Opinion
No. 500089/12.
2013-01-14
C & B ENTERPRISES USA, LLC, and Abraham Rosenberg, an individual and as managing member of C & B Enterprises USA, LLC, Plaintiffs, v. Phyllis KOEGEL, New York City Department of Finance, Defendants. Phyllis Koegel, individually, and derivatively on behalf of C & B Enterprises USA, LLC, Defendant, Counterclaim and Third–Party Plaintiffs Abraham Rosenberg, individually and as Member of C & B Enterprises USA, LLC, Plaintiffs and Counterclaim Defendants and Mark Rosenberg (a/k/a Chaim Rosenberg), Third–Party Defendant.
Jeffrey Kret, Esq., Cedarhurst, Attorney for Third Party Plaintiff. Evan M. Newman, Esq., Stahl & Zelmanovitz, New York, Attorney for Third Party Defendant Mark Rosenberg.
Jeffrey Kret, Esq., Cedarhurst, Attorney for Third Party Plaintiff. Evan M. Newman, Esq., Stahl & Zelmanovitz, New York, Attorney for Third Party Defendant Mark Rosenberg.
CAROLYN E. DEMAREST, J.
The following papers read on this motion:NYSCEF Doc. Nos.:
Notice of Motion, Affirmation in Support, Exhibits, Memorandum of Law, Affirmation of Service36–43
Affirmation in Opposition44
In this action, brought by plaintiff Abraham Rosenberg (“Abraham”) individually and derivatively on behalf of C & B Enterprises USA, LLC (“C & B”), third-party defendant Mark Rosenberg (“Mark”) moves, pursuant to CPLR 3211(a)(1), (5), and (7), to dismiss the five causes of action, including fraud, breach of fiduciary duty, and declaratory judgment, that defendant and third-party plaintiff Phyllis Koegel (“Koegel”), individually and derivatively on behalf of C & B, asserted against him in her third-party complaint.
BACKGROUND
C & B is a New York limited liability company that was formed on or about March 4, 2003 to purchase and build an apartment building at 728A Rogers Avenue, Brooklyn, New York (the “Property”). Koegel alleges that she founded the LLC jointly with Mark, with whom she was close personal friends, and that they initially each owned a 50% membership interest.
In his complaint, Abraham, Mark's brother, who received Mark's interest in the LLC on or about August 26, 2010, contends, to the contrary, that Mark was the sole member of C & B at the time it was formed and that “Koegel had nothing to do with C & B's purchase of the Property.” Abraham alleges that Mark performed contracting work on several of Koegel's properties over a 12–year period, that Koegel knew about Mark's interest in C & B by virtue of their friendship, and that, when their relationship grew hostile, Koegel claimed to have a 50% ownership of the LLC “[i]n an apparent attempt to extort Mark” and to “assassinate [his] character and destroy his reputation.”
Koegel states that “C & B” stands for Mark's Hebrew name, Chaim, and her nickname, “Barbie.”
On February 4, 2010, Koegel purportedly signed and filed with the Office of the City Register a “Sundry Agreement” and a “Declaration of Covenants and Restrictions” (collectively, the “Filings”), in which she claimed that she was a 50% member and managing member of the LLC and declared that the Property could not be sold, transferred, or encumbered without her permission. Abraham claims that he discovered the Filings in or about February 2010 when he and Mark attempted to refinance the Property. Abraham alleges that “[a]t no point was Koegel ever an owner of C & B nor was she ever its managing member,” and that, accordingly, the Filings “were filed without any authority and are completely fraudulent.” On January 17, 2012, Abraham commenced this action, seeking, individually and derivatively on behalf of C & B, damages for conversion, trespass, private nuisance, tortious interference with a prospective business relationship, and slander of title; judgment cancelling the Filings; a declaration that Koegel is not, and never was, a member or managing member of C & B; and a permanent injunction barring Koegel from holding herself out to be a member or managing member of C & B.
While Koegel initially did not timely interpose an answer, by order dated May 2, 2012, upon Abraham's motion for default judgment, which was withdrawn on the condition she remove the Filings against the Property, the Court granted her an extension of time to answer the complaint. On May 12, 2012, Koegel interposed an answer, which she amended on June 1, 2012 to include a counterclaim and a third-party complaint. On June 4, 2012, upon Koegel's motion by order to show cause, the Court issued a temporary restraining order barring Abraham from further encumbering or transferring the Property pending a hearing.
On October 26, 2012, upon conclusion of the preliminary injunction hearing, the Court vacated the temporary restraining order, finding that remaining issues of fact prevented a finding that Koegel was likely to prevail on the merits of her third-party action and that her delay in acting mitigated against a finding of imminent and irreparable harm for which money damages would not suffice.
The temporary restraining order was granted on condition Koegel post a $50,000 bond on or before June 10, 2012.
In Koegel's third-party complaint, she alleges that Mark exploited her trust and stole her investment in order to satisfy his business and personal debts. Koegel claims that, on or about March 14, 2003, she and Mark opened a bank account in the name of C & B, co-signing as “Members/Managers”; that, on or about March 17, 2003, she made an initial capital contribution to the account of $140,500; and that, on March 19, 2003, C & B closed on the Property, tendering the entire purchase price in cash withdrawn from the LLC's account. Koegel further alleges that, at Mark's insistence that he needed funds to develop the Property, between 2003 and 2007, she took out three home equity lines of credit and withdrew $160,000 in cash to invest in C & B. Koegel claims that Mark requested that she provide him checks made out to “cash” or “Mark's Quality Designs,” another company that Mark owns in full, because he was secretly using her money to pay his own creditors. Koegel also alleges that Mark pressured her into issuing him personal loans and, in July 2007, convinced her to list the Property for sale through a realtor, via a listing agreement that they both signed. The realtor was purportedly unable to find a purchaser.
Koegel claims that, in late 2007, after she told Mark that she could no longer afford to issue him any more personal loans, Mark met with Esther Fettman (“Fettman”), a real estate investor, and, without authority to do so and without Koegel's knowledge or consent, granted Fettman a membership interest in C & B in exchange for a short-term investment. Koegel claims that Mark converted some or all of these funds in order to pay his own debts and that she, as an owner of a 50% membership interest, never received any part of such funds. Fettman sold her interest back to the LLC in or about June 2009, which, Koegel claims, upon information and belief, was a preemptive settlement after Fettman discovered Mark's purportedly fraudulent and illegal actions and threatened legal action against him.
Koegel further alleges that, on January 14, 2008, without her knowledge or consent, Mark took out a $1,000,000 mortgage against the Property from Pearl Equities, LLC (“Pearl”), a nontraditional investment firm that employed one of Fettman's relatives. Koegel claims that Mark agreed to egregious terms, including 14% interest for six months, with a possible extension of six months for an additional $3,000 plus 14% interest, because he was unable to obtain mortgage financing through a conventional lending institution due to his excessive debt and various defaults. Koegel alleges that, in connection with the Pearl mortgage, Mark fraudulently represented, on various documents, that Fettman and he were the sole members of C & B and that he was managing member and presented a falsified operating agreement that did not make any reference to Koegel or her 50% membership interest in the LLC. Koegel further alleges that, on or about May 21, 2008, Mark obtained an additional $250,000 mortgage against the Property from Abraham Stern and Jacob Stern, making the same representations about C & B's membership and using the same falsified operating agreement. Koegel claims that Mark diverted some or all of the funds from both mortgages to pay down his own personal and business debts and that he did so without her knowledge or consent and without distributing any funds to her.
