### Melrose Assoc. Ltd. Partnership v Floral Assoc. Ltd. Partnership 2024 NY Slip Op 31933(U) June 4, 2024 Supreme Court, New York County Docket Number: Index No. 651323/2020 Judge: Andrew Borrok Cases posted with a "30000" identifier, i.e., 2013 NY Slip

Op 30001(U), are republished from various New York State and local government sources, including the New

York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication.

### [FILED: NEW YORK COUNTY CLERK 06/04/2024 05:01 P~ NYSCEF DOC. NO. 385



### SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 

### 53

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MELROSE ASSOCIATES LIMITED PARTNERSHIP, INDEX NO. Plaintiff, MOTION DATE

- V - INDEX NO. 651323/2020 RECEIVED NYSCEF: 06/04/2024

651323/2020 02/02/2024, 01/26/2024 FLORAL ASSOCIATES LIMITED PARTNERSHIP, JOSEPH T CEFALO, FREDERICK W CEFALO, STEPHEN R CEFALO, ESMC, LLC, MOTION SEQ. NO. 012 013
Defendant. DECISION+ ORDERON MOTION

-----------------------------------------------------------------------------------X HON. ANDREW BORROK: The following e-filed documents, listed by NYSCEF document number (Motion 012) 307,308,309,310, 311,312,313,314,315,316,317,318,319,320,321,322,323,324,325,326,327,328,329,330, 331,332,333,334,335,336,337,338,371,372,383 were read on this motion to/for JUDGMENT-SUMMARY The following e-filed documents, listed by NYSCEF document number (Motion 013) 339, 340, 341, 342, 343,344,345,346,347,348,349,350,351,352,353,354,355,356,357,358,359,360,361,362, 363,364,365,366,367,368,373,374,375,376,377,378,379,380,381,382 were read on this motion to/for SUMMARY JUDGMENT(AFTER JOINDER Upon the foregoing documents and for the reasons set forth on the record (tr. 

### 5.30.24), Melrose Associates Limited Partnership's motion for summaryjudgment (Mtn. Seq. No. 013) and the defendants' motion for partial summaryjudgment (Mtn. Seq. No. 012) are each granted solely to the extent set forth below.

Reference is made to a certain Amended and Restated Limited Partnership Agreement (the LP Agreement; NYSCEF 347), dated March 8, 1983, by andbetween, among others, Floral Associates Limited Partnership (Floral), the defendants Joseph T. Cefalo, Federick W. Cefalo, and Stephen R. Cefalo, and Melrose Associated Limited Partnership (Melrose) pursuant to

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### [FILED: NEW YORK COUNTY CLERK 06/04/2024 05:01 P~ NYSCEF DOC. NO. 385 INDEX NO. 651323/2020 RECEIVED NYSCEF: 06/04/2024
which Melrose and Floral agreed to form Floral as a limitedpartnership for the purpose of acquiring and managing an apartment complex located in Melrose, Massachusetts.

Pursuant to Section 6(c) ofLP Agreement, the parties agreed thatmonies received and expenses incurred in connection with the day-to-daybusiness or operations ofthe Partnership were to be borne 96% byMelrose and 4% byFloral Associates Limited Partnership:

c. Net Cash Receipts. 1. Forthe purpose ofthis Agreement, the term "NetCash Receipts" shall mean the netprofit, ifany, ofthe Partnership derived during any fiscal year orpartthereof from the operations of theProject subsequent to the issuance ofa temporary certificate ofoccupancy for the entire Project, afterthepaymentof allexpenses attributable to theProject, including, without limitation, allmanagementor other fees, including fees payable pursuant to the Supervisory Management Services Inventive Agreement, payable to any Partner or theirrespective Affiliates, whether such fees are regular or supplemental, as ascertained through the use ofgenerally accepted accounting principles, with all proper adjustments, consistently applied except that (A) depreciation ofbuildings, improvements and personalty ownedbythe Partnership shall notbe deducted; (B) Mortgage Loan amortization andpayments ofprincipal ofany other loan made to the Partnership, including Working Capital Loans, shall be deducted; (C) any depletions of reserves shall be added; and (D) amounts (other than reserves) expended or reserved for capital improvements, additions to the Project, reasonable working capital needs, replacement ofequipment, fixtures andpersonalty, replacement reserves, sinking funds and reserves for contingent liabilities, all as determinedby the Managing General Partner, and any amounts which any federal, state or local governmental agencyhavingjurisdiction overthe Project mayrequire to be established as a reserve or accrual, shall be deducted. 11. Net Cash Receipts, ifany (less any amount paidpursuant to Article 23), shall be distributed as soon as practicable, as determined bythe Managing General Partner in his sole discretion, after the end ofthe fiscal year ofthe Partnership. In no event shall Distributions ofNet Cash Receipts be distributed in an amount in excess ofthatpermittedunder the Regulatory Agreement, applicable laws or applicable rules and regulations ofHUD and/or MHFA. Distributions of Net Cash Receipts shallbeallocatedamongthePartners in accordance with their respectivePartnership Interests.
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### [FILED: NEW YORK COUNTY CLERK 06/04/2024 05:01 P~ NYSCEF DOC. NO. 385


