Opinion
96 Civ. 7570 (HB), 97 Civ. 1754 (HB)
January 17, 2001
OPINION ORDER
Plaintiffs Jay H. Koppel and Arnold E. Greenberg brought this action alleging, inter alia, various violations of the Securities Exchange Act and the anti-bundling rules thereunder, breaches of fiduciary duties and unjust enrichment against an investment partnership (Garment Capitol Associates), partnership's agents (the individually named defendants), and other related entities (Wien Malkin Bettex, 4987 Corporation and 498 Seventh Avenue Associates). At trial, the jury found for the defendants in all respects, and judgment on the verdict was later entered. Plaintiffs now move pursuant to Fed.R.Civ.P., Rules 50 and 59, for judgment as a matter of law, or in the alternative, for a new trial on certain of their claims. In addition, the plaintiffs move pursuant to Rule 52 for an order amending the judgment to include findings of fact and conclusions of law consistent with plaintiffs' proposed findings of fact and conclusions of law on this score. For reasons stated below, plaintiffs' motion is DENIED in part and GRANTED in part.
I. BACKGROUND
The following recitation of background facts will serve both as an introduction to the decision and as my findings on the unjust enrichment cause of action. The jury rendered an advisory verdict on the equitable claim.
1. Garment Capitol Associates ("Garment Capitol") was a partnership formed in 1957 to acquire and own the land and building located at 498 Seventh Avenue in Manhattan (the "Building"). (Exhibit D to Declaration of Thomas E. L. Dewey ("Dewey Dec.") at 3). Initially, the partners in Garment Capitol were Lawrence A. Wien, William F. Purcell, and Alvin Silverman, three partners in the firm then known as Wien, Lane, Klein Purcell, which was later known as Wien, Malkin Bettex ("Wien Malkin"). (Id. at 3, 9, Tr. 222). Each of the partners in Garment Capitol created a joint venture with numerous investors, known as "participants", who purchased an interest in a partner's ownership interest in Garment Capitol. (Dewey Dec. Ex. D at 3.)
"Tr." refers to the Transcript of the trial herein, including the charging conference.
2. From the beginning, it was not intended that Garment Capitol would operate the Building. Instead, the property was leased to a long-term lessee, 498 Seventh Avenue Associates, which had a 25-year lease on the property and the right to renew the lease for two additional 25-year terms. (Id.)
3. Pursuant to the lease, 498 Seventh Avenue Associates undertook to: pay rent to Garment Capital; maintain the building; and pay all real estate taxes applicable to the building. (Def. Ex. S1 at 3.) Indeed, the lessee had the obligation to pay all of the Building's operating and maintenance expenses. (Tr. 225-26; Dewey Dec. Ex. D at 3.) Pursuant to the lease between Garment Capital and 498 Seventh Avenue Associates, 498 Seventh Avenue Associates had the right to assign the lease, provided that the assignee undertook, in writing, to perform all of the obligations of the lessee under the lease. (Def. Ex. S1 at 8.)
4. The Garment Capitol prospectus disclosed that the partners in the lessee consisted of Mr. Wien and other partners at Wien, Lane, Klein Purcell, together with officers, directors or employees of Helmsley-Spear, Inc., the managing agent of the building; and also indicated that Wien, Lane, Klein Purcell would supervise the operation of Garment Capitol and be compensated for its services. (Dewey Dec. Ex. D.)
5. Each participant executed a standard participation agreement with the partner in Garment Capitol with whom he or she was entering into a joint venture. (Dewey Dec. Exs. E-G.) Those agreements provided that the partners in Garment Capitol, known as "Agents", would "not agree to sell, mortgage or transfer The Property or the premises, nor to make or modify any mortgage or lease of the premises, nor to dispose of any partnership asset, without the consent of all of the participants." (Dewey Dec. Ex. E ¶ 4.) They further provided that if consent of 90% in interest of the participants were obtained, the Agents had the right to purchase the interest of any non-consenting participant for the greater of the capital contribution of the participant, less any repayments made on that capital contribution, or $100. (Id.) The purpose of this provision was to secure favorable tax treatment for the investment, by having Garment Capitol and the participants be subject to only one level of taxation as a partnership, rather than two levels as a corporation, a benefit that the participants enjoyed for decades. (Tr. 139-40, 431.) At the same time, the 90% "buy-out" provision allowed decisions supported by an overwhelming majority of the participants to be implemented. (Tr. 140.)
6. The returns paid to the participants averaged more than 20% per annum for over thirty years. (Dewey Dec. Ex. C at 11, Tr. 435.) The evidence also established that defendant Peter L. Malkin had a small stake in the lessee while the building was prospering. (Tr. 232-33, 278.)
7. Commencing in the early 1990's, the property began to experience difficulties based, in part, on the changing nature of the garment industry in New York. (Tr. 245, 246-47, 440-41, Dewey Dec. EL C at 10.) The building began to lose money in 1994, requiring substantial capital calls on the partners in the lessee. (Tr. 264-65, Dewey Dec. Ex. C at 8.) During this time, many of the partners in the lessee either could not or would not pay their share of the capital calls, and Mr. Malkin took over their interests and their obligation to make the capital calls; with respect to some of these partners Mr. Malkin granted "overrides" providing that they would receive 50% of any net recovery to the lessee (Tr. 268-70.) Between late December 1994 and June 1995, a total of $1.3 million was contributed by the partners in the lessee to continue the operation of the building. (Tr. 268-69.) of that amount, Peter Malkin and his family members contributed $527,500. (Dewey Dec. Ex. C at 8.)
