21106/1994

Action No. 2

-

PHILIP NAROTZKY, FANNY NAROTZKY,ALFRED NAROTZKY and MORRIS HOROWITZ,

Defendants.

Suffolk County Clerk’sINDEX NO.

- against

PLAYBALL AT HAUPPAUGE, INC. andBERNARD GURTMAN,

Plaintiffs,

000894/2000

Action No. 1

TRIAL/IAS PART 20

Nassau County Clerk ’sINDEX NO.:

PLAYBALL AT HAUPPAUGE, INC.,

Additional Defendant on Counterclaim.

FANBE CORP.,

Defendants,

-

FANNY NAROTZKY, BALLPARK ASSOCIATES,L.P. and

- against

-._

PRESENT:HON. IRA B. WARSHAWSKY,

Justice.

BERNARD GURTMAN,

Plaintiff,

yjyQI-: - ,:;;-,\I_

COUNTY OF NASSAU‘. y-., ci.‘C.._.,?&ti.,,3j

- STATE OF NEW YORK

/

SUPREME COURT

I,-

SCANMEMORANDU M

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$1,584,000.00. A portion of the

proceeds of that sale has been distributed equally to Narotzky and Gurtman, and the

remainder is held in escrow by Narotzky ’s counsel, Robinson Brog, subject to the

determination of Action No. 2.

Because Ballpark has sold its real property, is no longer operating, and its sole

asset is a cash deposit in the Robinson Brog escrow account, all that needs to be

determined in Action No. 1 is the relative entitlement of Narotzky and Gurtrnan to the

Ballpark cash account.

Action No. 2 is an action for damages by Narotzky against Gurtman based on

Gurtman’s breach of fiduciary duty. Action No. 2 began as an action by Gurtman against

pendency of Action No. 1, Ballpark

sold its real estate in an arms-length transaction for

50150 partners in Ballpark.

When Action No. 1 was commenced, Ballpark owned real estate in Hauppauge,

New York, improved by a large building that formerly housed indoor sports facilities,

most recently an indoor softball facility. During the

Fanbe. Thus, Narotzky and

Gurtman are effectively

Narotzlcy and Gurtrnan are the sole and equal shareholders of

Fanbe Corp. is a 2% partner of Ballpark.

(‘Narotzky”) and plaintiff Bernard Gurtrnan

(“Gurtman”) are each 49% partners of Ballpark.

Fanbe Corp. The individual parties to these

actions, defendant Fanny Narotzky

Playball at Hauppauge.

THE PARTIES AND THE PROCEDURAL HISTORY

The above captioned Action No. 1 is an action to dissolve a real estate partnership

known as Ballpark Associates, L.P. (hereafter “Ballpark”), and further to dissolve the

corporate general partner of Ballpark,

TRIAJL

This matter proceeded to trial at the direction of the Appellate Division to

determine the damages due Fanny Narotzky (from Action No. 2) considering the lease

and partnership agreement she had with Bernard Gurtman and

DECISION AFTER

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Playball under the lease between Ballpark and

Playball, and the lease was to be a conduit of profits to the Ballpark partners, Narotzky

and Gurtman.

Gurtman ’s motion for reargument and leave to appeal to the Court of Appeals was

denied by the Appellate Division. Thus, what remains in Action No. 2 is an assessment

of Narotzky ’s damages occasioned by Gurtman ’s breach of fiduciary duty, not, it must be

pointed out, by the breach of a lease.

Narotzky/Gurtman partnership, Ballpark. Gurtman had personally

guaranteed the rent and tax obligations of

8,2002.)

The Appellate Division directed that Narotzky ’s damages be determined “in

accordance with the lease and partnership agreement ” between Gurtrnan ’s company

Playball, and the

$94,000.00 was inadequate. The court also

reversed the verdict on Gurtman ’s claim against Narotzky, and ordered that Gurtman ’s

claim against Narotzky be dismissed, and upheld the dismissal of Gurtman ’s claim

against Philip Narotzky. (See the Appellate Division decision of July

Playball was the sole tenant

of Ballpark under a written lease and operated an indoor softball facility at the Ballpark

premises. At the time of trial and for some years prior thereto, Gurtman was the sole

shareholder of Playball.

