Opinion
Index No.: 651767/2014
12-02-2015
COLIN E. COMER and CLASSIC AUTO L.L.C., Plaintiffs, v. RONALD S. KROLICK, FIRST NATIONAL BANK OF NEW YORK, FNBNY BANCORP, INC., MICHAEL DEL GIUDICE, MCM SECURITIES LLC, BRIDGEHAMPTON NATIONAL BANK, and BRIDGE BANCORP, INC., Defendants.
DECISION & ORDER
:
Motion sequence numbers 001, 002, 003, and 006 are consolidated for disposition.
Defendant Ronald S. Krolick moves, pursuant to CPLR 3211, to dismiss the complaint. Seq. 001. Defendants Bridge Bancorp, Inc. (BBI) and Bridgehampton National Bank (BNB) (collectively, the Bridgehampton Defendants) separately move to dismiss (Seq. 002), as do defendants Michael Del Guidice and MCM Securities LLC (MCM). Seq. 003. Finally, Krolick and Del Guidice move by order to show cause, pursuant to BCL § 724(c), to compel BBI to advance their legal fees in this action. Seq. 006. BBI opposes and cross-moves to dismiss their cross-claims for indemnification of legal fees. The motions are granted in part and denied in part for the reasons that follow.
I. Procedural History & Factual Background
As this is a motion to dismiss, the facts recited are taken from the complaint (Dkt. 10) and the documentary evidence submitted by the parties.
Plaintiff Colin E. Comer lives and works in Milwaukee, Wisconsin. He owns and operates plaintiff Classic Auto, L.L.C. (Classic), a business that purchases and renovates classic cars. Krolick is a New York licensed attorney and a licensed securities broker. In 2004, Comer and Krolick met when Krolick contacted Comer to purchase a classic car. Since then, and until the events giving rise to this action, they had a close personal friendship that included vacationing together and spending time with each other's friends and family. They also provided professional services for each other without charge, described by plaintiffs as a "bartering arrangement". For instance, Krolick assisted Comer with legal matters, such as a mortgage refinancing and pre-nuptial agreement, and Comer would not charge Krolick his usual commissions and fees for brokering classic car transactions.
The instant dispute arose from an investment Comer made in a bank holding company, which was solicited by Krolick in February 2010. Comer allegedly had reservations regarding the investment, but "Krolick specifically advised Comer that he would not need to worry about the financial and legal complexities of investing in a bank because Krolick was an insider, and would be acting to protect Comer's interests as his attorney and investment advisor, as he had always done." Complaint ¶ 35 (emphasis added). The complaint states that Krolick advised Comer to invest in Modern Capital Holding (MCH), which would be the general partner of Modern Capital Partners (MCP). Krolick and Del Giudice were principals of MCP. They also worked for defendant MCM, and allegedly solicited the subject transactions from MCM's office.
The court extensively quotes from the complaint because plaintiffs' claims turn on what Krolick allegedly told Comer. As discussed below, these allegations state a claim for malpractice and fraud. Moreover, based on the allegations in the complaint, these claims are not infirm for lack of reasonable reliance by virtue of the terms of the written agreements purportedly governing Comer's investment, the latter of which, contrary to Krolick's original contention, Comer did not sign.
"According to records provided by Defendants, MCP was originally formed as a Delaware limited partnership for the purpose of investing substantially all partnership assets in FNBNY Bancorp, the intended bank holding company for FNBNY. MCH, the General Partner of MCP, is a Delaware limited liability company registered to do business in New York and having its original principal place of business in New York. MCH was controlled by Mario M. Cuomo, Ronald S. Krolick, Paul B. Guenther, Michael Del Giudice, Jerome Le Jantel and Vincent S. Fleming." See Dkt. 55 at 14 n.7.
Krolick's stated plan was that MCP would own FNBNY Bancorp, Inc. (FNBNY Delaware), which, in turn, would wholly own First National Bank of New York (FNBNY), FNBNY Securities, L.L.C., and FNBNY Finance Company, L.L.C. However:
FNBNY Delaware was a Delaware Corporation.
Comer was not familiar with banking, corporate structures, private placement agreements, subscription agreements or any of the legal implications of investments such as that [sic] at issue. But he was assured by Krolick that he had the requisite expertise, and he would be representing Plaintiffs' interests and would explain anything to Comer that was material to the investment. As part of providing such assurance and advice, Krolick pitched Comer on the benefits of investing early so he could be a member of MCH's "leadership arm for all future investments." Specifically, Krolick advised Comer that he should invest early so that he could obtain the benefit of the "carried interest" program that would be offered to early investors. Krolick explained that the earned interest was a "special over-veiling interest in the enterprise the General Partners of MCH - MCP - would get to allocate." Krolick represented that the "early investors," (i.e., the first $12.5 million of the $500 million they intended to raise) would get the carried interest benefit. Krolick specifically promised that if Comer became an early investor, Krolick would get all of Comer's investment capital back, plus 25% a year of the invested amount for 5 years, plus "an additional $1 million."Complaint ¶¶ 37-39 (emphasis added).
In short, under the formula identified by Krolick, if Comer invested $1 million, earned interest at 25% on the $1 million over five years, plus received an additional $1 million he would receive over $3 million on his $1 million investment. Comer was not familiar with concepts such as carried interest or "over-veiling" rights in a corporate structure, but relied on the expertise and advice of Krolick as his attorney and investment advisor in deciding to make the investment.
Krolick further solicited and lured Comer to invest in FNBNY by representing that Krolick was personally investing the same amount of his own money "toe to toe" with Comer and, since he was on the inside, Krolick would be able to make sure that their investments were safe or "get them out" of their interests if he saw any problems.
