Matter of Rella

[*1] Matter of Rella 2006 NY Slip Op 51707(U) [13 Misc 3d 1206(A)] Decided on September 12, 2006 Surrogate's Court, Bronx County Holzman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 12, 2006
Surrogate's Court, Bronx County

In the Matter of the Estate of Grace T. Rella, Deceased



536-P/97



Harry Amer, Esq. for Anthony Rella, respondent in the SCPA 2103 proceeding.

Howard A. Rachlin, Esq. for Gilbert F. Rella and Marie Ann Sedacca, petitioners in the SCPA 2103 proceeding.

Lee L. Holzman, J.

In this SCPA 2103 discovery proceeding, one of the respondents, Anthony Rella, a son of the decedent, moves for summary judgment dismissing most of the claims set forth in the petition. The petitioners, who are two of the decedent's other children and the co-executors of her estate, move, pursuant to CPLR 3126 and 22 NYCRR 130-1.1, to strike Anthony's answer based upon his failure to produce his 1985 Federal Tax Return or, in the alternative, to sanction him for delaying the resolution of the litigation.

This proceeding was commenced against Anthony and three entities which he controlled, J.E.T. Ventures, Inc. (JET), Waterfalls Motel, Inc. (Waterfalls) and Anthony's Self-Employment Pension Plan (SEPP). The executors contend that the decedent owned a 5% interest in JET, a closely-held corporation that owned real property improved by a motel. At all times Anthony was the majority shareholder, an officer and a director of JET. The decedent, who died on April 15, 1997, acquired her interest in JET from the estate of her husband Angelo who died on December 7, 1992.

The original petition filed with the court on August 11, 1998 and the petition dated June 20, 2003, which is treated as an amendment to the original petition, both allege that Anthony diverted funds from JET either to himself or to the other respondents. The amended petition seeks the following relief: 1) $100,000 plus interest from December 7, 1992 as damages for diversion of income from the operation of the motel to Waterfalls and Anthony pursuant to a purported lease between JET and Waterfalls at a monthly rental of $2,500; 2) $50,000 plus interest from December 7, 1997 as damages for excessive interest that JET paid to SEPP on a $145,000 loan at 18% interest; 3) $40,000 plus interest from March 29, 1996 as the decedent's share of the sale of the real property and the motel for $800,000; 4) $32,500 plus interest from March 29, 1986 as the decedent's share of the $460,000 purchase money mortgage which constituted partial payment of the sale price; and 5) $222,500 plus interest from December 7, 1992 as damages for the above self-dealing and breaches of fiduciary duty.

Anthony makes the following arguments in support of his summary judgment application: 1) the estate's claim for damages with respect to the JET transactions with Waterfalls and SEPP should be dismissed both because there are no issues of fact and because the claims are barred by the three-year statute of limitations for a conversion action (CPLR 214[4]); 2) the estate's claim of $32,500 for failing to receive its share of the purchase money mortgage should [*2]be dismissed because it is included within the claim to recover $40,000 from the total purchase price of $800,000; and 3) the estate's claim of $222,500 for Anthony's breach of fiduciary duty should be dismissed because Anthony did not owe any fiduciary duty to either the decedent or her estate. Anthony contends that the estate has an interest of only 2.5% in JET. However, he concedes that he is not entitled to summary judgment with respect to whether the decedent's interest is 2.5% or 5%.

The executors assert that the causes of action are viable because they allege a fraud which was not discovered until after the decedent's death and, consequently, the causes of action were timely filed within two years of her death (CPLR 213[8]); and, even if the claims sound in conversion, at least a portion of the claims remain viable because the statute of limitations commenced on the date that each payment was converted, rather than on the date of the underlying lease or mortgage. In the alternative, should the court find that the petition sounds only in conversion, the executors request leave to amend their petition to include causes of action sounding in fraud, quasi contract, unjust enrichment and breach of fiduciary duty.

Summary judgment cannot be granted unless it clearly appears that no material triable issues of fact exist (Phillips v Joseph Kantor & Co., 31 NY2d 307 [1972]; Glick & Dolleck, Inc. v Tri-Pac Export Corp., 22 NY2d 439 [1968]). The movant must make a prime facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence in admissible form to demonstrate the absence of any material issue of fact (Alvarez v Prospect Hospital, 68 NY2d 320 [1986]; Friends of Animals, Inc. v Associated Fur Manufacturers, Inc., 46 NY2d 1065 [1979]). When the movant has made a prima facie case, the burden of going forward shifts to the party opposing the motion (Zuckerman v. City of New York, 49 NY2d 557 [1980]). Summary judgment is a drastic remedy which requires that the party opposing the motion be accorded every favorable inference and issues of credibility may not be determined on the motion but must await the trial (Westhill Exports, Limited v Pope, 12 NY2d 491 [1963]).

The petitioners and Anthony disagree with respect to whether Anthony owed a fiduciary obligation to the decedent as a result of their parent-child relationship and his involvement in her financial affairs. However, regardless of whether Anthony had a fiduciary relationship with the decedent with respect to every financial transaction between them, it is well settled that a majority shareholder of a close corporation is in a fiduciary relationship with the minority shareholder (Richbell Info. Serv., Inc. v Jupiter Partners, L.P., 309 AD2d 288, 300 [2003]; Spodek v Neiss, 304 AD2d 557 [2003]). Here, as it is not disputed that Anthony controlled JET, Waterfalls and SEPP, clearly there are material factual issues to be tried with respect to whether the following transactions constituted improper self-dealing: the purported lease of the motel to Waterfalls for a monthly rental of $2,500; paying 18% interest to SEPP for a loan; and allocating only $3,500 of the $800,000 received for the sale of the land and the motel to the decedent's interest in JET. Consequently, the court finds no merit in Anthony's contention that there are no material issues of fact to be tried.

