Opinion
No. 650838/2012.
12-21-2015
Stanley BARRY, Plaintiff, v. CLERMONT YORK ASSOCIATES LLC and Jeffrey Feil, as Managing Member of Clermont York Associates LLC, and Individually, Defendants.
Manatt, Phelps & Phillips, LLP, for plaintiff. Weil, Gotshal & Manges LLP, for defendants.
Manatt, Phelps & Phillips, LLP, for plaintiff.
Weil, Gotshal & Manges LLP, for defendants.
SHIRLEY WERNER KORNREICH, J.
Motion sequence numbers 012 and 013 are consolidated for disposition.
Plaintiff Stanley Barry moves, pursuant to CPLR 1003 & 3025(b), for leave to file a proposed first amended complaint (the PFAC). Seq. 012. Defendants Clermont York Associates LLC (Clermont or the Company) and Jeffrey Feil oppose and also move, pursuant to CPLR 3212, for summary judgment on the remaining claims in plaintiff's original complaint. Seq. 013. For the reasons that follow, plaintiff's motion to amend is denied and defendants' motion for summary judgment is granted.
I. Background & Procedural History
Unless otherwise indicated, the following facts are undisputed.
SeeDkt. 417 (joint statement of undisputed facts).
Clermont was originally formed in 1976 as a New York general partnership. It owns two residential apartment buildings in Manhattan, located at 445 East 80th Street (the 80th Street Building) and 444 East 82nd Street (the 82nd Street Building) (collectively, the Buildings). In October 2004, Clermont was converted to a New York limited liability company. Barry, the plaintiff, was formerly a general partner and is currently a member, holding a 12.174% interest in Clermont. Feil, the defendant, is Clermont's managing member. He personally has a 1.7391% interest in Clermont and indirectly owns another 0.7391% (he owns 1% of non-party Feil Family LLC, which has a 73.913% interest in Clermont). Feil also is the sole owner of non-party/proposed defendant Broadwall Management Corporation (Broadwall), Clermont's current managing agent.
The parties and their family members are currently embroiled in hotly contested litigation in Louisiana state court over other real estate and business matters. The conflicts underlying that lawsuit color and drive this otherwise financially senseless litigation. The current books and records dispute and prospective derivative fiduciary duty disputes are worth far less than the parties have spent bitterly litigating to this point. Despite this reality, this action is decided on the merits.
Jeffrey Feil's three sisters, Carole Feil, Judith Jaffe and Marilyn Barry, are the plaintiffs in the Louisiana action; the defendants include Jeffrey Feil and Broadwall. Jeffrey Feil is the son of Louis Feil, a real estate mogul that ran the Feil Organization, which owns property far more valuable than the two Upper East Side apartment buildings at issue in this case, such as the General Electric Building (570 Lexington Avenue). Jeffrey now runs that organization. One of Jeffrey's sisters, Marilyn, is Stanley Barry's wife. The Feil family's infighting has been widely reported on by the press. See, e.g.,Sarah Rose & Peter Grant, Real–Estate Family Wars With Itself,The Wall Street Journal (Sept. 2, 2013), available at http://www.wsj.com/articles/ SB10001424127887324432404579051193046212. This case is merely a small part of the Feil family's disputes, cannot resolve any of their issues, and serves only the possible purpose of providing leverage in the other litigation.
Clermont's operating agreement (the Operating Agreement) was entered into in October 2004. See Dkt. 418. Section 1.5 provides that Clermont's term runs through the end of 2054. See id. at 7. Section 6.1 provides that Feil, as Managing Member, has "the exclusive right to manage the Company's business." See id. at 25. Section 9.1 sets forth the members' right to inspect Clermont's books and records:
At all times during the continuance of the Company, the Managing Member shall keep, or cause to be kept, full and true books of account in which shall be entered, fully and accurately, all transactions of the Company. All of said books of account, together with a certified copy of the Articles, any amendments thereto, and an executed copy of such other instruments as the Members may execute to carry out and give effect to the provisions of this Agreement or to maintain the status of the Company as a limited liability company as constituted from time to time, shall at all times be maintained at the principal office of the Company, or at such other office of the Company as may be designated for such purpose by the Managing Member, and each Member may, at any time during reasonable business hours, at its own expense, inspect, examine and make photocopies of the books and records of the Company, or cause them to be examined by its representative, or by an attorney and/or a certified public accountant designated by such Member. In addition, following the written request of any Member, the Managing Member shall deliver to such Member, at the address designated by such Member, photocopies of those books and records of the Company designated by such Member; provided, however, that if a Member's request shall be unusual or extraordinary in light of past practice (including during the period that the Partnership shall have been operating), then the Company may advise the requesting Member of the reasonable charge to be imposed by the Company to supply such requested materials, and the requesting Member shall pay such charge prior to delivery by the Company of such requested materials.
See Dkt. 418 at 38 (emphasis added).
The genesis of the instant action was Barry's complaint that he was not being provided with sufficient books and records access to multiple entities in which he owns an interest, including Clermont. By letter dated October 3, 2011 (the October 2011 Letter), Larry Newman of Clermont wrote to Barry's accountant, Andrew Ross of Gettry Marcus Stern & Lehrer, P.C., setting forth the manner in which Barry would be provided the information Barry requested:
I write in order to set a reasonable procedure that will work for both of us in connection with your requests for information and documents relating to [Clermont] on behalf of [Barry]. Your initial requests were part of Mr. Barry's omnibus requests for access to records relating to multiple entities in which Mr. Barry has an interest, including Clermont. We complied with those requests and gave you and your colleague's access to voluminous files and responded to numerous follow up requests, via email, phone, and letter. With respect to Clermont in particular, over the past 18 months or so you have requested not only the year-end financials but also interim (six month) financials. In addition, you have made numerous follow up requests relating to the information or documents provided to you, such inquiries at times focusing on particular ledger entries.
