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+ ORDER ON 

MOTION 

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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 summary judgment (Mtn. Seq. No. 013) and the 

defendants' motion for partial summary judgment (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 and between, 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 

651323/2020 MELROSE ASSOCIATES LIMITED vs. FLORAL ASSOCIATES LIMITED 

Motion No. 012 013 

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[FILED: NEW YORK COUNTY CLERK 06/04/2024 05:01 P~ 

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which Melrose and Floral agreed to form Floral as a limited partnership for the purpose of 

acquiring and managing an apartment complex located in Melrose, Massachusetts. 

Pursuant to Section 6( c) of LP Agreement, the parties agreed that monies received and expenses 

incurred in connection with the day-to-day business or operations of the Partnership were to be 

borne 96% by Melrose and 4% by Floral Associates Limited Partnership: 

c. Net Cash Receipts. 

1. For the purpose of this Agreement, the term "Net Cash Receipts" shall mean the 

net profit, if any, of the Partnership derived during any fiscal year or part thereof 

from the operations of the Project subsequent to the issuance of a temporary 

certificate of occupancy for the entire Project, after the payment of all expenses 

attributable to the Project, including, without limitation, all management or 

other fees, including fees payable pursuant to the Supervisory Management 

Services Inventive Agreement, payable to any Partner or their respective 

Affiliates, whether such fees are regular or supplemental, as ascertained through 

the use of generally accepted accounting principles, with all proper adjustments, 

consistently applied except that (A) depreciation of buildings, improvements and 

personalty owned by the Partnership shall not be deducted; (B) Mortgage Loan 

amortization and payments of principal of any 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 of equipment, fixtures and personalty, replacement 

reserves, sinking funds and reserves for contingent liabilities, all as determined by 

the Managing General Partner, and any amounts which any federal, state or local 

governmental agency having jurisdiction over the Project may require to be 

established as a reserve or accrual, shall be deducted. 

11. Net Cash Receipts, if any (less any amount paid pursuant to Article 23), shall be 

distributed as soon as practicable, as determined by the Managing General Partner 

in his sole discretion, after the end of the fiscal year of the Partnership. In no 

event shall Distributions of Net Cash Receipts be distributed in an amount in 

excess of that permitted under the Regulatory Agreement, applicable laws or 

applicable rules and regulations of HUD and/or MHFA. Distributions of Net 

Cash Receipts shall be allocated among the Partners in accordance with their 

respective Partnership Interests. 

651323/2020 MELROSE ASSOCIATES LIMITED vs. FLORAL ASSOCIATES LIMITED 

Motion No. 012 013 

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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 of Project 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 or to be located on the Property or 

procured or to be procured for use in connection with the Property," respectively (id., § 2). 

On other hand, pursuant to Section 6( d) and ( e) of the LP Agreement, the parties agreed that 

gains from capital events would be split on a 50%/50% basis: 

d. Allocations of Capital Transaction Gain or Loss. 

1. Income, gain or loss from a transaction which generates Sale Proceeds or Loan 

Proceeds shall constitute Capital Transaction Gain or Capital Transaction Loss, as 

the case may be. 

2. Capital Transaction Loss shall be allocated among the Partners in accordance with 

their relative Partnership Interests. 

3. Capital Transaction Gain shall be allocated in the following manner and priority 

(prior to any distribution of any Sale Proceeds or Loan Proceeds): 

a) Up to an amount equal to the aggregate negative Capital Amounts of all 

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 of all 

Partners, after the allocation of gain 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 of all 

partners; 

c) Any remaining 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 of Sale Proceeds and Loan Proceeds. Upon the receipt of Sale Proceeds or 

Loan Proceeds, if the Partnership does not dissolve and terminate pursuant to Article 4, 

distributions of such proceeds, to the extent in the opinion of the Managing General 

Partner not required to pay any currently due obligation or liability of the Partnership not 

payable from current operating receipts or applied to the payment of any mortgage on the 

Project, repayment of which is not provided for in clauses (i) and (ii) hereof, shall be 

applied and distributed in the following order of priority: 

1. First, subject to the approval ofMHFA, to the repayment of any amounts loaned 

to the Partnership by any of the General Partners or their Affiliates pursuant to 

Paragraph c of Article 12 hereof; 

11. Second, subject to the approval of MHF A, to the repayment of any outstanding 

Working Capital Loans; 

