Opinion
108353/05.
Decided March 20, 2006.
This is an action by two minority members of a limited liability company, Pennington Property Co. LLC, the former owner of a building located at 316 West 95th Street on the Upper West Side of Manhattan.
Plaintiffs bring this action on their own behalf, and derivatively on behalf of the limited liability company, and on behalf of Pennington Property Co., the general partnership that previously owned the building, to redress claimed breaches of fiduciary duty by their fellow partners/members. The alleged breaches consist of the leasing of the LLC's property in 1994, and its subsequent sale in 2005, at prices that plaintiffs allege are far below fair market value. Plaintiffs also contend that the sale of the LLC's sole asset required the unanimous consent of the members, which was not obtained.
Defendant 316 Pennington LLC moves to dismiss the First Amended Complaint as against it, CPLR 3211(a)(1), (3) and (7), and to cancel the notice of pendency filed against its property, CPLR 6514.
Defendants Jay and Stuart Podolsky cross-move for the same relief, also arguing that plaintiffs' claims are barred by documentary evidence, that plaintiffs lack capacity to sue, and that the complaint fails to state a cause of action for aiding and abetting a breach of fiduciary duty.
Defendant Herbert Wolff cross-moves to dismiss as against him, CPLR 3211(a)(1), (3), (5) and (7), on the grounds of documentary evidence, lack of capacity, expiration of the statute of limitations with respect to the fifth cause of action, and failure to state a claim.
Defendant Solomon Freedman cross-moves for summary judgment dismissing the claims asserted against him, CPLR 3212.
The action has been discontinued as against defendant Sol Orbuch, and thus his cross motion for summary judgment is denied as moot.
Finally, plaintiffs cross-move for leave to file a second amended complaint, CPLR 3025(b).
FACTUAL ALLEGATIONS
In May of 1977, several individuals formed a general partnership called Pennington Property Co. to purchase a building located at 316 West 95th Street in Manhattan, known as the Hotel Pennington, which has seven floors and approximately 184 single-room-occupancy units (the Property). Originally, there were nine partners with the following ownership interests:
Plaintiff Steve Tzolis 10%
Plaintiff Vicky Tzolis 15%
Defendant Irving Goldofsky 10%
Defendant Sam Goldofsky 10%
Defendant Herbert Wolff 10%
Margot Wolff 25%
Rita Cwern 10%
Erna Berlin 5%
Bennet Cutler 5%
100%
Subsequently, defendants Toby Birnbaum and Mark Cwern acquired Rita Cwern's 10% interest. Defendant Herbert Wolff acquired Erna Berlin's and Bennet Cutler's 5% interests, and controls the shares owned by Margot Wolff, now deceased.
On October 1, 1980, the partnership leased the Property to non-party 316 West 95th Street Hotel Corp. for a 21-year term, expiring on September 30, 2001 (the First Lease).
Plaintiffs allege that, on November 1, 1994, seven years before the First Lease was to expire, the partnership secretly granted a new lease of the Property to defendant Pennington Leasing Corp. for a 30-year term, commencing on October 1, 2001 (the Second Lease). Plaintiffs allege that the shareholders of Pennington Leasing Corp. were all friends and family of certain of their partners, and that the lease rent was well below market value. Plaintiffs claim that they were not informed of the Second Lease until late in 2001, and that it was never approved or authorized by them.
On or about September 25, 1995, Pennington Property Co. LLC (Pennington LLC) filed Articles of Organization, converting the partnership to a limited liability company. The membership interests remained the same. The Articles of Organization provide that Pennington LLC is to be managed by one or more members. Plaintiffs allege, on information and belief, that defendant Herbert Wolff acted as the de facto manager of the company. No operating agreement was ever executed.
On or about May 1, 1997, Pennington Property Co. transferred the Property to Pennington LLC; the deed was recorded on May 30, 1997.
In 2003, defendant Parkway LLC, a company owned and controlled by defendants Jay and Stuart Podolsky, acquired Pennington Leasing Corp., lessee under the Second Lease.
On March 28, 2005, defendant Solomon Freedman, purportedly as a "Managing Member" on behalf of Pennington LLC, executed a contract to sell the Property to defendant 316 Pennington LLC, another company owned and controlled by the Podolskys. The sales price was $1.9 million. Plaintiffs allege that Freedman had no authority to act for Pennington LLC. It is noted that Freedman does not appear to be a member of Pennington LLC.