As I'm sure you understand, responding to Mr. Barry's repeated requests necessarily divert our attention and resources from the ongoing business of the Company. We will of course continue to respond to reasonable requests for information and access to the books and records of the LLC, consistent with the terms of the Operating Agreement and applicable New York law. However, in the interests of the Company and its members, we need to set sensible parameters for access to the Company's personnel and resources.
Based upon your past requests for information and consistent with the Company's usual practices with respect to preparation of the interim and year-end financial statements, we will endeavor, upon request from Mr. Barry, to make available year-end financial information in May and six-month financial information in October.
To the extent that your review or that of Mr. Barry gives rise to questions regarding the information reflected in the materials provided, we ask that such questions be set forth in one letter addressed to me, for each period at issue. Upon receipt of such a letter, we will endeavor to respond within a reasonable period of time consistent with the ongoing business of the Company and the reasonableness of any such requests.
Consistent with the above, enclosed please find the most recently requested interim financials for the Company. Please note that by providing such information now or in the future, we are not conceding that your requests are proper, and we reserve the right to examine the propriety of such requests and/or to decline to respond, in whole or in part,
Finally, I'm told that Mr. Barry sent an email to Mr. Fell requesting 2010 financials for the entities in which he has an interest. As you know, we have already provided you with 2010 financial statements for the Company. I will have someone gather the financials for the remaining entities and will provide them to you in due course.
See Dkt. 419.
In January and February 2012, Barry objected to the level of access outlined in the October 2011 Letter. On March 16, 2012, Barry commenced this action by filing his original complaint, which assets three causes of action: (1) a declaratory judgment as to his books and records rights under Clermont's operating agreement, which he contends are broader than those permitted by the October 2011 Letter; (2) specific performance of his books and records rights; and (3) an equitable accounting of Clermont. See Dkt. 1. Defendants moved to dismiss. By order dated November 26, 2012 (the MTD Decision), the court dismissed the specific performance cause of action and denied defendants' motion to dismiss the declaratory judgment and accounting causes of action. See Dkt. 22. The court allowed the declaratory judgment claim to proceed on the ground that it was premature on the motion to dismiss to adjudicate the reasonableness of the books and records protocol set forth in the October 2011 Letter. See MTD Decision at 5. The accounting claim was permitted to proceed because Barry had pleaded "that Feil had been diverting LLC funds to another company," an allegation the court held to be sufficient to plead the existence of "special circumstances." See id. at 7.
Approximately three years of highly contentious discovery followed, including substantial motion practice. In that time, in addition to extensive discovery, Barry was provided with timely responses to each of his books and records requests. Simply put, Barry was provided with all the Clermont financial records he asked for. Between August 27, 2013 and July 12, 2015, Barry did not make any books and records requests. On July 13, 2015, Barry requested information about a mortgage on the Buildings. Barry was provided with that information. To date, Barry has not identified any of Clermont's financial records he desires that have not been provided to him. Nonetheless, Barry still seeks an accounting.
At this juncture, Barry has all of the records that formed the basis of his 2012 complaint and much more. Barry now seeks to amend his complaint to allege further malfeasance on the part of the original defendants, Clermont and Feil, and also Broadwall and two of its employees, Andrew Ratner and Jay Anderson. Defendants oppose the amendment. They contend that since the ample discovery necessary to prove Barry's new allegations has already been provided, and since Barry still fails to proffer the requisite evidence of value or a quid pro quo arrangement, leave to amend should be denied because the proposed claims are clearly devoid of merit. As discussed below, defendants are correct. Defendants also seek summary judgment on the original complaint on the grounds that the undisputed facts and evidence demonstrate that the protocol set forth in the October 2011 Letter is consistent with Barry's LLC membership rights in Clermont and that circumstances warranting an equitable accounting are not present. Defendants, again, are correct.
The parties' joint letter dated March 23, 2015 summarizes the extensive discovery provided to Barry. SeeDkt. 446. The only outstanding issue is Barry's allegation that defendants committed ESI spoliation due to Broadwall's deletion of emails. Barry's spoliation allegations, which are substantively refuted in defendants' papers, do not warrant extensive consideration for two principal reasons. First, while some of Broadwall's emails were deleted priorto this action being commenced, Broadwall is not a party to this action. Broadwall is Clermont's managing agent. Broadwall also is the managing agent for many other buildings. Barry does not make a compelling showing that the Broadwall documents relevant to this case were not produced. Indeed, the relevant project files were printed out and produced. Hence, Barry cannot show prejudice from the alleged spoliation. Second, Barry also seeks to recast the alleged spoliation as a stand-alone ground for his proposed breach of fiduciary duty claims. As defendants correctly contend, while alleged spoliation in the context of litigation may give rise to a litigation sanction such as an adverse inference at trial [see generally Pegasus Aviation I, Inc. v. Varig Logistica S.A.,2015 N.Y. Slip Op 09187 (Ct.App. Dec.15, 2015) ], it is not an independent ground for a breach of fiduciary duty claim. Barry cites no authority to the contrary.
