Opinion
600455/05.
Decided September 29, 2008.
Wormser Keily Galef Jacobs, New York, New York, Attorney for the Plaintiff.
Seyfarth Shaw LLP, New York, New York, Attorney for the Defendant.
Michael A. Freeman, Esq., New York, New York, Attorney for the Defendant.
Kasowitz Benson Torres Et Al LLP, New York, New York, Attorney for the Defendant.
Wilson Elser Moskowitz Edelman Dicker, Nicholas Caiazzo, New York, New York, Attorney for the Defendant.
Seyfarth Shaw LLP, New York, New York, Attorney for the Defendant.
Following this court's decision and order dated January 6, 2006 (prior order"), the only remaining defendants in this action are Mingyi Zhong ("Zhong") and Robert Kaswell ("Kaswell") (collectively "defendants"). The only remaining causes of action asserted against them are for breach of fiduciary duty (1st cause of action) and for an accounting (5th cause of action). Defendants now move for an order dismissing what remains of this action for want of prosecution. Alternatively they seek summary judgment dismissing the complaint. Finally they seek sanctions under the Uniform Rules for Trail Courts, Part 130. Plaintiff Lio (sometimes "Lio") opposes the motion in its entirety.
Since issue has been joined and this motion was made before the note of issue was filed, the court may consider whether summary judgment relief is otherwise available. CPLR § 3212; Brill v. City of New York , 2 NY3d 648 (2004).
Certain facts are undisputed. Lio, Zhong and Kaswell formed a New York Limited Liability Company known as 80 Water View ("Water View") pursuant to an operating agreement. Each member of Water View made an initial cash contribution of $500,000.00, which was used to purchase a building located at 80 Main Street in Ossining, New York ("80 Main"). The parties intended to develop 80 Main into condominium apartments which would then be offered for sale to the public. $1.4 million dollars was used to purchase the property. The remaining $100,000 was to be used to further develop and operate the property.
Dissension soon arose between the members. In July 2004, Zhong made two capital calls. One call was made in the amount of $7,456.96 for the month of June 2004; the second was for $3,667.60 for the month of July 2004. Zhong and Kaswell met these calls. Lio, however, did not. Lio claims that such calls were not made in accordance with the requirements of the Water View operating agreement. There is no dispute, however, that the monies sought and collected were (and were intended to be) used to pay legitimate expenses of Water View, including regularly occurring taxes.
Other disputes erupted between the members. Lio claimed that he made certain expenses on behalf of Water View in the amount of $14,967.56 and that he was entitled to have his capital account credited in such amount. Zhong and Kaswell did not credit Lio's account for such amount.
A further dispute concerned the opportunity to purchase property located at 121 Main Street in Ossining New York ("121 Main"). The plaintiff and the defendants were all aware of the opportunity. Initial negotiations between the then owner of 121 Main, Bill Dempsey (Zhong's husband) and Dominick Jr. (Lio's son) ensued. While the parties dispute what the ultimate nature of the transaction would be, no contract was ever drawn in which Water View was to purchase 121 Main, and, in the end, Lio personally did not participate in the purchase in any way. Sometime in or around late September 2004, 121 Main was purchased by a newly created entity known as A.S.I.A. Enterprises LLC ("ASIA") Only Zhong and Kaswell are members of ASIA. According to the contract of sale, the purchase price of 121 Main was $415,000.
In March 2005 Lio commenced this action against Zhong, Kaswell and others. Thereafter in November 2005, Zhong and Kaswell brought an action for judicial dissolution of Water View, in Supreme Court, Westchester County (Index No. 20044/05) (dissolution action"). By decision and order dated August 10, 2007 the Hon. Kenneth W. Rudolph dismissed the dissolution action, holding that the parties' operating agreement preempts the Court's consideration of the petition it had before it. In so holding, however, Justice Rudolph expressly found that by filing the petition for dissolution, the petitioners [defendants herein] withdrew from Water View and surrendered their respective membership interests.
