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Case 1:12-cv-08551-LLS Document 28 Filed 04/26/13 Page 1 of 12

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

CORNWALL MANAGEMENT LTD and OLEG 12 CIV 08551 (LLS)

SOLOVIEV a/k/a OLEG V ALENTINOVICH

SOLOVIEV,


Plaintiffs,

-against-

THOR UNITED CORP. a/k/a THOR UNITED
CORPORATION, JOHN DOE THOR
ENTITIES, ATLANT CAPITAL HOLDINGS,
LLC, OLEG BATRACHENKO a/k/a
O.V.BATRACHENKOV, PETER KAMBOLIN,
NORTH 3RD DEVELOPMENT, LLC, and
ABRAHAM BENNUN,

Defendants.

REPLY MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS

ABRAHAM BENNUN'S AND NORTH 3RD DEVELOPMENT, LLC'S


MOTION TO DISMISS THE AMENDED COMPLAINT


OLSHAN FROME WOLOSKY LLP
Attorneys for Defendants
Abraham Bennun and
North 3rd Development, LLC
Park Avenue Tower
65 East 55th Street
New York, New York 10022
(212) 451-2300

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Defendants North 3rd Development and Abraham Bennun, by their attorneys, submit this

reply memorandum of law in support of their motion to dismiss the Amended Complaint.!

1.

THE FRAUD CLAIMS SHOULD BE DISMISSED

A.

The Fraud Claim Against North 3rd Development Should Be Dismissed

Plaintiffs' opposition memorandum confirms that the claims against North 3rd

Development should be dismissed. Both the Amended Complaint and Plaintiffs' opposition

brief states just two facts about North 3rd Development: its principal is Abraham Bennun, and it

purchased the Williamsburg Property. These facts, of course, are not enough to sustain a claim

for fraud against North 3rd Development, which requires the existence of some false

representation or omission. See Lerner v. Fleet Bank, N.A., 459 F.3d 273,291 (2d Cir. 2006).

The Amended Complaint alleges none. Indeed, Plaintiffs concede that they never met or

communicated with North 3rd Development, and that North 3rd Development was fornled in

October 2010 - months or years after the alleged fraud took place.

Rather than address these glaring deficiencies, Plaintiffs instead make nefarious-sounding

assertions that are demonstrably false. For example, Plaintiffs claim that North 3rd Development

purchased the Williamsburg Property from a "straw buyer intermediary," North 3rd Acquisition.

(PI. Mem. at 21). However, elsewhere, Plaintiffs concede that North 3rd Acquisition has no

affiliation with North 3rd Development, Bennun, or any of the other defendants. In fact, North

3rd Acquisition is owned by SL Green Realty Corp., a non-party that is not alleged to be

affiliated with any of the defendants in this action - facts that Plaintiffs similarly do not dispute.

Plaintiffs further attempt to drum up suspicion by asserting that North 3rd Development

acquired the Williamsburg Property for "only" $3 million. (PI. Mem. at 13). However, Plaintiffs

1 Capitalized tenus herein have the meanings set forth in North 3rd Development's and Bennun's opening
memorandum oflaw. (Dkt. No. 11).

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concede that the Property was in fact sold to an unaffiliated entity for more than $20 million,

which then sold only the less-valuable, partially-built residential portions to North 3rd

Development for $3 million, keeping the completed commercial portions for itself. (See Am.

Compi. ~~ 91,95). The mere fact that North 3rd Development is the current owner ofthe

Property does not render it liable for a fraud that occurred long before it was formed, and in

which it could have played no part. Accordingly, the claims against North 3rd Development

must be dismissed.

B.

The Fraud Claim Against Bennun Should Be Dismissed

Plaintiffs' fraud theory as to Bennun is that, when entering into the 2010 Arrangement,

the Thor Defendants knew that they were going to "short sell" the Williamsburg Property, and

that Bennun, as the Thor Defendants' attorney, knew of his clients' intent and is liable for his

failure (in violation of the attorney-client privilege) to disclose that information to Plaintiffs.

