Opinion
Index No. 654561/2022 MOTION SEQ. Nos. 003 004
02-29-2024
BULL HILL, LLC, HARDY LANE INVESTMENT FUND, LLC, HARDY LANE FOUNDATION, INC., Plaintiffs, v. HFZ MEMBER RB PORTFOLIO LLC, HFZ MEMBER RB ACQUISITIONS LLC, HFZ RB PORTFOLIO MANAGER, LLC, HFZ RB ACQUISITIONS MANAGER, LLC, HFZ CAPITAL GROUP, LLC, MONROE CAPITAL LLC, ZIEL FELDMAN, HELENE FELDMAN, NIR MEIR Defendants.
Unpublished Opinion
DECISION + ORDER ON MOTION
HON. JOEL M.COHEN, JUDGE.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 86, 102, 112 were read on this motion to DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 004) 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 103, 104, 112 were read on this motion to DISMISS.
This derivative action pleads a complex scheme among New York real estate development firm HFZ Capital Group, LLC, its principals Ziel and Helene Feldman, and asset management firm Monroe Capital LLC to divert millions of dollars from the investors of HFZ Reich Portfolio and HFZ Reich Acquisitions by stripping those entities of their assets. Plaintiffs Bull Hill, LLC, Hardy Lane Investment Fund, LLC, and Hardy Lane Foundation (collectively "Plaintiffs"), who were investors in HFZ Reich Portfolio and HFZ Reich Acquisitions, now bring this action on behalf of those entities.
Although expressly pleaded as a derivative action in the Amended Verified Complaint (NYSCEF 24 ¶ 1), the caption does not describe it as such. Plaintiffs are directed to take steps to amend the caption to state that it is brought derivatively on behalf of the nominal defendant entities.
The following statement of facts is drawn from the Amended Complaint, the factual allegations of which are assumed to be true solely for purposes of this motion to dismiss.
According to the Amended Verified Complaint, Ziel Feldman ("Feldman"), principal of Defendant HFZ Capital Group, LLC ("HFZ Capital"), planned to enter into a joint venture with the Reich Brothers, LLC ("Reich Brothers"), an industrial real estate firm run by Jonathan and Adam Reich (NYSCEF 24 ["FAC"] ¶2). During 2018, HFZ Capital sought investors for this joint venture.
Plaintiffs Bull Hill, LLC, Hardy Lane Investment Fund, LLC, and Hardy Lane Foundation are companies affiliated with Dr. Alfred I. Tauber ("Dr. Tauber") (FAC ¶¶ 18-20). In 2018, Mr Meir ("Meir") of HFZ Capital pitched the HFZ/Reich joint venture to Dr. Tauber (FAC ¶¶ 46-47). Plaintiffs allege that Meir provided Dr. Tauber with information showing the Reich Brother's promising historical performance and stated that the proposed venture was targeting a 30 percent rate of return (FAC ¶ 50). Thereafter, to close the deal with Dr. Tauber, HFZ Capital or its principals created ten companies whose purpose was to hold and manage the portfolio of industrial real estate (the "HFZ Reich Web") (FAC ¶ 47).
The principal entities in this "HFZ Reich Web" were nominal defendants HFZ Reich Member RB Portfolio LLC ("HFZ Reich Portfolio") (the holder of existing properties in the portfolio) and HFZ Reich Member RB Acquisitions LLC ("HFZ Reich Acquisitions") (the vehicle for acquiring future properties) (FAC ¶¶ 2, 21-22). In August 2018, Bull Hill contributed $2,500,000.00 in exchange for a 10 percent interest in HFZ Reich Portfolio (FAC ¶ 54). Over the course of 2019 and 2020, Plaintiffs made an aggregate of $15,839,681 in capital contributions to HFZ Reich Acquisitions (FAC ¶54).
According to Plaintiffs, the LLC agreements for the entities in the HFZ Reich Web, as well as related paperwork governing the operation of HFZ Reich Portfolio and HFZ Reich Acquisitions, appeared legitimate and included customary investor protections, including that "Manager" of the LLCs would be a "non-Member" of the LLCs and could only take actions in "its good faith reasonable business judgment." (FAC ¶ 3). Even then, the Manager was limited to decisions in the "ordinary and usual business affairs of the Company on a day-to-day basis" and was not empowered to enter into any extraordinary transactions. Further, the LLC Agreements stated that "[n]o Member shall transact any business for the company" and that "the Members shall not perform nor have the authority to perform any act, thing, or deed in the name of or on behalf of the Manager or the Company." (FAC ¶ 3).
