendants Denise Gallucci... and Venkata Saibaba Tata... are... officers of GEMS NY. ). Moreover, the Counterclaims contain no allegation that either Ms. Gallucci or Mr. Tata drafted the Topco Guaranty. Yet the Counterclaim Plaintiffs attempt to impute Topco s representations to Ms. Gallucci and Mr. Tata by alleging, in a conclusory manner, that GEMS NY, Ms. Gallucci, Mr. Tata and Topco all made the exact same representations regarding Topco s finances. (See Counterclaims 190.) Even under the pleading standard the Counterclaim Plaintiffs propose, such a conclusory allegation is insufficient to raise an inference that Ms. Gallucci or Mr. Tata participated in or had knowledge of the 7

12 purported fraud. See Zutty, 2011 WL , at *9 ( Conclusory allegations of fraud are insufficient. ) (citing Greschler v. Greschler, 51 N.Y.2d 368, 375 (1980)) (internal quotation marks omitted). The Counterclaim Plaintiffs further contend that where, as here, the individuals are corporate officers, CPLR 3016 does not require that every detail of the individual defendant s conduct be specifically alleged. (Opp. at 13.) In support of this argument, the Counterclaim Plaintiffs cite two cases in which courts have held that it was proper to infer that a corporation s officers participated in the corporation s fraud; however, in each case, unlike here, the individual was an officer of the corporation charged with the fraud. (Opp. at 13.) 6 As noted, however, neither Ms. Gallucci nor Mr. Tata are officers of Topco, the entity that purportedly made the representations at issue here. Thus, Pludeman and Great Eagle are distinguishable. B. The allegations regarding the Sukuk issuance and the Fajr Transaction are contradicted by documentary evidence. The Counterclaim Plaintiffs next create a trail of tangents in an attempt to lead the Court away from the documentary evidence that conclusively undermines their allegations regarding the Sukuk issuance and the Fajr Transaction. First, as set forth below, whether Sukuk is debt or equity is not the relevant issue. As the Counterclaim Plaintiffs admit, the crux of their argument is that Defendants failed to properly disclose an adverse change in Topco s financial condition and instead affirmatively misled Second Development into believing that the 2013 Financial Statements accurately reflected the financial condition of Topco. (Counterclaims 111.) As set forth below, the alleged adverse change was disclosed to the Counterclaim Plaintiffs by more than two weeks before the Lease and Guaranty were executed. (Opening Mem. at 12, Yaeger Aff., Ex. 1.) 6 See Pludeman, 10 N.Y.3d at 489 (individual defendants were top management of the defendant); Great Eagle, 104 A.D.3d at 732 (inference of knowledge was appropriate given the individual defendants positions at the company engaging in purportedly fraudulent conduct). 8

13 Counterclaim Plaintiffs contend that the cannot affirmatively resolve the issue of whether or not the information was properly disclosed because it was submitted through an affirmation from Defendants attorney who lacks first-hand knowledge of any such communications (Opp. at 19), but that argument is a red herring meant to distract the Court. It is well-settled that s can qualify as documentary evidence if they meet the essentially undeniable test. Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., 120 A.D.3d 431, 433 (1st Dep t 2014). The February 23rd meets that test. The Counterclaim Plaintiffs do not deny (nor could they) that the is addressed to and was received by Mr. Hochfelder. Instead, they seem to argue that the has not been properly authenticated for this motion. But the Counterclaim Plaintiffs have not argued that the is a forgery or that Mr. Hochfelder never received it. The fact that it was filed by attorney affirmation is irrelevant. Knowing that they cannot claim that the Sukuk issuance was not disclosed, the Counterclaim Plaintiffs resort to arguing that it was not properly disclosed because the December 2013 financial statements identified the Sukuk issuance as equity, not debt. (Opp. at 19.) This argument too is a red herring. Once the Sukuk was disclosed, the Counterclaim Plaintiffs, as sophisticated investors, could have and should have determined if the Sukuk was debt or equity. In their brief, Counterclaim Plaintiffs speak with authority about what Sukuk are. 7 (Opp. at 20.) Certainly, if they could do so for their brief, they could and should have done so upon receiving the financial statements disclosing the Sukuk. In this regard, the Counterclaim Plaintiffs were fully aware when they drafted their Counterclaims in this case that the Defendants classified the Sukuk as equity in their financial statements in reliance upon their auditor s opinion since that opinion was given to them in the pre-judgment remedy proceedings 7 Counterclaim Plaintiffs state Here, the Counterclaim plainly alleges that, as a matter of fact, the Sukuk bonds were debt (Compl. 112). This was so because the bonds are designed to comply with elements of Shari a law that preclude the charging of interest. Accordingly, Sukuk bonds are made to have features that look like equity, but in fact they are debt instruments. (Opp. at 20.) If Counterclaim Plaintiffs could so definitively state what Sukuk bonds were here, they could surely have come to the same conclusions when the Sukuk issuance was disclosed to them, which was before the Lease and Guaranty were entered. Thus, Counterclaim Plaintiffs cannot argue justifiable reliance on a statement by Defendants that the Sukuk were equity, which in fact they are. 9