A jury trial in Suffolk County in December 1999 resulted in dismissal of

Gurtman ’s claim against Philip Narotzky, and verdicts in favor of Fanny Narotzky on her

claim against Gurtman and in favor of Gurtman on his claim against Fanny Narotzky.

Narotzky appealed the verdict and Gurtman cross-appealed.

On appeal, the Appellate Division, Second Department, upheld the finding of

liability on Narotzky ’s claim against Gurtman and remanded for a new trial on damages

indicating that the jury damage award of

Playball at Hauppauge, Inc. (hereafter “Playball ”).

Narotzky, Narotzky ’s husband Al Narotzky, and Narotzky ’s son Philip Narotzky for

damages for breach of fiduciary duty, in which Narotzky counterclaimed against Gurtman

for breach of fiduciary duty. Plaintiffs in Action No. 2 were Gurtman and an entity

known as

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Playball was granted two 5-year renewal options. Upon

exercise of a renewal option, there was an additional 10% increase in rent, plus the 5%

Playball had four equal shareholders, being Narotzky, Gurtman, Philip Narotzky and

Morris Horowitz. Narotzky and Gurtman were “Investing Shareholders ”, while Philip

Narotzky and Morris Horowitz were “Managing Shareholders ”, employed by and

responsible for the day-to-day operations of Playball.

After Ballpark acquired the Hauppauge property, it entered into a net lease with

Playball. The lease ran for six years and provided for annual rent payment that increased

at the rate of 5% annually.

Playball was formed to

lease the Ballpark property and operate an indoor softball facility. Throughout most of

1993

77.) For example, if Ballpark

had $10.00 to distribute, $5.00 would go to each of Narotzky and Gurtman, and then

$4.00 of Narotzky ’s distribution would go to Gurtman to be credited against the loan.

At approximately the same time that Ballpark was formed,

$100,000.00 loan, until the loan was repaid in

full. (See Ballpark Partnership Agreement, Exhibit “D” at

$100,000.00. They

structured the distributions out of Ballpark so that 80% of Narotzky ’s distributions would

be paid to Gurtman in repayment of the

$25,000.00. Gurtman and Narotzky agreed that, in order to equalize their capital

contributions, they would deem that Gurtman had loaned Narotzky

net-

lease basis, property in Hauppauge, New York. Throughout its history, Narotzky and

Gurtman have been the sole principals of Ballpark, each having a 50% interest.

Gurtman contributed $225,000 to Ballpark ’s capital, and Narotzky contributed

PLAYBALL

Ballpark was formed in 1993 as a partnership to acquire and rent out, on a

Because Action No. 1 and Action No. 2 involve common parties and common

issues of law and fact, Supreme Court, Nassau County (O ’Connell, J.), ordered a joint

trial of Action No. 1 and Action No. 2.

BRIEF HISTORY OF BALLPARK AND

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Playball leased from Ballpark through May, 2000. Accordingly, Gurtman ’s guaranty

of Playball ’s rent and tax obligations extended through August, 2000, pursuant to the

Playball by reducing the loan amount.

Following the Buyout Agreement, Gurtman operated Playball, occupying the space

that

$24,000.00 for her share of

12.) Narotzky “virtually ” was

paid

$76,000.00. (See Buyout Agreement at $100,000.00 to

14.)

