Opinion
11709/07.
Decided June 6, 2008.
JONATHAN M. LANDSMAN, ESQ., New York, Attorney for Petitioner.
WACHTEL MASYR, LLP, By: Jeffrey T. Strauss, Esq., Attorneys for Respondents.
In this proceeding pursuant to the New York Limited Liability Company Law, Petitioner seeks an order dissolving Superior Vending, LLC ("Superior"), appointing a receiver or liquidating trustee to wind up the affairs of Superior, an accounting, attorneys' fees, and costs and disbursements of this action. Respondents urge dismissal of the Petition and counterclaim for: (a) certain monies that Petitioner was supposed to pay on account of the acquisition of another company; and (b) certain monies taken from Superior by Petitioner.
The action was tried before this Court, without a jury. Closing submissions were received from counsel on April 4, 2007. The Court notes that, although it asked counsel to submit memoranda of law together with Proposed Findings of Fact and Conclusions of Law, only Respondents' counsel submitted the latter document. A memorandum of law was received from Petitioner's counsel.
The Court carefully has considered the testimony offered during the trial and the evidence submitted. The Court also carefully has considered the arguments made by counsel on behalf of their respective positions. The Court observes that both counsel, during the trial, vigorously advocated on behalf of their clients and did so with professionalism and diligence. The Court has deliberated upon the matter and now makes its findings of fact and conclusions of law.
RELEVANT BACKGROUND
A.Formation of Superior Vending Corp.
Respondent Peter Plotkin ("Plotkin") has been in the vending machine business since December, 1997. His duties and responsibilities included the solicitation and acquisition of new vending accounts as well as overseeing the day to day operations of the vending machine business.In or about October 1997, Plotkin incorporated Superior Vending Corp. (the "Corporation") as a New York corporation. From October of 1997 through August 2000, Plotkin was the sole shareholder of the corporation.
In or about December 1997, the Corporation acquired the assets of an entity known as Refreshment Services, Inc. It was at that time that Plotkin began his career in the vending machine business. The business was fairly successful. The Corporation's 1999 Federal Income Tax Return reflects gross revenues of $550,606 and its 2000 return reflects gross revenues of $922,055.
B.The Relationship Between Plotkin and Tal
Plotkin and his wife, Melissa, worked together with the wife of Petitioner Arik Tal in a jewelry company. The couples formed a friendship. During the summer of 1998, the four spent a month together in a rented home on Fire Island.
Sometime during the summer of 2000, Plotkin was presented with the opportunity to acquire the assets of a vending machine company known as Vernon Vending Corp. ("Vernon Vending"). Plotkin called Tal to see if Tal would be interested in pursuing the acquisition of the company, as Plotkin's Corporation did not have sufficient assets to acquire Vernon Vending on its own.
Plotkin and Tal considered Vernon Vending to be approximately equal to the Corporation both in value and in the amount of gross annual revenues. The proposed acquisition would thus roughly double the size of Plotkin's existing business.
The assets to be acquired from Vernon Vending included approximately seventy vending machines at designated locations which generated a certain level of revenue, as well as trucks and equipment, a lease for an office at 17 Colonial Place in Mount Vernon, New York, and other incidental assets, such as used office equipment.
C.Tal's Investment in Superior
Plotkin and Tal previously had discussed the possibility of Tal making an investment and becoming actively involved as a working partner in the operation of Plotkin's vending machine business. Plotkin testified he considered Tal's interest in joining the Corporation to be an opportunity to bring in a working partner and expand the business. Plotkin realized that a working partner would be needed if the Corporation were to double in size through the acquisition of Vernon Vending.
Plotkin and Tal agreed that in exchange for an investment in the Corporation, Tal would become a 50% shareholder of the Corporation. Plotkin asserts Tal was to be a working partner and not a passive investor. They never reduced their agreement to writing.
In August 2000, Tal invested monies in the Corporation in order to acquire a 50% interest. The Corporation paid $320,000 for Vernon Vending, which had $900,000 in annual revenues. Plotkin and Tal agreed that Tal would pay the $170,000 due at closing to Vernon Vending pursuant to the Asset Purchase Agreement between the Corporation and Vernon Vending. The Asset Purchase Agreement further provided that the balance of $150,000 would be paid in thirty-six equal monthly installments of $4,166.67 plus interest payments of $281.25, rounded out to the sum of $4,450 per month, with the payments to begin on October 1, 2000 and continuing until the final payment on September 1, 2003. In connection with these monthly payment obligations, the Corporation executed a promissory note in favor of Vernon Vending dated August 31, 2000 and signed by Plotkin as President and "agreed to and individually approved by" Tal. The purchase price, and the remaining installments of the Note Obligations, were subject to adjustment, as provided in Section 2 of the Asset Purchase Agreement, if the revenues from the assets being acquired were not as guaranteed.
On August 22, 2000, Tal executed an "Unconditional Guarantee Agreement" in which he guaranteed the payments to Vernon Vending Corp. referred to the Asset Purchase Agreement. The Guarantee provided that Tal waived:
due diligence by Vernon Vending Corp. in collection of any indebtedness or other obligation guaranteed therein; notice of nonpayment, protest, notice of protest or other such notice.
The Guarantee further provided that Vernon Vending shall not have to:
first institute suit against the Corporation prior to demanding payment under the guarantee provided by Vernon Vending only agrees to request payment from Tal if the Corporation is in default;
exhaust any remedies it may have against the Corporation; and give notice of acceptance of the guarantee.
The Guarantee also provided that Vernon Vending may in its discretion seek to enforce the guarantee solely against Tal.
Further, the Guarantee contained a legend, in bold letters above the signature line warning the Guarantor to "READ CAREFULLY. THIS IS AN AGREEMENT TO GUARANTEE THE DEBTS OF ANOTHER. THIS MEANS THAT YOU MAY HAVE TO PAY THE WHOLE DEBT OR OBLIGATION OF Superior Vending Corp." Finally, the Guarantee contained a merger clause stating that it was the entire agreement of the parties and could only be altered by a signed writing.
The closing occurred on or about August 17, 2000.
THE FORMATION OF THE LLC
On October 18, 2000, Plotkin and Tal caused Superior to be formed as a New York limited liability company. Plotkin and Tal were the only members of the LLC. They did not sign an Operating Agreement.
At or about the time of the formation of the LLC in October 2000, Plotkin and Tal informally caused the assets of the Corporation to be transferred to the LLC, and they proceeded to operate the vending machine business that had been previously operated by the Corporation in the name of the LLC. They also operated in the name of the LLC the business that been acquired from Vernon Vending. Superior took over Vernon Vending's offices at 17 Colonial Place in Mount Vernon and started using Vernon Vending's telephone number (which, apparently, is still being used as of this date).
THE ADJUSTMENT OF THE VERNON VENDING PRICE
Assets of a vending machine company are valued upon the basis of the revenues generated. Plotkin and Tal negotiated for the acquisition of the Vernon Vending assets based upon a valuation of thirty-five cents of purchase price for every dollar of annual revenue generated by Vernon Vending assets.
Once the Vernon Vending assets had been acquired, it developed that the revenues from the assets of Vernon Vending were not as had been guaranteed. Plotkin and Tal then invoked the provisions of Paragraph 2 of the Asset Purchase Agreement which, as noted above, provided for an adjustment in the purchase price in the event that revenues did not meet expectations.
On or about April 1, 2001, the Corporation and Vernon Vending entered into an Agreement (the "Reduction Agreement") in which it was agreed that the outstanding balance of the Note Obligations in the sum of $129,050 were reduced by $25,000 and that the remaining, as reduced, balance of the Note Obligations of $104,050 was to be paid in 29 equal monthly installments of $3,587.94 (inclusive of interest) from May 1, 2001 through and including September 1, 2003.
While the Reduction Agreement made an adjustment in the purchase price, it did not reflect an agreement as to the amount by which the promised $900,000 in revenues had fallen short. On cross-examination, Maximon was asked to, and did, ascertain the revenues by working backwards from the amount of the price adjustment, $25,000. Paragraph 2 of the Asset Purchase Agreement included a formula for the calculation of the adjustment to the purchase price based upon "adjustment period sales", defined in the Asset Purchase Agreement to be "the buyer's actual gross sales generated from the Transferred Accounts [for the 6 month period from September 1, 2000 to February 28, 2001]. Using this formula and the actual "purchase price reduction" of $25,000, Maximon calculated the "adjustment period sales" as being the sum of $321,667 for the 6 month adjustment period, or $643,333 per year. Plotkin urges that this gives some insight into the value of the Vernon Vending portion of the business in the 2000 to 2001 period.
