FILED: KINGS COUNTY CLERK 05/02/2016 04:32 PM INDEX NO. 514527/2015 NYSCEF DOC. NO. 8 RECEIVED NYSCEF: 05/02/2016 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF KINGS THE BOARD OF MANAGERS OF THE ONE THREE THREE CONDOMINIUM, - against - Plaintiff, WATER STREET REALTY GROUP LLC and YARON HERSHCO, Defendants. x x Index No. 514527/2015 DEFENDANTS' MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION TO DISMISS EISENBERG & CARTON ATTORNEYS AT LAW 1227 MAIN STREET, SUITE 101 PORT JEFFERSON, NEW YORK 11777 TELEPHONE (631) 213-8282 FACSIMILE (631) 824-9332 Attorneys for Defendants 1 of 11
TABLE OF CONTENTS TABLE OF AUTHORITIES ii Preliminary Statement 1 Statement of Facts 2 ARGUMENT 3 POINT I PLAINTIFF'S FIRST AND SECOND CAUSES OF ACTION FOR BREACH OF CONTRACT AND EXPRESS WARRANTY FAIL TO STATE A CAUSE OF ACTION AGAINST MR. HERSHCO 3 A. Plaintiff Has Failed to Properly Plead Alter Ego Liability Sufficient to Peirce the LLC Veil 4 B. Mr. Hershco Cannot Be Held Personally Liable Based Upon His Execution of the Certification 5 POINT II PLAINTIFF'S THIRD CAUSE OF ACTION FOR NEGLIGENCE FAILS TO STATE A CAUSE OF ACTION AGAINST THE DEFENDANTS 7 CONCLUSION 8 2 of 11
Cases TABLE OF AUTHORITIES Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management, Inc., 18 N.Y.3d 341, 939 N.Y.S.2d 274, 962 N.E.2d 765 (2011) 5, 6 Board of Managers of Soho North 267 West 124th St. Condominium v. NW 124 LLC, 116 A.D.3d 506, 984 N.Y.S.2d 17 (1st Dep't 2014) 7 East Hampton Union Free School District v. Sandpebble Builders, Inc., 66 A.D.3d 122, 884 N.Y.S.2d 94, (2d Dep't 2009), aff d, 16 N.Y.3d 775, 919 N.Y.S.2d 496, 944 N.E.2d 1135 (2011) 3, 4 Kerusa Co. LLC v. W10Z/515 Real Estate Limited Partnership,12 N.Y.3d 236, 879 N.Y.S.2d 17, 906 N.E.2d 1049 (2009) 5,6 Matter of Morris v. New York State Department of Taxation & Finance, 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993) 4 Merritt v. Hooshang Construction, Inc., 216 A.D.2d 542, 628 N.Y.S.2d 792 (2d Dep't 1995) 7 Retropolis Inc. v. 14th Street Development LLC, 17 A.D.3d 209, 797 N.Y.S.2d 1 (1' Dep't 2005) 4 Russo v. Heller, 80 A.D.3d 531, 915 N.Y.S.2d 268 (1st Dep't 2011) 5 Stamina Products, Inc. v. Zintec USA, Inc., 90 A.D.3d 1021, 935 N.Y.S.2d 629, 631-2 (2d Dep't 2011) 4 Wiernik v. Kurth, 59 A.D.3d 535, 873 N.Y.S.2d 673 (2d Dep't 2009) 4 Statutes CPLR 3211(a)(7) 1 General Business Law 352-e 5 ii 3 of 11
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF KINGS THE BOARD OF MANAGERS OF THE ONE THREE THREE CONDOMINIUM, - against - Plaintiff, WATER STREET REALTY GROUP LLC and YARON HERSHCO, Defendants. x x Index No. 514527/2015 DEFENDANTS' MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION TO DISMISS Preliminary Statement Defendants Water Street Realty Group LLC ("Water Street Realty" or the "Sponsor") and Yaron Hershco ("Mr. Hershco") respectfully submit this Memorandum of Law in support of their motion pursuant to CPLR 3211(a)(7) to dismiss Plaintiff's Verified Complaint in its entirety as against Mr. Hershco, and Plaintiff's Third Cause of Action for negligence as against both Defendants, on the ground that such causes of action fail to state a claim for which relief can be granted. Defendant Water Street Realty does not at this time seek to dismiss Plaintiff's First and Second Causes of Action, for breach of contract and breach of express warranty, as asserted against it alone. As detailed below, Plaintiff's First and Second Causes of Action, for breach of contract and breach of express warranty, respectively, fail to state a claim against Mr. Hershco because Plaintiff admits that Mr. Hershco was not a party to the purchase agreements at issue, and Plaintiff's Verified Complaint fails to state any other cognizable basis for Mr. Hershco's liability with respect to the same. Plaintiff's Third Cause of Action for Negligence fails as a matter of 4 of 11