DISCUSSION
Want of Prosecution
Defendants claim that because Lio failed to file the Note of Issue, they are entitled to dismissal of this action for want of prosecution under CPLR § 3126. Assuming, without deciding, that the technical requirements of CPLR § 3126 (b) were met, dismissal on this basis is not warranted. Although discovery was delayed in this action, it was often extended by stipulation of the parties. Moreover, each party admits that some of the delays were attributable to substantial, albeit unsuccessful, efforts to settle the case. Finally, defendants do not dispute that at the time the Note of Issue was finally due, there was still some outstanding discovery. Since this motion was originally made, the court extended the date plaintiff was permitted to file the Note of Issue, which has now been filed. Under these circumstances, there is no basis to dismiss the action for want of prosecution.
Summary Judgment
Defendants otherwise seek summary judgment dismissing the remaining causes of action against them for an accounting and breach of fiduciary duty.
As the proponents of this motion for summary judgment, the moving defendants must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case. Winegrad v. New York Univ. Med. Ctr., 64 NY2d 851, 853 (1985). Once met, this burden shifts to the opposing party who must then demonstrate the existence of a triable issue of fact. Alvarez v. Prospect Hosp., 68 NY2d 320, 324 (1986); Zuckerman v. City of New York, 49 NY2d 557 (1980). A party may not defeat a motion for summary judgment with bare allegations of unsubstantiated facts. Zuckerman v. City of New York, supra at 563-64.
Accounting
Defendants contend that the cause of action for an accounting has become moot because such information was provided to Lio during the course of discovery. Lio does not address this branch of their motion. He does not argue that he still has a claim for an accounting notwithstanding the information provided to him in discovery. Consequently, defendants are granted summary judgment dismissing the 5th cause of action for an accounting.
Breach of Fiduciary Duty
In order to establish a claim for breach of fiduciary duty a plaintiff must establish a fiduciary relationship and misconduct on the part of defendant that caused plaintiff to suffer damages. Kurtzman vv. Bergstol, 40 AD3d 588 (2nd dept 2007). It is a breach of the duty for a fiduciary to injure or act contrary to the interests of the person to whom a duty of loyalty is owed. Doe v. Roman Catholic Diocese of Rochester , 51 AD3d 1392 (4th Dept. 2008). The managing members of LLC have a fiduciary obligation to the other members. LLCL § 409; Nathanson v. Nathanson , 20 AD3d 403 (2nd dept. 2005);
The claims of misconduct in this case have narrowed down to three particular acts by the defendants. The first claim is that the capital calls defendants made were made in violation of the parties' operating agreement. The second claim is that defendants failed to credit Lio's capital account with approximately $15,000 worth of expenditures that he contends to have made on behalf of Water View. The third claim is based upon the acquisition of 121 Main street by ASIA.
The court finds that there is no breach of fiduciary duty arising out of the capital calls made. Preliminarily, to the extent the parties present any arguments regarding capital calls that were made once a proceeding for judicial dissolution was brought, they are not part of the claims for breach of duty made in this action. Moreover, pursuant to Justice Rudolph's holding, once the dissolution petition was brought, defendants ceased to be members of Water View. Thus their post petition actions were not as members and the parties no longer stood in a fiduciary capacity to one another.
As more fully explained below, the court otherwise finds that the capital calls at issue in this action were made in substantial compliance with the procedures set out in the operating agreement. Even if the capital calls were not made in strict compliance with the operating agreement, making such calls was neither fiduciary misconduct nor was it contrary to Lio's interest.
Section 3.2.1 of the operating agreement pertains to Capital Calls." It provides that [t]he Managing Members may determine that the Company requires additional capital, in the form of cash, in order to carry out its operations and meet its business needs." Section 3.2.1.1. entitled Mandatory Capital Calls," provides that [t]he Manager may issue a mandatory call to the Members for up to One Hundred Fifty Thousand ($150,000) Dollars of additional capital . . ."