Plaintiffs claim that, as a result of this fraud, they forestalled litigation against the Thor

Defendants for the approximately three-and-a-half months between signing the 2010

Arrangement and the sale ofthe Williamsburg Property. (See PI. Mem. at 25).

First, Plaintiffs short delay in commencing suit against the Thor Defendants is

insufficient as a matter of law to satisfy the element of reliance.2 Plaintiff do not allege that they

advanced new funds or otherwise did anything differently in this short period. Although

Plaintiffs assert that the issue of reliance is normally too fact specific to be determined on a

motion to dismiss, they offer no factual issues to be resolved. Contrary to Plaintiffs' conclusory

2 To the extent that Plaintiffs suggest that they abated the filing of any claim against the Williamsburg Property, any
such notion must be rejected. Plaintiffs never had any agreement with the Property - the sole agreements at issue
here were between Plaintiffs and the Thor Defendants. Moreover, any attempt to recover from the Property would
be fruitless, as the lender has a first priority mortgage well in excess ofthe amounts sought to be recovered by
Plaintiffs.

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assertions, the Court can determine as a matter of law that a short and non-prejudicial delay in

bringing litigation does not constitute reliance to support a claim for fraud.

Plaintiffs' reliance theory is not the only aspect of their claim that is inherently

nonsensical. For example, Plaintiffs do not explain how, in light of the fact that a short sale

requires the consent of the lender3 (in this case, MB Financial Bank N.A., a non-party that is not

alleged to be affiliated with any of the defendants), the Thor Defendants could possibly have

planned to or known that they would short sell the Williamsburg Property. Nor do Plaintiffs

explain why the Thor Defendants would want, let alone plan, to short sell the Williamsburg

Property: a short sale results in no profit to the seller, who is still liable to the lender for the

deficiency. See 2 Law of Real Estate Financing § 12:10. Indeed, a seller would not resort to a

short sale unless it was in, or about to be, in default ofthe mortgage. See id. Thus, if the Thor

Defendants had not short sold the Williamsburg Property, they would have instead proceeded to

foreclosure, resulting in the same consequence for Plaintiffs.

If the Thor Defendants had no intent to short sell the Williamsburg Property, then

certainly Bennun could not have known of any such intent and, of course, Bennun cannot be

liable for his failure to disclose what he did not know.

Furthermore, Plaintiffs offer no plausible motive for Bennun to defraud Plaintiffs.

Plaintiffs allege that Bennun "had the financial motive to paint a far rosier financial picture than

actually existed in order to induce the plaintiffs to stay litigation." (PI. Mem. at 23). However,

the litigation to which Plaintiffs refer is the suit to recover the loans due under the 2007

3 "A real estate short sale is a transaction in which the mortgagor, with the consent ofthe mortgagee, sells the real
property to a third party for a price that results in the mortgagee receiving less than the amount due it, i.e., a
deficiency." In re Roberts, 09-52155, 2011 WL 2118857, at n. 2 (Bankr. D. Conn. May 25,2011); 2 Law ofReal
Estate Financing § 12: 10 ("Under the short-sale procedure, the mortgagor secures the agreement ofthe mortgagee to
release the mortgage upon a bona fide sale to a third party for an agreed upon price below the mortgage loan
balance.").

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Case 1:12-cv-08551-LLS Document 28 Filed 04/26/13 Page 5 of 12

Contracts. Bennun was not a party to the 2007 Contracts, and the litigation that was ultimately

commenced was against the Thor Defendants in Russia, not against Bennun. (See Am. Compi.

~~ 52, 72). Bennun could not possibly have had a motive to forestall litigation that had nothing

to do with him. Plaintiffs also assert that Bennun had "a desire to avoid repaying the loans used

to purchase the Property. (PI. Mem. at 24). However, the loans were made pursuant to the 2007

Contracts, to which Bennun was not a party.

