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Appel v. Kaufman

July 28, 2010

RONALD M. APPEL, RITA APPEL, AND NANETTE APPEL BLOOM, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED
v.
GERALD S. KAUFMAN, ET AL.



The opinion of the court was delivered by: McLaughlin, J.

MEMORANDUM AND ORDER

This action is brought by three tenants-in-common of a piece of property located at 401 North Broad Street, Philadelphia. In 1959, the property was purchased by a group of promoters, referred to as "Nominees," who leased the land and the building located on the land to the Terminal Commerce Building of Philadelphia, Inc. for a term of 99 years. The Nominees sold interests in the property to approximately 600 tenants-in-common and then took title and administered the business of the property as nominees for the tenants-in-common.

The plaintiffs challenge the right of the defendant George Kaufman, who has been managing the property since 1969 and acting as a "Nominee" of the property since 1977, to manage the property and act as Nominee. They accuse him of committing several acts of fraud and of breaching his fiduciary duty to the tenants-in-common. They present their claims in four counts.

The first count alleges claims of fraud and breach of fiduciary duty against Mr. Kaufman; his deceased wife, Carol F. Kaufman; and the Gerald S. Kaufman Corporation (the "Kaufman defendants").*fn1 The second count seeks an accounting and the appointment of a receiver to compel Mr. Kaufman and his corporation to account for their financial activities with respect to the property. The third count requests a declaratory judgment invalidating the deeds granting Mr. Kaufman and his corporation title to the property as Nominee, as well as declaring null and void a mortgage on the property between Kaufman and defendant Norwest Bank Minnesota, now known as Wells Fargo Bank, N.A. (in the past, the Court and the parties have referred to this defendant as "Norwest;" for the purposes of this motion, however, the defendant will be referred to as "Wells Fargo"). Finally, the fourth count requests a partition of the property, in which the property will be sold and the proceeds of that sale will be paid out to the tenants-in-common.

The Kaufman defendants move for summary judgment on all counts. Wells Fargo moves for summary judgment on count III. Their motions are limited to whether the plaintiffs' claims are barred by the applicable statutes of limitations or by the equitable doctrines of laches, waiver, estoppel or ratification, with the exception of the Kaufman defendants' request for summary judgment on the plaintiffs' partition claims.

The Court grants summary judgment for the defendants on all counts. The plaintiffs' claims under counts one, three, and four are barred by Pennsylvania's two-year statute of limitations for fraud. The plaintiffs' claims under count two are barred either by the six-year statute of limitations for an action at law for an accounting or by the equitable doctrine of laches.

I. The Summary Judgment Record

The defendants' motions turn on whether certain correspondence exchanged between the parties and their associates gave the plaintiffs sufficient notice of their claims to begin the running of the applicable limitations periods. The facts of the correspondence are not in dispute. The Court will first describe the history of the parties' relationship with the Terminal Commerce Building as background. The Court then will provide the details of the parties' previous correspondence.

A. Background

On September 1, 1959, Benjamin Kaufman, Nathan P. Jacobs, Samuel A. Seaver, Philip Kessler, and Arthur S. Mandelbaum (collectively the "original Nominees") formed an agreement (the "Agreement") between approximately 600 tenants-in-common (the "tenants-in-common") concerning the Terminal Commerce Building of Philadelphia, a property located at 401 North Broad Street, in Philadelphia, Pennsylvania (the "property"). Ex. C.*fn2 Under the terms of the Agreement, the original Nominees sold tenancy-in-common interests to the tenants-in-common for $5,000 each and took title to the property as nominees for the tenants-in-common.

The Agreement states that a 99-year lease was formed with the Terminal Commerce Building of Philadelphia as lessee (the "lease"). Under the agreement, the Nominees were responsible for the management of the property, including the collecting of rents under the lease and disbursing the proceeds to the tenants-in-common. The Agreement states that the property was purchased subject to a mortgage lien of approximately $4.4 million. The mortgage was refinanced at least two more times by the original Nominees, as reflected in a letter from Benjamin Kaufman to the tenants-in-common dated October 15, 1964, and a letter from Nathan Jacobs to the tenants-in-common dated May 5, 1978, respectively. Ex. Y.

Defendant George S. Kaufman, Benjamin Kaufman's son, took over the management of the property in or around 1969. From that point, the original Nominees paid him certain management fees. Upon his father's death in 1977, Mr. Kaufman assumed the role of Nominee in his father's place. On or about May 2, 1983, the remaining original Nominees and Mr. Kaufman, acting on behalf of his father, deeded title to the property to Mr. Kaufman to hold as sole Nominee for the tenants-in-common, as reflected in a Quitclaim Deed and Nominee Agreement (the "Quitclaim deed") bearing that date. Ex. W. Mr. Kaufman drafted a letter, dated May 24, 1983, informing the tenants-in-common of the action. Ex. Z. The Quitclaim deed, however, was not recorded until August 27, 1992, when it was recorded with the Philadelphia County Department of Records at Deed Book 143, Page 145. In 1999, Mr. Kaufman deeded title to the property to his corporation, the defendant Gerald S. Kaufman Corporation (the "Kaufman Corporation"), which thereafter acted as the sole Nominee for the tenants-in-common. This deed was recorded with the Philadelphia County Department of Records on June 25, 1999, at Deed Book 1073, Page 310.