II. Barry's Motion for Leave to Amend (Seq.012)
On July 6, 2015, Barry moved for leave to file the PFAC (see Dkt. 382), which contains 12 causes of action. The first two, a declaratory judgment regarding his books and records rights and an equitable accounting, respectively, are identical to the first and third causes of action in the original complaint. The other ten causes of action, numbered here as in the PFAC, are: (3) breach of fiduciary duty, asserted derivatively against Feil; (4) breach of fiduciary duty, asserted derivatively against Broadwall; (5) aiding and abetting Feil's breach of fiduciary duty, asserted derivatively against Broadwall, Anderson, and Ratner; (6) aiding and abetting Broadwall's breach of fiduciary duty, asserted derivatively against Feil, Anderson, and Ratner; (7) unjust enrichment, asserted derivatively against Ratner; (8) breach of contract (section 3.3 of the Operating Agreement, which states that members are personally liable to each other for gross negligence, willful misconduct or bad faith), asserted directly against Feil; (9) breach of fiduciary duty, asserted directly against Feil; (10) fraud, asserted derivatively against Broadwall; (11) aiding and abetting fraud, asserted derivatively against Anderson and Ratner; and (12) conspiracy to commit fraud, asserted derivatively against Anderson, Ratner, and Broadwall. In addition, the PFAC seeks punitive damages.
The claims in the PFAC concern allegations of self-dealing in connection with certain construction work performed on the Buildings. First, Barry complains about a window replacement project:
In 2002, Clermont undertook a window replacement project at [the 82nd Street Building] [ (the "Window Project") ]. In connection with the [Window Project], Clermont retained American Industries Corp. ("AIC"), which is owned by David Majewski, to manage the project. Prior to being selected by Clermont, AIC did not submit a bid for its role in connection with the [Window Project]. Under a 2002 proposed contract with AIC, AIC was to be paid a total of $5,535,000, which included: (i) $385,000 as a "C.M. fee"; (ii) $625,000 for "general conditions"; and (iii) $225,000 for "caulking." The 2002 proposed contract was never signed. Clermont also selected and paid two architectural/consulting firms to perform work in connection with the [Window Project]: H. Thomas O'Hara Architect, PLLC ("O'Hara") and Israel Berger & Associates LLC ("Israel Berger"). Prior to being selected by Clermont, neither O'Hara nor Israel Berger submitted bids for their roles in connection with the [Window Project]. O'Hara was to be paid a total of $107,000, and Israel Berger was to be paid a total of $80,000. By November 2002, Clermont had paid O'Hara $76,874.65 for work O'Hara had performed in connection with the [Window Project], and Clermont had paid Israel Berger $23,701.73 for work Israel Berger had performed in connection with the [Window Project]. In late 2002, the [Window Project] was put on hold. In 2006, when Clermont moved forward with the [Window Project], Clermont and AIC entered into a contract, which provided that the project's substantial completion date would be August 1, 2007. AIC was to be paid a total of $6,570,000 under this contract. The contract also provided that AIC would receive an additional 10% overhead and 10% profit on any change orders. Prior to being retained by Clermont, AIC did not submit a bid for its role in connection with the [Window Project]. In connection with the selection of a window manufacturer for the [Window Project], AIC obtained bids from four potential suppliers. Of the four window manufacturers that initially provided bids, Wausau Window and Wall Systems's ("Wausau") bid was the highest. Wausau was selected to manufacture the windows for the [Window Project]. There were 37 change orders to the 2006 contract between Clermont and AIC, which resulted in an additional payment of $760,822.41 to AIC in connection with the [Window Project]. Israel Berger approved the change orders. In total, AIC was paid in excess of $7.3 million for the [Window Project].
See Dkt. 417 at 3–5 (footnotes and paragraph breaks and numbers omitted).
Next, Barry complains about an apartment renovation:
In November 2006, Hesh Mermelstein, an in-house architect at Broadwall, prepared a budget for the renovation of combined Apartment 16DE at [the 80th Street Building] (the "Apartment 16DE Project") with a total estimated construction cost of $157,150. In or about February 2007, Clermont entered into a contract with Ross & Associates, LLC ("Ross & Associates") to serve as general contractor for the Apartment 16DE Project. Clermont did not seek bids from any other companies to serve as the general contractor for the Apartment 16DE Project. Ross & Associates is owned by James Ross and David Majewski. North Shore Cabinetry Inc. ("North Shore") submitted a bid, which was accepted, to act as a subcontractor for the Apartment 16DE Project. Clermont's contract with Ross & Associates for the Apartment 16DE Project had a contract sum of $202,500. In total, Clermont paid Ross & Associates in excess of $214,000 for the Apartment 16DE Project, following several change orders.
See Dkt. 417 at 6 (footnotes and paragraph breaks and numbers omitted).
Barry also takes issue with a lobby renovation at the 80th Street Building:
In or about March 2007, Clermont entered into a contract with Ross & Associates to serve as general contractor for the renovation of the lobby at [the 80th Street Building] (the "Lobby Project"). Clermont did not seek bids from any other companies to serve as general contractor for the Lobby Project. The contract with Ross & Associates for the Lobby Project had a contract sum of $462,500, and provided that Ross & Associates would receive "10 percent plus 5 percent" of the costs associated with any change orders. Clermont received three bids for the architectural work to be performed in connection with the Lobby Project, and selected O'Hara. The three bids were from Lichten Craig Architects LLP ($50,000 plus potential additional fees, expenses and other costs); SBLM Architects ($55,000 plus potential additional fees, expenses and other costs); and O'Hara ($55,000 plus potential additional fees, expenses and other costs). In total, Clermont paid O'Hara in excess of $58,000 for the work O'Hara performed in connection with the Lobby Project. The Lobby Project had at least ten change orders. The total cost of the Lobby Project was in excess of $582,000.
See Dkt. 417 at 7–8 (footnotes and paragraph breaks and numbers omitted).
