Opinion
654924/2017
11-01-2018
Nancy BEHRMAN and Nancy Behrman Communications, Inc., Plaintiffs, v. RED FLOWER, INC. and Yael Alkalay, Defendant.
For Plaintiffs: Lonqo Law Group, PLLC 9 Bartlett Street, Suite 141 Andover, MA 01810, By: Michael V. Longo, Esq. For Defendants: Law Offices of Ronald I. Paltrowitz 405 Lexington Avenue, 26th FloorNew York, New York 10174 By: Ronald I. Paltrowitz, Esq.
For Plaintiffs: Lonqo Law Group, PLLC 9 Bartlett Street, Suite 141 Andover, MA 01810, By: Michael V. Longo, Esq.
For Defendants: Law Offices of Ronald I. Paltrowitz 405 Lexington Avenue, 26th FloorNew York, New York 10174 By: Ronald I. Paltrowitz, Esq.
Robert R. Reed, J.
Plaintiffs Nancy Behrman (Behrman) and Nancy Behrman Communication, Inc. (NBC) seek to recover fees for public relations services they allegedly provided defendants Red Flower, Inc. (Red Flower) and Yael Alkalay (Alkalay). Behrman also seeks relief in connection with her investment in Red Flower. The six-count complaint asserts causes of action for: (1) breach of fiduciary duty; (2) quantum meruit; (3) unjust enrichment; (4) breach of the implied covenant of good faith and fair dealing; (5) accounting; and (6) constructive trust.
Issue was joined on August 30, 2017, when defendants filed their answer. Defendants now move, pursuant to CPLR 3212, for summary judgment dismissing the complaint and for sanctions pursuant to 22 NYCRR 130-1.1. Should the court deny the motion for summary judgment, defendants seek an order, pursuant to CPLR 3124, compelling plaintiffs' compliance with defendants' first request for production of documents.
Background
Alkalay is the President and a director of Red Flower, a New York corporation. Behrman is the President of NBC, a public relations and marketing firm. Allegedly in 1999, Alkalay met with Behrman about promoting Red Flower. Behrman states that she agreed to provide Red Flower with sweat equity in the form of deeply discounted public relations (PR) services. She states that, starting in October 2001, she billed $1,500 per month, plus expenses, whereas "[she] would typically have charged no less than $7,500 per month for the type of PR services [she] was providing to Red Flower." Behrman aff, ¶ 8. Behrman states that such agreements are her standard practice, that they are typically "not in writing, and there is no ‘set’ amount of equity which [she is] to receive; rather, there is an oral hand shake agreement that when the company is sold, [she] will receive the value of [her] services, as well as a premium for the value [she] added to the company." Behrman aff, ¶ 4.
On October 22, 2002, Behrman executed a "Joinder Agreement" with Red Flower, pursuant to which she paid $25,000 for 7.125 shares of Series A Preferred Stock. In 2004, Behrman executed a "Stock Purchase and Shareholders Agreement" (2004 Shareholder Agreement), acknowledging Red Flower's issuance of Series A-1 Preferred Stock.
Behrman states that she stopped billing Red Flower for PR services in 2011, but that she continued to provide services until sometime in 2012. A Quick Books printout, annexed as exhibit A to Behrman's affidavit, shows billing activity starting in October 2001 and ending in March 2011 and totaling $155,375.17. Allegedly, "the PR services rendered was [sic] in excess of $100,000 of service per year ...." Complaint, ¶ 22.
Alkalay states that Red Flower utilized NBC's PR services between 1999 and 2010, that these services were billed monthly and were paid in full. A list of payments that Red Flower allegedly made to plaintiffs, annexed as exhibit A to Alkalay's affidavit, shows payments made from October 1999 to February 2011 that total $187,62.52. According to Alkalay, the instant action was the first time that plaintiffs demanded additional compensation.
In mid-2016, Alkalay allegedly sought Behrman's assistance in selling a majority share of Red Flower and, to that end, Behrman sought to review the corporation's books and records. Alkalay allegedly refused to provide access and, by February 2017, ceased all communications with Behrman.
Behrman's attorney sent Red Flower letters in May and June 2017, requesting Red Flower's balance sheets, access to its books and records and that a quarterly investor meeting be held, pursuant the 2004 Shareholder Agreement. Not receiving a response, plaintiffs commenced the instant action, by filing a summons and complaint on July 20, 2017.
Alkalay states that Red Flower held semi-annual meetings with shareholders, that shareholders received electronic notification of these meetings and that Behrman chose not to attend. Lastly, she states that Behrman and her counsel were granted full access to all Red Flower's corporate records on October 26, 2017.
