Summary Judgment in Lieu of Complaint Meets Business Divorce
October 10, 2022
For most business divorce litigants, a dispositive win on the merits, even in a summary proceeding, can take years. Appraisal proceedings following a cash-out merger, for example, may involve multiple years of difficult financial and expert appraisal disclosure before the case reaches trial.
Just days ago, though, New York County Commercial Division Justice Andrew S. Borrok issued a decision in a lawsuit seeking recovery of a cash payout for an extinguished 40% minority interest in two New York limited partnerships following a merger transaction which – in what quite possibly could be a record – went from case commencement to entry of a final, colossal money judgment exceeding $35 million in exactly three months and four days. How is that even possible?
Elberg v Pewzner, Decision, Order, and Judgment, Index No. 657021/2022 [Sup Ct, NY County Oct. 3, 2022], was an offshoot of multiple prior litigations, including one we previously blogged about here, Crabapple Corp. v Elberg, all of which derived from a failed real estate development project for two hotels in Long Island City (planned to be a Crowne Plaza and Hotel Indigo) spawning many years of prior litigation in multiple courts. In Justice Borrok’s recent Decision, Order, and Judgment, the plaintiff, Ruben Elberg (“Ruben”), made a possibly unprecedented procedural maneuver with absolutely devastating results: a motion for summary judgment in lieu of complaint under CPLR 3213 based upon the prior issuance in another lawsuit of a declaratory judgment.
CPLR 3213 provides a mechanism for an accelerated money judgment, but the kinds of cases in which one may use it are narrow. The statute says, “When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint” (emphasis added).
As our sister blog, New York Commercial Division Practice, has written many times (you can read articles on the subject here, here, and here), CPLR 3213 usually is only appropriate for cases involving loan agreements, notes, guarantees, or other debt instruments where both the financial liability amount of indebtedness is clear from the face of the written instrument. This line of cases derives from the “instrument for the payment of money only” language of CPLR 3213.
Elberg is the first case I have seen in which a litigant successfully relied upon the alternative, “upon any judgment” language of CPLR 3213, for which there is virtually no case law, as we will see below.
The Development Project and Limited Partnerships
In 2012, a developer, Jacob Elberg (“Jacob”), spearheaded the formation of two New York limited partnerships, Royal CP Hotel Holdings, L.P. (“Royal CP”) and Royal HI Hotel Holdings, C.P. (“Royal HI”) with written partnership agreements you can read here and here. Under the limited partnership agreements, entities controlled by Jacob were the General Partner and Class C limited partner. The Class A limited partners were to be foreign EB-5 investors pursuant to the US Customs and Immigration Service’s Immigrant Investor Program, under which qualified investors investing at least $500,000 in projects creating at least 10 jobs may become eligible to obtain a visa to come to and remain in the US, and potentially obtain permanent residency. The Class B limited partner, an entity named Crabapple, Inc., was to serve as representative of the Class A foreign investors. The Class D limited partner was Jacob’s son, Ruben.
Under a waterfall provision in Section 3.4.2 of both limited partnership agreements, Ruben, as Class D limited partner, was entitled to receive 40% of the net proceeds from any “Capital Event.” A “Capital Event” was defined as the “sale, refinancing or other disposition by the Partnership of all or substantially all of its assets.”
The development projects were troubled from the start, with Crabapple apparently unable to procure enough EB-5 investors to adequately finance the project. Then, in 2013, Jacob died and the Surrogate’s Court appointed Jacob’s antagonistic children, Ruben and his sister, Tamara Pewzner (“Tamara”), co-executors of Jacob’s estate. Ruben and Tamara litigated for control of Jacob’s business affairs, with the court eventually appointing Tamara as manager of various Jacob-owned entities, effectively giving her control of Royal CP and Royal HI.
Three lawsuits (not including a bitter estate litigation between Ruben and Tamara) resulted from the failed development project: (i) a foreclosure proceeding commenced in 2014, (ii) an investor litigation on behalf of the EB-5 foreign investors; and (iii) a declaratory judgment action by Ruben to declare his rights and financial interests in Royal CP and Royal HI, which Tamara disputed.
The Merger and Sale
According to a local news article, in 2016, Royal CP and Royal HI sold the hotel development and land to a third party for $36 million. As part of the transaction, Royal CP and Royal HI effectuated a merger. The merger documents provided that the total merger consideration was slightly less than $36 million, and that the Class C and Class D limited partnership interests, including Ruben’s 40% minority interest, would be “redeemed” for a “combined total” of $27 million. The merger documents provided the right to dissent and seek fair value in an appraisal proceeding, though Ruben apparently declined to do so.
