CHARLES J. SIRAGUSA, District Judge.
This action involves a dispute over the direction and control of a limited partnership that was formed to own and operate a real estate investment. Plaintiff, the general and managing partner, commenced this action to stave off an attempt by Defendants, the limited partners, to oust Plaintiff from the partnership based on alleged breaches of fiduciary duties. Now before the Court is a motion for preliminary injunctive relief by Defendants. The application is denied.
At issue is the operation of the Birchwood Village apartment complex in Batavia, New York. In 1970, a group of churches in Batavia formed the Plaintiff not-for-profit corporation to address a perceived need for low-income housing. To finance the development of the project, Plaintiff borrowed $4.7 million, secured by a mortgage insured by the U.S. Department of Housing and Urban Development ("HUD"). HUD subsequently became the holder of the mortgage.
Due to HUD's involvement in the project, Plaintiff was required to operate the apartment complex in accordance with HUD regulatory agreements.
On September 1, 1979, Plaintiff conveyed Birchwood Village to a limited partnership, Brunswick Ltd. ("Brunswick"), of which Defendant Batavia Investors, Ltd (formerly known as Essex, Ltd) ("Batavia Investors") was a limited partner. The purchase price of $5.5 million was secured by a "wraparound mortgage" that was subject to the mortgage already held by HUD.
On December 1, 1979, Brunswick's partnership agreement was amended and restated in several respects. First, the name of the partnership was changed from Brunswick Ltd to Batavia Townhouses, Ltd. Second, Plaintiff joined the partnership as co-general partner and sole managing partner. The other general partner was David C. Green, and the sole limited partner was Defendant Batavia Investors. To reiterate, upon the execution of this new partnership agreement, Plaintiff not only held the wraparound mortgage given by the partnership to secure the purchase of Birchwood Village, but it also was a co-general partner and sole managing partner of the partnership. Additionally, and quite significantly, the partnership agreement stipulates that the partnership will dissolve automatically on December 1, 2020.
The Amended and Restated Partnership Agreement further indicates that the partnership will operate Birchwood Village as described in "Project Documents" filed with HUD. Such "Project Documents" specify that "Birchwood Village be operated as an affordable housing project for low-income residents." Complaint at ¶ 33. Paragraph 2.4 of the agreement further describes the purpose of the limited partnership as follows:
Complaint at ¶ 32.
In 1981, the partnership agreement was further amended, whereby David C. Green withdrew as a general partner, and Defendant Arlington Housing Corporation ("Arlington") became co-general partner with Plaintiff. Lawrence Penn ("Penn") was, and remains, a principal of both Arlington Housing Corporation and Batavia Investors.
Since at least 2000, the partnership has obtained regular audits of its financial statements, which it has shared with Defendants.
In 2004, the partnership agreement was again amended, to allow Arlington to withdraw as co-general partner and become a co-limited partner with Batavia Investors. Arlington was required to withdraw as general partner because its principal, Mr. Penn, had entered into a settlement agreement with HUD involving matters unrelated to this action or to Birchwood Village, which agreement prohibited him or his affiliates from serving as general partner of a partnership owning HUD property.
As the years passed, Plaintiff, as managing partner, continued to operate Birchwood Village as it always had been operated, as an apartment complex catering to low- and moderate-income tenants. Further, as already explained, such operation was in keeping with Plaintiff's original intention when it developed the apartment complex, and was also required as a condition of the mortgage agreement between Plaintiff and HUD. It is undisputed, though, that Plaintiff, both as sole owner of Birchwood Village prior to joining the partnership, and later as managing partner, always set rents at levels that were significantly below the FMR levels permitted by HUD, purportedly to accommodate the financial means of the tenants. In other words, Plaintiff could have charged higher rents and still been in compliance with HUD's requirements.
Between 1979 and 2012, the partnership continued making payments on the note owed to HUD, but did not make any payments on the wraparound note. In 2012, the partnership paid off the HUD loan, leaving only the mortgage debt owed to Plaintiff. However, thereafter the Partnership did not make payments on the outstanding wraparound note. The Limited Partners were aware of this fact. For example, the audits of the Partnership's financial statements for 2014-2017 observe that "[n]o principal payments have been made on the residual note[.]"