Analysis
Motion to Dismiss and Motion for Summary Judgment
As a preliminary matter, the parties dispute whether the instant motion is a motion to dismiss for failure to state a claim or a motion for summary judgment. "[A] motion to dismiss under CPLR 3211(a)(7) for failure to state a cause of action, which addresses merely the sufficiency of the pleadings, is distinct from a motion for summary judgment pursuant to CPLR 3212, which searches the record and looks to the sufficiency of the underlying evidence." Tenzer, Greenblatt, Fallon & Kaplan v. Capri Jewelry , 128 AD2d 467, 469 (1st Dept 1987). Here, despite being designated a motion for summary judgment, the notice of motion states that defendants seek dismissal of the complaint "on the grounds that [among other things] the Causes of Action ... fail to state a cause of action." NYSCEF document number 9 at 1-2. What is more, the supporting papers largely address the insufficiency of the complaint. As such, the court will treat the instant motion as a motion pursuant to CPLR 3211 (a) (7) and 3212.
CPLR 3211 (e) provides that a motion to dismiss pursuant to 3211 (a) (7) may be made at any time. On a motion to dismiss a complaint for failure to state a cause of action, the court is not permitted "to assess the merits of the complaint or any of its factual allegations, but only to determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action." Skillgames, LLC v. Brody , 1 AD3d 247, 250 (1st Dept 2003). "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." Id.
Pursuant to CPLR 3212 (b), "[t]o obtain summary judgment, the movant ‘must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact.’ " Madeline D'Anthony Enters., Inc. v. Sokolowsky , 101 AD3d 606, 607 (1st Dept 2012), quoting Alvarez v. Prospect Hosp. , 68 NY2d 320, 324 (1986). Once the movant satisfies its burden, the opposing party must " ‘produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action.’ " Madeline D'Anthony Enters., Inc. , 101 AD3d at 607, quoting Alvarez , 68 NY2d at 324.
Pursuant to CPLR 3211 (d) and 3212 (f), the court may deny the motion or may order a continuance if it appears "that facts essential to justify opposition may exist but cannot then be stated." "The party invoking [ CPLR 3212 (f) ] must provide a proper evidentiary basis supporting its request for further discovery." Global Mins. & Metals Corp. v. Holme , 35 AD3d 93, 103 (1st Dept 2006). Likewise, the party invoking CPLR 3211 (d) should "specify what facts warrant further discovery [and] how they are relevant to his opposition to the motion to dismiss ...." Warshaw Burstein Cohen Schlesinger & Kuh, LLP v. Longmire , 106 AD3d 536, 537 (1st Dept 2013) ; see also Cracolici v. Shah , 127 AD3d 413, 413 (1st Dept 2015) ("[t]he mere hope that discovery may reveal [helpful information], does not warrant denial of the motion").
Breach of Fiduciary Duty against Alkalay (First Cause of Action)
Defendants contend that the first cause of action fails to state a claim, because misconduct is not pleaded with particularity and the complaint fails to allege damages directly caused by the alleged breach of fiduciary duty. In addition, they argue that Alkalay has no personal liability for any of the alleged conduct, because the complaint fails to allege any conduct taken other than in her official capacity as an officer and director of Red Flower. Lastly, defendants contend that the claim is barred by the statute of limitations and the doctrine of latches. Plaintiffs contend that the motion is premature, because information necessary to develop this claim is in defendants' exclusive control. They also argue that the claim is sufficiently stated. Lastly, they contend that the claim is not time-barred, because it accrued in 2017, when it became apparent to Behrman that Alkalay would not honor their oral agreement regarding sweat equity.
To state a breach of fiduciary duty claim, a plaintiff must allege: (1) the existence of a fiduciary relationship; (2) misconduct by the defendant; and (3) damages caused by that misconduct. Burry v. Madison Park Owner LLC , 84 AD3d 699, 700 (1st Dept 2011). Under CPLR 3016 (b), the claim must be pleaded with particularity, and the circumstances constituting the alleged wrong must be stated in detail. See Peacock v. Herald Sq. Loft Corp. , 67 AD3d 442, 443 (1st Dept 2009) (finding that allegations of wrong-doing "lacked the specificity required to adequately state a claim for breach of fiduciary duty").
