jfk hotel owner, llc v hilton hotels corp
TRANSCRIPT
JFK Hotel Owner, LLC v Hilton Hotels Corp.2014 NY Slip Op 30676(U)
March 14, 2014Sup Ct, New York County
Docket Number: 650502/2013Judge: Eileen Bransten
Cases posted with a "30000" identifier, i.e., 2013 NYSlip Op 30001(U), are republished from various state
and local government websites. These include the NewYork State Unified Court System's E-Courts Service,
and the Bronx County Clerk's office.This opinion is uncorrected and not selected for official
publication.
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IAS PART THREE
--------------------------------------------------------------------){ JFK HOTEL OWNER, LLC,
Plaintiff,
- against-
HILTON HOTELS CORP., HILTON HOSPITALITY CORP., HL T EXISTING FRANCHISE HOLDING LLC, DOUBLETREE HOTEL SYSTEMS, INC., HILTON WORLDWIDE, CIBX COMMERCIAL MORTGAGE, LLC, and US BANK NATIONAL ASSOCIATION, as trustee for the registered holders of J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-CIBX, Commercial Mortgage Pass-Through Certificates, Series 2012-CIBX,
Defendants.
--------------------------------------------------------------------X BRANS TEN, J.
Index No. 650502/2013 Motion Date: 11/06/13 Motion Seq. No.: 013, 014
In motion sequence 013, Defendant CIBX Commercial Mortgage LLC ("CIBX")
moves to dismiss Plaintiff JFK Hotel Owner LLC's ("JFK Hotel") Second Amended
Complaint ("SAC") pursuant to CPLR 32ll(a)(l) and (a)(7). Plaintiff opposes. In
motion sequence 014, Defendants Hilton Hotel Corp. ("HHC"), Hilton Hospitality Corp.
("HHCI"), HL T Existing Franchise Holding LLC ("HL T Existing"), DoubleTree Hotel
Systems, Inc. ("DoubleTree"), and Hilton Worldwide ("HW", collectively, "Hilton" or
the "Hilton Defendants") move to dismiss JFK Hotel's Second Amended Complaint
pursuant to CPLR 321 l(a)(l), (a)(5), and (a)(7). For the reasons set forth below, CIBX's
motion to dismiss is granted in part and denied in part, and Hilton's motion to dismiss is
granted in part and denied in part.
[* 1]
JFK Hotel v. Hilton
Background1
Index No. 650502/2013 Page2 of34
JFK Hotel mvns and operates a 385-room hotel near the John F. Kennedy
International Airport in Queens, New York (the ''Hotel"). (SAC, 21.) In 2006, JFK
Hotel contracted with DoubleTree to operate the Hotel under the DoubleTree brand (the
"Franchise Agreement"). (SAC, 23.) From 2007 to 2013, Plaintiff operated the Hotel
under the DoubleTree franchise. (SAC, 25.) The Franchise Agreement provided the
Hotel with access to many benefits, such as Hilton's on-line reservation system, the
HiltonHonors database, and signage. (SAC , 24 ).
In July 2007, the Blackstone Group, a large financial services firm, purchased
HHC. (SAC~ 33.) Plaintiff alleges that in September 2007, Blackstone caused
DoubleTree to assign the Franchise Agreement to HLT Existing. (SAC, 34.) Plaintiff
further alleges that since April 2008, various individuals from HW, HL T Existing, and
DoubleTree have represented themselves as being agents ofHLT Existing. (SAC, 36.)
Plaintiff also alleges that a vice president of HHC signed an amendment to the Franchise
Agreement reflecting a change in the ownership of the Hotel. (SAC, 35.)
1 Allegations in this section are drawn from the Second Amended Complaint.
[* 2]
JFK Hotel v. Hilton
A. Plaintiff Refinances the Hotel
Index No. 650502/2013 Page 3of34
In late 2010, JFK Hotel sought to refinance a loan that was secured by the Hotel.
(SAC, 9, 49.) Plaintiff worked with a Canadian bank, CIBC, Inc. ("CIBC"), and dealt
with CIBC employees at CIBC offices during the loan process. (SAC,, 9, 49-51.)
However, the final lender was not CIBC, but rather CIBX. (SAC~ 51.) Unknown to
Plaintiff at the time of lending, CIBX is a joint venture between CIBC, as 17% owner,
and BSSF Commercial Mortgage Member, LLC ("BSSF"), as 83% owner. (SAC, 9.)
BSSF is a subsidiary of Blackstone Real Estate Debt Strategies, which is a division of the
Blackstone Group. (SAC,, 10-11.)
In order to induce CIBX to enter into the mortgage, an agreement was entered into
between CIBX, Plaintiff, and HLT Existing to provide assurances against the loss of the
DoubleTree franchise (the "Comfort Letter"). (SAC, 69.) The terms of the Comfort
Letter (i) provided CIBX with certain cure rights, (ii) called for Plaintiff to deliver a
general release of HL T Existing, and (iii) required HL T Existing to acknowledge that
there was no default under the Franchise Agreement. (SAC, 71.) The loan closed in
June 2011 for $35,000,000 (the "Loan"). (SAC 173.) CIBC serviced the Loan until July
2012, when Wells Fargo assumed servicing responsibilities. (SAC, 87.)
In addition to being the original lender, CIBX also served several other roles
related to the Loan. (SAC 19.) On June 22, 2012, CIBX assigned the Loan to US Bank
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JFK Hotel v. Hilton Index No. 650502/2013 Page 4 of34
National Association ("US Bank") as trustee for the registered holders of the J.P. Morgan
Chase Commercial Mortgage Securities Trust 2012~CIBX. (SAC~ 83.) CIBX served as
both the depositor of the Loan into a mortgage pool and as the sponsor of the offering of
securitized interests in the pool. (SAC 19.) Further, CIBX owned certificates, and as a
certificateholder of the pool, served as the "Designated Certificateholder," acting for the
controlling class of the mortgage pool. (SAC 19.)
It was not until roughly one year after the closing of the Loan that public
documents showed that Blackstone indirectly controlled CIBX. (SAC 181.) In addition,
CIBX's sale of the Hotel's mortgage to the securitization trust was not recorded in
Queens County until April 1, 2013. (SAC~ 88.)