These are far from the only deficiencies in the pleading. As with North 3rd

Development, the pleading is devoid of a single allegation that Bennun ever made a false

representation to Plaintiffs. Although Plaintiffs point to eight specific "facts" that are

purportedly alleged as to Bennun, none of these identifies a single false statement or omission.4

(PI. Mem. at 7). Plaintiffs instead allege that Bennun acted as the attorney to the Thor

Defendants and purportedly drafted the 2010 Arrangement (a claim that is demonstrably false, as

that agreement is in Russian, a language that Bennun does not speak). However, these

allegations are totally irrelevant: to state a claim for fraud, Plaintiffs must allege a false

"representation of material fact." Lerner, 459 F.3d at 291. They have not done so, nor can they,

because Plaintiffs concede that they never spoke to or met with BemlUn.

As an alternative theory, Plaintiffs seek to hold Bennun liable for fraudulent concealment,

asserting that he failed to disclose his clients' purported intent to short sell the Williamsburg

Property. However, there is no basis for Plaintiffs' assertion that Bennun had a duty to violate

the attorney-client privilege to disclose his clients' purported intent to Plaintiffs, whom he had

4 To the extent that Plaintiffs suggest that the false statement was made in the 2010 Arrangement, that argument
would not support a claim for fraud, because Plaintiffs do not dispute that Bennun is not a party to the 2010
Arrangement. Moreover, "New York law states clearly that an allegation that the defendant made the agreement
knowing that he or she would not abide by it says nothing which is not legally embraced by a cause of action for
breach of contract." Vista Co. v. Columbia Pictures Indus., Inc., 725 F. Supp. 1286, 1294 (S.D.N.Y. 1989). Of
course, no claim for breach of contract can lie against Bennun, who is not a party to the 2010 Arrangement, and
Plaintiffs cannot hold liable Bennun for "fraud" based on the Thor Defendants' breach of the 2010 Arrangement.

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Case 1:12-cv-08551-LLS Document 28 Filed 04/26/13 Page 6 of 12

never met or spoken to. Although Plaintiffs assert that Bennun had a duty to disclose based on

his "superior knowledge," this duty "only arises between two parties to a business transaction."

WestRM-W RiskMarkets, Ltd. v. XL Reinsurance Am., Inc., 02 CIV. 7344 (MOC), 2006 WL

2034627, at *10 (S.D.N.Y. July 19,2006). Here, Plaintiffs concede that Bennun was not a party

to the 2007 Contracts, the 2010 Arrangement, or any other business transaction with Plaintiffs.

Moreover, any attempt to impose liability on Bennun as a third party also fails, because "a third­

party duty to disclose has only been found where the third-party to the transaction has had some

direct communication with the fraud victim regarding the fraudulent transaction." Id.

Plaintiffs make no attempt to distinguish WestRM, and fail to cite a single case in which a

duty to disclose based on "superior knowledge" was imposed on a non-party to a business

transaction. Instead, Plaintiffs make a host of irrelevant factual allegations, essentially asserting

that Bennun's purported knowledge alone created a duty to disclose. This novel contention,

however, is not the law. Moreover, Plaintiffs make no attempt to explain how, where, or when

Bennun, who never met or spoke with Plaintiffs, was supposed to inform them of his client's

purported intention with respect to the 2010 Arrangement.

Even more disturbingly, Plaintiffs appear unfazed by the fact that the proffered disclosure

obligation would have required Bennun to violate the attorney-client privilege. Indeed, Plaintiffs

go one step further, asserting that attorneys have a general "duty to disclose [their clients']

fraud." (PI. Mem. at 19). This assertion flies in the face of centuries of legal jurisprudence.