Gurtman and Narotzky remained equal partners in Ballpark, but with an

adjustment in the “loan” from Gurtman to Narotzky that reduced the same from

“F”at

Playball was in occupancy under the lease, and for

three months thereafter. (See Buyout Agreement, Exhibit

73.) In

the Buyout Agreement, Gurtman personally guaranteed the payments of rent and real

estate taxes that were Playball ’s obligation under the lease. Gurtman ’s guaranty of rent

and taxes was to extend so long as

“F” at Playball was to remain in full force and effect (Buyout Agreement, Exhibit

Playball and became the 100% owner of

Playball.

The Buyout Agreement specifically provided that the lease between Ballpark and

Playball took place pursuant to a written Buyout Agreement which

was the result of negotiation between the parties. A few months later, Gurtman also

acquired the interest of Morris Horowitz in

Playball commenced operations and opened for business in the fall of 1993. Its

first several months were marked by cash flow problems and dissension among its

shareholders. Ultimately, in January, 1994, Gurtman bought out the interests of Narotzky

and of Philip Narotzky in Playball. Gurtman ’s acquisition of Narotzky ’s and Philip

Narotzky ’s interests in

Playball paid the rent and taxes,

there would be a positive cash flow to Ballpark each month that was to be distributed to

the Ballpark partners, Narotzky and Gurtman.

725.)

Because the lease was a net lease, Ballpark ’s only financial obligation was to pay

its mortgage. Under the structure of the lease, so long as

w14.) The lease also contains a waiver of

right to jury trial. (See Lease at

annual increase. (See Lease, Exhibit “E” at

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‘(use and occupancy ” issue, the other major issue argued at trial was

that of pre-decision/judgment interest pursuant to CPLR

that interest in an action for a breach of fiduciary duty is

discretionary with the court, both in rate and duration.

5001 (a) or (c). Gurtman argues

equitable in nature and thus is

Narotzky argues that, though agreeing the action is equitable in nature (breach of

2000-August 2000).

Besides the

1999-May 2000) and no payment

should be due when the premises were vacant May

Playball ending in mid 1994. Thereafter, Gurtman ceased paying any rent in excess of

Ballpark ’s mortgage obligation, which he proceeded to pay on behalf of Ballpark

throughout the duration of the tenancy.

NAROTZKY ’S THEORY OF DAMAGES

Narotzky argues she is entitled to damages for the amount that she would have

received had Gurtman honored his guaranty and his fiduciary obligation to Narotzky, and

made the full rent payments due to Ballpark under the lease.

Narotzky has argued that her damages in Action No. 2 is a straightforward

calculation, taking into account the amount of rent that Gurtman should have paid through

December 1999 (time of trial) and then until August 2000 when the guaranty expired, the

amount of distributions actually made to her early in the lease, the deemed loan owed by

Narotzky to Gurtman, and reduction in that loan based on the distributions that Gurtrnan

actually made to Narotzky.

Gurtman does not entirely disagree, but argues that any amounts due under the

lease ceased when its term ended in June 1999, and Narotzky has failed to establish “use

and occupancy ” of the property after that date (June

Buyout Agreement. Gurtman also took control of Ballpark, directing Ballpark ’s bank to

send all banking statements to Gurtman ’s home. However, even though Gurtman

personally guaranteed Playball ’s rent and tax obligations under the lease, Gurtman caused

distributions to be made to Narotzky for only the first five months that Gurtman operated

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(1988), including the degree of personal

wrongdoing by Gurtman, what other investment opportunities might have been available

to Narotzky, whether Narotzky delayed in bringing an action (the action was brought by

Gurtman), and other fundamental considerations of fairness.

The New York cases cited by Gurtman are not strictly on point, but do lend

support to his general argument that when a court is considering pre-decision interest in

an equitable action, good faith on the part of both sides should be taken into account.

