Third District Court of Appeal
State of Florida
Opinion filed January 5, 2022.
Not final until disposition of timely filed motion for rehearing.
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No. 3D20-1033
Lower Tribunal No. 12-39036
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GG Investment Realty, Inc., et al.,
Appellants,
vs.
South Beach Resort Development, LLC, et al.,
Appellees.
An Appeal from the Circuit Court for Miami-Dade County, William
Thomas, Judge.
Michael Compagno, P.A., and Michael Compagno (North Palm
Beach), for appellants.
Genovese Joblove & Battista, P.A., and Richard Sarafan and Joseph
B. Isenberg, for appellees.
Before LOGUE, LINDSEY and BOKOR, JJ.
LOGUE, J.
GG Investment Realty, Inc., Gene Grabarnick, Pauline Grabarnick,
and Garett Grabarnick (the “Counter-Defendants” or “Grabarnicks”) appeal
a final judgment in favor of South Beach Resort Development, LLC, De Soleil
Management, LLC, So. Beach Hotel, LLC, and Louis Taic (the “Counter-
Plaintiffs”) following a bench trial. Finding competent substantial evidence to
support the trial court’s findings of fact and no error of law, we affirm.
Background
This action stems from a transaction for the acquisition of a hotel
condominium in Miami Beach. The background facts are summarized from
the evidence presented at the bench trial.
Around 2001, real estate investors Gene Grabarnick and Ronald Molko
formed South Beach Resort Development, LLC (the “Company”) for the
purpose of developing a luxury hotel condominium on Collins Avenue (the
“Project”). Molko and Gene served as managing members. The ownership
in the Company was shared among Molko (50%), Gene and his wife Pauline
(37.5%), and their son Garett (12.5%). Gene would exercise the voting rights
on behalf of Pauline and Garett. To kickstart their project, the Company
obtained a $29 million construction loan. As a condition of the loan, the bank
required the formation of South Beach Resort Management, LLC (“SBRM”),
to act as manager of the Company. To that end, the Company’s ownership
2
was modified by reducing a 0.5% interest from each of Gene’s and Molko’s
respective interests so that SBRM obtained the remaining 1% interest.
The real estate partners also formed De Soleil Management, LLC
(“DSM”) to operate and manage the Project. The ownership in DSM was the
same as that in the Company before the formation of SBRM. Additionally,
GG Investment Realty, Inc., was incorporated as the exclusive real estate
broker for the sale of the condo units at the Project. GG Investment was
owned exclusively by Garett who sold 67 of the 80 units and was owed about
$550,000 in commissions through GG Investment.
Then came the 2008 financial crisis. The Company fell behind on its
payments and the loan went into default with a $17.8 million balance. After
entering a forbearance agreement to evade foreclosure, Gene and Molko
(hereinafter the “Sellers”) began looking for potential buyers to sell their
respective interests in the Project. Louis Taic and Michael Fischer, another
real estate duo from New York, became the ultimate buyers through their
entity, So. Beach Hotel LLC (“SBH” or “Buyer”), and proceeded to conduct
their due diligence while negotiations were taking place.
According to the Buyer’s accountants, the books and records of the
Company and DSM were lacking and inadequate such that a proper due
diligence was unfeasible. The Sellers decided to provide a balance sheet
3
that would be attached to the separate Purchase and Sale Agreements for
the Grabarnicks’ interest and Molko’s interest. That balance sheet, prepared
as of June 30, 2008, listed the supposed assets and liabilities of the
Company. Relevant here, under “Other Assets” were two accounts
receivables totaling approximately $3.1 million from SBRM, the entity that
owned a 1% interest in the Company and was created for the sole purpose
of acquiring the loan. As would later be discovered when the Company’s
2007 federal income tax return was filed in early 2009, its total assets in the
federal return substantially differed from the Sellers’ representations in the
2008 balance sheet. The Company’s tax return did not reflect those assets
and indeed, showed negative equity contrary to the 2008 balance sheet.