There are two difficulties with Plotkin's argument. First, Maximon testified, on direct examination, that he believed that the shortfall in revenues was only $50,000, which would be dramatically less than the approximately $250,000 shortfall indicated by Maximon's calculation. Second, the Reduction Agreement contains a provision in which it was acknowledged that "despite the clear terms of the August 22, 2000 Agreement which does not entitle the Purchaser to any adjustment in the Purchase Price hereto, that the adjustment in the Purchase Price is granted solely in consideration of the following concessions granted by the Purchaser to the Seller in detail below." While the Court need not delve into whether the Corporation was or was not entitled to a price reduction, it is significant that the Corporation and Vernon Vending apparently had a disagreement as to whether a reduction was appropriate or not. The $25,000 price reduction was a compromise granted by Vernon Vending in exchange for concessions from the Corporation and, therefore, it is unfair to assume that, because of a $25,000 price reduction, there was a $250,000 revenue shortfall.
PLOTKIN AND TAL HAVE A MAJOR FALLING OUT
Pursuant to arrangements made by Plotkin and Tal with Jakov Stiel in July 2001, Superior sold certain vending machines and accounts at designated locations to Jakov Stiel for the sum of $82,500. At or about this time, and continuing for a period thereafter, a dispute arose between Plotkin and Tal as to, among other things, the amount of the distributions (direct and otherwise) that each were receiving from the operations of Superior. The parties also were in dispute as to the amount of business Tal had generated and the hours Tal was putting in, as well as the appropriate focus of the LLC's business.
With regard to the issue of the distributions, Tal prepared a spreadsheet reflecting what he believed to be the distributions to him and Plotkin through the period August, 2001. The spreadsheet reflects the allocation of payments made for the Note Obligations — two monthly payments of $2,250 each for a total of $4,450 each month — which Superior had been making to the former owners of Vernon Vending. Additionally, a document prepared by Superior's accountant reflected the Note Obligations as having been paid from Tal's share of the distributions. Plotkin rejected Tal's calculations.
On or about September 6, 2002, Tal took a short term cash loan from Superior in the sum of $10,000. He testified he repaid the loan in cash the following Monday. Plotkin disputed that the loan was repaid. Further, Plotkin testified that, later in September 2002, he discovered that Tal had taken $10,000 in cash from a safety deposit box kept by Superior at Chase Bank. Tal denied taking that money. The Court, having observed the parties as they testified and having also had the opportunity to observe their demeanor while observing the testimony of the other, finds that Plotkin's testimony on both of these issues is to be credited and Tal's version is not credible. The Court concludes that Tal, frustrated by the fact that Plotkin was receiving much more money directly from the Corporation than Tal was (Tal's share being reduced by the payments being made to Vernon Vending), by the fact that Plotkin was rejecting Tal's attempts to redress the situation, and by the fact that Tal was pressing him to work, simply took matters into his own hands by taking $20,000 in corporate cash.
At or about the same time, Plotkin and Tal had caused the LLC to draw down the sum of $50,000 from a line of credit that was made available to Superior by Chase Bank. The proceeds of that draw were paid to an entity owned by Tal known as TMR Consulting, Inc. ("TMR"). TMR repaid the sum of approximately $44,500 to Superior and retained the remaining sum of $5,542. On October 15, 2002, Plotkin made a demand upon Tal for the return of the remaining $5,542, but the monies were not returned. Tal's refusal to pay the $5,542 over to the LLC is consistent with his retention of $20,000 in cash and is highly inconsistent with his claim that he had returned the first $10,000 and never took the second $10,000. If Tal had no intention of usurping corporate property, then he would have paid over the $5,542. That he did not do so, in the same time period that he twice helped himself to $10,000, reflects Tal's intention, at that time, to use self-help to address his disputes with Plotkin. There was clearly no justification for Tal's retention of the $5,542 and his retention of a relatively small sum is indicative of both his retention of a larger sum and his intent to stimulate a conflagration with Plotkin a conflagration that was not long in coming.
On the afternoon of October 15, 2002, Plotkin handed Tal a letter setting forth Plotkin's dissatisfaction regarding the sums taken by Tal in September and Tal's refusal to have TMR repay the $5,542 balance of the LLC's line of credit that had been advanced to TMR.
On the morning of November 22, 2002, Plotkin and Tal engaged in a shouting match at Superior's offices. Tal said Plotkin "dragged me by my hands; by my clothes, and tried to drag me out of company, physically." Plotkin admitted: "I grew agitated. I yelled at him". However, Plotkin claimed, "I don't recall threatening him." On cross-examination, Plotkin was asked "Did you every rip any portion of the phone out of the wall on that date?" His answer was "Not to the best of my memory." "I lost my temper. I don't recall — I know I never laid a finger on Mr. Tal. I don't believe I ever threatened him. . .I'm drawing a blank. I don't recall ripping a phone out of the wall." However, upon questioning by the Court, Plotkin admitted that he ". . . noticed the phone wasn't connected to the wall" after he calmed down.
The Court finds that both parties attempted to skew their testimonies regarding this incident to their best advantage and that neither was entirely candid. Plotkin, despite his initial denial of recollection, ripped the phone out of the wall. The Court does not credit Plotkin's denial of making a threat against Tal and finds that a threat was made. On the other hand, the Court does not believe that Plotkin laid his hands on Tal.
Tal called the police as a result of the incident, although no police report was filed. After the police calmed the parties down, Tal left Superior's offices.
It is undisputed that after the incident, Tal did not return to Superior's offices for a period of approximately 2 weeks. In that period, Plotkin indirectly caused an offer to be made to Tal to purchase Tal's interest in Superior. On or about December 3, 2002, an attorney, Robert A. Scher, wrote a letter on behalf of Tal.
On December 9, 2002, James Notaris, an attorney and certified public accountant, responded to Scher on Plotkin's behalf. In that letter, Notaris asserted that he read Scher's letter as making an offer to purchase Plotkin's interest in Superior and that Notaris understood that Superior had no equity as the liabilities exceeded the assets. Notaris stated that Plotkin no longer had any interest in purchasing Tal's interest but, because the company had no equity, it would be in Plotkin's interest to accept an offer from Tal that was similar in monetary terms to the prior offer made by Plotkin.
Tal returned to Superior's offices on the morning of December 9, 2002 and could not gain entrance. He contended that he had been locked out by Plotkin. Tal testified that when he arrived at Superior on December 9, 2002, he tried his key in the lock but it didn't work, so he rang the doorbell. According to Tal, Plotkin opened the door but would not let him into the business and told Tal to contact his lawyer.
Plotkin testified that Tal had come to the office at a time when the interior deadbolt lock was in place because Plotkin was in the process of counting money. Plotkin testified that when Tal rang the bell, he, Plotkin, opened the door. Plotkin related that Tal informed him that Tal was going to get a lawyer and sue Plotkin because Tal considered what Plotkin had done to be inexcusable.
The testimony of both parties leaves much to be desired. Plotkin eventually admitted he had changed the locks to the door in December 2002 and that he never gave Tal a key to the premises — a privilege which Tal previously enjoyed. This tends to support Tal's testimony that he was locked out on December 9. Further, since Scher had written to Notaris on December 3, and Notaris responded on December 9, and since it is apparent that Notaris discussed Scher's letter with Plotkin before responding to it, Plotkin was aware that Tal had an attorney a fact that tends to discredit his claim that Tal told him, on December 9, that he, Tal, was going to get a lawyer and sue.
While Notaris' letter was apparently sent by fax, it is unclear whether the letter was faxed before or after Tal attempted to gain entry to the premises.
On the other hand, Tal testified that he stayed away from the office for two weeks as a vacation and intended to return to work thereafter. This defies credulity. It is highly unlikely that after a heated altercation stimulated by Tal's belief that he was being unfairly deprived of his fair share of the distributions from the company, among other matters, and after Tal engaged counsel, that Tal simply would take a vacation and come back to work as if nothing happened. Indeed, if Tal genuinely believed that he had been physically assaulted, it is improbable that he would have returned without either first having communicated with Plotkin (or Notaris) and obtained assurances of peaceable behavior upon Tal's return or without having arranged for someone to accompany him. Accordingly, the Court discredits Tal's testimony in this regard as contrary to human experience. Moreover, Tal testified that on December 9, 2002 went to the bank to ask for a signature card on the LLC accounts and was refused. On that same day, Plotkin had filed a resolution with the bank giving Plotkin sole signature authority. It seems more likely than not that Tal went to the company office to complain about his inability to access the company accounts.