Also in 1999, Mr. Kaufman refinanced the property. On or about June 17, 1999, the Kaufman Corporation entered into a loan transaction with Aries Capital Incorporated ("Aries"), whereby Aries made a loan to the Kaufman Corporation in the principal amount of $6.7 million; the Kaufman Corporation signed and delivered to Aries a mortgage note in that amount; and the Kaufman Corporation signed and delivered a Mortgage, Security Agreement and Assignment of Leases and Rents to secure the amounts owed under the loan (the "Aries mortgage"). The Aries mortgage was recorded with the Philadelphia County Department of Records on June 25, 1999 at Mortgage Book 2066, Page 597. On July 15, 1999, Aries assigned the Aries mortgage to defendant Wells Fargo as trustee. The mortgage note matured by its terms in June 2009. Ex. AA.

Brothers Jack and Murray Appel were two of the original tenants-in-common. When Murray Appel passed away in 1982, he left his interest in the property to his wife, Sophie Appel. Upon her death in 1986, her children, Lee Appel and plaintiff Ronald Appel, inherited equal shares of her interest. Plaintiff Rita Appel is Lee Appel's widow, who inherited Lee Appel's interest after he passed away in September of 2007. When Jack Appel passed away in 1983, his widow, Emma Appel, inherited his interest. Upon her death in 1995, her children, Leonard Appel and plaintiff Nanette Appel-Bloom, inherited equal shares of her interest. Nanette Appel-Bloom inherited Leonard Appel's interest in the property when he passed away in 1998.

Nanette Appel-Bloom's husband, Cyrus J. Bloom, is counsel for the plaintiffs. Both Ronald Appel and Mr. Bloom are attorneys. Mr. Bloom began representing Ronald and Lee Appel in relation to the property no later than January 18, 2001. Deposition of Cyrus Bloom ("Bloom Dep.") at 10:6-11:4, attached as exhibit E to Wells Fargo's motion for summary judgment. He represented his wife throughout their marriage. Id. at 109:12-14. Leonard Appel also discussed issues related to the property with Mr. Bloom sometime in the late 1990s. Id. at 74:23-75:25; 93:21-94:12.

B. The Parties' Correspondence

Plaintiff Ronald Appel, plaintiffs' counsel Mr. Bloom, defendant Mr. Kaufman and Mr. Kaufman's accountant and attorney engaged in a brief correspondence in 1997-1998, followed by a longer period of correspondence in 2000-2001. In a letter dated October 22, 1997, Ronald Appel asked Mr. Kaufman's accountant, Bruce Rosen, about certain management and professional fees listed in a statement of income and expenses of the Terminal Commerce Building for 1996. Ex. D. The letter asked Mr. Rosen to advise Mr. Appel who received the payments and how they were computed. It also requested copies of income and expense statements and federal partnership returns for the preceding three years. Mr. Appel wrote to Mr. Rosen again on January 12, 1998, stating that he never received the requested information and that he was renewing that request. Ex. E.

The next piece of correspondence provided by the parties is a short memorandum, dated June 23, 2000, from Mr. Kaufman to Mr. Bloom. It stated that, per Mr. Bloom's request, Mr. Kaufman supplied "a copy of the net lease with two amendments" and "three years' statements from the tax returns." Ex. F. Mr. Bloom replied on July 27, 2000. In that letter, Mr. Bloom requested more detailed financials and tax returns, explaining that the tax returns originally supplied were missing certain schedules. Mr. Bloom's letter inquired into the fact that the tax returns showed a mortgage loan of $221,261 at the beginning of the year, whereas at the end of the year they showed a mortgage loan of $2,978,463.*fn3 The letter asked Mr. Kaufman to supply the reason for the loan, the party to whom the loan was made, the principals/owners of the borrower, the party who arranged for the loan on behalf of the borrower, the security for the loan, and queried why any "unneeded cash" held by the partnership was not distributed to the partners.*fn4 Ex. G.

Mr. Kaufman faxed a memorandum to Mr. Bloom, dated August 16, 2000. In the fax, he said that he had given Mr. Bloom's letter to Mr. Rosen who was instructed to collect "what you need and answer your questions." The fax also answered Mr. Bloom's questions about the mortgage. It explained that the lease allows the tenant to require the owner to mortgage the property for up to $750,000 and to lend the tenant the proceeds for the upkeep of the building. The letter explained that this had been done some years before and the loan had been paid down to $221,261 by 1999. Mr. Kaufman explained that, at that point, he had refinanced the property, increasing the mortgage debt to $2,9000,000, and lent the money to the tenant. The tenant then used the funds to prepare the building to lease to telecom companies. The letter also explained that there was "no basis for calling this a limited partnership," because it was a "co-tenancy." Ex. H. Mr. Rosen gave itemized answers to the rest of Mr. Bloom's questions in a letter to Mr. Bloom dated September 28, 2000. The letter states that complete tax returns for 1996, 1997 and 1998, except for the partner's K-1 forms, were enclosed. Ex. I.

