Richter Restrepo, PLLC is pleased to announce that the firm’s attorneys, Reginald Richter, Esq., Juan C. Restrepo, Esq. and junior associate, Eoin O’Mahony, Esq., have achieved a precedent setting result for Harlem nonprofit Community Association of the East Harlem Triangle, Inc. (“CAEHT”) in its dispute with Abyssinian Development Corporation (“ADC”) regarding the sale of the site of the Pathmark supermarket located on 125th St. between Third and Lexington Avenues in East Harlem. The property was sold to Extell Development in 2014 for $39 million. CAEHT and ADC each held a 50% interest in EHAT Corp., the general partner of EHAT, LP, which owned the property.

In the meticulously drafted complaint, CAEHT alleges that defendants, Rev. Calvin O. Butts, III, James Howard, ADC, Charles Simpson and his law firm Windels Marx Lane & Mittendorf, and Victor Sozio and his real estate brokerage firm Ariel Property Advisors, LLC engaged in a fraudulent scheme to steer the property to Extell for $39 million even though another bidder – a joint venture backed by prominent African American real estate developer R. Donahue Peebles – had offered to purchase the property for $42 million, $3 million more than Extell ultimately paid to acquire the property in 2014. CAEHT alleges in the complaint that the defendants conspired to fraudulently conceal the higher offer from EHAT Corp.’s board of directors. The complaint sets forth 58 causes of action against the defendants, among them fraud, breach of fiduciary duty, aiding and abetting liability and civil conspiracy. In its decision, the Court allowed 52 of the 58 causes of action in CAEHT’s complaint to proceed against the defendants.

Three separate law firms represent the defendants. The firms filed extensive motions in which they argued that the Court should dismiss all of CAEHT’s claims against the defendants. Counsel for Victor Sozio and Ariel Property Advisors, LLC even went so far as to request that the Court sanction Richter Restrepo's attorneys Reginald Richter, Esq. and Juan Restrepo, Esq. for filing what they contended to be frivolous and meritless claims against their clients.

The Court’s decision establishes new precedent under New York law with respect to the application of the so-called “out of pocket rule” to fraud cases involving real estate transactions. In its decision, the Court notes that it “has not located any cases involving a real estate seller fraudulently induced to part with its property at a lower price due to the concealment of a better offer” before ruling in CAEHT’s favor on the issue by citing analogous precedent in the context of the sale of corporate stock.

The “out-of-pocket rule” is a defense that restricts a plaintiff’s recovery in fraud cases to actual, non-speculative economic loss. Under the rule, if a plaintiff is unable to sufficiently demonstrate actual economic loss, the plaintiff cannot prove the required element of damages, and the fraud claim must be dismissed. The “out-of-pocket” rule is intended to prevent fraud claims based on inherently speculative damages such as lost profits and lost business opportunities. All of the defendants in the case argued that the Court was required to dismiss CAEHT’s fraud claims based upon the “out-of-pocket rule”. Richter Restrepo’s attorneys were able to convince the Court that the complaint had sufficiently alleged concrete, non-speculative damages and that, as a result, CAEHT’s fraud claims should not be dismissed based upon the “out-of-pocket rule”. As a consequence of the Court’s decision, CAEHT may seek to recover either (i) approximately $4.25 million (the difference in sale price plus disgorged legal and broker fees), or (ii) the difference between the fair market value of the property at the time the offer was made and the purchase price actually paid (plus disgorged legal and broker fees), whichever is greater. Because of the Court’s decision, CAEHT can now investigate the facts surrounding the sale of the Pathmark site by obtaining all relevant documents and communications, and deposing defendants and other witnesses under oath. To learn more about this remarkable case, read the Court’s opinion by clicking here

Richter Restrepo, PLLC is a community development, real estate and construction law firm. We represent nonprofits, transitional and supportive housing organizations, churches, developers, owners and construction contractors in connection with the acquisition, financing, management, construction and development of real property. We also represent these organizations in real property, joint venture and construction related litigation disputes. We are passionate about building communities and delivering value to our clients. If you need legal representation or advice, please call us at (347) 745-0375 for a free consultation.

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Published: 07/01/2022