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NCA Investors Liquidating Trust v. Dimenna

United States District Court, D. Connecticut

June 27, 2019

NCA INVESTORS LIQUIDATED TRUST, Plaintiff,
v.
JOHN J. DIMENNA, JR, THOMAS L. KELLY, JR., & WILLIAM A. MERRITT, JR., Defendants.

          RULING AND ORDER ON MOTION TO DISMISS OR FOR SANCTIONS

          VICTOR A. BOLDEN, UNITED STATES DISTRICT JUDGE

         NCA Investors Liquidated Trust (“NCA Investors Trust” or the “Plaintiff”) has sued John J. DiMenna, Jr., Thomas L. Kelly, Jr., and William A. Merritt, Jr. (“Defendants”), for breach of contract and unjust enrichment to recover $18, 800, 000 allegedly owed from defaulted loans and related enforcement obligations. Complaint, ECF No. 1.

         Thomas L. Kelly, Jr. and William A. Merritt, Jr. (“Defendants”) now seek to dismiss the case or levy sanctions against NCA Investors Trust for the destruction of discovery documents by an NCA Trustee. Motion for Sanctions, ECF No. 164.

         For the following reasons, the Court GRANTS IN PART AND DENIES IN PART the motion for sanctions.

         To the extent Defendants seek dismissal, the Court denies the motion is DENIES the motion without prejudice to renewal after the close of discovery.

         To the extent that Defendants seek an adverse jury instruction with respect to their affirmative defenses on NCA Investors Trust's unjust enrichment claim, the Court DENIES the motion without prejudice to renewal at the time of trial.

         To the extent that Defendants seek attorney's fees and costs related to any additional discovery required because of the spoliation of evidence as well as associated with bringing this motion, the Court GRANTS the motion.

         Defendants shall file any motion for attorney's fees and costs within twenty-one (21) days of the resolution of this case in this Court.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         A. Factual Allegations

         NCA Investors Trust is a liquidated trust established during the In re: Newbury Common Assocs., LLC, No. 15-12507, Chapter 11 bankruptcy action. Third Amended Complaint, ECF No. 133 (“Third Am. Compl.”), at ¶¶ 4, 8. DiMenna, Kelly, and Merritt are owners of Seaboard Realty, LLC (“Seaboard Realty”). Id. at ¶ 12. Mr. DiMenna owned fifty percent and Mr. Kelly and Mr. Merritt each owned twenty-five percent. Id. NCA Investors Trust alleges that Defendants, through their interests in Seaboard Realty, personally guaranteed approximately $18.5 million in loans for two separate projects: a $15, 300, 000 mezzanine loan to Park Square West Member Associates, LLC (“Park Square Guarantee”) and a $3, 500, 000 mezzanine loan to Seaboard Hotel Member Associates, LLC (“Courtyard Guarantee”). Id. at ¶ 9.

         1. Corporate Entities

         Seaboard Realty owns 100% of PSWMA II, LLC (“PSWMA II”), which owns 100% of PSWMA I, LLC (“PSWMA I”). Id. at ¶¶ 12, 13. PSWMA I owns 100% of Park Square West Member Associates, LLC (“Park Square Borrower”). Id. at ¶ 13. Park Square Borrower owns 100% of non-Debtor Park Square West Associates, LLC (“Park Square Property Owner”). Id. at ¶ 14. And the Park Square Property Owner owns the Park Square West commercial property at 101 Summer Street, Stamford, Connecticut (“Park Square Property”) in fee simple. Id. at ¶ 15.

         Seaboard Realty owns twenty-five percent of Seaboard Hotel member Associates, LLC (“Courtyard Borrower”), while the remaining interest is split among fifty-five other owners. Id. at ¶ 16. The Courtyard Borrower owns 100% of Seaboard Hotel Associates, LLC (“Courtyard Lessee”). Id. at ¶ 17. And the Courtyard Lessee is the ground lessee for property at 275 Summer Street, Stamford, Connecticut (“Courtyard Property”). Id. at ¶ 18.

         2. Park West Loan

         On November 1, 2012, NCA Investors Trust allegedly loaned $12 million to Park Square Borrower, a loan supported in three ways: (1) a guarantee by PSWMA I of Park Square Borrower's repayment of the loan; (2) an inter-creditor and subordination agreement in the original principal amount of $6.85 million entered into by Seaboard Realty, PSWMA II, and the Park Square Borrower; and (3) an Indemnification and Guarantee Agreement in favor of NCA Investors Trust entered into by Mr. DiMenna. Id.at ¶ 19-20.

         On March 25, 2014, the Park Square Borrower, NCA Investors Trust, DiMenna, and PSWMA I modified the Park Square loan and increased it to $15.3 million. Id. at ¶ 25. The modified variable interest loan is based on 13.5% (14% at the date of the modification) for the initial $12 million advance and 17.5% (18% at the date of the modification) for the $3.3 million additional advance, with interest payable beginning on April 1, 2014, a balloon principle payment upon the maturity date, and a modified loan has a 24% default rate. Id. at ¶ 26.