law because that claim is duplicative of Plaintiff's breach of contract and breach of express warranty claims. Statement of Facts The allegations set forth in Plaintiff's Verified Complaint are accepted as true and summarized here solely for purposes of this motion to dismiss. A true and correct copy of Plaintiff's Verified Complaint is attached as Exhibit A to the accompanying Affirmation of Lloyd M. Eisenberg dated May 2, 2016 ("Eisenberg Affirmation"). According to the Verified Complaint, this action concerns the alleged failure to properly construct the One Three Three Condominium, a building consisting of 52 residential units at 133 Water Street, Brooklyn, New York (the "Condominium"). (Verified Complaint 7) Defendant Water Street Realty was the sponsor of the Condominium, and Mr. Hershco is the sole member of Water Street Realty. (Verified Complaint Ifig 5 to 6) The units in the Condominium were sold to unit owners ("Unit Owners") via purchase agreements (the "Purchase Agreements"), which, in turn, incorporated by reference the Condominium offering plan, as amended (the "Offering Plan"). (Verified Complaint r 68 to 69 ) Significantly, Plaintiff admits, as it must, that only Defendant Water Street Realty "is the direct party to the Purchase Agreements and Offering Plan, including all of its Amendments." (Verified Complaint 14) Nevertheless, Plaintiff alleges what it appears to intend to be two alternative grounds for Mr. Hershco's purported personal liability. Specifically, Plaintiff alleges "alter ego" liability as follows: 61....[I]ndividual Defendant Yaron Hershco is the sole principal behind the Sponsor which has' obligated itself to perform work it has failed to perform. 62. Defendant Hershco has been integral to the actions complained of herein in his capacity as principal of Sponsor and has enabled and will continue to enable Sponsor to evade liability for its actions. 2 5 of 11
63. Upon information and belief, the sole purpose of the entity structure and status of Water Street Realty Group, LLC is to shield Defendant Hershco from liability for actions like those complained of herein. 64. The Sponsor entity is a mere instrumentality and alter ego for Defendant Hershco and exists merely to advance his pecuniary interests while defrauding innocent purchasers. 65. Accordingly, Defendant Hershco is liable to Plaintiff jointly and severally, for the matters complained of herein against the Sponsor. (Verified Complaint Ili 61 to 65) As a separate ground purportedly supporting Mr. Hershco's personal liability, Plaintiff alleges "[a]dditionally, Defendant Hershco executed the Sponsor's Certification annexed to the Offering Plan as well as the Ninth Amendment and the Amendment Filing Form." (Verified Complaint 66) Plaintiffs Verified Complaint does not attach the referenced Certification (or any other document referenced, cited or quoted in the Verified Complaint), but states that the Certification at issue is "annexed to the Offering Plan at page 401," and quotes extensively from that Certification. (Verified Complaint 48) For the Court's convenience, a copy of the Certification is attached as Exhibit B to the accompanying Eisenberg Affirmation. Additional allegations from Plaintiffs Verified Complaint are repeated below to the extent necessary in the context of the legal argument presented. ARGUMENT POINT I PLAINTIFF'S FIRST AND SECOND CAUSES OF ACTION FOR BREACH OF CONTRACT AND EXPRESS WARRANTY FAIL TO STATE A CAUSE OF ACTION AGAINST MR. HERSHCO A business entity exists independently of its owners, who generally are not personally liable for its obligations, and individuals may incorporate for the express purpose of limiting their liability. East Hampton Union Free School District v. Sandpebble Builders, Inc., 66 A.D.3d 3 6 of 11