8. Ultimately, Peter Malkin and members of his family owned 53.75% of the lessee. This majority interest did not, however, confer control over the lessee on Mr. Malkin, since major decisions of the lessee required a vote of partners holding 75% or more of the interests in the lessee. (Tr. 468.)
9. Throughout 1995, Peter Malkin and others at Wien Malkin considered possible alternatives to solve the problems at the building. This process was complicated by the other partners in the lessee and their representatives. Leona Helmsley, representing her husband's 36.25% of the lease, repeatedly changed her position concerning continued investment in the lease. (Tr. 263-64, 282-83, 289-90, 444-46; Pl. Ex. 148.) Irving Schneider, a senior employee at Helsmley-Spear, Inc. whose daughters owned 5% of the lease (Tr. 282), threatened litigation against Mr. Malkin and Mrs. Helmsley concerning the property (Tr. 447-50, Pl. Ex. 148, Def. Ex. A9, Def. Ex. J7) — threats that Mr. Malkin took seriously both because of Mr. Schneider's history of litigation against Mr. Malkin and Mrs. Helmsley (Tr. 465), and because of the disastrous effect such litigation would have had on the market position of the property.
10. By late 1995, the situation had reached a critical juncture. The lessee continued to lose money, and a tax payment of over $1 million was due at the beginning of January. In the last weeks of 1995, Mr. Malkin, the other partners in the lessee or their representatives, and Apple Bank, which held the mortgage on the building, agreed on a plan that would secure payment of the taxes and continued operation of the building while the building was being sold. The important elements of the plan were that: (i) Mr. Malkin, Harry Helmsley, Irving Schneider and Alvin Schwartz (the latter two having daughters who together owned 10% of the partnership interests in the lessee) agreed to sign promissory notes with personal liability for the amount of the taxes; (ii) the Bank agreed to pay the taxes as protective advances under its mortgage; (iii) Garment Capitol agreed to forebear on declaring a default under the lease for the non-payment of the taxes; (iv) the lessee agreed to continue to pay rent, to operate the building pending sale and cooperate in a sale; and (v) the proceeds of the sale would be split between the lessee and Garment Capitol pursuant to an allocation to be determined by two independent experts, Brown Harris Stevens Appraisal and Consulting, LLC ("Brown Harris") and Edward S. Gordon, Inc. ("ESG") (Tr. 480-481, Dewey Dec. Ex. C at 9-14.)
11. Mr. Malkin's uncontradicted testimony was that the elements of this plan were a "package arrangement" with the other partners in the lessee and the Bank, in that each of the elements was necessary in order to go forward. (Tr. 486-87.) For example, the Bank specifically required that all four principals of the lessee sign the note with personal liability for the tax payment. (Tr. 327, 480-81, 486-87, Def. Ex. K5.)
12. 498 Seventh Avenue Associates assigned the lease to a corporation, 4987 Corporation. This was a right specifically granted to the lessee under its lease with Garment Capitol, and this right was disclosed in the prospectus sent to the participants prior to their making their investment. (Dewey Dec. Ex. D at 3) ("[the lease] can be surrendered or assigned by the lessee, without further liability, upon sixty days' notice to [Garment Capitol] Associates.")
13. The independent experts retained to provide an allocation of the sale proceeds were two of the best-known real estate firms in New York. Together, they prepared what became known as the "Consensus Report" which set forth the proposed allocation of the sale proceeds. The two individuals primarily responsible for the preparation of the Consensus Report were Sharon Locatell from Brown Harris and David Maurer-Hollaender from ESG. Both had extensive experience in real estate. Ms. Locatell had done hundreds of appraisals all over the country, and worked under the supervision of Abe Barkan, one of the best known real estate appraisers in New York City. (Tr. 350-51, 395-96, 398, 513, 516, 527.) Mr. Maurer-Hollaender also had extensive experience in sophisticated real estate transactions, although not in appraisals. (Tr. 634-35.) These experts determined the methodology employed in the Consensus Report; no one from Wien Malkin told them how to do their analysis or what the result of their allocation should be. (Tr. 519, 527, 653.)