"Because the power to manage the affairs of a corporation is vested in the directors and majority shareholders .... they have an obligation to all shareholders to adhere to fiduciary standards of conduct and to exercise their responsibilities in good faith when undertaking any corporate action ...." Alpert v. 28 Williams St. Corp. , 63 NY2d 557, 568 (1984). "[A] corporate officer who participates in the commission of a tort may be held individually liable, ... regardless of whether the corporate veil is pierced.’ " Ramos v. 24 Cincinatus Corp. , 104 AD3d 619, 620 (1st Dept 2013) (internal quotation marks omitted). However, an officer or "[a] director is not personally liable for a corporation's breach of an agreement merely by virtue of his or her decisions or actions that resulted in the corporation's promise being broken." Hixon v. 12-14 E. 64th Owners Corp. , 107 AD3d 546, 547 (1st Dept 2013) ; see also Georgia Malone & Co., Inc. v. Rieder , 86 AD3d 406, 408 (1st Dept 2011), affd 19 NY3d 511 (2012) ("[i]t is well established that officers or agents of a company are not personally liable on a contract if they do not purport to bind themselves individually").
Here, the complaint states that Alkalay breached her fiduciary duty to Behrman by: "entering into business transactions that were not in the best interest of Red Flower or the investors, and failing to maintain business relationships with retailers" (complaint, ¶ 38); "shift[ing] her distribution from retail based to spa based, without consultation or notice to Behrman" (id. , ¶ 39); and "denying Behrman access to financial information and records, as well as failing to conduct quarterly meetings," as provided in the 2004 Shareholder Agreement. Id. , ¶ 40. This conduct allegedly caused damages in excess of $25,000.
To the extent the claim is premised on alleged violations of the 2004 Shareholder Agreement, Alkalay may not be held personally liable, because the agreement is between Red Flower and its investors. See Hixon , 107 AD3d at 547 ; see also Georgia Malone & Co., Inc. , 86 AD3d at 408. The remaining allegations "lack[ ] the specificity required to adequately state a claim for breach of fiduciary duty." Peacock , 67 AD3d at 443 ; see also Stortini v. Pollis , 138 AD3d 977, 979 (2d Dept 2016) (affirming dismissal of breach of fiduciary duty claim where "complaint failed to allege factual details and circumstances of the defendants' alleged misconduct"). Nor is it clear from the allegations of the complaint how any of the alleged conduct caused damages to Behrman. Furthermore, the vagueness of plaintiffs' allegations prevents the court from ruling on whether the claim is time-barred.
Notably, to the extent the alleged damages are based on the loss of her investment as a Red Flower shareholder, such damages give rise to a derivative claim only. See Serino v. Lipper , 123 AD3d 34, 40-41 (1st Dept 2014). Moreover, it appears that Red Flower's revenues and profits increased between 2002, when Behrman invested in Red Flower, and 2016. See Alkalay aff, exhibit B.
In opposition, plaintiffs fail to correct these pleading defects. Instead, they attempt to recast the claim. They describe Behrman and Alkalay as partners in a joint venture and argue that Alkalay's refusal to communicate constitutes a breach of her fiduciary duty to Behrman, which threatens Behrman with the loss of the time and energy she invested in Red Flower. This new version of the claim "is not viable because the complaint alleges only arm's length business transactions and no special circumstances that might give rise to a fiduciary relationship between [Behrman and Alkalay]." Benzies v. Take-Two Interactive Software, Inc. , 159 AD3d 629, 630-631 (1st Dept 2018) (internal citation omitted) ; see also Roni LLC v. Arfa , 74 AD3d 442, 444 (1st Dept 2010), affd 18 NY3d 846 (2011) (internal citation omitted) ("[a] conventional business relationship between parties dealing at arm's length does not give rise to fiduciary duties ...").
Plaintiffs also argue that they require discovery to develop this theory of liability. They state that, while they were permitted to review Red Flower's books and records in October 2017, "there were many questions which were raised, and much of the information Behrman and counsel were seeking was not readily available." Longo affirmation, ¶ 22. However, they fail to specify what facts warrant further discovery. "The mere hope that discovery may reveal [helpful information], does not warrant denial of the motion." Cracolici , 127 AD3d at 413.
Accordingly, the first cause of action is dismissed.
Quantum Merit and Unjust Enrichment (Second and Third Causes of Action)
Defendants contend that the second and third cause of action must be dismissed because quasi contract claims are unavailable where, as here, parties allegedly entered into an oral contract that is barred under the statutes of frauds. In addition, defendants contend that the claims are barred under the statute of limitations and that the complaint insufficiently alleges the value of the benefit conferred on defendants. In opposition, plaintiffs contend that the statute of frauds is inapplicable to the quasi contact claims. They also contend that because the oral agreement was for monthly PR services with an indefinite term, it did not need to be in writing. In addition, they argue that whether they received adequate compensation for their services cannot be resolved on a motion for summary judgment. Lastly, they argue that these claims, like the breach of fiduciary duty claim, did not accrue until 2017.