The Managers of both HFZ Reich Acquisitions and HFZ Reich Portfolio were HFZ RB Acquisitions Manager LLC and HFZ RB Portfolio Manager LLC (collectively, the "Manager Defendants"). The Manager Defendants were wholly owned by HFZ Capital. Plaintiffs allege that both Ziel and Helene Feldman signed documents and contracts on behalf of the Nominal Defendants in their individual capacity or as principals of HFZ Capital (¶¶ 7, 75, 105).
In October 2018, Monroe Capital LLC ("Monroe"), an asset management firm specializing in private credit markets, lent HFZ Reich Portfolio and HFZ Reich Acquisitions approximately $40 million (later increased to $43,466,019) ("$43 Million Monroe-Reich Loan") (FAC ¶¶ 5; 29). This loan was secured by the value of all companies in the HFZ Reich Web (FAC ¶73). Feldman valued the industrial portfolio held by the HFZ Reich Web at $400 million (FAC ¶ 5).
Months went by and investor reports were issued for the HFZ Reich Web indicating that the assets were performing and continued to be valuable (FAC ¶¶ 9; 88). Bank statements of HFZ Reich Portfolio reflect that investors contributed a total of $34,290,113.44 to HFZ Reich Portfolio (FAC ¶ 55). The Complaint alleges, upon information and belief, that HFZ Reich Acquisitions' capital calls received totaled $186,814,715 (FAC ¶65).
However, beginning in or around August 2020, "the general public had started to learn about aspects of HFZ's fraud as HFZ Capital began to default on significant swaths of debt" (FAC ¶ 87). One of the loans in default around that time was an $8,000,000 loan by Plaintiff Bull Hill to HFZ Reich Acquisitions. When the loan was not repaid on time, Dr. Tauber contacted Feldman's executive assistant to discuss repayment of the loan. He was assured verbally and in writing that the debt would be repaid, but payment never came (FAC ¶87). After repeated attempts to reach Feldman and Meir, Feldman finally responded to Dr. Tauber by email informing him that "all of HFZ's ownership interests in that portfolio were foreclosed upon by the lender and have unfortunately been lost," and that the representations that had been made to Dr. Tauber concerning his investments "cannot be fulfilled by HFZ." (id.). Feldman did not mention his purported side deal with Monroe (id.).
Over the course of 2021 and 2022, Dr. Tauber's counsel repeatedly contacted counsel for Feldman, Meir and HFZ Capital to attempt to gain additional information about the meaning of the cryptic email from Feldman. Finally, Plaintiffs were told that Monroe had acquired all assets of HFZ Reich Portfolio and HFZ Reich Acquisitions in December 2020 through a foreclosure following defaults on $156,946,017 in loans to various HFZ entities, not limited to HFZ Reich Portfolio and HFZ Reich Acquisitions (FAC ¶ 88).
Having not received notice of the Monroe Foreclosure before the fact, Plaintiffs undertook an investigation (FAC ¶89). They discovered that before the HFZ Reich Web was formed, Monroe loaned HFZ Capital $100 million (later upsized to $113.5 million) (FAC ¶ 4), and HFZ Capital's principals, including the Feldmans, had personally guaranteed that debt (FAC ¶72). HFZ Capital defaulted on that loan, but Monroe did not respond to the default by foreclosing on HFZ Capital's assets as it was entitled to do (FAC ¶ 1). Instead, shortly after the creation of the HFZ Reich Web, Monroe signed the $43 million loan agreement with the HFZ Reich Web (FAC ¶ 5), which Plaintiffs learned was also personally guaranteed by Feldman and his wife (and all of their assets) as well as by all assets of the HFZ Reich Web (FAC ¶73).
Plaintiffs also discovered that Monroe was a member of HFZ Reich Acquisitions (FAC ¶55). However, Plaintiffs allege that none of Monroe's capital contributions appear in the bank accounts of HFZ Reich Acquisitions, and the addition of Monroe to the membership roll of HFZ Reich Acquisitions was concealed from investors (FAC ¶ 8).
Plaintiffs further allege that although the $43 Million Monroe-Reich Loan was supposed to have been a loan to HFZ Reich Portfolio and HFZ Reich Acquisitions, more than $40 million of the loan proceeds were never deposited into the bank accounts of either HFZ Reich Portfolio or HFZ Reich Acquisitions. Instead, Monroe paid the funds directly to HFZ Capital and its principals, none of whom were borrowers (FAC ¶ 6). Plaintiffs allege that other funds were improperly diverted to HFZ Capital and/or its principals. In September 2020, Feldman and Meir caused HFZ Reich Portfolio to take out a $30 million loan from Avishai Abrahami (the "$30 million Abrahami Loan"). Pursuant to the loan documents, the $30 million loan was secured by three real estate properties that were part of the industrial portfolio (FAC ¶85). Plaintiffs allege that once Abrahami wired the $30,000,000 loan proceeds to HFZ Portfolio's bank account, they were quickly transferred up the corporate chain to HFZ Capital through a series of improper intercompany transfers (FAC ¶86).
