Opinion
INDEX NO. 650251/2017
02-22-2018
DEBBIE PAPPAS, Plaintiff, v. THE 38-40 LLC, PHILIP KIRSH, NICK GLENDIS, DAFNI FAMILY TRUST, 38 DAFNI LLC, FRANGIOS HALKIADAKIS Defendants.
NYSCEF DOC. NO. 94 MOTION DATE __________ MOTION SEQ. NO. 001
DECISION AND ORDER
The following e-filed documents, listed by NYSCEF document number 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16, 22, 25, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 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, 84, 85, 86, 87, 88, 89 were read on this application to/for PREL INJUNCTION/TEMP REST ORDR. HON. SALIANN SCARPULLA:
Plaintiff Debbie Pappas ("Plaintiff"), as Personal Representative of the Estate of Louis Pappas ("Pappas Estate"), commenced this action individually and derivatively on behalf of The 38-40 LLC ("38-40 LLC") seeking declaratory and injunctive relief, an accounting, the production of 38-40 LLC's documents books, and records, and damages for breach of contract, breach of fiduciary duty, waste, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and conversion. In the motion and cross-motions presently before me, Plaintiff seeks a preliminary injunction, and some of the defendants seek dismissal of the complaint. Background
Unless otherwise specified, all facts are taken from the Verified Complaint and are accepted as true only for purposes of the cross-motions to dismiss. Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994).
38-40 LLC was formed in or around August 2009. Thereafter, decedent Louis Pappas ("Pappas"), defendant Philip Kirsh ("Kirsh"), defendant Nikolaos Glendis ("Glendis"), and defendant Frangios Halkiadakis ("Halkiadakis"), each holding a 25% membership interest in 38-40 LLC, executed 38-40 LLC's Operating Agreement and the First Amendment to the Operating Agreement (together, "Operating Agreement").
In or about December 2012, Glendis transferred his 25% membership interest to defendant DAFNI Family Trust, which Glendis controlled and managed. In or about October 2013, Halkiadakis transferred his 25% membership interest to Kirsh for $1,424,000. On or about October 31, 2013, the DAFNI Family Trust transferred 20% of its membership interest to Kirsh for $1,150,000, and retained a 5% membership interest.
Because of the foregoing transfers, Kirsh now holds a 70% membership interest in 38-40 LLC. Plaintiff alleges that, in effectuating these two membership interest transfers, Kirsh, the DAFNI Family Trust, and Halkiadakis breached the terms of the Operating Agreement by not observing Pappas's Right of First Refusal ("ROFR"), or obtaining Pappas's written consent before these transfers occurred.
Prior to Pappas's death, 38-40 LLC owned and operated three separate properties in Long Island City, New York: 38-40 10th Street ("38-40 Property"); 38-60 10th Street ("38-60 Property"); and 38-68 10th Street ("38-68 Property") (collectively, "Property"). 38-40 LLC transferred two parcels of the Property to defendant 38 DAFNI LLC.
Also, sometime before Pappas's death on October 31, 2015, Kirsh took out a $3.3 million mortgage ("Mortgage") on the remaining 38-40 Property without the consent or approval of Pappas, which Plaintiff contends was a violation of the Operating Agreement and Kirsh's fiduciary duties. Plaintiff further contends that the money received from the Mortgage was used to finance Kirsh's personal businesses.
On April 6, 2016, Plaintiff was appointed as Personal Representative of the Pappas Estate by the Probate Division of the Circuit Court for Broward County, Florida. Plaintiff claims that, since August 2016, she has made numerous, unsuccessful demands for production of documents relating to: the transfers of 38-40 LLC membership interests; the Mortgage and allocations of the loan proceeds secured by 38-40 LLC; an accounting of 38-40 LLC's income and expenses from 2014 to the present; and information regarding other mortgages, loans, indebtedness, or other encumbrances on 38-40 LLC's Property.
Plaintiff commenced this action in January 2017. In the complaint, Plaintiff asserts causes of action seeking declaratory and injunctive relief, an accounting, the production of 38-40 LLC's documents, books, and records, and damages for breach of contract, breach of fiduciary duty, waste, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and conversion.
Plaintiff now moves for a preliminary injunction enjoining 38-40 LLC, Kirsh, Glendis, DAFNI Family Trust, 38 DAFNI LLC, and Halkiadakis from, inter alia, taking any action to diminish the value of or dissipate any property owned by 38-40 LLC and appointing a temporary receiver. Kirsh and 38-40 LLC (collectively "Moving Defendants") oppose the motion and cross-move to dismiss the complaint pursuant to CPLR 3211(a)(1) & (7).
Causes of action seven and seventeen (seeking an accounting) and ten (seeking the production of 38-40 LLC's documents, books, and records) have only been asserted against the Moving Defendants. The remaining sixteen causes of action have been asserted against all defendants.
Glendis also cross-moved to dismiss the complaint, however, the action was dismissed with prejudice against Glendis by stipulation dated April 26, 2017.
In support of the cross-motions to dismiss, Moving Defendants submit the Operating Agreement and argue that Plaintiff is not a Member of 38-40 LLC and therefore lacks standing to: (1) assert any derivative claims on behalf of 38-40 LLC (causes of action one through nine); (2) seek the production of documents, books, and records (tenth cause of action); (3) seek declaratory relief to enforce 38-40 LLC Members' rights (parts (c), (e), (f), (g), (i) & (j) of the eleventh cause of action); (4) to assert any claim for conversion (eighteenth cause of action) or breach of contract that does not relate to Pappas's allocations and distributions (twelfth cause of action) because these rights belong exclusively to 38-40 LLC Members; and (5) assert individual causes of action for breach of fiduciary duty, breach of implied covenant of good faith and faith dealing, or for an accounting (causes of action thirteen, sixteen, seventeen, respectively). Moving Defendants also argue that Plaintiff lacks standing to assert individual causes of action for waste, unjust enrichment, and conversion (claims fourteen, fifteen, and eighteen) because those claims are based on harm or injury to 38-40 LLC and are derivative in nature.
Moving Defendants maintain that the only claims that Plaintiff would be able to pursue as a non-member of 38-40 LLC are parts (a), (b), and (d) of the eleventh cause of action, however, they argue that they should be dismissed for alternate reasons. Moving Defendants maintain that parts (a) and (b) - which seek the dissolution of 38-40 LLC and the appointment of a Liquidating Agent in accordance with Operating Agreement §17 - should be dismissed because none of the events listed in Operating Agreement §17 have occurred to warrant the dissolution of 38-40 LLC.
Moving Defendants further argue that dismissal of part (d) of the eleventh cause of action- in which Plaintiff which seeks an order directing Defendants to divest and/or rescind the transfer of membership shares which occurred prior to Pappas's death - is warranted because the ROFR does not apply when a Member transfers his/hers/its interest to a pre-existing Member of 38-40 LLC; Moving Defendants argue a Member is a "permitted assignee" under Operating Agreement §13, and the transfers occurred pursuant to that section, not pursuant to Operating Agreement §14, which would have triggered the ROFR requirement. Finally, Moving Defendants argue that Plaintiff failed to state a cause of action for claims two through eight and twelve through eighteen.
In opposition to the cross-motions to dismiss, Plaintiff asserts that the Complaint "clearly states causes of action" for each claim asserted and argues that the cross-motions should be denied because pre-discovery motions to dismiss are strongly disfavored as premature. Plaintiff also asserts that the documents submitted in support of the cross- motions to dismiss do not constitute documentary evidence because they are not authenticated by anyone with personal knowledge, and therefore should not be considered by me.
Plaintiff further argues that, once Pappas died, his membership in 38-40 LLC passed to the Pappas Estate; therefore, as the personal representative of the Pappas Estate, Plaintiff has standing to sue as a Member of 38-40 LLC. Discussion
On a CPLR 3211 motion to dismiss, "the pleading is to be afforded a liberal construction" - dismissal pursuant to CPLR 3211(a)(1) "is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law," Leon, 84 NY2d at 87-88 (internal citations omitted), "and conclusively disposes of the plaintiff's claim." Fortis Fin. Services, LLC v Fimat Futures USA, Inc., 290 AD2d 383, 383 (1st Dept 2002) (internal citations and quotation marks omitted). Moreover,
where allegations are contradicted by documentary evidence, they are not presumed to be true or granted every favorable inference inasmuch as 'the interpretation of an unambiguous contract is a question of law for the court, and the provisions of the contract delineating the rights of the parties prevail over the allegations set forth in the complaint.'Sterling Fifth Assoc. v Carpentille Corp., Inc., 9 AD3d 261, 261-62 (1st Dept 2004) quoting Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285 AD2d 143, 150 (1st Dept 2001).
Plaintiff first argues that all documents submitted by Moving Defendants in support of their cross-motions to dismiss pursuant to 3211(a)(1) do not qualify as documentary evidence because they were submitted by an attorney's affirmation and are not authenticated by anyone with personal knowledge. However, an attorney's affirmation, "even if he has no personal knowledge of the facts, may, of course, serve as the vehicle for the submission of acceptable attachments which do provide 'evidentiary proof in admissible form.'" Zuckerman v City of New York, 49 NY2d 557, 563 (1980); De-Spec, Inc. v Sadick, 147 AD3d 425 (1st Dept 2017).
The Operating Agreement submitted by Moving Defendants in support of their cross-motions to dismiss is "explicit and unambiguous" and constitutes documentary evidence. Dixon v 105 W. 75th St. LLC, 148 AD3d 623, 626 (1st Dept 2017). See also 150 Broadway N.Y. Assoc., L.P. v Bodner, 14 AD3d 1 (1st Dept 2004) ("where a written agreement . . . unambiguously contradicts the allegations supporting a litigant's cause of action for breach of contract, the contract itself constitutes documentary evidence"); Fontanetta v Doe, 73 AD3d 78, 84-85 (2d Dept 2010) ("documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are 'essentially undeniable,' would qualify as 'documentary evidence'") (internal citations omitted). I therefore consider the Operating Agreement in support of the Moving Defendants' cross-motions to dismiss.
Plaintiff does not contest the authenticity of the Operating Agreement submitted by Moving Defendants. In fact, Plaintiff cites to and relies on the Operating Agreement in her memorandum of law and affidavits opposing the cross-motions to dismiss.
Standing to Pursue Derivative Causes of Action
Moving Defendants argue that Plaintiff does not have standing to pursue the derivative causes of action pled in the complaint because Plaintiff is not a member of 38-40 LLC. To pursue a claim derivatively on behalf of a limited liability company, a plaintiff must be a member of the limited liability company "at the time of-the alleged wrong," MFB Realty LLC v. Eichner, 2016 WL 3541398 (Sup Ct, NY County 2016) (internal citation omitted), at the commencement of the lawsuit, Herman v Herman, 122 AD3d 506, 507 (1st Dept 2014) citing Tzolis v Wolff, 10 NY3d 100, 102 (2008), "and throughout litigation." Cohen PDC, LLC v. Cheslock-Bakker Opportunity Fund, LP, 2010 WL 4530242 (Sup Ct, NY County 2010); see also Jacobs v. Cartalemi, 156 AD3d 605 (2d Dept 2017).
Under the terms of the terms of the Operating Agreement, a Member's death constitutes a "Withdrawal Event," which "terminates the continued membership of [the deceased] Member in [38-40 LLC]." Operating Agreement §16. The Operating Agreement further provides that "any successor in interest to such Member (including . . . any executor, administrator, heir . . .)" is not "entitled to any rights or interest of such Member in [38-40 LLC], other than the allocations and distributions to which such Member is entitled, unless such successor in interest is admitted as a Member in accordance with this Agreement." Operating Agreement §16.
To be admitted as a new Member of 38-40 LLC, two events must occur. First, the person seeking membership must obtain the "consent of Members holding at least Fifty-One (51%) percent of the Percentage Interests." Operating Agreement §15. Next,
[a]s a condition to the admission of a new Member, such Member shall execute and acknowledge such instruments, in the form and substance satisfactory to the LLC, as the LLC may deem necessary or desirable to effectuate such admission and to confirm the agreement of such Member to be bound by all of the terms, covenants and conditions of this Agreement, as the same may have been amended.Operating Agreement §15.
As expressly provided in Operating Agreement §16, Pappas's membership in the LLC terminated upon his death on October 31, 2015. The Operating Agreement also expressly provides that Plaintiff, as Personal Representative of the Pappas Estate, is a successor in interest only, and is entitled to Pappas's allocations and distributions but not his membership rights or interests. Under the plain terms of the Operating Agreement neither Plaintiff nor the Pappas Estate are Members of 38-40 LLC, thus Plaintiff lacks standing to pursue derivative claims on 38-40 LLC's behalf. See, e.g., Herman, 122 AD3d at 507; MFB Realty LLC, 2016 WL 3541398; Cohen PDC, LLC, 2010 WL 4530242; Budis v. Skoutelas, 2014 WL 4092327 (Queens County 2014) ("According to the clear terms of the Operating Agreement, plaintiff is an interest holder but not a member of [the] LLC and, therefore, is not vested with the requisite member status necessary to bring [derivative claims].").
Cf. Crabapple Corp. v. Elberg, 153 AD3d 434, 435 (1st Dept 2017) (controlling interest in LLC passed to estate of deceased majority interest holder and sole managing member of the LLC where the "relevant agreements contained no provision regarding the succession of management of the LLCs in the event of [the majority member's] death"); Chan v. Louis, 303 AD2d 151, 152 (1st Dept 2003) (denying a CPLR 3211(a)(7) motion to dismiss and finding that plaintiff had standing to pursue derivative action based on the "uncontroverted allegation that, as administratrix of her husband's estate, she has a 50% interest in" the corporation).
In opposition, Plaintiff does not allege that she ever sought admission as a new Member and received consent from 51% of the existing Members, as required by the Operating Agreement §15. Instead, Plaintiff submits a Form 1065 (Schedule K-1) of the LLC's 2015 federal tax return and argues that the Pappas Estate is a Member of the LLC because, under Item G of the form, the "limited partner or other LLC Member" box is checked.
Tax form 1065 (Schedule K-1) is a document used to report an individual's income from a limited liability company, and is insufficient to show that either Plaintiff or the Pappas Estate is or ever became a member of 38-40 LLC. Accordingly, that part of the cross-motions to dismiss the derivative claims for lack of standing is granted, and Plaintiff's causes of action one through nine are dismissed with prejudice.
The instructions for Form 1065 explicitly require that Item G must be completed on Form 1065 (Schedule K-1), and there are only two options are available under Item G: "General partner or LLC member-manager" or "Limited partner or other LLC member."
Standing to Pursue the Remaining Causes of Action
Moving Defendants also argue that, although Plaintiff asserts several direct causes of action, these causes of action are actually derivative, and Plaintiff lacks standing to pursue them. A claim is derivative where it "seeks to recover for injury to the business entity," and a claim is direct where the plaintiff "seeks redress for injury to him or herself individually." Yudell v Gilbert, 99 AD3d 108, 113 (1st Dept 2012). A shareholder or LLC member may not sue in his/her/its individual capacity to remedy a harm against a business entity - the claim must be brought derivatively, see Abrams v. Donati, 66 NY2d 951, 953 (1985), unless the defendant "has breached a duty owed directly to the shareholder which is independent of any duty ow[ed] to the [business entity]." Serino v. Lipper, 123 AD3d 34, 39 (1st Dept 2014) (internal citations omitted).
To determine whether the claim is individual or derivative, the court "should consider (1) who suffered the alleged harm . . . and (2) who would receive the benefit of any recovery or other remedy." Yudell, 99 AD3d at 114 (internal citations and quotation marks omitted); see Serino, 123 AD3d at 40. Additionally, even if a plaintiff properly alleges an individual harm sufficient to support a direct claim, "if it is confused with or embedded in the harm to the corporation, it cannot separately stand." Serino, 123 AD3d at 40 (internal citations omitted); Yudell, 99 AD3d at 115; Abrams, 66 NY 2d at 952; Barbour v Knecht, 296 AD2d 218, 228 (1st Dept 2002) ("The mingling of derivative claims and individual claims requires dismissal of the causes of action so affected."); see also Psilakis v. Arpaia, 2013 WL 1232742 (Sup Ct, NY County 2013) ("derivative claims on behalf of an LLC may not be intermingled with the same cause of action as individual claims") (internal citations omitted).
Moreover, "because the direct or derivative nature of a claim is a matter of standing, a claim is subject to sua sponte dismissal where it is improperly brought as a direct action." Rutigliano v. Locantro, 2017 WL 880485 (Sup Ct, NY County 2017) citing Stark v. Goldberg, 297 AD2d 203, 204 (1st Dept 2002); see also H & M Trading Co. LLC v Jordache Ltd., 49 Misc 3d 1213(A) (Sup Ct, NY County 2015).
Plaintiff alleges that she is suing directly in her individual capacity for causes of action ten through nineteen. Causes of action eleven through nineteen are plead almost identically - and contain the same allegations - as derivative causes of action one through nine. Moving Defendants point out that the fourteenth cause of action for waste, the fifteenth cause of action for unjust enrichment, and the eighteenth cause of action for conversion must be dismissed because they plainly allege harm to 38-40 LLC - not to Plaintiff individually; as such, they are derivative and cannot be asserted as individual claims. Plaintiff concedes this argument in opposition to the cross-motions to dismiss.
The remaining causes of action (tenth, eleventh, twelfth, thirteenth, sixteenth, seventeenth and nineteenth) must also be dismissed because they mix derivative and individual claims. For example, Plaintiff's allegations regarding the unauthorized mortgage and resulting encumbrance on the Property, the failure of defendants to collect rent from a tenant at the Property, and alleged breaches of the Operating Agreement following Pappas's death all seek to redress harm to 38-40 LLC and should be asserted derivatively. See, e.g., Serino, 123 AD3d at 40; Yudell, 99 AD3d at 114 ("Allegations of mismanagement or diversion of corporate assets also plead a wrong to the corporation.").
While Plaintiff claims that the above conduct also caused the diminution in value of Plaintiff's interests in the LLC, "any pecuniary loss plaintiff[] suffered derives from a breach of duty and harm to the business entity." Yudell, 99 AD3d at 114. See Hahn v. Stewart, 5 AD3d 285, 286 (1st Dept 2004) ("an allegation of diminution in the value of stock based on breach of fiduciary duty gives rise to a derivative action only") (internal citations and quotation marks omitted).
To the extent that Plaintiff has individual claims entitling her to challenge the transfer of membership interests that occurred prior to Pappas's death and to an equitable accounting, allegations supporting these claims confuse derivative and individual rights within each cause of action and are therefore dismissed, without prejudice to replead. Yudell, 99 AD3d at 115; Barbour, 296 AD2d at 228; Abrams, 66 NY2d at 953.
Because I am dismissing the complaint in its entirety for Plaintiff's lack of standing to assert the claims alleged, I also dismiss the complaint as to the non-moving defendants, DAFNI Family Trust, 38 DAFNI LLC and Halkiadakis. Additionally, I deny Plaintiff's motion for a preliminary injunction as moot.
Also, because I am dismissing the complaint on standing grounds I have not addressed Moving Defendants' alternative grounds for dismissal.
In accordance with the foregoing it is
ORDERED that Plaintiff Debbie Pappas, as Personal Representative of the Estate of Louis Pappas's motion for a preliminary injunction is denied; and it is further
ORDERED that the cross-motions to dismiss the complaint are granted, the complaint is dismissed in its entirety against all defendants; with the first through ninth, fourteenth, fifteenth and eighteenth causes of action dismissed with prejudice, and the tenth, eleventh, twelfth, thirteenth, sixteenth, seventeenth and nineteenth dismissed without prejudice; and it is further
ORDERED that the Clerk of the Court is directed to enter judgment accordingly.
This constitutes the decision and order of the Court. 2/22/18
DATE
/s/ _________
SALIANN SCARPULLA, J.S.C.