In any event, following the brief exchange between the parties on December 9, 2002, Tal never returned to Superior's offices. He never demanded a key, never telephoned Plotkin and never sent him any correspondence, except for communications between counsel. On the other hand, Tal has not received any distributions from Superior since December 9, 2002 nor has he received any K-1 or other financial documents. The only contact between the parties since that date has been through each party's respective attorneys.
PAYMENT OF SUPERIOR'S OBLIGATIONS TO VERNON VENDING
Ten monthly payments of the Note Obligations were outstanding when Tal was excluded from Superior in November, 2002. After that time, and continuing through and including September 2003, Plotkin caused 10 monthly payments in the amount of $3,587.94 each to be made to the former owners of Vernon Vending in payment and satisfaction of the Note Obligations as reduced by the Reduction Agreement. Nine of the payments were made between January and September 2003, and the tenth payment was the December 2002 payment. The sums paid totaled $35,879.40.
The approximate sum of $48,000 was outstanding on Superior's line of credit when Tal left its offices in November 2002. Thereafter, between November 2002 and August 2005, Plotkin caused 34 monthly payments in the amount of $1,588.07 each to be paid to Chase Bank, for a total of $53,994.38.
Tal did not personally make any payments or contribute any of his personal funds to the making of any of the payments made for the Note Obligations or Superior's line of credit after November 22, 2002.
TAL'S DEPARTURE FROM SUPERIOR
Tal has not worked in the vending machine business since December 9, 2002. Plotkin, however, continued to operate the business.
In 2003, Plotkin began collecting Superior's revenues in the account of PWP Consulting Incorporated, a corporation he formed for the purpose of depositing monies earned from Superior and attempting to shield those monies from Tal. PWP Consulting operated Superior's assets in 2003 and 2004 and collected all of the revenue. PWP Consulting neither acquired any new vending companies in 2003 and 2004 nor did it acquire any new accounts. PWP Consulting was merely a continuation of Superior.
In March 2003, Plotkin signed two checks from Superior to PWP Consulting totaling $33,000 without Tal's consent, thereby transferring the Superior bank account balance to PWP. Since that time, separate bank accounts for the two entities have not been maintained by Plotkin and the funds have been commingled. Plotkin admitted using the revenues generated by Superior in 2003 and 2004 in order to operate a vending machine business.
The Court notes that, as time passes, vending machines age and depreciate in value; further, as time goes by, those in control of the locations where the vending machines are placed may terminate the agreements governing placement and the number of machines in operation may decline for that reason. However, it does not appear that it would have been terribly difficult in 2003 or even in 2004 to ascertain what the assets of Superior were and, if Superior was dissolved, to sell the machines and the routes.
However, Plotkin kept the business going. He explained that the revenues generated from the operation of the vending machines owned and/or operated by the LLC were used to pay the for the expenses associated with their operation, including expenses for the costs of the snack items and sodas dispensed through the machines, labor associated with the operation and maintenance of those machines, gas and related costs for the vehicles used to access the machines, insurance, as well as the Note Obligations owed to the former owners of Vernon Vending, and the monthly payments owed to Chase Bank in connection with the LLC's outstanding balance on its line of credit.
TAL'S EARLIER DISSOLUTION ACTION
On March 11, 2003, following an exchange of heated correspondence between counsel, Tal commenced a proceeding in the Supreme Court of the State of New York, County of Westchester, Index No. 03510/03, in which he sought a judgment directing, among other things, that the LLC be dissolved. Tal also asserted claims against Notaris and his company. Plotkin served an answer, on behalf of the LLC and himself, opposing dissolution. Since it seems readily apparent that the severe antagonism between Plotkin and Tal rendered it no longer reasonably practicable to carry on the business of Superior in conformity with the articles of organization (which had listed Tal as a member of the LLC), see Limited Liability Company Law Section 702; Matter of Extreme Wireless, LLC, 299 AD2d 549 (2d Dept. 2002), it seems probable that, had Tal's dissolution proceeding been prosecuted with reasonable diligence, dissolution would have been decreed. Plotkin's opposition to the dissolution seems to have been intended to permit him to continue to operate the business, while depriving Tal of the benefits of his equity investment. On the other hand, it does not appear that Tal made any application to the Court to limit, restrict, or otherwise control Plotkin's operation of the company.
Notaris and his firm moved to dismiss the claims asserted against them by Tal, a motion that was granted by Justice W. Denis Donovan by order entered October 15, 2003. Tal pursued an appeal. On September 21, 2005, the Appellate Division, Second Department, affirmed Justice Donovan's order. See Tal v. Superior Vending, LLC , 20 AD3d 520 (2d Dept. 2005).
However, during the pendency of the appeal, Tal failed to prosecute the dissolution proceeding at the trial court level. On May 20, 2004, the action was marked "off calendar". The proceeding was dismissed in May 2005 (See CPLR 3404), though the Appellate Division was apparently not notified of this development. Around this same time, Scher, who had been representing Tal, was suspended from the practice of law. Scher was suspended for one year by order of the Appellate Division, Second Department, issued April 25, 2005. See Matter of Scher , 18 AD3d 57 (2d Dept. 2005). The principal ground for suspension was the neglect by Scher of a legal matter entrusted to him, with Scher having a prior disciplinary history, including three letters of admonition involving complaints of neglect.
On May 23, 2005, Scher wrote to Tal and informed Tal of his suspension from practice. Scher stated that, while he could no longer represent Tal, the firm of Scher Scher, P.C. would be continuing and that Daniel J. Scher (Scher's son) would continue the representation unless Tal decided he wanted other counsel. Scher stated that unless Tal advised to the contrary, it would be assumed that Tal wished to have the firm continue its representation.
Tal testified that he spoke with Robert Scher virtually every week from March 2003, when the dissolution case was commenced, through 2007. Tal claimed that he understood that Scher's son was going to pursue the case and that Robert Scher promised that his son would take care of it. Tal claimed that he spoke with Robert Scher because he, Tal, was waiting for Daniel Scher to call and because he, Tal, could not get through to Daniel Scher.
Tal claims that, despite his almost weekly calls to Robert Scher over a four year period, Tal was unaware that the dissolution proceeding was dismissed. The Court finds this testimony to be unworthy of belief. While it may well not be entirely Tal's fault that Scher let the case lie fallow, it cannot be denied that a client who is seriously interested in pursuing a matter, particularly a contentious litigation marked by a high degree of personal animosity between the principals, would make periodic inquiries with counsel to assure that the matter was progressing. There is no indication that Tal ever wrote to Scher demanding action, asking for a progress report, or asking to see any files or papers. There is no indication that Tal ever went to Scher's office to review the file or even asked to. The claim that Tal regularly spoke with Robert Scher after the suspension order is likewise not worthy of belief. Scher himself could not give legal advice (Judiciary Law, § 478) and there is no indication that he did so. To the extent that Tal is contending that he was speaking to Robert Scher because Tal could not get a call from Daniel Scher, it is clear that if a client is unable to even speak to his attorney for several years, the client is on notice that the attorney may not be pursuing the matter diligently (at least in the absence of any other communications, such as letters, e-mails, etc). At the very least, the absence of action by an attorney, followed by the suspension of that attorney, followed by an inability to speak to the attorney who took over the matter (the son of the suspended attorney) would give rise to concerns as to what, if anything, was going on with the litigation. Moreover, Tal knew that, when he left, he had not gotten anything for his interest and a reasonable person would have expressed concern, and demanded action, to address both what Tal had not gotten and to protect against actions that might be taken by Plotkin.
Tal testified that he first learned of the 2005 dismissal of the case in 2006 or 2007 when it was brought to his attention by his present counsel. Thus, the fact is that, from March 2003 when the case was filed through 2006 or 2007, Tal himself did nothing to request, demand, or importune the Schers, or anyone else, to move the matter forward. If Tal was truly serious about pursuing the dissolution of Superior and seeking his share of the income and assets, and preventing Plotkin from acting unilaterally, he would have done more than just sit back and wait. A client who, according to his version of events, had been physically dragged out of the corporate offices, denied access to the bank records, and cut out of his share of the profits, would have demanded attention from his attorney and, failing to receive it, sought replacement counsel. There is no indication that Tal ever wrote to Scher or anyone else demanding action or even inquiring as to the status of the case. Even though Tal was evidently on speaking terms with Scher until 2006 or 2007, Scher was not called as a witness.
