Rosenbluth v Ornstein

[*1] Rosenbluth v Ornstein 2008 NY Slip Op 52084(U) [21 Misc 3d 1117(A)] Decided on October 10, 2008 Supreme Court, Nassau County Austin, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 October 10, 2008
Supreme Court, Nassau County

Robert Rosenbluth, Individually, and derivatively on behalf of OL MORICHES LLC, Plaintiff,

against

Alex Ornstein, SCOTT LEYTON, THE MORICHES-VINEYARDS CORPORATION, OL MANAGING MEMBER LLC, and OL MORICHES LLC, Defendants.



19450-07



COUNSEL FOR PLAINTIFF

Rosenberg, Calica & Birney, LLP

100 Garden City Plaza, Suite 408

Garden City, New York 11530-3200

COUNSEL FOR DEFENDANTS

Reisman, Peirez & Reisman, LLP

1305 Franklin Avenue

P.O. Box 119

Garden City, New York 11530

Leonard B. Austin, J.

Defendants, Alex Ornstein, Scott Leyton, The Moriches-Vineyards Corporation, OL Managing Member LLC, and OL Moriches LLC, move for an order pursuant to CPLR 7503(a) dismissing the complaint and compelling arbitration or, in the alternative, dismissing all derivative causes of action brought on behalf of OL Moriches, LLC and all claims which are duplicative of Plaintiff's cause of action for breach of fiduciary duty [*2]pursuant to CPLR 3211(a)(1),(3) and (7).

BACKGROUND

Plaintiff, Robert Rosenbluth ("Rosenbluth"), is a member of OL Moriches LLC ("OL Moriches"), a limited liability company formed to purchase and develop a 26 acre parcel ("Parcel") in Center Moriches New York for condominium units. He brings this action against Defendants on his own behalf and as a derivative claim on behalf of OL Moriches.

Rosenbluth alleges that Defendants, Alec Ornstein s/h/a Alex Ornstein ("Ornstein") and Scott Leyton ("Leyton"), induced him to invest substantial capital to become a 5% owner and member of OL Moriches. Ornstein and Leyton formed Defendant OL Managing Member LLC ("Managing Member"), the 95% owner of OL Moriches. They are its sole members. The Operating Agreement states, "[t]he purposes of the Limited Liability Company are to acquire, develop, own, hold, mortgage

and sell certain real property located in the Town of Brookhaven, Suffolk County, New York . . ." (Complaint ¶25).

Prior to any development of the Parcel, Ornstein and Leyton formed Defendant The Moriches-Vineyards Corporation ("Vineyards"). OL Managing Member conveyed the Parcel to Vineyards for a purchase price of $12 million. Vineyards proposed to develop the condominium units according to Vineyards's offering plan, Vineyards intended to offer the 92 condominium units for sale for a total of $45 million. The terms of sale of the Parcel from OL Managing Member to Vineyards provided for $6 million in cash and $6 million in notes which are subordinate to all acquisition and construction loans, in addition to being dependent upon success of the project. The notes are not subject to repayment until the sale of each unit, at which time a $65,000 installment would then mature and become due.

Rosenbluth points to the atypical risk evident in the terms of sale as an indicator that the transfer was not an arms-length transaction. He also alleges that the $12 million purchase price was below market value given the state of the real estate market at the time of the conveyance and Vineyards's offering plan indicating that the units would be offered for sale in the aggregate of more than $45 million. Finally, Rosenbluth avers that Defendants have refused to provide him with his 5% share of the net cash proceeds of the sale due him.

Alleging that he has been deprived of participation in the lucrative development of the condominium project, as well as his share of the net sale profits of the Parcel, and that OL Moriches has been deprived of its property for less than fair market value and of its business opportunity, Rosenbluth brings this action on behalf of himself and OL Moriches for breach of fiduciary duty, seeking to set aside the fraudulent conveyance, to enjoin Defendants from proceeding with the Condominium Offering Plan, to recover compensatory and punitive damages, to impose a constructive trust and for an accounting.