A jury found that Gurtman breached his fiduciary duty to Fanny Narotzky. How

does that breach translate into damages ? The Appellate Division clearly stated that a re-

trial was on the issue of “damages only ” in accordance with the lease and partnership

& Whinney, 484 U.S. 169

pre-

decision interest. After determining the amount due Narotzky, the court will determine

what interest, if any, is appropriate. The court will consider the guidelines set forth in

Ostemech v Ernst

Oshrin, Supreme Court, Suffolk County, in response to a

motion requesting, among other things, that “Bernard Gurtman [to] continue making

rental payments as per Playball ’s lease and the parties ’ January 29, 1994 Buyout

Agreement until a further Order of the Court ” denied said motion.Thus, Gurtman argues

that even if he is now found to owe said rental amounts as damages for breach of

fiduciary duty, he should not be required to pay interest on an amount that a court of

concurrent jurisdiction found he did not have to pay at that time.

The court will read CPLR 5001(a) literally. There is no issue this is an equitable

action and that section 5001(a) clearly gives the court discretion in an award of

F.2d 77, 87 (2d Cir. 1980). None of these

are on point when carefully read.

As to the non-payment of the rent, Gurtman points out that in 1998 (this case

actually began in 1994) Justice

& Co. Ins., 637 Blyth, Eastman. Dillon

F.2d 474 (2d Cir. 1973);

Rolf v

(Bar&r. S.D.N.Y. 2000); Spector v Mermelstein, 485

fiduciary duty), interest is mandatory when the only relief sought is compensatory in

nature. The cases Narotzky cites supporting his point are all Federal. (In re Kovler, 253

B.R. 592

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74)

1,2000, three months after the tenant

had vacated and including the period that Gurtman ’s personal guaranty (Exhibit G,

$206,373.00. He thus submits proposed values

(Exhibit L) for those periods ending on August 3

$196,546.00 and 2000-2001 would equal

$196,546.00. Each year thereafter the rent

would increase by 5% over the prior year ’s rent.Thus, the rent for 1999-2000 would be

($178,679.00) =

Playball (Gurtman), had the

option to renew for an additional term. The first year of the renewal would be 110% of

the last year of payment

$478,835.32.

Narotzky argues that pursuant to the lease, the tenant,

$323,43 1.68. (Again, this does not include 1993.) The amount due Ballpark as of this

point in time would be

$802,267.00. (This does

not include 1993 because no distributions were anticipated in that year.) During that

same period, the mortgage payments paid by Gurtman on behalf of Ballpark were

finds

from its reading of the above referenced documents that it is to determine what monies

should have been available to Fanny Narotzky if Gurtman had paid the rent to the owners

of Ballpark (of which he was one) after subtracting the payments made by Gurtman on

behalf of Ballpark. The court believes it has no choice in this matter, not being privy to

the manner in which the jury answered the interrogatories submitted to them by the trial

court.

The evidence at trial was directed at Gurtman ’s failure to appoint an accountant, as

well as failing to pay rent to Ballpark. It is not clear specifically what or how damages

would flow from Gurtman ’s acts in breaching his “fiduciary duty ”. However, it is logical

to infer that since Gurtman, as tenant, did not pay himself or Narotzky the rent pursuant to

the lease, but rather paid the obligation the tenant had under the lease as well as the

mortgage and taxes owed by Ballpark (the partnership), the damage to Narotzky would be

her share of the rent that went unpaid.

These amounts are fairly straight forward until the lease term expired on June 29,

1999. As of that date the rent that would have been paid was

agreement. Thus, court is not to retry the issue of a fiduciary breach. The court

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Playball with Ballpark?Yes.It continued in operation without any change because we were inlitigation trying to solve this problem.

From this Narotzky wishes the court to infer a lease renewal.

There are certain things that are very clear to this court about these parties. If there

was a way for one or the other of these neighbors and obviously once friends to get an

edge on the other once the relationship started to break down in 1994, they took it. It is

obvious to the court from the decisions it has read, the frustration of Justice Oshrin in

handling this case, a matter that was actually first filed in 1994.The parties treat the

Playball renew its lease with Ballpark when the six year leaseterm expired?

Q -A.

Did Q -

A.