On April 26, 2005, approximately a month later, Freedman wrote a letter to each member of the LLC advising them of the sale and requesting and recommending that each sign an "Approval, Consent and Authorization" form enclosed with the letter. This document provided that, by signing, the member approved the sale of the Property for $1.9 million. Each signing member also consented to the buyer paying Freedman and Wolff a $100,000 fee "for negotiating the sale" of the Property, along with two other buildings, and authorized Freedman or Wolff to execute the deed on behalf of Pennington LLC. Defendants Wolff, Birnbaum and Cwern, together representing 55% of the members of Pennington LLC, signed the consent form.
Plaintiffs allege, upon information and belief, that Toby Birnbaum received approximately $50,000 of the $100,000 paid to Freedman and Wolff.
The First Amended Complaint contains six causes of action. The first and second seek declaratory judgments that the sale of the Property to 316 Pennington is void and that the Second Lease was unauthorized and also void, CPLR 3001. Plaintiffs allege that Freedman did not have the authority to sign the documents on behalf of Pennington LLC and that the sale was without the required consent or vote of the members because, as interested parties, Wolff and Birnbaum could not sign the consent forms. Plaintiffs further allege that the sale price was for substantially less than market value, and thus unlawful and unconscionable. In the second cause of action, plaintiffs allege that Parkway LLC's acquisition of Pennington Leasing Corp. (the holder of the Second Lease) constituted an assignment of the Second Lease, which required the landlord's prior written consent, and that consent was not obtained.
The remaining four causes of action assert claims for breach of fiduciary duty against the various defendants. Plaintiffs, both individually and on behalf of Pennington Property Co. and/or Pennington LLC, seek at least $10,000,000 in compensatory damages and an additional $1,000,000 in punitive damages.
The third cause of action, asserted against Wolff and Freedman, alleges that Wolf, as manager of Pennington LLC, and Freedman, as its attorney and authorized agent, owed a fiduciary duty to the company and to plaintiffs. Wolff and Freedman are alleged to have breached those duties by selling the Property for a small fraction of its value, and by receiving improper payments or benefits at the expense of the company or other members. The fourth cause of action, asserted against defendants 316 Pennington LLC, the Podolskys and Birnbaum, is for aiding and abetting the aforesaid claimed breach of fiduciary duty.
In the fifth cause of action, Wolff and the Goldofskys are sued based on their status as partners of Pennington Property Co. By entering into the Second Lease in 1994 with a company controlled by their family and friends at well below market value, these defendants allegedly engaged in self-dealing and wasted partnership assets, at the expense of the partnership and in breach of their fiduciary duties.
The sixth cause of action, asserted against Solomon Freedman, alleges that Freedman was and is the attorney for Pennington LLC, and, as such, owed plaintiffs fiduciary duties. Freedman allegedly failed to disclose that he had ownership interests in properties being simultaneously leased or sold to the Podolskys.
In support of their motion to further amend the complaint, plaintiffs clarify that it was Herbert Wolff, the HEW Limited Partnership and H.E. Wolff Trustee, which collectively acquired Erna Berlin's and Bennett Cutler's interests.
Plaintiffs further allege that defendants Wolff and Freedman together owned a majority interest in two other hotel properties, the Continental and the Montroyal, which are contiguous to the Property. In 2004, Wolff and Freedman began negotiating with the Podolskys for the sale of the Property together with the Continental and Montroyal. On May 6, 2004, Freedman sent a letter and memorandum to "all members" of the three limited liability companies owning the Continental, Montroyal and Pennington properties, advising that the Podolskys had made an offer to purchase all three properties for $7.3 million and recommending approval of the sale. Plaintiffs were not on the distribution list on this letter.
On October 27, 2004, Freedman's law partner sent another letter to the members of Pennington LLC, again excluding plaintiffs, advising about a further meeting with the Podolskys where they increased their offer for all three properties to $8.0 million. This letter also states that Wolff already had proxies from the majority of the members owning the Continental and Montroyal properties, and that he hoped to obtain a proxy for Pennington LLC.