B. Events Leading to Termination of Franchise Agreement
Hilton periodically conducts quality inspections of its franchises throughout the
world. (SAC 191.) The Complaint alleges that from August 2009 until February 2011,
the scores that the Hotel received on its quality inspection reports steadily improved.
(SAC~ 92.) The Complaint further alleges that in November 2011, no points were
deducted from the Hotel's assessment for its failure to have the proper number of portable
tub seats as required by the Americans With Disabilities Act ('~ADA"). (SAC 195.)
During an inspection in February 2012, Hilton resulted in a deduction of twenty points for
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JFK Hotel v. Hilton Index No. 650502/2013 Page 5of34
missing tub seats and alarm system issues. (SAC 1 103.) During an inspection in July
2012, after the Loan's securitization, Hilton deducted 126 points for failure to have six of
twelve tub seats. (SAC 197.)
Plaintiff alleges that tub seats had been back-ordered since March 2012. (SAC 1
98.) Further, Plaintiff avers that the Hotel ordered tub seats again in October 2012, but
Hurricane Sandy prevented their delivery. (SAC 198.) During an inspection on January
3, 2013, 126 points were again deducted for having only eight of twelve required tub
seats. (SAC 1103.) The Second Amended Complaint alleges that the tub seats arrived at
the Hotel on January 4, 2013 and that no guest ever requested a tub seat without receiving
one. (SAC 11 101, 103.)
C. Franchise Termination and Loan Default
On January 18, 2013, Hilton notified Plaintiff that the Franchise Agreement would
be terminated as of February 17, 2013 (the '~Termination Notice"). (SAC 1106.) The
Termination Notice stated that the default was non-curable in accordance with Section
14(b)(l) of the Franchise Agreement. (SAC 1 109.) The Termination Notice described
Plaintiff as engaging in the same noncompliance within a consecutive twenty-four month
period and in a pattern of non-compliance with Double Tree system standards over a
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JFK Hotel v. Hilton Index No. 650502/2013 Page 6of34
significant period. (SAC iii! 109-10.) The Termination Notice also demanded $4 million
in liquidated damages pursuant to the Franchise Agreement. (SAC if 112.)
US Bank, through its special servicer, Midland Loan Services ("Midland"), sent
Plaintiff a notice of default on the Loan dated February 8, 2013" ("Notice of Default").
(SAC if 131.) The Notice of Default accelerated the Loan's due date and increased the
interest rate to the default rate. (SAC if 131.) The grounds for default stated in the Notice
of Default were (i) a default under the Franchise Agreement that entitled Hilton to
terminate, and (ii) the termination of the Franchise Agreement. (SAC 4j[4j[ 133-34.) US
Bank did not exercise any of its cure rights under the Comfort Letter. (SAC if 138.)
On February 9, 2013, Radisson Hotels International, Inc. ("Radisson") approved a
franchise for the Hotel. (SAC 4i[ 129.) Contrary to Plaintiffs interpretation of the Loan,
US Bank required its consent before allowing the Radisson re-branding to proceed. (SAC
4i[ 149.) Plaintiff alleges that CIBX, through its control of US Bank and Midland,
unreasonably conditioned consent to the re-branding upon Plaintiff paying various fees
and establishing a litigation reserve. (SAC 4i[ 158.)
D. Plaintiff Files Instant Lawsuit
On February 15, 2013, Plaintiff filed the instant suit, seeking a temporary
restraining order enjoining Hilton from terminating the Franchise Agreement, which this
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JFK Hotel v. Hilton Index No. 650502/2013 Page 7 of34
Court granted (the "TROn). On August 15, 2013, Plaintiff settled its claims against US
Bank, and US Bank agreed to the Radisson re-branding and to withdraw the Notice of
Default. (Aug. 15, 2013, Oral Arg. Tr., at 26: 1-38:22 (Nina Koss O.C.R.).) In October
2013, the Hotel successfully re-branded as a Radisson. (Oct. 15, 2013, Oral Arg. Tr., at
4:12-15 (Nina Koss O.C.R.).)
In Plaintiff's Second Amended Complaint, it asserts claims against the Hilton
Defendants, CIBX and US Bank. As noted above, all claims against US Bank and
Midland have been settled, including Plaintiffs ninth cause of action. In addition,
Plaintiff's first, tenth, eleventh, and twelfth causes of action have been withdrawn or
rendered moot due to the completion of the re-branding process.
The Second Amended Complaint asserts ten remaining causes of action. As
against CIBX, the Second Amended Complaint asserts (i) breach of contract arising out
of the Notice of Termination, (ii) breach of contract arising from wrongful acceleration of
the Loan's balance, (iii) breach of contract arising from interference with the Radisson re-
branding process, (iv) breach of contract arising from concealing the Loan's
securitization, (v) breach of the covenant of good faith and fair dealing in the Loan
arising from a failure to investigate the circumstances surrounding the Termination
Notice, (vi) tortious interference with prospective business relations arising from
Radisson re-branding, and (vii) fraudulent inducement for failure to disclose CIBX's and
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JFK Hotel v. Hilton Index No. 650502/2013 Page 8 of34
DoubleTree's relationship through Blackstone. Against the Hilton Defendants, the
Second Amended Complaint asserts causes of action for (i) breach of contract for
wrongful termination of the Franchise Agreement, (ii) breach of the covenant of good
faith and fair dealing, (iii) tortious interference with contract by providing the
Termination Notice to US Bank and CIBX, and (iv) fraudulent inducement for failure to
disclose CIBX's and DoubleTree's relationship through Blackstone.
In motion sequence 013 and 014, CIBX and the Hilton Defendants move to
dismiss the Second Amended Complaint.
I. Motion to Dismiss Standard
On a motion to dismiss a complaint for failure to state a cause of action, all factual
allegations must be accepted as truthful, the complaint must be construed in a light most
favorable to the plaintiffs and the plaintiffs must be given the benefit of all reasonable
inferences. Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 13 A.D.3d 172, 174 (1st
Dep't 2004). "We ... determine only whether the facts as alleged fit within any
cognizable legal theory." Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994). This Court
must deny a motion to dismiss, "if from the pleadings' four comers factual allegations are
discerned which taken together manifest any cause of action cognizable at law." 511 W.