Section V of the operating agreement identifies the rights, powers and duties of management and 5.1.1. provides as follows:
Management by Managing Members. The Company shall be managed by the Members. Except in situations in which the unanimous approval of Members is required by nonwaivable provisions of applicable law or this Section 5.1.1.2 of this Agreement, the following powers of the Company shall be exercised solely by or under the authority of the Members owning more than fifty percent (50%) of the Percentages then held by all Members:
The agreement enumerates those business decisions which require all three members to agree. (Operating Agreement Section 5.1.1.2). All other decisions must be made by or under the authority of the Members owning more than fifty percent (50%) of the Percentages then held by all Members . . ." This includes a Mandatory Capital Call. Section 5.1.1.1 (f).
Lio argues that the capital calls were improper because they were made by Zhong only. While the original call was in fact made by Zhong, it is clear that Kaswell agreed and acquiesced in the decision.
Lio further argues that even if Kaswell agreed with Zhong to make the capital calls, they were improper because the operating agreement only permits an individual member with at least a 50% interest to make the call. Since neither Zhong nor Kaswell individually owned 50% of Water View, he argues they could not whether acting alone or together effect a capital call.
Lio's argument is contrary to the language of the operating agreement, which permits members who in the aggregate hold 50% of Water view to make certain decisions. Under Lio's interpretation, the provision would have no meaning, since none of the members held a 50% interest. Contract provisions should be interpreted in such a manner as to give them effect. God's Battalion of Prayer Pentacostal Church, Inc. v. Miele Associates, LLP , 6 NY3d 371 (2006); Travelers Indemnity Co. v. Commerce and Industry Ins. Co. of Canada, 36 AD3d 1121 (3rd dept. 2007); American Express Bank Ltd. v. Uniroyal. Inc., 164 AD2d 275 (1st dept. 1990). Lio's argument is, therefore, rejected.
In any event even if the capital call was not made in strict conformance with the operating agreement, there could be no breach of fiduciary duty. The calls did not injure Lio nor were they made contrary to his interests. There is no dispute that the capital calls were made to pay regular and necessary expenses of Water View. Indeed most of the expenses related to taxes due on 80 Main, the non-payment of which would have exposed the property to potential forfeiture.
The court also rejects Lio's claim that defendants' failure to credit his capital account with $15,000 constitutes a breach of fiduciary duty. The parties have a dispute about the bona fides of Lio's claim. Defendants' decision not to credit Lio's account without further documentation and authentication of the expenses is not misconduct. The court does not reach the issue of who is correct in this dispute; it is not germane to whether defendants' actions constitute a breach of their fiduciary duty to Lio. Nor should this court resolve the dispute simply because it still remains unresolved. There is no existing cause of action plead in this action which would warrant resolution of such dispute, which is simply a final reconciliation of the parties' accounts upon the dissolution of Water View.
Lio's final claim is that defendants usurped for themselves an opportunity to purchase 121 Main.
In business contexts, fiduciary duties include a duty to communicate business opportunities to one another and not to exclude partners from such opportunities while the venture is ongoing. Meinhard v. Salmon, 249 NY 458 (1928); Salm v. Fedlstein, 20 AD3d 469 (1st dept. 2005). A claim for lost business opportunities involves a showing that the plaintiff had an interest or tangible expectancy in the opportunity at issue. Burg v. Horn, 380 F.2d 897 (2nd Cir. 1967); Blaustein v. Pan American Pet. Trnasp. Co, 263 AD 97 (1st dept. 1941).
There is no dispute that Lio knew about the opportunity to purchase 121 Main, since it is conceded that his son, acting on his behalf, was involved in the initial negations to purchase. The parties' dispute centers more on whether plaintiff had an interest or tangible expectancy in the opportunity at issue. In this regard the court needs to distinguish between whether Lio personally had an interest in purchasing 121 Main from whether Lio, in his capacity as a member of Water View, had an interest in purchasing 121 Main. It is only the latter that would give rise to a claim for breach of fiduciary duty. As individuals, none of the parties had any fiduciary duty to one another.