Koegel claims that, in or about December 2009, she first discovered that Mark had mortgaged the Property and sent him a cease and desist letter demanding that he immediately repay the unauthorized mortgage loans, which he failed to do. On or about August 26, 2010, without notice to or consent from Koegel, Mark transferred his interest in C & B to his brother Abraham. Koegel alleges that this transfer was without consideration and was an attempt to hide his assets from creditors and his ex-wife and to prevent Koegel from obtaining information about his fraudulent actions on behalf of C & B. Abraham contends that he has spent over $1,000,000 on the Property since receiving what he claims is 100% of the LLC and that he “transformed it from a vacant lot into a fully functioning residential development consisting of a seven family dwelling and a four story building.” Abraham alleges that he brought this action in part to cancel the Filings because he seeks to refinance the Property. Koegel claims that Abraham has never discussed the terms of the refinance with her or shown her a proposed refinancing agreement.
Koegel's third-party complaint asserts five causes of action against Mark.
The first cause of action alleges that Mark breached his fiduciary duty to Koegel by executing documents without authorization, failing to disclose all material facts about C & B to her, and failing to hold a vote or obtain her prior consent, in violation of Limited Liability Company Law (“LLC Law”) §§ 402 and 604, before transferring membership interests, incurring debt outside the ordinary course of business, and encumbering the Property. Koegel's second cause of action is a derivative claim for breach of fiduciary duty, alleging that, through misrepresentations and omissions, Mark caused the LLC to incur excessive debt and encumbrances and diverted the proceeds of the mortgages to himself. The fourth cause of action in the third-party complaint alleges that Mark defrauded Koegel by “knowingly, deliberately, maliciously and repeatedly [withholding] material information” while transferring membership interests and mortgaging the Property and attempting to deprive Koegel of her 50% membership interest in C & B. Koegel's fifth cause of action is a derivative claim for fraud, alleging that Mark defrauded C & B by falsifying documents and causing financial detriment in pursuit of satisfying his own personal and business debts. Finally, Koegel's sixth cause of action, improperly alleged as a derivative claim, is a hodge-podge of allegations seeking an accounting, declaratory judgment that Koegel is a member of the LLC and a judicial determination as to percentage and allocation of membership interests, and a permanent injunction against Abraham barring him from encumbering the Property or incurring any debts on behalf of the LLC outside of the ordinary course of business without Koegel's prior knowledge or consent or a vote of the members.
Koegel's third cause of action is a counterclaim against Abraham for aiding and abetting Mark's purported breach of fiduciary duty.
On July 31, 2012, Mark filed the instant motion to dismiss Koegel's third-party complaint as against him. First, Mark argues that each of Koegel's claims is time barred by the Statute of Limitations. Second, Mark contends that Koegel's individual and derivative fraud claims must be dismissed because she does not and cannot plead justifiable reliance and because she does not plead with particularity pursuant to CPLR 3016(b). Third, Mark asserts that he cannot be held personally liable for breach of fiduciary duty and fraud because all of the actions alleged were taken on behalf of C & B. Koegel argues, in opposition, that her claims are all timely, that she properly pled her two causes of action for fraud, and that there is a legal and factual basis to hold Mark personally liable for breach of fiduciary duty and fraud. In her opposition papers, Koegel states that, in withdrawing $160,000 from three home equity lines of credit, she was justifiably relying upon Mark's representation that he needed a further investment to develop the Property while he was in fact diverting the LLC's assets to himself.
DISCUSSION
Upon a motion to dismiss pursuant to CPLR 3211, “the court must afford the pleading a liberal construction, accept all facts as alleged in the pleading to be true, accord the plaintiff the benefit of every possible inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (Breytman v. Olinville Realty, LLC, 54 AD3d 703, 703–04 [2d Dept 2008] ). However, the court must base its judgment on factual allegations rather than legal conclusions and can afford no deference to assertions that are “inherently incredible or flatly contradicted by documentary evidence.” Under CPLR 3211(a)(1), a party “may move for judgment dismissing one or more causes of action against him on the ground that ... a defense is founded upon documentary evidence.” “A motion to dismiss pursuant to CPLR 3211(a)(1) will be granted only if the documentary evidence resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim” (Fontanetta v. John Doe 1, 73 AD3d 78, 83 [2d Dept 2010], quoting Fortis Fin. Servs. v. Fimat Futures USA, 290 A.D.2d 383, 383 [1st Dept 2002] ). In his motion papers, Mark does not provide any document sufficient to constitute such a defense to any of Koegel's causes of action against him. Therefore, his motion pursuant to CPLR 3211(a)(1) is denied.
