Opinion
2006/09758.
Decided May 12, 2008.
Jolly Caplash v. Rochester Oral Maxillofacial Surgery Associates, LLC and Mohammed Salahuddin was commenced by Dr. Caplash in August, 2006 seeking a declaratory judgment that Dr. Caplash is president and CEO of ROMSA. The consolidated action, Vernon Loveless, DMD v. Jolly Caplash, DMD, Mohammed Salahuddin, DMD, and Rochester Oral and Maxillofacial Surgery Associates, LLC, was commenced by Dr. Loveless, seeking to recover $400,000 from Dr. Caplash, allegedly due to Dr. Caplash's failure to make interest payments.
In a decision released on February 1, 2008, the Fourth Department reversed a previous order of the court and concluded that Dr. Salahuddin raised an issue of fact as to whether Dr. Caplash was a member of ROMSA "within the meaning of the statute. Caplash v. Rochester Oral Maxillofacial Surgery Associates, LLC and Salahuddin , 48 AD3d 1139 (4th Dept. 2008). The Fourth Department further held as follows:
The record does not disclose the circumstances under which the attorney came to represent the company and whether such representation was authorized by the operating agreement. We thus conclude that there is an issue of fact whether plaintiff has standing to seek dissolution. We therefore reverse the order, deem defendant's motion withdrawn, vacate the appointment of a receiver and remit the matter to Supreme Court for a hearing to determine that issue.
Id. at 1139. Thereafter, by scheduling order dated February 26, 2008, a hearing was scheduled to begin March 12, 2008. The scheduling order indicated that the hearing would "continue throughout the balance of that week." To accommodate a conflict, the hearing was subsequently rescheduled to March 13, 2008. As discovery had not been completed and the parties and their counsel had failed to reserve the balance of the week for the completion of the hearing, the court issued another scheduling order dated March 14, 2008, scheduling the resumption of the trial for May 28, 2008 and notifying counsel and parties to reserve the balance of that week for completion of the hearing. The March 14, 2008 scheduling order raised the issue of ROMSA's active participation in the litigation on one side of a 50-50 membership dispute and states:
After hearing Mr. Kristal's testimony yesterday, and examining the pleadings, the court invites a motion directed to the issue of the LLC's interposition of a counterclaim for dissolution. LLCL § 702. See Application of Clemente Bros., Inc, 19 AD2d 568 (3d Dept. 1963) (statute "grants to the corporation as a separate entity no authority to determine whether a proceeding shall be initiated to dissolve itself"), aff'd, 13 NY2d 963 (1963). The motion invited might also address whether the participation of the LLC in this litigation has gone well beyond appearing as a "proper jural party for the limited and passive purpose of rendering it amenable to the orders of the court'" by "assum[ing] a militant alignment on the side of one of the two equal, discordant stockholders.'" Matter of Levitt (Public Relations Aids, Inc.), 109 AD2d 502, 510-11 (1st Dept. 1985 quoting Matter of Clement, supra), and whether by virtue thereof the LLC's funds properly are being used. Id.
Five motions in these matters ensued and are pending before the court. First, in Caplash v. Rochester Oral Maxillofacial Surgery Associates, LLC and Mohammed Salahuddin, Index No. 2006-5846, defendant Salahuddin moved for summary judgment, citing as grounds LLCL § 412, CPLR 3212, 3211(a)(3), and CPLR 2221. Dr. Salahuddin's Notice of Motion is entitled "Motion for Summary judgment against Plaintiffs and/or Vacate this Court's Order of 3/14/08 and/or Strike Caplash's Second Cause of Action." The next motion was made by Dr. Caplash and sought an order of protection against the Notice to Take Deposition upon Oral Examination of R. Paul Hegner by Peter Kristal, Esq., pursuant to CPLR 3103. The third motion received by the court was made by Peter Kristal, Esq., on behalf of ROMSA, seeking partial summary judgment on ROMSA's first and second counterclaims, an injunction pursuant to CPLR 6301, and preclusion pursuant to CPLR 3126. The fourth motion received by the court was made by Dr. Loveless, pertaining to the matter of Loveless v. Jolly Caplash, Mohammed Salahuddin, and Rochester Oral and Maxillofacial Associates, LLC, Index NO. 2006-9758, for an order pursuant to CPLR 2221(e) and CPLR 3212 granting plaintiff summary judgment against Dr. Caplash for the relief demanded in the complaint. This motion was followed up by an additional motion made by Dr. Caplash, seeking an order granting costs, attorneys' fees, and sanctions against the opposing parties and counsel pursuant to 22 NYCRR § 130-1.1.