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JFK Hotel v. Hilton Index No. 650502/2013 Page 9 of34
232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 (2002) (internal
quotation marks and citations omitted).
However, on a CPLR 321 l(a){l) motion, "[i]t is well settled that bare legal
conclusions and factual claims, which are either inherently incredible or flatly
contradicted by documentary evidence ... are not presumed to be true on a motion to
dismiss for legal insufficiency." O'Donnell, Fox & Gartner v. R-2000 Corp., 198 A.D.2d
154, 154 (1st Dep't 1993). The court is not required to accept factual allegations that are
contradicted by documentary evidence or legal conclusions that are unsupported in the
face of undisputed facts. See Zanett Lombardier, Ltd. v. Maslow, 29 A.DJd 495, 495
(1st Dep't 2006) (citing Robinson v. Robinson, 303 A.D.2d 234, 235 (1st Dep't 2003).
Ultimately, under CPLR 321 l(a)(l}, "dismissal is warranted only if the documentary
evidence submitted conclusively establishes a defense to the asserted claims as a matter of
law." Leon, 84 N.Y.2d at 88.
II. CIBX's Motion to Dismiss
In motion sequence 013, Defendant CIBX moves to dismiss the Second Amended
Complaint pursuant to CPLR 321 l(a)(l) and (a)(7), on the grounds that Plaintiff fails to
state a cause of action and that the terms of the Loan foreclose Plaintiff's claims.
[* 9]
JFK Hotel v. Hilton Index No. 650502/2013 Page 10of34
A. Breach of Contract Claims Against CIBX Arising from Control of US Bank
Plaintiff alleges three cause·s of action against CIBX that arise out of US Bank and
Midland's conduct in handling the Loan. First, the third cause of action alleges that
CIBX breached the Loan's terms by causing US Bank to issue the Notice of Termination.
Second, the fourth cause of action alleges breach of contract arising from CIBX causing
US Bank to wrongful accelerate the Loan's balance. Finally, the fifth cause of action
alleges that CIBX breached the Loan's terms by causing US Bank to interfere with the
Radisson re-branding process.
To state a claim for breach of contract, a plaintiff must plead the existence of a
valid contract, plaintiffs performance thereunder, defendant's breach and resulting
damages. See Morris v. 702 E. Fifth St. HDFC, 46 A.D.3d 478. 479 (1st Dep't 2007).
The Second Amended Complaint does not allege that CIBX is in contractual privity with
Plaintiff. Rather, Plaintiff alleges that CIBX should be held liable as if it were the
contracting party, namely US Bank, because it has some unknown right to direct US
Bank's action as relating to the Loan's securitization.
Plaintiff cites Cerchia v. VA. Mesa, Inc. for the proposition that further discovery
is needed to discern the extent of CIBX's control over US Bank and US Bank's handling
of the Loan. 191A.D.2d377, 378 (1st Dep't 1993). In Cerchia, the First Department
held that discovery on jurisdictional issues was necessary and that the complaint should
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JFK Hotel v. Hilton Index No. 650502/2013 Page 11 of34
not have been dismissed on jurisdictional grounds. Id. The court stated that "discovery
may reveal evidence supporting a conclusion that [the defendant corporation] may be
acting as a "dummy" corporation for [the corporation under contract] so that the latter
could avoid payment of plaintiffs commissions." Id.
Plaintiff argues that the "degree to which CIBX continues to exercise control over
the Loan;; is presently unknown. Plaintiff contends that further discovery is needed to
discern the terms of the Loan assignment to US Bank and CIBX's continued right to
control US Bank. However, Plaintiffs allegations fall short of the allegations in Cerchia
sufficient to defeat a motion to dismiss. Here, no discovery is necessary because the veil
piercing claim fails on its face.
The Second Amended Complaint alleges that CIBX, as "Designated
Certificateholder" controlled the actions of US Bank to perpetrate a wrong against JFK
Hotel. Although the Loan in owned by a trust and not a corporation, Plaintiffs breach of
contract claims against CIBX, arising from US Bank's conduct, closely resembles an
attempt to pierce the corporate veil or some other type of alter ego claim. CIBX can be
viewed as the controlling shareholder, and US Bank as the corporation.
As New York courts have long held, "[p]iercing of the corporate veil is not a cause
of action independent of that against the corporation; it is established when the facts and
circumstances compel a court to impose the corporate obligation on its owners, who are
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JFK Hotel v. Hilton Index No. 650502/2013 Page 12of34
otherwise shielded from liability." Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d
167, 174 (1st Dep't 2013) (citing Morris v. New York State Dept. of Tax. and Fin., 82
N.Y.2d 135, 141 (1993). The same concept can be applied to the instant case. The
release of the underlying wrong would preclude a plaintiff from asserting claims against
the controlling entity. Cf Skylon Corp. v. Guilford Mills, Inc., 901 F.Supp. 711, 714 n.4
(S.D.N.Y. 1995) ('"Despite that fact that master and servant are not joint tort feasors
[sic], a release of one discharges the other.'") (quoting Kinsey v. William Spencer & Son
Corp., 165 Misc. 143 (N.Y. Sup. Ct. 1937), ajf'd, 255 A.D. 995 (2d Dep't 1938), ajf'd,
281 N.Y. 601 (1939)).
Plaintiff has released all of its claims against US Bank as trustee and Midland as
special servicer. See Aug. 15, 2013, Oral Arg. Tr., at 31: 11-32:7 (Nina Koss O.C.R.).
Accordingly, any allegedly wrongful actions taken by US Bank that may have been
directed by CIBX have been released and can no longer support a claim. The level of
CIBX's control over US Bank's actions is irrelevant because the underlying ciaims have
been settled. Unlike in Cerchia, no amount of discovery will yield a different result.