122, 126, 884 N.Y.S.2d 94, 98 (2d Dep't 2009), aff d, 16 N.Y.3d 775, 919 N.Y.S.2d 496, 944 N.E.2d 1135 (2011). Likewise, unless they expressly bind themselves individually, individuals may not be held personally liable on contracts made by their entities. Stamina Products, Inc. v. Zintec USA, Inc., 90 A.D.3d 1021, 1022, 935 N.Y.S.2d 629, 631-2 (2d Dep't 2011); Wiernik v. Kurth, 59 A.D.3d 535, 537, 873 N.Y.S.2d 673, 675-76 (2d Dep't 2009). Plaintiff cannot reasonably dispute such black letter law and, as noted above, admits that Mr. Hershco did not sign the Purchase Agreements or Offering Plan personally. Instead, Plaintiff seeks to invoke two exceptions to the general rule, each of which is unavailing for the following reasons. A. Plaintiff Has Failed to Properly Plead Alter Ego Liability Sufficient to Peirce the LLC Veil Plaintiff seeks to hold Mr. Hershco personally liable as alter ego of the Sponsor under the doctrine of piercing the corporate veil, which applies to limited liability companies. Retropolis Inc. v. 14th Street Development LLC, 17 A.D.3d 209, 210, 797 N.Y.S.2d 1, 2 (1st Dep't 2005). To pierce the corporate veil, a plaintiff "must demonstrate that a court in equity should intervene because the [members] of the [limited liability company] exercised complete domination over it in the transaction at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to plaintiff." East Hampton, 66 A.D.3d at 126, 884 N.Y.S.2d at 98; Matter of Morris v. New York State Department of Taxation & Finance, 82 N.Y.2d 135, 142-3, 603 N.Y.S.2d 807, 811, 623 N.E.2d 1157, 1161 (1993). The factors this Court must consider in determining whether there has been an abuse of the privilege of doing business in the limited liability company form include the failure, to adhere to corporate formalities, inadequate capitalization, commingling of assets, and the personal use of company funds. East Hampton, 66 A.D.3d at 127, 884 N.Y.S.2d at 99. 4 7 of 11
Paragraphs 61 to 65 of Plaintiff's Verified Complaint, quoted in full above, merely allege that Mr. Hershco is the sole member of Defendant Water Street Realty, that he acted as principal of Water Street Realty, that Mr. Hershco formed Defendant Water Street Realty to shield himself from liability and to advance his pecuniary interests. Even if true, such allegations are insufficient as a matter of law to pierce the corporate/limited liability company veil. Plaintiff has not alleged a single factor that this court could consider in determining whether to pierce that veil. Plaintiff's barebones allegation that Mr. Hershco advanced his pecuniary interests "while defrauding innocent purchasers," is insufficient to support a claim to pierce the corporate veil. Russo v. Heller, 80 A.D.3d 531, 532, 915 N.Y.S.2d 268, 270 (1' Dep't 2011) ("bare-bones allegations" that defendant "created, caused and misused [corporation] to defraud plaintiff and...other creditors, and...is known to [Plaintiff] to be the principal in and owner of [corporation]" did not "provide the particularity required to support a veil-piercing claim") (internal quotations omitted). B. Mr. Hershco Cannot Be Held Personally Liable Based Upon His Execution of the Certification Plaintiff's attempt to hold Mr. Hershco personally liable by reason of his execution of the Certification at issue must be rejected. The Certification was required to be included in the Offering Plan pursuant to General Business Law 352-e(6) (the "Martin Act") and its implementing regulations. Significantly, the Court of Appeals has repeatedly held that no private right of action can be predicated upon compliance with the Martin Act. Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management, Inc., 18 N.Y.3d 341, 353, 939 N.Y.S.2d 274, 279, 962 N.E.2d 765, 770 (2011); Kerusa Co. LLC v. W10Z/515 Real Estate Limited Partnership,12 N.Y.3d 236, 247, 879 N.Y.S.2d 17, 23, 906 N.E.2d 1049, 1056 (2009). 5 8 of 11
