LI investor wins round in Kmart case

A Long Island real estate investor has won a partial victory in the latest round of a long battle connected to Kmart’s bankruptcy settlement in 2002.

A decision Monday from a state judge allows Old Westbury real estate investor Lawrence Kadish to litigate his case against Bank of New York Mellon Trust Co., Merrill Lynch, Aztex Corp. and other companies that had a part in setting up a real estate tax advantage for Kmart in 1982.

Kadish, who had invested in a pool of 18 Kmart properties, sued those companies on several grounds, including failing to pursue full recovery of Kmart assets during bankruptcy, breach of contract and fraud. If all had gone well, the investment deal would have given him full ownership of those properties in January 2010, the suit said.

The overarching issue was whether those claims had already been decided in the bankruptcy settlement, and State Supreme Court Justice Stephen A. Bucaria in Mineola said no. While he granted some of the defendants’ requests by dropping them from certain allegations, the judge allowed most of Kadish’s claims to continue against Aztex, the limited partnership created by Merrill Lynch solely for Kmart’s real estate deals.

But key is the judge’s decision not to dismiss the bank and Merrill Lynch on the claim that they breached their fiduciary duties, said Kadish’s attorney, Jeffrey Wurst, a partner in Ruskin Moscou Faltischek in Uniondale.

Often, shell or one-purpose companies are set up to limit liability to certain partners or transactions. They don't necessarily hold a lot of assets, but the companies tied to them do, in this case the bank and Merrill Lynch. “It is eroding the protections that a large corporation has when it creates special purpose entities,” Wurst said, referring to Merrill Lynch for setting up Aztex. “When Merrill Lynch sets up Aztex to be involved in a transaction and Aztex creates culpable conduct, Merrill Lynch can’t escape that conduct.”

Attorneys for the other defendants did not return calls.

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