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NCA Investors Liquidating Trust v. Dimenna

United States District Court, D. Connecticut

December 23, 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 FOR SUMMARY JUDGMENT

          VICTOR A. BOLDEN UNITED STATES DISTRICT JUDGE

         NCA Investors Liquidated Trust (“NCA Investors Trust” or “Plaintiff”) has sued John J. DiMenna, Jr., Thomas L. Kelly, Jr., and William A. Merritt, Jr., for breach of contract, or alternatively, unjust enrichment, to recover $18, 800, 000 allegedly owed from defaulted loans and related enforcement obligations. Third Am. Compl., ECF No. 133 (Oct. 12, 2017) (“Compl.”).

         Mr. Kelly and Mr. Merritt (“Defendants”[1]) have moved for summary judgment, and NCA Investors Trust has objected.

         For the following reasons, Defendants' motion for summary judgment is GRANTED in part and DENIED in part.

         NCA Investors Trust's breach of contract claims are dismissed, but its unjust enrichment claim will proceed to trial, although this claim will be limited as discussed herein.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         A. Factual Background

         NCA Investors Trust is a liquidated trust established during the In re: Newbury Common Assocs., LLC, No. 15-12507 (LSS) (Bankr. D. Del.), Chapter 11 bankruptcy action. Pl.'s Local Rule 56(a)(2) Statement, ECF No. 203-1 ¶ 52 (Nov. 4, 2019) (“Pl.'s SMF”). NCA Investors Trust is the successor-in-interest to the claims of UCF 1 Trust 1 (“UFC”). Id. ¶ 52.

         Since 1996, DiMenna, Kelly, and Merritt were the three managing members and owners of Seaboard Realty, LLC (“Seaboard Realty”), a “Stamford-based real estate company that maintained a portfolio of high-quality, distinctive commercial, residential, and hospitality properties.” Id. ¶ 1; id. at Add'l Facts ¶ 1. During the relevant time period here, Mr. DiMenna owned fifty percent of Seaboard Realty, while Mr. Kelly and Mr. Merritt each owned twenty-five percent. Id. at ¶ 2. Seaboard Realty's Operating Agreement required “unanimous” consent by all three managing members for “business” decisions. Id. at Add'l Facts ¶ 11 (citing Ex. 5: Seaboard Realty Operating Agreement § 7.3).

         Mr. DiMenna “managed the day-to-day operations of Seaboard Realty, ” and NCA Investors Trust alleges that as co-managing members, Defendants were also responsible for daily operations and “for locating investment properties and obtaining debt financing for the properties to be purchased, ” as well as raising capital from investors. Id. ¶¶ 3, 4; cf. Id. at Add'l Facts ¶ 1 (“DiMenna had no background or experience in investment banking, venture capital, real estate finance or financial matters, generally.”). But because the Seaboard Realty Operating Agreement allegedly vested sole management authority in Defendants, NCA Investors Trust alleges that the Gregory Stanton, the Chief Operating Officer of SPMI, would have provided Mr. Kelly or Mr. Merritt with any information requested by them. See Ex. 3: Prejudgment Remedy Hearing Tr., ECF No. 203-4 at 175: 9-16 (Mar. 28, 2016) (“Q. If Mr. Merritt or Mr. Kelly came up to you and said, I need a statement, you wouldn't have told them, no way, I'm not giving you that document, correct? A. Correct. Q. You would have given them what they asked for? A. Yes.”); see also Pl's SMF at Add'l Facts ¶ 37 (alleging that Defendants “never obtained information from anyone other than DiMenna, nor did they ever independently verify the accuracy of what he told them.”).

         At the regular meetings of Seaboard Realty managing members, Mr. DiMenna provided Defendants “with documentation and information demonstrating that the enterprise was on sound financial footing.” Pl.'s SMF ¶ 8. But NCA Investors Trust alleges that these documents “demonstrated pervasive accounting problems, construction problems, and operations deficits.” Id. It turns out that Mr. DiMenna provided false information to Defendants. Compare Ex. 44, ECF No. 195-52, with Ex. 45, ECF No. 195-53 (two different cash balance statements - Ex. 44 allegedly located by Mr. Merritt after November 2015 and Ex. 45 being the one presented by Mr. DiMenna, which showed the entreprise in good financial health).

         NCA Investors Trust alleges that Defendants, through their interests in Seaboard Realty, personally guaranteed $18.8 million in loans for two separate projects: a $15, 300, 000 mezzanine loan to Park Square West Member Associates, LLC (“PSW Guarantee”) and a $3, 500, 000 mezzanine loan to Seaboard Hotel Member Associates, LLC (“Courtyard Guarantee”). Id. ¶¶ 19-23, 27, 31-33.