On August 14, 2020, Monroe declared a default and immediate acceleration in the amount of $113,500,000.00, in connection with the 2017 loan to HFZ Capital (FAC ¶89). Five days after the first default, on August 19, 2020, Monroe declared a default and immediate acceleration in the amount of $43,466,019.00 in connection with the 2018 $43 Million Monroe Reich Loan to HFZ Reich Portfolio and HFZ Reich Acquisitions (FAC ¶89). Plaintiffs allege that neither default was disclosed to third-party investors or Members in HFZ Reich Portfolio or HFZ Reich Acquisitions (FAC ¶89).
In October 2020, Monroe sent to Feldman notices of its intent to foreclose upon the assets of HFZ Reich Portfolio and HFZ Reich Acquisitions and filed two lawsuits (under seal) against HFZ Capital. Almost immediately, Feldman and Monroe's managing director, Kyle Asher, began to exchange emails about a possible deal in connection with the foreclosure (FAC ¶¶10; 90). It took only days for Asher and Feldman to agree to terms to resolve what Asher refers to as "the illegitimate Reich Loan" (that is, the $43 Million Monroe-Reich Loan). Email correspondence dated November 24, 2020, between Ziel Feldman and Adam Feldman of HFZ Capital and Kyle Asher and Aaron Peck of Monroe lays out in "some detail" the final results of this agreement (FAC ¶91). Some of the key terms include that: (1) Feldman agreed to provide some-but not all-of his personal property that had been pledged to guarantee the debt; (2) Feldman would walk away with a $43 million mansion and $13-14 million in cash for his personal use; (3) Feldman would retain a "20% upside interest" in the deal, provided that he signed a "bad boy" letter, which could be used to revoke that interest if Feldman were to do anything to interfere with Monroe's profit margins; (4) Feldman would "provide a full and complete accounting and disclosure of all personal and corporate assets"; (5) Feldman and Meir "personally and on behalf of HFZ" would "acknowledge and agree sale process was commercially reasonable" and would further agree that any "actual 'surplus' proceeds" would be used to repay the $113 million "corporate loan" taken out by HFZ Capital; and (6) the deal further provided that the "Other Third Party equity investors shall be foreclosed out" without any compensation at all (FAC ¶ 11). In the event Monroe was ever paid off, any upside was "to be had for Ziel/HFZ on the backend" after considering a "TBD economic deal for Witkoff' (a New York real estate developer who was to be an "active consultant" with respect to the assets now owned by Monroe) (FAC ¶¶97-98).
According to the Amended Complaint, one investor, Shimon Menahem, learned of Monroe's involvement ahead of time and demanded to be cut in (FAC ¶12). In early September 2020, approximately two weeks after Monroe had sent default notices to HFZ Capital, a $3 million loan that Menahem had made to HFZ Reich Portfolio was suddenly repaid with $1 million in interest (FAC ¶12). Feldman explained to Monroe that it could not avoid cutting Shimon Menahem into their deal to avoid trouble and therefore Monroe was prepared to agree that the "Shimon equity group" would "retain material value in Reich equity, subject to terms to be agreed between Monroe and Shimon." (FAC ¶98). For Abrahami, his $30 million loan was never repaid and Feldman would be required to "sign an affidavit acknowledging the invalidity of the 30mm loan" as a condition to doing this new deal with Monroe (FAC ¶98).
On December 9, 2020, Monroe held a UCC auction to dispose of the various assets. The Terms of Public Sale stated that "the principal asset of the Portfolio LLCs is control of and 100% of the direct interests in HFZ Member RB Portfolio .... HFZ RB Portfolio Member owns a 50% limited liability company interest in HFZ Reich Holdings, LLC." The Terms of Public Sale further stated that "the principal asset of Acquisitions LLCs is control of and 70% of the direct interests in HFZ Member RB Acquisitions LLC .... HFZ RB Acquisitions Member owns a 95% limited liability company interest in HFZ Reich Properties LLC." Although the UCC foreclosure documents listed HFZ Capital as the debtor, not HFZ Reich Portfolio or HFZ Reich Acquisitions, Monroe purported to "auction off' the assets of HFZ Reich Portfolio and HFZ Reich Acquisitions. During the auction, Monroe was the only bidder and thereby acquired the industrial real estate assets. Consistent with Monroe's agreement with Feldman, there was no objection from Feldman or Meir. Plaintiffs allege that there was no notice to any of the other Members of HFZ Reich Portfolio and HFZ Reich Acquisitions, and no Member consented (FAC ¶99).