14. The Agents for Garment Capitol then sought approval of this program from the participants through a July 26, 1996 "Consent Solicitation" accompanied by a letter from Mr. Malkin. (Dewey Dec. Exs. B, C.) Among other things, the Consent Solicitation disclosed that: (i) Mr. Malkin and his wife owned 53.75% of the shares of 4987 Corporation (Dewey Dec. Ex. B at 1-2) and hence would share in the allocation of sale proceeds to the lessee; (ii) the lease had been assigned to 4987 Corporation "thereby effectively terminating the liability of the Original Lessee and its remaining partners under the Operating Lease" (Dewey Dec. Ex. C at 1-2); (iii) Wien Malkin represented both Garment Capitol and 498 Seventh Avenue Associates and would also represent 4987 Corporation in connection with the sale and in certain other matters pending the sale (Dewey Dec. Ex. C at 22); (iv) 4987 Corporation was in default of its obligations under the lease because of its failure to pay real estate taxes (Dewey Dec. Ex. C at 2); (v) the real estate taxes had been paid by Apple Bank as a protective advance under its mortgage on the property (Dewey Dec. Ex. C at 3); (vi) the shareholders of the lessee or their representatives had acquired a subordinated participation interest in the mortgage on the property (Dewey Dec. Ex. C at 3); and (vii) a "cost" of the sale program was sharing the proceeds of the sale with the lessee (Dewey Dec. Ex. C at 19, 23.) The Consent Solicitation also fully and accurately described the methodology used by the authors of the Consensus Report in determining the proposed allocation of sale proceeds. (Dewey Dec. Ex. C at 13-14, Tr. 547.)
15. More than 90% of the participants approved the sale program set forth in the Consent Solicitation. (Tr. 498.) Thereafter, the building — which had been valued at $14.4 million by Mr. Barkan in December 1995 — (Tr. 523, Pl. Ex. 44 at 1) — sold in March 1997 for $42 million.
II. STANDARD OF REVIEW
A. Standard for Judgment as a Matter of Law
A party may move for judgment as a matter of law pursuant to Fed.R.Civ.P. 50(b), after having made such a motion during a trial at the close of all the evidence. In ruling on a motion for judgment as a matter of law, the court must deny the motion unless,
viewed in the light most favorable to the nonmoving party, the evidence is such that, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable [persons] could have reached.Simms v. Village of Albion 115 F.3d 1098, 1110 (2d Cir. 1997). Consequently, a motion for judgment as a matter of law should only be granted when
(1) there is such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or (2) there is such an overwhelming amount of evidence in favor of the movant that reasonable and fair-minded [persons] could not arrive at a verdict against [it].Caruolo v. John Crane, Inc., 226 F.3d 46, 51 (2d Cir. 2000).
On a motion for judgment as a matter of law, the district court "must view the evidence in the light most favorable to the party against which the motion was made . . . making all credibility assessments and drawing all inferences in favor of the non-movant." EEOC v. Ethan Allen. Inc., 44 F.3d 116, 119 (2d Cir. 1994) (internal citations omitted).
B. Standard for Motion for a New Trial
Fed.R.Civ.P. 59 permits the granting of a new trial after an earlier trial by jury, and the decision whether to grant a new trial is "committed to the sound discretion of the trial judge." Metromedia Co. v. Fugazy, 983 F.2d 350, 363 (2d Cir. 1992). cert. denied, 508 U.S. 952 (1993). A motion for a new trial may be joined with a motion for judgment as a matter of law.
"A motion for a new trial ordinarily should not be granted unless the trial court is convinced that the jury has reached a seriously erroneous result or that the verdict is a miscarriage of justice." Caruolo, 226 F.3d at 54 (2d Cir. 2000).
III. DISCUSSION
At the outset, I reject defendants' argument that plaintiffs are procedurally barred from seeking judgment as a matter of law now because they did not make a motion for such relief the close of all the evidence. During the trial, when one of the attorneys for the defendants asked about motions for judgment, this Court directed that such motions need not be made, and that instead, all such motions that could possibly be made would be deemed to have been made and decision reserved. (Tr. 617.)
A. Plaintiffs' Claims re: Self-dealing
Plaintiffs argue that they are entitled to judgment or a new trial based on their claims that Peter Malkin engaged in self-dealing. Specifically, plaintiffs point out that Mr. Malkin testified that he owed a fiduciary duty to the participants in Garment Capitol Associates. (Tr. 216-217.) Mr. Malkin also conceded that it was in his economic interest to have the allocation (of sales proceeds) to the lessee be as high as possible, while it was in the interest of the participants to have the allocation to the lessee be as low as possible. (Tr. 406.)
Under New York law, a party will not be held liable for self-dealing where he secures the "informed consent" of those to whom he owes a duty of utmost good faith. Cf. Birnbaum v. Birnbaum, 555 N.Y.S.2d 982, 985 (4th Dep't 1990). In Riviera Congress Assocs. v. Yassky, 277 N.Y.S.2d 386, 393 (1966), the New York Court of Appeals considered a case wherein "the limited partners were fully apprised in the prospectus that the defendant general partners intended to lease the premises to their own corporation and that such tenant would be capitalized at only $50,000." The Court found that "[t]his clear statement of purpose has the effect of `exonerating' the defendants, at least in part' from adverse inferences that might otherwise be drawn against them simply from the fact that they dealt with themselves." Id. (citation and internal quotation marks omitted). The Court concluded that the only issue of fact remaining was "whether the defendants acted honestly and in good faith . . . ." Id. (citation and internal quotation marks omitted).
In this case, the Court charged the jury that "[a] fiduciary is bound to exercise the utmost good faith and undivided loyalty toward his beneficiaries throughout the relationship" and that "[a] fiduciary must act in accordance with the highest principles of morality, fidelity, loyalty and fair dealing." (Tr. 909.) The Court further charged the jury on plaintiffs' specific "self-dealing" allegations, and also emphasized that defendants bore the burden of proof on their ratification defense to these claims. (Tr. 910, 919.)
