Zulawski v Taylor
Annotate this CaseDecided on July 1, 2005
Supreme Court, Erie County
Paul Thomas Zulawski, Jr., Plaintiff,
against
Richard Taylor, THOMAS DESIGN GALLERY, LLC, PATRICIA HARTNER, DONALD G. POWELL, ESQ., and ZDARSKY, SAWICKI & AGOSTINELLI, Defendants.
2004/12400
Stephen A. Sharkey, Esq.
R. Anthony Rupp, Iii, Esq.
Rupp, Baase, Pfalzgraf, Cunningham & Coppola, LLP
Attorneys for Plaintiff
Larry Kerman, Esq.
Blair & Roach, Llp
Terence B. Newcomb, Esq.
Terrence M. Connors, Esq.
Connors & Vilardo
Attorneys for Defendants
Eugene M. Fahey, J.
Plaintiff, Paul Thomas Zulawski, Jr., brings this action against Defendants, Richard Taylor, Thomas Design Gallery, LLC, Patricia Hartner, Douglas Powell, Esq. and Zdarsky, Sawicki & Agostinelli, for a declaratory judgment, breach of contract, fraud, breach of fiduciary duties, slander, tortious interference, legal malpractice, dissolution, unjust enrichment and an accounting.
Defendants, Richard Taylor and Patricia Hartner, move to dismiss the causes of action against them.
Defendant, Thomas Design Gallery, LLC, also moves to dismiss the causes of action against it.
Defendant Taylor's motion to dismiss is denied in its entirety. [*2]
Defendant Hartner's motion to dismiss is denied in its entirety.
Defendant Thomas Design's motion to dismiss is also denied in its entirety.
Under these circumstances, for the purposes of dismissal for failure to state a cause of action, CPLR §3211(a)(7), the Court is constrained to deem that the pleading's allegations are true, and that the pleader is entitled to every favorable inference that might be drawn (see Westhill Exports Ltd. V. Pope, 12 NY2d 491 [1963]).
The allegations in the Complaint may be summarized as follows:
Plaintiff Zulawski was the owner of Thomas Custom Interiors, an interior decorating business in Williamsville. He desired to expand the business and eventually began discussions with Defendant Taylor as a potential investor. The two then agreed to form a limited liability company, an "LLC", to operate the business, and sharing equally in profit and management duties.
The two then retained an attorney to draft the terms of the formation of the LLC, Defendant, Donald Powell, of Defendant, Zdarsky, Sawicki and Agostinelli. Powell had represented both men on earlier occasions.
Powell then drafted Articles of Organization for the proposed LLC, Defendant Thomas Design Gallery. He also drafted an Operating Agreement, Demand Grid Note and General Security Agreement and forwarded them to Plaintiff Zulawski for his review.
A grand opening for the new business was scheduled for September 17, 2004 at 4:00 p.m. At 2:00 p.m. Zulawski received a telephone call from Powell asking whether he was ready to sign the various agreements. Zulawski then told Powell he had not yet had an adequate opportunity to review them and was not prepared to sign.
Ten minutes later, Zulawski received a phone call from Taylor telling him to sign the Agreement or he would cancel the grand opening.
The three then met at the business, where Taylor and Powell presented Zulawski with modified versions of the various agreements, as well as two entirely new documents, an Employment Agreement with respect to Zulawski's Presidency of the LLC, and a "conflict waiver" prepared by Powell - that in the event of a dispute between Taylor and Zulawski, that Powell and his law firm would represent Taylor, and Zulawski would obtain separate counsel.
Zulawski then objected to signing anything and indicated he needed an attorney.
Taylor then told Zulawski to sign or he would bankrupt him. Zulawski signed the documents.
The altered documents effectively stripped Zulawski of any managerial authority over the business and Defendant Hartner, who had been appointed manager by Taylor, almost immediately began firing business employees, and making disparaging remarks about Zulawski to customers, employees, suppliers and vendors.
On October 29, 2004, Taylor notified Zulawski that he was fired. At a meeting at the store, Taylor informed the employees that Zulawski had been removed from the LLC because he was mentally and physically ill.
As to Plaintiff Zulawski's first cause of action, for a declaratory
judgment action declaring the demand Grid Note and General[*3]
Security Agreement null and void.