Six days later, on December 15, 2020, Monroe executed a Transfer Statement for the assets "sold" to itself at the auction. On December 16, 2020, Monroe issued an announcement that it was the winning bidder at the UCC sale. To date, Monroe appears to be continuing to operate many of the properties it obtained at the UCC sale but has recently announced that it intends to sell at least two of them (FAC ¶100).
Plaintiffs bring this derivative action on behalf of HFZ Reich Portfolio and HFZ Reich Acquisitions ("Nominal Defendants"), alleging claims against the HFZ RB Portfolio Manager, LLC HFZ RB Acquisitions Manager, LLC, HFZ Capital Group, LLC, Ziel Feldman, and Helene Feldman (the "HFZ Defendants") for breach of contract, breach of the implied covenant, breach of fiduciary duties, aiding and abetting breach of fiduciary duties, and accounting. Plaintiffs bring claims against Monroe for tortious interference, aiding and abetting breach of fiduciary duties, breach of the implied covenant, constructive trust, and accounting (NYSCEF 24).
Nir Meir was also originally a defendant but has since been dismissed from this case at the request of Plaintiffs (see NYSCEF 109).
Monroe and the HFZ Defendants now separately move to dismiss the Amended Complaint as alleged against them. The motions are granted in part and denied in part, as described below.
DISCUSSION
As an initial matter, both Monroe and the HFZ Defendants argue that Plaintiffs cannot bring this suit derivatively because the Portfolio Companies have not paid their taxes and are not in good standing under Delaware Law. Under Delaware law, if an LLC fails to pay its annual taxes that LLC "shall cease to be in good standing[.]" (6 Del. C. § 18-1107(h); see also id. §18-1107(/) [LLC not in good standing "may not maintain any action, suit, or proceeding in any court of the State of Delaware until such domestic [LLC] . . . has been restored to . . . good standing"]).
Defendants do not cite a case in which a court found that plaintiffs lacked capacity to sue derivatively on behalf of entities that were not in good standing as of the date on which the lawsuit was filed. Rather, the cases cited indicate that suit was precluded when cancellation of an LLC occurred prior to filing of the action (see Meissner v. Yun, 150 A.D.3d 455 [1st Dept 2017]; Otto v. Otto, 110 A.D.3d 620 [1st Dept 2013]).
In any event, the Court finds that Plaintiffs have equitable standing under Delaware law. Plaintiffs have demonstrated that a complete failure of justice will occur unless they are granted standing (see Bamford v. Penfold, L.P., CV 2019-0005-JTL, 2022 WL 2278867, at *29 [Del Ch 2022]; see also Schoon v. Smith, 953 A.2d 196, 210 [Del 2008]). To dismiss this action based on lack of standing would be to reward the HFZ Defendants for failing to pay taxes for the entities. Indeed, at the hearing on a temporary restraining order, one of Plaintiffs' concerns was that the defendants would dissolve the nominal entities during this litigation. The Order to Show Cause was resolved by stipulation of the parties, whereby the defendants agreed to be restrained from dissolving the nominal entities (NYSCEF 56). It would be inconsistent with that resolution to now find that Plaintiff cannot maintain this action because of Defendants' own failure to pay taxes (see Shabtai v. HFZ Capital Group, LLC, 75 Misc.3d 1226(A) [Sup Ct, NY County 2022] ["Defendants argue that once a certificate of cancellation has been filed, a dissolved Delaware limited liability company lacks the capacity to sue or be sued . . . Under the facts and circumstances of this case, this argument twists logic beyond all recognition . . . The defendants can not subvert Delaware's winding up requirements, their obligations and exposure to legitimate claims merely by causing the dissolution of the Dissolved Entities"] [Borrok, J.], order affd, appeal dismissed, 220 A.D.3d 471 [1st Dept 2023]).
I. Motion 04: HFZ Defendant's Motion to Dismiss
A. Veil-Piercing Claims
The allegations in the amended complaint adequately plead a basis for piercing the corporate veil so as to assert claims against HFZ Capital and the Feldmans. Under Delaware law, to pierce the corporate veil or hold that there is alter ego liability, a plaintiff must "prove that some 'fraud or injustice' would be perpetrated through misuse of the corporate form" (Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, France, 19760-NC, 2004 WL 5366102, at *7 [Del Ch 2004]). "Specific facts a court may consider when being asked to disregard the corporate form include: "(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a facade for the dominant shareholder." A decision to disregard the corporate entity generally results not from a single factor, but rather some combination of them, and "an overall element of injustice or unfairness must always be present, as well." (MicroStrategy Inc. v. Acacia Research Corp., CIV.A. 5735-VCP, 2010 WL 5550455, at *11 [Del Ch 2010]).