Mark also moves, pursuant to CPLR 3211(a)(5), to dismiss Koegel's causes of action against him on the basis that they are all barred by the Statute of Limitations. Mark argues that Koegel's sixth cause of action, for declaratory judgment, accrued when she purportedly first acquired her membership interest in C & B in 2003. A claim for judgment declaring an ownership interest in an LLC is subject to a six-year Statute of Limitations pursuant to CPLR 213 ( see Stern v. BSL Dev. Corp., 163 A.D.2d 35, 35 [1st Dept 1990] ). “The limitation period on commencement of a declaratory judgment action should not begin until the right to bring an action for coercive relief accrues” (Charney v. North Jersey Trading Corp., 172 A.D.2d 390, 390 [1st Dept 1991] ). While Mark cites Local 381 Pension Fund v. Chemical Bank (222 A.D.2d 415 [2d Dept 1995] ) in arguing that the Statute of Limitations begins to run “as of the date the stock was issued,” it was not the plaintiff's interest in the defendant corporation, but its receipt of a stock certificate, that was disputed in that case. Moreover, in Stern, which Mark cites for the same proposition, the plaintiff was time barred from asserting a declaratory judgment claim because he waited more than six years to challenge the defendant's assertion that he improperly issued stock to himself ( see163 A.D.2d at 35). In the case at bar, despite the fact that Mark claims that “Koegel was never treated as a member,” Koegel alleges numerous instances in which she acted on behalf of C & B, or invested in the LLC, from its founding in 2003 until 2007. There is no indication, in Koegel's complaint or Mark's opposition, that there was a justiciable dispute over Koegel's membership interest in C & B prior to Mark's transfer of a membership interest to Fettman in 2007 and, subsequently, his acquisition of two mortgages on the Property in 2008 and transfer of the LLC to Abraham in 2010 ( see id. [holding that the Statute of Limitations for declaratory judgment began to run from the date the defendant sent a letter challenging the plaintiff's acquisition of stock] ). As all of the events that could have triggered a claim for declaratory relief occurred less than six years from the date this action was commenced, Koegel's sixth cause of action is timely.
Nevertheless, Koegel's sixth cause of action must be dismissed as currently pled. CPLR 3014 mandates that “[s]eparate causes of action ... be separately stated and numbered.” Koegel attempts, under a single cause of action, asserted derivatively on behalf of C & B, to seek declaratory judgment, an accounting, access to the LLC's books and records, and a permanent injunction. These claims are distinct and are predicated upon separate factual allegations. Moreover, Koegel's claims for declaratory judgment, accounting, and access to C & B's books and records are direct claims, as they concern her personal rights regarding the LLC and seek to determine whether Mark diverted funds that Koegel purportedly invested ( see Yudell v. Gilbert, 99 AD3d 108, 114 [1st Dept 2012] ). Therefore, Koegel's sixth cause of action is dismissed, without prejudice. Koegel is granted leave to replead her claims for relief separately and in proper form.
Mark further contends that Koegel's direct and derivative breach of fiduciary duty claims are time barred. Where a party seeks monetary damages for breach of fiduciary duty, courts apply the three-year “injury to property” Statute of Limitations pursuant to CPLR 214(4) (Pursnani v. Stylish Move Sportswear, Inc., 92 AD3d 663, 664 [2d Dept 2012]; Kaufman v. Cohen, 307 A.D.2d 113, 118 [1st Dept 2003] ). However, “where an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213(8)” (IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 NY3d 132, 139 [2009];Kaufman, 307 A.D.2d at 119). Koegel seeks damages for breach of fiduciary duty in connection with Mark's purportedly improper transfer of Koegel's interest in C & B to Fettman in 2007 and Abraham in 2010 and Mark's purported mortgaging of the Property in 2008, for his personal benefit, without Koegel's knowledge or authority. As the allegations of Mark's fraud are essential to the breach of fiduciary causes of action, a six-year statute of limitations under CPLR 213(8) applies ( see IDT Corp., 12 NY3d at 139;see Kaufman, 307 A.D.2d at 119). Accordingly, Mark's motion to dismiss the breach of fiduciary causes of action based upon the statute of limitations is denied as the alleged acts occurred within six years of the filing of the complaint.