Nor, for that matter, did Plaintiff raise the rents at Birchwood Village appreciably after the HUD loan was paid, even though the FMR restrictions previously imposed by HUD were no longer applicable.
Nevertheless, since 2012, Birchwood Village has been making money ($1.6 million) for the partnership, which, for accounting reasons, has been accruing in the partnership's bank accounts, rather than being applied to the wraparound mortgage. On this point, Plaintiff's Executive Director explains:
Greenbaum Decl. at ¶ ¶ 168, 170.
As the preceding paragraph suggests, income from the operation of Birchwood Village subsequent to the payoff of the HUD mortgage has been sufficient to only partially pay the outstanding wraparound mortgage held by Plaintiff, such that the entire amount will not be paid off by the date the partnership is set to terminate in December, 2020.
Although the limited partners have no right under the partnership agreement to direct or manage the partnership, they eventually began seeking an opportunity for the partnership to sell Birchwood Village, so as to fully satisfy the partnership's debt obligation to Plaintiff prior to the dissolution of the partnership in 2020. In October, 2014, Mr. Penn notified Plaintiff that the limited partners were interested in having the partnership sell Birchwood Village to a third party.
Docket No. [#7-4] at p. 9. Penn stated that Intercoastal's offer would expire if not accepted by November 30, 2014.
On November 13, 2014, Plaintiff notified Penn that it was not interested in purchasing the limited partners' shares, but did not directly address Intercoastal's offer.
On December 9, 2014, Plaintiff sent a letter to Schuman, purporting to accept Intercoastal's purchase offer. Subsequently, and even though Plaintiff's acceptance was made after the deadline in Intercoastal's offer, Schuman notified Plaintiff that Intercoastal was still agreeable to the sale, and would be preparing "a proposed Purchase and Sale Agreement for the acquisition of the Birchwood Village Apartments in accordance with the letter of Intent dated October 22, 2014," which he expected to receive in January, 2015.
On June 28, 2018, Mr. Penn, on behalf of Defendants, requested a meeting with Plaintiff, purportedly "to discuss future plans for the property." Penn did not indicate what he wanted to discuss with Plaintiff, though he suggested that the parties have "independent legal counsel" present at the meeting. Penn proposed that the meeting not take place until August, "[i]n order to provide sufficient time to coordinate all the board members' availability[.]"
On August 9, 2018, a meeting was held at Birchwood Village, involving Mr. Penn and Plaintiff, at which, for the first time, Penn accused Plaintiff of violating its fiduciary duties to the limited partners by failing to charge tenants sufficient rent. That is, Penn accused Plaintiff of charging too little for rent, resulting in the partnership's inability to pay off the wraparound mortgage, which will eventually result in the partnership defaulting on its debt obligation to Plaintiff. Penn orally offered to pay Plaintiff $6.5 million, in exchange for Plaintiff's general partnership interest and the mortgage obligation.
On August 21, 2018, Penn's attorney sent a follow-up letter to Plaintiff, reiterating the accusation that Plaintiff had "for many years managed the Project for its advantage," "but contrary to the interests of the limited partners," by "set[ting] the Project rents substantially below the fair market value of the rental units and the level allowable under the Regulatory Agreement that the Partnership entered into with the Department of Housing and Urban Development."
On September 10, 2018, Plaintiff notified Penn in writing that it rejected the purchase offer, and that it considered his "accusations" to be "without merit.
On November 19, 2018, Defendants sent a registered letter to Plaintiff, purporting to remove Plaintiff as General Partner "for cause," pursuant to Section 11.2 of the Amended and Restated Partnership Agreement.