Here, Plaintiffs allege the entire HFZ Reich Web was operated as a single consolidated business structure dominated by HFZ Capital and the Feldmans, which is evidenced the fact that funds, including capital calls, and loans to the Nominal Defendants were transferred out of the nominal entities to the HFZ Capital and/or the Feldmans. Plaintiffs also allege that the $43 million loan taken out by the Nominal Defendants was part of a negotiation with Monroe to "cure" HFZ Capital's default on a separate $113 million loan that was taken out before the Nominal Defendants even existed. These factual allegations are sufficient to plead alter ego liability (see Kostyatnikov v. HFZ Capital Group LLC, 212 A.D.3d 477, 478 [1st Dept 2023] [ "the complaint adequately allege[d] that defendants Ziel Feldman and Nir Meir exercised domination and control over defendant entities . . . through defendant HFZ Capital Group LLC, by abusing the corporate form to deprive plaintiffs of their investment").
B. Breach of Contract
The HFZ Defendants' motion to dismiss Plaintiffs' first and second cause of action for breach of the HFZ Reich Portfolio Agreement and HFZ Reich Acquisitions Agreement is denied.
Plaintiffs allege that the HFZ Defendants breached Section 10.1, which provides that "[t]he Manager shall keep correct and complete books and records of the Company's accounts and transactions," by failing to maintain and produce books and records such as corporate consents, resolutions, or minutes from official meetings. While the HFZ Defendants argue that they did provide certain books and records to Plaintiffs, Plaintiffs allege that "the production was deficient and contained no corporate consents, resolutions or minutes from any official meeting." (FAC ¶ 102). Accordingly, this claim survives.
Next, Plaintiffs allege that the HFZ Defendants breached Section 6.1- which provides that the "Manager shall conduct or cause to be conducted in its good faith reasonable business judgment the ordinary and usual business and affairs of the Company"- through the Manager Defendants' abdication of their managerial obligations and through HFZ Capital and the Feldmans' exercise of control over the Manager Defendants and the Nominal Defendants (FAC ¶¶ 51-53, 75, 77). This claim is not conclusively refuted by the HFZ Defendants, whose only argument is that this "claim is plainly at odds with the provisions of the respective agreements and the legitimately bargained-for corporate structure, which Plaintiffs agreed to while represented by sophisticated counsel, and which demonstrates that each of the HFZ Defendants at all times acted with complete authority under the respective operating agreements" (Reply at 7). Thus, the HFZ Defendants simply ask that the Court accept their version of facts, which the Court cannot do on a motion to dismiss. Thus, this claim survives.
Likewise, the branch of the breach of contract claims that alleges a breach of Sections 7.2, 8, and 14.1.1 survives. Plaintiffs allege that the HFZ Defendants breached the LLC Agreements by participating in management of the Nominal Defendants in violation of Section 7.2, which prohibits members from doing exactly that (FAC ¶¶53, 78); causing all assets of the Nominal Defendants, including all membership interests in the industrial properties, to be pledged as collateral in connection with the $43 Million Monroe-Reich Loan in violation of Section 8, which provides that only a member may authorize a pledge of its own membership interest (FAC ¶ 80); and by failing to disclose the litany of litigations brought and/or threatened against them in violation of Section 14.1.1 (FAC ¶¶ 34-44).
In response to each of these claims, the HFZ Defendants argue that these provisions of the LLC Agreements only apply to members, and that none of the HFZ Defendants were ever members of the LLCs. Given that the Court has found that Plaintiffs' allegations of veil-piercing are sufficient, these arguments fail. Accordingly, the HFZ Defendants' motion to dismiss Plaintiffs' breach of contract claims is denied.
C. Breach of the Implied Covenant of Good Faith and Fair Dealing
The third and fourth causes of action alleging a breach of the implied covenant of good faith and fair dealing in the HFZ Reich Portfolio Agreement and HFZ Reich Acquisitions Agreement are dismissed as duplicative of the claims asserted for breach of contract.
The Delaware Supreme Court has explained that the "the implied covenant of good faith and fair dealing often comes into play in two situations": (1) "when it is argued that a situation has arisen that was unforeseen by the parties and where the agreement's express terms do not cover what should happen", and (2) "when a party to the contract is given discretion to act as to a certain subject and it is argued that the discretion has been used in a way that is impliedly proscribed by the contract's express terms" (Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, 202 A.3d 482, 504 [Del 2019]).