Finally, Barry complains about Clermont's contractors' work on Feil's and Ratner's personal residences without compensation:
The following contractors performed services for Clermont and also provided services to [Feil] at one or more of his personal residences: AIC, Jerome Aluminum Products Corp., Matisoff Heating and Plumbing Co., Inc., O'Hara, Israel Berger, Power Tech Electric Corp. ("Power Tech"), North Shore, and C & C Flooring. O'Hara performed work for [Feil] personally for no charge. North Shore and Power Tech performed work for [Feil] personally at discounted rates. Beginning in approximately 2008, a renovation project occurred at [Feil's] apartment located at 1049 Fifth Avenue in Manhattan (the "1049 Fifth Avenue Project"). The general contractor for the 1049 Fifth Avenue Project was North Shore. O'Hara provided services in connection with the 1049 Fifth Avenue Project. At least four people at O'Hara worked on the 1049 Fifth Avenue Project: H. Thomas O'Hara, Frank Demmerle, Sean Smith and David Weissberg. O'Hara created a set of drawings for the 1049 Fifth Avenue Project, liaised with the cooperative board of 1049 Fifth Avenue, and submitted a "Cost Affidavit" to the New York City Department of Buildings in connection with the 1049 Fifth Avenue Project (in which O'Hara estimated the total construction cost of the project to be $55,000). The total cost of the 1049 Fifth Avenue Project was in excess of $626,000.60.
Starting in 2008, Andrew Ratner undertook a renovation project at his private residence located at 4 Seven Springs Court in Lloyd Harbor, New York. Beginning in approximately 2008, Mr. Ratner undertook a renovation of his then private residence located at 969 Park Avenue in Manhattan. The following contractors performed work for Clermont and also provided services to Mr. Ratner at one or more of his private residences: Ross & Associates, AIC, Dennis Flynn ("Flynn") of the Rosenbaum Design Group, North Shore, Power Tech, C & C Flooring, and H & B Construction Services, Inc. Flynn performed architectural services for Mr. Ratner's personal renovation projects for which Flynn did not charge Mr. Ratner. Mr. Ratner's wife purchased $12,000 face value United States Saving Bonds at a purchase price of $6,000, which she gave to Flynn's daughter. The savings bonds also named Flynn as an additional payee. Mr. Ratner also gave Flynn several gift cards purchased by Mr. Ratner's wife in exchange for unbilled architectural services performed on Mr. Ratner's residences.
See Dkt. 417 at 8–10 (footnotes and paragraph breaks and numbers omitted).
Barry alleges that these construction projects were a quid pro quo resulting in higher costs to Clermont. However, the PFAC is devoid of any facts demonstrating that Clermont overpaid for the work performed on the Buildings or that the amount paid was not the product of sound business judgment or that it was part of a quid pro quo arrangement. Indeed, Barry does not even allege what, in his view, would be a reasonable cost to complete the Clermont construction projects.
It should be noted that the contractors used by Clermont are the same contractors Feil has used for decades to perform work on the many buildings owned by the Feil Organization. That Feil chose to use his long-time contractors instead of putting the projects up for bid does not raise a reasonable inference of malfeasance. Absent proof of actual waste (i.e., overpaying a contractor in an amount incompatible with the exercise of reasonable business judgment) or proof of an actual quid pro quoarrangement, neither of which are proffered despite all of the discovery provided to Barry, Barry's allegations relating to the construction projects are not actionable.
Moreover, while the PFAC is the first time Barry seeks to assert claims based on these construction projects, Barry has known about them from the inception of this case. Indeed, Barry's complaints about the projects were asserted as a basis for his equitable accounting claim. See MTD Decisions at 6 ("Barry is alleging that Feil is using his position in Clermont to gain benefits for himself at the expense of Clermont having to pay more in building costs"). Barry, nonetheless, seeks leave to amend more than three years after he filed his original complaint and almost a decade after the underlying events occurred. Putting aside the prejudice of his delay, and that the costs to the Company of litigating these claims far exceed the amounts at issue, Barry simply has not alleged nor proffered proof of any actual wrongdoing.
Barry also knew about another of his allegations in the PFAC concerning wrongful diversion of overnight interest; that issue was resolved in 2007.
It should be noted that aside from this being an allegation of breach of fiduciary duty, it also implicates section 5.2 of the Operating Agreement, which prohibits in-kind distributions. SeeDkt. 418 at 25.
There are issues regarding the timeliness of the claims and whether they may relate back to the filing of the original complaint which the court will not reach because the claims are meritless. These issues include a possible unsettled question of whether tolling due to the existence of a fiduciary relationship applies in this context.
Barry's burden of proof was made clear at the outset. Less than a month after the motion to dismiss was issued, on December 19, 2012, the parties were back before the court for oral argument on discovery motions. See Dkt. 78 (12/19/12 Tr.). At argument, the court repeatedly emphasized that Barry's allegations turned on him proving a quid pro quo scheme. See, e.g., id. at 9–10. In other words, for Barry to prove that Feil committed wrongdoing with respect to the subject construction projects, he would have to prove that another contractor would be willing to perform comparable work for significantly less money and that Feil caused Clermont to overpay the contractors in exchange for free work on his personal residences. While the court made clear that discovery would not be permitted on collateral matters (i.e., the parties' disputes not at issue in this action), Barry was permitted to take discovery to prove his quid pro quo allegations. Hence, the viability of the PFAC is not assessed based on its conclusory allegations of malfeasance, but on whether the discovery, including extensive depositions, revealed actual evidence of the alleged quid pro quo scheme.
After three years of discovery, Barry has not produced any such evidence. All Barry continues to rely on are his original, bald allegations that the amounts charged were above market and that a quid pro quo scheme should be inferred. At a minimum, proof of the actual market rate of the subject construction projects should have been proffered. Absent this obtainable, minimal showing and in light of the contractors' long-standing relationship with the Feil Organization (which, as noted, has real estate holdings well beyond those at issue in this case), there is nothing in the record that demonstrates the use of the contractors was anything more than an appropriate business decision. Barry has not rebutted this showing by any evidence despite lengthy, expensive and robust discovery. Absent a showing that the contractors were overpaid for the subject work or that their work was shoddy, Barry cannot prove Clermont was harmed by their work on the personal residences. The free work performed on Feil's and Ratner's homes could not, on its own, cause harm to Clermont. The only harm to Clermont would be alleged overcharges or faulty work—neither of which was shown.