The Prior Decisions
In the ensuing six years, Tamara refused to pay her brother the merger proceeds, contending that Royal CP and Royal HI were governed by prior versions of the LP agreements and/or that Ruben’s interest was less than 40%. In at least six decisions, multiple courts ruled against Tamara:
- In August 2017, the Appellate Division – First Department issued a decision holding that “[t]he record demonstrates that [Ruben] was a 40% minority” owner;
- In January 2021, Justice Borrok issued a decision in which it was “adjudged and declared” that Ruben “is entitled to receive 40% of the Net Proceeds from a Capital Event” from Royal CP and Royal HI;
- In March 2021, Justice Borrok in a transcribed appearance lambasted Tamara’s counsel for continuing to dispute Ruben’s ownership of 40% of Royal CP and Royal HI;
- On March 2021, Justice Borrok issued a decision granting a “supplemental declaration” that Ruben was a 40% owner because “the First Department previously found as such;”
- In March 2022, the Appellate Division – First Department issued a decision affirming Justice Borrok’s January 2021 decision granting Ruben a declaratory judgment; and
- In June 2022, the First Department issued an order denying Tamara leave to reargue or to appeal to the Court of Appeals.
The Motion for Summary Judgment in Lieu of Complaint
On June 29, 2022, just six days after denial of Tamara’s motion for leave to reargue or to appeal to the Court of Appeals, Ruben moved for summary judgment in lieu of complaint, his papers consisting of just an attorney affirmation and seven exhibits. Ruben’s attorney affirmation cited just one case for the proposition that a court may grant summary judgment in lieu of complaint based on a prior declaratory judgment.
The one case Ruben cited, Steinard v Steinard (221 AD2d 835 [3d Dept 1995]), is among just a small handful of appellate cases to directly consider the viability of a motion for summary judgment in lieu of complaint based on the “upon any judgment” language of CPLR 3213, ruling that “any judgment qualifies for the accelerated treatment afforded by CPLR 3213.”
For example, in Fiore v Oakwood Plaza Shopping Ctr., Inc. (164 AD2d 737 [1st Dept 1991], affd 78 NY2d 572 ), the Court ruled that an out-of-state judgment by confession is entitled to accelerated treatment under CPLR 3213. Conversely, in Gettysburgh St. Holding Corp. v Bank of New York Mellon (137 AD3d 1076 [2d Dept 2016]), the Court ruled that an order dismissing a New York lawsuit (which is not a judgment), does not qualify under CPLR 3213.
In opposition, Tamara submitted an attorney affirmation, client affidavit, and accountant affidavit arguing that there was a triable issue of fact about the amount of the net merger proceeds, Tamara contending that the amount was “little more than $6 million,” not $36 million as Ruben alleged. Tamara also argued that the prior declaratory judgments in Ruben’s favor were not an “instrument for the payment of money only,” essentially ignoring the alternate “upon any judgment” language of CPLR 3213.
In Justice Borrok’s decision and resulting judgment, the Court again lambasted Tamara for contesting the amount of the merger proceeds, writing:
[T]he amount of the total consideration subject to distribution pursuant to the terms of the November LP Agreements was not hatched from Mr. Elberg. This amount comes from Ms. Pewzner. Indeed, her attorney sent out the Notice of Special Meeting and Proxy Statement with this amount in connection with the August 25, 2016 merger. Having done this, she can not now disavow the amount sent to the partners and argue that an issue of fact exists or that Mr. Elberg is the source of this information. It is simply another false statement by Ms. Pewzner.
The Court ruled:
Inasmuch as the Appellate Division has already determined that Mr. Elberg is a 40% owner of Royal CP . . . and Royal HI . . . and that the November LP Agreements govern, and . . . the November LP Agreements make clear the waterfall of distribution of the proceeds, there simply are no issues of fact as to (i) the amount of the proceeds, (ii) how the proceeds should be distributed including how much should have been distributed to Mr. Elberg pursuant to the terms of the November LP Agreements, (iii) that Mr. Elberg has made a demand for his share of the proceeds and (iv) that they have not been paid. Thus, summary judgment in lieu of complaint must be granted.
The Next Phase and Potential Issues
Four days ago, Tamara appealed the judgment. With the parties’ extensive litigation history, one can expect Tamara to perfect her appeal. A short list of potential appellate arguments:
First, the underlying declaratory judgment potentially did not qualify for accelerated judgment under CPLR 3213 because the prior declaratory judgment upon which it was based was silent as to the amount of indebtedness.
Second, although the underlying declaratory judgment stated that Ruben was entitled to 40% of the “Net Proceeds” from a “Capital Event,” including a merger, there was, as Tamara argued before Justice Borrok, a genuine issue of fact as to the amount of the net proceeds from the merger (i.e., gross proceeds minus expenses).
Third, although Justice Borrok awarded a massive $4 million in legal fees, there was no documentary evidence in the record to support the fee award.
One hopes the appeals court in Elberg will provide some careful legal analysis in this novel appeal, providing practitioners some useful guidance about the circumstances in which one may obtain an accelerated judgment based upon the seldom litigated “upon any judgment” prong of CPLR 3213.