Plaintiffs contend that "[t]here was no freely granted consent as a matter of law" because of the alleged "bundling" of the consent to the transaction with the allocation of $10 million to the lessee. (Pl. Mem. at 3.) Plaintiffs here rely on Delano v. Kitch, 542 F.2d 550, 553 (10th Cir. 1976) ("Delano I"), on rehearing, 554 F.2d 1004 (10th Cir. 1977) ("Delano II"), appeal after remand, 663 F.2d 990, 999 (10th Cir. 1981),cert. denied, 456 U.S. 946 (1982) ("Delano III"). The authority set forth in Delano is instructive, but not controlling. I note that the strict fiduciary standard applicable in Delano I under Kansas law is quite similar to the standard applicable here. See 542 F.2d at 554 (it was reversible error not to tell the jury that directors and officers owed the "highest degree of fidelity, good faith, care and diligence") (internal citation omitted).
In Delano I, a minority stockholder, individually and derivatively on behalf of his corporation, brought an action against directors and an officer and attorney of the corporation for alleged breach of their fiduciary duties in connection with a contract for the sale of the corporation's outstanding shares which was negotiated by defendants without the knowledge of some of the stockholders. Delano I is distinguishable on its facts. In Delano I, where certain shareholders had only ten days to agree to a proposed sale or to reject it, the Tenth Circuit found that "[t]his pressure served to force consent" and further observed that
[i]t is obvious that all the outsiders were faced with this same compulsion to quickly agree to sell or to become minority shareholders in a situation much different than ever before, that is with a large corporate newspaper chain as the controlling stockholder rather than a number of individuals. There was no real choice given to the bank as a practical matter if it wanted to preserve some of the value of the shares for the beneficiary. The bank secured the direction of the probate court and agreed to sell. Under these conditions, it agreed to nothing more than the sale itself. The same conclusion must be reached as to appellants, Victoria Bloom and Victor Delano.Id. at 553.
The Delano III court held that
Ratification is not effective in favor of the fiduciary and against the beneficiary if the beneficiary must act to protect his or her own interests or acts under duress imposed by the fiduciary. Cf. Restatement (Second) of Trusts § 218(2)(c) (1959) (trustee cannot obtain beneficiary's ratification through improper conduct); Restatement (Second) of Agency §§ 101, 462 (1957) (agent cannot force principal to ratify under duress). Plaintiffs acted under duress and to protect their interests. They learned of the contract after a majority had already agreed to it and when they had only ten days to decide whether to participate. If they did not sell, plaintiffs would find themselves in a significantly different position: although still minority shareholders, they would no longer be involved in a family-owned company in which no one person owned a majority, but in a company controlled by a newspaper conglomerate.663 F.2d at 999.
In this case, the Consent Solicitation provided that the participants had 90 days to decide whether to agree to the sale and an allocation of proceeds to 4987 Corporation. (Dewey Decl., Ex. C at 1.) Thus, duress was not a factor. In Delano I, the Court concluded that the plaintiffs
cannot be held to have agreed to the fee or to the employment contract. There was no disclosure made as to the other aspects of the sale. The fact the fee and the employment contract were mentioned in the sales agreement does not alter this result. It is obvious that the whole time sequence was arranged to bring about an apparent acquiescence or ratification of the fee and contract. This cannot be in view of the duty owed by Mr. Brown and Mr. Kitch to the stockholders. [Plaintiff] was not informed of the corporate meetings when the stockholders, who were privy to the negotiations conducted by [defendant], were advised of the terms of the contract. [Plaintiff] did not know of the fee requirement until February 26th when [defendant] told him . . . . he was going to have to pay like everybody else.' Thus the compulsion was contrived by one in a fiduciary position to create an appearance of ratification by the persons to whom the duty was owed. The trial court in refusing the instructions tendered by the appellants was in error in not instructing the jury on the consequences of their agreement to sell under these circumstances. It does not matter what this compulsion is called, as it was obviously present and effective. The instructions gave the impression that by signing the sales agreement, there automatically followed a complete ratification of everything [defendants] had done. On this record, we must hold as a matter of law that there was no ratification.542 F.2d at 54.
Here, unlike in Delano there was no contrived time sequence, no whiff of hanky panky and in fact, the record portrays no deficiency in the required disclosure with regard to Mr. Malkin's personal interest in the sale program. The Consent Solicitation contained a detailed section entitled "Potential Conflicts of Interest" which explained in plain terms that Mr. Malkin and his family would "receive 53.75% of any net sale proceeds received by [4987 Corporation]" in accordance with the proposed allocation formula. (Dewey Decl. Exh. C at 23.) Plaintiff argues thatDelano III stands for the proposition that a fiduciary cannot condition the approval of a self-dealing payment on approval of a beneficial sale. As set forth above, this is not the holding of Delano III. Delano III simply held that the jury's verdict was reasonable in light of the particular facts of the case. In any event, New York law does not impose the same rule. Instead, New York cases require a more nuanced inquiry. New York courts have repeatedly recognized that
[o]ne of the most stringent precepts in the law is that a fiduciary shall not engage in self-dealing and when he is so charged, his actions will be scrutinized most carefully. When a fiduciary engages in self-dealing, there is inevitably a conflict of interest: as fiduciary he is bound to secure the greatest advantage for the beneficiaries; yet to do so might work to his personal disadvantage. Because of the conflict inherent in such transaction, it is voidable by the beneficiaries unless they have consented. Even then, it is voidable if the fiduciary fails to disclose material facts which he knew or should have known, if he used the influence of his position to induce the consent or if the transaction was not in all respects fair and reasonable.Flaum v. Birnbaum, 508 N.Y.S.2d 115, 122 (4th Dep't 1986) (citing II Scott, Trusts § 170, at 1298, 3d ed 1967).