On September 29, 2008, the deal was finalized. SBH acquired all of
Molko’s 50% membership interest and one-third of the Grabarnicks’
combined 50% membership interest. 1 The Purchase and Sale Agreements
included a paragraph titled, “Additional Representations and Warranties”
1
In exchange for its portion of the Grabarnicks’ interest, SBH paid (a)
$200,000 to the Sellers’ counsel for the transaction and for prior legal fees;
(b) up to $1,400,000 to satisfy outstanding liens and accounts payable; and
(c) $3,470,000 of the existing construction loan on the Project. In exchange
for Molko’s entire 50% membership interest, SBH (a) paid Molko $300,000
at closing; (b) executed a $1,000,000 promissory note in favor of Molko; and
(c) had the Company execute a $700,000 promissory note in favor of Molko.
Additionally, two promissory notes were executed for GG Investment’s
unpaid commissions totaling $500,000.
4
which provided, in relevant part, that each “Seller represents that the balance
sheet for [the Company] attached hereto as Exhibit ‘J’ is true and correct in
all material respects.” After closing the transaction, SBH held a two-thirds
membership interest in the Company and DSM and became the managing
member of both entities. The Grabarnicks held a one-third minority interest.
As a result of the change in ownership, SBH and the Grabarnicks
entered into an Amended Operating Agreement for the Company. Under
paragraph 10(a) of this Agreement, SBH, as managing member, could
demand, in its reasonable discretion, additional capital contributions from
each member. If a member failed to make the required capital call, the
Agreement provided that “the other Members shall make the Additional
Capital Contribution which the ‘Non-Contributing Members’ failed to make
and to treat the Additional Capital Contributions made by such members as
a loan by the Contributing Members to the Non-Contributing Members.” The
Agreement also specified the conditions for the non-payment of such loan
including dilution of the Non-Contributing Member’s percentage interest
under paragraph10(d) and the grant of a security interest on the Non-
Contributing Member’s entire percentage interest with the right to conduct a
UCC sale of the security interest under subsection (e).
5
Between October 2008 and March 2010, pursuant to the Amended
Operating Agreement, SBH made additional capital calls from each member.
None of the Grabarnicks made the required contributions. As a result, SBH,
the only other member, made capital contributions totaling $2 million to keep
the Project afloat. The Grabarnicks were provided written notice of each
capital contribution. SBH also sent the Grabarnicks a demand letter for their
obligations under the Agreement regarding the missed capital calls totaling
$997,287.04. The letter also requested personal guaranties for additional
capital contributions if needed. The Grabarnicks were placed on notice that
if payment was not received, SBH, pursuant to the Agreement, had elected
to foreclose its security interest on the Grabarnicks’ membership interest in
the Company.
On October 3, 2012, GG Investment sued the Company and DSM to
recover on the promissory notes for its unpaid commissions. On February
26, 2013, the Company and DSM, together with SBH and Taic as additional
Counter-Plaintiffs, filed a six-count counterclaim in the underlying action
against the Grabarnicks and Molko. 2 In response, the Grabarnicks filed their
2
The Counter-Plaintiffs sued for fraudulent inducement and as an alternative
remedy rescission against GG Investment, Molko, and the Grabarnicks
(Counts I and II); breach of contract against Molko under his Purchase and
Sale Agreement (Count III); breach of contract against the Grabarnicks
6
own counterclaim against the Company, SBH, and Taic for their actions
regarding the capital calls and subsequent UCC sale of the Grabarnicks’
minority interest. 3
Following a four-day bench trial, the trial court entered final judgment
for the Counter-Plaintiffs finding, among other things, that they had proved
their claims for fraudulent inducement and breach of contract against the
Grabarnicks. 4 In its detailed, twenty-nine-page order, the trial court made
numerous findings of fact and conclusions of law as discussed in the next
paragraphs.