Then, in May 2010:
Krolick contacted Comer to contribute 50% of his subscribed amount for "General Partner Interest Capital" to MCH, and provided wiring instructions to wire funds to MCH's account at PNC Bank for his FNBNY investment. Krolick told Comer what entity he should send his money to for his FNBNY investment since Comer had no understanding of how the deal was being structured. At the time, Comer had not been asked to review or sign any agreements. To the contrary, his attorney and investment advisor [i.e., Krolick,] had assured Comer that there was no need for Comer to review anything because Krolick would explain whatever was important from the legal-ese papers.Complaint ¶ 40 (emphasis added).
When it came time for Comer to sign the contract, Krolick "discourag[ed] him from reading the content or obtaining independent counsel." ¶ 41. Instead:
by e-mail on June 30, 2010, Krolick told Comer "I will send you separate signature pages tomorrow so you don't have to fight through the package." Krolick specifically advised Comer that Krolick had reviewed the legal papers on Plaintiffs' behalf, and so there was no need for Comer to do so. He then sent Comer the signature pages for an early subscription agreement and the limited liability company agreement but not the content of those agreements. Relying on Krolick, and his direction where to send Comer's money for Comer's FNBNY investment, Comer wired $1 million to MCH within a few days, even before he had ever signed any documents. The funds were received and accessed by MCH despite the fact Comer never reviewed or acknowledged he reviewed, or signed that subscription agreement or the other agreements related to the investment. Krolick knew that Comer had wired his money without signing anything.Id.
After Comer invested the $1 million, in August 2010, Krolick provided Comer with an updated business plan and advised him to sign a subscription agreement. The new plan, purportedly, was for FNBNY Delaware to acquire another bank, Madison National Bank (Madison). In truth, FNBNY Delaware was merely acquiring a 4.9% stake in Madison, and Comer's money was used to make this purchase. In October 2010, Krolick notified Comer that the transaction had been completed. In December 2010, Krolick informed Comer of a plan to acquire more banks. Krolick further informed Comer that he was in discussions with Suffolk County National Bank and Bridgehampton National Bank.
Madison was a New York corporation. As explained below, though Madison was renamed "FNBNY Bancorp", it, as the surviving entity in the eventual merger, remained a New York corporation. As further explained below, the new Madison/FNBNY Bancorp entity is referred to as "FNBNY New York."
Subsequently, on December 29, 2010,
Krolick told [Comer], that they [i.e., Krolick and Del Guidice of MCM] had decided to adjust the ownership structure of the investment. Blaming "regulators" and citing discussions with their counsel, Debovoise & Plimpton, Krolick told the investors that the investment would be restructured from an investment in MCH to a direct investment in FNBNY, the subsidiary of the bank holding company of which Krolick was President and Chief Executive Officer.Complaint ¶ 47.
Plaintiffs claim that this contravened the type of investment Krolick promised Comer. Plaintiffs explain:
The effect of all of the post-subscription, post-investment maneuverings by Krolick and his partners was that Plaintiffs were misled as to what they were investing in when they invested months earlier. When the structure of the investment changed, Comer's investment was substantially diluted because, despite the title "merger and acquisition," the MCH investors were only injecting $3 million - one-third of which was Comer's money - to obtain a 4.9% interest in Madison. Instead of the FNBNY investors "owning" a bank, they owned a small percentage in the Madison bank entity. In short, the MCH control group was using other people's money, including Plaintiffs' money, to obtain their small stake in Madison, and did not disclose in advance what they were doing or how they were doing it.
Although the control group had pledged that they would put $37 million of other capital into MCP, upon information and belief, they did not do anything close to that. There was no "acquisition" of Madison. There was an "acquisition" of a minority share interest in Madison, which was renamed and called FNBNY, and the Madison National Bancorp holding company was renamed FNBNY Bancorp [herein referred to as FNBNY New York]. The rest of the interest in the new FNBNY and [FNBNY New York] was being held by prior Madison officers and shareholders. The only concession made by Madison and Madison National Bancorp is they agreed to change their name to FNBNY and FNBNY Bancorp, respectively. For all practical purposes, investors like Plaintiffs provided the funds for people like Krolick and Del Giudice, and MCH and MCP control group members, to acquire their interests in Madison. The control group became a
subset of MCH shareholders and Madison National Bancorp shareholders, and Krolick and his cronies controlled MCH.Complaint ¶¶ 49-50 (emphasis added).
Krolick did not provide Comer with a subscription agreement for MCH until June 2011 (the First Subscription Agreement). On June 28, 2011, Comer signed the First Subscription Agreement in alleged reliance on Krolick's advice, and allegedly without understanding the legal significance of the contract he was signing. See Dkt. 25. The First Subscription Agreement governs Comer's $1 million investment in MCH.
MCH is a Delaware LLC. The First Subscription Agreement is governed by Delaware law and contains a merger clause.