Anthony's statute of limitations argument stands on firmer terrain. The applicable statute of limitations for a breach of the fiduciary obligation that a majority interest in a business entity owes to a minority interest depends upon whether the substantive remedy sought is legal or equitable in nature (Loengard v Santa Fe Indus., Inc., 70 NY2d 262 [1987]). Where the relief sought is equitable in nature, the breach of fiduciary duty claim is covered by the six-year statute of limitations set forth in CPLR 213(1) (Loengard v Santa Fe Indus., Inc., supra; Kaufman v [*3]Cohen, 307 AD2d 113 [2003]). However, where only money damages are sought for the breach of the fiduciary obligation, the actions are viewed as conversion actions or actions for "injury to property" governed by the three-year statute of limitations set forth in CPLR 214(4) (Tatko v Sheldon Slate Prod. Co., 2 AD3d 1030, 1031 [2003], citing Cialeo v Mehlman, 210 AD2d 67, 68 [1994]; see also Kaufman v. Cohen, 307 AD2d at 118, citing Yatter v William Morris Agency, 256 AD2d 260, 261 [1998] and Whitney Holdings, Ltd. v Givotovsky, 988 F. Supp. 732, 741 [SDNY 1997]. The three-year limitations period to commence a cause of action for conversion is computed from the time the cause of action accrued (CPLR 203[a]), "that is when the conversion occurred" (Sporn v MCA Records, Inc., 58 NY2d 482, 488 [1983]).

Here, the petition seeks only monetary damages for each alleged breach of fiduciary duty by Anthony or by the other entities that he controlled. With respect to the transactions between JET and either Waterfalls or SEPP, the petition does not contain allegations of fraud or concealment which the decedent or the executors relied upon to their detriment sufficient to procure a judgment on the ground of fraud. Notwithstanding that leave to amend pleadings is "freely given" (CPLR 3025[b]), the executors' request to allege additional causes of action, including fraud, is denied because it would place an unfair burden upon the respondents to require that they prepare a defense against new causes of action at this stage of the proceeding. Specifically, the proceeding has been pending for more than eight years, the parties have already engaged in extensive disclosure and the executors have filed a note of issue and statement of readiness. Moreover, the executors' failure, at this late date, to annex a proposed amended pleading or to demonstrate that the proposed causes of action have merit are additional reasons to deny leave to amend the petition (see Thompson v Cooper, 24 AD 203 [2005]). For the purpose of computing the statute of limitations, this proceeding was commenced on August 11, 1998, the date that the original petition alleging the conduct sub judice was filed with the court (SCPA 301[a]). Consequently, the claims involving transactions between JET and either Waterfalls or SEPP are time-barred unless the alleged conversions occurred within three years of August 11, 1998.

The petitioners allege without contradiction that Anthony completely controlled JET, Waterfalls and SEPP. Therefore, it may be inferred from these allegations that he could transfer assets from one of these entities to another at whim. Thus, it would appear that each time Waterfalls received rental income that it allegedly should have paid to JET, or that SEPP allegedly received an excessive interest payment from JET, such diversion of income constituted a conversion of JET property. Moreover, Anthony never produced a written lease to establish the date that JET leased the property to Waterfalls. In short, each transaction resulting in an alleged diversion of income should be treated as a separate conversion (see Pagano v. Smith, 201 AD2d 632 [1994], holding that each installment that is due on a mortgage creates a new cause of action).

Based upon the above analysis, Anthony's motion for summary judgment dismissing some of the claims on the ground that they are barred by the statute of limitations is granted solely to the extent that the estate is barred from recovering on any alleged conversions arising from transactions between JET and either Waterfalls or SEPP that occurred more than three years prior to August 11, 1998, the date this proceeding was commenced. The court also notes that Anthony is correct in asserting that the estate cannot recover both a portion of the $460,000 purchase money mortgage from the sale of JET assets and 5% of the $800,000 purchase price. [*4]However, if the estate establishes that it is entitled to 5% of the total purchase price, it might be entitled to elect to recover 5% of the purchase money mortgage proceeds and 5% of $340,000, the balance of the purchase price. The estate's request for $222,500 in damages, equaling the total damages requested for all of the other claims arising from Anthony's breach of his fiduciary obligations, is a request for alternative relief. To the extent that this alternate request for relief incorporates claims for diversion of funds arising out transactions between JET and either Waterfalls or SEPP, Anthony's summary judgment motion to dismiss is granted only insofar as the claims included in the alternative request for relief arise from transactions between JET and either Waterfalls or SEPP that occurred more than three years prior to August 11, 1998.

The executors' motion for relief based upon Anthony's failure to produce his 1985 Federal Tax Return is the last issue to be determined. Anthony alleged that the interest that the estate now owns in JET was reduced from 5% to 2.5% when additional JET shares were issued to him for services that he rendered to JET. The executors seek the tax return to see if Anthony reported the value of the additional stock as income on the return. Although Anthony agreed to produce the return for in camera inspection, it was not produced. The executors have a right to be annoyed by Anthony's tardiness in seeking to obtain a copy of the return from the Internal Revenue Service. However, Anthony ultimately did all he could to obtain a copy, and the agency indicated that the 1985 return would have been destroyed if it was not the subject of an audit. Consequently, the executors' motion for relief based upon Anthony's failure to produce the 1985 tax return is denied, as it appears that the non-production was beyond his control.

The order to be settled shall also provide that the matter is scheduled for a pre-trial conference at 9:30 a.m. on November 13, 2006, at which time a date certain for trial shall be selected.

Settle order.



SURROGATE