Defendants seek dismissal of the complaint. They allege that the Operating Agreement for OL Moriches contains a broad arbitration clause mandating Plaintiff to arbitrate the issues raised in this action. In the alternative, they seek dismissal of the derivative causes of action on the grounds that a derivative cause of action is not authorized by law for a Limited Liability Company. They also seek dismissal of all [*3]causes of action which are duplicative of the claims for breach of fiduciary duty. The grounds asserted for dismissal of the derivative and purported duplicative claims are pursuant to CPLR 3211 (a)(1), (3) and (7).

Plaintiff disputes Defendants' contention that he is obligated to arbitrate the issues raised, as they are inextricably intertwined with claims against Vineyards, which is not contractually obligated or entitled to proceed to arbitration.

DISCUSSION

A.Arbitration

"A party aggrieved by the failure of another to arbitrate may apply for an order

compelling arbitration" and may prevail only if "a valid agreement" to arbitrate was made. CPLR 7503(a).

Claims which are "inextricably bound together" ought to be resolved in one action and in one forum. See, Young v. Jaffe, 282 AD2d 450 (2nd Dept. 2001); Brennan v. A.G. Becker, Inc., 127 AD2d 951, 953 (3rd Dept. 1987); and Steigerwald v. Dean Witter Reynolds, Inc., 84 AD2d 905, 906 (1st Dept. 1981). See also, Atlantic Beach Fire Dist. v. Losardo General Contractors, 17 Misc 3d 1107(A), (Sup. Ct. Nassau Co. 2007), which sanctions litigation rather than arbitration where arbitrable and non-arbitrable claims are intertwined.

The initial inquiry in a proceeding to mandate arbitration is always whether there is a valid agreement to arbitrate. See, God's Battallion of Prayer Pentecostal Church, Inc. v. Miele Assoc. LLP, 6 NY3d 371 (2006). "No party is bound to arbitrate unless by clear language he has so agreed...nor should parties be inveigled' into arbitration." Kahn v. Biernbaum, 55 AD2d 589 (1st Dept. 1976).

Here, Defendants assert that "when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms." R/S Assoc. v. New York Job Development Auth., 98 NY2d 29, 32 (2002). See also, Primavera Laboratories, Inc. v. Avon Products, Inc., 297 AD2d 505 (1st Dept. 2002). No issue is taken with such basic contract law. Ornstein and Leyton, as well as Ronald Cypers, a 5% member of Vineyards, consent on behalf of Vineyards to participate in the arbitration proceeding, and argue that Plaintiff should, therefore, be bound to proceed to arbitration. Defendants offer no authority to support their claim that a unilateral consent to arbitration offered by a third party after an action has been commenced against it can be binding upon the party who commenced the litigation. Simply put, Plaintiff is not a party to an arbitration agreement with Vineyards. Vineyards cannot consent to arbitration on Plaintiff's behalf.

Defendants identify no agreement binding Plaintiff to arbitrate with Vineyards. Indeed, there is no written document evidencing any agreement between Plaintiff and Vineyards, a corporation and a "separate legal entity." See, City Bank Farmers Trust Co. v. Macfadden, 13 AD2d 395, 402 (1st Dept. 1961), affd., 12 NY2d 1035, cert. den.,375 U.S. 823 (1963).

The Operating Agreement of OL Moriches which contains the arbitration clause runs between Managing Member and Rosenbluth. Ornstein and Leyton's contention that they are operating Vineyards in accordance with the OL Moriches Operating Agreement is not relevant. The exclusive management rights for OL Moriches lie in Managing Member, an LLC, not Ornstein and Leyton. Ornstein and Leyton fail to make [*4]the distinction between their individual capacities and those of the business entities they have formed. Accordingly, in the absence of Plaintiff's consent to arbitrate with Vineyards, the application to stay this action must be denied.

