Shomron v Fuks

[*1] Shomron v Fuks 2006 NY Slip Op 52047(U) [13 Misc 3d 1228(A)] Decided on September 25, 2006 Supreme Court, New York County Stackhouse, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 25, 2006
Supreme Court, New York County

Ruth Shomron, on behalf of R&l Realty Associates, a New York Partnership, Plaintiff,

against

Yoram Fuks, Mali Fuks, Gadi Hill, Trustee u/t/a dated February 20, 1992, and Greenland Holding Co., Ltd., Defendants.



102882/02

John E. H. Stackhouse, J.

The plaintiff seeks to rescind the sale of four cooperative apartments from R&L Realty Associates to defendants Greenland Holding Co., Ltd. and Gadi Hill, Trustee u/t/a dated February 20, 1992, on the basis of fraud. R&L Realty Associates was the sponsor of an offering plan in April of 1990 to convert 205-209 West 103rd Street, New York, New York to cooperative ownership. From March 1991 to the present day, Ruth Shomron and Mali Fuks have been equal partners in R&L Realty Associates.

The defendants counterclaim for judgment on promissory notes executed by plaintiff in 1992 in the amount of $13,695 plus 7% interest.

By order of the Honorable Marcy S. Friedman, the various causes of action in this case were joined for trial in March 2005 and were accorded a trial preference in August 2005. The claims of fraud, breach of fiduciary duties, and the request for imposition of a constructive trust on Mali Fuks (for all the rents and profits she and/or Yoram Fuks received from the rental of the four cooperative apartments from the time of sale up through to the present,) as well as request for dissolution of R&L Realty Associates pursuant to Partnership Law §63 as a result of alleged self-dealing, were consolidated for trial.

On June 19, 2006, this Court added Mali Fuks (Ruth Shomron's partner and Yorum Fuks' wife) as a party defendant in order to allow the Court to hear all claims against Mali Fuks.

FINDING OF FACTS AND CONCLUSIONS OF LAW

The plaintiff, Ms. Shomron, on behalf of R&L Realty Associates, testified that Mali and Yoram Fuks failed to disclose Yoram Fuks' interest in the trust, (with attorney Gadi Hill as trustee, and Greenland Holding Co., Ltd.) to Ruth Shomron. Ms. Shomron thought the partnership was [*2]selling the four apartments to buyers in Israel. Had she known either of the Fukses had a financial interest in the apartments, she never would have consented to the sale by R&L Realty Associates to the Trust or to Greenland Holding Co., Ltd.

Ruth Shomron moved to New York City in 1972. In 1985, Ms. Shomron formed a partnership, R&L Realty Associates, with Larry Goldstein, a real estate broker. In 1985, R&L Realty Associates bought 205 West 103rd Street, a 360 unit run-down apartment building. In 1987, they started converting it to a co-op. In that same year, Howard Simon became a partner of R&L Realty Associates. R&L Realty Associates needed to raise money for the renovation of the existing apartments and the maintenance of the building. In the mid-1980s, Ruth Shomron met Mali and Yoram Fuks and the families became close friends. In 1989, Shomron asked Mali Fuks to join her partnership. Mrs. Fuks subsequently purchased a one-half subpartnership interest in Ruth Shomron's one-third interest in R&L Realty Associates, for $125,000, including any additional contributions as may be required for the partnership, split evenly with Ruth Shomron. Immediately, R&L Realty Associates required additional capital contributions from its partners to cover the building's net operating expenses, pay vacancy allowances to tenants, renovate apartments and make capital improvements to the common areas of the building. The goal was to convert it to cooperative ownership. Goldstein and Simon each contributed $80,000 to the partnership. Ruth Shomron and Mali Fuks were required to pay $40,000 each. However, Mali Fuks failed to pay her full amount, contributing only $35,000, leaving Ruth Shomron to pay $45,000.

In 1990, Larry Goldstein terminated his subpartnership interest by withdrawing from R&L Realty Associates. Howard Simon then assumed a 49% interest in R&L Realty Associates while Ruth Shomron and Mali Fuks each assumed a 25.5% interest.

In 1990, Ms. Shomron and Ms. Fuks contributed $66,000 and $23,000, respectively, to the ongoing partnership. In 1991, Ms. Shomron paid $72,000; Mrs. Fuks paid $500. From 1992 through today, Mrs. Fuks has failed to contribute any additional monies to R&L Realty Associates. To meet costs, R&L Realty Associates borrowed $238,000, but this only covered urgent expenses.