### (NYSCEF Doc. No. 347, § 

### 6[c] [emphasis added]). INDEX NO. 651323/2020 RECEIVED NYSCEF: 06/04/2024



### This understanding is also reflected in the definition ofProject which is defined as "the Property and Improvements, collectively," with these two terms in turn defined as the subject property and "all machinery, equipment, fixtures and personalty located orto be located on the Property or procured or to be procured for use in connection with the Property," respectively (id., § 

### 2).
On otherhand, pursuant to Section 6(d) and (e) ofthe LP Agreement, the parties agreed that gains from capital events wouldbe split on a 50%/50% basis: d. Allocations ofCapital Transaction Gain or Loss. 1. Income, gain or loss from a transaction which generates Sale Proceeds orLoan Proceeds shall constitute Capital Transaction Gain or Capital Transaction Loss, as the case maybe. 2. Capital Transaction Loss shall be allocated among the Partners in accordance with theirrelative Partnership Interests. 3. Capital Transaction Gain shall be allocated in the following manner and priority (prior to any distribution ofany Sale Proceeds or Loan Proceeds): a) Up to an amount equal to the aggregate negative Capital Amounts ofall Partners having negative Capital Accounts shall be allocated to each such Partner in the same proportion as his negative Capital Account bears to such aggregate negative Capital Account; b) Up to an amount equal to the aggregate Capital Account Shortfalls ofall Partners, after the allocation ofgain under clause (a) above, shall be allocated to each Partner in the same proportion as his Capital Account Shortfall bears to such aggregate Capital Account Shortfalls ofall partners; c) Anyremaining Capital Transaction Gain shall be allocated 50% to the Limited Partner and 50%, in the aggregate, to the Original Limited Partner and the General Partners.

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e. Distributions ofSale Proceeds and Loan Proceeds. Upon the receipt ofSale Proceeds or Loan Proceeds, ifthe Partnership does not dissolve and terminate pursuant to Article 4, distributions ofsuch proceeds, to the extent in the opinion ofthe Managing General Partnernotrequired to pay any currently due obligation or liability ofthe Partnership not payable from current operating receipts or applied to the payment ofany mortgage on the Project, repayment ofwhich is notprovided for in clauses (i) and (ii) hereof, shall be applied and distributed in the following order ofpriority: 1. First, subject to the approval ofMHFA, to the repayment ofany amounts loaned to the Partnership by any ofthe General Partners or their Affiliates pursuant to Paragraph c ofArticle 12 hereof; 11. Second, subject to the approval ofMHF A, to the repayment ofany outstanding Working Capital Loans;
111. Third, to the Limited Partner, in an amountup to the Unreturned Capital Contribution ofthe Limited Partner. 1v. Fourth, to the Development Company, in an amount equal to any outstanding Deferred Developer Fee.
v. Fifth, an amount up to the aggregate Unreturned Capital Contributions ofthe Original Limited Partner and the General Partners, to each such Partnerin the same proportion as his Unreturned Capital Contributionbears to such aggregate Unreturned Capital Contributions. v1. Sixth, to the extent ofany remaining aggregate positive balance in the Partners' Capital Accounts after the foregoing distributions, to each such Partnerhaving a positive Capital Accountbalance in the same proportion as the positive Capital Account ofsuch Partnerbears to the aggregate positive Capital Accountbalance ofall Partners. v11. Finally, the balance ofany funds then remaining shall be distributed 50% to the Limited Partner and 50%, in the aggregate, to the Original Limited Partner and the General Partners. (id., § 

### 6[d]-[e]).

Pursuant to Section 12(i), the parties further agreed that Floral could enter into agreements with Affiliates ofthe defendants provided that the amounts chargedwere "onterms reasonably competitive with those which may be obtained from unaffiliated persons" (id, § 12[i]).