Because the records of the Company and DSM were in such disarray,
express representations and warranties were required for due diligence
purposes. The Sellers knew that numerous figures on the 2008 balance
sheet attached to the Purchase and Sale Agreements were not accurate
despite their express warranty that the balance sheet was “true and correct
in all material respects.” Testimony was presented that the Buyer had to rely
under their Purchase and Sale Agreement and the Amended Operating
Agreement (Counts IV and V); and declaratory judgment (Count VI).
3
The Grabarnicks filed a sixteen-count counterclaim for breach of the
Amended Operating Agreement, fraudulent misrepresentation, aiding and
abetting fraud, civil conspiracy, negligent misrepresentation, breach of
fiduciary duty, constructive fraud, conversion, and civil theft.
4
The claims against Molko were settled and are not at issue here.
7
upon the Sellers’ representations on the balance sheet regarding the
financial state of the Company. The trial court found that the Sellers made
fraudulent misrepresentations—in the form of the balance sheet and
warranties in the purchase agreements—to induce the Buyer to purchase
the failing Company, and that the Buyer relied upon such fraudulent
misrepresentations to its detriment.
As for GG Investment’s underlying claim to recover on the promissory
notes, the trial court found that the notes issued to GG Investment for its
unpaid commissions were tainted by the fraud and were unenforceable. In
so ruling, the trial court concluded that GG Investment was a third-party
beneficiary of the sale of the Project based on the fraudulent 2008 balance
sheet. The trial court relied upon the references made to the notes in the
purchase agreements as well as Garett’s testimony that the notes were part
of the transaction.
As for the Counter-Plaintiffs’ claim for breach of the Amended
Operating Agreement, the trial court found that the Grabarnicks had
breached this agreement by failing to make the required capital contributions
and failing to repay the loans for same made by SBH. Nevertheless, the trial
court concluded that no damages were recoverable because the Counter-
Plaintiffs had obtained the Grabarnicks’ membership interest at the UCC
8
sale. Lastly, the trial court found in favor of the Counter-Plaintiffs on all of the
Counter-Defendants’ counterclaims stemming from SBH’s actions regarding
the capital calls and resulting UCC sale. The trial court concluded that the
UCC sale of the Grabarnicks’ minority membership interest was “valid and
not commercially unreasonable.”
Final judgment was entered by separate order awarding the Counter-
Plaintiffs the sum of $6,969,494.37, inclusive of pre-judgment interest, on the
fraudulent inducement claim, and $1,365,034.95 for breach of the Purchase
and Sale Agreement against the Grabarnicks. This timely appeal by the
Grabarnicks ensued.
Analysis
“We review a judgment rendered after a bench trial to ensure that the
trial court’s findings of fact are supported by competent, substantial
evidence. Pure legal conclusions are reviewed de novo.” SG 2901, LLC v.
Complimenti, Inc.,
323 So. 3d 804, 806 (Fla. 3d DCA 2021).
The Grabarnicks raise four issues on appeal. They assert that the trial
court erred by: (1) awarding fraud damages that were not supported by
competent substantial evidence and failing to adjust the award in proportion
to the parties’ respective membership interests and provide a setoff for
Molko’s settlement; (2) failing to apply provisions in the Amended Operating
9
Agreement requiring the managing member to obtain a third-party loan
before making capital calls and failing to apply the dilution of interest
requirements for members who failed to make the required capital calls; (3)
finding Pauline and Garett engaged in the same fraud in the inducement as
Gene; and (4) denying GG Investment’s claims to collect on the promissory
notes for its unpaid commissions. Each issue will be discussed in turn.
1) Damages on Fraud Claim
The Grabarnicks first challenge the damages awarded by the trial court
on the fraud claim. They assert no competent substantial evidence supports
the award; the trial court failed to consider the percentage of membership
interest sold by the Grabarnicks and Molko; and the trial court failed to grant
a setoff to account for Molko’s settlement with the Counter-Plaintiffs.