14 prior to the preparation of these Counterclaims. (See Guest Aff., Ex. 1.) 8 Given that knowledge, and given the requirement that fraud be pled with particularity, Counterclaim Plaintiffs cannot simply make a naked allegation in their Counterclaim that the Sukuk was debt, without some support in their claim or some allegation about the steps they took to determine if the Sukuk was debt or equity and upon which they concluded that it was debt. 9 Specifically, Counterclaim Plaintiffs can provide no evidence (beyond bare allegations) to refute E&Y s opinion that the Sukuk issuance is equity and no authority to support their apparent argument that its classification as equity renders disclosure ineffective. Bare allegations alone cannot support a fraud claim. See Zutty, 2011 WL , at *9 ( Conclusory allegations of fraud are insufficient. ) (citing Greschler v. Greschler, 51 N.Y.2d 368, 375 (1980)) (internal quotation marks omitted). Similarly, the Counterclaim Plaintiffs try to confuse the point where they argue that the July 27, 2014 E&Y letter does not explicitly identify the Fajr Transaction. (Opp. at 18.). Defendants attached the E&Y letter because of Counterclaim Plaintiffs claim that the Defendants allegedly represented that the transaction would provide necessary liquidity and cash to Topco and would inject some $150 million into Topco s U.S. operations but that the Fajr Transaction had not closed. (See Opp. at 15.) The E&Y letter responds to these points and shows that, in fact, Topco received the promised liquidity and cash on July 26, (Yaeger Aff., Ex. 3.) Counterclaim Plaintiffs argue that the security under the Lease was reduced in the Third Amendment because of Defendants alleged representation that the Fajr Transaction would imminently 8 Guest Aff. refers to the Affidavit of Nick Guest in Opposition to Plaintiff s Motion for an Order of Attachment, dated July 7, 2014, Doc. No. 62, Index. No / The Counterclaim Plaintiffs argument that whether the Sukuk issuance was debt or equity is a question of fact is both incorrect and irrelevant. (Opp. at 20.) The principal case upon which the Counterclaim Plaintiffs rely, In re SubMicron Systems Corp., does not stand for the principle cited by Counterclaim Plaintiffs. 432 F.3d 448 (3d Cir. 2006). SubMicron was an appeal from a federal district court s finding that corporate advances from insiders of a bankrupt company should not be recharacterized as equity, which is a specific type of claim in the bankruptcy arena. Id. The U.S. Court of Appeals for the Third Circuit affirmed, finding that the district court s decision was not clearly erroneous. Id. at 457. Thus, contrary to the Counterclaim Plaintiffs argument, SubMicron does not stand for the proposition that the classification of Sukuk as debt or equity is a question of fact. 10

15 close. As established, it did imminently close but even if it had not, Counterclaim Plaintiffs can show no damages because the Fajr Transaction closed before any further security was required. 10 That is, the Third Amendment provided that the Tenant would post an initial $7.5 million in security and would increase that security to $15 million no later than two days after Second Development acquired fee title to the real property at issue. (Ward Aff, Ex. A 6.) 11 In fact, the $7.5 million in security was timely posted but because Second Development has still not acquired fee title to the property (See Counterclaims 170), no additional security is yet due, even though the Fajr deal has already closed. Accordingly, the Counterclaim Plaintiffs have not adequately alleged, as they must, that they were damaged by the purported misrepresentations about the Fajr Transaction since the Fajr deal closed before any additional security was required to be paid. 12 See Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 A.D.3d 10 The allegation that the Counterclaim Plaintiffs agreed to reduce the security due under the Lease because of the imminent Fajr Transaction is not supported by logic or the facts. If this allegation were true, the parties would have either (a) delayed the date for payment of the full $15 million security until the Fajr transaction had closed or (b) made payment of the second $7.5 million in security keyed to the close of the Fajr transaction. They did neither. Instead, the parties reduced the initial security to $7.5 million, which was paid at the time of the Third Amendment, well before the Fajr transaction could have closed, and they made payment of the additional $7.5 million keyed to the Counterclaim Plaintiffs acquisition of the property, not keyed to the Fajr closing. Thus, there is no support for the proposition that the parties changed the security based upon the Fajr deal; in fact, the security was changed because Counterclaim Plaintiffs had acquired none of the real estate to that point in time and the Tenant did not believe it should put up the full amount of security when Counterclaim Plaintiffs had not performed any of their responsibilities yet. 11 Ward Aff. refers to the Affirmation of Robert J. Ward in Further Support of Counterclaims 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), dated October 23, 2014 and filed concurrently herewith. 12 Counterclaim Plaintiffs have not set forth any damages caused by the alleged Fajr misrepresentation. They seem to argue that as a result of such alleged misrepresentation, they agreed to initial security of $7.5 million instead of $15 million but this money was placed with the escrow agent, Old Republic National Title Insurance Company, and would only be received by Second Development upon the commencement of construction of the building which was the subject of the Lease. (Ward Aff., Ex. A 6.) However, construction of the building never commenced and thus Second Development would never receive this security. Thus, there can be no damages caused by the alleged fraud relating to Fajr because regardless of whether the security was $7.5 million or $15 million, Counterclaim Plaintiffs never received any of it. Further, if Second Development argues that it should have been paid the $7.5 million but has not been, that is an argument that the Lease and Topco Guaranty have been breached, which are breach of contract claims, not fraud. As Defendants have argued here, the real claims at issue here are breach of contract claims, not fraud claims. 11