Contrary to Plaintiffs' outlandish assertion, the law is clear that "professionals such as lawyers

and accountants do not have a duty to 'blow the whistle' on their clients. Calcutti v. SBU, Inc.,

273 F. Supp. 2d 488,494 (S.D.N.Y. 2003); Morin v. Trupin, 711 F. Supp. 97, 113 (S.D.N.Y.

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Case 1:12-cv-08551-LLS Document 28 Filed 04/26/13 Page 7 of 12

1989) ("neither lawyers nor accountants are required to tattle on their clients in the absence of

some duty to disclose.") (citation omitted).

Plaintiffs' attempt to use the crime-fraud doctrine to create a duty to disclose is

misguided. This doctrine cannot create a duty by attorneys to report crimes; rather, it's purpose

is merely to ensure that a would-be criminal is not inadvertently aided by the law in carrying out

his crime. See United States v. Jacobs, 117 F.3d 82,87 (2d Cir. 1997). Similarly, the ethics

rules and case law cited by Plaintiffs merely prohibit a lawyer from engaging in dishonest or

fraudulent conduct, or from assisting his client from engaging in illegal or fraudulent activity.

(See PI. Mem. at 20). None of those authorities create an affirmative duty to disclose, nor could

they without stripping the attorney-client privilege of any force or meaning.

Finally, Bennun's alleged failure to disclose his clients' intent is not actionable, because a

fraud claim can only be based on a misrepresentation or omission of fact, or in some cases, a

present intention not to perform. (See Dkt. No. 11 at 18-19). Although Plaintiffs claim that

Bennun had a "fraudulent, preconceived, and undisclosed intention of not performing under the

2010 Arrangement" (PI. Mem. at 21), Bennun is not a party to the 2010 Arrangement, and

therefore could not have had a preconceived intent to perfoml a promise that he never made.

C.

Plaintiffs' Allegations Against Unspecified "Defendants"
Do Not State a Claim Against Bennun or North 3rd Development

Aside from those described above, the Amended Complaint contains no further

allegations against Bennun or North 3rd Development specifically; rather, it repeatedly

references unspecified "defendants." Although Plaintiffs concede that such allegations do not

satisfy the requirements of Fed. R. Civ. P. 9(b), they argue that a different standard applies here,

because the defendants are all "insiders" or "affiliates." (PI. Mem. at 15). However, the

proposition that fraudulent representations need not be attributed to specific defendants when

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Case 1:12-cv-08551-LLS Document 28 Filed 04/26/13 Page 8 of 12

they are insiders or affiliates applies only in the securities fraud context, not to claims of

common law fraud.

Specifically, a "relaxed" pleading standard has been applied in cases where a plaintiff

alleged that an offering memorandum or similar document contained false statements. In such

cases, courts have rightly found it appropriate to permit the plaintiff to plead fraud against

"defendants" generally, because "misstatements or omissions in documents [such as annual

reports and financial reports] ... may be presumed to entail the collective actions of the directors

[and] officers ...." Somerville v. Major Exploration, Inc., 576 F. Supp. 902, 911 (S.D.N.Y.

1983); see also Luce v. Edelstein, 802 F.2d 49,55 (2d Cir. 1986) (complaint's reference to

unspecified "defendants" was insufficient to state a claim; sole exception was with respect to

allegations that an offering memorandum contained false representations). All of the cases cited

by Plaintiffs confirm that this standard is not applied outside of the securities fraud context.

Here, unlike in cases involving false S.E.C. filings or offering statements, there is no

basis to lump Bennun or North 3rd Development into the general allegations concerning the

2010 Arrangement or any purportedly false statements made in connection therewith. Moreover,

Plaintiffs' attempt to characterize Bennun as an "insider" seriously misunderstands the meaning

of that term. An "insider" in this context refers to a corporate insider - a term of art unique to

securities fraud cases. In any event, in Stevens v. Equidyne Extractive Indus. 1980, Petro/Coal

Program 1, 694 F. Supp. 1057, 1062 (S.D.N.Y. 1988), the chief case relied on by Plaintiffs, the

court expressly held that because the attorney "in drafting the offering memorandum was acting

not on [his] own behalf but on that of the [other] defendants, [he was] not a corporate insider and

therefore the relaxed standards of pleading with respect to who said what do not apply." Here,

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too, Bennun is alleged to have acted as counsel to the Thor Defendants and drafter of the relevant

agreements. He is not, therefore, exempt from the protections of Rule 9(b).