On February 8, 2005, the Podolskys confirmed in writing the agreement under which they would pay $100,000 to Freedman and Wolff "for negotiating with your partners to obtain their consent and authorization to sell the [three] buildings." In addition, on April 4, 2005, the Podolskys agreed to assume and pay for the defense of Pennington LLC, Wolff, Freedman, Birnbaum, and Mark and Rita Cwern against any lawsuit brought by plaintiffs or other minority members of Pennington LLC.
Plaintiffs proposed Second Amended Complaint purports to add Pennington LLC as a direct plaintiff and the HEW Limited Partnership and H.E. Wolff Trustee as defendants. Plaintiff also seek leave to replace the existing fifth cause of action with a claim for breach of fiduciary duty solely against Sol Orbuch, and to assert a new sixth cause of action against 316 Pennington LLC and the Podolskys for commercial bribery.
head DISCUSSION
The first and second causes of action, which seek a declaration that the sale of the Property by Pennington LLC to 316 Pennington and that the acquisition in 2003 of the Second Lease by Parkway LLC were both unauthorized and void, must be dismissed, CPLR 3211(a)(3). Plaintiffs, as members holding a minority interest in Pennington LLC are not parties to the contract of sale or the Second Lease, and thus have no standing in their individual capacities to bring suit to rescind the sale or lease of the LLC's assets.
A shareholder lacks standing to pursue a direct cause of action to redress wrongs suffered by the corporation; rather such claims must be asserted derivatively, for the benefit of the corporation. Abrams v. Donati, 66 NY2d 951, 953 (1985), rearg denied 67 NY2d 758 (1986). In Golub v. Estate of Tesler ( 251 AD2d 46 [1st Dept 1998]), the Court held that the refinancing of a corporation's mortgage, without the plaintiff's consent, in violation of the parties' shareholders' agreement requiring such consent, was a wrong committed against the corporation that plaintiff may not assert in his individual capacity. See also Bassett v. Battle, 253 App Div 893 (2nd Dept 1938) (cause of action to rescind sale of corporate property allegedly without the consent of two-thirds of the shareholders belonged to corporation). Likewise, claims alleging waste and mismanagement on the part of the board of directors are derivative in nature. Lee v. 401-403 57th St. Realty Corp., 306 AD2d 108, 109 (1st Dept), lv dismissed in part, denied in part 100 NY2d 638 (2003); Bevilacque v. Ford Motor Co., 125 AD2d 516, 519 (2nd Dept 1986).
Nor do plaintiffs have any right to challenge the sale or lease derivatively, since New York law does not permit members to bring derivative actions on behalf of a limited liability company. When the Limited Liability Company Law (LLCL) was enacted in New York in 1994, a conscious decision was made by the Legislature to eliminate the right of an LLC's individual members to bring derivative actions. Early drafts of the bill had included such a right, but such provisions were deliberately eliminated. Rich, 2005 Practice Commentaries, McKinney's Cons Law of NY, Book 32A, Limited Liability Company Law, 2006 Supp Pamph, at 7. While one federal district court has held that the failure to include the right to bring a derivative action in the statute itself, does not prevent the court from relying on common law, which supports such a right ( Weber v. King, 110 F Supp 2d 124 [ED NY 2000]), the Second Department has since held that a member of a limited liability company does not have a right to bring a derivative action on behalf of the company. Hoffman v. Unterberg, 9 AD3d 386, 388-89 (2nd Dept 2004); see also Lio v. Zhong, 10 Misc 3d 1068 (A), Slip Copy, 2006 WL 37044 (Sup Ct, NY County 2006); Schindler v. Niche Media Holdings, LLC, 1 Misc 3d 713, 716 (Sup Ct, NY County 2003); Jacobs v. Educational Training Systems, Inc., Sup Ct, Nassau County, June 18, 2001, O'Connell, J., Index No. 20217/00. In the absence of a ruling on the issue by the First Department, this court is, of course, required to follow the only Appellate decision in this state on the point.