The Court concludes that the dissolution of the company and the distribution of assets was simply not a priority for Tal, at least until the commencement of the current proceeding in 2007.
PLOTKIN'S ACQUISITION OF ADDITIONAL ASSETS
On October 28, 2004, after Tal's dissolution proceeding had been marked "off calendar", Plotkin caused a corporation known as Superior Vending Services, Inc. to be formed. His wife, Melissa Plotkin, was its sole shareholder. Plotkin testified that the new company was formed to "legally document and create a distinction" with respect to the work that Plotkin was doing in the vending machine industry after his breakup with Tal and after Tal had commenced litigation in 2003. This, however, was clearly a transparent sham. Melissa Plotkin had no experience in the vending machine industry and the creation of the "new" entity was hardly an arms-length transaction. But, in any event, Plotkin made no pretense of keeping the assets of the companies separated. The assets were commingled and the entities operated as one. From the fact that Tal never sought interim relief from the court in the period that the prior proceeding was pending, and did not do anything further until 2007, a reasonable person could conclude that Tal had abandoned his claims.
Superior Vending Services, Inc. purchased the assets of another vending business in early 2005. It acquired the assets of Select Snack Time Inc. for the sum of $700,000, $200,000 of which was paid at the closing on January 7, 2005, and an additional $500,000 was to be paid in monthly note payments. The down payment funds were obtained from a home equity loan secured by the Plotkins' residence. The Court did not permit Plotkin to offer documentary evidence that would show that the Snack Time purchase was made using the home equity loan, because Plotkin refused to produce those documents in discovery. Nevertheless, the Court credits Plotkin's testimony as to how he financed the acquisition and observes that no evidence was offered that would show that the payments came from any other source.
Tal had no involvement in connection with the acquisition of the assets of Select Snack Time, Inc., nor did he contribute financially or in any other way to the down payment made at the closing, to the Note payments made after the closing, or for the home equity loan used to fund the down payment.
Plotkin testified that, while he had counterclaimed against Tal in the first lawsuit, he believed that the counterclaim had been resolved with the dismissal of the case. It seems apparent that Plotkin proceeded with the acquisition of additional routes in the belief that the issues existing between him and Tal had been resolved through the dismissal of their respective claims against each other.
THE PRESENT PROCEEDING
On June 28, 2007, Tal commenced this proceeding with the filing of an Order to Show Cause and a Verified Petition, dated June 14, 2007. During pre-trial proceedings conducted before the Court on July 13, 2007 and then again at the commencement of the trial, counsel stipulated that the LLC was to be dissolved in accordance with the provisions of Section 702 of the Limited Liability Company Law of the State of New York.
Respondents asserted three counterclaims: (a) a First Counterclaim seeking the recovery of $160,000 in funds that Tal was supposed to contribute for the purchase of Superior Vending; (b) a Second Counterclaim, seeking to recover from Tal $25,542, comprised of the $10,000 loan not repaid by Tal, $10,000 in cash taken by Tal from the LLC's safety deposit box and $5,542 which Tal's company, TMR Consulting, Inc., failed to repay to the LLC; and (c) a Third Counterclaim asserting that, as a result of Tal's actions, Plotkin was confronted with "losing almost his entire investment" in Superior and suffered $330,000 in damages.
In his reply, Tal denied all liability to Respondents.
TAL'S CLAIMS OF UNDER REPORTING OF REVENUES
Tal's expert witness, Maximon, offered valuation testimony on what he regarded as Superior's assets and Tal's interest therein. However, he also opined on the accuracy of the reporting of revenues by Plotkin in the years following Tal's exclusion from the business in connection with Petitioner's theory that Tal is entitled to a share of the profits from the time he left until the time of the instant action.
With regard to the alleged under reporting of income, Maximon offered testimony in support of Petitioner's theory that Plotkin grossly under-reported revenues generated by Superior Vending since Tal's exclusion in 2002. In doing so, Maximon relied upon documents created by Plotkin in 2007, for the purposes of this litigation, which documents were received in evidence as Exhibits 34-36. Plotkin produced Exhibit 34 on the second day of his deposition. He produced Exhibit 35 on the following day (the day of the Trial Readiness Conference before the Court), stating that he noticed a mistake in the initial round of documents for 2005, as they had understated revenues. Plotkin prepared exhibits 34-36 by taking data from original Excel spreadsheets that list the daily revenue from each vending machine for all years. Maximon used those documents to create a summary of the information he received from Plotkin, which was received in evidence as Exhibit 7.
In general, Maximon's testimony revealed that the documents Plotkin prepared showed that there was more total income for all of Plotkin's entities than was reported on their collective tax returns. For example, evidence was offered that the 2003 PWP Consulting tax return (Ex. 22) shows gross receipts of $1,000,662, but Plotkin's Superior Vending LLC revenues according to Exhibit 7 (Revenues for the years 2003 through 2007 for Superior Vending LLC) were just $437,882.80. Plotkin admitted that PWP Consulting did not acquire new routes or businesses in 2003.
To continue:
Maximon testified that $437,822 is not the actual revenue that any combination of businesses reported in 2003. He stated they generated revenues of at least $1.6 million per year. Plotkin claims he did not under
report revenues for 2003.
The 2004 Superior Vending LLC revenues were $923,528.50; the 2004 tax return gross receipts for that entity were $20,319. The 2004 PWP Consulting tax return gross receipts are $737,432. When questioned about this at trial, Plotkin asserted he never under reported income. At his deposition, however, he estimated that the 2004 revenues credited to PWP Consulting were between $1 million and $1,125,000.
Plotkin testified at his deposition that the 2005 revenues credited to Superior Vending Services, Inc. were between $2 million and $2.5 million; the 2005 tax return showed gross receipts of just $678,811. Further, the 2005 revenues of Superior Vending LLC alone were $769,357.57 (more than the revenues reported for all of Superior Vending Services, Inc., which had acquired Select Snack Time in January 2005). Thus, the revenues reported on the tax returns were again substantially less than the actual revenues. Plotkin could not explain the discrepancy as to 2005 revenues.
As to 2006, Plotkin testified at his deposition that the revenues credited to Superior Vending Services, Inc. were between $2 million and $2.5 million; the tax return stated gross receipts of just $763,583. According to Exhibit 7 (the Revenue report), the revenues for Superior Vending LLC machines alone were $536,745.66. If Plotkin is to be believed, therefor, one can conclude that most of the revenues for Superior Vending Services, Inc. in 2006 came from Superior Vending LLC assets.
Based on this evidence, Tal argues that Plotkin was taking substantial amounts of cash out of the business. He notes that Plotkin admitted he used company revenue for years to pay his gardener, his nanny, his personal automobile and other personal expenses. Plotkin further admitted that he spent company funds on personal expenses (Ex. 9, TT: 576-698). These totaled $215,000.
Tal argues that, because he was excluded from the business in December 2002, he was prevented from sharing in this cash flow for more than five years and should receive an appropriate credit for these funds. He submits that, even though his expert, Maximon, testified that the cash flow does not affect his market value analysis of the company's value, Tal believes this should not preclude him from receiving an equitable share of the cash during the years he was excluded.
The Court notes that Tal and Plotkin secured a reduction in the purchase price to be paid for Vernon Vending because the Vernon Vending revenues were short of expectations in 2001, the expectation being $900,000. Since it was expected that Plotkin's existing venture and Vernon Vending were roughly equal, it would have been expected that the combined revenues would be roughly $1.8 million per year. Maximon testified that the combined businesses generated at least $1.6 million per year. (Tr. 389-391). Thus, even assuming that there was under-reporting of revenues, it does not appear that the revenues, in fact, were significantly greater than what the parties expected going in or experienced when they were together for 2002. Nor is there any reason to believe that there was any dramatic spike in revenues thereafter.
VALUATION OF THE BUSINESS
Petitioner called Hillel Maximon, an expert on valuation of businesses, as a witness to offer valuation testimony on Superior Vending and on Tal's interest in same. Two witnesses were called by the Respondents, to wit: Plotkin, and Michael Daddona, neither of whom were offered as expert witnesses on valuation issues.
Taking Respondents' witnesses' testimony first, Plotkin testified that based upon his nearly ten and one-half years of experience in the vending machine industry, vending machine companies are valued on the basis of the revenue generated by the vending machines and other assets that the company owned and/or operated. The range of valuation typically is twenty-five to thirty-five cents for each dollar of annual revenue generated.