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Pursuantto a certain ConsultingAgreement (NYSCEF Doc. No. 313), dated January 2, 2018, by andbetween Floral andFloral Associates Development Company 

### (FADC), an affiliate ofthe defendants, Floral retained FADC to assist in the sale ofthe building. Pursuant to the terms of the Consulting Agreement, and according to the defendants, the defendants earned 1% ofthe sales price in the way ofa fee bynegotiating a reduction ofthe brokerage commission from the sale 

### (i.e., a capital event and not from operations
- from operations theyreceived other fees) due from 4% to 2%. This expense is not an operating expense. It is an expense directly tied to and linked to the event ofsale. Thus, it, like the brokerage commission, is not an expense or fee to be deducted from the operations ofthe Projectin the definition ofNet Cash Receipts 

### (i.e., ''from the operations of theProject... afterthepaymentof allexpenses attributableto theProject, including, withoutlimitation, allmanagementorother fees...") (NYSCEF Doc. No. 347, § 6[c]). The phrase "including, without limitation" modifies the language comingbefore it, 

### i.e., the "expenses attributable to the Project" (id.). Put anotherway, wereFADC's fee properly deducted in the definition ofNet Cash Receipts, as defendants urge, brokerage commissions on sales wouldbe included and deducted there as well. This clearly is notthe business deal.

In its first cause ofaction Melrose argues that the defendants breached their fiduciary duties and the LP Agreementby failing to distribute on a 96%-4% basis some $1,006,260 in operating cash listed on a June 11, 2019 statement, preparedby CohnReznick to projectthe cash available to be distributed upon liquidation after the sale. Much ofthe difference ofwhatwasreceivedby Melrose (some $503,130; 

### see NYSCEF Doc. No. 9, ,i 47) and this approximately $1 million figure is accounted for by the 1% fee receivedby FADC. In its second cause ofaction Melrose

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argues that the defendants breached their fiduciary duties by entering into the Consulting Agreement andbypaying the defendants 1 % ofthe sales price which they did notknow priorto approving the sale and in its allocation on a 96%-4% basis. Melrose also argues that the defendants improperly deducted certain "AccruedExpenses" (this again relating to FADC's 1 % fee) from operating cash (third cause ofaction), improperlyretained some $98,000 thatwas due to be distributed at closing (fourth cause ofaction), improperlypaid some $75,000 inbonuses using operating cash (fifth cause ofaction), failed to provide a post-sale accounting (sixth cause ofaction), and improperlyusedpartnership funds to reimburse their legal fees (seventh cause of action).

In their opposition papers, the defendants argue that they were entitled to enterinto the Consulting Agreementbecause the LP Agreement authorizes them to do so and as a Net Cash Receipt they were entitled to charge Melrose 96% ofthis expense. They further argue that the defendants cannot challenge the reasonableness ofthe fee because they do nothave an expert witness and they have adduced the testimony ofMelissa Chaput who indicates it is in fact reasonable (NYSCEF Doc. No. 328). The defendants further argue that part ofthe remaining cash comes from a 2014 refinancing and that some moneywas required to beheldpursuantto certain HUD escrows. The defendants are onlypartially correct.

1. Melrose is entitled to summaryjudgment as to liability on its first and second causes of action. As discussed on the record and above, the defendants are not correct that the 1 % Consulting Agreement fee is to be deducted in the definition ofNet Cash Receipts as an operating expense and thus split on a 96%/4% basis. It is moreproperlyunderstood as an
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expense in connection with the sale to be split 50%/50% as a reasonable affiliate transaction. Put another way, this was not an expense ofthe Project. As discussed on the record, like a brokerage commission, this was an expense in managing the capital event ofsale. The defendants are correct however that affiliated transactions are authorizedby Section 12(i) ofLP Agreement and that the limitation is simply that amounts charged can'tbe more than that charged by a third party.
2. Inasmuch as discovery is complete and Melrose does nothave an expert which creates an issue offact as to whether the fee chargedbyFADC was reasonable, the defendants are entitled to summaryjudgmentthat the hiring ofFADC was not abreach, norwas the fee charged. With respect to Melrose's claim thatthe defendants failed to distribute the cash at the end ofthe partnership, Melrose is entitled to summaryjudgmentthat the defendants breached their obligations under the LP Agreement. However, an issue offact exists as to the amount which should have been distributed on a 50%/50% basis or as part ofNet Cash Receipts because the record is not clear as to what portion ifany is attributable to a 2014 refinancing. The cash in the account is presumptively operating cash. Cash is fungible and it will be incumbent on the defendants to establish what ifany ofthe cash results from a prior capital event. Forthe avoidance ofdoubt, the escrows pursuant to any HUD refinancing is not a deduction from Net Cash Receipts on sale because on sale the escrows were released.