Motion by Dr. Loveless
Dr. Loveless seeks summary judgment on the promissory note signed by Dr. Caplash upon his purchase of Dr. Loveless' interest in ROMSA.
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Dr. Loveless' motion for summary judgment on the note is granted.
Dr. Salahuddin's Motion for Summary Judgment against Dr. Loveless
Dr. Salahuddin's motion for summary judgment seeks judgment dismissing Dr. Loveless's claims as stated against him in Loveless v. Caplash, et al. Dr. Salahuddin contends that after the sale of his interest in ROMSA to Dr. Caplash, Dr. Loveless no longer had a contractual relationship with Dr. Salahuddin and that there was no privity of contract between them at any time relevant to Loveless' claim. Dr. Loveless' claim against Dr. Salahuddin sounds in tortious interference with contract, namely the promissory note, not Dr. Caplash's contract with ROMSA (as assumed by Dr. Salahuddin). Dr. Loveless alleges that Dr. Salahuddin tortiously interfered with Dr. Caplash's ability to perform his obligations pursuant to the Promissory Note.
Dr. Salahuddin has not established prima facie entitlement to summary judgment on this cause of action stated by Dr. Loveless by reference to the privity issue. "As federal courts applying New York law have recognized, conduct constituting tortious interference with business relations is, by definition, conduct directed not at the plaintiff itself, but at the party with which the plaintiff has or seeks to have a relationship." Carvel Corp. v. Noonan , 3 NY3d 182 , 192 (2004). Dr. Salahuddin's motion for summary judgment on the cause of action stated against him by Dr. Loveless is denied.
Balance of Dr. Salahuddin's Motions
The problem with Salahuddin's motion for summary judgment dismissing Caplash's motion for dissolution of the LLC is that (1) the Appellate Division ordered a hearing on the issue of Caplash's standing to seek dissolution as a member of the LLC, and (2) his argument drawn from the LLCL § 401 and § 412 that Salahuddin had authority as an agent of the LLC to hire counsel who would in turn accept Caplash's registration on behalf of the LLC is fully undermined by the provisions in the Operating Agreement for management of the company by its officers (Article VII), including a President who is by the Operating Agreement given unrestricted authority as "Chief Executive Officer of the Company" to engage in "the general management of the affairs of the company" in the absence of contrary "direction of the members." Operating Agreement § 8.6. On the first issue, an unequivocal direction to hold a hearing is not lightly discarded in favor of summary disposition, even at the behest of the party which originally opposed the summary judgment motion reviewed by the Appellate Division. While such a remand and directive does not "necessarily preclude a summary disposition, summary judgment is nonetheless inappropriate" in this case inasmuch as the same question of fact identified by the Appellate Division remains after Mr. Kristal's testimony. Adams Drug Co., Inc. v. Knobel, 129 AD2d 401, 403 (1st Dept. 1987).