Michael Daddona also was called as a witness by the Respondents on this issue. He stated that based on his thirty-five years of experience, he also was of the view that vending machine companies are valued on the basis of a range of twenty-five to thirty-five cents for each dollar of annual revenue. The specific range chosen in each instance is based upon a function of the age, quality and condition of the machines, trucks, and computers being transferred as well as whether or not there are contracts for the accounts being transferred.
The Court now will turn to the testimony of Petitioner's expert, Hillel Maximon.
Although Maximon was recognized to be an expert on the issue of valuation, his calculations, methodology and opinions, give the Court some pause. His testimony had some highly irregular and anecdotal aspects. To illustrate, on one occasion, while counsel was attempting to lay a foundation for the admission of an exhibit containing a financial comparison, the following questions and answers were asked:
THE COURT:Let me ask you a question, sir. Where did you get the information set forth?
THE WITNESS:This is firsthand information.
THE COURT:What do you mean firsthand?
THE WITNESS:I work in a local liquor store that has a concession, and I review their candy prices. So I know these numbers.
Since the witness' analysis of a candy concession in a liquor store seemed, to the Court, to be significantly different than an analysis of a vendor's operation, the exhibit containing the expert's observations did not come into evidence.
On another occasion, while the witness was searching for support for his calculations on a proposed exhibit, the following testimony occurred:
THE COURT:What was the information that you used?
THE WITNESS:I know the Snapple price, because I've been working with Snapple routes. I used Snapple routes from that.
I used another worse case scenario. In the supermarket, a case for 12-ounce cans of soda, which varies between 2.50 for a 12-pack and 3.33.
THE COURT:Where did you get that from?
THE WITNESS:From the local supermarket.
******
MR. STRAUSS:Perhaps I could do some voir dire.. . . . I'm acting under the assumption that the supermarket is in Massachusetts.
THE COURT:I don't know.
MR. STRAUSS:And the Snapple is in Massachusetts.
THE COURT:I don't know about that assumption. I thought I heard the testimony that the Snapple was in Connecticut.
Am I correct?
THE WITNESS:No. It's in New York.
THE COURT:In?
THE WITNESS:New York City.
The Court denied the admissibility of the exhibit based on the unreliable anecdotal information relied upon by the expert witness.
Turning now to Maximon's testimony as to the value of the LLC at issue here, he testified that book value is the minimum valuation of the company, and that Superior Vending's book value was $467,319 in 2001; $364,293 in 2002; $339,775 in 2003, $346,608 in 2004; $751,423 in 2005 and $710,767 in 2006. However, although he also testified that he obtained these values from the tax returns, he never explained where on the tax returns he obtained the information and his exhibit (52) which contains selected figures from tax returns does not contain the book values. However, the Court has reviewed the tax returns and has located some of the numbers cited by Maximon, though such numbers are really balance sheet numbers ( i.e., the total asset values and total liability and shareholders' equity values, which values match).
For 2005, the tax return for Superior Vending Services, Inc. shows an end of the year balance sheet of $751,423, this, of course, is the entity which acquired Snack Time that year (a fact that seems apparent from the dramatic balance growth from the beginning of the year of $4,794) from the proceeds of the loan against the Plotkins' home. In contrast, the 2005 return for Superior Vending Corp. contains a blank balance sheet. The 2005 return for PWP Consulting (the entity in which Plotkin parked the LLC assets) shows a balance sheet value at the beginning of the year of $439,606 and a year end value of-$22,027. The 2005 return for Superior Wholesale Corp. shows a balance sheet value of $6,464 at year end. This suggests that what Maximon called book value for 2005 is nothing more than the balance sheet value of the Snack Time assets.
For 2004, the $346,608 reported by Maximon was derived from the line on the 2004 Superior Vending LLC return reflecting partners' capital accounts (line 21); the line that appears above the next line (line 22) on which the total liability and shareholders' equity value appears, which, for 2004, was $478,596. In 2004, PWP Consulting showed a year end balance sheet value of $439,606.
It is evident that Maximon made errors in compiling his information (albeit, perhaps, in Plotkin's favor). It is also evident that, because of the multiplicity of entities, a book value approach, on this record, is unreliable since it is entirely unclear whose books are being valued and, indeed, whether the numbers used by Maximon are, in fact, book values. Further, no testimony was offered by the accountant who prepared the returns as to how and why the values were apportioned between the various entities. For example, the 2004 balance sheet reporting for Superior Vending LLC and PWP Consulting, if added together, would yield a total in excess of $900,000. Since Snack Time had not yet been acquired, it would seem that the combined values are entirely reflective of LLC assets. Similarly, there is no explanation as to why the 2005 Superior Vending Services, Inc. return reported a balance sheet value of $751,423, while the Snack Time assets were purchased for $700,000. Nor is there any explanation for why the PWP Consulting balance sheet value dropped so dramatically in 2005, declining from a positive $439,606 to a negative $22,027. While Plotkin testified that, as time passed, the value of the assets that belonged to Superior LLC declined to nearly being negligible, such a decline would seemingly not be visited within the space of but one calendar year.
In 2007, at the commencement of this proceeding, Maximon valued Superior Vending at $1.4 million, including $700,000 to $900,000 of good will (calculated by subtracting the book value of the company from the $1.4 million). This valuation was based on Plotkin's deposition testimony of actual revenues, at 35 cents of value per dollar of revenue. The 35 cents on the dollar figure came from the original Vernon Vending transaction. Ultimately, the Vernon Vending sales price was reduced by $25,000, making the new ratio 36.42 cents on the dollar ($295,000 purchase price for $810,000 in sales revenue). However, it is apparent that this valuation includes revenues derived from the Snack Time assets and assumes the validity of the Maximon's book values. As noted previously, there is also reason to doubt whether the sales revenue was $810,000, given that Maximon testified that the drop-off from the promised $900,000 was $50,000 and also his calculation that, based on the $25,000 reduction, the adjusted sales volume for one year would be $643,333 (though, as discussed previously, there is reason to doubt the reliability of this calculation).
In any event, Tal submits that based upon this valuation, the Court should award him $700,000 as and for his share of the value of the business.
Maximon did a second market value valuation of Superior Vending using a different method. This second method is based upon the number of cases of product sold in the year, with a multiplier in order to get a value. He stated that in trying to determine value using this method, his results were "somewhere around" $1.15 million dollars. When the Court asked him to explain his calculations, his response was as follows:
. . .I took Mr. Plotkin's testimony of three-million dollars of Superior Vending Services, Inc., and I applied an average case revenue of 30 dollars to it, or 24 bottles on an average. If it's water; if it's Coke; if it's Snapple. I used a dollar and a quarter to get a $30 case price. I divided 30 into three-million dollars.
THE COURT: Where did you get the 30 dollars case price from.
I know you said a dollar and a quarter. I guess I'm asking where does that come from? Why a dollar and a quarter as opposed to a dollar or a dollar, fifty?
THE WITNESS: I know the Snapple numbers. I know the 12-ounce Coke numbers. I know the candy numbers, and I know the 20-ounce numbers. All independently. One of the other. And I did the calculation to determine those costs.
THE COURT: Okay.
THE WITNESS: And so I came up with, your Honor — And this is more of an art than a science. There are no hard numbers, and numbers move and percentages will move. I'm trying to use an example of a determination how you do the kind of calculation.
I took the three-million dollars that Mr. Plotkin testified to, and divided it by the 30 dollars average case sale, to determine that there were 100,000 cases.
And then I looked at his wholesale business of about a million dollars, and I divided that by a 15 dollars wholesale price — 50 percent discount to arrive at a total of one — I'm sorry. For that line, 66,666 cases. And in all told, 166,666 cases.
THE COURT: Okay.
THE WITNESS: Routes are selling today at between four and six multipliers. So, I picked a five, to get to a $833,333 value. And to that, I added the benefit from this kind of a business, which is a cash business, which is a pretty standard way of looking at how cash businesses manage.
And this is without making any negative statements about any parties here in the room. Cash is cash, and somehow some of it doesn't get reported.
And in my opinion, there is evidence that a lot of this revenue that did not get reported. (sic). So, I assumed of the four-million dollars, that approximately 20 percent might not get reported, which is $800,000, at an income tax rate of 40 percent, is another $320,000.
So, when I add the 320 to the 833, I get the million, one-five. (Maximon TT: p. 348:3 to 350:20).
As a result of the above rather unorthodox approach, Tal submits that under this method of valuation he should receive $575,000 (which, of course, is less than half of $1.5 million for some inexplicable reason).