Plaintiffs also purport to rely on District Court Judge Denny Chin's decision in Cabrini Dev. Council, CDC Operations, Inc. v. LCA-Vision, Inc. ( 197 FRD 90, 94-95 [SD NY 2000], appeal dismissed in part, vacated in part, sub nom., Excimer Assoc., Inc. v. LCA Vision, Inc., 292 F3d 134 [2d Cir 2002]). However, that ruling related to a claim that a member of a limited liability company purporting to bring a derivative claim on its behalf had fraudulently joined the limited liability company as a defendant to defeat federal diversity jurisdiction. Judge Chin merely noted that there had been no case law on point at the time of the filing of the lawsuit in 1997, and that since that time, Weber v. King, supra, had recognized such a right under the common law, and that therefore, the "plaintiffs were not unreasonable in predicting that New York substantive law might grant them the relief they sought (emphasis added)." 197 FRD at 95. Indeed, later in the decision, Judge Chin expressly recognized that Weber may have been wrongly decided. Id. at 98.
Finally, plaintiffs contend that, as members of a member-managed limited liability company, they also have the authority to commence a lawsuit on behalf of Pennington LLC, naming it as a direct plaintiff, and now seek leave to amend their complaint to do so. However, as minority members of Pennington LLC, plaintiffs do not have authority to so act on behalf of the company. By their own admission, such a lawsuit would have to be approved by at least a majority of the membership interests, and the proposed amendment does not allege that such litigation has been approved by the members of Pennington LLC. See e.g. Heritage Co. of Massena v. LaValle, 199 AD2d 1036 (4th Dept 1993) (dismissing claims brought by a partner in the name of the partnership as unauthorized under the partnership agreement).
Plaintiffs further claim that they have the right to challenge the sale in 2005 and the acquisition of the Second Lease by the Podolskys in 2003 as partners of Pennington Property Co. However, it is undisputed that the Property was transferred from Pennington Property Co. to Pennington LLC on May 1, 1997. Whether or not that partnership still exists, the Property was indisputably owned by the limited liability company when the transactions that plaintiffs seek to rescind occurred, and thus any right to challenge those transactions belongs solely to Pennington LLC.
In paragraph "FIFTEENTH" of the partnership agreement, the partners agreed that the partnership shall continue and their agreement remain in full force and effect so long as the parties own the Property.
Accordingly, the first and second causes of action must be dismissed based on plaintiffs' lack of standing, CPLR 3211(a)(3). In view of the dismissal, the Notice of Pendency must be vacated, CPLR 6501.
Defendants also argue for dismissal of the remaining claims on the basis of documentary evidence showing that the sale of the Property was approved by 55% of the ownership interests of Pennington LLC, CPLR 3211(a)(1). Defendants contend that only a majority vote was needed pursuant to paragraph "TWENTIETH" of the 1977 partnership agreement. Plaintiffs argue, to the contrary, that the sale was an extraordinary event that needed to be approved by 100% of the members under paragraph "NINTH" of the partnership agreement, or if that agreement does not apply, by a two-third's majority pursuant to the pre-1999 version of LLCL § 402(d)(2). In addition, plaintiffs contend that the consents were insufficient under LLCL § 411, because defendants Wolff and Birnbaum both had a financial interest in the transaction, and thus their consents are invalid.
A key issue, therefore, is whether the 1977 partnership agreement governs the rights and duties of the parties herein. Pennington LLC filed Articles of Organization in 1995, converting the partnership to a limited liability company, with the membership interests remaining the same. The Articles of Organization provide that Pennington LLC is to be managed by one or more members. No operating agreement was ever executed. Both plaintiffs and defendant Wolff contend that the partnership agreement should be deemed the operating agreement for the company.
Defendants 316 Pennington LLC and Solomon Freedman, although not themselves members of the company, likewise argue that the partnership agreement continues to control the actions of the members of Pennington LLC.
Section 417(a) of the Limited Liability Company Law provides that the members of an LLC "shall adopt a written operating agreement" relating to the business of the company, the conduct of its affairs and the rights and powers of its members. LLCL § 417(c) permits the operating agreement to be entered into before the formation of the LLC. At least one court has held that a document can qualify as an operating agreement as long as it is in writing, executed by all of the members, and sets forth an agreement concerning voting and/or ownership of the company. Matter of Spires v. Lighthouse Solutions, LLC, 4 Misc 3d 428 (Sup Ct, Monroe County 2004). Here, as all parties appear to concede, the 1977 partnership agreement governs the rights and duties of the members of Pennington LLC, and thus supercedes the provisions of LLCL § 402(d) with respect to the consent needed to approve the sale of the company's sole asset.
Paragraph "NINTH" of the partnership agreement provides, in pertinent part, as follows:
NINTH: None of the parties shall, without the written consent of the others, on behalf of the partnership:
(a)Assign, transfer, pledge, compromise or release, any of its debts except upon payment in full, or arbitrate or consent to the arbitration of any of its disputes or controversies.
(b) Make, execute and deliver any . . . mortgage of any kind, deed, . . . contract to sell, or contract of sale of the partnership property or any other contract under seal whether similar or dissimilar to any of the foregoing.
(c)Hire or agree to hire any person or persons.
(d)Engage in any transaction with any person, partnership or corporation whom the other parties shall previously in writing, have requested him not to trust, deal with or transact business with (emphasis added).
Paragraph "TWENTIETH" of the partnership agreement provides:
TWENTIETH: It is expressly understood and agreed that all decisions shall be binding only when made by the partners holding the majority of the interest in the partnership.
Plaintiffs contend that these two provisions can be reconciled in that paragraph "NINTH" requires the written consent of all partners to certain extraordinary and special matters, while paragraph "TWENTIETH" merely requires a majority vote on matters which are more common and usual, and are not the extraordinary matters listed in paragraph "NINTH." Defendant 316 Pennington LLC (the only defendant to address this issue) contends that paragraph "NINTH" does not specify the necessary quantum of consent needed for such approval, and that the quantum of consent is provided in paragraph "TWENTIETH." Plaintiffs' construction of the partnership agreement is also challenged as requiring unanimous consent for every conceivable act of a real estate holding company, and would purportedly render paragraph "TWENTIETH" meaningless.
In making this argument counsel for 316 Pennington LLC misquotes paragraph "NINTH." The phrase reads that no partner shall sell partnership property "without the written consent of the others," (emphasis added), while defense counsel omits the underlined word and quotes this provision as "without written consent of the others," ( see 316 Pennington LLC's Reply Mem. of Law, at p. 7).
Plaintiffs' interpretation seems the correct way to read these two provisions, and is consistent with the Partnership Law, which also distinguishes between ordinary and extraordinary acts. Section 20(2) of the Partnership Law requires all of the partners to authorize an act "not apparently for the carrying on of the business of the partnership in the usual way," while Partnership Law § 40(8) provides that any differences as to "ordinary matters connected with the partnership business" may be decided by majority vote.
The fact that defendants offer a different interpretation of these two paragraphs does not render the partnership agreement ambiguous so as to warrant a trial. Bethlehem Steel Co. v. Turner Constr. Co., 2 NY2d 456, 460 (1957); American Para Professional Sys., Inc. v. Hooper, 13 AD3d 167, 169 (1st Dept 2004); Moore v. Kopel, 237 AD2d 124, 125 (1st Dept 1997). In addition, the language of paragraph "NINTH" is not so broad as to require unanimous consent for all actions taken by the partnership. For instance, leasing the Property is not listed as an action requiring unanimous consent Moreover, it is the defendants' proposed construction that a majority vote controls all matters that would render paragraph "NINTH" meaningless. "The task of the court is to enforce the plain meaning of an unambiguous agreement, rather than to accept a construction that would render a purposeful provision of the contract meaningless." Bluebird Partners, L.P. v. First Fidelity Bank, N.A., New Jersey, 248 AD2d 219, 224 (1st Dept 1998) (citations omitted).
Even assuming a majority vote was all that was required, plaintiffs argue that the consents of defendants Wolff and Birnbaum were insufficient under LLCL § 411(a)(1) because they had a financial interest in the transaction. LLCL § 411 provides that where a manager has a "substantial financial interest" in a contract, the contract is not void or voidable for this reason, if the material facts are disclosed in good faith and the contract is approved by either the disinterested managers or the members.
Here, plaintiffs allege that Wolff acted as the de facto manager of Pennington LLC, and that he did not adequately disclose: (1) the real purpose of the $100,000 fee; (2) that Toby Birnbaum was to receive a portion of that fee; (3) his interest in the other hotel properties being sold; or (4) his indemnification agreement with the Podolskys. Defendants' documentary evidence fails to conclusively refute plaintiffs' allegations that Wolff had a substantial financial interest in the transaction which was adequately disclosed in good faith to all of the members of Pennington LLC, such that his consent to the sale should be counted. Goshen v. Mutual Life Ins. Co. of NY, 98 NY2d 314, 326 (2002) (a motion under CPLR 3211(a)(1) may only be granted "where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law").