B.Motion to Dismiss- Legal Standard

1.CPLR 3211(a)(1)

CPLR 3211(a)(1) permits the court to dismiss an action based upon documentary evidence. To obtain a dismissal pursuant to CPLR 3211(a)(1), the defendant must establish that the documentary evidence that forms the basis of the defense must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim. Leon v. Martinez, 84 NY2d 83 (1994); Sheridan v. Town of Orangetown, 21 AD3d 365 (2nd Dept. 2005); Montes Corp. v. Charles Friehofer Baking Co., Inc., 17 AD3d 330 (2nd Dept. 2005); 730 J & J LLC v. Fillmore Agency, Inc., 303 AD2d 486 (2nd Dept. 2003); and Berger v. Temple Beth-el of Great Neck, 303 AD2d 346 (2nd Dept. 2003). 2.CPLR 3211(a)(3)

CPLR 3211(a)(3) permits the court to dismiss an action when the party bringing the action lacks the legal capacity to bring the action. The concept of capacity is a separate legal doctrine from the concept of standing. Community Bd. 7 of Borough of Manhattan v. Schaffer, 84 NY2d 148, 154 (1994). "Capacity... concerns a litigant's power to appear and bring its grievance before the court." Id. at 155. It is a "threshold question involving the authority of a litigant to present a grievance for judicial review". Town of Riverhead v. New York State Bd. of Real Property Services, 5 NY3d 36, 41 (2005). Artificial entities, such as business corporations, unincorporated associations and governmental entities, obtain the capacity to sue through statute or relevant enabling legislation. Community Bd. 7 of Borough of Manhattan v. Schaffer, supra at 155.

"(T)he capacity to bring a derivative action has been recognized, without statutory authority, in those circumstances that demand such relief." Caprer v. Nussbaum, 36 AD3d 176, 187 (2nd Dept. 2006).

3.CPLR 3211(a)(7)

CPLR 3211(a)(7) permits the court to dismiss a complaint that fails to state a cause of action.

When deciding such a motion, the court must determine whether the plaintiff has a legally cognizable cause of action and not whether the action has been properly plead. Guggenheimer v. Ginzburg, 43 NY2d 268 (1977); and Rovello v. Orofino Realty Co., 40 NY2d 633 (1976); and Well v. Yeshiva Rambam, 300 AD2d 580 (2nd Dept. 2002); and Frank v. Daimler Chrysler Corp., 292 AD2d 118 (1st Dept. 2002). The complaint must be liberally construed, and plaintiff must be given the benefit of every favorable inference. Leon v. Martinez, supra; Sitar v. Sitar, 50 AD3d 667 (2nd Dept. 2008); Mitchell v. TAM Equities, Inc., 27 AD3d 703 (2nd Dept. 2006); and Paterno v. CYC, LLC, 8 AD3d 544 (2nd Dept. 2002). The court must also accept as true all of the facts alleged in the complaint and any factual submissions made in opposition to the motion. 511 West 232rd Street Owners Corp. v. Jennifer Realty Co., 98 NY2d 144 (2002); Sokoloff [*5]v. Harriman Estates Development Corp., 96 NY2d 409 (2001); and Alsol Enterprises, Ltd. v Premier Lincoln-Mercury, Inc., 11 AD3d 493 (2nd Dept. 2004).

If, from the facts alleged in the complaint and the inferences which can be drawn from those facts, the court determines that the pleader has a cognizable cause of action, the motion must be denied. Sokoloff v. Harriman Estates Development Corp., supra; and Stucklen v. Kabro Assocs., 18 AD3d 461 (2nd Dept. 2005).

While factual allegations contained in the complaint are deemed true, legal conclusions and facts contradicted on the record are not entitled to a presumption of truth. In re Loukoumi, Inc., 285 AD2d 595 (2nd Dept. 2001); and Doria v. Masucci, 230 AD2d 764 (2nd Dept. 1996).