Mark further contends that Koegel's fraud claims must be dismissed because she “does not, and cannot, plead the element of justifiable reliance” and because she fails to satisfy the stringent pleading requirement of CPLR 3016(b). “In an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by [the] defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury” ( Rabos v. R & R Bagels & Bakery, Inc., 2012 N.Y. Slip Op 7974 [2d Dept 2012], citing Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 [1996] ). “Alternatively, instead of an affirmative misrepresentation, a fraud cause of action may be predicated on acts of concealment where the defendant had a duty to disclose material information” (Kaufman, 307 A.D.2d at 119–120; citing Swersky v. Dreyer & Traub, 219 A.D.2d 321, 326 [2d Dept 2009] ). “Thus, where a fiduciary relationship exists, the mere failure to disclose facts which one is required to disclose may constitute actual fraud, provided the fiduciary possesses the requisite intent to deceive” ' (Kaufman, 307 A.D.2d at 120; citing Whitney Holdings, Ltd v. Givotovsky, 988 F Supp 732, 748 [SDNY 1997] ).
Pursuant to CPLR 3016(b), a plaintiff alleging fraud must state “the circumstances constituting the wrong ... in detail.” The Court of Appeals has “cautioned that section 3016(b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud' “ (Pludeman v. Northern Leading Sys., Inc., 10 NY3d 486, 491 [2008], quoting Lanzi v. Brooks, 43 N.Y.2d 778, 780 [1977] [internal quotation marks omitted] ). Accordingly, the plaintiff need not provide “unassailable proof' at the pleading stage, [but] the complaint must allege the basic facts to establish the elements of the cause of action' [and] suffice to permit a reasonable inference' of the alleged misconduct” (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 NY3d 553, 559 [2009], quoting Pludeman, 10 NY3d at 491–92).
In the third-party complaint's fourth cause of action, Koegel alleges that Mark defrauded her personally by concealing material facts about his purported admission of new members to C & B, causing C & B to incur debts other than in the course of ordinary business, transferring C & B's assets with the intention of depriving Koegel of her rights as a member of C & B, and falsifying documents in order to conceal his fraudulent conduct and allow him to continue to use the assets of C & B for his personal gain. To the extent that the fourth cause of action alleges that Mark incurred the indebtedness of C & B other than in the course of ordinary business, that is a derivative cause of action ( see Abrams v. Donati, 66 N.Y.2d 951, 953 [1985] ). However, the fourth cause of action has sufficiently alleged a cause of action for fraudulent concealment as the third party complaint clearly includes allegations of a fiduciary duty between Mark and Koegel, that Mark concealed information regarding transactions that affected Koegel's membership interest, and that Mark was required to reveal such facts ( see Kaufman, 307 A.D.2d at 119–120;Limited Liability Company Law §§ 401, 409(a)).
In opposition to the motion, Mark notes that the third-party complaint alleges that Mark insisted Koegel take out personal lines of credit for the benefit of C & B and Mark later used those funds for his personal benefit. However, the fourth cause of action does not recite this claim and, accordingly, this claim will not be considered in the fourth cause of action.