First, Defendant Taylor contends that first Zulawski is not a proper party to assert a claim because the Note and Security Agreements were drafted between Taylor and Zulawski on behalf of Defendant Thomas Design, and under the Limited Liability Company Law §610, a member is not a party to assert a claim that belongs to the LLC.
Secondly, Defendant Taylor argues that Section 8.1.1 of the Operating Agreement appointed him as manager of the Company, Defendant Thomas Design, with all powers of the Company to be exercised by him, that he then designated Plaintiff Zulawski to execute the note and security agreement on behalf of Thomas Design and that therefore there is no basis to assert that the Note and Security Agreement are null and void.
The Court is persuaded that each claim is without merit.
As to the first, §610 of the LLCL reads in its entirety:
"A member of a limited liability company is not a proper party to proceedings by or against a limited liability company except where the object is to enforce a members right against or liability to the limited liability company." (emphasis added).
Under the facts alleged here to the extent that the claim is stated against the LLC, rather than Defendant Taylor individually, the exception to the rule in §610 clearly controls.
As to the second argument, Plaintiff Zulawski's signature, in whatever capacity, evaporates from the agreements, if a fact finder were to conclude a wrongful act or threat overcame Zulawski's will, as is his claim in the Complaint (see Austin Instrument, Inc. v. Loral Corp., 29 NY2d 124 [1971]). And any assertion that Zulawski is not a proper party to lodge such a claim flies in the face of logic and equity.
Defendant Taylor's motion to dismiss the first cause of action is denied.
As to the second cause of action sounding in contract fraud
as to the Operating Agreement.
Defendant Taylor contends that documentary evidence provides a complete defense and that he is not a proper party pursuant to LLCL §609.
More specifically, again the claim is that §609(a) precludes Zulawski's claim against Taylor, in that member Taylor is not a proper party to an action against the LLC.
The Section reads in pertinent part:
"Liability of members, managers and agents: (a) Neither a member of a limited liability company, a manager...not an agent...is liable for any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely (emphasis added) by [*4]being such member...or by acting (or omitting to act) in such capacities or participating...in the conduct of the business."
Defendant Taylor has not explained why the second cause of action should be construed as a claim for liability against the LLC. The cause of action clearly relates to the formation of the LLC by Plaintiff Zulawski and Defendant Taylor and Taylor's individual obligations to Zulawski under the agreement. The terms of §609(a), addressing individual member liability for LLC liability solely on the basis of being a member or acting in the conduct of LLC business, do not appear germane to the cause of action here, where the Court is dealing with allegations made by one member of the LLC against the only other member.
Here is what one learned treatise has said concerning the protection offered to members by the Section: "In many ways the members of an LLC have the same protection as shareholders of corporations...""New York courts have not yet addressed the circumstances under which it might be appropriate to pierce the veil" of an LLC to hold its members personally liable for the obligations of the entity. It seems likely that a corporate standard would be applied, and that the veil would be pierced only in egregious situations where, for example, a member has treated the LLC consistently as its alter ego or used it to commit fraud (NY Prac., New York Limited Liability Companies and Partnerships §3:3).
Defendant Taylor's motion to dismiss the second cause of action is denied.
As to Defendant Taylor's motion to dismiss the fourth cause
of action, for fraud.
None of the cases cited by Defendant Taylor involve a motion to dismiss under CPLR §3211, but rather at trial save F&M Precise Metals, Inc. v. Goodman, 2004 WL 2059567, which is readily distinguishable on its facts, in that the plaintiff there was represented by counsel, and it was clear that the defendant has signed the contract in a non-individual capacity.
The Court is persuaded that Plaintiff Zulawski has sufficiently alleged that Defendant Taylor made false promises with the undisclosed intention not to perform, thereby inducing Zulawski to enter the contractual relationship. A contractual promise
made with the undisclosed intention not to perform it constitutes fraud (Manufacturers & Traders Trust Co. v. Cottrell, 71 AD2d 538, 543, 422 NYS2d 990, quoting Sabo v. Delman, 3 N.Y,2d 155, 162, 164 NYS2d 714, 143 NE2d 906; see, Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 NY2d 954, 956, 510 NYS2d 88, 502 NE2d 1003) (see also, Graubard Mollen Dannett & [*5]Horowitz v. Moskovitz, 86 NY2d 112, 122, 629 NYS2d 1009, 653 NE2d 1179).
Defendant Taylor correctly contends that a party cannot recover damages for fraud and also seek rescission citing Vitale v. Coyne Realty, 66 AD2d 562 (4th Dept. 1979). That does not stand for the proposition that a plaintiff cannot initially seek damages and rescission.
As the learned Justice John Callahan said in his dissent in Vitale, supra at 568, in an area where the majority was in general agreement (563),
"CPLR 3002 permits pleading of inconsistent causes of action and specifically permits pleading of a claim for damages for fraud and for rescission. However, a plaintiff must elect a remedy...At what point in the trial election must be made should be determined by the trial judge in light of the record as it develops...(citations omitted)"
There is no requirement for election in the pleadings.
Defendant Taylor's motion to dismiss the fourth cause of action is denied.
As to Defendant Taylor's motion to dismiss the fifth cause of
action for breach of duty.
The Court has already dealt with the question of one member bringing suit against another member of an LLC above, to conclude that LLCL §§609 and 610 do not work a bar.
The Court takes it that the question of whether a fiduciary relationship exists between parties "is necessarily fact specific to a particular case (Weiner v. Lazard Everest Co., 241 AD2d 114, 122 [1st Dept. 1998])".
The acts of loaning money, working in concert, and managing an LLC, all in relation to another member of a two member LLC, arguably give rise to a relationship analogous to the embarkation on a joint venture or partnership.
The learned Justice Austin has addressed the question in terms that suggest that such an action will lie.
"(P)artners in joint ventures, however constituted (emphasis added), owe one another a fiduciary duty of loyalty. The duty includes an obligation not to favor one's own interests over those of the joint venture, to unfairly manipulate or control corporate processes to retain control or to appropriate for oneself an opportunity that belongs to the joint venture. A partner has a fiduciary obligation to other partners in the organization and owes a duty of individual and [*6]undiluted loyalty to those whose interests the fiduciary is to protect...This is an inflexible rule of fidelity which bars not only blatant self-dealing but also requires avoidance of situations in which a fiduciary's personal interest might possibly conflict with the interests of those to whom the fiduciary owes a duty of loyalty...(citations omitted) (Salm v. Feldstein, 2004 WL 1944988, Nassau Cty. 2004)."
Defendant Taylor also raises Edwil Indus. v. Stroba Instruments Corp., 131 AD2d 425 (2d Dept. 1987) for the proposition that the allegations for breach of fiduciary duty must allege that the breach be distinct from the contract between the parties.
The case is not on point. Edwil, supra upheld the dismissal of a cause of action for fraud when the only fraud alleged related to contract breach.
The proper standard for withstanding a dismissal motion is contained in Labart v. Seneca Resources Corp., 285 AD2d 974 (4th Dept. 2001) at 976, 977:
"...it is well established that the same conduct constituting the breach of a contractual obligation may also constitute the breach of a duty arising out of the relationship created by the contract but independent of the contract itself (citations omitted)...'This legal duty must spring from circumstances extraneous to, and not constituting elements of the contract, although it may be connected with and dependent upon the contract' (Bristol-Meyers Squibb v. Delta Star, 206 AD2d 177, 179)."
Certainly, Plaintiff Zulawski has pled allegations decidedly distinct from the allegation of contract breach, effectively summed up at page 10 of his Memorandum of Law:
"...that Taylor, acting in concert with Hartner, plotted to expel' plaintiff from the LLC and steal his interest in the business and waged a campaign to damage plaintiff and his business relationships with existing vendors, customers and suppliers of the LLC by disparaging his business reputation, all while occupying a position of trust as plaintiff's co-member of the LLC..." [*7]
Borrowing from Labart, supra at 977, it may well be unclear at this stage in the litigation whether the Plaintiff will succeed in establishing a fiduciary relationship with Defendant separate and distinct from the contractual relationship, he has undeniably stated a cognizable cause of action for breach of fiduciary duties.
Defendant Taylor's motion to dismiss the fifth cause of action is denied.
As to Defendant Taylor's motion to dismiss the sixth cause
of action, for slander.
The motion alleges (1) failure to state a cause of action and (2) failure to plead with sufficient particularity pursuant to CPLR §3016(a).
In that regard, the Complaint reads at paragraph 92,
"Specifically, Taylor made the following statement:
At a meeting with employees of the Business on October 29, 2004, Taylor informed the employees that plaintiff had been removed from Thomas Design Gallery, LLC because he was mentally and physically ill.'"