16 495, 498 (1st Dep t 2011) (in order for a fraudulent inducement claim to be viable, plaintiff must demonstrate, inter alia, that the party to whom the misrepresentation was made... was damaged ). 13 III. The Allegations Concerning Nations Academy are Unnecessary, Scandalous, and Prejudicial and Should Be Stricken A. The allegations regarding Nations Academy substantially prejudice the Defendants and would require significant expenditures of time and money on unrelated issues. Notwithstanding the Counterclaim Plaintiffs arguments to the contrary, the Nations Academy dispute bears no resemblance to this case. The plaintiff in that case was a disgruntled investor in a failed venture who claimed fraud. (See Scharf Aff., Ex. E.) Here, however, Counterclaim Plaintiffs are not investors in the project but rather would-be landlords of the proposed site. They have not invested a single cent in GEMS or in the proposed school. In fact, rather than themselves being the investors, they currently hold and/or control the return of approximately $10 million dollars that was invested by GEMS. (Counterclaims 95.) The Counterclaim Plaintiffs also conveniently fail to mention that not a single party to the Nations Academy dispute is involved in this action. (See Scharf Aff., Ex. E.) In sum, the contrast between this case and the Nations Academy dispute could not be more definite, and thus the allegations concerning Nations Academy 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 [plaintiff] or the alleged treatment of him and the articles dated from before the dispute at issue). In addition, the allegations concerning Nations Academy are substantially prejudicial to Defendants. Because the Nations Academy dispute was settled before the parties had an opportunity to 13 At 196, Second Development asserts that the alleged fraud caused damages described by Second Development as the loss of Tenant s stream of rental payments totaling $940,846,100 over the course of the Lease. This articulation makes clear that the damages were caused by breach of contract and does not show how the alleged Fajr misrepresentation caused these damages. Further, as to the remaining damages articulated in 196, contract deposits and professional fees and the loss of the opportunity to construct the residential condominium project, there is no articulation as to how these alleged damages were caused by the asserted misrepresentations. Thus, the fraud claims should be dismissed. 12

17 make dispositive motions, conduct discovery, or try the case, the defendants had no opportunity to disprove the allegations in the complaint. Allowing these allegations to remain in the Counterclaims would force Defendants to find and depose witnesses relevant to the case. That would be a substantial waste of time and money since the Nations Academy case bears no relationship to the dispute before the Court and, given the passage of time, it may not be possible to find the witnesses material to that case. The cases cited by Counterclaim Plaintiffs do not support their argument. For instance, the Counterclaim Plaintiffs rely exclusively on a fifty-year-old Monroe County case for the proposition that allegations that supply some historical background and stage setting for an action should not be stricken. (Opp. at 22 (citing Greenberg v. Nusbaum s Dep t Store, 35 Misc. 2d 326, 329 (Sup. Ct. Monroe Cnty. 1962)).) Greenberg involved a dispute between business owners regarding the alleged mismanagement of a department store. The historical background and stage setting to which the court referred consisted of allegations in the complaint regarding the history of the same store and management at issue in the case. See Greenberg, 35 Misc. 2d at (summarizing the allegations at issue). Notably, none of the allegations concerned unrelated purported prior misdeeds by the defendants. Unlike the situation in Greenberg, the Counterclaim Plaintiffs here are not providing historical background to their own relationship with Defendants. Instead, they make assertions about an unrelated transaction in which they played no part and of which they have no firsthand knowledge in a blatant attempt to prejudice the Defendants. Because the allegations that Defendants engaged in a prior fraudulent scheme and are trying to pull a similar scheme are undoubtedly prejudicial to Defendants and would require significant time and expense to disprove, even assuming the material witnesses could be found, all references to Nations Academy should be stricken. (Counterclaims 91.) 13