“Florida law provides for an election of remedies in fraudulent
inducement cases: recission, whereby the party repudiates the transaction,
or damages, whereby the party ratifies the contract.” Mazzoni Farms, Inc. v.
E.I. DuPont De Nemours & Co.,
761 So. 2d 306, 313 (Fla. 2000). “In tort
actions, the measure of damages seeks to restore the victim to the position
he would be in had the wrong not been committed.” Ashland Oil, Inc. v.
Pickard,
269 So. 2d 714, 723 (Fla. 3d DCA 1972).
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Here, the Counter-Plaintiffs elected to affirm the Purchase and Sale
Agreement with the Grabarnicks and recover their damages due to the
difficulty in returning to the pre-transaction status quo. The trial court’s
damages award was based on the difference in value of the assets as
represented on the 2008 balance sheet and what the evidence at trial
showed regarding the accuracy of those assets as of the date of closing.
Specifically, the trial court found:
This Balance Sheet listed as assets the two accounts receivable
from SBRM to [the Company], each in the amount of
$1,572,622.39, for a total of $3,145,244.78 that did not exist. The
Grabarnicks also misrepresented on the Balance Sheet “Other
Current Assets” of “Rent Exchange” in the amount of
$682,208.62 and amounts purportedly due from DSM and De
Soleil Master Association of $364,317.60 for a total of
$1,046,556.22. These items were not, in fact, assets.
These are the figures the trial court used to calculate the damages awarded
on the fraud claim: $4,191,801. Therefore, the Grabarnicks’ argument that
the trial court awarded speculative damages for fraud is unconvincing.
The Grabarnicks further assert that the damages should have been
calculated based on their respective membership percentage interest in the
Company, and that the award should have been reduced based on Molko’s
settlement with Counter-Plaintiffs. These arguments are similarly unavailing.
Gene and Molko were business partners with a common goal: to sell their
respective membership interests in the Company and DSM. Because a
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settlement was reached with Molko relating to his counterclaim, the trial court
was only required to award damages against the Grabarnicks. If the
settlement had not been reached, the Grabarnicks and Molko would have
been jointly and severally liable on the fraud claim. 5 Moreover, the settlement
was reached to resolve Molko’s counterclaim to recover on two promissory
notes that he received as part of the transaction for his membership interest.
Therefore, the settlement amount is irrelevant to the damages for the fraud
claim against the Grabarnicks and cannot be reduced from such award
because that sum was not paid to the Counter-Plaintiffs.
2) The Amended Operating Agreement
The Grabarnicks next assert that the trial court erred by failing to apply
the provisions in the Amended Operating Agreement regarding the capital
call contributions. 6 The trial court rejected the Grabarnicks’ argument that
5
As an intentional tort, the common law doctrine of joint and several liability
applies to the claim of fraud in the inducement. See Merrill Crossings Assocs.
v. McDonald,
705 So. 2d 560, 560–61 (Fla. 1997) (applying the common law
doctrine of joint and several liability to intentional torts); First Fin. USA, Inc.
v. Steinger,
760 So. 2d 996, 998 (Fla. 4th DCA 2000) (noting that “[f]raud in
the inducement is a recognized intentional tort”).
6
The relevant provision, which was drafted by the Sellers’ counsel, provides:
10. As to Additional Capital Contributions referred to in Section
V of the Operating Agreement, Gene and SBH agree as follows:
(a) Additional Capital Contributions. If, at any time or from
time to time, [the] Managing Member [SBH] determines in its
reasonable discretion, that the Company requires additional
12
SBH, as managing member, was required to borrow the money from a third-
party lender prior to making a capital call. Instead, the trial court found that
the Agreement “expressly allows” SBH to request additional capital
contributions from the other members if it “does not desire to borrow such
funds.” Indeed, despite the seeming inconsistency under paragraph 10(a) of
the Agreement, the managing member was vested with broad powers
including making “any and all business and non business decisions
concerning the property . . . as well as the decisions concerning [the
Company].” These broad powers included the discretion to decline to seek a
third-party loan given the pre-existing loan obligation and the troubled
financial state of the Company.