Upon cross-examination, counsel for Plotkin sought to have Maximon value the business in different ways as of the time the parties split up. Maximon valued the business as of December 2002 (the end of the last year that the parties worked together). The 2002 Federal Income Tax Return for the LLC reflected gross receipts for the full year (after returns and allowances) of $1,211,043. The monthly revenue report for December 2002 reflected revenues for that month in the amount of $63,125. Based upon the LLC's tax return and the monthly revenue report for December 2002, revenues for the 11 months ended November 30, 2002 were in the amount of $1,147,918 (i.e., $1,211,043 — $63,125).
As an additional means of calculating revenues for the 11 months ended November 30, 2002 (based upon the assumptions by Plotkin and Tal that Vernon Vending and the Corporation were approximately equal in terms of value and revenue, and based upon Maximon's testimony on cross-examination that, by application of the purchase price adjustment formula set forth in Paragraph 2 of the Asset Purchase Agreement) the revenues for Vernon Vending would be $643,334 the revenues for the full year of 2002 on an extrapolated basis would be $1,286,668. Subtracting the December 2002 revenues in the amount of $63,125 results in revenues for the period ended November 30, 2002 in the amount of $1,223,543.
Although Maximon questioned the accuracy of the gross receipts figure on the LLC's 2002 Federal Income Tax Return, he suggested that the cost of goods sold figure shown on line 2 of the return in the amount of $915,044 was a reliable figure. Maximon further explained that, using the cost of goods sold figure of $914,044 reflected in the 2002 tax return, it would be appropriate to apply a ratio based upon the relationship between cost of goods sold and revenues in order to determine what might be a more appropriate revenue figure for 2002. In that connection, using the $915,044 cost of goods sold figure reflected at line 2 of the LLC's 2002 tax return, and using a historical ratio of .64 (which was the ratio of cost of cost of goods sold to revenues as reflected in the LLC's 2001 income tax return prepared by Tal's accounting firm) — the annualized revenue figure would be $1,421,177. Subtracting the December 2002 revenues of $63,125 from that figure results in revenues for the period ended November 30, 2002 in the amount of $1,366,631.
Tal and Plotkin viewed the Vernon Vending operation to be equal to Plotkin's existing operation. Assuming that these equal operations were each responsible for one-half of the combined 2002 revenues, an even division of the roughly $1.37 million in revenues would yield roughly $683,000 in revenues for each wing and that figure is roughly in line with Maximon's calculation that the adjusted revenues for Vernon Vending were $643,333 annualized.
Using the range of revenues above, and applying the 35¢ per $1 of revenue valuation formula, results in the following range of values of the LLC as of November 30, 2002:
Revenue:35¢ FactorValue50% Interest
$1,147,912x .35$401,771 ÷ 2 =$200,886
$1,223,543x .35$428,240÷ 2 =$214,120
$1,366,631x .35$478,321÷ 2 =$239,161
CONCLUSIONS OF LAW
A.The Petition
Given the parties' agreement that the nature of their relationship requires that the business be dissolved, the legal question before the Court is how the winding up and distribution of assets, pursuant to Sections 703 and 704 of the Limited Liability Corporation Law, are to be implemented. While the provisions of Section 703 and 704 may be varied by operating agreement, there is no operating agreement here.
Section 703 provides that, in the event of dissolution of a limited liability company, the Supreme Court may wind up the limited liability company's affairs and, in connection therewith, may appoint a receiver or liquidating trustee. Section 704 provides that, upon dissolution, the assets are to be distributed as follows:
a)to creditors,
b)to members or former members in satisfaction of liabilities for distributions under Sections 507 or 509; and
c)". . .to members first for the return of their contributions, to the extent not previously returned, and second respecting their membership interests, in the proportions in which the members share in distributions in accordance with Section 504.
Section 504 provides that no member has the right to demand distributions in any form other than cash and that no member may be compelled to accept a distribution of any asset in kind to the extent that the percentage of the asset distributed to him or her exceeds a percentage of that asset that is equal to the percentage he or she shares in distributions. The provisions of Section 504, like those of Sections 507 and 509, may be varied by the operating agreement but, here, there is no operating agreement.
Section 507 provides that a member is entitled to receive distributions from the company prior to withdrawal from the company and before dissolution and winding up of the company. Section 509 provides that, upon withdrawal a member is entitled to receive "within a reasonable time after withdrawal, the fair value of his or her membership interest in the limited liability company as of the date of withdrawal based upon his or her right to share in distributions from the limited liability company. A member may not withdraw prior to the dissolution and winding up of the company. Limited Liability Company Law, § 606(a). Thus, while Section 507, dealing with interim withdrawals may have application here (and is discussed further, infra), Section 509 does not, as Tal did not withdraw prior to dissolution.
The positions of the parties at the outset of the trial were at extreme ends of the spectrum. Plotkin's view, which finds support in the literal language of the statute, was that the Court could only distribute the assets of the LLC, which Plotkin identified, in his testimony, as consisting of 137 vending machines, worth a total of $23,500, and 6 trucks, worth $9,000. While the LLC owned and operated 138 vending machines in December 2002, there were only 25 in operation in September, 2007 and 105 were in the warehouse. Plotkin explained that some accounts fell prey to competition, i.e., the locations were taken over by other vending machine companies. Some accounts were lost because the companies at which the machines were housed closed or moved away. As examples, the LLC lost the machines at the Westchester Mall and the Valhalla School District. Because Heineken and IVI Environmental downsized, the number of machines at their locations was reduced.
This excludes machines owned by others, such as Snapple, but which were serviced by Superior.
Plotkin's initial approach is plainly inequitable and unfair. If the Court accepted it, it would mean that Tal would be limited to $16,250 (assuming that the vending machines and trucks sold for the values ascribed to them by Plotkin), despite having invested $170,000 of his own money, which Plotkin had the benefit of for many years. When the Court, during the trial, observed that this was unfair, and suggested that a better approach might be to value Tal's interest as of November, 2002, Plotkin acceded to the use of that approach.
On the other hand, Tal's approach, to which he continues to adhere, is that the Court should distribute all of the assets of all of the entities, contending that Plotkin acquired all of his vending machine interests through the use of Superior assets. He also, in effect, seeks payment for distributions unpaid to him. This approach also is plainly unfair and inequitable. It is established that a significant part of Plotkin's current business derives from the Snack Time assets in early 2005, which was paid for by a loan against his residence. Thus, it would not be fair or equitable to grant Tal any interest in a business that was acquired independently, some three years after Tal was out of the venture. Moreover, it is difficult, if not impossible, to ascertain what the interim distributions are that should have been paid to him.
Turning first to whether Tal is entitled to any interim distributions under Section 507, the Court concludes that Tal has not shown any such entitlement. The agreement of the parties was that Tal was to pay the balance due on Vernon Vending out of his share of the profits. After he left, Plotkin paid $35,879.40, with the payments continuing until the final payment in September 2003. Since, even assuming under-reporting of revenues, there is no basis to believe that the actual revenues were significantly greater than what the parties experienced in 2002, there is no reason to conclude that Tal would have received anything above the amounts necessary to pay off the Vernon Vending debt.
Further, as also noted above, there was roughly $48,000 outstanding on Superior's line of credit when Tal departed in November, 2002. Plotkin paid $53,994.38 to satisfy this debt between November 2002 and August 2005. This expense would come off the top before any distributions to either member.
Tal's theory is also predicated on the assumption that he should be entitled to one-half of the distributions, though he did no work. The Court has found that the agreement of the parties was that each was to work in the business; Tal's failure to work was a precipitating cause of the break-up. Under the circumstances, Plotkin, as a full-time worker and manager of the business, would be entitled to reasonable compensation for his services, an expense of the business which would also reduce the bottom-line available for distribution on account of profit-sharing.
To be sure, Plotkin created a morass by seizing control of the LLC's assets, attempting to shield them from Tal by moving the assets around different companies, and then adding to the existing assets. He compounded this through the use of the "Superior" name with respect to the Snack Time business. On the other hand, it is also fair to say that the "marking off" of the prior dissolution proceeding in May 2004, followed by the dismissal of that proceeding in May, 2005, followed by some two additional years of inactivity, may have encouraged Plotkin to believe that Tal had decided not to pursue his claims on the Superior assets and that there was no longer any necessity to account for those assets.