Mark also alleges that the derivative fifth cause of action for fraud must be dismissed as there are no allegations of reliance by C & B upon misrepresentations by Mark. “[A]llegations of mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually” (Abrams, 66 N.Y.2d at 953;see Albany–Plattsburgh United Corp. v. Bell, 307 A.D.2d 416, 419 [3d Dept 2003] ). In an action with allegations similar to those in the present action, the Second Department held that a 50% shareholder's fraud claims against the remaining 50% shareholders were derivative where plaintiff alleged that defendant shareholders executed a mortgage upon the corporation's property without plaintiff shareholder's knowledge, kept the money for themselves, and further misappropriated and diverted corporate assets (Hu v. Shen, 57 AD3d 616, 617 [2d Dept 2008] ).
It appears to be uncontested that Mark was a member of C & B. As there is no contention that any articles of organization for the LLC hold otherwise, to the extent they exist, it appears that Mark was also a manager pursuant to the LLC Law (see Limited Liability Company Law § 401(b)). Accordingly, the fifth cause of action properly alleges a derivative fraud cause of action against C & B as Koegel's claims of mismanagement by Mark, that resulted in Mark's personal benefit, plead a wrong to the corporation and must be alleged derivatively (see Limited Liability Company Law § 610; Tzolis v. Wolff, 10 NY3d 100, 102 [2008] (holding, “members of a limited liability company (LLC) may bring derivative suits on the LLC's behalf, even though there are no provisions governing such suits in the Limited Liability Company Law”)). Mark's contention that the fifth cause of action was not pled with enough particularity, pursuant to CPLR 3016(b), is rejected. The fifth cause of action sufficiently alleges that Mark, holding himself out as a manager of C & B, misrepresented that he had sole authority to act on behalf of C & B, that he diverted mortgage proceeds for his personal benefit, that he failed to disclose Koegel's membership in C & B in making transactions on behalf of C & B, and the LLC was damaged as a result of the purported misrepresentations and omissions.
It is noted, however, that the Second Department dismissed the fraud cause of action for lack of particularity pursuant to CPLR 3016(b).
Although Mark's memorandum in support of the motion to dismiss states that “the statute of limitations bars every claim”, the memorandum is devoid of any argument in support of the dismissal of the fraud causes of action pursuant to CPLR 213(8). Regardless, the alleged underlying actions that are the subject of the fourth and fifth cause of action occurred after 2006 so the pleading is within the statute of limitations pursuant to CPLR 213(8).
Lastly, Mark's specious contention that he cannot be held personally liable for breach of fiduciary duty and fraud because all the alleged wrongdoing was on behalf of the LLC must be rejected. Mark claims that it is “a matter of statute that as a member of an LLC, Mark is not responsible for the allegedly tortious acts of his LLC,” citing LLC Law § 609. However, it is axiomatic that a member is liable for his own torts, despite the shield of the LLC form. In 277 Mott Street, LLC v. Fountainhead Constr., LLC (2009 Slip Op 31446[U] [Sup Ct, N.Y. County 2009] ), upon which Mark relies, the court states that “a managing member [of an LLC] may be held personally liable if s/he participates in the commission of a tort in furtherance of company business.” Limited Liability Company Law § 417(a)(1) prohibits the elimination of personal liability of a manager for acts or omissions made in bad faith or that involve intentional misconduct. In the instant case, Koegel alleges that Mark held himself out to be the managing member of C & B and that he was the one who transferred membership interests, incurred excessive debt, and mortgaged the Property without her knowledge or consent and then diverted the fraudulently-induced proceeds to his personal use. Therefore, the limited liability of an LLC member is no defense to the breach of fiduciary duty and fraud claims asserted against Mark.
CONCLUSION
Accordingly, Mark's motion to dismiss Koegel's third-party complaint is granted only to the extent that Koegel's sixth cause of action, a derivative claim for declaratory judgment, accounting, and injunctive relief, is dismissed. Mark's motion is denied to the extent that he seeks dismissal of the first, second, fourth, and fifth causes of action, for breach of fiduciary duty and fraud. Koegel is granted leave, in the interest of justice, to replead her individual cause of action for declaratory judgment, accounting, and injunctive relief as deemed necessary within twenty days of the receipt of the notice of entry for this order.
The foregoing constitutes the decision and order of the Court.