         1. Corporate Entities

         The Seaboard Property Management, Inc. (“SPM”), a company solely owned and controlled by Mr. DiMenna, managed the Seaboard Realty properties. Id. ¶ 5. In exchange for four percent of the total monthly gross receipts and five percent of the net commercial rentals, “SPM's responsibilities included collecting rent, marketing and leasing space, paying operating expenses, filing tax returns, procuring insurance, providing for maintenance, repairs, and alterations, contracting with service providers, and purchasing all goods and materials utilized in the operation of the business.” Id. ¶ 6.

         Seaboard Realty created Park Square West Member Associates, LLC (“PSWMA”) and Park Square West Associates, LLC (“PSWA”) to effectuate the purchase of the Park Square West Apartments, located at Summer Street in Stamford, Connecticut (“PSW Property”). Id. ¶ 13. PSWA took title to the PSW Property. Id. PSWMA was the sole member, and thus owned 100%, of PSWA. Id. Seaboard Realty was the managing member and owned a twenty-five percent interest in PSWMA, while fifty individual investors owned the remaining seventy-five percent interest. Id.

         Seaboard Realty created Seaboard Hotel Member Associates, LLC (“SHMA”) and Seaboard Hotel Associates, LLC (“SHA”) to effectuate the purchase of the Courtyard by Marriott Hotel, located on Summer Street in Stamford, Connecticut (“Courtyard Hotel”). Id. ¶¶ 19, 20. SHA took title to the Courtyard Hotel. Id. ¶ 20. SHMA was the sole member, and thus owned 100%, of SHA. Id. Seaboard Realty was the managing member and owned a twenty-five percent interest in SHMA, while over fifty individual investors owned the remaining seventy-five percent interest. Id.

         2. Park Square West Loan

         In early 2011, Seaboard Realty contracted to purchase the PSW Property. Id. ¶ 11. Mr. DiMenna advised Defendants “that the purchase would be accomplished by assuming a $22 million mortgage held by the Connecticut Housing Finance Authority (‘CHFA') and raising the remaining amount from individual investors.” Id. ¶ 12.

         On December 28, 2011, Mr. DiMenna executed a promissory note on behalf of PSWMA for $8 million in favor of Titan Capital ID, LLC (“Titan”) (“Titan Loan”). Ex. 10: Promissory Note to Titan Capital ID, LLC, ECF No. 195-18 (Dec. 28, 2011). Defendants allege Mr. DiMenna did so without their knowledge, consent, or authority. Local Rule 56(a)(1) Statement of Undisputed Facts in Support of Mot. for Summ. Judgment, ECF No. 195-2 ¶ 15 (Sept. 6, 2019) (“Defs.' SMF”). As a condition of the Titan Loan, “Titan required that Seaboard Realty provide it with a written consent certifying that it was the sole member and manager of PSWMA (which was false); that so long as the Titan Loan was outstanding, DiMenna was to be the sole managing member of Seaboard Realty (which was false); and that Kelly and Merritt were to resign as managing members of Seaboard Realty (which was false).” Pl.'s SMF ¶ 16.

         Mr. DiMenna not only forged the signatures of Mr. Kelly and Mr. Merritt for the written consent, but neither of them “were aware of the written consent, and did not sign, authorize, or consent it.” Id. ¶ 17. Although attached to the written consent were forms in which Defendants purportedly resigned as managing members of Seaboard Realty, neither “intended to resign, nor did they sign, authorize, consent to, or even know about the resignation.” Id. ¶ 18. Nevertheless, NCA Investors Trust alleges that because Defendants knew of the PSW Property purchase, “they are charged with constructive knowledge of the facts underlying that purchase.” Id. ¶¶ 17, 18; see also Id. at Add'l Facts ¶ 25 (alleging that “[e]ven though the [PSW Property purchase] was the largest acquisition undertaken by Seaboard Realty, neither Kelly nor Merritt had any meaningful involvement in the deal”).

         On or about November 1, 2012, PSWMA executed a Mezzanine Promissory Note for $12 million (“the PSW Loan”) in favor of UCF. Id. ¶ 21. The PSW Loan was executed by Mr. DiMenna on behalf of PSWMA, and guaranteed by both Mr. DiMenna and an unauthorized entity established by Mr. DiMenna called PSWMA I, LLC (“PSWMA I”). Id. ¶ 22. Although PSWMA I was purported to be the sole member of PSWMA, it actually held no interest in that entity. Id.