The doctrine of laches bars recovery where a party's inaction has prejudiced another party, making it inequitable to permit recovery. First National Bank v. Calano, 223 AD2d 524 (2d Dept. 1996). Laches is an equitable doctrine, based on a lengthy neglect or omission to assert a right and the resulting prejudice to an adverse party. Saratoga County Chamber of Commerce v. Pataki, 100 NY2d 801, 816 (2003). The mere lapse of time, without a showing of prejudice, is insufficient to sustain a claim of laches; prejudice must be shown and may be demonstrated by a showing of injury, change of position, loss of evidence or some other disadvantage resulting from the delay. Matter of Linker, 23 AD2d 186 (1st Dept. 2005). To establish laches, a party must show: (1) conduct by an offending party giving rise to the situation complained of; (2) delay by the complainant in asserting his or her claim for relief despite the opportunity to do so; (3) lack of knowledge or notice on the part of the offending party that the complainant would assert his or her claim for relief; and (4) injury or prejudice to the offending party in the event that relief is accorded the complainant. Cohen v. Krantz, 227 AD2d 581 (2d Dept. 1996). These elements have been established and operate to preclude Tal from seeking interim distributions now and from seeking to an equal share in the combined value of the vending machine assets as presently constituted.
The situation complained of resulted from conduct by Tal, i.e., the usurpation of some $25,000 in corporate funds in September, 2002. While Tal initially pursued his claims for relief with reasonable promptness, he delayed in pursuing these claims, resulting in the "marking off" of the case in 2004 and the dismissal of the case in May 2005, even though he had the opportunity to pursue his claims. While the neglect of his attorney may not have been Tal's fault, he is, nevertheless, responsible for the consequences of that delay as well as responsible for his own lack of interest until 2007. Plotkin had no knowledge or notice that Tal, after years of inactivity, would bring a second case. There would clearly be injury and prejudice to Plotkin if now, after all these years, liability would be imposed upon him for assets, and profits derived therefrom, acquired after Tal's initial proceeding was dismissed.
It is clear that the winding up and distribution of this vending machine company involves more than the mere sale of the outmoded vending machines and used trucks presently owned by the LLC. The whole of this company, like most companies, is worth more than the sum of its parts. If nothing else, Plotkin had the use of the "Superior" trade name, telephone number, and business location. There is something to Maximon's point that there was goodwill in the LLC; good will is the advantage acquired by a business beyond the mere value of its capital in consequence of the patronage received from regular customers, on account of its local position or common celebrity, or reputation for skill or affluence or punctuality, or from other circumstances. Matter of Ball, 161 A.D. 79, 80-81 (2d Dept. 1914). But, on the other hand, no effort was made by Tal and his expert to tease out from the facts what the goodwill value of the LLC might have been in 2002 or what they would be independent of the assets acquired from Snack Time in 2005. Moreover, it seems unfair for Tal to benefit from, or sustain a detriment by, any changes in good will that occurred after his departure, at least where his departure occurred so long ago. Moreover, given the often contradictory and confusing nature of Maximon's testimony as to value, the Court is not of the opinion that a choice among many alternative valuations, none of which seem inherently more appropriate than the rest, is the proper, and equitable way to resolve this matter.
Indeed, to return to the language of the statute, the Court's obligation is to provide for a distribution of the assets of the LLC. It cannot be said that the assets that are attributable to the Snack Time acquisition are now, or ever were, assets of the subject LLC. On the other hand, Section 704 (c) provides that assets (assuming there any and assuming that there no liabilities to creditors or for unpaid interim distributions to which there is an entitlement) are first to be distributed to members first "for the return of their contributions, to the extent not previously returned" and then in respect of their membership interests.
As discussed with counsel during the trial, the Court has found instruction in the recent Appellate Division, First Department case of Lyons v. Salamone , 32 AD3d 757 (1st Dept. 2006). In Lyons, the court confirmed that an equitable method of liquidation of an LLC is to allow either party to bid fair market value of the other party's interest in the business and appoint a receiver directed to accept the highest legitimate bid. Here, though, there is evident impossibility in ascertaining the "fair market" of the assets of the LLC, as, strictly speaking, those assets consist of 25 or so vending machines in actual use, 105 warehoused vending machines, and 6 old trucks. While there may be some good will in the business as of November 2002, and in the use of the Superior name, telephone number and business location, it is impossible to separate the value of that good will from the good will that inhered in the Snack Time business.
The fairest and most equitable approach to this situation is to proceed in accordance with Section 704(c) and provide for a return to Tal of his membership contribution and then for a distribution based on his membership interest. This may be accomplished by viewing the parties as having achieved an effective and permanent parting of the ways in December, 2002.
Tal invested the sum of $170,000 and made twenty-six (26) note payments from his share of the LLC's distributions for the months of October 1, 2000 through November 1, 2002; the first 7 payments in the total sum of $31,150 and the remaining 19 payments in the total sum of $68,170.86, for a total of $99,320.86. In accordance with Section 704(c), Tal is entitled to have his contributions returned to him.
Given the fact that Tal left the business in November 2002, and, from that point forward contributed no further funds to the business and performed no further services for the business, it seems appropriate to treat Tal as if his membership interest had, in fact, terminated as of November 30, 2002. To allow Tal to collect a share of the profits for the five years that have passed since his parting of ways with Plotkin, taken together with his failure to pursue actively his first action for dissolution in 2003, would permit Tal to reap a windfall.
It seems fair and equitable to the Court to permit Plotkin to purchase Tal's share of the LLC, at a price predicated upon what Tal's actual investment, $269,320.86 ($170,000 + $99,320.86) plus 9% interest running from November 22, 2002. See,
CPLR 5002. This resolution seems appropriate to the Court, as it is more generous to Tal than the range of values based upon the 35¢ per $1 of revenue approach, as such values range from $200,886 to $239,161. This will allow Plotkin to continue to run his business provided he pays Tal his equitable share.
The Court deems it appropriate to award pre-judgment interest in this matter, the purpose of which is not to be punitive, but to indemnify Tal for the costs of Plotkin having the use of Tal's money from November 2002 through the present time. Van Nostrand v. Froehlich , 44 AD3d 54 , 57 (2d Dept. 2007), citing Love v. State of New York, 78 NY2d 540, 544 (1991); Trimboli v. Scarpaci Funeral Home, 37 AD2d 386, 389 (2d Dept. 1971), affirmed 30 NY2d 687 (1972). Since Plotkin has had the use of the money and has presumably used it to his benefit and has realized some profit from it, tangible or otherwise from having had it in his hands all along, there is nothing unfair about requiring him to pay over this "profit", in the form of interest, to Tal. See Love v. State, supra, 78 NY2d at 53. Rather than attempt to reconstruct what the actual profit was a task that borders on the herculean and struggle with how to deal with the fact that, after 2005, there was a second, independent business and, the fact that the original business gradually lost most of its locations and most of its machines fell out of use, it is preferable to allow Tal to regain his money, together with statutory interest. In reaching this conclusion, the Court is not unmindful of the fact that the statutory 9% interest rate is, at a minimum, a presumptively reasonable rate of return. Cf. Dubec v. New York City Housing Authority, 39 AD3d 410 (1st Dept. 2007) (suggesting that in action against public housing authority where court had discretion to apply a lesser interest rate, interest of 5.8% might not be an improvident exercise of discretion). In this fashion, Tal will obtain the return of his investment together with a reasonable return on that investment.
Plotkin points out that Tal was supposed to be making the payments on the Vernon Vending deal and that the LLC, meaning Plotkin, actually made those payments from December 2002 through September 2003. He urges that he be given a credit for the payments, totaling $35,879.90. This argument fails. First, in ascertaining Tal's interest, the Court has included only the payments Tal actually made and not the payments he should have made. Second, the Court cannot ignore the fact that Plotkin, in March 2003, took the $33,000 in the LLC bank account for himself. While it is not possible to ascertain whether much, if any, of that $33,000 was generated by profits prior to November 2002, it would be manifestly unfair to reduce Tal's investment in terms of dollars paid out by dollars paid out after Tal's departure, at least where Tal did not receive any money after he left. The $33,000 taken by Plotkin (and the payments made on the line of credit of which Tal received benefit) effectively cancels out any claim for a credit against monies unpaid to Tal.
B.The Counterclaims
The Court rejects the First Counterclaim in which it was contended that Tal had failed to pay $160,000 towards the purchase of the Vernon Vending assets. The evidence establishes that Tal made these payments (actually by the downpayment monies and by the periodic monthly payments deducted from Tal's distributions) until he left the business. To the extent that Tal did not pay the ten remaining installments totaling $35,879.40, and Respondents paid those, that issue has been addressed by crediting Tal only with the monies he actually contributed.