In January 2012, Krolick informed Comer that the Federal Reserve Board approved the transaction in which MCH sought to acquire 4.9% of Madison. It turns out that transaction had not yet closed. In March 2012, Krolick informed Comer that he needed more money to close. "Rather than disclosing that the banks that were the subject of Plaintiffs' investment were in financial difficulty, Krolick framed this cash shortage as a liquidity issue and an opportunity for Comer to make a high interest, short term 'bridge' loan." Complaint ¶ 55 (emphasis added). Plaintiffs further allege, "[u]pon information and believe, as Krolick's business partner, Del Giudice was aware of and contributed to Krolick's solicitation of Plaintiffs for additional funding pitched as providing a bridge loan to FNBNY and FNBNY Bancorp to address a short term liquidity issue." ¶ 56. Krolick stressed the urgency of procuring this short term bridge loan, and assured Comer that he would be paid back in three to six months since the bridge loan would be funded with Classic's operating capital and Comer stated that Classic' needed the loan to be quickly repaid. Comer then asked Krolick what the interest rate would be on the loan. Krolick responded that Comer would get 12-14% annual interest, the lower 12% being the rate if the loan was paid back in three months. Krolick stated that his "own feeling is it will be back in 3 months." ¶ 65. Based on Krolick's assurances, on March 29, 2012, Comer wired $2 million to FNBNY Bancorp's account believing he was making a bridge loan. To date, Comer has not been paid back for his original $1 million investment or the $2 million bridge loan. What has since come to light is that Krolick signed Comer's signature on a second subscription agreement dated April 2, 2012 (the Second Subscription Agreement), which provides that the $2 million was for equity (207,253.8860 shares of Class A Common Stock) in FNBNY Delaware and was not a bridge loan. See Dkt. 26.
As discussed below, at oral argument, the court dismissed the claims against Del Giudice for failure to plead non-conclusory allegations. Plaintiffs are given leave to replead against Del Giudice if they can set forth specific facts regarding what Del Giudice actually did wrong, as opposed to his mere general knowledge of the transactions.
Classic came to own shares of BBI through the Second Subscription Agreement and subsequent mergers with FNBNY New York and BBI. It should be noted that FNBNY New York is a New York corporation, and the Second Subscription Agreement is governed by New York law and contains a merger clause. Classic, not Comer, is a party to the Second Subscription Agreement. See Dkt. 26 at 1, 4, 24-25. The same is true with the First Subscription Agreement, where the signature line indicates that Comer was signing on behalf of Classic. See Dkt. 25 at 17. Nonetheless, Comer is a named plaintiff on the fraud and negligence claims based on the allegation that he had a personal relationship with Krolick. While plaintiffs ultimately will have to take a definitive position on who is entitled to the money sought from defendants, doing so is not necessary at this juncture. That said, it will be necessary to clarify myriad matters, for instance, the issue of whether it was Comer or Classic that made the alleged bridge loan. While the funds were taken from Classic, it is not clear if the loan was meant to be made by Comer, who then would be obligated to repay Classic, or if Classic was meant to be the lender. These questions can be addressed in interrogatories and depositions.
In September 2013, FNBNY New York announced that it would be acquired by BBI. In October 2013, Krolick flew to Wisconsin to dissuade Comer from taking any legal action with respect to the merger because the merger supposedly would be financially beneficial to Comer. On February 14, 2014, FNBNY merged with BNB, and FNBNY New York merged with BBI.
It should be noted that the merger may well increase the value of Comer's investment in the long run. However, Comer's complaint is that he was not supposed to have an interest in BBI but, allegedly, agreed to make a bridge loan. BBI, as successor to FNBNY New York and FNBNY Delaware (the original borrower), may be liable for the bridge loan if such a loan agreement is found to exist.
On June 10, 2014, plaintiffs commenced this action by filing a Summons with Notice and filed the complaint on August 22, 2014. See Dkt. 10. Plaintiffs assert ten causes of action, numbered here as in the complaint: (1) legal malpractice against Krolick; (2) fraud against Krolick, Del Giudice, and MCM; (3) breach of fiduciary duty against Krolick, Del Giudice, and MCM; (4) negligent misrepresentation against Krolick, Del Giudice, and MCM; (5) breach of contract (i.e., the alleged bridge loan agreement) against FNBNY, FNBNY New York, BBI, and BNB; (6) fraud against all defendants; (7) breach of fiduciary duty against all defendants; (8) negligent misrepresentation against all defendants; (9) conversion against all defendants; and (10) unjust enrichment/constructive trust against all defendants.
On October 6, 2014, defendants moved to dismiss. On October 31, 2014, Krolick and Del Giudice filed cross-claims (declaratory judgment and breach of contract) (see Dkt. 42) against BBI for indemnification of their attorneys' fees under section 7.9.1 of the Agreement and Plan of Merger between FNBNY New York and BBI dated September 27, 2013 (the BB1/FNBNY Merger Agreement), which provides:
For a period of six years after the Effective Time, Bridge Bancorp shall indemnify, defend and hold harmless each person who is now, or who has been at any time before the date hereof or who becomes before the Effective Time, an officer, director or employee of FNBNY or an FNBNY Subsidiary (the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including attorney's fees), liabilities or judgments or amounts that are paid in settlement (which settlement shall require the prior written consent of Bridge Bancorp, which consent shall not be unreasonably withheld) of or in connection
with any claim, action, suit, proceeding or investigation, whether civil, criminal, or administrative (each a "Claim"), in which an Indemnified Party is, or is threatened to be made, a party or witness in whole or in part or arising in whole or in part out of the fact that such person is or was a director, officer or employee of FNBNY or an FNBNY Subsidiary if such Claim pertains to any matter of fact arising, existing or occurring at or before the Effective Time (including, without limitation, the Merger and the other transactions contemplated hereby), regardless of whether such Claim is asserted or claimed before, or after, the Effective Time, to the fullest extent as would have been permitted by FNBNY under the NYBCL and under FNBNY's Certificate of Incorporation and Bylaws. Bridge Bancorp shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the fullest extent as would have been permitted by FNBNY under the NYBCL and under FNBNY's Certificate of Incorporation and Bylaws, upon receipt of an undertaking to repay such advance payments if he shall be adjudicated or determined to be not entitled to indemnification in the manner set forth below. Any Indemnified Party wishing to claim indemnification under this Section 7.9.1 upon learning of any Claim, shall notify Bridge Bancorp (but the failure so to notify Bridge Bancorp shall not relieve it from any liability which it may have under this Section 7.9.1, except to the extent such failure materially prejudices Bridge Bancorp) and shall deliver to Bridge Bancorp the undertaking referred to in the previous sentence.See Dkt. 46 at 60-61 (bold in original).