Therefore, Plaintiffs breach of contract claims against CIBX, arising from US
Bank's actions, namely the third, fourth, and fifth causes of action, are dismissed with
prejudice.
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JFK Hotel v. Hilton Index No. 650502/2013 Page 13of34
B. Breach of Contract Arising Out of Securitization and Use of Confidential
Information
Plaintiffs sixth cause of action asserts a breach of contract against CIBX for its
role in the securitization process of the Loan and improper use of confidential
information.
1. Securitization
Plaintiff alleges that the securitization of the Loan triggered Plaintiff's right to sell
the Hotel. Plaintiff further alleges that CIBX was the only party with knowledge of the
securitization, and therefore CIBX had a duty to notify Plaintiff that its right to sell was
triggered. Plaintiff argues that it had no way to discover the securitization and that CIBX
breached its implied duty to notify Plaintiff upon securitization. CIBX argues that the
Loan does not contain any language that imposes a duty to notify Plaintiff about the
securitization.
In order to state a cause of action for breach of contract, the pleading must allege
the existence of an agreement, performance by the plaintiff, failure to perfonn by the
defendant, and resulting damages. See, e.g., Harris v. Seward Park Hous. Corp., 79
A.D.3d 425, 426 (1st Dep't 2010). The parties dispute the existence of an agreement
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JFK Hotel v. Hilton Index No. 650502/2013 Page 14 of34
requiring CIBX to disclose the securitization. The provision that most closely resembles
any such agreement to disclose is Section 4.1 l(b) of the Loan, which states:
Lender shall not unreasonably withhold its consent to the sale of the Property [if the buyer meets specified criteria] ... and is otherwise reasonably acceptable to Lender ... provided that such Sale occurs after the earlier to occur of a Secondary Market Transaction and the date that is two years from the date of this Agreement.
See SAC Ex. 5 at 43
When dealing with issues of contract interpretation, courts must construe the
agreement according to the parties' intent, and the best evidence of what parties to a
written agreement intended is what was said in the writing. See, e.g., Slatt v. Slatt, 64
N.Y.2d 966, 966 (1985). Courts may not fashion a new contract for the parties under the
guise of interpreting the writing. See, e.g., Tanking v. Port. Auth. of NY & NJ., 3
N.Y.3d 486, 490 (2004) (holding that a court may not ''rewrite the contract and supply a
specific obligation the parties themselves did not spell out"); Flag Wharf, Inc. v. Merrill
Lynch Capital Corp., 40 A.D.3d 506, 507 (1st Dep't 2007) ("Courts will not rewrite
contracts that have been negotiated between sophisticated, counseled commercial
entities").
Plaintiff does not point to any specific provision in the Loan that requires CIBX to
disclose the securitization. Plaintiff cannot identify any such provision because there is
simply no stated obligation in the Loan to disclose the Loan's securitization. See
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JFK Hotel v. Hilton Index No. 650502/2013 Page 15 of34
Tanking, 3 N.Y.3d at 490 (courts may not "supply a specific obligation the parties
themselves did not spell out"). However, Plaintiff is correct that implied obligations can
exist in contracts under certain circumstances. This argument will be addressed in the
next section, regarding the impJied covenant of good faith and fair dealing.
Beyond the lack of a contractual duty to disclose, Plaintiff fails to plead that its
damages are a result of the alleged breach. Under the Loan, Plaintiff always had a right
to seek the lender's consent to sell the Hotel. See SAC Ex. 5 at 42 (Loan§ 4.1 l(a)). The
Loan's securitization did not change Plaintiffs rights, it only changed the level of
discretion that the lender could exercise in refusing to consent to the sale. The Loan
states that because the lender is relying on the expertise of Plaintiff in operating the hotel,
the lender will have absolute discretion in allowing the sale of the Hotel for up to two
years, or until securitization. See SAC Ex. B at 42. After securitization, the lender could
not unreasonably withhold consent to a sale. See SAC Ex. B at 42.
Plaintiff avers that its right to sell the Hotel with reasonable consent from the
lender was triggered when the Loan was securitized. The Loan was dated June I 0, 2011,
and the securitization occurred on June 22, 2012. See SAC~ 80·83, Ex. 5 at 1.
Therefore, Plaintiff missed the opportunity to sell the Hotel for one year under the
reasonable consent standard, rather than the absolute discretion standard.
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JFK Hotel v. Hilton Index No. 650502/2013 Page 16of34
However, the Second Amended Complaint fails to plead either what damages were
suffered during this year, or how the alleged breach caused those damages. The Plaintiff
does not plead any missed sale opportunity or the lender's improper rejection of a
proposed sale using an improper standard. Without resulting damages, a claim for breach
of contract cannot stand. See Fowler v. Am. Lawyer Media, Inc., 306 A.D.2d 113, 113
(1st Dep't 2003) ("the complaint still fails as it lacks allegations showing any damages.")
(citing Lexington 360 Assocs. v. First Union Nat'! Bank, 234 A.D.3d 187, 189-90 (1st
Dep't 1996). Therefore, Plaintiff has failed to state a cause of action for breach of
contract based upon CIBX's failure to disclose the securitization.
u. Confidential Information
Plaintiff alleges that CIBX breached its obligations under the Loan by using
Plaintiffs confidential information "for purposes other than those permitted under the
Loan." More specifically, Plaintiff avers that CIBX disseminated confidential
information as demonstrated in a news article, entitled ~~Hotel Loan Taints Post-Crisis
CMBS," which is annexed to the Second Amended Complaint as Exhibit 22. The article
cites two financial analysts from Barclays who allegedly learned that the Franchise
Agreement was terminated from a Midland "servicing note." See SAC Ex. 22 at 1.
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JFK Hotel v. Hilton Index No. 650502/2013 Page 17of34
Exhibit 22 to the Second Amended Complaint does not support Plaintiff's theory
of breach because the article references only Midland. See SAC Ex. 22. The article
states that "Midland Loan Services ... indicated the ... franchise agreement was
terminated 'for cause."' See SAC Ex. 22. There is simply no reference to CIBX's
disclosures. As noted above, any claims against US Bank and Midland have been settled
and cannot support a cause of action against CIBX.
Also as noted above, Plaintiff fails to plead what damages were suffered as a result
of the breach, and how those damages were caused by the disclosure of confidential
information. See Lexington 360 Assocs. v. First Union Nat. Bank of North Carolina, 234
A.D.2d 187, 190 (1st Dep't 1996) ("VVhere a party has failed to come forward with
evidence sufficient to demonstrate damages flowing from the breach alleged and relies,
instead, on wholly speculative theories of damages, dismissal of the breach of contract
claim is in order").
CIBX's dissemination of Plaintiff's confidential information as alleged in the
Complaint cannot support a breach of contract claim. The alleged disclosure was done
through Midland and any claim was settled. Therefore, Plaintiff's sixth cause of action is
dismissed, without prejudice to replead other allegedly improper disclosures.
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JFK Hotel v. Hilton Index No. 65050212013 Page 18 of34
E. Breach of the Covenant of Good Faith and Fair Dealing
Plaintiffs eighth cause of action asserts that CIBX breached the covenant of good
faith and fair dealing inherent in the Loan. Plaintiff alleges that (i) CIBX caused Midland
to issue the Notice of Default, (ii) CIBX failed to investigate the circumstances around
the Termination Notice, (iii) CIBX failed to exercise any cure rights under the Comfort
Letter, and (iv) CIBX interfered with the Radisson re-branding process. As already
described, these allegations are all derivative of claims against US Bank and Midland that
have been settled.
However, Plaintiff also puts forth two allegations that are asserted directly against
CIBX. First, Plaintiff maintains that the Loan contained an implied duty requiring CIBX
to disclose the securitization. Second, Plaintiff avers that CIBX intentionally concealed
its Blackstone affiliation, knowing that Blackstone would be on both sides of the
franchisor/lender relationship with the Hotel.
Since at least the early twentieth century, New York courts have stated that implied
covenants can exist in a contract. In Wood v. Duff-Gordon, 222. N.Y. 88, 91 (1917),
Justice Cardozo held that although a particular provision may not be expressly stated in a
contract, a covenant may still be implied where a reasonable person in the position of the
promisee would be justified in understanding such a promise. See also 511 W. 232nd
Owners Corp. v. Jennifer Realty Corp., 98 N.Y.2d 144, 153 (2002) ("[T]he duties of good
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JFK Hotel v. Hilton Index No. 650502/2013 Page 19 of34
faith and fair dealing ... encompass 'any promises which a reasonable person in the
position of the promisee would be justified in understanding where included."') (quoting
Rowe v. Great At!. & Pac. Tea Co., 46 N.Y.2d 62, 69 (1978)).
t. Duty to Disclose Securitization
The Second Amended Complaint avers that the Loan's securitization implicated
Plaintiffs right to sell the Hotel. Plaintiff furthers alleges that CIBX was the only party
with knowledge of the securitization, and therefore CIBX had a duty to notify Plaintiff
that its right to sell was triggered. Plaintiff argues that because it had no way to discover
the securitization on its own, the Loan contained an implied covenant that CIBX would
notify Plaintiff upon securitization. CIBX argues that the Loan simply does not impose a
duty to notify Plaintiff about the securitization.
The implied covenant of good faith and fair dealing superimposes upon contracts
all promises that a reasonable person would understand as being included and are
necessary to effectuate the intention of the parties. See 511 W. 232nd Owners Corp. v.
Jennifer Realty Corp., 98 N.Y.2d 144, 153 (2002). Courts in New York have held that a
duty to give notice can be an implied covenant. See Components Direct, Inc. v. Eur. Am.
Bank & Trust Co., 17 5 A.D .2d 227 ~ 230 (2d Dep 't 1991) ("(Defendant] had an absolute
right to terminate credit under the loan agreement. However, ... the obligation of good
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JFK Hotel v. Hilton Index No. 650502/2013 Page 20 of34
faith would require a period of notice to allow the corporate plaintiff a reasonable
opportunity to seek alternate credit.").
Plaintiffs argument fails, however, because a breach of an implied covenant must
have the effect of depriving one party of the fruits of the contract. See 511 W. 232nd
Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) (quoting Dalton v.
Educational Testing Serv., 87 N.Y.2d 348, 389 (1995)).
In 511 W. 2 32nd Owners Corp., the defendant was the sponsor of a plan to convert
an apartment building into a cooperative, and the plaintiffs were the board of directors
and individuals who had purchased cooperative shares. See 98 N.Y.2d 144, 150 (2002).
Plaintiffs alleged that the sponsor-defendant rejected offers from prospective buyers,
allowed the offering plan to lapse, and retained a majority of the cooperative shares for
itself. 511 W. 232nd Owners Corp., 98 N.Y.2d at 150. The Court of Appeals held that
the complaint sufficiently pleaded a breach of the implied covenant of good faith because
the alleged conduct of the sponsor-defendant ''defeated the purpose of the contract." 511
W. 232nd Owners Corp., 98 N.Y.2d at 152. "In sum, plaintiffs allege that the sponsor's
retention of shares so drastically undermined the contract that its fundamental objective--
the creation of a viable cooperative--has been subverted." 511 W. 232nd Owners Corp.,
98 N.Y.2d at 152.
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JFK Hotel v. Hilton Index No. 650502/2013 Page 21 of34
Here, Plaintiff argues that CIBX "concealed the sale of the Loan ... such that
Plaintiff never learned of the acceleration of its rights to sell the Hotel." However,
Plaintiff does not argue that CIBX's failure to disclose the securitization drastically
undermined the purpose and fundamental objective of the Loan. Further, the Loan does
not require a securitization, but merely allows for the possibility of a securitization,
suggesting that the Hotel's sale after a securitization was not the primary purpose of the
Loan. See SAC Ex. B at 7 4 ("Borrower acknowledges that Lender may effectuate a
Second Market Transaction) (emphasis added). Therefore, CIBX' s failure to provide
notice of the securitization cannot be said to deprive Plaintiff of the fruits of the contract.
Accordingly, this Court holds that CIBX did not breach its duty of good faith and
fair dealing by failing to notify Plaintiff of the securitization. In addition, for the reasons
stated above, Plaintiff fails to allege any damages that resulted from the lack of notice.