1,200O. In fact, counsel argues it is the burden of Narotzky

to prove use and occupancy and they have proven nothing. He also points out that the

guaranty guarantees the payment of rent not use and occupancy. Thus, Gurtman owes

nothing to Narotzky after June 30, 1999.

Narotzky counters and points out that Gurtman had taken over control of Ballpark

by this time and he was thus in position to renew the lease (with himself), but chose not to

do so. However, at the first trial in Suffolk County, Gurtman testified that:

Playball was a tenant in default since

approximately the middle of 1994. Thus, he argues, neither the lease nor any of its terms

should be used by the court in determining the use and occupancy value of the premises

from July 1, 1999 to August 3

$34,395.71.

Gurtman ’s counsel argues that it cannot be presumed that the lease was renewed as

of the end of its term in June 1999 in that

1,200O would be

$98,273.45; and the amount from July 1,

2000 to August 3

30,200O would be 1,200O to June

$98,273.45; the amount

from January

Playball had given notice it was vacating the premises.)

The period from July 1, 1999 to December 3 1, 1999 would be

covered. (Gurtman had personally guaranteed Playball ’s obligation on the rent including

a period of three months after

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$151,983.82.

As pointed out earlier, in an order dated November 6, 1998, on a motion filed on

September 26, 1997, the court denied Narotzky ’s application to compel Gurtman to

$41,129.05 equals $193,112.87 less -

$41,129.05

Balance due Narotzky

-

$82,258.11

Credit to Gurtrnan

8,343.OOTotal

- $ $10,774.28

Miscellaneous expenses

$63,140.50Insurance

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1,2000, Gurtman expended the following sums on the property:

Mortgage and taxes

$193,112.87 due Narotzky.

After August 3

$79,383.00 equals$272,495.87 less $79,383.00. $76,000.00 equaling -

$3,383.00 and the payback of the loan to Narotzky as part of the initial

investment

$272,495.87.

This amount must then be reduced by distributions made by Gurtman to Narotzky

(stipulated) of

$544,99 1.75. Narotzky ’s 50% share would equal

$66,156.43 equaling$478,835.32 plus

$66,156.43.

The total amount due Ballpark equals

$127,412.48. Thus, the amount owed by Gurtman to Ballpark from July 1, 1999 to

August 3 1, 2000 equals

-

$193,568.91.

Said amount shall be reduced by the mortgage paid by Gurtman during that period

1,200O equals

$178,679.00 per fiscal year. Further, for our purposes, the term

“rent ” in the personal guaranty of Gurtman will be equivalent to “use and occupancy ”,

and Gurtman will be responsible for its payment.

Thus, the amount due from July 1, 1999 to August 3

1,200O will be fixed at the amount of rent that was being paid as

of June, 1999, equaling

1, 1999 to August 3

Playball was essentially a

“month to month ” tenant after June, 1999. “Use and occupancy ” of the premises from

July

matter as one in equity when it suits them and as the breach of a lease when that would

favor their respective positions.

The court finds that this lease was never renewed, that

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way.to determine whether the rent was excessive. However,

there is no indication that Gurtman mismanaged the business or did anything that

prevented the business from being a success. It was only his own out of pocket

investments that kept the business going. It is uncontroverted that Narotzky, though

within her legal rights and despite a minimal financial investment, adamantly refused to

re-negotiate a lease that appeared inappropriate in only a short period of time after it had

Playball stayed, the more valuable became the property.

But, of course, you cannot spend or invest the increase in value of property.

Gurtman argues that the rent was far in excess of what should have been set and

the Narotzkys refused to permit a reduction once their son was no longer part of the

business. The court has no

$177,719.10 owed to Narotzky and it is to that amount that interest will be

applied, if it is appropriate to apply interest.