As I noted above, all material facts relative to Mr. Malkin's personal interest were disclosed. I must also examine whether judgment as a matter of law or a new trial is warranted on the questions of whether Mr. Malkin used the influence of his position to induce the consent or if the transaction was not in all respects fair and reasonable.
In this case, Mr. Malkin, in his role of Agent for the participants recommended that the participants approve the sale program. However, this does not constitute unlawful inducement: indeed Mr. Malkin had an obligation to recommend the sale program to the participants as the various alternatives to the sale program that he had identified were markedly inferior and would have required the passive investors to either become involved in the day to day operation of the property, create a controlled affiliate to operate the property and/or invest more money in the property. Turning to the question of whether the transaction was in all respects fair and reasonable, the defendants point out several key facts. First, Mr. Malkin's wholly uncontradicted testimony was that the sale program was a package deal. Mr. Malkin testified that
the lessee group [which required Ms. Helmsley's votes to make any decisions] would not agree [to the sale program] unless it was a total package; and, unless they agreed and signed the promissory notes, the bank would not agree; and unless the bank agreed, the taxes would not be paid and the property would be foreclosed. So everybody had to agree or there was no deal.
(Tr. 486-87.)
The record is clear that the building began to lose money in 1994, and that between late December 1994 and June 1995, a total of $1.3 million was contributed by the partners in the lessee to continue the operation of the building. (Tr. 268-69.) If the lessee had failed to organize a scheme to pay the real estate taxes that were due on January 1, 1996 ($957,764) and June 1, 1996 ($1,801,783.76), the tax bill may well have burdened the individual participants unless the participants and their agents found an interim operating lessee to pay the taxes or paid the taxes themselves. Mr. Malkin testified that no other lessee would have assumed such a liability, as the building's rents were not covering operating expenses and the vacancy rate hovered at 50%. Moreover, the plaintiffs did not refute Mr. Malkin's testimony that none of the participants, as an individual or as a group, could have paid the taxes. In short, at the end of 1995, the participants faced the very real possibility that the building in which they had invested would be lost, i.e. the city tax authorities could have in very short order foreclosed on the property to satisfy unpaid property taxes. The plaintiffs also did not present any evidence contradicting Mr. Malkin's testimony that it was his desire to distribute the sales proceeds in a manner that was actually "unfair to the lessee group" (and wholly in the interests of the participants). In a November 20, 1995 draft, Mr. Halper, one of Mr. Malkin's partners at Wien Malkin drafted a plan at Mr. Malkin's behest wherein each participant would receive the net proceeds of the contemplated sale after the lessee group was reimbursed for expenses associated with the expense of sale and out-of-pocket expenses incurred to maintain the operation of the building. (Tr. 309; Pl. Ex. 82.) Additionally, each individual participant would have been asked, independent of a consent to the sale of the property, to voluntarily share 25% of the net proceeds over $10,500,000 with the lessee. Leona Helmsley, who had power of attorney over 36.25% of the lessee, would not agree to such a favorable result for the participants. As mentioned above, action by the lessee required a 75% vote, and Mr. Malkin and his wife owned only 53.75% of shares in the lessee.
Thereafter, a plan was developed whereby an even more favorable result for the participants was contemplated. Mr. Malkin testified that as of December 19, 1995, he believed Ms. Helmsley would go along with a plan under which the maximum amount that the lessee could receive from the proposed sale of the building was a $1,300,000 voluntarily contributed amount. (Tr. 358; Pl. Ex. 44.) Mr. Malkin testified that in other real estate participation investments with which he had been associated, such as the Empire State Building, participants had been asked to make contributions on a strictly voluntary basis. (Tr. 310.)
Unfortunately for the participants in this case, Leona Helmsley changed her intentions at some point in time subsequent to December 21, 1995 and prior to January 1, 1996, and indicated that she would not agree to terminate the lease. (Tr. 391-393) (uncontradicted testimony of Mr. Malkin). Thereafter, a plan was devised whereby the lessee would not rely upon voluntary contributions from the participants, but would instead receive an amount of the sales proceeds to be determined by real estate experts. This plan received Ms. Helmsley's approval, and this was the plan submitted to the participants for approval in the Consent Solicitation.