Moreover, Barry has presented no proof that consideration for the alleged arrangement was Clermont work as opposed to possible overcharges or consideration related to other buildings. Since Barry only asserts claims on behalf of Clermont with respect to the two buildings at issue, Barry cannot recover for the alleged quid pro quoif consideration for the residential work was something not affecting Clermont.
Consequently, Barry's motion for leave to amend is denied. It is well settled that this court has discretion to deny leave to amend when the proposed amendment is palpably devoid of merit or would cause undue prejudice to defendant. 2470 Cadillac Resources, Inc. v. DHL Exp. (USA), Inc., 129 A.D.3d 527 (1st Dept 2015) ; Mosaic Caribe, Ltd. v. AllSettled Group, Inc., 117 A.D.3d 421, 422, 985 N.Y.S.2d 33 (1st Dept 2014) ; McGhee v. Odell, 96 A.D.3d 449, 450, 946 N.Y.S.2d 134 (1st Dept 2012). While "[i]t is true that leave to amend a pleading should be freely granted, so long as there is no surprise or prejudice to the opposing party' [Kocourek v. Booz Allen Hamilton Inc., 85 A.D.3d 502, 504, 925 N.Y.S.2d 51 (1st Dept 2011),] it is equally true that the court should examine the sufficiency of the merits of the proposed amendment' [Heller v. Louis Provenzano, Inc., 303 A.D.2d 20, 25, 756 N.Y.S.2d 26 (1st Dept 2003) ]." Boaz Bag Bag v. Alcobi, 129 A.D.3d 649 (1st Dept 2015). "Therefore, a motion for leave to amend a pleading must be supported by an affidavit of merits and evidentiary proof that could be considered upon a motion for summary judgment." Id., quoting Non–Linear Trading Co. v. Braddis Assocs., Inc., 243 A.D.2d 107, 116, 675 N.Y.S.2d 5 (1st Dept 1998) (internal quotation marks omitted). The court, therefore, is "not required to accept [a plaintiff's] allegations as true on a motion to amend." Boaz Bag Bag, 129 A.D.3d at 649 (emphasis in original), quoting Non–Linear Trading, 243 A.D.2d at 117, 675 N.Y.S.2d 5.
This is all the more appropriate on this motion since the court has before it a robust summary judgment record.
For the reasons stated above, Barry's claims have no merit. If they were meritorious, Barry would have proffered proof by now. To be sure, it is undisputed that the alleged quid pro quo scheme, if true, would be a breach of Feil's fiduciary duties as managing member of Clermont and a breach of the Operating Agreement. The new proposed defendants also could be liable for aiding and abetting Feil's breaches. But, Barry's claims are infirm for lack of proof.
Nor will the court permit further discovery. Barry had ample opportunity to prove wrongdoing, and he has not done so. Not only can he not point to any overpayments or a nexus between the free work and the work on Clermont's buildings, it is apparent that Barry has not, despite three years of discovery, even bothered to investigate or proffer estimates of the reasonable costs of the construction work. Instead, he relies on conclusory allegations and out-of-context deposition testimony.
For instance, as noted at oral argument, in Manhattan, spending $200,000 to combine high-end apartments is not unheard of, even if the apartments are not actually "made out of gold."
Furthermore, while delay, without more, is not a sufficient basis to deny leave to amend, when lateness is "coupled with significant prejudice," leave to amend should be denied. See Pomerance v. McGrath, 124 A.D.3d 481, 482 (1st Dept 2015), citing Edenwald Contracting Co. v. City of New York, 60 N.Y.2d 957, 959, 471 N.Y.S.2d 55, 459 N.E.2d 164 (1983). The court is cognizant of the context of this litigation and concurs with defendants' view that Barry simply does not wish to see the case end, regardless of its merit. The court has been heavily involved in the discovery, and despite the proficiency of counsel, the acrimony and consequent expense associated with litigating ordinarily trivial matters has risen to a level not ordinarily seen in this commercial part. As a result, this action has been a net loss for all parties, and future litigation would only continue to drain the Company of more resources than Feil is even alleged to have misappropriated.
The cost to the Company must be considered when assessing the existence and severity of prejudice. The gravamen of the PFAC are derivative claims, which Barry would only be permitted to prosecute on behalf of and for the benefit of the Company. In others words, his prosecution of such claims must align with the best interests of the Company. It is apparent, however, that Barry is pursuing a personal vendetta against Feil and appears to be using this case to obtain leverage in the Louisiana action (e.g., seeking discovery not obtainable in that case).
Most importantly, this case cannot possibly resolve the real, underlying disputes between Feil and his siblings over the future of the Feil Organization. Where, as here, no colorable allegations are pleaded, bad motive is apparent, and the Company is suffering immense financial harm due to the extraordinary legal fees expended, the court finds prejudice warranting denial of leave to amend. Moreover, as set forth below, this action is at its end since summary judgment on the declaratory judgment and accounting claims is granted to defendants.