The Third Counterclaim, for $330,000 in damages, was withdrawn during the trial.
The Second Counterclaim has been established. Respondents are entitled to a credit for 50% of certain monies the Court finds owed by Tal to Plotkin and Superior Vending, LLC. As discussed previously, the Court finds that: Tal borrowed $10,000 which never was repaid; Tal removed another $10,000 from the company's safety deposit box; and Tal improperly retained $5,542.85, which he had used for his own business, TMR Consulting, Inc. Thus, Plotkin is entitled to a credit of 50% of $25,542.85, or $12,771.43.
C.Implementation
Based on the foregoing, Respondents shall be afforded the opportunity to purchase all of Tal's right, title, and interest in and to the LLC for $256,549.43 ($269,320.86 — $12,771.43) plus 9% interest thereon running from November 22, 2002 to the date of payment. Plotkin shall be afforded 45 days from the date of this Decision and Order to make payment. Petitioner shall be obligated to surrender all of his right, title and interest in the LLC in exchange for the payment of this sum.
In the event that Plotkin fails to purchase Tal's share of the business for at least the amount set forth above within 45 days from the date of this Decision and Order, then a receiver will be appointed. The receiver shall marshal the assets, pay debts, and liquidate the business. To the extent monies remain after the expenses of the receiver and the payment of just obligations, the monies shall first be applied to Plotkin's indebtedness to Tal, and, thereafter, any remaining monies would be distributed to Plotkin. In marshaling the assets, the receiver shall not be confined only to those assets which were in existence as of November 30, 2002. Because Plotkin effectively commingled the assets of the LLC with later-acquired assets, he may not now be heard to complain that Tal should be limited to enforcing his rights to principal in excess of $250,000 against assets now said to be worth $32,500. After all, Plotkin would recoup his investment by a sale of all of the assets. Plotkin has extracted significant monies from the vending machines during their useful lives without payment to Tal or recognition of the investment from Tal which made those monies possible. Rather, under the circumstances present, the Court believes that an equitable lien may be imposed upon all of the property of all vending machine entities operated by Plotkin to the extent of the amount invested by Tal, with interest. See Petrukevich v. Maksimovich, 1 AD2d 786 (2d Dept. 1956).
In order to avoid unnecessary expense, the Court will not appoint a receiver in this Decision and Order. Instead, the Court will provide that Petitioner is to submit a proposed Judgment within 45 days of the date of this Decision and Order; the Court will then designate a receiver in the Judgment to be signed and entered if the purchase by Respondents has not occurred. On the settlement date of the Judgment, counsel for each party shall submit an affirmation attesting to the status of the purchase.
Tal's request for attorney's fees, costs and disbursements is denied. Such an award may be made only where authorized by statute, court rule or written agreement of the parties. See, e.g., Matter of A.G. Ship Maintenance Corp. v. Lezak, 69 NY2d 1 (1986); Adams v. Washington Group, LLC , 49 AD3d 786 (2d Dept. 2008). Tal has not cited any statute or court rule that would support the awarding of litigation expenses to him. Nor is there any written agreement between the parties which would authorize such relief.
Tal's request for an accounting is denied as unnecessary in view of the relief granted herein. The cases cited by Tal in support of his claim for an accounting are not on point.
Kaufman v. Cohen, 307 AD2d 111 (1st Dept. 2003) held that, as a matter of pleading, plaintiffs had sufficiently alleged entitlement to an accounting against their former partner with respect to misappropriation of a partnership business opportunity arising from defendant's reacquisition of an interest in a partnership building following a foreclosure sale. In that case, it was alleged that defendant told his partners that the partnership interest in the building was not worth salvaging, though he was secretly agreeing with new partners to reacquire the building out of foreclosure at a substantial discount. Here, Tal has not brought a common law fraud claim and has not sought to establish that the acquisition of the Snack Time assets was a corporate opportunity in which he was properly entitled to share. Notably, Tal does not allege, nor did he testify, that, if he had known about the Snack Time acquisition, he would have contributed any funds towards the acquisition.
In Matter of Spires v. Lighthouse Solutions, LLC , 4 Misc 3d 428 (Sup. Ct. Monroe County 2004), a member of a limited liability company who had been excluded therefrom in October, 2003, commenced a dissolution proceeding on October 29, 2003. An order to show cause directed all parties not to sell or dispose of any assets of the company, except in the ordinary course of business, and required petitioner to maintain certain funds that he withdrew from the company in escrow. The court granted dissolution and, because the other members had continued to operate the business, directed an accounting and a report to the court and counsel for petitioner on the business of the company. This Court notes that the decision was rendered on May 6, 2004 and the order directed that the accounting and report be provided by May 12, 2004, just six days later. Here, because of Tal's laxity in pursuing his first dissolution proceeding, the passage of time, and the commingling of assets, it is clear that the business which existed at the time of the first proceeding in March, 2003 is no longer extant and that it is neither feasible nor just to order Plotkin to account for an enterprise which, at this point, consists mainly of assets acquired years after Tal's physical departure.
As both Tal and Plotkin have consented to dissolution of Superior Vending, LLC, the Court will direct, in accordance with Section 702 of the Limited Liability Company Law, that Tal, as the petitioner herein, file a certified copy of this Order of dissolution with the Department of State within 30 days of the date hereof. The Court will also direct, pursuant to Section 705 of the Limited Liability Company Law, Plotkin shall file articles of dissolution with respect to Superior Vending, LLC, within 90 days of the date of this Order of dissolution.
Any other and further relief requested by either party is denied.
CONCLUSION
Based upon the evidence adduced at the trial and the facts found and the conclusions of law stated above, it is hereby
ORDERED that Superior Vending, LLC shall be dissolved; and it is further
ORDERED that Petitioner Arik Tal shall file a certified copy of this Order with the New York State Department of State within thirty (30) days of the date hereof; and it is further
ORDERED that Respondent Peter Plotkin shall file articles of dissolution with respect to Superior Vending, LLC within ninety (90) days of the date hereof; and it is further
ORDERED that the winding up and distribution of assets of Superior Vending, LLC shall occur as follows; and it is further
ORDERED that Respondents Superior Vending, LLC and Peter Plotkin shall pay the sum of $256,549.43, together with 9% interest running from November 22, 2002 to the date of payment to Petitioner Arik Tal, as and for the return of his contributions and for his membership interest, such payment to be made within forty-five (45) days of the date hereof and, upon such payment, Petitioner Arik Tal shall be obligated to surrender all of his right, title and interest in Superior Vending, LLC; and it is further
ORDERED that, in the event Respondents shall fail to timely make the payment required by the preceding paragraph, the Court will appoint a receiver who shall marshal the assets of all vending machine entities owned or controlled by Respondent Peter Plotkin, without regard to whether such assets were in existence as of November 30, 2002, sell same, pay all just obligations of the business and to the extent monies remain after the expenses of the receiver and the payment of just obligations, the monies shall first be applied to pay Petitioner Arik Tal the sum of $256,549.43, together with 9% interest running from November 22, 2002 to the date of payment, and, thereafter, any remaining monies shall be paid to Respondent Peter Plotkin; and it is further
ORDERED that Petitioner Arik Tal shall prepare a proposed Judgment in accordance with the provisions of this Decision and Order and shall notice same for settlement before this Court within forty five (45) days of the date hereof, such proposed Judgment to be noticed for settlement in accordance with the provisions of 22 N.Y.C.R.R. § 212.33, and it is further;
ORDERED that, on the settlement date of the proposed Judgment, counsel for Petitioner and counsel for Respondents shall each serve and file an affirmation attesting to the status of the purchase provided for herein so that the Court may determine whether the appointment of a receiver is necessary and appropriate; and it is further
ORDERED that the application by Petitioner Arik Tal for attorney's fees, costs and disbursements is denied; and it is further
ORDERED that the application by Petitioner Arik Tal for an accounting is denied; and it is further
ORDERED that the Petition is sustained to the extent indicated above and is otherwise denied; and it is further
ORDERED that the First Counterclaim is dismissed; and it is further
ORDERED that the Second Counterclaim is sustained to the extent indicated above and is otherwise denied; and it is further
ORDERED that any and all other or different relief sought by any party herein is denied; and it is further
ORDERED that counsel for the parties shall contact the Court and make arrangements to retrieve, and to actually retrieve, their respective exhibits within thirty (30) days of the date hereof.
The foregoing constitutes the Decision and Order of this Court.