In Assured, the Court of Appeals held that "[a] private litigant may not pursue a common law cause of action where the claim is predicated on a violation of the Martin Act or implementing regulations and would not exist but for the statute." 18 N.Y.3d at 353, 939 N.Y.S.2d at 274, 962 N.E.2d at 770. Likewise, in Kerusa, in affirming the dismissal of a complaint brought by a condominium purchaser based upon alleged omissions from offering plan amendments, the Court of Appeals held: But for the Martin Act and the Attorney General's implementing regulations,... the sponsor defendants did not have to make the disclosures in the amendments. Thus, to accept Kerusa's pleading as valid would invite a backdoor private cause of action to enforce the Martin Act in contradiction of our holding in [CPC Intl. v. McKesson Corp., 70 N.Y.2d 268,519 N.Y.S.2d 804, 514 N.E.2d 116 (1987)] that no private right to enforce the statute exists. 12 N.Y.3d at 245, 879 N.YS.2d at 22, 906 N.E.2d at 1054. To allow the Certification in this action to serve as the basis for personal liability against Mr. Hershco would be to permit Plaintiff to take the backdoor approach in violation of these holdings. The Certification would not exist but for the Attorney General's regulations and any action brought based on the Certification may be brought by the Attorney General alone. The undersigned is aware of several unreported trial court decisions to the contrary. Such trial court decisions do not constitute binding precedent in this case, and it is respectfully submitted that those decisions are in error given the holdings in Assured and Kerusa which bar private rights of action based on the Martin Act, pursuant to which the Certification was included in the Offering Plan. - 6-9 of 11
POINT II PLAINTIFF'S THIRD CAUSE OF ACTION FOR NEGLIGENCE FAILS TO STATE A CAUSE OF ACTION AGAINST THE DEFENDANTS Plaintiff's Third Cause of Action for negligence alleges only that "Defendants owed Plaintiff a duty to protect it and the Unit Owners from the damage incurred by reason of the property damage to the Building and the Units" (Verified Complaint 84), and that for the reasons detailed in the Verified Complaint, "Defendants breached this duty by failing to construct and remediate the Building per their representations and the applicable law." (Verified Complaint 85) That cause of action cannot be maintained because "[b]reach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated." Board of Managers of Soho North 267 West 124th St. Condominium v. NW 124 LLC, 116 A.D.3d 506, 507, 984 N.Y.S.2d 17, 18 (1St Dep't 2014). Accordingly, "[a]llegations of negligence based on defects in construction of a condominium sound in breach of contract rather than tort." Id., accord Merritt v. Hooshang Construction, Inc., 216 A.D.2d 542, 543, 628 N.Y.S.2d 792, 794 (2d Dep't 1995) (allegations that a builder negligently constructed a house sounded in contract, not tort). In this case, Plaintiff's claims are based entirely on an alleged breach of contract and/or warranty, not tort, since Plaintiff has not alleged that the Defendants breached a duty other than to build and repair the Condominium in the manner promised. Accordingly, in as much as no independent legal duty to Plaintiff has been alleged, Plaintiff's negligence claim is duplicative of its First and Second Causes of Action for breach of contract and breach of express warranty, and fail to state a cause of action. 7 10 of 11
CONCLUSION For the foregoing reasons, Defendants' motion should be granted in its entirety, together with such other and further relief as the Court deems just and proper. Dated: Port Jefferson, New York May 2, 2016 EISENBERG & CARTON By: Lloyd M. Eisenberg 1227 Main Street, Suite 101 Port Jefferson, New York 11777 (631) 213-8282 Attorneys for Defendants 8 11 of 11