As to the first point raised by Taylor, the cases cited involving simple newspaper reports of illness, cancer in one instance and AIDS in the other, and are readily distinguishable on those facts.
Golub, as executor of Chen Sam v. Enquirer/Star, 89 NY2d 1074, at 1076 actually illustrates the distinction between our case and the others.
" Generally, a written statement may be defamatory if it tends to expose a person to hatred, contempt or aversion, or to induce an evil or unsavory opinion of him in the minds of a substantial number of the community'...Even on a professional level, a defamatory meaning may attach to derogatory statements that would cause apprehension about a person's ability to conduct business.
In that sense, the statement that plaintiffs' decedent had cancer did not defame her in her trade, business or profession. To be actionable as words that tend to injure another in his or her profession, the challenged statement must be more than a general reflection upon decedent's character or qualities. Rather, the statement must reflect on her performance or be incompatible with the proper conduct of her business...words must have such a relation to the [*8]profession or occupation of the plaintiff that they directly tend to injure him in respect to it'. Here, however, the statement did not impugn, or even relate to, any particular talent or ability needed to perform in decedent's profession as a publicist (citation omitted)."
A person who utters a false and misleading statement harmful to the interests of another may be held liable for damages resulting therefrom, if the statement is uttered maliciously and with the intent to harm another, or is done recklessly and without regard to its consequences, and a reasonably prudent person would or should anticipate that damage to another would naturally flow therefrom (see Penn-Ohio Steel Corp. v. Allis-Chambers, 7 AD2d 441 [1st Dept. 1959]).
The cause of action lays out the necessary elements to the claim.
As to the question of sufficient particularity, Defendant Taylor cites our earlier case, Brett v. Arthur, Erie County Index No. 1998/2039. That case involved the mixing of paraphrase and quoted fragments from a letter, and included the dropping of the words "we believe" in one of the quoted fragments. Examining the letter, the Court concluded that it appeared to be no more then an expression of opinion as a matter of law.
The Court is of the opinion that the requirement for particularity is less stringent where the statement is uttered rather than written. Siegel in his Practice Commentaries has looked favorably that the plaintiff plead the quoted words as close as possible to what they are believed to be. "If at trial it turns out that the words are not precisely the same, but close enough and equally defamatory, the plaintiff can then move for an order conforming the pleadings to the proof (McKinney Consol. Laws CPLR §3016 C3016:2 p. 66)."
Defendant Taylor's motion to dismiss the sixth cause of action is denied.
As to Defendant Hartner's motion to dismiss the seventh cause
of action sounding in slander against her.
The statements alleged against her are:
"In or around September or October of 2004, Hartner informed a supplier, Dan Macafoose that people from Arizona were after [plaintiff] for money he owed them' and that Macafoose would never get a dime from [plaintiff] because that is the scam he runs.'; and
In or around September or October of 2004, Hartner stated to Tom Procnow of Tucker Homes, Inc., a vendor of the Business, that plaintiff had screwed over everyone in Town' and that he owed everyone money.'"
Defendant Hartner contends that dismissal is warranted in that the statements are mere opinion and that special damages must be shown. [*9]
Both contentions are without merit.
"With respect to an oral charge that a person is dishonest or is cheating, or is a cheat, rascal, swindler or the like, special damages must be shown or the charge must be made of a person in connection with his occupation or with reference to his methods of carrying on business in order to render such a charge actionable (emphasis added) (NY Jurisprudence 2d, Defamation and Privacy §31, citing Lyford v. Winters, 163 AD2d 720 [1914], see also Grimaldi v. Schillaci, 106 AD2d 728 [3d Dept. 1984])."
The Court is persuaded that the words are reasonably susceptible of a defamatory meaning.
Defendant Hartner's motion to dismiss the seventh cause of action is denied.
As to Defendants Taylor and Hartner's motion to dismiss the eighth
cause of action for tortious interference with prospective economic
advantage, for failure to state a cause of action.
The case cited by Defendant again works to illuminate why the cause of action properly stands.