The Grabarnicks similarly take issue with the trial court’s ruling
upholding the UCC sale of their minority interest in the Company. They
assert that, under paragraph 10(d) of the Agreement, SBH was required to
dilute their membership interest before proceeding with the UCC sale. The
funds, whether for capital improvements, to defray losses, or
resulting from either party’s failure to satisfy its indemnification
obligations set forth in the Purchase Agreement, or otherwise for
the benefit of the Company, the Managing Member shall first
attempt to borrow any funds needed for such purpose from third-
party lenders on commercially reasonable terms. If the Managing
Member is unable or does not desire to borrow such funds, then
the Managing Member shall request an Additional Capital
Contribution from each Member.
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trial court also rejected this argument by pointing to paragraph 10(e) in which
each member “grants to the other Members a security interest (within the
meaning of the Uniform Commercial Code in effect in the jurisdiction in which
the Company is located) in the Grantor’s entire Percentage Interest as
security for the Grantor’s obligations” under the loan. This subsection further
provides that if a Non-Contributing Member defaults in repayment of the loan,
the Contributing Member “shall also have the right to exercise all of the rights
and remedies of secured parties” under the UCC, including the “sale of the
Non-Contributing Member’s Percentage Interest pursuant to Article 9” of the
UCC.
We find the trial court’s interpretation of these provisions in the
Agreement legally sound, and that it properly concluded the UCC sale was
valid and commercially reasonable.
3) The Fraud Ruling regarding Pauline and Garett
The Grabarnicks next assert that the trial court erred in finding Pauline
and Garett had engaged in the same fraud as Gene. However, each of the
Grabarnicks signed the Purchase and Sale Agreement (PSA) which included
the balance sheet with the fraudulent misrepresentations. Moreover, the
PSA specifically refers to Gene, Pauline, and Garett as “Sellers” or the
“Grabarnick Group” as each was a party to that agreement. Thus, the trial
14
court properly found that each of the Grabarnicks were responsible for the
representations and warranties made in the PSA. It was also undisputed that
Gene exercised the voting rights for Pauline and Garett and, as the trial court
found, there was “a long and unbroken history of Garett being represented
by Gene in all [of the Company]’s affairs.” Thus, there is competent
substantial evidence to support the trial court’s finding that each of the
Grabarnicks “knew that the Balance Sheet contained material falsehoods,
or, at a minimum, that they certainly should have known that their
representations concerning its accuracy were false.”
4) GG Investment’s Promissory Notes
Lastly, the Grabarnicks challenge the trial court’s rejection of GG
Investment’s claims to recover on the promissory notes for its unpaid
commissions. The trial court found that the notes were unenforceable
because they were tainted by fraud. Specifically, the trial court found “the
parties intended that GG Investment would benefit directly from the
transaction,” and the Grabarnicks’ PSA “specifically referenced $500,000
payable via promissory note, to GG Investment in the section discussing the
‘Purchase Price.’” The trial court also based its ruling on Garett’s testimony
that the notes were part of the transaction and would not have been executed
but for the closing of the transaction. Accordingly, the trial court equated GG
15
Investment to a third-party beneficiary under the purchase agreement
through which it fraudulently obtained the notes. HTP, Ltd. v. Lineas Aereas
Costarricenses, S.A.,
661 So. 2d 1221, 1222 (Fla. 3d DCA 1995) (“A party
can successfully defend against liability on a claim by showing that he was
fraudulently induced to enter into the contract or transaction upon which such
liability is asserted.”). We find no error in this determination.
Conclusion
Because the trial court’s “thorough final judgment, which contains
factual findings based on credibility determinations derived from live
testimony, is supported by competent substantial evidence,” Complimenti,
323 So. 3d at 804, we affirm the final judgment in all respects.
Affirmed.
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