111. Third, to the Limited Partner, in an amount up to the Unreturned Capital 

Contribution of the 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 of the 

Original Limited Partner and the General Partners, to each such Partner in the 

same proportion as his Unreturned Capital Contribution bears to such aggregate 

Unreturned Capital Contributions. 

v1. Sixth, to the extent of any remaining aggregate positive balance in the Partners' 

Capital Accounts after the foregoing distributions, to each such Partner having a 

positive Capital Account balance in the same proportion as the positive Capital 

Account of such Partner bears to the aggregate positive Capital Account balance 

of all Partners. 

v11. Finally, the balance of any 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 of the defendants provided that the amounts charged were "on terms reasonably 

competitive with those which may be obtained from unaffiliated persons" (id, § 12[i]). 

651323/2020 MELROSE ASSOCIATES LIMITED vs. FLORAL ASSOCIATES LIMITED 

Motion No. 012 013 

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[FILED: NEW YORK COUNTY CLERK 06/04/2024 05:01 P~ 

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RECEIVED NYSCEF: 06/04/2024 

Pursuant to a certain Consulting Agreement (NYSCEF Doc. No. 313), dated January 2, 2018, by 

and between Floral and Floral Associates Development Company (F ADC), an affiliate of the 

defendants, Floral retained F ADC to assist in the sale of the building. Pursuant to the terms of 

the Consulting Agreement, and according to the defendants, the defendants earned 1 % of the 

sales price in the way of a fee by negotiating a reduction of the brokerage commission from the 

sale (i.e., a capital event and not from operations - from operations they received 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 of sale. Thus, it, like the brokerage commission, is not an expense or fee to be 

deducted from the operations of the Project in the definition of Net Cash Receipts (i.e., ''from the 

operations of the Project ... after the payment of all expenses attributable to the Project, 

including, without limitation, all management or other fees ... ") (NYSCEF Doc. No. 347, 

§ 6[c]). The phrase "including, without limitation" modifies the language coming before it, i.e., 

the "expenses attributable to the Project" (id.). Put another way, were F ADC' s fee properly 

deducted in the definition of Net Cash Receipts, as defendants urge, brokerage commissions on 

sales would be included and deducted there as well. This clearly is not the business deal. 

In its first cause of action Melrose argues that the defendants breached their fiduciary duties and 

the LP Agreement by failing to distribute on a 96%-4% basis some $1,006,260 in operating cash 

listed on a June 11, 2019 statement, prepared by CohnReznick to project the cash available to be 

distributed upon liquidation after the sale. Much of the difference of what was received by 

Melrose (some $503,130; see NYSCEF Doc. No. 9, ,i 47) and this approximately $1 million 

figure is accounted for by the 1 % fee received by F ADC. In its second cause of action Melrose 

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argues that the defendants breached their fiduciary duties by entering into the Consulting 

Agreement and by paying the defendants 1 % of the sales price which they did not know prior to 

approving the sale and in its allocation on a 96%-4% basis. Melrose also argues that the 

defendants improperly deducted certain "Accrued Expenses" (this again relating to F ADC's 1 % 

fee) from operating cash (third cause of action), improperly retained some $98,000 that was due 

to be distributed at closing (fourth cause of action), improperly paid some $75,000 in bonuses 

using operating cash (fifth cause of action), failed to provide a post-sale accounting (sixth cause 

of action), and improperly used partnership funds to reimburse their legal fees (seventh cause of 

action). 

In their opposition papers, the defendants argue that they were entitled to enter into the 

Consulting Agreement because the LP Agreement authorizes them to do so and as a Net Cash 

Receipt they were entitled to charge Melrose 96% of this expense. They further argue that the 

defendants cannot challenge the reasonableness of the fee because they do not have an expert 

witness and they have adduced the testimony of Melissa Chaput who indicates it is in fact 

reasonable (NYSCEF Doc. No. 328). The defendants further argue that part of the remaining 

cash comes from a 2014 refinancing and that some money was required to be held pursuant to 

certain HUD escrows. The defendants are only partially correct. 

1. Melrose is entitled to summary judgment 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 of Net Cash Receipts as an 

operating expense and thus split on a 96%/4% basis. It is more properly understood 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 of the Project. As discussed on the 

record, like a brokerage commission, this was an expense in managing the capital event 

of sale. The defendants are correct however that affiliated transactions are authorized by 

Section 12(i) of LP Agreement and that the limitation is simply that amounts charged 

can't be more than that charged by a third party. 