11. Implied Duty to Disclose CIBX's Relation to Blackstone
Plaintiff avers that CIBX actively concealed its affiliation with Blackstone with
full knowledge that Blackstone would be both the franchisor and lender to the Hotel.
Plaintiff argues that CIBX's concealment of this allegedly pivotal fact was material to its
decision to enter into the Loan. CIBX argues that Plaintiff points to no actual duty~
contractual or statutory, which required its disclosure of the relationship.
[* 21]
JFK Hotel v. Hilton Index No. 650502/2013 Page22of34
Although CIBX had no express duty to disclose, a duty to disclose or give notice
can be implied through the covenant of good faith and fair dealing inherent in aU
contracts. See Lonner v. Simon Prop. Grp., 57 A.D.3d 100, 108 (2d Dep't 2008) ("the
terms of the fee disclosure are ... unclear and hidden, which is sufficienf' to support a
claim for breach of the implied covenant of good faith); Components Direct, Inc. v. Eur.
Am. Bank & Trust Co., 175 A.D.2d 227, 230 (2d Dep't 1991) ("the obligation of good
faith would require a period of notice to allow the corporate plaintiff a reasonable
opportunity to seek alternate credit.").
Plaintiff sufficiently avers that CIBX' s allegedly knowing concealment of the
CIBX/Blackstone relationship "ha[ d] the effect of destroying or injuring the right of
[Plaintiff) to receive the fruits of the contract." See 51 l W: 232nd Owners Corp., 98
N. Y .2d at 153. Plaintiff alleges that "the Hilton Defendants' bad faith, improper motive
and wrongful acts in connection with the attempted wrongful termination of the Franchise
Agreement are motivated in part by their affiliation with Blackstone and CIBX and their
intention to benefit Blackstone and CIBX at Plaintiff's expense." See SAC ~ 209.
Further, in contrast to the lack of allegations regarding the importance of post-
securitization sale rights, the Second Amended Complaint repeatedly references the
importance of the Blackstone relationship. Plaintiff pleads that it "'considered the lack of
an affiliation between its franchisor and its lender (whom it perceived to be CIBC) as
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JFK Hotel v. Hilton Index No. 650502/2013 Page 23of34
crucial information in its refinancing decision." See SAC ii 60. Further, Plaintiff avers
that "[t]he conflict of interest in having under common control the decision-making
power on and over both Plaintiffs debt and Plaintiffs franchise ... is a condition that
Plaintiff did not knowingly accept. Information that would have revealed the connection
between its franchisor and its lender was affirmatively concealed and in all events
wrongfully not disclosed to Plaintiff." See SAC 'if 61.
Accepting the allegations of the complaint as true and providing every reasonable
inference in favor of Plaintiff, this Court cannot say as matter of law that the Second
Amended Complaint fails to state a claim for breach of the implied covenant of good faith
and fair dealing. Plaintiff sufficiently pleads that the failure to disclose CIBX's
Blackstone relationship "drastically undermined the contract [such] that its fundamental
objective ... ha[d] been subverted." 511 W. 232nd Owners Corp., 98 N.Y.2d at 152.
Therefore, CIBX' s motion to dismiss the eighth cause of action is denied to the extent it
alleges a breach of the implied covenant of good faith and fair dealing due to CIBX' s
concealment of Blackstone relationship and is otherwise granted.
F. Tortious Interference with Prospective Business Relations
Plaintiffs next claim against CIBX, the fourteenth cause of action, alleges that
CIBX wrongfully interfered with Plaintiffs relationship with Radisson "through control
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JFK Hotel v. Hilton Index No. 650502/2013 Page 24 of34
of the actions of the Special Servicer." See SAC~ 251. Again, however, for the reasons
stated above, avennents against CIBX derived from its alleged actions in controlling US
Bank and Midland cannot support a cause of action. All claims arising out of the conduct
of both US Bank and Midland have been settled. Therefore, Plaintiff's fourteenth cause
of action is dismissed with prejudice.
G. Fraudulent Inducement against CIBX
Plaintiffs final cause of action against CIBX alleges that both CIBX and the
Hilton Defendants fraudulently induced Plaintiff to enter into the Loan and the Comfort
Letter by failing to disclose the relationship between DoubleTree, as franchisor, and
CIBX, as lender, through their ultimate parent corporation the Blackstone Group.
CIBX argues that it had no duty to make any affiliation disclosures to Plaintiff.
CIBX contends that neither the Loan nor any statute or common law precept imposed
such a disclosure duty. Plaintiff argues that the 4'special facts" doctrine imposed a duty
on CIBX to disclose its corporate parentage because that information was exclusively
within CIBX's control and could not have been discovered by Plaintiff.
"It is well established that, absent a fiduciary relationship between the parties, a
duty to disclose arises only under the 'special facts' doctrine." Jana L. v. W. l 29th St.
Realty Corp., 22 A.D.3d 274~ 277 (1st Dep't 2005). "The doctrine requires satisfaction of
[* 24]
JFK Hotel v. Hilton Index No. 650502/2013 Page 25 of34
a two-prong test: that the material fact was infonnation peculiarly within [the] knowledge
of [the defendant), and that the information was not such that could have been discovered
by [the plaintiff] through the exercise of ordinary intelligence." Jana L., 22 A.D.3d at
278 (internal citations omitted). The Jana L. Court further noted that "(if] the other party
has the means available to him of knowing ... he must make use of those means, or he
will not be heard to complain that he was induced to enter into the transaction by
misrepresentations." 22 A.D.3d at 278 (internal citations omitted). The First Department
held that the plaintiff could not rely on the special facts doctrine because the plaintiff
"hadt at the very least, a duty to inquire. If nothing else, the 'exercise of ordinary
intelligence' suggests a simple inquiry [is required]." Jana L., 22 A.D.3d at 278.