Carvel Corporation v. Noonan, 3 NY3d 182 [2004], involved a post-jury appeal on a tortious interference claim by a Carvel Ice Cream franchisee, when Carvel began selling its ice cream through supermarkets. The Court outlined the appropriate standard from NBT Barcorp Inc. v. Fleet/Norstar, 87 NY2d 614 (1999):
"[T]he degree of protection available to a plaintiff for a competitor's tortious interference with contract is defined by the nature of plaintiff's enforceable legal rights. Thus, where there is an existing, enforceable contract and a defendant's deliberate interference results in a breach of that contract, a plaintiff may recover damages for tortious interference with contractual relations even if the defendant was engaged in lawful behavior. Where there has been no breach of an existing contract, but only interference with prospective contract rights, however, plaintiff must show more culpable conduct on the part of the defendant. (87 NY2d at 621 [citations omitted])."
Here, as in Carvel, supra , it is the second circumstance, where there has been no breach of an existing contract, and where the plaintiff must show more culpable conduct on the part of the defendant than deliberate interference creating a breach. [*10]
The Plaintiff has effectively pled such culpable conduct in the earlier causes of action alleging fraud, slander, and breach of fiduciary duty.
Defendants' motion to dismiss the eighth cause of action is denied.
As to Plaintiff Zulawski's tenth cause of action, for dissolution.
Defendant Taylor claims that Plaintiff Zulawski was properly expelled from Thompson Design, and that therefore he cannot seek its dissolution. He further argues that the Operating Agreement bans dissolution of the LLC except by unanimous written agreement of its members.
The argument that rests upon factual assertions that are in dispute: (1) the propriety of Zulawski's expulsion and (2) the validity of the Operating Agreement and then asserting that a contract provision of the LLC can stand up to Section 702 of the LLC Law, which expressly provides for the dissolution of an LLC under certain circumstances. Such a stance does not provide a proper basis for dismissal. The motion is denied.
As to Plaintiff Zulawski's eleventh cause of action
for unjust enrichment.
Defendant Taylor apparently again argues that he is not a proper party against whom to assert a claim on the basis of §609 of the LLC Law. The Court has rejected the argument as it pertains to the second cause of action and adopts a similar analysis to reject it here. Plaintiff Zulawski's claim for unjust enrichment is not stated against Defendant Taylor simply on the basis of his being a member of the LLC, or acting, or participating in the business.
The argument that Plaintiff Zulawski cannot argue in the alternative has also been addressed.
And the Court has already also addressed the question of deficiencies of the fraud claim for the purposes of dismissal. That claim survives. Therefore, the unjust enrichment claim, if based upon it, also survives. The motion is denied.
As to Plaintiff Zulawski's twelfth cause of action
for an accounting.
Defendant Taylor's strongest claim here is that it is generally required that a party plead that there has been a demand for an accounting and a refusal, citing Goldstein v. Tri-Continental Corp., 282 NY 21 (1939). The developing case law in New York appears to eliminate the necessity where a demand would be futile under the circumstances (see Kaufman v. Cohen, 307 AD2d 113 [1st Dept. 2003]). Here, where Plaintiff Zulawski has already been expelled from the LLC by Defendant Taylor, and where the Defendant Taylor is denying that the Plaintiff Zulawski is entitled to any relief, such a
demand would be utterly superfluous. The Court is not inclined to raise form over substance. The motion is denied.
As to Defendant Thomas Design Galleries' motion relating to
Plaintiff's tenth, eleventh, and twelfth causes of action.
The logic of the Court's determinations above apply with equal force to Defendant Thomas; its motion is also denied as to those claims.
As to Defendant Thomas' motion to dismiss Plaintiff Zulawski's
third cause of action for breach of the employment agreement.
Defendant Thomas argues that provisions of the Operating Agreement and the Employment Agreement provide a complete defense to the claim. This stance misreads the documentary evidence/CPLR §3211(a)(1) standard. There is nothing unambiguous in either document that would constitute such a ground so as to "definitively dispose" of the claim (see Bronxville Knolls, Inc. V. Webster Toma Center Partnership, 221 AD2d 248 [1st Dept. 1995]). Again the Defendant is essentially arguing "accept our interpretation and dismissal is appropriate". But that is not the appropriate standard for dismissal.
Defendant Taylor's motion to dismiss the various causes of action against him is denied in its entirety.
Defendant Hartner's motion to dismiss the various causes of action against her is denied in its entirety.
Defendant Thomas Design's motion to dismiss the various causes of action against it is denied in its entirety.
Submit order upon notice to opposing counsel.
Eugene M. Fahey, J.S.C.
Dated: July 1, 2005
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