Later in March of 1991, Howard Simon withdrew from R&L Realty Associates; leaving Ms. Shomron and Mrs. Fuks as equal one-half partners. Lacking funds, R&L Realty Associates was under time pressure to renovate the apartments and convert them to co-ops as soon as possible. As set forth in Plaintiff's exhibits, R&L Realty Associates incurred a net loss of $241,978 in 1990 and $222,899 in 1991. Ruth Shomron discussed with Mali Fuks the need to bring in another partner to help cover the financial burdens of the partnership. Mrs. Fuks claimed that finding a new partner was unnecessary because she knew investors in Israel who would purchase apartments. In January of 1992, the Greater New York Savings Bank began to foreclose on the building.

When the real estate recession hit, Mali represented to Ruth that she had found buyers in Israel. [*3]One of these buyers, Gadi Hill, contacted R&L Realty Associates, stating that he was the attorney for the purchaser of apartments 5E and 1D. Gadi Hill was made Trustee of the defendant-Trust, and purchased the two apartments in the name of the Trust at $82,000 for 5E and $40,000 for 1D. Unbeknownst to Ruth Shomron, the Trust represented by Gadi Hill was the Yoram Fuks Revocable Trust, of which Mr. Fuks was the sole settler and beneficiary. In December of 1992, Greenland, which had loaned money to R&L Associates, agreed to accept the transfer of apartment 1C. Greenland also purchased unit 6B for the price of $60,000. Again, Ruth Shomron was unaware of the fact that Yorum Fuks was the sole shareholder and principal of the Greenland Holding Co., Ltd., and therefore consented to what amounted to Yoram Fuks' purchase of the apartments without knowing it.

Ruth Shomron asserts, and the Court believes, that she would not have agreed to the sale of units 1C, 6B, 5E and 1D to the Trust and Greenland Holding Co., Ltd. if she had known Yoram Fuks was the true purchaser. There was a great disparity between the amount of funds contributed by Ruth Shomron and the much lower amount contributed by Mali Fuks. R&L Realty Associates was in desperate need of money; the bank was foreclosing on the building and Ruth Shomron could not rely on Mali Fuks for her promised contributions. Ruth definitely felt pressure to sell to the Fuks' "friends"; even for a below market price. Mali Fuks readily agreed to the sale.

Besides Ruth Shomron, Mali Fuks, and Gadi Hill, the following witnesses appeared: Sonja Talesnik, Zvi Zer and Yoram Fuks.

Sonja Talesnik was the lawyer for R&L Realty Associates. Ms. Talesnik testified that she was led to believe that the four cooperative apartments in dispute (1C, 1D, 5E and 6B) were being purchased by friends of the Fukses, not Mali and Yorum directly.

Gadi Hill was the trustee for the Trust and Greenland Holding Co., Ltd., and testified he was unaware that Yoram Fuks was in fact the sole settler and beneficiary of the Trust, and sole shareholder of Greenland Holding Co., Ltd. He further testified that Ruth Shomron was unaware of the true purchasers of the four cooperative apartments.

Zvi Zer testified that he was Mali Fuks' personal assistant intermittently from 1996 through 2004. He further testified that at Mali Fuks' request he spent a long night mediating a fight between her and Mr. Fuks. The fight included a discussion about units 1C, 1D, 5E and 6B in the building. According to Zvi Zer, Mali Fuks wanted to collect the rent on the four cooperative apartments but Yoram Fuks rebuffed her; arguing that it was impossible since Gadi Hill collected the rent and Ruth Shomron was not supposed to know of their involvement. Mr. Zer testified that Mali Fuks agreed the rent should stay with Gadi Hill, but wanted a commitment form her husband that she would get the credit she deserved for structuring the purchases, including partial control of the trust and corporation. Zvi Zer further testified that Mali Fuks acknowledged putting forward the guise of anonymous buyers and completing the transaction of the four cooperative apartments, units 1C, 1D, 5E and 6B at below-market value when the partnership was desperate to sell them to raise money. This Court is persuaded that Yoram Fuks committed fraud, and Mali [*4]Fuks was complicit in that fraudulent conduct and further breached her fiduciary duty as Ruth Shomron's partner in R&L Realty Associates.