Here, despite Plaintiffs repeated allegations regarding the extreme importance of
CIBX' s Blackstone affiliation, the Second Amended Complaint does not aver that
Plaintiff asked CIBX about its ownership structure. Further, the Second Amended
Complaint also does not allege that Plaintiff conducted any research on this issue prior to
closing on the Loan. "It is insufficient for [Plaintiff] to simply make the conclusory
statement that the information ... could not have been obtained [by it] through the
exercise of ordinary intelligence." Jana L., 22 A.D.3d at 278.
[* 25]
JFK Hotel v. Hilton Index No. 650502/2013 Page 26 of34
Accordingly, CIBX's motion to dismiss Plaintiff's fifteenth cause of action for
fraudulent inducement, as much as it is asserted against CIBX, is hereby granted, without
prejudice to replead facts regarding Plaintiffs inquiry into CIBX's ownership.
III. Hilton's Motion to Dismiss
In motion sequence 014, the Hilton Defendants move to dismiss the Complaint
pursuant to CPLR 321 l(a)(l), (a)(5), and (a)(7), on the grounds that Plaintiff fail to state
a cause of action, that Plaintiff released certain claims in the Comfort Letter, and that the
terms of the Franchise Agreement foreclose Plaintiffs claims.
A. Breach of Contract Arising out of Termination Notice
Plaintiff's second cause of action asserts that Hilton breached the Franchise
Agreement when it issued the Termination Notice. Plaintiff avers that the Termination
Notice was improper because there was neither the same non-compliance with Hilton
standards within a twenty-four month period, nor a "pattern" of non-compliance, as
required by the Franchise Agreement.
Hilton moves to dismiss the breach of contact claim, arguing that there was a clear
pattern of non-compliance. Hilton contends that the pattern of safety hazards and other
deficiencies is shown in affidavits that accompanied Hilton's opposition to Plaintiffs
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JFK Hotel v. Hilton Index No. 650502/2013 Page 27 of34
motion for a temporary restraining order. Hilton further argues that it had the right to
terminate the Franchise Agreement because it had already issued a Notice of Default
within the previous twenty-four months.
Plaintiff argues that the Franchise Agreement does not define what constitutes a
"pattern." Plaintiff also argues that Hilton certified in the Comfort Letter that there was
no existing default, and therefore Hilton cannot base the termination on any conduct pre-
dating the Comfort Letter.
Plaintiffs cause of action survives because Hilton raises factual contentions,
which are not appropriately considered on a motion to dismiss. See, e.g., Quantum Corp.
Funding Ltd. v. Sw. Bell Tel., LP, 45 A.D.3d 505, 506 (1st Dep't 2007) (stating that
"factual issues ... cannot be resolved at this early stage of the proceedings"). Hilton's
reference to facts that are extraneous to the Second Amended Complaint are irrelevant to
the instant motion. See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d
144, 152 (2002) (noting that courts must look to "the pleadings' four comers" on a
motion to dismiss). Further, affidavits that "assert the inaccuracy of plaintiffI's]
allegations may not be considered, in the context of a motion to dismiss, for the purpose
of determining whether there is evidentiary support for the complaint." Tsimerman v.
Janoff, 40 A.D.3d 242, 242 (1st Dep't 2007).
[* 27]
JFK Hotel v. Hilton Index No. 650502/2013 Page 28 of34
Hilton's arguments against the breach of contract claim amount to factual
assertions that are inappropriate on a motion to dismiss. The existence of a pattern of
noncompliance with Hilton brand standards is a factual one that cannot be considered at
this juncture. Accordingly, Hilton's motion to dismiss the second cause of action is
denied.
B. Breach of the Covenant of Good Faith and Fair Dealing
Plaintiffs seventh cause of action asserts a breach of the covenant of good faith
and fair dealing against Hilton based on several allegations. Plaintiff asserts that Hilton
(i) attempted to tenninate the Franchise Agreement without providing an opportunity to
cure, (ii) disclosed confidential information to CIBX and US Bank, (iii) discriminated
against the Hotel on the Hilton website, and (iv) mandated that the Hotel charge a price
higher than other Hilton properties nearby.
Hilton argues that Plaintiffs good faith claim is duplicative of its breach of
contract claim and must be dismissed. Plaintiff responds that its seventh cause of action
is based on a wider array of allegations than the breach of contract claims.
Plaintiff's claims relating to the Termination Notice and disclosure of confidential
information are duplicative of the breach of contract claim. Plaintiffs allegations here
are based on the same facts alleged in the breach of contract claim. See Amcan Holdings,
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JFK Hotel v. Hilton Index No. 650502/2013 Page 29of34
Inc. v. Canadian Imperial Bank o[Commerce, 70 A.D.3d 423, 426 (1st Dep't 2010)
(dismissing claim for breach of implied covenant of good faith as duplicative of breach of
contract claim).
Plaintiff is correct that its claim here is wider than the breach of contract claim.
However, the discrimination allegations that remain are also insufficient to support a
claim for breach of the covenant of good faith, for two reasons. First, the Franchise
Agreement provided that Hilton had the right to ~~engage in any Other Businesses, even if
they compete with the Hotel, .... [which] will not give rise to any liability [for] ...
breach of any applicable implied covenant of good faith and fair dealing, or divided
loyalty." See SAC Ex. 1 at 36. This provision forecloses Plaintiffs claim because the
implied covenant of good faith "cannot be construed so broadly as effectively to nullify
other express terms of a contract." Fesseha v. TD Waterhouse Investor Servs., Inc., 305
A.D.2d 268, 268 (1st Dep't 2003).
Second, Plaintiff does not allege that these alleged discriminatory acts "deprived it
of the fruits of the contract." See 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98
N.Y.2d 144, 153 (2002). In fact, the Second Amended Complaint contradicts such an
argument, alleging that "the Hotel remained near to or at 100% occupancy through the
end of2012." See SAC~~ 28, 99. Whatever damages Plaintiff did suffer due to the
[* 29]
JFK Hotel v. Hilton Index No. 650502/2013 Page 30 of34
alleged discrimination in favor of other properties cannot be said to have deprived
Plaintiff of the fruits of the Franchise Agreement.
Plaintiffs seventh cause of action is dismissed without prejudice to replead.
