Kilbride Invs. Ltd. v. Cushman & Wakefield of Pa., Inc.

Citation: 294 F. Supp. 3d 369Docket: CIVIL ACTION NO. 13–5195

Court: District Court, E.D. Pennsylvania; February 15, 2018; Federal District Court

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Kilbride Investments Limited, Busystore Limited, and Bergfeld Co. Limited (plaintiffs) have accused Cushman, Wakefield of Pennsylvania, Inc., C. W. Blank Rome LLP, Blank Rome, and Cozen O'Connor, P.C. (defendants) of fraud, claiming they were misled into investing over $27 million in a Philadelphia real estate project, "River City," due to false representations regarding zoning restrictions, project feasibility, and property valuation. Currently before the court are two summary judgment motions from Cozen O'Connor and Cushman, Wakefield, alongside four Daubert motions from both sides. The memorandum primarily addresses Cozen's motion, which is partially granted and partially denied.

Background details reveal that the River City Property, spanning 8.2 acres, was targeted for acquisition by Ravinder Chawla and Richard Zeghibe in 2006, who engaged attorney Charles Naselsky from Cozen O'Connor to facilitate the purchase. Naselsky created JFK BLVD Acquisition GP, LLC to acquire the property from R. F. Penn Associates, L.P. An agreement was executed on May 12, 2006, for $32.5 million. Architect James Rappoport was also brought on to design a development concept. In May 2006, Naselsky hired Cushman, Wakefield to appraise the property, which resulted in a draft appraisal on June 23, 2006, valuing the property at $57 million. However, this appraisal erroneously reported the sale price and date of the acquisition contract, stating a price of $50 million and a date of January 2006, rather than the correct price of $32.5 million and date of May 2006. Following receipt of the appraisal, Chawla requested Naselsky to inflate the property value to over $100 million.

Zeghibe provided feedback on the June 2006 draft appraisal of the River City Property, advocating for a higher valuation due to its development potential. Naselsky expressed concerns about the appraised value of $57 million, suggesting it aligned too closely with the contract price and that critical factors for development were overlooked. Following a meeting with McNeil, the appraiser, a revised draft was submitted on July 10, 2006, increasing the value to $77 million, while inaccurately reflecting the sale price as $50 million instead of the actual $32.5 million. An "Agreement of Sale" for the property at $50 million was circulated by Naselsky, but plaintiffs allege the transaction was a mere "internal flip" intended to inflate valuations. Naselsky left Cozen on July 28, 2006, and joined Blank Rome, continuing to collaborate with Chawla and Zeghibe. On August 7, 2006, he learned of a Proposed Zoning Ordinance passed by the City Council, which limited building heights on two parcels of the River City Property. Despite these restrictions, Chawla and Zeghibe sought investors, leading to a meeting with Eli Weinstein, who agreed to purchase the property for $70 million on September 26, 2006. Weinstein, along with potential investors like Berish Berger, was actively involved in the acquisition process.

On December 6, 2006, Berger attended a meeting in Philadelphia where Rappoport presented designs for the River City Property. Following this meeting, Berger received a C. W appraisal valuing the property at $77 million and agreed to partner with Weinstein for its purchase. On December 18, 2006, Kilbride, a family trust, transferred $12 million to a title company for the property acquisition. At Berger's request, Busystore Limited sent $9.5 million to Weinstein’s entity, Pine Projects LLC. Additionally, on January 19, 2007, Bergfeld wired $5 million to Pine Projects. Berger later discovered that Weinstein misappropriated these funds, resulting in the plaintiffs not obtaining any interest in the River City Property.

This case marks the fourth civil action related to the River City project filed by Berger and associated plaintiffs. Following a previous Memorandum dated August 18, 2017, which granted summary judgment to certain defendants for lack of standing, the remaining plaintiffs in this case are Kilbride Investments Limited, Busystore Limited In Liquidation, and Bergfeld Co. Limited. 

The applicable law states that a motion for summary judgment is granted if there are no genuine disputes regarding material facts and the movant is entitled to judgment as a matter of law. A material fact could affect the outcome of the case, and a genuine dispute exists if reasonable evidence supports a verdict for the nonmoving party. The court must view evidence in the light most favorable to that party and cannot weigh evidence or determine truth at this stage. The nonmoving party must present evidence supporting each element of its claims.

Plaintiffs aim to hold Cozen accountable for the alleged fraudulent actions of its employee, Naselsky, through claims of conspiracy to commit fraud and aiding and abetting fraud, based on the doctrine of respondeat superior. The Court assesses whether Cozen can be held liable under this theory, concluding that it can. Cozen acknowledges its employment relationship with Naselsky. Under respondeat superior, an employer is liable for an employee's torts that cause injury to a third party if those acts occur within the scope of employment, encompassing both intentional and negligent conduct. Although Pennsylvania courts have not definitively ruled on the applicability of respondeat superior to civil conspiracy, Cozen contends that the two concepts are fundamentally incompatible, citing a case that argues against dual vicarious liability. The Court aligns with a contrasting view from the Southern District of New York, which dismisses the dual liability argument, asserting that a corporation can be liable for fraud orchestrated by its executives. The Court emphasizes public policy considerations, stating that it is more just for the employer, who entrusted the agent, to bear the consequences of the agent's wrongful acts rather than an innocent third party.

Cozen can be held liable for conspiracy under respondeat superior, which allows for employer liability irrespective of knowledge or involvement in the alleged wrongdoing. However, this liability is restricted to actions taken within the scope of employment. Cozen acknowledges that Naselsky was acting within this scope while negotiating a purchase agreement, forming a special-purpose entity, providing legal advice, and engaging vendors on behalf of his clients. Consequently, Cozen's liability is limited to actions related to the conspiracy occurring before Naselsky's departure on July 28, 2006.

The court must assess whether plaintiffs have provided sufficient evidence of a conspiracy and underlying fraud during Naselsky's tenure at Cozen. Cozen claims that Weinstein acted alone in defrauding the plaintiffs regarding the River City Property, arguing Naselsky cannot be liable for Weinstein's actions. However, evidence also suggests that Naselsky and Chawla engaged in activities to fraudulently inflate the property's price and misled investors about zoning limitations. 

To establish civil conspiracy under Pennsylvania law, plaintiffs must demonstrate: 1) a combination of two or more individuals pursuing a common unlawful purpose; 2) an overt act in furtherance of that purpose; and 3) actual legal damage. This conspiracy can be proven by circumstantial evidence, but mere suspicion is insufficient. The court finds genuine issues of material fact regarding Naselsky's conspiracy with Chawla, noting their longstanding relationship and evidence of direct compensation to Naselsky from Chawla, separate from legal fees owed to Cozen.

Naselsky omitted legal fees owed to Cozen on settlement sheets during real estate closings to prevent Chawla from using closing proceeds to pay for these fees, allowing Chawla to delay payment until he secured funds from an investor. Plaintiffs allege that Naselsky continued to represent Chawla's entity, WAP, in acquiring the River City Property and engaged in several actions that furthered a conspiracy, including:

1. Requesting a revision of the 2006 Appraisal engagement letter to expand the "Intended Users" section, enabling its use to mislead potential lenders and investors.
2. Failing to correct false information in draft appraisals regarding the sale price of the River City Property, misrepresenting it as $50 million instead of the actual $32.5 million.
3. Misrepresenting to C. W. that the sale was private and involved no brokers, knowing this to be untrue.
4. Persuading an appraiser to inflate the appraisal value from $57 million to $77 million.
5. Drafting a fraudulent Agreement of Sale designed to artificially increase the property's value.

Additionally, Naselsky facilitated the conspiracy by omitting Cozen's legal fees at closing, allowing Chawla and Zeghibe to delay payment. Evidence suggests Naselsky learned of a height ordinance while at Cozen, with his testimony indicating he was aware by early summer 2006, prior to leaving the firm on July 28, 2006. The Court found that a fact-finder could conclude Naselsky conspired with Chawla to inflate the property price and conceal the ordinance to mislead investors.

However, the Court rejected the plaintiffs' claim of an additional overt act related to false information about a purported $50 million sale, noting insufficient evidence to support that either Naselsky or Rappoport provided such information. Without more evidence, the Court determined that speculation could not support a genuine factual dispute, thus ruling that Cozen could not be held liable for any false price representation.

Liability for civil conspiracy is contingent upon the existence of an underlying tortious act, which is not independently actionable. In this case, the underlying tort is fraud, defined under Pennsylvania law by six elements: misrepresentation, materiality, falsehood, intent to mislead, justifiable reliance, and resultant injury. Cozen contends that plaintiffs cannot demonstrate the underlying fraud, arguing that the damages were caused solely by Weinstein's actions and that plaintiffs are collaterally estopped from asserting fraud against Chawla due to a prior jury decision. The court finds that a genuine issue of material fact exists regarding whether Naselsky and Chawla's misrepresentations during Naselsky's tenure at Cozen were a proximate cause of the plaintiffs' damages. Pennsylvania employs the "substantial factor" test for proximate causation, allowing for multiple contributing causes. The court may only resolve proximate causation as a matter of law if no reasonable jury could differ on the issue. Evidence presented by the plaintiffs suggests that Berger relied on an inflated appraisal of the River City Property, influenced by misrepresentations from Naselsky and Chawla, who allegedly manipulated the appraisal process and executed a "sham sale" to enhance property value.

Plaintiffs established a genuine issue of material fact regarding whether the actions of Naselsky and Chawla, during Naselsky's employment at Cozen, were a substantial factor in causing plaintiffs' harm. Cozen's argument for collateral estoppel on the fraud claim is rejected, as it failed to demonstrate that the issue in the previous case (where a jury found Chawla not liable for fraud) is identical to the current case involving the alleged conspiracy between Naselsky and Chawla. Under Pennsylvania law, several criteria must be met for issue preclusion, including identity of issues and final adjudication on the merits, which Cozen did not satisfy. The jury in the prior case found certain parties liable for fraud but did not find Chawla liable for the underlying fraud, and Naselsky was not a party in that action. Consequently, the court cannot conclude that the issues are identical. Additionally, Cozen invoked the intracorporate conspiracy doctrine, arguing it cannot be liable for Naselsky's actions as he was acting within his official capacity. This doctrine states that agreements among agents of the same entity do not constitute unlawful conspiracy, as their acts are attributed to the principal entity.

The intracorporate conspiracy doctrine protects attorneys from conspiracy liability when they are alleged to conspire with clients, based on the premise that a client and attorney function as a single entity in their agency relationship. Relevant case law includes Bowdoin v. Oriel and Heffernan v. Hunter, where courts affirmed this doctrine's applicability to attorney-client interactions. The doctrine implies that corporations, like individuals, can only act through agents, including attorneys, who are shielded from liability for actions taken within this relationship.

In a notable case, Doherty v. American Motors Corp., allegations arose that in-house and outside counsel conspired with the corporation to coerce a plea deal in violation of 42 U.S.C. 1985(2). The court emphasized that the right to independent legal counsel is fundamental to the adversarial system. Similarly, the Third Circuit in General Refractories Co. ruled that outside counsel could not be held liable for conspiring with an insurance company to violate state law, even if the attorney’s actions were in bad faith.

However, if independent third parties participate in a conspiracy, the intracorporate conspiracy doctrine does not apply. In this context, Cozen argues that Naselsky cannot be liable for conspiracy as he allegedly conspired solely with his clients, WAP and Patriot, and their principals. Conversely, plaintiffs contend that third parties were involved, which would create an exception to the doctrine, referencing Marshall v. Fenstermacher, where the court declined to apply the doctrine due to the involvement of individuals outside the attorney-client relationship, thus allowing for potential liability under 1985(3). The plaintiffs assert that their claims similarly extend beyond the attorney-client framework, challenging Cozen's reliance on the intracorporate conspiracy doctrine.

Plaintiffs have demonstrated sufficient evidence indicating that Naselsky, Chawla, and Zeghibe conspired with various individuals and entities, including C. W., Rappoport, and Chawla's business partner Sahaya, during Naselsky's employment at Cozen. The Court finds that this evidence raises a material fact issue regarding the involvement of others in the conspiracy, rendering the intracorporate conspiracy doctrine inapplicable.