3. Melrose is also entitled to summaryjudgmentwith respect to liability as to its third cause ofaction for unjust enrichment only insofar as, as set forth above, any ofthe "Accrued
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Expenses" listed on the June 11, 2019 statement (NYSCEF Doc. No. 345) deducted from the net cash from sale related to FADC's fee and were thus mischaracterized as an operating expense.
4. Melrose is also entitled to summaryjudgment as to liability as to its fourth cause of action alleging that the defendants failed to distribute certain sums ofoperating cash
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### i.e., some $98,000. They are nothowever entitled to entry of judgment on damages. Although John McCullough indicated in his December 11, 2019 email (NYSCEF Doc. No. 365) that Floral anticipated making a $98,000 final distribution, it is unclear whatif any amount was to derived from an earlier capital event 

### (i.e., the 2014 refinancing) such that the splitwouldbe 50%/50% andnot 96%/4%. This email is prima facia evidence that the amounts in the account shouldbe distributed as Net Cash Receipts, and the defendants shall bearthe burden at trial ofdemonstrating otherwise.

5. Melrose is not entitled to summaryjudgmenton their fifth cause ofaction, alleging that the defendants improperlypaid some $75,000 in employee bonuses as an operating expense. The fully developed record indicates that these bonuses were awarded to employees for their years ofservice to Floral. This was not a sales or other capital event expense. It was within Floral's discretion to award such bonuses pursuant to Section 12 ofthe LP Agreement, and such performance bonuses are properly characterized as an operating expense attributable to the Project within the meaning ofSection 6(c).

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### 6. Melrose is entitled to summaryjudgment as to their sixth cause ofaction for an accounting setting forth all distributions made pursuant to the sale ofthe subject property, and that properly accounts for FADC's fee as a capital expense related to the sale. Such accounting must also set forth which other sums derived from the 2014 refinancing or any other capital event, such that all funds maybe properly characterized as either operating or capital expenses, and distributed accordingly. The defendants' expert report provided after fact discovery and which does not account for a full wind-up is insufficient, and does not moot this cause ofaction, as the defendants' contend.

7. Neither Melrose (seventh cause ofaction) nor the defendants (fifth counter-claim) are entitled to summaryjudgment seeking legal fees. There has been no finding as to whether the defendants committedwillful misconduct, fraud, bad faith, or gross negligence as ofyet. Section 21(b) ofthe LP Agreement provides for reimbursement of legal fees absent such finding.
8. Melrose otherwise simply fails to meet its burden ofproofto demonstrate that dismissal ofthe defendants' counterclaims and affirmative defenses is warranted, except to the extent these counterclaims and affirmative defenses that are addressed above 

### (see NYSCEF Doc. No. 368, at 20-21).

9. The defendants are entitled to summaryjudgment as to their first, second, third and fourth counterclaims, alleging breach ofthe implied covenant ofgood faith and fair dealing against Melrose, and violations ofMass Gen Laws Ann 93A against Melrose and ESMC
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based on Melrose's hold-up ofthe sale. The defendants have met theirburden ofshowing that the $750,000 payment demanded byMelrose to close on the sale was a shakedown based on a misrepresentation, i.e., that the payment was required to obtain the consent of the limited partners ofMelrose, when in fact no consent was sought ofthe limited partners and in fact some $250,000 ofthat moneywas being diverted to ESMC. This was an unfair or deceptive tactic within the meaning ofMass Gen Laws Ann 93A (Anthony's PierFour, Inc. v HBCAssoc., 411 Mass 451,475, 583 NE2d 806, 822 [1991]). Such misrepresentation also constitutes a breach ofthe covenant ofgood faith and fair dealing. Melrose fails to raise a triable issue offact in opposition because Melrose's arguments of waiver and ratification have alreadybeen considered and rejected (MelroseAssoc. Ltd. Partnership v FloralAssoc. Ltd. Partnership, 212 AD3d482,483 [1st Dept 2023]). In addition, the Courtnotes that the record does not establish laches because the passage of time has notbeen so significant and in fact Melrose fails to allege anyprejudice.

The Court has considered the parties' remaining arguments and found them unavailing. Accordingly, it is hereby

ORDERED thatMelrose's motion for summaryjudgment (Mtn. Seq. No. 013) is granted solely to the extent set forth herein; and it is further

ORDERED thatthe defendants' motion for summaryjudgment (Mtn. Seq. No. 012) is granted solely to the extent set forth herein; and it is further

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ORDERED thatthe parties shall appear for a pre-trial conference on June 14, 2024, at 11 :30am.

6/4/2024

DATE ANDREW BORROK, J.S.C. CHECK ONE:
APPLICATION: CHECK IF APPROPRIATE:

# ~ CASE DISPOSED GRANTED**□** DENIED SETTLE ORDER INCLUDES TRANSFER/REASSIGN NON-FINAL DISPOSITION GRANTED IN PART SUBMIT ORDER FIDUCIARY APPOINTMENT

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