In December 5, 2000, Mr. Kaufman issued an "Update Report" to the investors. It explained the current status of the lease. The report stated that "[w]e will continue to pay distributions to the partners and reduce our mortgage loan." The report speculated that, "in the not-too-distant future," the loan would either be paid off, doubling the distributions to the partners, or Mr. Kaufman would refinance and distribute the proceeds "for the fourth or fifth time." Ex. J.

Mr. Bloom responded in a letter dated December 7, 2000. The letter recognized that Mr. Rosen did supply complete tax returns for the years 1997, 1998 and 1999. Mr. Bloom, however, stated that he had not received detailed financial statements for those years. He also stated that what he had received raised "some disturbing questions." Specifically, among other questions concerning the management of the tenancy, the letter questions Mr. Kaufman's justification for being paid $201,000 in management fees for the three years in question. The letter also questioned why the mortgage was increased to $2.9 million, how many times the tenant can require the owner to mortgage the property, the identity of the principals/owners of the tenant, and whether Mr. Kaufman or any member of his family, had a direct or indirect interest ownership or other financial interest in the tenant.

Ex. K.

Mr. Bloom sent another letter on January 18, 2001. In that letter, Mr. Bloom stated that he did not receive a response to his December 7, 2000, letter. The letter demanded copies of detailed financial statements for the years 1997-2000. It also demanded, "[o]n behalf of my wife, Nanette Bloom, and Ronald and Lee Appel, tenants in common of Terminal Commerce Building," that Mr. Kaufman "repay all management fees at any time directly or indirectly paid to you," that Mr. Kaufman distribute such fees to the tenants-in-common and that he cease payment of future management fees. The letter also demanded an accounting, requesting that Mr. Kaufman "fully account for your activities from the time that you assumed the management of the forgoing property." Plaintiff Ronald Appel was cc'd on the letter. Ex. L.

The next letter was from Michael Feinstein, Mr. Kaufman's attorney. In that letter, dated February 7, 2001, Mr. Feinstein stated that Mr. Bloom's letter provided no justification for a full accounting and itemized the information that Mr. Rosen and Mr. Kaufman had already provided. The letter stated that, if Mr. Bloom could "demonstrate a legitimate reason why Mr. Kaufman should provide [additional information], any such request will be taken under advisement." Ex. M.

Mr. Bloom replied on February 15, 2001. His letter stated that Mr. Feinstein's letter was "an invitation to litigation, which, if it becomes necessary, would likely be in the form of a class action on behalf of all investors/tenants in common." The letter reiterated that the tax returns supplied by Mr. Rosen raised "disturbing questions." The letter also askes "[b]y what authority, and by what documents signed by the investors, is [Mr. Kaufman] [the] nominee, and with what rights and powers?" Ex. N. In a follow-up letter dated March 12, 2001, Mr. Bloom stated that he had not heard from Mr. Feinstein or Mr. Kaufman in response to his February 15 letter. Mr. Bloom stated that "we are in the process of consulting with counsel in Philadelphia... with a view to instituting appropriate legal action." Ex. O.

Mr. Feinstein responded in a letter dated March 13, 2001. The letter stated that Mr. Kaufman is paid a management fee of only $42,000 a year. A memorandum to Mr. Bloom from Mr. Kaufman, dated March 6, 2001, was enclosed with the letter. The memorandum explained, in detail, the nature of the management fees and why Mr. Kaufman was paid $201,000 for the years in question.

Mr. Feinstein's letter also answered Mr. Bloom's question about the source of Mr. Kaufman's authority as Nominee. He referred to the 1959 Agreement, stating that "if, as you allege, your wife originally inherited her interest in the Company from her father, she should know that the Company's Tenancy in Common Agreement designated [the original Nominees] for all the tenants in common." It further stated that the Kaufman Corporation is the successor to all original Nominees. The letter also reiterated Mr. Kaufman's position that Mr. Bloom failed to assert a legitimate basis for Mr. Kaufman to provide an accounting. It did, however, invite Mr. Bloom, with proper authority of a record owner of interest, to review the books and records of the Kaufman Corporation in its offices in Chicago, Illinois. Ex. P.

Mr. Bloom replied on March 22, 2001, the final letter in the parties' correspondence. He stated that Mr. Feinstein's letter failed to explain "by what authority, and by what documents signed by all of the investors,[Mr. Kaufman] is, or has the right to be, [the] nominee, and with what rights and powers." The letter stated that, "[i]n the present posture, I can only conclude that Mr. Kaufman is an interloper with no authority whatsoever to act, or to do anything, on behalf of the tenants in common, or to take any management fees in any amount." The letter also stated that, "[b]ecause of his failure to answer [the relevant question from the December 7, 2000, letter], I must conclude that [Mr. Kaufman] or one or more members of his family has a direct or indirect ownership or other financial interest in the tenant." The letter rejected the offer to review the records of the Kaufman Corporation, because, among other reasons, the ...


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