As indicated earlier, FNBNY Delaware had previously merged with Madison, which was governed by a merger agreement dated March 29, 2012. See Dkt. 45. Madison was the surviving corporation, but was renamed "FNBNY Bancorp", and is referred to herein as FNBNY New York. Krolick was an officer and director of FNBNY Delaware. Del Giudice was a director.
By letters dated June 27 and July 8, 2014, Krolick and Del Giudice demanded that BBI advance their legal fees. See Dkt. 47 & 48. On October 9, 2014, BBI filed an action in Suffolk County Supreme Court seeking a declaratory judgment regarding Krolick's and Del Giudice's entitlement to indemnification of their legal fees in this action. See Bridge Bancorp, Inc. v Krolick, Index No. 68419/2014 (Sup Ct, Suffolk County) (Garguilo, J.). By order dated March 11, 2015, Justice Garguilo dismissed that action, holding that Krolick's and Del Giudice's right to indemnification should be litigated in this case. See Dkt. 122.
On March 24, 2015, Krolick and Del Giudice moved by order to show cause for advancement of their legal fees. On April 10, 2015, BBI cross-moved to dismiss Krolick's and Del Giudice's cross claims. The court held oral argument on all of the instant motions on July 21, 2015. See Dkt. 148 (7/21/15 Tr.). As previously noted, the court dismissed the claims against Del Giudice and reserved on the balance of the motions.
The delay in deciding the motions to dismiss, which were fully briefed in November 2014, was due to recusals of the two prior assigned Justices. This case did not come before this court until a preliminary conference was held on March 31, 2015. See Dkt. 131. The oral argument transcript was not submitted until September 17, 2015.
II. Motions to Dismiss (Seq. 001, 002, & 003)
A. Legal Standard
On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v Gani Realty Corp., 60 AD3d 491 (1st Dept 2009); Skillgames, LLC v Brody, 1 AD3d 247, 250 (1st Dept 2003), citing McGill v Parker, 179 AD2d 98, 105 (1992); see also Cron v Harago Fabrics, 91 NY2d 362, 366 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged and the inferences that can be drawn from them, the complaint states the elements of a legally cognizable cause of action. Skillgames, id., citing Guggenheimer v Ginzburg, 43 NY2d 268, 275 (1977). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. "However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration." Skillgames, 1 AD3d at 250, citing Caniglia v Chicago Tribune-New York News Syndicate, 204 AD2d 233 (1st Dept 1994). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed only if "the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326 (2002) (citation omitted); Leon v Martinez, 84 NY2d 83, 88 (1994).
B. Claims Against Krolick (Seq. 001)
Plaintiffs assert causes of action against Krolick for malpractice, fraud, breach of fiduciary duty, negligent misrepresentation, conversion, and unjust enrichment. These claims seek redress for two sets of alleged wrongs. To begin, plaintiffs allege that Comer's first investment of $1 million was induced by Krolick's misrepresentations about the nature of the investment. Next, plaintiffs allege that Comer's subsequent $2 million investment was induced by Krolick's representation that it would be a bridge loan, not additional equity.
Plaintiffs claim both investments were made as a product of legal malpractice and fraud. They contend Krolick, allegedly acting as Comer's attorney, did not accurately portray the nature of the investments, what the moneys would be used for, or the contractual terms that would govern repayment. Plaintiffs further contend that but for these misrepresentations, they never would have invested.
Krolick seeks dismissal of both the malpractice and fraud claims. He argues that he did not serve as Comer's attorney with respect to the subject investments, that the terms governing the contracts (e.g., the merger clauses) preclude Comer's claims of extra-contractual representations and oral agreements, and that plaintiffs suffered no proximately caused losses. On this motion to dismiss, Krolick's arguments fail.
"In order to recover damages in a legal malpractice action, a plaintiff must establish that the attorney failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession and that the attorney's breach of this duty proximately caused plaintiff to sustain actual and ascertainable damages." Dombrowski v Bulson, 19 NY3d 347, 350 (2012) (citations and quotation marks omitted). It is axiomatic that a legal malpractice claim does not lie in the absence of an attorney-client relationship. Cusack v Greenberg Traurig, LLP, 109 AD3d 747 (1st Dept 2013), citing Waggoner v Caruso, 68 AD3d 1, 5 (1st Dept 2009).
Krolick seeks dismissal on the ground that he was not plaintiffs' attorney. The complaint, however, adequately pleads the existence of an attorney-client relationship with respect to the transactions at issue in this case. While Krolick disputes these allegations, the court must assume, for the purposes of this motion, the truth of the allegation that Krolick told Comer that he would be representing plaintiffs as their legal advisor. See, e.g., Complaint ¶ 35. Moreover, the complaint pleads sufficient facts to infer that Krolick served as Comer's transactional counsel. It states that Krolick specifically advised Comer to not read the subscription agreements and that Krolick told Comer that he would explain the terms of the deal. Krolick, however, allegedly misrepresented the terms of the contracts.
As noted earlier and discussed during oral argument, it is unclear whether Comer or Classic is the proper plaintiff. Likewise, it is not clear if Krolick was both Comer's and Classic's attorney, or just Comer's. These, however, are questions of fact that cannot be resolved on this motion.
