The still on-going litigation arising out of Hills of Heartland LLC can help illuminate the role of a transactional lawyer. The latest installments are two opinions out of the NY Appellate Court, 2nd department, Casavecchia v. Mizrahi, 2008 NY Slip Op 00938 & 2008 NY Slip Op. 00939 (NY AD [2nd] December 16, 2008). The appellate opinions grow out of orders by Judge Warshawsky (N.Y. Sup. Ct., Nassau County) on August 23, 2006 and on September 11, 2007. The point here is not to parse the opinion, but to note the inconsistency between the LLC’s operating agreement and the practice of the parties.
Casavecchia and Mizrahi were serial real estate developers who
were in business together for many years constructing and marketing residential housing of which Hills of Heartland is just one. Allegedly, as a development was completed , the profits were used to finance the building of a new development. There came a time when plaintiff was no longer associated with the business.
Order, September 11, 2007, at 2. One of the key disputes between Casavecchia and Mizrahi related to the role (and purpose) of Hills of Heartland LLC. In the Order of August 26, 2006, Judge Warshawsky found that the purpose of Hills of Heartland LLC was solely to develop Hills of Heartland:
Defendant bootstraps section 202(f) & (c) of the LLC on to the Hills of Heartland Operating Agreement to support the claim that the purpose of the Company was to build and to lend money. He unfolds a rather convoluted claim that plaintiff was interested in the Company lending money rather than distributing it when the Company acquired a parcel of land on which it has now completed development…. * * * His profound ending is that the process of lending retained money rather making a distribution to investors is a sage and efficacious way of doing new business with old money.
* * * The only dispute in the arguments of the parties … is whether the Company was formed to lend money.
Despite thoroughly and carefully searching the record the court can find no evidence that it was. Defendant’s assertion is unsupported by evidentiary proof in admissable form …. He testified that the Company had not made any loan. He admitted in the answer that it was formed to build homes.
Id. at 4.
Mizrahi’s attorney appears to have focused on Section 202(f) of the New York Limited Liability Company Law, which includes in the laundry list of general powers of an LLC the power to "lend money for any lawful purpose, invest or reinvest its funds…." Earlier in the opinion, Judge Warshawsky had quoted paragraph 4 of the LLC’s Operating Agreement, which included an omnibus purpose clause:
4. PURPOSE. The Company is formed for the purpose of acquiring, owning, operating, developing, constructing buildings of all kinds or nature and selling real estate and engaging in any lawful act or activity for which limited liability companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.
Order of August 26, 2006, at 2 (emphasis added).
The point here is not to assess Judge Warshawsky’s conclusion, could well have been influenced by the fact that he loaned the LLC’s funds to a company in which the Casavecchia’s had no ownership interest:
that defendant Mizrahi is the only investor in the Company who is actively involved in Casa Mason, the proposal of being an unsecured, unguaranteed, interest free lender to a Mizrahi entity appears to be a bountiful bonanza to only defendant.
Id. at 5.
Instead, assuming that the parties’ prior practice had been to invest in particular development projects via project-related unincorporated business entities (UBEs), why did the purpose clause not only refer to investment in real estate generally, but also include an omnibus purpose clause? Surely, some transactional dropped the ball here, probably by trying to save drafting time by pulling out a form.
There is more that I could say, but I’ll stop here.
posted by Gary Rosin
This entry was posted on Wednesday, February 11th, 2009 at 6:59 pm and is filed under Commentary, LLCs. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
Transactional Perspectives on Casavecchia v. Mizrahi
The still on-going litigation arising out of Hills of Heartland LLC can help illuminate the role of a transactional lawyer. The latest installments are two opinions out of the NY Appellate Court, 2nd department, Casavecchia v. Mizrahi, 2008 NY Slip Op 00938 & 2008 NY Slip Op. 00939 (NY AD [2nd] December 16, 2008). The appellate opinions grow out of orders by Judge Warshawsky (N.Y. Sup. Ct., Nassau County) on August 23, 2006 and on September 11, 2007. The point here is not to parse the opinion, but to note the inconsistency between the LLC’s operating agreement and the practice of the parties.
Casavecchia and Mizrahi were serial real estate developers who
Order, September 11, 2007, at 2. One of the key disputes between Casavecchia and Mizrahi related to the role (and purpose) of Hills of Heartland LLC. In the Order of August 26, 2006, Judge Warshawsky found that the purpose of Hills of Heartland LLC was solely to develop Hills of Heartland:
Id. at 4.
Mizrahi’s attorney appears to have focused on Section 202(f) of the New York Limited Liability Company Law, which includes in the laundry list of general powers of an LLC the power to "lend money for any lawful purpose, invest or reinvest its funds…." Earlier in the opinion, Judge Warshawsky had quoted paragraph 4 of the LLC’s Operating Agreement, which included an omnibus purpose clause:
Order of August 26, 2006, at 2 (emphasis added).
The point here is not to assess Judge Warshawsky’s conclusion, could well have been influenced by the fact that he loaned the LLC’s funds to a company in which the Casavecchia’s had no ownership interest:
Id. at 5.
Instead, assuming that the parties’ prior practice had been to invest in particular development projects via project-related unincorporated business entities (UBEs), why did the purpose clause not only refer to investment in real estate generally, but also include an omnibus purpose clause? Surely, some transactional dropped the ball here, probably by trying to save drafting time by pulling out a form.
There is more that I could say, but I’ll stop here.
posted by Gary Rosin
This entry was posted on Wednesday, February 11th, 2009 at 6:59 pm and is filed under Commentary, LLCs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.