Defendants claim that the negotiations for 121 Main always contemplated that it would be acquired for investment separate and apart from 80 Main. They never contemplated 80 Water View taking title. They discussed various uses of the property, including renting it out and/or using it as a sales office for 80 Main, instead of using trailer. They claim that although Lio was involved in the initial negotiations, he either did not have, nor did not he want to contribute, the funds necessary to purchase 121 Main.
Lio does not address defendants' claim that he was unwilling or unable to financially participate in the transaction to purchase 121 Main. Instead, Lio focuses on his claim that 121 Main Street was being considered for use as offices and storage space for Water View.
Preliminarily the Court rejects defendants' argument that Lio's financial inability to participate in the transaction warrants summary judgment in its favor. The Appellate Division of this department has repeatedly held that a parties' financial inability to undertake the business opportunity presented does not, as a matter of law, preclude a trier of fact from finding of breach of fiduciary duty. Owen v. Hamilton , 44 AD3d 452 (1st dept. 2007).
The Court otherwise finds, however, that Lio did not have a tangible expectation that Water View would take title to 121 Main. This is because the Water View operating agreement does not contemplate the acquisition of collateral real estate for investment purposes. Water View's operating agreement identifies the purpose of the LLC is to purchase and develop 80 Main. The operating agreement also permits Water View to undertake activities that are necessary, convenient, desirable and incidental" to the development of 80 Main.
The gravamen of the agreement was the development of the property at 80 Main, and 80 Main, only. There is no language that expressly permits the acquisition of any other real estate. The catchall language that permits other activities in facilitation of the development of 80 Main is not broad enough to permit Water View to acquire additional parcels of real estate for investment purposes.
Even if the court accepts Lio's position, that 121 Main was to be used for sales offices and storage, such use would be collateral to any acquisition of 121 Main Street. Defendants have testified that 121 Main was being purchased for investment purposes, because the price was right. Lio admits in his memorandum of law that 121 Main Street would eventually be sold for the right price. The need for storage and/or sales offices for the Water View project would be limited in term in nature. Purchase of real property to accomplish this goal is certainly not necessary. It is undisputed in this record that other options existed for setting up a sales office, including using a trailer. Given the required capital outlay to purchase real estate for such a tangential use, a purchase is neither convenient or desirable. While operation of a sales office may be incidental to the 80 Main Street project, purchase of real estate is not.
Thus defendants have made a prima facie showing that the purchase of 121 was always intended to be a transaction separate and apart from the development of Water View. Lio has not raised any issue of fact from which a trier of fact could conclude that the purchase (as opposed to the use) of 121 Main was within the purview of Water View's operating agreement. Consequently he cannot show that any of the members of Water view had a tangible expectancy that such property would be purchased by Water View.
Sanctions
The court, in its discretion, may award to any party or attorney in any civil action or proceeding before the costs in the form of reimbursement for actual expenses reasonably incurred and reasonable attorney's fees, resulting from frivolous conduct as under 22 NYCRR 130-1.1. Frivolous conduct is defined as conduct which: (1) is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law; (2) is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or (3) asserts material factual statements that are false.
Although the Court believes that defendants are entitled to summary judgment dismissing the complain against them, the court does not find that Lio's claims are frivolous within the meaning of the court rule.
CONCLUSION
In accordance with this decision
It is hereby:
ORDERED that defendants Zhong and Kaswell's motion to dismiss for want of prosecution is denied, and it is further
ORDERED that defendants Zhong and Kaswell's motion for summary judgment dismissing the first and fifth causes of action against them is granted, and it is further
ORDERED that the clerk shall enter a judgment in favor of defendants Zhong and Kaswell and against plaintiff Lio dismissing the complaint, and it is further
ORDERED that upon the dismissal of the first and fifth causes of action against defendants Zhong and Kaswell this matter is finally resolved is, and it is further
ORDERED that any requested relief not expressly addressed herein is denied, and it is further
ORDERED that this shall constitute the decision and order of the Court.
SO ORDERED: