DECISION and ORDERINTRODUCTION This action involves a dispute over the direction and control of a limited partnership that was formed to own and operate a real estate investment. Plaintiff, the general and managing partner, commenced this action to stave off an attempt by Defendants, the limited partners, to oust Plaintiff from the partnership based on alleged breaches of fiduciary duties. Now before the Court is a motion for preliminary injunctive relief by Defendants. The application is denied.BACKGROUNDAt issue is the operation of the Birchwood Village apartment complex in Batavia, New York. In 1970, a group of churches in Batavia formed the Plaintiff not-for-profit corporation to address a perceived need for low-income housing. To finance the development of the project, Plaintiff borrowed $4.7 million, secured by a mortgage insured by the U.S. Department of Housing and Urban Development (“HUD”). HUD subsequently became the holder of the mortgage.Due to HUD’s involvement in the project, Plaintiff was required to operate the apartment complex in accordance with HUD regulatory agreements.1 Such regulatory agreements included a provision stating: “The Owners covenant and agree that…[a]dmission to the project shall be limited to families having a low or moderate income which does not exceed the limits established by the Commissioner and in effect at the time of admission.”2 Such regulatory agreements further stated: “The rent charged for each unit shall not exceed the upper limit of the range shown for such type of unit on the rental schedule approved in writing by the Commissioner.”3 Such rental schedules set forth Fair Market Rents (“FMRs”) for each unit. The HUD FMRs are “set at the 40th percentile in the rent distribution [for a particular community.] By definition, 60 percent of the modest (nonluxury) rental housing units in a community rent for more than the FMR.”4 Plaintiff, though, has always intended Birchwood Village to serve low-and moderate-income tenants even without regard to HUD’s requirement that it do so.On September 1, 1979, Plaintiff conveyed Birchwood Village to a limited partnership, Brunswick Ltd. (“Brunswick”), of which Defendant Batavia Investors, Ltd (formerly known as Essex, Ltd) (“Batavia Investors”) was a limited partner. The purchase price of $5.5 million was secured by a “wraparound mortgage” that was subject to the mortgage already held by HUD.On December 1, 1979, Brunswick’s partnership agreement was amended and restated in several respects. First, the name of the partnership was changed from Brunswick Ltd to Batavia Townhouses, Ltd. Second, Plaintiff joined the partnership as co-general partner and sole managing partner. The other general partner was David C. Green, and the sole limited partner was Defendant Batavia Investors. To reiterate, upon the execution of this new partnership agreement, Plaintiff not only held the wraparound mortgage given by the partnership to secure the purchase of Birchwood Village, but it also was a co-general partner and sole managing partner of the partnership. Additionally, and quite significantly, the partnership agreement stipulates that the partnership will dissolve automatically on December 1, 2020.The Amended and Restated Partnership Agreement further indicates that the partnership will operate Birchwood Village as described in “Project Documents” filed with HUD. Such “Project Documents” specify that “Birchwood Village be operated as an affordable housing project for low-income residents.” Complaint at 33. Paragraph 2.4 of the agreement further describes the purpose of the limited partnership as follows:The sole purpose and business of the Partnership shall be to acquire real property, together with the improvements thereon, as described in the Project Documents, and to own, hold, manage, maintain, and operate thereon the Project together with such other activities related directly or indirectly to the foregoing as may be necessary, advisable, or convenient to the promotion or conduct of the business of the Partnership, including without limitation the incurring of indebtedness and the granting of liens and security interests in the real and personal property of the Partnership to secure the payment of such indebtedness; all in such manner as will conform to all rules and regulations of Agency, and insofar as is consistent therewith, will maximize the Federal, state and local income tax benefits available to the Partnership. The specifications of such business shall be deemed a limitation upon the powers of the General Partner.Complaint at 32.In 1981, the partnership agreement was further amended, whereby David C. Green withdrew as a general partner, and Defendant Arlington Housing Corporation (“Arlington”) became co-general partner with Plaintiff. Lawrence Penn (“Penn”) was, and remains, a principal of both Arlington Housing Corporation and Batavia Investors.Since at least 2000, the partnership has obtained regular audits of its financial statements, which it has shared with Defendants.5 Additionally, since at least January 2015, Plaintiff, as general partner, has sent Defendants monthly reports concerning the rent being charged for every unit at Birchwood Village.6In 2004, the partnership agreement was again amended, to allow Arlington to withdraw as co-general partner and become a co-limited partner with Batavia Investors. Arlington was required to withdraw as general partner because its principal, Mr. Penn, had entered into a settlement agreement with HUD involving matters unrelated to this action or to Birchwood Village, which agreement prohibited him or his affiliates from serving as general partner of a partnership owning HUD property.7 Significantly, as a result of Arlington’s required withdrawal as general partner, Plaintiff became the sole general partner and managing partner in addition to holding the wraparound note and mortgage given by the partnership to purchase Birchwood Village.As the years passed, Plaintiff, as managing partner, continued to operate Birchwood Village as it always had been operated, as an apartment complex catering to low-and moderate-income tenants. Further, as already explained, such operation was in keeping with Plaintiff’s original intention when it developed the apartment complex, and was also required as a condition of the mortgage agreement between Plaintiff and HUD. It is undisputed, though, that Plaintiff, both as sole owner of Birchwood Village prior to joining the partnership, and later as managing partner, always set rents at levels that were significantly below the FMR levels permitted by HUD, purportedly to accommodate the financial means of the tenants. In other words, Plaintiff could have charged higher rents and still been in compliance with HUD’s requirements.Between 1979 and 2012, the partnership continued making payments on the note owed to HUD, but did not make any payments on the wraparound note. In 2012, the partnership paid off the HUD loan, leaving only the mortgage debt owed to Plaintiff. However, thereafter the Partnership did not make payments on the outstanding wraparound note. The Limited Partners were aware of this fact. For example, the audits of the Partnership’s financial statements for 2014-2017 observe that “[n]o principal payments have been made on the residual note[.]“8Nor, for that matter, did Plaintiff raise the rents at Birchwood Village appreciably after the HUD loan was paid, even though the FMR restrictions previously imposed by HUD were no longer applicable.9 That is because, Plaintiff contends, Birchwood Village was never intended to be a market-rate apartment complex, regardless of whether or not HUD imposed such restrictions.10Nevertheless, since 2012, Birchwood Village has been making money ($1.6 million) for the partnership, which, for accounting reasons, has been accruing in the partnership’s bank accounts, rather than being applied to the wraparound mortgage. On this point, Plaintiff’s Executive Director explains:Interest expense on the Wraparound Note and Mortgage [in 2017] was $330,000. For 2017, the accrued interest, although owed to Churches, was not transferred as cash to Churches, but rather left to accumulate as cash in the Partnership’s accounts. The interest in prior years 2016, 2015 and 2014 was accounted for in the same way.Because of the way the accrued interest on the Wraparound Note and Mortgage has been accounted for, the Partnership at December 31, 2017 had cash assets of $179,612 in its checking account, and $1,457,151 in its savings account, for a total of $1,636,763, all as reflected on the balance sheet.… In essence, the accrued interest owed to Churches on the Wraparound Note and Mortgage has been kept in what amounts to a “sinking fund” in order to partially satisfy the Debt Obligation to Churches when the Partnership ends in December 2020.Greenbaum Decl. at