III. Summary Judgment (Seq.013)
A. Legal Standard
Summary judgment may be granted only when it is clear that no triable issue of fact exists. Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 325, 508 N.Y.S.2d 923, 501 N.E.2d 572 (1986). The burden is upon the moving party to make a prima facie showing of entitlement to summary judgment as a matter of law. Zuckerman v. City of New York, 49 N.Y.2d 557, 562, 427 N.Y.S.2d 595, 404 N.E.2d 718 (1980) ; Friends of Animals, Inc. v. Associated Fur Mfrs., Inc., 46 N.Y.2d 1065, 1067, 416 N.Y.S.2d 790, 390 N.E.2d 298 (1979). A failure to make such a prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers. Ayotte v. Gervasio, 81 N.Y.2d 1062, 1063, 601 N.Y.S.2d 463, 619 N.E.2d 400 (1993). If a prima facie showing has been made, the burden shifts to the opposing party to produce evidence sufficient to establish the existence of material issues of fact. Alvarez, 68 N.Y.2d at 324, 508 N.Y.S.2d 923, 501 N.E.2d 572 ; Zuckerman, 49 N.Y.2d at 562, 427 N.Y.S.2d 595, 404 N.E.2d 718. The papers submitted in support of and in opposition to a summary judgment motion are examined in the light most favorable to the party opposing the motion. Martin v. Briggs, 235 A.D.2d 192, 196, 663 N.Y.S.2d 184 (1st Dept 1997). Mere conclusions, unsubstantiated allegations, or expressions of hope are insufficient to defeat a summary judgment motion. Zuckerman, 49 N.Y.2d at 562, 427 N.Y.S.2d 595, 404 N.E.2d 718. Upon the completion of the court's examination of all the documents submitted in connection with a summary judgment motion, the motion must be denied if there is any doubt as to the existence of a triable issue of fact. Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223, 231, 413 N.Y.S.2d 141, 385 N.E.2d 1068 (1978).
B. Declaratory Judgment
Defendants seek summary judgment on Barry's declaratory judgment claim regarding his books and records rights. The court previously denied dismissal of this claim because there was a ripe dispute between the parties regarding this issue. See MTD Decision at 4–5; see also Thome v. Alexander & Louisa Calder Foundation, 70 A.D.3d 88, 99, 890 N.Y.S.2d 16 (1st Dept 2009) ("The general purpose of the declaratory judgment is to serve some practical end in quieting or stabilizing an uncertain or disputed jural relation either as to present or prospective obligations." (citation omitted).
Clermont is a New York LLC. Section 10.4 of its Operating Agreement provides that it is governed by New York law. See Dkt. 418 at 41. It further provides that "the provisions of this Agreement shall override the provisions of the LLCL [New York Limited Liability Company Law] to the extent of any inconsistency or contradiction between them." See id. Hence, Barry's books and records rights are governed by section 9.1 of the Operating Agreement plus all applicable sections of the LLCL that are not inconsistent with the Operating Agreement. Section 1102(b) of the LLCL provides:
Any member may, subject to reasonable standards as may be set forth in, or pursuant to, the operating agreement, inspect and copy at his or her own expense, for any purpose reasonably related to the member's interest as a member, the records referred to in subdivision (a) of this section, any financial statements maintained by the limited liability company for the three most recent fiscal years and other information regarding the affairs of the limited liability company as is just and reasonable.
(emphasis added).
Reasonableness is the touchstone of LLC members' statutory books and records rights. Section 9.1 of the Operating Agreement does not suggest that LLCL § 1102(b)'s reasonableness standards do not apply. In fact, section 9.1, as noted earlier, speaks to inspection during "reasonable business hours", and "the reasonable charge" for "unusual or extraordinary" requests. See Dkt. 418 at 38. Moreover, since Barry's books and records rights under section 9.1 are contractual in nature, the court must construe those rights in a commercially reasonable manner. See Cole v. Macklowe, 99 A.D.3d 595, 596, 953 N.Y.S.2d 21 (1st Dept 2012) ("a contract should not be interpreted to produce an absurd result, one that is commercially unreasonable, or one that is contrary to the intent of the parties.") (emphasis added), citing In re Lipper Holdings, LLC, 1 A.D.3d 170, 171, 766 N.Y.S.2d 561 (1st Dept 2003) (citations omitted); cf. Prokupek v. Consumer Capital Partners LLC, 2014 WL 7452205, at *7 (Del.Ch.2014) ("Given that LLC agreements can grant members inspection rights that exceed the rights provided for in the statute, there is no reason to expand the LLC Act's plain language when the parties refrained from doing so themselves.") (citations and quotation marks omitted). It follows, therefore, that Barry books and records rights are "subject to reasonable standards."
If this were a typical books and records lawsuit, where the company was simply refusing to turn over all required records or permit photocopying, the result would be clear. See generally Mickman v. Am. Int'l Processing, L.L.C., 2009 WL 2244608, at *1–3 (Del.Ch.2009). But this is not the case. The October 2011 Letter did not simply deny Barry the access required by the section 9.1 . Rather, it "set a reasonable procedure that will work for both of us in connection with [Barry's] requests for information and documents." See Dkt. 419. Barry, as noted, had made "omnibus requests for access to records relating to multiple entities in which Mr. Barry has an interest", only some of which related to Clermont. See id. Barry's requests (not unlike this lawsuit) were simply overwhelming the Company. Clermont, thus, sought to set forth a reasonable procedure for handling those requests.
The October 2011 Letter made clear that Clermont "will of course continue to respond to reasonable requests for information and access to the books and records of the LLC, consistent with the terms of the Operating Agreement and applicable New York law." SeeDkt. 419.
The parties do not cite any binding New York authority on how reasonableness is to be determined under these circumstances. To be clear, at issue here is not Barry's right to the Clermont financial records he desires. After all, Clermont responded to all of his books and records demands made during the pendency of this case. Barry does not claim to be missing any of the requested records. This is not unsurprising, since the October 2011 Letter does not purport to deny Barry his books and record rights. To the contrary, the protocol provides for automatic semi-annual disclosure, and when Barry has asked for more, he has gotten it. Hence, the only issue for the court to decide is whether the protocol imposed by Clermont in the October 2011 Letter is permissible under the Operating Agreement. The court answers this question in the affirmative.