Plaintiff argues that its claims are based on the HFZ Defendants' abuse of the discretion granted to the Managers under the LLC Agreements. However, Section 6.1 provides that the "Manager shall conduct or cause to be conducted in its good faith reasonable business judgment the ordinary and usual business and affairs of the Company." Therefore, any breach of good faith and fair dealing claims are covered by the Member LLC Agreements themselves and is already included in the breach of contract claim. Therefore, this claim is duplicative and must be dismissed.
D. Breach of Fiduciary Duty and Aiding and Abetting Breach of Fiduciary Duty
The HFZ Defendants have failed to demonstrate that Plaintiffs' fifteenth cause of action for breach of fiduciary duty against HFZ Capital should be dismissed. The HFZ Defendants only argument in favor of dismissal is based on Plaintiffs purported "failure to establish any liability theory related to alter ego," (NYSCEF 101 at 17), but for the reasons previously set forth, Plaintiffs have adequately pleaded alter ego liability as to the HFZ Defendants.
Likewise, Plaintiffs' ninth and twelfth causes of action for breach of fiduciary duty against HFZ Reich Portfolio Manager and HFZ Reich Acquisitions Manager survive. First, contrary to the HFZ Defendants' arguments, only where a contract and breach of fiduciary duty claim "overlap completely" should the Court dismiss the breach of fiduciary duty claim as duplicative (In re MultiPlan Corp. Stockholders Litig., 268 A.3d 784, 805 [Del Ch 2022]). As was the case in MultiPlan, because the Court cannot conclude that the Plaintiffs' fiduciary duty claim would be subsumed within the contractual claim, the Court declines to grant dismissal on that basis (id.).
Second, Section 6.2 of the LLC Agreements provides that: "Manager shall not be liable to the Company or to any Member for any act performed or omitted to be performed by it on behalf of the Company, provided such act or omission was taken in good faith, was reasonably believed by Manager to be in the best interests of the Company, was reasonably believed to be within the scope of authority granted or reserved to manager by the terms of this Agreement and did not constitute fraud, gross negligence or willful misconduct." (NYSCEF 3 & 4 § 6.2). Here, taking the facts as true, Plaintiffs have pled facts that could establish fraud, gross negligence, or willful misconduct, including that the Manager Defendants colluded with Monroe to transfer millions of dollars in assets of the LLCs to satisfy a debt that had been previously incurred by HFZ Capital (FAC ¶169). Accordingly, these claims survive.
Plaintiffs' eleventh and fourteenth causes of action also allege that the non-managing HFZ Defendants aided and abetted the Manager Defendants' breach of fiduciary duty. Under New York law, "[a] claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of the breach" (Kaufman v. Cohen, 307 A.D.2d 113, 125 [1st Dept 2003]).
As noted above, contrary to the HFZ Defendants' arguments, Plaintiffs have adequately alleged a "breach by a fiduciary of obligations to another." Furthermore, Plaintiffs have adequately alleged that the non-managing HFZ Defendants "knowingly induced or participated in the breach" by dominating and controlling the operations of HFZ Reich Portfolio and HFZ Reich Acquisitions, which were supposed to be conducted by the HFZ Reich Portfolio Manager and the HFZ Reich Acquisitions Manager, and by failing to establish any functioning internal oversight or controls over the operations of HFZ Reich Portfolio and HFZ Reich Acquisitions, causing damage to Plaintiffs.
The HFZ Defendants' argument that Plaintiffs improperly utilize group pleading is unavailing. The Amended Complaint includes specific allegations against the non-Manager HFZ Defendants, including that both Feldmans signed documents and contracts on behalf of the Nominal Defendants in their individual capacity or as principals of HFZ Capital (¶¶ 7, 75, 105), and that Ziel Feldman consented "on behalf of HFZ" to the Monroe Foreclosure (¶ 97). Accordingly, dismissal of the eleventh and fourteenth causes of action is denied.
E. Accounting
The HFZ Defendants' motion to dismiss the nineteenth cause of action for accounting is denied. The HFZ Defendants' assertion a claim for an accounting is not cognizable under Delaware law is unavailing (see AQSR India Private, Ltd. v. Bur. Veritas Holdings, Inc., CIV. A. 4021-VCS, 2009 WL 1707910, at *14 [Del Ch 2009] [rejecting argument that accounting claim should be dismissed because it is not an independent claim]; Ambase Corp. v. 111 W. 57th Sponsor LLC, 2018 NY Slip Op 30049[U], 34 [Sup Ct, NY County 2018] ["Defendants erroneously claim that because, under Delaware law, an accounting is an equitable remedy, it may not be maintained as a separate cause of action."]; Shabtai v. HFZ Capital Group, LLC, 75 Misc.3d 1226(A) [Sup Ct, NY County 2022], order affd, appeal dismissed, 220 A.D.3d 471 [1st Dept 2023] [refusing to dismiss claim for accounting under New York law]).