Accordingly, the motions to dismiss based on documentary evidence, CPLR 3211(a)(1), are denied.
The existing third and sixth causes of action adequately state claims against defendants Wolff and Freedman for breach of fiduciary duty to the plaintiffs. Likewise, the fourth cause of action adequately states a cause of action against 316 Pennington LLC and the Podolskys for aiding and abetting a breach of fiduciary duty by Wolff and Freedman.
Managing members have statutory and common-law fiduciary duties to the members of the company. LLCL § 409; Salm v. Feldstein, 20 AD3d 469, 470 (2nd Dept 2005); Nathanson v. Nathanson, 20 AD3d 403, 404 (2nd Dept 2005). A minority member of a limited liability company may sue other managing members, based upon claims of breach of fiduciary duty; such claims are a personal right that belongs to the minority member. Lio v. Zhong, 10 Misc 3d 1068 (A), supra, citing Burkhard, J., "LLC Member and Limited Partner Breach of Fiduciary Duty Claims: Direct or Derivative Actions," Journal of Small and Emerging Business Law, vol. 19 (Spring 2003). If Wolff, as plaintiffs allege, operated as Pennington LLC's de facto manager, he owed a fiduciary duty to the minority members of the company, including the plaintiffs herein.
Likewise, Freedman, as the company's counsel and purportedly as its authorized agent, owed Pennington LLC's minority members a fiduciary duty. Collins v. Telcoa Intl. Corp., 283 AD2d 128, 134 (2nd Dept 2001) (allegations that corporation's attorney had duty to act responsibly to protect minority shareholder's interests adequately stated cause of action for attorney's breach of fiduciary duty); Franco v. English, 210 AD2d 630, 634 (3rd Dept 1994) (lawyer's fiduciary duty extended to limited partners).
A fiduciary is charged with a "duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect." Birnbaum v. Birnbaum, 73 NY2d 461, 466 (1989). Where a conflict of interest exists, nothing less than full and complete disclosure is required of the fiduciary. Salm v. Feldstein, supra, 20 AD3d at 470.
Plaintiffs allege that Wolff and Freedman failed to make full disclosure of their conflict of interest to all members of Pennington LLC, in that they did not disclose their membership interests in Continental and Montroyal, the dispute over the 55-year lease on Continental, or the nature of the package deal they had arranged with the Podolskys. In addition, they allegedly failed to disclose that the Podolskys had agreed to defend them in any lawsuits commenced by plaintiffs or other minority members. Plaintiffs also contend that the consent forms incorrectly described the $100,000 payment to Wolff and Freedman as one for "negotiating the sale" of the three properties, when, in fact, plaintiffs contend, the payment was for acquiring the extra 10% they believed was required to sell the Hotel Pennington, because the members of Continental and Montroyal limited liability companies had already approved the deal several months earlier.
It bears repeating that, on a motion to dismiss for failure to state a claim, the complaint should be given a liberal construction, its factual allegations are to be taken as true, and the court is limited to ascertaining "whether the facts, as alleged, fit within any discernible legal theory." Sheila C. v. Povich, 11 AD3d 120, 122 (1st Dept 2004). Accordingly, accepting all of the plaintiffs' allegations and the inferences that plaintiffs draw from them as true, a breach of fiduciary claim is stated against Wolff and Freedman.
Freedman moves for summary judgment dismissing the breach of fiduciary duty claims asserted against him, CPLR 3212. In considering a summary judgment motion, as contrasted to a motion to dismiss, the court is not required to accept all of the complaint's allegations as true; rather, the court must determine whether a material and triable issue of fact exists from the admissible evidence submitted. Sheehan v. Gong, 2 AD3d 166, 168 (1st Dept 2003).