Turning to the second point, the delegation in § 8.6 to the President was, in the absence of a duly authorized "direct[ive] of the Members," plenary. Cf., in the corporate context, Hellman v. Hellman, ___ Misc 3d ___, 2008 WL 659801, 2008 NY slip. op. 28086 (Sup.Ct. Monroe Co. March 12, 2008). Karen S. Walker, New York Limited Liability Companies and Partnerships § 6.20, at 191 (2002)("In a manager-managed LLC, use of corporate officer labels for managers seems fully justified, at least so long as the actual authority of the officers is similar to that of the comparable corporate officers.") Salahuddin's argument drawn from LLCL § 401 and § 412 is, therefore, misplaced. These are default provisions vesting management of a LLC "in its members" in the absence of an operating agreement providing otherwise. See LLCL § 401(a)("unless the articles of organization provides for management . . . by a manager")("subject to any provisions in the articles of organization or the Operating Agreement"); LLCL § 408(a) (providing that member management is "subject to any provisions in the articles of organization or the Operating Agreement"). Indeed, it has been held that, even if the articles of organization vest management of the company in its members generally, "such vesting of authority is subject to any provisions in . . . the operating agreement . . . granting or withholding the management powers or responsibilities of one or more members.'" Nathanson v. Nathanson , 20 AD3d 403 , 403-04 (2d Dept. 2005) (quoting § 401(a) and upholding an operating agreement vesting management powers and responsibilities in one member against a claim that it violated the statute, § 417, and the company's articles of organization providing generally for member management). See LLCL Practice Commentaries Part 5B (Management)("Management by members is subject to any provision in the operating agreement . . .")
Here, the articles of organization provide for management by one or more members. Thus, by extension, even a provision in an operating agreement providing generally for member management (§ 7.1 of the operating agreement in this case) may be qualified by another provision which delegates such management authority to a President "subject to the direction of the members"(§ 8.6). The structure of this operating agreement compels the conclusion that ROMSA is a manager-managed LLC and not a member-managed LLC unless the members take action at a duly convened meeting or by written consent. See LLCL Practice Commentaries Part 5B (Management)("In a manager-managed LLC, the managers hold such offices and have such responsibilities as provided in the operating agreement"); 3 Ribstein Keetinge, Limited Liability Companies, Appendix B-8, fn.1 ("in a member-managed LLC, each member is an agent of the LLC for carrying on the business of the LLC in the usual course. On the other hand, in a manager-managed LLC, members do not have agency authority and managers do."); 5 White, New York Business Entities § L401.01 (same).
Similarly, Salahuddin's contention that he was an agent of ROMSA for the purpose of hiring counsel for the entity to defend it against a simple declaratory judgment action relative to the June 2006 members meeting and election, and thereby to convert ROMSA's status in that action as a mere nominal defendant into an active litigant on one side of this 50-50 membership dispute (complete with counterclaims against the other 50% member) is wholly misplaced. Section 412(a) speaks only of an agency "for the purpose of . . . [an LLC's] business" and the execution of instruments "for apparently carrying on in the usual way the business of the limited liability company." It does not address the extraordinary transformation of an LLC as a nominal defendant in a declaratory judgment action into an active litigant against one of its members.
Accordingly, Salahuddin's assertion that he had authority on behalf of ROMSA to hire an attorney for the company, who in turn would have authority to accept Caplash's resignation on behalf of the company, depends upon whether he was president of the company at the relevant time, there being no evidence of any duly authorized ( see Art. VII) "direction of the members" within the meaning of § 8.6 of the operating agreement.
Mr. Kristal's testimony at the hearing was that, on June 14, 2006, there was a membership meeting of ROMSA at which he attended at the behest of Salahuddin, together with Salahuddin, Caplash, Paul Hegner, and Hegner's secretary. There was no appointment of counsel for ROMSA attempted at the meeting, but the members did elect Caplash as president after Salahuddin nominated him. According to Kristal, Caplash hesitated at the meeting in his acceptance of the post, but he later accepted the position in writing. At the time of the 2006 election, the officers of ROMSA, as reflected in the operating agreement (§ 8.1), were as follows: "Vernon Loveless, D.M.D., President," and "Mohammed Salahuddin, D.D.S, Secretary and Treasurer."
Loveless, however, resigned from ROMSA in 2004, and Kristal acknowledged in his testimony that no formal election occurred when Caplash bought out Loveless' interest in ROMSA. Kristal offered a vague opinion that Salahuddin became president of ROMSA after the Caplash buyout, but he failed to account in his testimony for the election he described (he acknowledged that Caplash accepted the results of the election subsequently in writing), and he fully ignored Article VII of the Operating Agreement in regard to the conduct of company meetings and the majority vote criterion of § 7.10. Moreover, Kristal's opinion is compromised by § 8.1 concerning the appointment or election of officers by the members and the requirement that vacancies "be filled by the members." See also, LLCL § 414, § 416. Salahuddin could not under the operating agreement arrogate to himself the presidency of ROMSA after the election, and there has yet been no effort to prove that he did so, other than by way of Kristal's testimony that Salahuddin undertook without ceremony the day-to-day management of the business when Loveless departed, and a handwritten note of a July 2006 meeting, signed by Salahuddin purportedly as president and Caplash purportedly as secretary/treasurer, attached to ROMSA's motion for summary judgment, evidence which raises an issue of fact on the matter requiring a continuation of the hearing.
In his Amended Complaint, Caplash alleged that Salahuddin was on June 14, 2006, president of ROMSA and its Chief Executive Officer, ¶¶ 22-23. These allegations were admitted by Salahuddin in his answer and by ROMSA in its answer.
So far as the company's books and records are concerned, however, on the current record Salahuddin remained Secretary and Treasurer of ROMSA throughout. Operating Agreement § 8.1 (officers serve "at the pleasure of the members and until his successor is duly elected"); § 8.1 ("vacancies in any office may be filed by the Members"). As Article VII and VIII are structured, he had no authority to act on behalf of ROMSA in the absence of a duly authorized directive of the members, there being no written consents of the members for "action" taken without a meeting as contemplated by § 7.13. See also, Operating Agreement § 8.8 (Secretary's duties are not managerial but ministerial in nature); § 8.9 (Treasurer's duties described as ministerial in nature).
In addition, the Caplash complaint itself remains extant, and seeks a declaration that Caplash was duly elected President in the June 14th meeting, as Kristal testified that he was, and that Caplash's initial hesitancy to take the post was overcome by his subsequent written acceptance. In the absence of any evidence to the contrary other than Kristal's anecdotal evidence that Salahuddin assumed de facto the general affairs of the company, and the handwritten July 2006 memorandum, the court would be bound by the terms of the operating agreement (if proof is closed now on the hearing) to conclude that Salahuddin was not at the relevant time in a position to act on behalf of ROMSA as its President.
It must be remembered, because of references in the testimony to a claim of majority ownership of ROMSA, that the operating agreement does not permit weighted voting according to each member's so-called equity interest (§ 7.10) and does not permit a finding of a quorum when less than 2/3 of the "Members entitled to vote" (in this case two) are present (§ 7.9). Moreover, § 3.1 provides for an equal 50% "Membership Interest" in ROMSA (§ 1.1[s]), as distinguished from the concept of "value of Membership Interest" as defined in § 1.1(l) (Fair Market Value) and § 6.1. Accordingly, on the evidence thus far presented, Salahuddin could not as member, secretary or treasurer take action on behalf of ROMSA under the relevant provisions of the operating agreement given his 50% membership interest under § 3.1 and § 3.4 ("one vote only") with respect to Caplash's December attempt at resignation. Compare the default provision of LLCL § 4.02(a). At the time, Salahuddin might have himself accepted the resignation as the only other member of ROMSA, but there is no evidence that he did so before the motion for dissolution was argued or before Caplash subsequently rescinded his resignation. In any event, Salahuddin had at the time interposed a counterclaim for dissolution and a motion for the same in the Caplash action, thus implicitly recognizing Caplash's membership status, a recognition that was not withdrawn until Salahuddin decided at the eleventh hour to withdraw his motion for dissolution.
Finally, there is a question of fact whether Caplash's written intention to resign as a member was conditional on his obtaining a release from his employment contract and the covenant not to compete. Kristal admitted in his testimony that his acceptance letter, purportedly on behalf of ROMSA, did not address the conditions demanded by Caplash in his resignation letter for his resignation. Under these circumstances, and without any additional proof at a continued hearing (Caplash has not had an opportunity to testify), Caplash's claimed resignation might well be viewed, in reality, only an offer to resign on stated conditions that remained unfulfilled as of the date of Kristal's purported acceptance letter, and therefore not effective.
The issue of Kristal's claimed authority to act on behalf of ROMSA under the member indemnification provision of the operating agreement (Art. IX) is frivolous.
For all these reasons, Salahuddin's motion for summary judgment closing the hearing midstream and declaring that Caplash had no standing as a member of ROMSA to seek dissolution is denied.
ROMSA's Motion for Summary Judgment
By Amended Complaint, Caplash stated four causes of action against Salahuddin and none against ROMSA, LLC. At the end of his amended complaint, Caplash requested relief in the form of a declaratory judgment "against Salahuddin and ROMSA" finding that Caplash was duly elected president. The first cause of action, however, was stated in its caption to be as "AGAINST THE DEFENDANT SALAHUDDIN" only, and made no claim against the entity defendant. Nor did any of the other causes of action implicate ROMSA or otherwise request relief of the LLC. The original complaint included only a single cause of action for a declaratory judgment declaring Caplash was duly elected president and requested no affirmative relief other than that specific declaration. Caplash alleged a deadlock in his original and amended complaints, but did not request dissolution.
In response to the original complaint, Salahuddin answered and interposed counterclaims, which he admits are derivative in nature, against Caplash. Salahuddin also demanded dissolution of ROMSA. In his answer to the amended complaint, Salahuddin dropped the dissolution claim but maintained a derivative counterclaim.
Also in response to the original complaint, according to the hearing testimony thus far adduced and by express recital in the retainer agreement introduced into evidence, Salahuddin hired his then personal attorney, Peter Kristal, Esq., to represent the entity defendant, ROMSA LLC, to defend ROMSA in the declaratory judgment action. The record does not reveal whether Kristal interposed an answer to original complaint (a computer printout from the Monroe County Clerk indicates that one was not filed), but in response to the amended complaint, he interposed counterclaims against Caplash arising out of what ROMSA's characterizes as Caplash's inappropriate competition with ROMSA and his failure to remit earnings to ROMSA as allegedly required under his employment agreement. Kristal also alleged a second counterclaim alleging that Caplash improperly used a company credit card. The answer to the Amended Complaint requested a "money judgment" against Caplash. It requested no injunction or other equitable relief.
Since ROMSA requested a money judgment only and did not request permanent injunctive relief in this action, a request for preliminary injunctive relief is inappropriate and should be denied on that ground alone. Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 94 NY2d 541, 545-46 (2000); Matter of Gebman v. Pataki, 256 AD2d 854, 855 (3rd Dept. 1998), lv. to appeal denied, 93 NY2d 808 (1999); Leif B. Pederson, Inc. v. Weber, 128 AD2d 453, 455 (1st Dept. 1987); Halmar Distributors, Inc. v. Approved Mfg., 49 AD2d 841 (1st Dept. 1975); 13 Weinstein-Korn-Miller, New York Civil Practice, ¶ 6301.04[2], at p. 63-23 (2d ed. 2005); David D. Siegel, New York Practice § 327, at 497-98 (3d ed. 1999). Accordingly, ROMSA's motion for injunctive relief is denied.
No evidence has been adduced that a meeting of ROMSA was held during which the retainer was authorized by a vote of the members, nor is there any evidence that the initiation of a lawsuit in the entity's name against one of its members was duly authorized. Instead, Salahuddin and Kristal rely on the member management provisions of the LLCL and the general provision in the operating agreement for member management as authority for the extraordinary circumstance of an entity defendant, sued only in a nominal capacity in a declaratory judgment action seeking resolution of a dispute concerning a company election between two co-equal owners, and interposing a counterclaim against one of its members, one fully duplicative of Salahuddin's derivative counterclaim and one in addition to it. For the reasons stated above, Salahuddin's and Mr. Kristal's reliance on the member management provisions of the LLCL and the general provisions in the articles of organization and operating agreement for the same is misplaced. According to the unambiguous provisions of this operating agreement, ROMSA is a "manager-managed" LLC in the absence of duly authorized "action" of the members under Article VII of the operating agreement and §§ 7.9, 7.10 and 7.13.
Accordingly, even assuming that Salahuddin was president of ROMSA in August and December of 2006, a matter of some considerable dispute because of the June election, he had no authority to hire counsel for ROMSA for the purpose of prosecuting in the LLC's name an action against a co-equal 50% member; the sole remedy was the derivative suit he instituted by way of his own counterclaim. See Stone v. Frederick, 245 AD2d 742, 744-45 (3d Dept. 1997) (collecting authorities), discussed in Hellman, supra, slip opn. at 12. Contrary to Kristal's repeated characterization, Caplash did not sue ROMSA. Drawing an analogy from the partnership context, "[s]ince this is a dispute between partners over the interpretation of the rights and obligations under the partnership agreement, it is not a proceeding by or against the partnership [citation omitted], even though the partnership is made a nominal party plaintiff." Tesco Properties, Inc. v. Troy Rehabilitation and Insp. Project, Inc., 166 AD2d 839, 841 (3d Dept. 1990).
See Tzolis v. Wolff, ___ NY3d ___, slip opn., at 15 (February 14, 2008)(Read, J., dissenting) (describing a LLC as "a new business form combining corporate-type limited liability with partnership tax advantages and organizational characteristics")
The court has the authority on ROMSA's motion to search the record and to grant summary judgment to a non-moving party (CPLR 3212 [b]) "with respect to a cause of action or issue that is the subject of the motions before the court." Dunham v. Hilco Constr. Co., 89 NY2d 425, 430 (1996). The court exercises its authority under CPLR 3212(b) to grant summary judgment dismissing the counterclaims interposed by ROMSA, LLC. For these same reasons, Dr. Caplash's motion pursuant to CPLR 3103, seeking a protective order against the Notice to Take Deposition of Paul Hegner by Peter Kristal, Esq., is granted, pending a determination as to whether Mr. Kristal is properly authorized to act as counsel for ROMSA.
Dr. Salahuddin's Motion to Strike the Court's March 14, 2008 Order
Dr. Salahuddin contends that the court's March 14, 2008 order must be vacated and set aside because "it confuses the Business Corporation Law with the Limited Liability Company Law of the State of New York by citing BCL cases not apropos to this action." Affirmation of R. Regan, Esq. dated March 19, 2008, ¶ 26. The March 14 order was in the nature of scheduling coupled with an invitation to the parties to address this unusual situation of the entity defendant, nominal in so far as Caplash's complaint was concerned, appearing in the action via separate counsel and interposing claims against one of its members which were identical to those derivative claims brought by Salahuddin, and in addition to these derivative claims. The order was not filed (the original is still in my chambers file as are all of my scheduling orders) and directed relief against no one, especially Salahuddin, who now appears aggrieved by it. The motion to vacate it is denied as unnecessary.
Dr. Salahuddin's Motion to Strike Dr. Caplash's Second Cause of Action
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Dr. Caplash's Motion for SanctionsDr. Caplash seeks an order granting him sanctions because Dr. Salahuddin, Richard Regan, Esq. and Peter Kristal, Esq. have moved the court for various relief, rather than permitting the completion of the hearing mandated by the Fourth Department's February 1, 2008, decision. The circumstances presented do not warrant an award of sanctions. Dr. Caplash's motion in that regard is denied.
SO ORDERED.