42-50 21st Street Realty LLC v. First Central Savings Bank
1:20-cv-05370
| E.D.N.Y | Apr 4, 2022Background
- In 2009 FCSB loaned 42-50 21st Street Realty LLC ("21st Street") funds to buy a Long Island City property; 21st Street operated an adult nightclub through an affiliated lessee (21 Group).
- FCSB (via Chief Lending Officer Thomas Stevens) negotiated bespoke loan terms, and the parties agreed to automatic debit/sweep arrangements among accounts (including transfers from 21 Group’s merchant and operating accounts to 21st Street’s mortgage account).
- After a police shutdown of the nightclub in December 2017, 21st Street alleges FCSB sought to make the loan appear non‑performing so it could sell the loan at a premium; 21st Street claims FCSB cancelled the automatic sweeps in early 2018, causing missed mortgage payments.
- FCSB assigned the loan to Watermarq, which accelerated and sought foreclosure based on alleged defaults (including alleged missing financials and missed payments); 21st Street later settled with Watermarq and sued FCSB and Stevens.
- 21st Street asserted claims for fraud, negligent/fraudulent misrepresentation, violation of N.Y. Gen. Bus. Law § 349, breach of the implied covenant of good faith and fair dealing, and breach of contract; defendants moved to dismiss.
- The Court granted the motion in part and denied in part: dismissed fraud, negligent misrepresentation, implied‑covenant, and breach‑of‑contract claims; allowed a limited § 349 claim to proceed (survives only as to alleged practice of terminating authorized automatic payments to manufacture defaults); Stevens was dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Fraud (affirmative misstatements) | FCSB/Stevens misrepresented the loan as current and that automatic payments were being made based on billing statements | Statements are not particularized as fraudulent; billing statements do not show the alleged misrepresentations | Dismissed for failure to plead with Rule 9(b) particularity |
| Fraud (omissions/duty to disclose termination of automatic payments) | FCSB concealed that it had stopped automatic debits (and its intent to sell the loan) | No fiduciary or special‑knowledge duty to disclose; plaintiff could monitor its own accounts and contract limited notice obligations | Dismissed for lack of duty and unreasonable reliance |
| N.Y. Gen. Bus. Law § 349 (consumer‑oriented deceptive practice) | FCSB has a practice of terminating authorized automatic payments to manufacture defaults (consumer‑oriented, materially misleading) | Conduct is a private contract dispute; mortgage/note limit remedies | Partially allowed: § 349 claim survives as to alleged practice of terminating automatic debits (but not billing‑statement allegations) |
| Breach of contract re: transfer/sweep agreements | FCSB breached its promise to effect transfers that would fund mortgage payments | Transfer agreements benefitted 21 Group (not 21st Street); 21st Street lacks contract enforcement rights | Dismissed: 21st Street lacks privity/third‑party enforcement; cannot treat 21 Group and 21st Street as one entity |
| Implied covenant of good faith and fair dealing | FCSB breached by failing to notify of non‑monetary defaults and default interest accrual | Loan documents define notice obligations and displace any implied duty | Dismissed: cannot imply notice obligations inconsistent with contract terms |
| Negligent misrepresentation | FCSB/Stevens negligently withheld material information about defaults | No special or privity‑like relationship; plaintiff is sophisticated and contract defined notice; reliance unreasonable | Dismissed for failure to plead a special relationship and reasonable reliance |
Key Cases Cited
- United States ex rel. Foreman v. AECOM, 19 F.4th 85 (2d Cir. 2021) (permitting judicial notice of documents integral to complaint)
- Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 13 F.4th 247 (2d Cir. 2021) (duty to disclose arises where party has superior knowledge or fiduciary duty)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading requirement; reject conclusory allegations)
- Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (scienter and duty to disclose principles)
- Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168 (2d Cir. 2004) (circumstantial evidence for fraudulent intent)
- Oswego Laborers’ Loc. 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20 (N.Y. 1995) (§ 349 requires consumer‑oriented conduct, not a purely private contract dispute)
- Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (N.Y. 2018) (third‑party contract enforcement principles)
- Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38 (N.Y. 1985) (third‑party beneficiary test)
- Greenberg, Trager & Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565 (N.Y. 2011) (borrower‑lender relationship generally does not create special duty for negligent misrepresentation)
- Vt. Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (N.Y. 2004) (implied covenant cannot override express contract terms)
- TVT Records v. Island Def Jam Music Group, 412 F.3d 82 (2d Cir. 2005) (when separate writings form a single transaction is a factual inquiry)