D.

Plaintiffs' Reliance on "Badges of Fraud" Is Misguided and Irrelevant

Plaintiffs also make the bizarre argument that they have somehow satisfied the pleading

requirements of Rule 9(b) by pleading the existence of "badges of fraud." However, Plaintiffs

seriously misunderstand this legal concept. First, badges of fraud have no application in a case

for common law fraud. Rather, they are used exclusively in the fraudulent conveyance context.

See In re Sharp Int'l Corp., 403 F.3d 43,56 (2d Cir. 2005) (badges of fraud are "circumstances

so commonly associated with fraudulent transfers that their presence gives rise to an inference of

intent"). Moreover, the existence of "badges of fraud" cannot remedy the Plaintiffs' utter failure

to identify a single misrepresentation or omission of fact. Rather, "badges of fraud" constitute

circumstantial evidence that courts may use to infer a different element - intent. See, e.g.,

Scantek Med., Inc. v. Sabella, 583 F. Supp. 2d 477,497 (S.D.N.Y. 2008).5

II.

THE ALTER EGO CLAIMS SHOULD ALSO BE DISMISSED

Plaintiffs' claim to pierce the corporate veil belies their true intent in bringing this

lawsuit: to find a deep pocket to make liable for the uncollectable judgments they have against

the Thor Defendants. Plaintiffs' attempt, however, to render North 3rd Development and

Bennun liable for the Thor Defendants' obligations is unsupported by law or fact.

First, Plaintiffs concede that, in order to pierce the corporate veil, they must establish

"complete domination of the corporation." (PI. Mem. at 27). In support of their efforts to treat

Bennun and North 3rd Development as one, Plaintiffs plead a single fact: that Bennun is North

5 Plaintiffs cite only one case in support of their argument that the presence of "badges of fraud" satisfies the Rule
9(b) specificity requirement, Sullivan v. Kodsi, 373 F. Supp. 2d 302 (S.D.N.Y. 2005). However, that case similarly
deals with fraudulent conveyances and not common law fraud. Moreover, in that case, the "badges of fraud" were
used to infer intent, not to eviscerate the requirement that a plaintiff plead a false misrepresentation or omission.

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3rd Development's sole owner. Not a single one of the ten factors that courts consider when

determining whether complete domination exists is pled: there is no allegation that Bennun

disregarded the corporate form, failed to keep adequate books and records, failed to adequately

capitalize North 3rd Development, commingled funds, etc. See Arctic Ocean Int'l, Ltd. v. High

Seas Shipping Ltd., 622 F. Supp. 2d 46,53 (S.D.N.Y. 2009). The mere fact that North 3rd

Development is a single-member entity is irrelevant. See, e.g., Long v. AT & T Info. Sys., Inc.,

733 F. Supp. 188,207 (S.D.N.Y. 1990) ("the relationship between a parent corporation and its

wholly-owned subsidiary is insufficient in itself to pierce the corporate veil.").

Similarly, in support of their attempt to attribute the actions of the Thor Companies to

Bennun or North 3rd Development, Plaintiffs allege: (1) that North 3rd Development shares

office space with Thor USA; (2) that there is an overlap in ownership between North 3rd

Development and the Thor Companies because Bennun has at all times had a direct or indirect

ownership interest in the Williamsburg Property; and (3) that Bennun is employed by Thor

Capital and Thor Realty, allegedly in Moscow, Russia. (Pl. Mem. at 28).6

However, "courts routinely refuse to pierce the corporate veil based on allegations

limited to the existence of shared office space or overlapping management .... " Spagnola v.