II. Motion 03: Defendant Monroe Capital's Motion to Dismiss
Monroe's motion to dismiss is granted solely with respect to the claims based on tortious interference with contract. The motion is denied with respect to Plaintiffs' claims for breach of the implied covenant of good faith and fair dealing, aiding and abetting breach of fiduciary duty, constructive trust, and accounting.
A. Tortious Interference
Plaintiffs have failed to state a claim for tortious interference with contract. Plaintiffs allege in their fifth and sixth causes of action that Monroe tortiously interfered with the LLC Agreements of the Nominal Defendants through, inter alia, their intentional efforts to secure an improper and invalid asset pledge for the $43 Million Monroe-Reich Loan and the subsequent collusive foreclosure (FAC ¶¶ 140-151). Monroe argues that it has done nothing more than "act[] in its own economic interest" and that it has the right "to protect its own legal or financial stake in the breaching party's business" (White Plains Coat & Apron Co., Inc. v. Cintas Corp., 8 N.Y.3d 422, 426 [2007] [noting that the economic interest defense has been applied where defendant was the breaching party's creditor]).
"The imposition of liability in spite of a defense of economic interest requires a showing of either malice on the one hand, or fraudulent or illegal means on the other" (Foster v. Churchill, 87 N.Y.2d 744, 750 [1996]). "Although economic interest is cast as a defense, courts routinely dismiss tortious interference claims at the pleading stage when it is evident, on the face of the complaint, that the doctrine applies" (Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent, Corp., 72 Misc.3d 1218(A) [Sup Ct, NY County 2021]).
Here, Plaintiffs allege that Monroe's economic justification defense does not apply because Monroe worked with the HFZ Defendants to actively conceal the lender's alleged interest in the collateral and undermine the Nominal Defendants' interests, including by negotiating a refinancing agreement to enrich Monroe and the HFZ Defendants to the detriment of Plaintiffs and other investors; suborning consent to the foreclosure; diverting hundreds of millions of dollars owed to the Nominal Defendants away from them and to Monroe as lender itself, returning surplus value only to the Feldmans and Menachem. However, a creditor's alleged interfering conduct "in attempting to protect its security interest, cannot be construed as malicious or carried out with the intent to harm the plaintiff." (Ultramar Energy Ltd. v. Chase Manhattan Bank, N.A., 179 A.D.2d 592, 593 [1st Dept 1992]).
In addition, "[i]t is well established that only a stranger to a contract, such as a third party, can be liable for tortious interference with a contract" (Ashby v. ALM Media, LLC, 110 A.D.3d 459 [1st Dept 2013]; Bradbury v. Israel, 204 A.D.3d 563, 564 [1st Dept 2022]). Here, Plaintiffs allege that Monroe was an investor member of HFZ Reich Acquisitions, and therefore Monroe cannot be considered a stranger to the HFZ Reich Acquisitions LLC Agreement. Accordingly, Plaintiffs have failed to state a claim for tortious interference with contract.
As to Plaintiffs' seventh and eighth causes of action for Tortious Interference with Prospective Economic Advantage, these claims are dismissed. The entirety of Plaintiffs' tortious interference with prospective economic advantage claims relies on the assumption that the LLC Agreements are potentially not binding. However, Plaintiffs provide no explanation to justify this possibility. Therefore, these claims are dismissed.
B. Aiding and Abetting Breach of Fiduciary Duty
In their tenth, thirteenth, and sixteenth causes of action, Plaintiffs have sufficiently pleaded claims against Monroe for aiding and abetting a breach of fiduciary duty by the Manager Defendants and HFZ Capital. Under New York law, "[a] claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of the breach" (Kaufman v. Cohen, 307 A.D.2d 113, 125 [1st Dept 2003]).
Here, Plaintiffs allege that Monroe received copies of the operating documents in connection with the $43 Million Monroe-Reich Loan (FAC ¶ 82) and was aware that the Manager Defendants were charged with operating the Nominal Defendants and owed fiduciary duties to the Nominal Defendants (FAC ¶ 51). Indeed, as noted, Monroe itself is alleged to be a Member of HFZ Reich Acquisitions. Plaintiffs have adequately alleged that Monroe "knowingly induced or participated in the breach" because Monroe was holding a $113 million prior loan to HFZ Capital that was in or about to be in default, and Monroe was willing work out a deal with the HFZ Defendants in order to deal with that larger preexisting loan.