On these facts, I find that the transaction was, under the circumstances, fair and reasonable, keeping in mind that the alternative was loss of the building. By designing a sales program which Ms. Helmsley could agree to, Mr. Malkin spared the participants the loss of their investment and secured a sale whereby the participants received the bulk of the sale proceeds. When faced with the choice of (1) personally contributing additional six-figure sums on an indefinite basis to keep the building financially afloat, (2) allowing the participants to lose their investment by doing nothing, or (3) structuring a sales program that the mortgagee (Apple Bank) and Ms. Helmsley could agree to that would provide the participants with a substantial return on their investment, Mr. Malkin appears to have done the best he could. Breach of fiduciary duty? Not by a long shot.
B. Plaintiffs' Fiduciary Duty Claim Against Wien Malkin
The plaintiffs also argue that, on the evidence presented at trial, the question of whether Wien Malkin owed a fiduciary duty to the participants should not have been left to the jury but decided by the Court as a matter of law in favor of plaintiffs. (Pl. Reply Mem. at 4.) The defendants acknowledge that Wien Malkin represented Garment Capitol Associates but contend that it did not owe a fiduciary duty to the individual participants. Indeed, in a July 26, 1996 letter sent to the participants with the Consent Solicitation, Mr. Malkin made clear that "Wien, Malkin Bettex will continue as counsel to Associates to help assure an optimum sale result and represent Associates, as well as the New Lessee, [i.e. 4987 Corporation] in connection with the Sale." (Pl. Ex. 1 at 2.)
It is well-settled that "a fiduciary duty arises when a lawyer deals with persons who, although not strictly his clients, he has or should have reason to believe rely on him." Croce v. Kurnit, 565 F. Supp. 884 (S.D.N.Y. 1982, aff'd, 737 F.2d 229 (2d Cir. 1984) (citing cases). "[C]ourts have not employed a single, well-defined test for determining whether an attorney-client relationship exists, and, moreover, have consistently rejected the argument that indicia of a formal relationship are necessary." First Hawaiian Bank v. Russell Volkening, Inc., 861 F. Supp. 233, 238 (S.D.N Y 1994). In First Hawaiian, the court listed several factors to be considered in deciding whether such a relationship exists. The only factor which is remotely relevant here is the sixth and final factor: "whether the purported client believes that the attorney was representing him and whether this belief is reasonable." Id. (citations omitted). Here, the Wien Malkin and the participants were not in privity with one another, as Wien Malkin did not formally represent the individual participants in the transaction. However, plaintiffs' relationship with Wien Malkin approached privity. Wien Malkin provided the participants with a legal opinion and advice on which the participants reasonably might have relied. See LNC Investments, Inc. v. First Fidelity Bank, N.A., 935 F. Supp. 1333, 1351 (S.D.N.Y. 1996). Moreover, though Wien Malkin spelled out its role in connection with the transaction, it did not solicit the participants' consent to the conflict of interest. See Hotel Prince George Affiliates v. Maroulis, 599 N.Y.S.2d 27, 28 (1st Dep't 1993) (where potential conflict of interest exists, attorneys must make full disclosure of conflict and obtain consent from both sides). Alternatively, the Consent Solicitation could have instructed the participants to consult their own legal advisors to assess the sale program. However, even if Wien Malkin's participation in this transaction constituted a breach of a duty owed to the participants, I find that plaintiffs have failed to establish any resulting injury and that no reasonable fact-finder could conclude that any injury accrued to the plaintiffs as a result of such conduct. To the contrary, as discussed in § III.A. supra, the record is clear that Wien Malkin attorneys including Peter Malkin sought and worked long and hard to secure the best possible result for the participants in a difficult situation and accordingly, no damages can be forthcoming.
See RESTATEMENT (THIRD) LAW GOV. LAWYERS § 131, Conflicts of Interest in Representing an Organization, cmt. b ("An organization's lawyer thus is said to represent the entity and not the elements that make it up. A lawyer for an organization serves whatever lawful interest the organization defines as its interest, acting through its responsible agents and m accordance with its decisionmaking procedures.") (citing § 96(1) and Comment d thereto).
C. The Court's Instruction on Breach of Fiduciary Duties
Plaintiffs sought to hold Wein Malkin and Messrs. Malkin, Katzman and Loehr liable for breaches of fiduciary duties to the participants. Plaintiffs contend that the Court's instruction to the trial jury that "deceitful intent" was an element of plaintiffs' claim for breach of fiduciary duty was wrong as a matter of law". (Pl. Mem. at 7.) This Court based its charge on authority submitted by the defendants: Flickinger v. Harold Brown Co., 947 F.2d 595, 599 (2d Cir. 1991) ("An action for breach of fiduciary duty requires a showing of `deceitful intent' on the part of the fiduciary") (citing Horn v. 440 East Co., 547 N.Y.S.2d 1, 5 (1989)) (modifying decision of Baer, J. which, inter alia, denied summary judgment on breach of fiduciary duty claim). In the charging conference, the plaintiffs argued against inclusion of a "deceitful intent" element in the jury charge. In McCoy v. Goldberg, 810 F. Supp. 539, 548-49 (S.D.N.Y. 1993), Judge Conner concluded that "[t]he weight of authority in New York clearly holds that proof of deceitful intent is not an element of a claim for breach of fiduciary duty." The Second Circuit has held that "[t]he elements of a claim for inducing breach of fiduciary duty under New York law are: (1) a breach by a fiduciary of obligations to another; (2) that the defendant knowingly induced or participated in the breach; and (3) that the plaintiff suffered damages as a result of the breach." Independent Order of Foresters v. Donald Lufkin Jenrette, Inc., 157 F.3d 933, 937 (2d Cir. 1998) (citing Whitney v. Citibank, N.A., 782 F.2d 1106, 1115 (2d Cir. 1986).