It is clear to the court that Gurtman used large amounts of his own money to keep

his corporation, Playball, alive so that it could pay the real estate taxes it was responsible

for under the lease and pay the mortgage which was the responsibility of Ballpark.This

was not entirely a selfless act. It was clearly to his advantage because he, along with

Fanny Narotzky, was a personal guarantor on the mortgage. This action also inured to the

benefit of Narotzky. The longer

-

$355,438.20 (owed to Ballpark), 50% of said

amount

- he is incorrect.

A year earlier, July 1996, Justice Oshrin denied Fanny Narotzky ’s request for a

temporary receiver and/or an independent accountant. Considering that order and the

circumstances of this case brought out on trial, pursuant to the court ’s discretion, CPLR

5001(a), no interest will be ordered from that date forward on monies that accumulated

(were owed) after that date, September 26, 1997.

As to monies that the court finds were owed prior to that date (January 1, 1994 to

September 30, 1997) they would amount to

continue making payments pursuant to the lease and the additional agreement of January

29, 1994. Narotzky ’s counsel argues this was merely the denial of a summary judgment

motion

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1,983.82.

$25,000.00 investment, will impose interest at a rate of

3% per year from October 1, 1997 to the date of this decision compounded annually. Said

amount is to be calculated by the Clerk of the County and added to the amount the court

has decided is owed in damages of $15

$101,719.10. It is upon this amount that the court,

considering the equities involved and the good faith of the parties, the personal

investment of Gurtman in this venture above and beyond the initial investment and the

return Narotzky has made on her

$76,000.00 to determine what monies were due to Narotzky by September

1997, resulting in an amount of

$177,719.10 must be

reduced by

$76,000.00 which we have deducted as a credit to Gurtman

would have been recovered by September 1997. The amount of

1,1994 to

September 27, 1997, the formula that was established for the repayment of Gurtman ’s

loan to Narotzky (to compensate for his larger investment of cash and her comparatively

smaller investment) would have taken effect and 80% of her 50% share would have been

paid to Gurtman. Thus, the

$177,719.10. However, during the period of January

& Y), and inappropriately claimed a larger tax deduction than he was entitled

for Playball ’s losses on his 1994 tax return.

Though defense counsel does not demonstrate in any way that his client Fanny

Narotzky acted in good faith, he points out the obvious, that she was denied the use and

benefit of monies that an award of pre-decision interest was designed to compensate.

As pointed out earlier, as of the end of September 1997, Fanny Narotzky would

have been owed

started.

Though insistent that pre-decision interest is mandatory, Narotzky argues in the

alternative that Gurtman has not acted in good faith. She points out that a jury determined

he breached his fiduciary duty (the same jury also found she did as well), he took over

control of Ballpark, he failed to engage an accountant to operate Ballpark and collect the

rent as required by the Buyout Agreement, he hid the rental shortfall from Narotzky

(Exhibits X

200305 JUN -13-

2,2003

setoffs. There is also insufficient proof to

conclude that any delay in this case initially reaching a trial was due to Gurtman. In fact,

Gurtman as pointed out, initiated the first action in Suffolk County nine years ago. The

inferences drawn from Justice Oshrin ’s decision from July 1996 is that both sides had

been less than cooperative in moving the case forward. The fact that the case did not go

to trial until nearly three years later is some evidence of such a conclusion. The request

for attorney fees is denied.

Dated: June

$9,622.05 for having paid one-half of the transcript and record on

appeal.

ATTORNEY FEES

Initially, there is no legal basis for attorney fees. This is not an action under a

lease. It is an action in equity with the damages being calculated by the rent not

forwarded to Narotzky, less certain substantial

evident&y basis to give Narotzky credit for the credit given to the

buyer of the property at closing for roof replacement or repair. There is no indication that

this was the type of repair envisioned by the lease for which Gurtman would have been

personally responsible.

COSTS

The Appellate Division awarded Narotzky “costs” as a result of the appeal of the

Suffolk jury verdict. This matter is directed to be calculated by the Clerk of the Court,

crediting Gurtman

ROOF CREDIT

There is no