The statute of frauds, as set forth in General Obligations Law § 5-701 (a) (1), provides that an agreement is void "unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith," if the agreement "[b]y its terms is not to be performed within one year from the making thereof." Generally, at-will arrangements are capable of performance within one year, because the parties can terminate them at any time without breach. See Goldfarb v. Romano , 160 AD3d 448, 449 (1st Dept 2018) (finding statute of frauds inapplicable to an at-will employment agreement); see also Foster v. Kovner , 44 AD3d 23, 27 (2007) (finding statute of frauds inapplicable to an agreement to create a joint venture). However, "[a] service contract of indefinite duration ... is not by its terms performable within a year ... [where] performance is dependent, not upon the will of the parties to the contract, but upon that of a third party." Zupan v. Blumberg , 2 NY2d 547, 550 (1957) ; see also Zaveri v. Rosy Blue, Inc. , 4 AD3d 146, 146 (1st Dept 2004) (finding that "[t]he alleged oral agreement obligating defendants to pay plaintiff commissions on sales made subsequent to the termination of his employment with defendants [was] unenforceable under the statute of frauds"). Where the statute of frauds applies, "the necessity of a writing may not be circumvented by the simple expedience of recasting the action as one seeking damages for unjust enrichment." J.E. Capital v. Karp Family Assoc. , 285 AD2d 361, 362 (1st Dept 2001) ; see also Tallini v. Bus. Air , 148 AD2d 828, 830-31 (3d Dept 1989) (finding that "plaintiff's claim that he was denied commissions which he was entitled to under a theory of unjust enrichment depend[ed] on proof of the oral contract [that could not be performed within one year] and therefore [was] also barred by the Statute of Frauds"). Nor may "plaintiffs ... utilize a quantum meruit theory of recovery to circumvent the Statute of Frauds." American-European Art Assoc. v. Trend Galleries , 227 AD2d 170, 171 (1st Dept 1996) ; see also Martin H. Bauman Assoc. Inc. v. H & M Intl. Transp. , 171 AD2d 479, 484 (1st Dept 1991) ("quantum meruit is intended to avoid a party's unjust enrichment; it is certainly not a device wherein a plaintiff may enforce a purported agreement which might ultimately be found not to be viable").
Here, plaintiffs contend that they entered into an oral contract with Red Flower, agreeing to provide their PR services at a discounted rate "and to be compensated for the fair and reasonable market value of those services at a later time through an increased equity position and or premium return upon the sale of the company." Longo affirmation, ¶ 55. The described arrangement is akin to "service contract of indefinite duration ... [where] performance is dependent, not upon the will of the parties to the contract, but upon that of a third party," because performance is tied to Red Flower's purchase by another entity. Zupan , 2 NY2d at 550. As such, the oral agreement is barred by the statute of frauds, which plaintiffs may not circumvent by invoking quantum meruit or unjust enrichment. See J.E. Capital , 285 AD2d at 362 ; see also American-European Art Assoc. , 227 AD2d at 171 ; Strauss v. Fleet Mtge. Corp. , 282 AD2d 736, 737 (2d Dept 2001) (affirming dismissal of unjust enrichment and quantum meruit claims, where breach of contract claim was barred by the statute of frauds). In opposition, plaintiffs fail to offer any note or memorandum establishing the existence of the oral agreement. Therefore, the claims are barred by the statute of frauds.
In addition, the claims are time-barred. The claims are governed by the six-year statute of limitations, which began to run from the time plaintiffs provided their services. See Demian v. Calmenson , 156 AD3d 422, 423 (1st Dept 2017) (finding that quasi-contract claims were time-barred under the six-year statute of limitations, as they accrued "when any alleged benefit could have been conferred by plaintiff"); see also Hakim v. Hakim , 99 AD3d 498, 502 (1st Dept 2012) (finding unjust enrichment and quantum meruit claims "[were] not time-barred to the extent they [sought] recovery for services [plaintiff] allegedly performed within the six years before he commenced [the] action"). Here, defendants make a prima facie showing that Red Flower ceased utilizing plaintiffs' PR services in February 2011 (see Alkalay aff, exhibit A), more than six years before commencement of the instant action. In opposition, plaintiffs demonstrate that they continued to bill Red Flower through March 2011 (see Behrman aff, exhibit A), which is also more than six years before they commenced the instant action. In addition, Behrman states that "[she] believe[s] all active PR work for Red Flower stopped sometime in 2012." Id. , ¶ 13. However, such speculative and unsupported assertions are insufficient to raise an issue of fact. See Madeline D'Anthony Enters., Inc. , 101 AD3d at 609 (internal quotation marks and citation omitted) ("[m]ere conclusory assertions, devoid of evidentiary facts, are insufficient [to raise an issue of fact], as is reliance upon surmise, conjecture or speculation"). Moreover, in response to defendants' first request for production of documents, which plaintiffs annex as exhibit B to their opposition papers, plaintiffs fail to proffer any evidence of services provided after March 2011. Therefore, the claims are time-barred.