In support of his motion, Freedman avers that the $100,000 fee he and Wolff received was for negotiating the sale of all three properties, and was disclosed to all of the members of Pennington LLC. He further avers that his actions on behalf of the company were approved and authorized by the majority of the members, and that he did not fail to disclose his ownership interests in the other two hotels. With respect to the latter contention, specifically, he avers that "many of the Members of the selling LLC were also Members of the two (2) other entities simultaneously being sold to the Podolskys; all of whom including the Plaintiffs attended meetings at which the ownership by me or members of my family in the other properties, were constant topics of discussion, so that all Members were fully informed of that fact." Freedman 11/04/05 Aff., ¶ 23. In his reply affidavit, he again states that he personally discussed his interest in the other two properties with plaintiff Steve Tzolis at many meetings. Freedman 11/30/05 Aff., ¶ 13.
In opposition to Freedman's motion for summary judgment, plaintiff Steve Tzolis points out that he was not copied on either the May 6 or October 27, 2004 letters purportedly sent to the members of all three limited liability companies, and was never notified of any meeting or vote by the members of Pennington LLC, as contemplated in the May 6th memorandum. Tzolis 12/8/05 Aff., ¶ 14. Steve Tzolis further contends that he did not know, at the time he was asked to consent to the sale, that Freedman wished to sell his interest in Continental and Montroyal, or even that he owned an interest. Id., ¶ 15. He further contends that he was unaware of the February 8, 2005 agreement between the Podolskys and Wolff and Freedman concerning the $100,000 fee or the Podolskys' agreement to provide a defense to any legal challenge. The court cannot determine who is telling the truth on this issue, from papers alone.
Accordingly, issues of fact exist as to whether Freedman made full disclosure of his interest in the sale of the Property, and the other hotels, to all of the members of Pennington LLC. Particularly lacking from this defendant's papers is an explanation as to why the plaintiffs were not copied on the May 6th and October 27, 2004 correspondence, advising and discussing the negotiations with the Podolskys. Therefore, Freedman's motion for summary judgment is denied.
To state a claim for aiding and abetting a breach of fiduciary duty, a plaintiff must plead a breach of fiduciary duty, that the defendant knowingly induced or participated in the breach, and damages resulting from the breach. Kaufman v. Cohen, 307 AD2d 113, 125 (1st Dept 2003). "A person knowingly participates in a breach of fiduciary duty only when he or she provides substantial assistance' to the primary violator." Id. at 126.
Plaintiffs allege that the Podolskys' $100,000 payment to Wolff, Freedman and/or Birnbaum, and their agreement to pay for the cost of defending any litigation plaintiffs may commence, was intended as a bribe to obtain the necessary consents to the sale for substantially less than fair market value. Assuming the truth of these claims, the complaint adequately states a claim against these defendants for aiding and abetting a breach of Wolff and Freedman's fiduciary duties to the plaintiffs. Accordingly, the motions seeking dismissal of the fourth cause of action are denied.
Plaintiffs' existing fifth cause of action for breach of fiduciary duty in connection with the Second Lease is barred by the statute of limitations. A claim for breach of fiduciary duty which seeks monetary damages must be brought within three years from the date of the breach. Kaufman v. Cohen, 307 AD2d at 118. The First Amended Complaint alleges that defendants Wolff and the Goldofskys breached their fiduciary duties as partners of Pennington Property Co. by granting the Second Lease on November 1, 1994 for a rent that was well below market value. Since the acts complained of occurred on or prior to November 1, 1994, over ten years before this action was commenced on June 16, 2005, the claim is time-barred. Even assuming the truth of plaintiffs' allegations that they were not informed that the Second Lease had been granted, until November 2001, and that some type of equitable tolling applies, their claim is still time-barred because plaintiffs still waited more than three years following this discovery to bring suit.
In opposition to Wolff's cross motion for dismissal of this claim, plaintiffs' counsel argues that "defendants' statute of limitations defense is specious. All of the alleged breaches of fiduciary duty, beginning with Wolff's unauthorized consent to transfer the underlying lease to the Podolsky's, occurred no earlier than 2003." Pls. Mem. of Law, at 14. As discussed above, plaintiffs lack standing to challenge the purported assignment of the Second Lease to Parkway LLC in 2003, and their claims with respect to the granting of the Second Lease back in 1994 are, in fact, dropped from the proposed Second Amended Complaint.
The fifth cause of action is dismissed.