Nonetheless, Krolick argues that the terms of the very contracts Krolick allegedly misrepresented preclude Comer's claims. On this motion, that argument carries no weight. Parties are ordinarily obligated to read contracts and are bound by their terms regardless of whether they actually did so. See Cash v Titan Fin. Servs., Inc., 58 AD3d 785, 788 (2d Dept 2009) ("[a] party is under an obligation to read a document before he or she signs it, and a party cannot generally avoid the effect of a [document] on the ground that he or she did not read it or know its contents."), quoting Martino v Kaschak, 208 AD2d 698 (2d Dept 1994). However, on a motion to dismiss, this principle will not defeat a claim for malpractice based on an attorney's failure to accurately explain the terms of a contract to his client. See Kram Knarf, LLC v Djonovic, 74 AD3d 628 (1st Dept 2010) ("allegations that defendant attorneys negligently gave their plaintiff clients an incorrect explanation of the contents of legal documents in connection with a property acquisition sufficiently states a legal malpractice claim against them"). That is particularly so where, as here, Comer alleges that Krolik dissuaded him from reading the documents and also forged his signature on the Second Subscription Agreement. At most, as discussed below, Comer's failure to read the contracts presents a question of fact as to reasonable reliance.
Next, Krolick argues that plaintiffs fail to state a claim for fraud. He further argues that, at best, the malpractice and fraud claims are duplicative and plaintiffs should not be allowed to simultaneously maintain both claims. "The elements of a cause of action for fraud [are] a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages." Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 (2009); see Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., 115 AD3d 128, 135 (1st Dept 2014). Pursuant to CPLR 3016(b), "the circumstances constituting the wrong shall be stated in detail." Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 491 (2008).
The complaint states a claim for fraud. Simply put, plaintiffs allege that but for Krolick's alleged misrepresentations about the nature of the investment, misrepresentations which are set forth with particularity, they would not have invested. Contrary to Krolick's contentions, plaintiffs have adequately pleaded damages, even though they received the shares provided for in the subscription agreements. Plaintiffs, however, contend that the First Subscription Agreement was represented to be an entirely different investment and the second was represented to be a loan, not an equity investment. In suing for fraud, Comer is seeking what he thought he bargained for. To the extent plaintiffs' damages should be discounted by the value of the shares plaintiffs received, that is an issue beyond the scope of this motion.
Krolick also contends that even if plaintiffs pleaded actual reliance on his representations, the fraud claim nonetheless fails because such reliance was unreasonable as a matter of law. See Stuart Silver Assoc. v Baco Dev. Corp., 245 AD2d 96, 98-99 (1st Dept 1997) ("Where a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means, he cannot claim justifiable reliance on defendant's misrepresentations"). Krolick avers that if Comer would have read the subscription agreements, he would have understood that his investment was much different than represented by Krolick.
The argument fails since, according to the complaint, Comer did not read the agreements at Krolick's urging and as a result of his trust in Krolick as his close friend and lawyer. Comer alleges he was hesitant to invest in a bank holding company because of its complexity, but Krolick assured him that the terms would be explained to him so Comer would not, on his own, have to figure out the details. He allegedly was further assured that his lawyer and advisor, Krolick, would protect the investment, and Krolick sent him separate signature pages. For Krolick to now complain, essentially, that Comer should not have listened to him, is simply not a tenable argument on a motion to dismiss. At best, it presents questions of fact, since "[t]he question of what constitutes reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss." ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 NY3d 1043, 1045 (2015).
It should be noted that, as Krolick observes, the line between malpractice and fraud is not clear in a case such as this. That is, Krolick's alleged failure to accurately inform Comer of the investment terms is, as even Krolick admits, an allegation of outright fraud. However, since the elements of fraud are more exacting than malpractice (a negligence claim), that Krolick's alleged wrongdoing may actually have been undertaken with fraudulent intent is not a reason to foreclose, on a motion to dismiss, the possibility of recovery on a negligence theory. See Vermont Mut. Ins. Co. v McCabe & Mack, LLP, 105 AD3d 837, 840 (2d Dept 2013) ("Where, as here, tortious conduct independent of the alleged malpractice is alleged, a motion to dismiss a cause of action as duplicative is properly denied"); see also On the Level Enterprises, Inc. v 49 E. Houston LLC, 104 AD3d 500, 501 (1st Dept 2013) (CPLR 3014 permits a party "to plead inconsistent theories of recovery").
Moreover, Comer has validly pleaded a claim for breach of fiduciary duty based on his personal and professional relationship with Krolick. "A fiduciary relationship arises 'between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.'" Roni LLC v Arfa, 18 NY3d 846, 848 (2011), quoting EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 (2005). "A fiduciary relationship is 'necessarily fact-specific' and is also 'grounded in a higher level of trust than normally present in the marketplace between those involved in arm's length business transactions.'" Oddo Asset Mgmt. v Barclays Bank PLC, 19 NY3d 584, 593 (2012), quoting EBC I, 5 NY3d at 19. "[A] fiduciary relationship might be found to exist, in appropriate circumstances, between close friends or even where confidence is based upon prior business dealings." Apple Records, Inc. v Capitol Records, Inc., 137 AD2d 50, 57 (1st Dept 1988) (emphasis added); see Lawrence v Kennedy, 95 AD3d 955, 958 (2d Dept 2012) (same).
The complaint pleads ample allegations regarding Comer's and Krolick's personal and professional relationship, and further alleges that Comer relied on that relationship in trusting Krolick's representations about the subject investments. Thus, even in the absence of an attorney client relationship, Krolick's alleged misrepresentations may be actionable. Furthermore, the alleged fiduciary relationship provides a basis for the negligent misrepresentation claim. See J.A.O. Acquisition Corp. v Stavitsky, 8 NY3d 144, 148 (2007) ("A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information").
The conversion and unjust enrichment claims asserted against Krolick, however, are dismissed as duplicative. If Krolick is not liable for intentionally or negligently inducing plaintiffs to invest, Krolick would not have committed any wrongful act that would give rise to any recovery. See Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 182 (2011) (unjust enrichment claim viable only when "it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered").