         On November 2, 2012, UCF funded the PSW Loan. Id. ¶ 23. Defendants allege they “did not know about, consent to, or authorize the PSW Loan or any of the documents concerning it and were completely unaware of it.” Defs.' SMF ¶ 24. NCA Investors Trust alleges Defendants had constructive knowledge of the PSW Loan because they “had access to all of the documents and information related to the PSW Loan, but chose to abdicate their management responsibilities.” Pl.'s SMF ¶ 24 (citing Ex. 16: 12/30/2011 PSW Closing Statement, ECF No. 203-4; Ex. 35: 2012 O'Connor Davies Audit, ECF No. 203-4; Ex. 36: 2013 O'Connor Davies Audit, ECF No. 203-4; Ex. 38: 2012-2015 PSW Borrower Form 1065).

         As part of the PSW Loan, UCF required that Mr. DiMenna be the sole managing member of Seaboard Realty, and that Defendants “were to have no role managing Seaboard Realty and its various properties.” Id. ¶ 25. Mr. DiMenna provided UCF with both the forged written consent from the Titan Loan and the forged resignations of Defendants he prepared in connection thereof. Id. ¶ 26. Additionally, UCF's consent was required with “any action or attempted action to remove, replace, or substitute DiMenna as the managing member of Seaboard Realty.” Id.

         PSWMA made monthly interest-only payments on the PSW Loan through June 2015. Id. ¶¶ 30, 73.

         3.Courtyard Loan

         In April 2011, Seaboard Realty contracted to purchase a ground lease to operate the Courtyard Hotel for approximately $30 million. Id. ¶ 19; id. at Add'l Facts ¶ 32.

         On November 30, 2012, SHMA executed a Mezzanine Promissory Note for $3.5 million in favor of UCF (“Courtyard Loan”). Id. ¶ 27. The Courtyard Loan was executed by Mr. DiMenna on behalf of SHMA, and personally guaranteed by Mr. DiMenna and allegedly also guaranteed by Seaboard Hotel LTS Member Associates, LLC (“LTSMA”). Id. ¶ 28. LTSMA was an entity created to own 100% of the interest in Seaboard Hotel LTS Associates, LLC (“LTSA”), which was purchasing a property in Stamford to construct a Residence Inn by Marriott hotel. Id.

         Defendants allege they “did not know about, consent to, or authorize the Courtyard Loan or any of the documents concerning it.” Defs.' SMF ¶ 29. NCA Investors Trust alleges Defendants had constructive knowledge of the Courtyard Loan, because they “had access to all of the documents and information related to the Courtyard Loan, but chose to abdicate their management responsibilities.” Pl.'s SMF ¶ 29 (citing various documents, Exs. 39-42).

         SHMA made monthly interest-only payments on the Courtyard Loan through July 2015. Id. ¶¶ 30, 74.

         4.St. John's Towers

         In 2012, Mr. DiMenna formed Stamford Residential Associates, LLC (“SRA”) to purchase a mixed-use real estate property known as the St. John's Towers, located in Stamford, Connecticut. Id. ¶ 42. Stamford Residential Member Associates, LLC (“SRMA”) owned SRA. Id. Neither Defendants nor Seaboard Realty had any involvement in the St. John's Tower project. Id. ¶ 43.

         In February 2013, a few months after the initial PSW and Courtyard Loans were made by UCF, Daniel Palmier invested $300, 000 in SRMA. Id. ¶ 44. Daniel Palmier is the CEO of UCF. Id. ¶ 41.

         SRA ultimately did not purchase the St. John's Towers and had no income. Id. ¶ 46.

         5. Upsize Loan and Further Conditions

         On March 25, 2014, PSWMA executed an Amended and Restated Mezzanine Promissory Note in favor of UCF and increased the PSW Loan from $12 million to $15.3 million (“Upsize Loan”). Id. ¶ 31. UCF required several conditions for the Upsize Loan.

         First, UCF required Mr. DiMenna and Defendants to enter into a brokerage agreement whereby a UCF affiliate, CPR Capital Funding, LLC (“CPRCF”), “received the exclusive right to place permanent debt and mezzanine or preferred equity financing” on several Seaboard Realty properties, including the PSW Property and the Courtyard Hotel, as well as on the St. John's Towers, which was not a Seaboard Realty property, nor did Defendants have any interest in the St. John's Towers. Id. ¶ 32; see also Id. ¶¶ 43, 44.

         Second, UCF required Defendants' personal guarantees on the principals of the PSW Loan, the Courtyard Loan, and the Upsize Loan, for a total of $18.8 million (the “Upsize Guarantees”). Id. ¶ 33.

         Third, UCF required that PSWMA obtain a “Legal Opinion Regarding (a) authority of all entities to enter into amendment/additional documents; (b) enforceability of all amendment/additional documents, ” which included the Upsize Guarantees. Id. ¶¶ 34, 35 (with ¶ ...


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