This Court must consider whether the erroneous instruction is of a magnitude that mandates a new trial. "A jury instruction is erroneous if it misleads the jury as to the correct legal standard or does not adequately inform the jury on the law." Gordon v. New York City Bd. of Educ., 232 F.3d 111, 116 (2d Cir. 2000) (citation omitted). "An erroneous instruction requires a new trial unless the error is harmless." Id. "An error is harmless only if the court is convinced that the error did not influence the jury's verdict." Id. This court concludes that the error was harmless, recognizing that to prevail on a claim for breach of fiduciary duty, a party must prove causation and damages. See LNC Investments, Inc. v. First Fidelity Bank. N.A. New Jersey, 173 F.3d 454, 465 (2d Cir. 1999) ("[W]here damages are sought for breach of fiduciary duty under New York law, the plaintiff must demonstrate that the defendant's conduct proximately caused injury in order to establish liability."). As set forth above, there was no evidentiary basis for a finding that either the sale program or the supposed breaches of duty caused the participants any damages. The record is clear that the defendants did the best they could for the parties when confronted with the whims of a non-party who did not have the best interests of the participants at heart. Because this Court is confident in the validity of the jury's verdict, and because "plaintiff[s] [were] not prejudiced when the jury denied [them] recovery on this . . . claim" a new trial should not be granted. Holzapfel v. Town of Newburgh, 145 F.3d 516, 527 (2d Cir.), cert. denied, 525 U.S. 1055 (1998).
D. Plaintiffs' Unjust Enrichment Claim
The plaintiffs' claim of unjust enrichment, an equitable claim, was submitted to the jury for an advisory verdict. The jury found for the defendants on this score. The Court informed the jury, inter alia, that "plaintiffs claim that the sales proceeds which the participants received were reduced by the $6,919,481.97 received by 4987 Corporation; $297,544 received by the law firm of Wien Malkin Bettex, $100,000 for the sale and the remainder for the Solicitation; $20,000 received by Brown Harris Stevens Consulting LLC; and $95,994.90 paid for other obligations of 4987 Corporation." (Tr. 918.)
The following analysis constitutes this Court's Conclusions of Law with respect to plaintiffs' unjust enrichment claim:
Although its verdict is not binding, an advisory jury's purpose is "to enlighten the conscience of the Court." Skoldberg v. Villani, 601 F. Supp. 981, 982 (S.D.N.Y. 1985) (Weinfeld, J.) It is wholly within the discretion of the trial court whether to accept or reject, in whole or in part, the verdict of the advisory jury. 9 Charles A. Wright Arthur R. Miller, Federal Practice and Procedure § 2335, at 126 (1971).
The Second Circuit recently reiterated the elements of an unjust enrichment claim:
To prevail on a claim for unjust enrichment in New York, a plaintiff must establish I) that the defendant benefitted; 2) at the plaintiffs expense; and 3) that "equity and good conscience require restitution. The "essence" of such a claim "is that one party has received money or a benefit at the expense of another."Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000) (citations omitted).
"Unjust enrichment . . . does not require the performance of any wrongful act by the one enriched." Simonds v. Simonds, 408 N.Y.S.2d 359, 364 (1978) (citations omitted); United States v. Incorporated Village of Island Park, 888 F. Supp. 419, 455 (E.D.N.Y. 1995). "Innocent parties may frequently be unjustly enriched." Simonds, 408 N.Y.S.2d at 364. What is required for a finding of unjust enrichment generally, however, is that a party hold property under such circumstances that in equity and good conscience he ought not to retain it. Id. (citations and quotation marks omitted). A court must make its determination based on legal inference drawn from circumstantial evidence, applying equitable principles. Sharp v. Kosmalski, 386 N.Y.S.2d 72, 76 (1976).
The plaintiffs' unjust enrichment claim is swiftly disposed of. Clearly, the participants' share of the sales proceeds was diminished by the amounts set forth above. Such an amount constitutes a benefit to the recipients. However, the facts established at trial do not compel a finding that "equity and good conscience" require restitution of the lessee's portion of the proceeds from the sale of the building. If the lessee had not cooperated with the participant in the sale and had not funded substantial pre-sale operating deficits out of its partners' pockets and arranged for the payment of the real estate taxes due on the building, thereby avoiding foreclosure or litigation that would have tied up the property, the building could not have been marketed and sold in an orderly fashion. It is not unjust for the lessee to receive an allocation of the sales proceeds that was calculated by two independent experts where the record shows that a partner in the lessee (Leona Helmsley) who had no obligation to the participants could have unilaterally derailed the Sales Program, thereby jeopardizing the participants' investment.