On December 17, 2018, Plaintiff commenced this action. The Complaint purports to state the following claims: 1) "Breach of Contract Justifying an Injunction"; 2) "Breach of contract justifying damages"; and 3) "Declaratory Judgment." The Complaint demands a permanent injunction barring Defendants from interfering with Plaintiff's right to direct and control the business of the partnership, a declaration that Plaintiff has not violated the partnership agreement or otherwise done anything giving Defendants "cause" under the agreement to remove Plaintiff as general partner, and money damages, together with attorney's fees, costs and disbursements.
On January 4, 2019, Defendants filed an answer with counterclaims, along with the subject motion for preliminary injunctive relief. The counterclaims allege, in pertinent part, that
Docket No. [#6] at p. 11. The counterclaims demand a declaratory judgment, "declaring the parties' respective rights and obligations," as well as an injunction enforcing the purported "November 19, 2018 notice of removal."
Defendants' application for preliminary injunctive relief (Docket No. [#7]) seeks a mandatory injunction "enforcing the removal of [Plaintiff]" as general and managing partner.
Docket No. [#7-1] at p. 10. Defendants also contend that they will suffer "irreparable harm if [Plaintiff] is permitted to retain control of the Partnership during the course of this litigation[.]"
In support of the contention that Plaintiff has set the rents too low at Birchwood Village, Defendants have submitted, inter alia, an affidavit from a retired HUD employee, Stanley Houle ("Houle"), asserting that the rents being charged at Birchwood Village are, and always have been, set significantly below the HUD FMR level. In other words, Houle indicates that Birchwood Village could have charged significantly more for rents than it has charged, even when the HUD restrictions were in place prior to the payoff of the HUD loan in 2012.
Plaintiff, however, maintains that it has not breached its fiduciary duties in any way, and that Defendants therefore cannot establish their entitlement to preliminary injunctive relief. In particular, Plaintiff contends that Defendants' arguments about market rents and mismanagement are specious, since it has always been stated in the partnership agreement and understood by the partners that Birchwood Village would be run as a low-income apartment complex, and that the primary benefit to the limited partners would be tax losses.
Docket No. [#18] at pp. 1-2 (emphasis in original). Plaintiff asserts in this regard that the limited partners' total capital contribution to the partnership was only $400,000, and that for them the investment "was a classic low-income housing tax shelter, designed to generate `tax benefits' in the form of annual operating losses that were allocated and passed through to them under the Partnership Agreement."
In support of its response, Plaintiff has submitted an affidavit from its accountant, Douglas Zimmerman, CPA ("Zimmerman"), explaining the purpose of the limited partnership from a tax standpoint, and the tax benefits that Defendants have received. Notably in this regard, Zimmerman states that
Docket No. [#17] at p. 4.
Id. at pp. 4-5. Zimmerman indicates that Defendants will face income tax liability upon the dissolution of the partnership,
Insofar as Defendants are contending that Plaintiff breached fiduciary duties by "torpedoing" the potential sale of the property to Intercoastal in 2014, Plaintiff responds that its alleged late response was not to blame for the potential deal falling through, that there was never an actual purchase offer, and that any breaches of fiduciary duties occurring in 2014 are now time-barred in any event.
Plaintiff further maintains that Defendants' contention that it should be charging "market-rate rents" is not plausible, since Birchwood Village cannot realistically charge market-rate rents:
Greenbaum Decl. at ¶ ¶ 149-150. Further, Plaintiff states that if Defendants were permitted to increase the rents at Birchwood Village to "market rates," "most of [the current] tenants . . . would be forced to move out immediately because they would be unable to pay rents at those levels." Greenbaum Decl. at ¶ 150.
On March 28, 2019, the Court heard oral argument. At the completion of oral argument, the Court announced that it was denying the application, and that it would issue a written decision.
Defendants admittedly are requesting mandatory preliminary injunctive relief,
H'Sh aka v. O'Gorman, 758 F. App'x 196, 198 (2d Cir. Feb. 13, 2019) (footnote omitted). For the reasons to be discussed below, Defendants here have not met the standard to obtain a prohibitory injunction, much less a mandatory injunction. More specifically, Defendants have not shown that they will suffer irreparable harm if the application is granted; have not shown that they are likely to succeed on the merits of the underlying claim; and have not shown that the balance of hardships tips decidedly in their favor.