As noted, Feil is Clermont's managing member and has the exclusive authority to manage the Company. As a result, his decisions are subject to significant deference under the business judgment rule. See Levandusky v. One Fifth Ave. Apt. Corp., 75 N.Y.2d 530, 537–38, 554 N.Y.S.2d 807, 553 N.E.2d 1317 (1990) ( "the business judgment rule prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.' "), quoting Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979) ; see also Pokoik v. Pokoik, 115 A.D.3d 428, 429, 982 N.Y.S.2d 67 (1st Dept 2014) (members of LLC who act in good faith are entitled to the protections of the business judgment rule and LLCL § 409 ). Under Delaware law (which New York views as persuasive in the absence of controlling precedent [see, e.g., 546–552 W. 146th St. LLC v. Arfa, 99 A.D.3d 117, 122, 950 N.Y.S.2d 24 (1st Dept 2012) ] ), when LLC member books and records rights are subject to "reasonable access", the managing member may, under certain circumstances, set the parameters of reasonableness. See NAMA Holdings, LLC v. World Market Center Venture, LLC, 948 A.2d 411, 419 (Del.Ch.2007) (Lamb, V.C.), aff'd 945 A.2d 594 (Del.2008).
Vice Chancellor Lamb has explained:
As is typical of a manager-managed limited liability company, [the managing members] are vested with both the power and the obligation to do any and all things necessary, proper, convenient or advisable to manage the assets and affairs of [Venture] in accordance with and subject to the limitations of [the Agreement.] Thus, absent any explicit language in [the Agreement] stipulating that someone other than [the managing members] can determine what constitutes "reasonable access" to [the LLC's] books and records, it is the managing members who have that power and obligation. Rather than accept the orderly decision-making structure contained in the Venture Agreement, [the non-manning member] essentially argues that it has the power to make a unilateral determination of the terms, conditions, and documents that constitute "reasonable access" [That] interpretation, however, negates, or, at the very least, substantially undermines, the plain meaning of the reasonableness limitation. Such a discretionary proviso would make little sense if the party charged with determining the reasonableness of an inspection demand was the same party making the demand in the first place. The contracting parties must have therefore intended that [the managing members] retain the power to make a judgment as to reasonableness.
NAMA, 948 A.2d 419–20 (emphasis added).
Summary judgment is granted to defendants on the declaratory judgment claim. There is no question of fact that the October 2011 Letter and the books and records access provided to Barry thereunder comported with his rights under the Operating Agreement. Since the inception of this case, the disclosure provided has adequately afforded Barry the ability to remain appraised of Clermont's financial situation. Two annual financial disclosures are made. In the absence of unusual circumstances that might otherwise create the urgency for more updated access, Barry has no need for more regular financial reporting. Clermont simply owns two buildings on the Upper East Side. A non-managing member, ordinarily, has no valid business reason for needing constant access to a real estate holding company's records. Barry contends that two annual disclosures instead of, for instance, three or four, is somewhat arbitrary. However, there is no objectively correct amount of access. Rather, Feil, as the managing member, had the right, and, indeed, the obligation, to set reasonable limits on Barry's books and records access under the circumstances of Barry's 2011 unprecedented and overwhelming requests. As with the accounting claim, discussed below, Feil's duty was to ensure that Barry did not cause the Company to waste resources by indulging unwarranted intrusion. Feil, as managing member, has discretion to set limits. Barry does not. So long as Feil's books and records restrictions are not clearly unreasonable, the court must defer to Feil's business judgment.
Furthermore, that Barry and Feil dislike each other does not warrant a different result. If that were the case, bickering LLC members could routinely do away with the powers of a managing member. LLC law does not operate in this fashion. To the contrary, member-managed LLCs are supposed to be immune from dissenting non-managing members' views about day-to-day management. So long as the managing member does not run afoul of his contractual and fiduciary obligations, his business decisions cannot be questioned, either by non-managing members or the court. While Barry claims Feil engaged in wrongdoing with respect to the above-mentioned construction projects, such claims, as discussed, are not viable. Feil is not alleged to have engaged in any other wrongdoing since the inception of this action that might give rise to a need by Barry for greater books and records access. Consequently, the protocol governing Barry's books and records requests set forth in October 2011 Letter did not contravene the Operating Agreement.
The court declines to declare what reasonable restrictions might be appropriate in the future since doing so would constitute an impermissible advisory opinion. That said, it is clear that if the Company continues to provide timely good faith responses to Barry's requests, such as the recent mortgage documents request, this should suffice to provide Barry with the books and records access he is entitled to.
C. Equitable Accounting
Defendants also seek summary judgment on Barry's equitable accounting claim, arguing that circumstances warranting an accounting are not present. In granting summary judgment to defendants, the court addresses a question of first impression in the First Department: what limits exist, if any, on the rights of a non-managing member of an LLC to demand an accounting from the managing member?
It is well settled that "[t]he 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." Lawrence v. Kennedy, 95 A.D.3d 955, 958, 944 N.Y.S.2d 577 (2d Dept 2012), quoting Palazzo v. Palazzo, 121 A.D.2d 261, 264, 503 N.Y.S.2d 381 (1st Dept 1986). It is undisputed that Feil, as managing member, has fiduciary duties to Clermont's members, including Barry. Moreover, unlike other jurisdictions, in the First Department, "[a]n allegation of wrongdoing is not an indispensable element of a demand for an accounting where the complaint indicates a fiduciary relationship between the parties or some other special circumstance warranting equitable relief." Morgulas v. J. Yudell Realty, Inc., 161 A.D.2d 211, 213–14, 554 N.Y.S.2d 597 (1st Dept 1990) ; see Adam v. Cutner & Rathkopf, 238 A.D.2d 234, 242, 656 N.Y.S.2d 753 (1st Dept 1997) (same). Nonetheless, even in the First Department, "[t]o be entitled to an equitable accounting, a claimant must demonstrate that he or she has no adequate remedy at law." Unitel Telecard Distribution Corp. v. Nunez, 90 A.D.3d 568, 569, 936 N.Y.S.2d 17 (1st Dept 2011), citing Kastle v. Steibel, 120 A.D.2d 868, 869, 502 N.Y.S.2d 538 (3d Dept 1986).
The First Department's rule that wrongdoing need not be alleged appears to contravene a holding of the Court of Appeals. See Owen v. Blumenthal, 280 N.Y. 96, 100–01, 19 N.E.2d 977 (1939) ("In so far as an accounting is based upon wrongdoing thus alleged, it may not be had unless such wrongdoing is first established."); see also Benedict v. Whitman Breed Abbott & Morgan, 110 A.D.3d 935, 938, 973 N.Y.S.2d 341 (2d Dept 2013) (To obtain an accounting, a plaintiff must show that there was some wrongdoing on the part of a defendant with respect to the fiduciary relationship); Nicholson v. Nicholson, 288 A.D.2d 743, 744, 732 N.Y.S.2d 749 (3d Dept 2001) ("wrongful conduct was an essential element of defendant's cause of action for an accounting"); Mosdos Chofetz Chaim, Inc. v. RBS Citizens, N.A., 14 FSupp3d 191, 209 (SDNY 2014) (citing wrongdoing requirement in Benedict); Int'l Bus. Machs. Corp. v. Comdisco, Inc., 602 A.2d 74, 78 (Del.Ch.1991) ("The accounting usually ordered by this Court, however, involves the wrongdoing of a fiduciary.").
Barry is advocating a commercially unreasonable proposition. He contends that any member of any New York LLC can, at any time, demand an accounting from the LLC. Barry does not place a caveat on this proposition. The court, however, cannot believe that in holding that wrongdoing need not be alleged to justify an accounting, the First Department meant to suggest that commercial reasonableness cannot be taken into account. While the First Department has stated that alleged wrongdoing is not "an indispensable element," the First Department has never clarified, in the absence of wrongdoing, what circumstances may justify precluding an LLC member from obtaining an accounting. This court holds that lack of commercial reasonableness is such a circumstance.
The LLC, a relatively modern form of corporate governance, not only has the benefit of limited liability, but also the virtually limitless possibilities of customization. One of the beauties of the LLC is that members can specifically and explicitly determine how their company is to be run. Unlike traditional fiduciaries that necessarily are bound by "the punctilio of an honor the most sensitive" [see People v. Grasso, 50 A.D.3d 535, 546, 858 N.Y.S.2d 23 (1st Dept 2008), quoting Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545 (1928) ], LLC members are permitted to disclaim some of the most fundamental fiduciary obligations. See, e.g., Kagan v. HMC–New York, Inc., 94 A.D.3d 67, 72–73, 939 N.Y.S.2d 384 (1st Dept 2012) (LLC members may disclaim fiduciary duties by explicitly doing so in the operating agreement), citing Kelly v. Blum, 2010 WL 629850, at *10 (Del.Ch.2010). Moreover, while New York has its own set of LLC laws, those are merely default rules that can easily be overridden by the LLC's operating agreement. Hence, when a member complains that his rights were violated based on traditional notions of equity and corporate fair play, courts must be wary not to lose sight of the nature of the LLC and provide members with rights they did not bargain for and, in many cases, expressly disclaimed. This court, sitting in New York's commercial part, recognizes that the flexibility an LLC provides sophisticated business people is an essential tool for modern capital activity. At its heart is predictability. Courts should be wary of undermining that predictability.
It is axiomatic that LLC members have no right to disrupt the orderly operations of the LLC's business without good cause. Nor should members have the right to effectively avail themselves of broader books and records rights than they agreed to in the operating agreement, which, in effect, is what an unfettered accounting right would accomplish. Moreover, in the context of an LLC, commercial reasonableness should not be disregarded. Ordering an accounting based on the demand of any member for any reason is expensive and disruptive—i.e., commercially unreasonable—an outcome not equitable to the LLC or its other members. Ergo, the relief of an equitable accounting should not lie where such relief is itself inequitable.
In this case, millions of dollars have been incurred by Clermont in this books and records proceeding. Barry has had the benefit of extensive discovery. That discovery has not uncovered any actionable wrongdoing with respect to the properties at issue. If Barry could file a complaint with well pleaded allegations of fiduciary breaches, a description not applicable to the PFAC, he could have maintained an action at law for damages against Feil and the other proposed defendants. He could not. This failure to maintain an action at law should not result in the further expense of an accounting for no good reason.
To conclude, to the extent Barry seeks Clermont's records, he may do so in accordance with his books and records rights. To the extent he seeks to hold Clermont's managers and agents liable for wrongdoing, he may do so if he can properly state a claim against them. To the extent he seeks endless litigation and costly intrusion into Clermont's business in the hope of uncovering a not yet known instance of malfeasance, he is precluded.
Summary judgment is granted to defendants. Accordingly, it is
The court must issue a declaratory judgment. The court does so in a separate order filed simultaneously with this decision. The parties are advised that such judgment may not be immediately available on NYSCEF due to the County Clerk's new procedures for reviewing judgments. The parties may obtain a copy by contacting this part's clerk, who will email the parties a copy upon request.
ORDERED that the motion by plaintiff Stanley Barry to amend his complaint is denied; and it is further
ORDERED that the motion by defendants Clermont York Associates LLC and Jeffrey Feil for summary judgement against plaintiff is granted, the third cause of action for an accounting is dismissed, and the Clerk is directed to enter the declaratory judgment separately filed in conjunction with this decision, which declares the protocol governing Barry's books and records requests set forth in October 2011 Letter did not contravene the Operating Agreement.