C. Claims Against the Bridgehampton Defendants (Seq. 002)
As noted earlier, these defendants are the successors, via merger, to FNBNY and FNBNY New York. Therefore, FNBNY and FNBNY New York do not separately move to dismiss.
Plaintiffs assert a breach of contract claim against the Bridgehampton Defendants. Plaintiffs claim that Krolick, acting as agent of FNBNY Delaware, entered into a binding bridge loan agreement with plaintiffs. Plaintiffs do not appear to be seeking rescission of the Second Subscription Agreement but, instead, seek to enforce the alleged bridge loan agreement. The Bridgehampton Defendants, however, claim that the terms of the Second Subscription Agreement, such as its merger clause, preclude plaintiffs from maintaining a claim to enforce an oral loan agreement that contradicts the express terms of the Second Subscription Agreement. Ordinarily, the Bridgehampton Defendants would be correct. See Ashwood Capital, Inc. v OTG Mgmt., Inc., 99 AD3d 1, 9 (1st Dept 2012). But, where, as here, Comer alleges that Krolick, not he, signed the Second Subscription Agreement, the agreement's merger clause does not bar plaintiffs from stating a claim for breach of the bridge loan agreement.
It is not clear that the loan agreement was necessarily oral, since its terms allegedly were set forth in emails. Regardless, the issue of whether the agreement was oral or written is of no moment at this juncture, as defendants do not proffer an argument which turns on the loan agreement not being reduced to writing.
Next, the Bridgehampton Defendants argue the fraud claim asserted against them should be dismissed for lack of reasonable reliance due to the merger clause. For the reasons discussed above, on this motion, this argument is rejected.
However, the breach of fiduciary duty claim asserted against the Bridgehampton Defendants is dismissed because the banks, unlike Krolick individually, did not have a fiduciary relationship with plaintiffs. According to the complaint, FNBNY Delaware was merely plaintiffs' counterparty to the alleged bridge loan contract. Similarly, the negligent misrepresentation claim asserted against the Bridgehampton Defendants is dismissed since the existence of a fiduciary relationship is an element of such a claim. See J.A.O. Acquisition Corp., 8 NY3d at 148.
Plaintiffs submit no authority for the proposition that since Classic was a member in MCH, the original general partner of MCP (which was intended to invest all of its assets into FNBNY Delaware), FNBNY Delaware has fiduciary duties to Classic.
The conversion and unjust enrichment claims asserted against the Bridgehampton Defendants also are dismissed. At best, they are duplicative of the breach of contract claim since if plaintiffs fail to prevail on the contract claim - that is, if the Bridgehampton Defendants establish their lack of an obligation to repay the alleged bridge loan - then there is no basis for plaintiffs to recover the loan though equitable or quasi contract claims.
It should be noted that if the Second Subscription Agreement is held to be enforceable against plaintiffs, such a finding would also preclude the assertion of any quasi-contract claims relating to its subject matter. See EBC I, 5 NY3d at 23, accord Clark-Fitzpatrick, Inc. v Long Island R.R. Co., 70 NY2d 382, 388 (1987).
D. Claims Against MCM and Del Giudice (Seq. 003)
When Comer was solicited to invest, Krolick and Del Giudice worked for MCM. Plaintiffs seek to hold MCM vicariously liable for the claims asserted against Krolick and Del Giudice. As noted earlier, the claims against Del Giudice were dismissed at oral argument for failure to plead with the requisite specificity.
It is well settled that "[u]nder the doctrine of respondeat superior, an employer may be vicariously liable for the tortious acts of its employees only if those acts were committed in furtherance of the employer's business and within the scope of employment." Doe v Guthrie Clinic, Ltd., 22 NY3d 480, 484 (2014) (emphasis added), quoting N.X. v Cabrini Med. Ctr., 97 NY2d 247, 251 (2002). Plaintiffs allege that Krolick's solicitation of the subject investments occurred within the scope of Krolick's employment at MCM. MCM disputes this allegation. Since defendants do not proffer any documentary evidence conclusively refuting this allegation, the question of whether MCM may be held vicarious liable for Krolick's alleged malfeasance cannot be resolved on this motion. MCM, therefore, remains a defendant on each of the causes of action asserted against Krolick that survive this motion.
Plaintiffs allege, for instance, that Krolick, who worked for both MCM and FNBNY Delaware, performed his work out of a single office. This alone is likely insufficient to establish respondeat superior liability. However, MCM's mere denial that it had nothing to do with the subject bank investment is not a basis for dismissal, since allegations in the complaint must be presumed to be true on a motion to dismiss.
III. Advancement & Indemnification of Legal Fees (Seq. 006)
The standard governing BBI's cross-motion to dismiss the cross-claims is the same standard under CPLR 3211 set forth earlier with respect to defendants' motion to dismiss the complaint. It will not be repeated here.
On this motion, Krolick and Del Giudice seek advancement of their legal fees from BBI, not a final adjudication of their indemnification rights. It is well established that "[i]ndemnification and advancement of legal fees are two distinct corporate obligations." Crossroads ABL LLC v Canaras Capital Mgmt., LLC, 105 AD3d 645 (1st Dept 2013), citing Ficus Investments, Inc. v Private Capital Mgmt., LLC, 61 AD3d 1, 9 (1 st Dept 2009) ("whether an officer is entitled to advancement is determined in a summary proceeding, while the right to indemnification is delayed until the conclusion of the matter."), quoting Kaung v Cole Nat'l Corp., 884 A2d 500, 509 (Del 2005).
B. Discussion
Krolick's and Del Giudice's right to advancement and indemnification is complicated by the numerous mergers discussed earlier. To briefly recap, Krolick and Del Giudice, who were directors of FNBNY Delaware, claim to have indemnity rights under section 6.1.1 of FNBNY Delaware's bylaws:
The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company . . . against expenses (including attorneys' fees), judgments, fines, amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company.See Dkt. 124 at 8-9 (emphasis added).
Similarly, section 8.1 of the Amended and Restated Certificate of Incorporation of FNBNY Delaware states:
The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, including actions by or in the right of the Corporation, whether civil, criminal, administrative, arbitrative or investigative, by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or of any constituent corporation absorbed by the Corporation in a consolidation or merger, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, sole proprietorship, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the fullest extent permitted by the [Delaware General Corporation Law ("DGCL")], and any other applicable law, as from time to time in effect.See Dkt. 123 at 5-6. Hence, the indemnification is mandatory and applies to former directors.
Section 8.2 further provides:
The Corporation may pay in advance any expenses (including attorneys' fees) that may become subject to indemnification under Section 10.1 [sic] if the person receiving the payment undertakes in writing to repay the same if it is ultimately determined that such person is not entitled to indemnification by the Corporation under Delaware law.See id. at 6 (emphasis added).
Krolick's and Del Giudice's motion for advancement is denied. Although indemnification as directors of FNBNY Delaware is mandatory, advancement of legal expenses is permissive. Krolick and Del Guidice, not BBI (which, of course, was uninvolved in FNBNY Delaware's contracts), could have provided for mandatory advancement, as opposed to permissive advancement. See Charney v Am. Apparel, Inc., 2015 WL 5313769, at *7-8 (Del Ch 2015) (Bouchard, C.) (former director not entitled to advancement where the advancement right was qualified by the words "may advance" and "may be so paid"); see also Gentile v SinglePoint Financial, Inc., 787 A2d 102, 106 (Del Ch 2001) (discussing difference between mandatory and permissive advancement), aff'd 788 A2d 111 (Del 2001) (bylaw unambiguous; did not provide for mandatory advancement). They did not.
When advancement and indemnification rights are set forth in a contract, such rights must be strictly construed. Haynes v Kleinewefers & Lembo Corp., 921 F2d 453, 456 (2d Cir 1990) ("When a claim is made that a duty to indemnify is imposed by an agreement, that agreement must be strictly construed so as not to read into it any obligations the parties never intended to assume. In the absence of a duty to indemnify imposed by law, a negligent party has no right to be indemnified unless the right is contractually-derived.") (applying New York law; citations omitted"), accord Hooper Assocs., Ltd. v AGS Computers, Inc., 74 NY2d 487, 491 (1989) ("Inasmuch as a promise by one party to a contract to indemnify the other for attorney's fees incurred in litigation between them is contrary to the well-understood rule that parties are responsible for their own attorney's fees, the court should not infer a party's intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise") (emphasis added); see Gentile, 788 A2d at 113 ("if the bylaw's language is unambiguous, the Court need not interpret it or search for the parties' intent"). Consequently, even though Krolick and Del Giudice are willing to obligate themselves to repay BBI if they are ruled to not have indemnification rights, their making that offer merely grants BBI the discretion - not the obligation - to advance their fees. BBI does not wish to do so. Hence, Krolick and Del Giudice are not entitled to advancement.
That said, BBI's motion to dismiss the cross-claims for indemnification is denied. Unlike advancement, which can be denied solely on the language in FNBNY Delaware's governing documents, BBI's indemnity obligation turns on the subsequent merger agreements.
Krolick and Del Giudice claim that on April 2, 2012, pursuant to the merger agreement between FNBNY Delaware and Madison, whereby the surviving entity was FNBNY New York, FNBNY New York assumed FNBNY Delaware's indemnity obligations to Krolick and Del Giudice. See Dkt. 125 (Madison Merger Agreement). This assumption of liabilities purportedly occurred by virtue of section 1.2, which provides that the merger "shall have the effects set forth in Section 906 of the New York Business Corporation Law [the NYBCL] and Section 259 of the Delaware General Corporation Law [the DGCL]." See id. at 1.
Section 906(b)(3) of the NYBCL provides:
[When a] merger or consolidation has been effected . . . the surviving or consolidated corporation shall assume and be liable for all the liabilities, obligations and penalties of each of the constituent entities.Section 259(a) of the DGCL provides:
When any merger or consolidation shall have become effective under this chapter, for all purposes of the laws of this State the separate existence of all the constituent corporations, or of all such constituent corporations except the one into which the other or others of such constituent corporations have been merged, as the case may be, shall cease and the constituent corporation shall become a new corporation, or be merged into one of such corporations, as the case may be . . . and all debts, liabilities and duties of the respective constituent corporations shall thenceforth attach to said surviving or resulting corporation, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it.
The merger between FNBNY New York and BBI is governed by the BBI/FNBNY Merger Agreement, which is dated September 27, 2013. See Dkt. 126. Krolick and Del Giudice claim that in this merger, "BBI [a New York entity] assumed all the obligations of FNBNY New York, including the indemnification and advancement obligations which FNBNY New York had assumed from FNBNY Delaware." See Dkt. 117 at 13-14. Krolick and Del Giudice rely on section 2.1(b) of the BBI/FNBNY Merger Agreement, which states that "the separate existence of FNBNY [New York] shall cease and all of the rights, privileges, powers, franchises, properties, assets, liabilities and obligations of FNBNY [New York] shall be vested in and assumed by [BBI]." See Dkt. 126 at 12. They assert that this provision "directly obligates BBI to indemnify [] Krolick and Del Giudice for any claims arising, in whole or in part, from the fact that they were officers or directors of FNBNY New York." See Dkt. 117 at 14.
As noted earlier, Krolick and Del Giudice further rely on section 7.9.1 of the BBI/FNBNY Merger Agreement, which requires BBI to:
indemnify, defend and hold harmless each person who is now, or who has been at any time before the date hereof . . . an officer, director or employee of FNBNY [New York] or an FNBNY [New York] Subsidiary (the 'Indemnified Parties') against all losses, claims, damages, costs, expenses (including attorneys' fees), liabilities or judgments or amounts that are paid in settlement (which settlement shall require the prior written consent of [BBI], which consent shall not be unreasonably withheld) of or in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal or administrative (each a 'Claim'), in which an Indemnified Party is, or is threatened to be made, a party or witness in whole or in part out of the fact that such person is or was a director, officer or employee of FNBNY [New York] . . . to the fullest extent as would have been permitted by FNBNY under the [BCL].See Dkt. 126 at 60-61. Krolick and Del Giudice were directors of FNBNY Delaware but not FNBNY New York. Krolick and Del Giudice aver that BBI's assumption of FNBNY New York's indemnity obligations, which, in turn, were previously assumed from FNBNY Delaware, plus the indemnity language in section 7.9.1, make BBI's indemnity obligations unmistakably clear.
BBI disagrees. BBI contends the Madison Merger Agreement vitiated the bylaws and certificate of incorporation of FNBNY Delaware, and that since the Bylaws of Madison (i.e., FNBNY New York) do not provide an indemnification obligation to FNBNY Delaware's former directors, Krolick's and Del Giudice's indemnification rights were extinguished. BBI notes that Exhibit A to the Madison Merger Agreement provided that Madison's certificate of incorporation would be amended, but the amendment did not include an express indemnification right for FNBNY Delaware's directors. See Dkt. 125 at 11-15. This is true. FNBNY New York's bylaws, unremarkably, only address the indemnification rights of FNBNY New York's directors. It is not clear, however, that this is dispositive. It is unclear if former FNBNY Delaware directors are considered former FNBNY New York directors. And, even if this is not so, since BBI assumed FNBNY Delaware's liabilities, Krolick and Del Giudice contend that BBI remains liable for FNBNY Delaware's indemnification obligations.
The parties do not cite any on-point precedent governing these circumstances. The issue here is the tension between (1) the omission of any express mention of indemnity for FNBNY Delaware's former directors in the merger agreements and bylaws of FNBNY New York and BBI; and (2) BBI's clear liability for the liabilities of FNBNY Delaware. The cases relied on by the parties are inapposite. Krolick's and Del Giudice's reliance on Bowen Eng'g v Estate of Reeve, 799 FSupp 467 (DNJ 1992), a non-binding out-of-state trial court case applying New Jersey law, is misplaced for a number of reasons. Principally, the merger in Bowen, unlike the merger here, appears to have been a sham. See id. at 488 (the surviving entity was a "mere continuation" of the original entity). Also inapposite is Grant-Howard Assocs. v Gen. Housewares Corp., 63 NY2d 291 (1984), which stands for the now well-established principle that, in a merger agreement, companies can allocate liability for post-merger claims among themselves, "but they cannot affect the rights of a stranger to their contract." Id. at 297. In other words, parties to the merger cannot eliminate the right of a third-party tort victim to sue either of the merging companies. The companies may only allocate liability amongst themselves. Here, in contrast, the question is whether in light of the applicable arms' length, bargained-for provisions of the merger agreements, did the parties intend to disclaim Krolick's and Del Giudice's rights to indemnification? The record on this motion to dismiss does not provide the answer. The indemnification cross-claim, therefore, survives this motion. It also is premature to address the proper amount of indemnification. Accordingly, it is
Moreover, the indemnification claim here is not a claim between the seller and purchaser. Rather, it is a claim asserted against the purchaser by the former directors of the seller, the latter being more akin to a third-party claimant.
New York law is in conflict with Delaware law on certain issues. Compare 546-552 W. 146th St. LLC v Arfa, 99 AD3d 117, 124 (1st Dept 2012), with Stifel Fin. Corp. v Cochran, 809 A2d 555 (Del 2002). It is not clear which law applies. At the summary judgment stage, the parties shall provide the court with more robust authority (particularly from the Delaware Court of Chancery) on (1) how indemnity rights of directors of the non-surviving entity are impacted by a merger; and (2) which law applies to the question of whether fees-on-fees are permitted.
ORDERED that the motions to dismiss are granted to the following extent: (1) the claims against defendant Michael Del Guidice are dismissed without prejudice and with leave to replead; (2) the ninth (conversion) and tenth (unjust enrichment) causes of action are dismissed against defendants Ronald S. Krolick and MCM Securities LLC; (3) the seventh (breach of fiduciary duty), eighth (negligent misrepresentation), ninth (conversion), and tenth (unjust enrichment) causes of action are dismissed against defendants First National Bank of New York, FNBNY Bancorp, Inc., Bridge Bancorp, Inc., and Bridgehampton National Bank; and (4) the motions to dismiss are otherwise denied; and it is further
ORDERED that the motion by defendants Ronald S. Krolick and Michael Del Guidice for advancement of legal fees is denied, and the cross motion by defendant Bridge Bancorp, Inc. to dismiss their cross-claims for indemnification is denied; and it is further
ORDERED that the stay of discovery issued on the July 21, 2015 record is hereby lifted; and it is further
ORDERED that the parties are to appear in Part 54, Supreme Court, New York County, 60 Centre Street, Room 228, New York, NY, for a status conference on December 17, 2015, at 10:30 in the forenoon. Dated: December 2, 2015
ENTER:
/s/_________
J.S.C.