2. Inasmuch as discovery is complete and Melrose does not have an expert which creates an 

issue of fact as to whether the fee charged by F ADC was reasonable, the defendants are 

entitled to summary judgment that the hiring of F ADC was not a breach, nor was the fee 

charged. With respect to Melrose' s claim that the defendants failed to distribute the cash 

at the end of the partnership, Melrose is entitled to summary judgment that the defendants 

breached their obligations under the LP Agreement. However, an issue of fact exists as 

to the amount which should have been distributed on a 50%/50% basis or as part of Net 

Cash Receipts because the record is not clear as to what portion if any 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 if any of the cash 

results from a prior capital event. For the avoidance of doubt, 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 summary judgment with respect to liability as to its third cause 

of action for unjust enrichment only insofar as, as set forth above, any of the "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 F ADC' s fee and were thus mi scharacterized as an 

operating expense. 

4. Melrose is also entitled to summary judgment as to liability as to its fourth cause of 

action alleging that the defendants failed to distribute certain sums of operating cash -

i.e., some $98,000. They are not however 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 what if 

any amount was to derived from an earlier capital event (i.e., the 2014 refinancing) such 

that the split would be 50%/50% and not 96%/4%. This email is prima facia evidence that 

the amounts in the account should be distributed as Net Cash Receipts, and the 

defendants shall bear the burden at trial of demonstrating otherwise. 

5. Melrose is not entitled to summary judgment on their fifth cause of action, alleging that 

the defendants improperly paid 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 of service 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 

of the LP Agreement, and such performance bonuses are properly characterized as an 

operating expense attributable to the Project within the meaning of Section 6( c ). 

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6. Melrose is entitled to summary judgment as to their sixth cause of action for an 

accounting setting forth all distributions made pursuant to the sale of the subject property, 

and that properly accounts for F ADC' 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 may be 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 of action, as the defendants' contend. 

7. Neither Melrose (seventh cause of action) nor the defendants (fifth counter-claim) are 

entitled to summary judgment seeking legal fees. There has been no finding as to 

whether the defendants committed willful misconduct, fraud, bad faith, or gross 

negligence as of yet. Section 21 (b) of the LP Agreement provides for reimbursement of 

legal fees absent such finding. 

8. Melrose otherwise simply fails to meet its burden of proof to demonstrate that dismissal 

of the 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 summary judgment as to their first, second, third and fourth 

counterclaims, alleging breach of the implied covenant of good faith and fair dealing 

against Melrose, and violations of Mass Gen Laws Ann 93A against Melrose and ESMC 

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based on Melrose's hold-up of the sale. The defendants have met their burden of showing 

that the $750,000 payment demanded by Melrose 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 of Melrose, when in fact no consent was sought of the limited 

partners and in fact some $250,000 of that money was being diverted to ESMC. This was 

an unfair or deceptive tactic within the meaning of Mass Gen Laws Ann 93A (Anthony's 

Pier Four, Inc. v HBC Assoc., 411 Mass 451,475, 583 NE2d 806, 822 [1991]). Such 

misrepresentation also constitutes a breach of the covenant of good faith and fair dealing. 

Melrose fails to raise a triable issue of fact in opposition because Melrose' s arguments of 

waiver and ratification have already been considered and rejected (Melrose Assoc. Ltd. 

Partnership v Floral Assoc. Ltd. Partnership, 212 AD3d 482,483 [1st Dept 2023]). In 

addition, the Court notes that the record does not establish laches because the passage of 

time has not been so significant and in fact Melrose fails to allege any prejudice. 

The Court has considered the parties' remaining arguments and found them unavailing. 

Accordingly, it is hereby 

ORDERED that Melrose's motion for summary judgment (Mtn. Seq. No. 013) is granted solely 

to the extent set forth herein; and it is further 

ORDERED that the defendants' motion for summary judgment (Mtn. Seq. No. 012) is granted 

solely to the extent set forth herein; and it is further 

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Motion No. 012 013 

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!FILED: NEW YORK COUNTY CLERK 06/04/2024 05: 01 PM! 

NYSCEF DOC. NO. 385 

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RECEIVED NYSCEF: 06/04/2024 

ORDERED that the 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 

651323/2020 MELROSE ASSOCIATES LIMITED vs. FLORAL ASSOCIATES LIMITED 

Motion No. 012 013 

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□ OTHER 

□ REFERENCE 

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