Monroe provides no support for its argument that there is an "economic interest" defense to a claim of aiding and abetting a breach of fiduciary duty. Furthermore, a distinguishing factor in Stanfield Offshore Leveraged Assets, Ltd. v. Metro. Life Ins. Co. (2008 NY Slip Op 31179[U], *8 [Sup Ct, NY County 2008])-which noted that "demanding and pressuring a debtor for repayment of a bona fide debt does not amount to a corrupt inducement, participation, or substantial assistance necessary to give rise to aider and abettor liability"-is that Plaintiff alleges there were two debts, one of which Plaintiffs had nothing to do with and did not know about. And unbeknownst to Plaintiffs, the assets that they were told supported their investment had already been pledged to a prior debt. Given these allegations, Monroe has failed to demonstrate that the aiding and abetting breach of fiduciary duty claim should be dismissed.
C. Breach of the Implied Covenant
Monroe argues that Plaintiffs seventeenth cause of action for breach of implied covenant claim must be dismissed because Monroe was well within its rights to conduct a UCC public auction. However, "[E]ven where one has an apparently unlimited right under a contract, that right may not be exercised solely for personal gain in such a way as to deprive the other party of the fruits of the contract." (Richbell Info. Servs., Inc. v. Jupiter Partners, L.P., 309 A.D.2d 288, 302 ). Plaintiff alleges that even if Monroe arguably had the right to foreclose under the terms of the $43 Million Monroe-Reich Loan, the collusive deal that Monroe brokered with Feldman to secure that foreclosure was made in bad faith and in violation of Monroe's implied duty (see Stevens v. Publicis, S.A., 50 A.D.3d 253, 255 [1st Dept 2008] ["bad faith may include evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance"] [citation omitted]; Richbell, 309 A.2d at 302 [upholding implied covenant claim that alleged that the defendant had exercised its contractual right malevolently for its own gain]). Given Plaintiffs the benefit of all reasonable inferences from their factual allegations, Monroe has failed to demonstrate that this claim should be dismissed as a matter of law.
D. Constructive Trust & Accounting
Finally, Monroe argues that Plaintiffs' prayers for constructive trust (eighteenth cause of action) and accounting (nineteenth cause of action) must be dismissed because Plaintiffs and Monroe lacked a fiduciary relationship.
In general, to impose a constructive trust, four factors must be established: "(1) a confidential or fiduciary relationship, (2) a promise, (3) a transfer in reliance thereon, and (4) unjust enrichment" (Sharp v. Kosmalski, 40 N.Y.2d 119, 121 [1976]). However, while the [Sharp] factors are useful in many cases[,] constructive trust doctrine is not rigidly limited" (Simonds v. Simonds. 45 N.Y.2d 233, 241 [1978]; Robinson v. Day, 103 A.D.3d 584, 587 [1st Dept 2013] [same]; Marini v. Lombardo, 79 A.D.3d 932, 933 [2d Dept 2010] [noting that since the Sharp factors "serve only as a guideline, a constructive trust may still be imposed even if all of the elements are not established"]; see also Latham v. Father Divine, 299 NY 22, 27 [1949] ["[A] constructive trust is merely 'the formula through which the conscience of equity finds expression"]; In re Koreas, Controle et Revision S.A., 961 F.2d 341, 353-54 [2d Cir 1992] ["a person wrongfully acquiring property can be treated as a constructive trustee notwithstanding the lack of a fiduciary relationship"] [applying New York law]). Similarly, the right to an accounting applies even where there is no fiduciary relationship "where special circumstances are present warranting equitable relief in the interest of justice." (Grossman v. Laurence Handprints-NJ., Inc., 90 A.D.2d 95, 105 [2d Dept 1982]).
Taking the factual allegations in this action as true for purposes of this motion, Monroe has failed to demonstrate that these equitable remedies are inapplicable as a matter of law.
Accordingly, it is
ORDERED that Monroe's motion to dismiss is GRANTED IN PART, and the tortious interference claims are dismissed; the motion is otherwise denied; it is further
ORDERED that the HFZ Defendants' motion to dismiss is GRANTED IN PART, and the breach of the implied covenant of good faith and fair dealing claim is dismissed; the motion is otherwise denied; it is further
ORDERED that all defendants answer the Amended Complaint within twenty (20) days of the date of this Order.
This constitutes the Decision and Order of the Court.