Diamond v. SLD 500 LLC

Background

Warren Diamond and Faith Diamond, as trustee of the Warren Diamond Trust, brought contract claims against Scott Diamond and SLD 500, LLC. The amended complaint relied on diversity jurisdiction and asserted claims for specific performance and breach of a December 2012 agreement. The agreement concerned payment arrangements for a Manhattan real estate investment. Plaintiffs alleged as many as 71 breaches, with claimed liquidated damages of $250,000 per breach, or up to $17.75 million. They did not seek actual damages.

The Warren Diamond Trust was not a party to the 2012 agreement. The parties to that agreement included Warren Diamond, Scott Diamond, SLD 500, LLC, Tunnel Associates, LLC, Mitchell Rutter, and Jacob Frydman. The agreement concerned property owned by 500 Lincoln Owner, LLC. The Trust owned a 12.5% interest through related entities. SLD 500 was a co-manager of 500 Lincoln, and Scott Diamond was its sole member and manager.

Paragraph 3(d) of the agreement required 500 Lincoln to make automatic monthly distributions from a specified Citibank account when the balance exceeded $50,000. Paragraph 3(d)(B)(v) provided that 12.5% of later distributions would be made as directed by “Scott Diamond (or his successors as trustee of the Warren Diamond Trust).” Scott initially served as the Trust’s sole trustee. Faith became co-trustee in July 2015, and Scott was removed as trustee on August 7, 2015; Faith then became the sole trustee.

Court’s Contract Interpretation

The court applied New York law because the agreement selected New York law. It treated the parties’ briefing as addressing a motion for judgment on the pleadings, which asks whether the pleadings support a legally viable claim while drawing reasonable inferences for the plaintiffs. The court stated that the agreement was clear and unambiguous and therefore had to be enforced according to its plain meaning.

The court concluded that Paragraph 3(d)(B)(v) referred to Scott in his role as trustee, not in his individual capacity. The court relied on the agreement’s careful distinction among Scott’s individual role, his role as trustee, and his role through SLD 500 as a manager. The reference to Scott’s “successors as trustee of the Warren Diamond Trust,” and the fact that the 12.5% distribution represented the Trust’s ownership share, supported that interpretation.

The court further held that Paragraph 3(d) imposed the payment obligation on 500 Lincoln, not on Scott individually or on SLD 500. Under the agreement, Scott or a successor trustee could direct how the Trust’s 12.5% distribution would be paid, but the agreement did not make Scott or SLD 500 responsible for causing 500 Lincoln to make the distributions.

Pre- and Post-Removal Conduct

For the period before August 7, 2015, Scott was a trustee or co-trustee and had authority under Paragraph 3(d)(B)(v) to direct how 500 Lincoln’s 12.5% payment to the Trust would be made. Even so, the court found that plaintiffs had not asserted a viable claim under the 2012 agreement holding Scott liable for any direction he made. The court noted that plaintiffs had not brought claims for breach of fiduciary duty or breach of the Trust Agreement.

For the period after August 7, 2015, Scott no longer had the authority to direct the Trust’s distributions because he was no longer a trustee. The court rejected plaintiffs’ attempt to impose liability on Scott based on his alleged continuing involvement as a co-manager or agreement signatory. It held that plaintiffs were conflating Scott’s former trustee role, SLD 500’s role as co-manager, and Scott’s individual obligations under the agreement.

Other Arguments

The court rejected plaintiffs’ argument that Scott and SLD 500 were liable simply because they signed the agreement. Being signatories did not mean that they assumed every obligation assigned by the agreement to another legal entity. The court also discussed, but did not apply, corporate-veil piercing. Plaintiffs had expressly stated that they were not pursuing a veil-piercing theory, and neither Scott nor SLD 500 had an ownership interest in 500 Lincoln.

The court also held that “Lincoln Citi Account” was not ambiguous. The agreement defined that term precisely as 500 Lincoln’s account at a specified Citibank branch and account number. The court concluded that neither Scott nor SLD 500 was required by the agreement to keep that account open. It also found that the amended complaint did not allege that the account’s closure caused any failure to make a distribution.

Conclusion and Procedural Posture

The court concluded that neither Scott nor SLD 500 could be held liable for breach of the 2012 agreement and that plaintiffs’ two contract claims were foreclosed. Because of that conclusion, the court did not reach the issue of whether the liquidated-damages provision was an unenforceable penalty.

The opinion did not itself state that judgment on the pleadings was granted or that the claims were dismissed. Instead, after setting out its definitive contract interpretation, the court authorized defendants to formally move for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) within seven days, with plaintiffs allowed seven days to respond.