For the foregoing reasons, defendants' motion for summary judgment is granted as to the second and third causes of action and those claims are dismissed.
Breach of the Implied Covenant of Good Faith and Fair Dealing (Fourth Cause of Action)
Plaintiffs do no oppose the motion to dismiss for failure to state a claim with respect to their fourth cause of action and voluntarily withdraw it with prejudice.
Accounting (Fifth Cause of Action)
Defendants contend that the accounting claim must be dismissed, because plaintiffs have an adequate remedy at law and because neither Red Flower nor Alkalay owes plaintiffs a fiduciary duty. Defendants respond that Behrman, as a shareholder who has been frozen out, is entitled to an accounting. They also contend that the letters sent to defendants prior to commencing the instant suit, annexed as exhibit C to the complaint, demonstrate that the requisite demand for an accounting was made.
"The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest." Palazzo v. Palazzo , 121 AD2d 261, 265 (1st Dept 1986). In addition, the plaintiff must demonstrate that she has no adequate remedy at law and that, prior to commencing the suit, she demanded an accounting, which was refused. Unitel Telecard Distrib. Corp. v. Nunez , 90 AD3d 568, 569 (1st Dept 2011).
Here, the complaint seeks a full accounting of financial activity undertaken by Alkalay as President and CEO of Red Flower. Having dismissed the breach of fiduciary duty claim against Alkalay, the accounting claim is likewise dismissed. See Stortini v. Pollis , 138 AD3d 977, 979 (2d Dept 2016).
The court also notes that, contrary to their assertion, plaintiffs failed to demand an accounting. In their communications with defendants, plaintiffs merely demanded access to Red Flower's books and records. See complaint, exhibit C. This failure constitutes an independent basis for dismissal. See Walsh v. Wwebnet, Inc. , 116 AD3d 845, 848 (2d Dept 2014) (affirming "dismissal of the plaintiffs' derivative cause of action for an accounting, since they failed to allege that they demanded an accounting and that the corporation's directors refused to provide them with an accounting").
Therefore, the motion to dismiss the fifth cause of action is granted.
Constructive Trust (Sixth Cause of Action)
The parties dispute whether the complaint states facts necessary for the imposition of a constructive trust.
"In the development of the doctrine of constructive trust as a remedy available to courts of equity, the following four requirements were posited: (1) a confidential or fiduciary relation, (2) a promise, (3) a transfer in reliance thereon and (4) unjust enrichment." Sharp v. Kosmalski , 40 NY2d 119, 121 (1976).
Here, plaintiffs contend that defendants have been unjustly enriched by receiving the value of plaintiffs' PR services. However, as explained above, an arms-length business transaction does not give rise to a fiduciary relationship. See Benzies , 159 AD3d at 630-631 ; see also Roni LLC , 74 AD3d at 444. "In the absence of a confidential or fiduciary relationship, plaintiffs have no cause of action for imposition of a constructive trust against [defendants]." Evans v. Rosen , 111 AD3d 459, 459 (1st Dept 2013) (internal citations omitted).
Motion for Costs and Sanctions
Defendants seek costs and sanctions, arguing that, because each of the asserted causes of action is deficient, the instant suit is frivolous. Title 22 NYCRR § 130-1.1 (a) authorizes the court, in its discretion, to award costs or sanctions "upon any party or attorney in a civil action or proceeding who engages in frivolous conduct." Here, defendants have not shown conduct that "is completely without merit in law" or "undertaken primarily to delay or prolong the resolution of the litigation." 22 NYCRR § 130-1.1 (c). Therefore, the motion is denied.
Accordingly, it is hereby
ORDERED that defendants' motion to dismiss is granted and the complaint is dismissed in its entirety with costs and disbursements to defendants as taxed by the Clerk upon the submission of an appropriate bill of costs; and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.