Yoram Fuks' testimony, along with that of his wife, Mali Fuks, is not credible. From the testimony of the three non-party witnesses, plus the conflicting testimonies of Yoram and Mali Fuks, the evidence is clear and convincing that Mali and Yoram Fuks did not disclose their ownership of the apartments to Ruth Shomron when they bought them from R&L.

The defendants contend that the R&L Partnership Agreement provides that sixty six and two-thirds percent of the partners must agree to allow the partners to sue each other, and Mali Fuks is a 50% partner, and therefore Ruth Shomron lacks standing to bring this action. However, because Mali Fuks violated her fiduciary obligations to R&L Realty Associates, she is adverse to the partnership, nullifying her 50% voting interest. Therefore, for purposes of this lawsuit, Ruth Shomron is the 100% voting partner for protecting the Partnership. See §7.01 of R&L Realty Associates' Partnership Agreement (Plaintiff's Exhibit 6). Pursuant to New York Partnership Law §63(1)(d), the court shall dissolve a partnership when "[a] partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts [her]self in matters relating to the partnership business that are not reasonably practicable to carry on the business in partnership with him," or under §63(1)(f), "[o]ther circumstances render a dissolution equitable." This is the case here.

The defendant also contends that the action is barred by the Statute of Limitations. That is incorrect. Although Ruth Shomron confronted Yoram Fuks in 1994 to ask whether he had any ownership interest in the apartments, Mr. Fuks replied that he did not, and Ms. Shomron accepted his answer as truthful. This Court is persuaded by the evidence that Ruth Shomron first became aware of Yoram Fuks' ownership interest in the apartment in February of 2000, when Mali Fuks admitted such interest under oath, during an arbitration proceeding. Ms. Shomron sued for rescission of the contract, based on the arbitrator's 2002 ruling, within the 2-year limit imposed by the statute of frauds "from the time the plaintiff [ ] discovered the fraud, or could with reasonable diligence have discovered it," or within "six years from the date the cause of action accrued." CPLR §213.8.

The defendants also contend that Ruth Shomron would have sold Yoram Fuks the four apartments had he disclosed his identity as the buyer. Again, based upon the testimony presented before this Court, I am persuaded that Mali and Yoram Fuks obfuscated their identities in the purchase of the four apartments for a "distress sale" price, and Ruth Shomron would not have consented to this had she known his identity as the buyer. After all, if Mali could buy the apartments, she should have been able to contribute funds to the partnership, making the sale unnecessary. As husband and wife, the law treats Mali and Yoram as one. Therefore, the purchase by Mr. Fuks and the subsequent legal ramifications reflects equally upon Mali Fuks. London v. Goodman, 6 Misc 2d 277, 162 NYS2d 972 (Sup. Ct. NY County 1957). [*5]

The defendants further contend that Ruth Shomron must return the sum paid as consideration for the sale in order to demand rescission and return of the apartments. It is well settled that a party induced by fraud to enter a contract may rescind the contract and return the consideration. Adams v. Gillig, 199 NY 314, 317, 319 (1910). Equitable rescission, unlike an action for damages on account of fraud, is not to compensate for the wrong, but to undo the wrong and put the parties in status quo. In re Teller's Estate, 277 A.D. 937, 938, 98 NYS2d 875, 876 (4th Dept. 1950). Therefore, the defendants must return the apartments to R&L Realty Associates in return for the sum paid. Since the sale is a nullity, no interest is due on the sum. In any case, since their hands are unclean, they cannot make a profit on their misdeeds. The court further finds that the promissory notes were procured by fraud and are nullities.

This Court denies all of Yoram Fuks' counterclaims as without merit. The sale from R&L Realty Associates to Greenland Holding Co., Ltd. is set aside. The four apartments are hereby returned to the partnership, R&L Realty Associates. The partnership will return the purchase price to the buyers. R&L Realty Associates will be the recipient of a constructive trust imposed against Mali Fuks for the rents and profits she and Yoram Fuks realized, as owners of the four apartments, from the time of the sale till the present. Birnbaum v. Birnbaum, 177 A.D. 409, 420, 503 NYS2d 451, 458 (4th Dept. 1968). Subsequently, the partnership will be dissolved and the assets divided equitably.

JUDGMENT FOR THE PLAINTIFF

The attorneys are directed to pick up exhibits in room 308 at 80 Centre Street within 30 days of the date of this order.

DATED: September 25, 2006

JOHN E.H. STACKHOUSE, JSC