18 B. The allegations concerning Nations Academy are wholly irrelevant to this dispute. In an attempt to support their allegations relating to Nations Academy, Counterclaim Plaintiffs contend that the allegations are relevant to show that Defendants have engaged in a similar scheme in the past, justifying punitive damages on their contract claim. (Opp. at ) They also argue that the allegations are relevant to prove the Defendants intent. (Id. at 24.) as set forth below, neither contention has merit. Because the allegations concerning Nations Academy have no relevance to the issues in this case, they should be stricken. See Soumayah v. Minnelli, 41 A.D.3d 390, 392 (1st Dep t 2007) (under CPLR 3024(b) the inquiry is whether the purportedly scandalous or prejudicial allegations are relevant to a cause of action ); see also Wegman v. Dairylea Co-op., Inc., 50 A.D.2d 108, 111 (4th Dep t 1975) (the test under CPLR 3024(b) is whether the allegation is relevant, in an evidentiary sense, to the controversy and, therefore, admissible at trial ). As a general matter, punitive damages are not recoverable for an ordinary breach of contract as their purpose is not to remedy private wrongs but to vindicate public rights. Rocanova v. Equit. Life Assur. Soc y of the United States, 83 N.Y.2d 603, 613 (1994). 14 The Counterclaims are utterly devoid of any allegation that this dispute implicates the rights of the public or that Defendants conduct was aimed at the public generally. Indeed, the contract claim makes no mention of seeking punitive damages whatsoever. That is not surprising, as this case is nothing more than a run-of-the-mill contract dispute between two private parties. Accordingly, not only are the allegations concerning Nations Academy irrelevant to the issue of punitive damages, but punitive damages are also unavailable in this case. 14 Punitive damages are permissible in contract actions only where the conduct was aimed at the public generally. Id. Thus, a party seeking punitive damages on a contract claim must demonstrate not only egregious tortious conduct, but also that such conduct was part of a pattern of similar conduct directed at the public generally. Tartaro v. Allstate Indem. Co., 56 A.D.3d 758, 759 (2d Dep t 2008) (emphasis added). The Counterclaim Plaintiffs misapprehend the nature of the existence or pattern of prior conduct that can give rise to punitive damages on a contract claim. It is not, as the Counterclaim Plaintiffs seem to claim, any prior conduct purportedly similar to the conduct at issue. (Opp. at ) Rather, as the Counterclaim Plaintiffs own cases show, it is a pattern of similar conduct directed at the public generally. Rocanova, 83 N.Y.2d at 613; accord Tartaro, 56 A.D.3d at 759; Mulder v. Donaldson, Lufkin & Jenrette, 208 A.D.2d 301, 309 (1st Dep t 1995). 14

19 The Counterclaim Plaintiffs next contend that the allegations concerning Nations Academy are relevant to show Defendants intention to perpetrate the same scheme upon Counterclaim Plaintiffs. (Opp. at 24.) In essence, the Counterclaim Defendants argue that a fraud claim based on events that occurred six years ago that involved none of the parties to this litigation, involving claims by investors (unlike the Counterclaim Plaintiffs here), and that was subsequently settled without a finding of fault is somehow relevant to show that the Defendants intended to defraud the Counterclaim Plaintiffs. This argument borders on nonsensical. Further, it is a well-settled rule of evidence that it is improper to prove that a person did an act on a particular occasion by showing that he did a similar act on a different, unrelated occasion. Matter of Brandon s Estate, 55 N.Y.2d 206, (1982). Courts have recognized some exceptions to this rule where the evidence has some relevance due to similarity. Id. at 211. However, the allegations concerning Nations Academy are not even similar to the issues here. Rather, they are just an attempt to improperly allege that GEMS committed fraud in the past and therefore must have committed fraud here as well. In sum, because the Nations Academy allegations are substantially prejudicial to Defendants and are irrelevant to the issues in this case, they should be stricken. CONCLUSION For all of the foregoing reasons, the Defendants respectfully request that the Court (i) dismiss Merchant s Counterclaim and Third-Party Claim pursuant to CPLR 3211(a)(7); (ii) dismiss Second Development s 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). 15

20 Dated New York, New York October 23, 2014 SCHULTE ROTH & ZABEL LLP By /s/ Robert J. Ward Robert J. Ward Michael L. Yaeger Frank W. Olander 919 Third Avenue New York, NY Telephone Attorneys for Counterclaim Defendant and Third-Party Defendants 16