Irreparable harm, which is frequently called the single most important prerequisite to obtaining preliminary injunctive relief, involves considerations such as whether money damages can adequately compensate the movant if relief is not granted, and whether there is an urgent need to protect the movant:
Silber v. Barbara's Bakery, Inc., 950 F.Supp.2d 432, 439 (E.D.N.Y. 2013) (collecting additional cases).
In the instant action, Defendants' delay in seeking preliminary injunctive relief warrants denial of their request, even without regard to whether money damages would be adequate compensation for any injury.
Defendants nevertheless deny that they were dilatory in making the instant application. In that regard, their reply states:
Reply [#21] at pp. 9-10. However, this argument is unpersuasive inasmuch as it relies on a very selective view of the factual record. Again, Defendants conspicuously fail to indicate exactly when it was that they claim to have "learned[ed] that the rents at the Property ha[d] been suppressed far below market level." They were, though, on actual notice of the rent level for many years, if not decades. Moreover, Defendants were plainly not in any hurry to quell this alleged severe breach of fiduciary duties by Plaintiff, since they requested the meeting with Plaintiff in June, but did not disclose the purpose of the meeting until August. Then, following that meeting and Plaintiff's rejection of Defendants' written purchase offer (which rejection could not have been a surprise to Defendants, given that the written offer was one million dollars less than what Penn had offered orally two weeks earlier), Defendants waited two more months, until November 19, 2018, to send a notice to Plaintiff, purporting to remove Plaintiff as the general partner.
In sum, Defendants are requesting an injunction to effectively end a business practice of which they have been aware for years if not decades, and to which they have never objected until recently. This fact alone belies the need for the "extraordinary and drastic" remedy that Defendants are now requesting.
Apart from this delay, the Court agrees with Plaintiff that Defendants' ability to establish irreparable harm depends on their ability to show that there is actual "cause" to remove Plaintiff as general partner and managing partner. That is, Defendants contend that they will be irreparably harmed if they are denied their right under the partnership agreement to remove Plaintiff for cause. However, as will be discussed further below, Defendants have not demonstrated that such cause exists. Therefore, Defendants have also failed to demonstrate irreparable harm for this reason.
Defendants have not shown that they are likely to succeed on the merits of the underlying claims. Rather, the only thing that Defendants have clearly shown is that the rents that have been charged at Birchwood Village over the years have been below both market rates and HUD's FRM rates. However, such fact is not necessarily indicative of malfeasance by Plaintiff. Indeed, Plaintiff has persuasively argued that such fact is consistent with the purpose for which Birchwood Village was established, and with the purpose of the limited partnership, which was to provide tax losses to Defendants. Defendants' contrary bald assertion that Birchwood Village should have been operated as a market-rate apartment complex once the HUD mortgage was paid in 2012, not only flies in the face of the facts of record, but begs the question why they never never complained until 2018. Defendants have not provided any convincing answer to that question. Nor have Defendants otherwise shown that the purpose of the limited partnership was to maximize profits, as opposed to tax benefits.
Defendants also have not clearly shown that Plaintiff did anything improper with regard to the Intercoastal "purchase offer" in 2014. Defendants contend that Plaintiff "kill[ed] this offer to purchase" insofar as they "did not return [the letter of intent] until after the end of November when the offer had expired."
For all of these reasons, Defendants have not clearly shown at this time that they are likely to succeed on the merits of this action.
Defendants also have not clearly shown that there are sufficiently serious questions going to the merits of its claims to make them a fair ground for litigation, and that the balance of the hardships tips decidedly in their favor because extreme or very serious damage will result from a denial of preliminary relief. With regard to the balance of hardships, for example, if the application is denied the partnership will merely continue to do business as it has done for the past forty years without objection by Defendants. On the other hand, if the application is granted Plaintiff will be ousted from the position within the partnership that it has held since 1979, and the operation of the apartment complex will likely be disrupted to the detriment of the tenants.
Defendants' application [#7][#11] for preliminary injunctive relief is denied.
SO ORDERED.