In Count II, plaintiffs assert Cozen's liability for aiding and abetting fraud based on Naselsky's substantial assistance to Chawla, invoking respondeat superior. The Court dismisses Cozen's claim that Pennsylvania does not recognize aiding and abetting as a cause of action, citing recent precedents confirming such recognition, including the Pennsylvania Supreme Court's endorsement of the "concert of action" theory in Skipworth and subsequent cases. 

To establish aiding and abetting fraudulent misrepresentation under Pennsylvania law, the following elements must be proven: (1) a fraudulent misrepresentation, (2) the aider and abettor's knowledge of the fraud, and (3) substantial assistance or encouragement of the fraud. The Court finds that the plaintiffs have presented evidence of fraud by Chawla and that Naselsky aided and abetted this fraud by concealing the true sale price from C. W. and misrepresenting the nature of the sale. Additionally, evidence shows that Naselsky drafted an agreement intended to inflate the property's value despite knowing the sale would not occur.

Plaintiffs provided evidence indicating that Naselsky facilitated a conspiracy by concealing Cozen's legal fees during closing, enabling Chawla and Zeghibe to postpone payments until they secured investor funds, thereby avoiding personal investment in the deal. The Court found that a jury could reasonably conclude that Naselsky significantly aided Chawla in committing fraud while employed at Cozen, leading to the denial of Cozen's motion for summary judgment regarding Count II. The motion was granted in all other respects. On August 17, 2017, the Court also granted a joint motion for summary judgment from Cushman, Wakefield of Pennsylvania, Blank Rome LLP, and Cozen O'Connor P.C. concerning the plaintiffs' claims for lack of subject-matter jurisdiction due to standing issues. WAP, owned solely by Ravinder Chawla, focused on real estate development, while Richard Zeghibe was associated with Patriot, which was misidentified as Patriot Properties, Inc. in Cozen's intake form. Plaintiffs disputed aspects of Naselsky's knowledge regarding the Proposed Zoning Ordinance, claiming he was aware of it in early summer 2006, and contested the term "proposed" since they argued enforcement began before its official enactment. The September 2006 Nominee agreement was replaced by a December 2006 agreement, with disputes over attendees at relevant meetings. Notably, Towerstates Limited and Ardenlink Limited, which had wired $12.5 million to Pine Projects, are no longer plaintiffs. The Court rejected Cozen's reliance on case law regarding municipal liability under the doctrine of respondeat superior, citing distinguishable contexts. Upon Naselsky's departure from Cozen, Chawla and his entities owed over $462,000 for legal services, which was fully paid by February 2007.

The preclusive effect of a prior federal court judgment, which applies substantive state law, is determined by the law applicable in the state where the federal diversity court is located, as established in Semtek Int'l, Inc. v. Lockheed Martin Corp. The relevant verdict form queried whether plaintiffs had proven, by clear and convincing evidence, that certain defendants were liable for fraud. The Supreme Court's interpretation of the intracorporate conspiracy doctrine, first articulated in Copperweld Corp. v. Independence Tube Corp., concluded that a corporation cannot conspire with its subsidiary under the Sherman Antitrust Act, as their goals are unified and lack separate corporate consciousness. The case of Doherty involved a plaintiff who was indicted for bribery connected to American Motors Corporation's dealings, to which he pleaded nolo contendere. The court noted that the involvement of Weinstein as a third party in the conspiracy was not substantiated during Naselsky's employment at Cozen, and therefore that aspect was disregarded. Plaintiffs claimed that summary judgment was inappropriate due to factual disputes regarding Naselsky's clients; however, the court determined that the concept of third-party involvement negated the applicability of the intracorporate conspiracy doctrine and did not address this claim further. Additionally, under Pennsylvania law, the elements of fraud include: 1) a misrepresentation, 2) materiality, 3) falsity, 4) intent to mislead reliance, 5) justifiable reliance, and 6) proximate injury resulting from that reliance.