Finally, plaintiffs' cross motion for leave to serve and file a Second Amended Complaint is granted in part, and denied in part. As discussed above, plaintiffs may not add Pennington LLC as a direct plaintiff, and leave to amend is denied with respect to the proposed new fifth cause of action, since the action has been discontinued as to Sol Orbuch.
Plaintiffs also seek leave to add a new sixth cause of action against 316 Pennington LLC and the Podolskys for commercial bribery, i.e., violation of Penal Law § 180.03. While leave to amend is freely granted absent prejudice or surprise to the opposing party ( Zaid Theatre Corp. v. Sona Realty Co., 18 AD3d 352, 354-55 [1st Dept 2005]), where, as here, the proposed amendment is completely devoid of merit and legally insufficient, leave to amend should be denied ( Heller v. Louis Provenzano, Inc., 303 AD2d 20, 25 [1st Dept 2003]). Plaintiffs contend that New York recognizes a civil cause of action for commercial bribery, citing to Niagara Mohawk Power Corp. v. Freed ( 265 AD2d 938, 939 [4th Dept 1999]). However, plaintiffs' counsel fails to cite to binding First Department precedent rejecting the Fourth Department's holding in Niagara Mohawk, and concluding that there is no private right of action for commercial bribery. Sardanis v. Sumitomo Corp., 279 AD2d 225, 229-30 (1st Dept 2001); see also Wint v. ABN Amro Mtge. Group, Inc., 19 AD3d 588, 589-90 (2nd Dept 2005) (agreeing with First Department in Sardanis, that no private right of action exists for a violation of Penal Law § 180.03, and declining to follow Niagara Mohawk).
Accordingly, plaintiffs' cross motion to serve and file a second amended complaint is granted only to the extent of adding the new factual claims, and denied with respect to the first, second, fifth and sixth causes of action.
The action is further dismissed as against defendants Irving and Sam Goldofsky, Rita Cwern, Pennington Leasing Corp. and Parkway LLC., only named as defendants with respect to the first, second and fifth causes of action, now dismissed.
CONCLUSION AND ORDER
For the foregoing reasons, it is
ORDERED that the motion by defendant 316 Pennington LLC and the cross motion by defendants Jay Podolsky and Stuart Podolsky for dismissal of the First Amended Complaint is granted to the extent of dismissing the first and second causes of action pursuant to CPLR 3211(a)(3) and the notice of pendency pursuant to CPLR 6501, and is denied in all other respects; and it is further
ORDERED that the cross motion by defendant Herbert Wolff to dismiss the First Amended Complaint is granted to the extent of dismissing the first and second causes of action pursuant to CPLR 3211(a)(3) and the fifth cause of action pursuant to CPLR 3211(a)(5), and is denied in all other respects; and it is further
ORDERED that the cross motion by defendant Solomon Freedman for summary judgment is denied; and it is further
ORDERED that the cross motion by defendant Sol Orbuch for summary judgment is denied as moot; and it is further
ORDERED that plaintiffs' cross motion for leave to serve and file a Second Amended Complaint is granted only to the extent of adding the new factual claims, and denied with respect to plaintiffs' proposed first, second, fifth and sixth causes of action; and it is further
ORDERED that the action is dismissed as against defendants Irving Goldofsky, Sam Goldofsky, Rita Cwern, Pennington Leasing Corp. and Parkway LLC.; and it is further
ORDERED that the clerk may enter an order of dismissal in favor of said defendants against the plaintiffs accordingly; and it is further
ORDERED that the action shall continue as to the other defendants; and it is further
ORDERED that plaintiffs are directed to serve and file the Second Verified Amended Complaint, in conformity with this opinion and order, within twenty (20) days of service of a copy of this order with notice of entry upon their attorneys; and it is further
ORDERED that defendants Herbert Wolff, 316 Pennington LLC, Jay Podolsky, Stuart Podolsky, Solomon Freedman, and Toby Birnbaum are directed to serve and file an answer to the Second Verified Amended Complaint within 20 days from the date of service of said Amended Verified Complaint; and it is further ORDERED that the Clerk of the County of New York is directed to cancel the Notice of Pendency filed on June 16, 2005 against the property located at 316 West 95th Street, New York, New York 10025, designated on the land map of New York County as Section 1, Block 1253, Lot 38, upon the service of a copy of this order with notice of entry by counsel for 316 Pennington LLC.