Summary Judgment Granted Defendants, Denied Plaintiff, In Action Among Participants In Mixed-Use Real Estate Project

On October 21, 2024, Justice Joel M. Cohen granted summary judgment to defendants and denied it to plaintiff in a dispute concerning the development and operation of a mixed-use commercial and residential property at 242 10^th Avenue in Manhattan. The case is 242 Tenth Investors LP v. GVC 242 Tenth Sponsor, LLC, Index No. 651242/2021.

Plaintiff 242 Tenth Investors, referred to by the Court as “Investor”, was formed to develop a certain property (the “Property”) under a limited partnership agreement (“LPA”). As limited partner, 242 Tenth Investors made an initial capital contribution amounting to 80% of the Partnership’s capital. Defendant GVC 242 Tenth Sponsor, as Sponsor and the general partner, contributed the remaining 20% through its investor arm and co-defendant.

The budget for development and operation of the Property and the business plans reached by the parties were based on various assumptions, derived in part from representations made by the Property’s seller, a non-party, concerning the physical condition of the Property and the application of rent regulations to certain units, as well as an assumption that other units could eventually be deregulated through a New York City program that provided for the removal of certain high rent units from the rent regulation scheme (“High-Rent Deregulation”).

Under the LPA, certain Partnership actions required Investor’s approval. These included changes to the business plan involving a cost increase in excess of $50,000 annually, terminating or modifying the construction contract relating to the renovation of the Property, or entering into a new contract with a value of $50,000 or more.

After purchase, Sponsor discovered that the condition of the Property was worse than previously known or expected, raising concerns about safety and habitability, and that the occupant of a unit that seller had represented to be unregulated sought a ruling that his apartment was rent stabilized. In addition, the rent regulation laws were changed 1) to preclude substantial increases to the legal rents of regulated apartments based on physical improvements, and 2) to eliminate High-Rent Deregulation.

In October 2020, Sponsor first disclosed that the cost of renovations – many of which had already been completed – had nearly doubled, and issued a capital call. Investor responded by terminating Sponsor, and Sponsor refused to accept its removal, or cooperate in transition to a new sponsor. Investor bought suit, alleging that Sponsor had exhausted the Partnership's capital and violated the LPA by changing the business plan and budget, and dramatically expanding the planned renovations, without Investor’s approval. Investor sought both declaratory/injunctive relief preventing Sponsor from continuing to act as sponsor, and monetary relief for breaches of fiduciary duty and contract.

The Court denied Investor’s claim for declaratory/injunctive relief because it failed to meet the LPA’s requirements that, in order to effect Sponsor’s removal, Investor must: a) provide to Sponsor notice of its removal of Sponsor, and an opportunity for Sponsor to cure the circumstances cited for removal, within 90 days from Investor learning of such circumstances, and b) release or indemnify loan guarantors designated by Sponsor. Slip op., pp. 8-11.

As to Investor’s other claims, breach of contract could not survive in light of the Court’s findings on declaratory/injunctive relief and Investor’s failure to establish damages. Id., pp. 11-12. And Investor had withdrawn its allegation that Sponsor had paid its attorneys’ fees with Investor’s funds -- the only other damages alleged by Investor in connection with its fiduciary breach claim. Id., p.11, n.1.

Justice Cohen therefore denied summary judgment to 242 Tenth Investors and granted it to 242 Tenth Sponsor, dismissing the complaint in its entirety.

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