C. Tortious Interference with Contract against Hilton
Plaintiff's thirteenth cause of action alleges that Hilton tortiously interfered with
the Loan by providing the Termination Notice to CIBX and US Bank, causing them to
wrongfully accelerate the Loan. Plaintiff argues that Hilton improperly sought benefit its
alleged affiliate, CIBX, and to help its other struggling properties that were paying higher
franchise fees by issuing the Termination Notice and causing the Loan to go into default.
"Tortious interference with contract requires the existence of a valid contract
between the plaintiff and a third party, defendant's knowledge of that contract,
defendant's intentional procurement of the third-party's breach of the contract without
justification, actual breach of the contract, and damages resulting therefrom." Lama
Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 424 (1996).
Plaintiff's claim fails because the Second Amended Complaint does not allege that
Hilton lacked justification in providing notice to US Bank. The Comfort Letter requires
that Hilton as "Licensor[,] shall notify Lender in writing of any default of Licensee under
the Franchise License Agreement." See SAC Ex. 4 at I. C::omplying with contractual
[* 30]
JFK Hotel v. Hilton Index No. 650502/2013 Page 31 of34
obligations does not equate to acting without justification. See Foster v. Churchill, 87
N.Y.2d 744, 750 (1996) ("'[p]rocuring the breach of a contract in the exercise of equal or
superior right is acting with just cause or excuse and is justification for what would
otherwise be an actionable wrong"') (quoting Felson v. Sol Cafe Mfg. Corp., 24 N.Y.2d
682, 687 (1969)). To hold otherwise would require Hilton to choose between breaching
its obligations to US Bank under the Comfort Letter or committing a tort against Plaintiff
by interfering with the Loan.
Therefore, the Comfort Letter conclusively establishes a defense to Plaintiff's
tortious inference claim as a matter of law, an.d Plaintiffs thirteenth cause of action is
dismissed with prejudice.
D. Fraudulent Inducement against Hilton
Plaintiffs fifteenth cause of action asserts that the Hilton Defendants knowingly
misrepresented their relationship to CIBX in certain federally-required disclosure
documents to induce Plaintiff to sign the Comfort Letter. Hilton argues that any fraud
claims were released by the Comfort Letter's express terms. Plaintiff does not dispute
that its fraudulent inducement claim is covered by the wording of the release. Rather,
Plaintiff contends that the release is invalid because it was not fairly and knowingly made.
[* 31]
JFK Hotel v. Hilton
Section 8 of the Comfort Letter (the "Release") states that Plaintiff
Index No. 650502/2013 Page 32 of34
acknowledges that it is aware that it may hereafter discover claims presently unknown or unsuspected, or facts in addition to or different from those which it now knows or believes to be true, with respect to the matters released herein. Nevertheless, it is the intention of [Plaintiff], through this letter agreement, and with the advice of counsel, to fully and finally settle and release all such matters, and all claims relative thereto, which do now exist, may exist or have existed between [Hilton] and [Plaintiff]. [Plaintiff] hereby acknowledges that it has been advised by its legal counsel, [and] understands and acknowledges the significance and consequence of this release ....
See SAC Ex. 4 at 5.
"[A] release may encompass unknown claims, including unknown fraud claims, if
the parties so intend and the agreement is 'fairly and knowingly made."' Centro
Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C. V., 17 N.Y.3d 269, 276 (2011).
"[A] party that releases a fraud claim may later challenge that release as fraudulently
induced ... if it can identify a separate fraud from the subject of the release." Centro
Empresarial Cempresa SA., 17 N.Y.3d at 276. A party may also challenge a release
based upon overreaching or unfair circumstances, such as limited time to investigate or
deliberate. See Johnson v. Lebanese Am. Univ., 84 A.D.3d 427, 430 (1st Dep't 2011).
Here, Plaintiff argues that the release was not fairly and knowingly made because
Hilton failed to disclose its affiliation with CIBX and affirmatively represented that its
affiliates did not engage in providing financing to franchisees. However, Plaintiff's
allegations regarding the release are identical to the underlying fraud alleged in the
[* 32]
JFK Hotel v. Hilton Index No. 650502/2013 Page 33 of34
Second Amended Complaint. See SAC ii 267 ("But for the material omission of the fact
that its franchisor was related to its lender, Plaintiff would not have entered the Loan, the
Mortgage, the Comfort Letter or any other Loan documents"). Therefore, Plaintiff has
failed to plead a fraud separate from the subject of the release as required by New York
law. See Centro Empresarial Cempresa S.A., 17 N.Y.3d at 276.
Plaintiff's fifteenth cause of action is dismissed without prejudice to replead either
a fraud separate from the underlying fraud or unfair circumstances in the Comfort Letter's
execution.
The Court has considered the remaining arguments and finds them unpersuasive.
(Order of the Court appears on the following page.)
[* 33]
JFK Hotel v. Hilton
Accordingly, it is hereby CONCLUSION
Index No. 650502/2013 Page 34 of34
ORDERED that Defendant CIBX' s motion to dismiss the Second Amended
Complaint as asserted against it is granted in part and denied in part, such that the third,
fourth, fifth, and fourteenth causes of action are dismissed with prejudice, the sixth and
fifteenth causes of action are dismissed without prejudice to replead, and the motion to
dismiss the eighth cause of action is denied; and it is further
ORDERED that the Hilton Defendants' motion to dismiss the Second Amended
Complaint as asserted against it is granted in part and denied in part, such that the
thirteenth cause of action is dismissed with prejudice, the seventh and fifteenth causes of
action are dismissed without prejudice to replead, and the motion to dismiss the second
cause of action is denied; and it is further
ORDERED that counsel are directed to appear for a preliminary conference on
April 8, 2014 at 10:00 a.m., 60 Centre St., Room 442, New York, NY 10007. Please see
the Court's Preliminary Conference Order Form, available at'
http://www.nycourts.gov/courts/comdiv/PDFs/PreliminaryConferenceOrderPart3.pdf
This constitutes the decision and order of the court.
Dated: New York, New York
March ( \{ , 2014 ENTER:
Hon. Eileen Bransten, J.S.C.
[* 34]