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Note: As owner of Dupont Street Developers LLC (Buyer), Joseph Brunner (Alleged Fraudster), contracted with 49 Dupont Realty Corp. (Seller) to purchase land located in Brooklyn, New York for USD 20,000,000. Subsequently. Alleged Fraudster “effectuated a transfer of the contract rights” from Buyer to another entity owned by Alleged Fraudster, Anmuth Holdings, LLC (Anmuth). As part of a proposed resale, Chaim Miller formed 49 Dupont Lofts LLC (collectively, Plaintiffs) to purchase the property from Anmuth. Plaintiffs intended to “flip” the property and sell it to a group of Chinese-based buyers but was told by Alleged Fraudster that doing so would be “illegal”. Alleged Fraudster and Plaintiffs restructured the agreement with Alleged Fraudster promising Plaintiffs to assign the contract of sale from Anmuth to the proposed Chinese buyers and pay Plaintiffs the difference in price “less [Alleged Fraudster]’s actual costs in obtaining a letter of credit” if Plaintiffs would lend Alleged Fraudster funds for the LC.

The land had previously been designated by the state as a hazardous waste site due to petroleum discharge, and pursuant to a regulatory order, Seller was “obligated to implement an environmental remediation program and obtain a certification of completion” from the appropriate New York regulatory body. Under the contract between Seller and Buyer, Alleged Fraudster assumed the obligations under the remediation order and was required to provide a letter of credit in favor of Seller to secure Alleged Fraudster’s performance thereunder. Accordingly, Alleged Fraudster, using Plaintiffs’ funds, obtained three letters of credit issued by Investors Bank (Issuer) cumulatively for USD 4,700,000 in favor of Seller. While Alleged Fraudster agreed to promptly return Plaintiffs’ funds when the collateral was no longer needed, Plaintiffs agreed to a broadly-worded release with Alleged Fraudster regarding all claims Plaintiffs “ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever related, from the beginning of the world to the day of the date of this Release.” When Alleged Fraudster failed to return the collateral, Plaintiffs sued for its return and later amended the complaint to include a count for breach of contract. The trial court denied Alleged Fraudster’s motion to dismiss with leave to amend after discovery. The New York Supreme Court, Appellate Division, Mastro, Chambers, Sgroi and Maltese, modified the trial order and granted Alleged Fraudster’s motion to dismiss.

Although the trial court had refused to dismiss the claims due to Alleged Fraudster not having properly pleaded the release agreement as a basis for doing so, the appellate court noted that although the defense of release was not specifically asserted, “the court may treat the motion as having specified the right ground and grant relief, absent prejudice, which has not been demonstrated.” The clear terms of the release precluded the causes of action asserted by Plaintiffs, and Plaintiffs failed to “allege each of the elements of fraud in the inducement, which would be required in order to set aside the release”.

[MJK]

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