E. Plaintiffs' Anti-Bundling Claim
Finally, plaintiffs claim that they are entitled to a new trial on their claims under Rules 14a-4(a)(3) and 14a-4(b)(1) for two reasons. First, they argue that it was "wholly inconsistent with the Second Circuit's opinion for the Court to have required plaintiffs to show that defendants would not have conditioned the approval of one element of the sale program on other elements." (Pl. Mem. at 10.) Rules 14a-4(a)(3) and 14a-4(b)(1) require that a form of proxy shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters and that a means be provided in the form of proxy whereby the person solicited is afforded an opportunity to specify, by boxes, a choice between approval or disapproval of or abstention with respect to each separate matter to be acted upon. The Second Circuit, in Koppel v. 4987 Corp., 167 F.3d 125, held, as a matter of first impression, that a private right of action existed for violations of Rules 14a-4(a)(3) and 14a-4(b)(1).
The Court instructed the jury that
in order to find that the bundling of two or more separate elements or aspects caused injury to the plaintiff, you must first find that the plaintiffs, if proven by a preponderance of the evidence that the agent would not have made approval of the sale program contingent upon the approval of each element.
(Tr. 903-904.)
The Court relied on the Second Circuit's decision in this case, specifically the Circuit's observation that the applicable regulations made plain that the SEC has recognized
that under the rules, management may still "condition the effectiveness of any proposal on the adoption of one or more other proposals, if permitted by state law"; in such a case, however, the rules require unbendingly that the proposals remain as separate voting items on the proxy.Koppel v. 4987 Corp., 167 F.3d 125, 138 (2d Cir. 1999) (quoting Regulation of Communications Among Shareholders, 57 Fed.Reg. at 48,287).
The plaintiffs argue that the error in this Court's instruction on plaintiffs' anti-bundling claims was not harmless and that a new trial on such claims must be held. This Court should grant plaintiffs' motion for a new trial on this score only if it "is convinced that the jury has reached a seriously erroneous result or that the verdict is a miscarriage of justice." United States v. Landau, 155 F.3d 93, 104 (2d Cir. 1998) (quoting Smith v. Lightning Bolt Prods., Inc., 861 F.2d 363, 370 (2d Cir. 1988)). In this case, there was no evidence that the jury's verdict was egregious or contrary to the weight of the evidence. The charge was clear and unequivocal that "plaintiffs must prove by a preponderance of the evidence that if they had been given the chance to vote on each element of the sale program separately, they would have received more than they received from the sale of the building under the sale program." (Tr. 905.) The jury concluded that plaintiffs failed to carry their burden and found for the defendants. Assuming arguendo that defendants' form of proxy violated the antibundling rules, any such error did not impermissibly shift the burden of proof with respect to the ultimate issue herein, i.e., whether the violation of the rule resulted in injury to the plaintiffs. While a close question, this Court must deny plaintiffs' motion for a new trial on this score.
The plaintiffs also contend that this Court's jury charge on the anti-bundling claims was in error insofar as it imposed upon plaintiffs the burden of proving that the defendants acted negligently in bundling the proposals. At the charging conference, plaintiffs argued that it was improper to instruct the jury that the plaintiffs must prove an element of negligence to prevail on their antibundling claims. (Tr. 723, 726-730.) Plaintiffs assert that neither the anti-bundling rules nor the Second Circuit's decision in this case requires a finding of scienter prior to finding a violation of the rule. Indeed, the Rules are steeped in mandatory language. Rule 14a-4(a)(3) of Title 17 of the Code of Federal Regulations provides, in relevant part, that a proxy statement "shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters . . . ." Rule 14a-4(b)(1) of Title 17 of the Code of Federal Regulations provides, in relevant part, that "means shall be provided in the form of proxy whereby the person solicited is afforded an opportunity to specify . . . between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon.
In Gerstle v. Gamble-Skogmo, the Second Circuit recognized that plaintiffs seeking compensation under Rule 14a-9 from a beneficiary who is responsible for the preparation of a misleading proxy statement are not required to establish any evil motive or even reckless disregard of the facts; and in such a case it would be inappropriate to require plaintiffs to prove scienter. 478 F.2d 1281 (2d Cir. 1973). The Gerstle case established a negligence standard for actions brought under Rule 14a-9. Accordingly, the jury was informed that negligence was an element of the plaintiffs' anti-bundling claim, with an instruction that broadly defined what negligence meant in the context of this case:
In a case like this, the plaintiff need not demonstrate that the bundling of allegedly separate elements resulted from knowing conduct undertaken by the defendants. This element is satisfied if you find that the defendants negligently drafted the consent solicitation. I charge you that the preparation of the consent solicitations by the defendants, if you find they combined elements that should have been presented separately, satisfies this element.
(Tr. 904.) As the defendants point out, this definition of negligence is more akin to strict liability, and in any event, such an instruction was not clearly erroneous. Thus, the plaintiffs' motion for a new trial on this score must be denied.
IV. CONCLUSION
For all the foregoing reasons, the plaintiffs' motion pursuant to Fed.R.Civ.P. 52 for judgment in its favor on their unjust enrichment claims is DENIED. Further, plaintiffs' motion for judgment or a new trial based on Mr. Malkin's alleged self-dealing and Wien Malkin's alleged conflict of interest is DENIED. Plaintiffs' motion for a new trial based on this Court's harmless error with regard to the instruction on fiduciary duties and antibundling claims is also denied.
SO ORDERED.