Chubb Corp., 264 F.R.D. 76, 87 (S.D.N.Y. 2010); Capmark Fin. Grp. Inc. v. Goldman Sachs

Credit Partners L.P., 11 CIV. 7511,2013 WL 1420243, at *13 (S.D.N.Y. Apr. 9,2013) ("That a

subsidiary shares employees, officers, and directors with a parent does not permit the corporate

form to be disregarded. Moreover, that Bennun allegedly had a direct or indirect interest in the

6 These allegations are demonstrably false. North 3rd Development does not have offices at 551 Fifth Avenue; its
offices are on West 42nd Street. Moreover, Bennun has never been employed by any company in Russia; he resides
in New York. Plaintiffs do not allege that the Thor Defendants or North 3rd Development disregarded corporate
formalities, were inadequately capitalized, intermingled funds, failed to use discretion, did not have arms' length
dealings, were not treated as independent profit centers, paid or guaranteed each others' debts, or intermingled
funds.

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Williamsburg Property has no bearing on who the owners or managers of these entities were, and

does not support the conclusion that there is an overlap in management. Similarly, the mere fact

that Bennun allegedly is employed by two non-party entities with the name "Thor" in the title ­

entities that Plaintiff has never alleged are affiliated with the other defendants - cannot somehow

make Bennun liable for the obligations of the Thor Companies, particularly given that Bennun is

alleged to be a mere employee of those companies, and not in any control position.

Second, as the Second Circuit has made clear, "the element of domination and control [is

not] sufficient of itself to justify the piercing of a corporate veil." Freeman v. Complex

Computing Co., Inc., 119 F.3d 1044, 1053 (2d Cir. 1997). Rather, Plaintiffs must demonstrate

that "such domination was used to commit a fraud or wrong." Am. Fuel Corp. v. Utah Energy

Dev. Co., Inc., 122 F.3d 130, 134 (2d Cir. 1997). Here, all that Plaintiffs allege is that Bennun

created North 3rd Development months after the alleged fraud took place to purchase the

Williamsburg Property. There is nothing improper, let alone fraudulent, about that. 7 Having

failed to satisfy either prong, Plaintiffs' veil-piercing claim must be dismissed.

Conclusion

Defendants North 3rd Development and Abraham Bennun respectfully request that the

Court dismiss the Amended Complaint with prejudice, and grant such other and further relief as

the Court deems just and proper.

7 Although Plaintiffs assert that Rule 9(b) is inapplicable to their alter ego claim, the fact of the matter is that
Plaintiffs' non-existent allegations of how the corporate form was used for a wrongful or fraudulent purpose do not
satisfy any pleading standard. Moreover, the case law cited by Plaintiffs provides that, when the claim is based on
some non-fraudulent "wrong" attributable to the defendant's complete domination, a plaintiff need not comply with
Rule 9(b). See. e.g .• United Feature Syndicate, Inc. v. Miller Features Syndicate. Inc .• 216 F. Supp. 2d 198,223
(S.D.N.Y.2002). However, even in that case, the court ultimately applied the 9(b) standard and dismissed the
complaint for lack of particularity. Here, Plaintiffs do not assert some non-fraudulent wrong: they specifically
assert claims for fraud against all of the defendants and allege that Bennun created North 3rd Development to aid in
that fraud. They cannot, therefore, rely on this hypothetical standard, and "the heightened pleading standard of
Rule 9(b) is the lens through which those allegations must be examined." EED Holdings v. Palmer Johnson
Acquisition Corp .. 228 F.R.D. 508,512 (S.D.N.Y. 2005) (citations omitted).

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Dated: New York, New York

April 26, 2013

OLSHAN FROME WOLOSKY LLP

By:

/s/ Renee M Zaytsev
Thomas J. Fleming
Renee M. Zaytsev
Attorneys for Defendants
Abraham Bennun and
North 3rd Development, LLC
Park Avenue Tower
65 East 55th Street
New York, New York 10022
(212) 451-2300

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