         3. Courtyard Loan

         On November 30, 2012, NCA Investors Trust allegedly entered into a loan agreement with the Courtyard borrower for $3.5 million, with 12.5% interest payable beginning on January 1, 2013 and a 24% default rate, loan guaranteed by Seaboard Hotel LTS Member Associates, LLC (“Courtyard Guarantor”) and Mr. DiMenna, as a condition of NCA Investors Trust making the Courtyard Loan. Id. at ¶ 21-22. The Courtyard Guarantor and the Courtyard Borrower also pledged 100% of the membership interest in Courtyard Guarantor and Courtyard Lessee and other security interests. Id. at ¶ 23. Finally, the obligations of the Park West Loan and the Courtyard Loan were cross-defaulted and cross-collateralized among the Park West Borrower, the Courtyard Borrower, Mr. DiMenna, PSWMA I, and the Courtyard Guarantor. Id. at ¶ 24.

         4. Bankruptcy Action

         On December 13, 2015, Seaboard Realty, PSWMA II, PSWMA I, Park West Borrower, Courtyard Borrower, Courtyard Guarantor, and other related entities filed Chapter 11 petitions in Delaware Bankruptcy Court. Id. at ¶ 28. Other Seaboard entities later filed Chapter 11 petitions. Id. at ¶ 29.

         5. Document Destruction

         META Advisors, a trustee of NCA Investors Trust, entered a contract for the storage of Seaboard records. Newbury Common-Moving Seaboard Documents E-Mail, ECF No. 164-6 (“Seaboard Documents Email”).

         On July 27, 2017, there was an e-mail to “confirm our agreement that You (Barran Janitorial) agree to work as an Independent contractor for META Advisors; in its capacity as the trustee of the NCA Investors' Liquidated Trust, to move all of the Seaboard records, boxes and computers, from the basement of One Atlantic Street in Stamford, CT, to 300 Wilson Avenue in Norwalk, CT, for the total of $2, 000 (paid once the job is complete).” Id. Bob Musumeci of RTA International owned the Norwalk facility. Id.

         On July 29, 2017, Lou Pento sent an e-mail to Mr. Musumeci that “[w]e received 10 truck loads of files today from 7:30 AM to 5:30 PM. We arranged the boxes by number sequence so that all files are easily accessible. Please note the boxes that are all the way on the left are marked with a red x and we were told that these are no longer needed.” Id.

         On July 30, 2017, Lou Pento advised Mr. Musumeci to keep the boxes until further notice. Id. (“For now, please don't get rid of any of the boxes. I'm not sure what files are marked with a red X. but before we throw any of them out, I want to clarify what they are.”).

         On December 4, 2017, a litigation hold was served upon NCA Investors Trust, which stated that NCA Investors Trust was “currently engaged in and/or may become engaged in litigation. Thus, the You, and all of your employees, agents, representative and businesses, are hereby given notice not to destroy, conceal or alter any paper or electronic files, . . . . Please forward a copy of this letter to all persons and entities with custodial responsibility for the items referred to in this letter.” Notice of Requirement to Retain Documents for Purposes of Litigation and/or Pending Litigation, ECF No. 164-7 (“Litigation Hold”).

         In May 2018, Mr. Musumeci disposed of the documents. Affidavit of Charles Deluca, ECF No. 164-10 (“Deluca Aff.”), at ¶ 7

         On July 3, 2018, NCA Investor Trust counsel notified counsel for the Defendants of an index of all the boxes of Seaboard documents provided to NCA Investors Trust. Id. at ¶ 4.

         On July 5, 2018, counsel for Defendants requested “to inspect the boxes referenced in your recent disclosure.” Id. at 5.

         Between July 5 and August 17, 2018, counsel for Defendants made four requests for the documents. Id. at 5-18.

         On August 22, 2018, NCA Investors Trust's counsel notified Defendants' counsel that Mr. Musumeci discarded the documents at his warehouse in May of 2018. Id. at ¶ 7.

         B. Procedural History

         On February 2, 2016, NCA Investors Trust sued Mr. DiMenna and Defendants, alleging two counts of breach of contract and one count of unjust enrichment. Complaint, ECF No. 1. On the same day, NCA Investors Trust also moved for a prejudgment remedy. Motion for Prejudgment Remedy, ECF No. 8.

         On February 23, 2016, the Court held a status conference in the case and set a March 11, 2016 hearing for the motion for prejudgment remedy. Minute Entry, ECF No. 22.

         On March 15, 2016, the Defendants filed an Answer to the Complaint and asserted cross-claims against Mr. DiMenna. Answer to Complaint with Affirmative Defenses and Jury Demand, ECF No. 32.

         On March 23, 2016, NCA Investors Trust amended its Complaint and its motion for prejudgment remedy. Amended Complaint, ECF No. 40; Amended Motion for Prejudgment Remedy, ECF No. 41.

         On March 28 and 31, 2016, the Court held a prejudgment remedy hearing and NCA Investors Trust moved orally for an entry of default as to Mr. DiMenna. Minute Entry, ECF No. 50; Minute Entry, ECF No. 53.

         On April 29, 2016, the Court held another motion hearing on the prejudgment remedy. Minute Entry, ECF No. 60.

         On May 31, 2016, NCA Investors Trust formally moved for an entry of default as to Mr. DiMenna, which was granted on June 8, 2016. Motion for Default Entry, ECF No. 64; ...


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