C.Derivative Causes of Action

1.LLC Member's Capacity to Sue

During the pendency of this application, the Court of Appeals ruled that members of a limited liability company ("LLC") "may bring derivative suits on the LLC's behalf" notwithstanding the absence of a provision allowing such suits in the Limited Liability Company Law. Tzolis v. Wolff, 10 NY3d 100, 102 (2008), abrogating Hoffman v. Unterberg, 9 AD3d 386 (2nd Dept. 2004) upon which Defendants rely. Accordingly, with respect to dismissal of the derivative claims on the basis of Rosenbluth's capacity, the motion must be denied.

2.Sufficiency of the Derivative Causes of Action

"A derivative action proceeds not on the basis of any individual right, but as an assertion of the interest of the entity by one or more of its owners or members when the management of the entity fails to act to protect that interest." Caprer v. Nussbaum, supra at 186. It allows the shareholder to "protect his or her interest by asserting the cause of action on the corporation's behalf." Id.

Plaintiff alleges the following derivative claims: breach of fiduciary duty (second cause of action); aiding and abetting breach of fiduciary duty (fourth cause of action); fraudulent conveyance (fifth cause of action); accounting (ninth cause of action); waste, mismanagement and misappropriation of corporate opportunity (tenth cause of action); to void the transaction at issue pursuant to Limited Liability Company Law §411 (eleventh cause of action); unfaithful agent (thirteenth cause of action); attorneys' fees (fourteenth cause of action); for injunctive relief (fifteenth cause of action); to set the fraudulent transactions aside, to recover the value of the transaction, and for attorneys' fees pursuant to Debtor Creditor Law §§ 274, 276, 276-a and 278 (sixteenth cause of action) and for a constructive trust (seventeenth cause of action). Defendants argue that all of the foregoing derivative causes of action should be dismissed because harm was sustained primarily by Rosenbluth and not OL Moriches. In affording Plaintiff every favorable inference, each of the aforementioned causes of action, Plaintiff sets forth allegations and/or seeks damages pertaining to injury on behalf of the limited liability company, OL Moriches. Thus, Defendants' motion to dismiss the derivative causes of action pursuant to CPLR 3211(a)(7) must be denied. [*6]

D.Duplicative Claims

Although CPLR 3211 permits dismissal of a complaint when a cause of action is not "adequately pleaded", it does not, however, provide for dismissal of alternative theories of recovery based upon the same facts.See, Auguston v. Spry, 282 AD2d 489 (2nd Dept. 2001)(breach of contract and unjust enrichment may be pleaded alternatively). Indeed, the CPLR permits a plaintiff at the pleading stage to "plead in the alternative" and to seek "relief in the alternative." CPLR 3014, 3017.

Defendants seek to dismiss the fifth (fraudulent conveyance), sixth (fraud), seventh (breach of contract), eighth (conversion), tenth (waste, mismanagement and misappropriation of corporate opportunity), twelfth (tortious interference), thirteenth (unfaithful agent) and sixteenth (Debtor Creditor Law) causes of action as duplicative of Plaintiff's first cause of action which alleges that the Managing Member breached its fiduciary duty owed to Rosenbluth and the third cause of action which alleges that Ornstein and Leyton aided and abetted the Managing Member in its breach. These two causes of action seek compensatory and exemplary damages in excess of $25 million.In this regard, the cases cited by Defendants as authority to dismiss these claims are not applicable as they primarily are concerned with the resolution of summary judgment motions pertaining to malpractice claims rather than to CPLR 3211(a)(7) motions. Plaintiff has stated various alternative theories which at this stage must be sustained.

The twelfth cause of action alleges tortious interference with contract. It must be dismissed for failure to state a cause of action, as a business entity cannot be charged with tortious interference with its own contract. Manley v. Pandick Press, 72 AD2d 452, 454 (1st Dept.), app. dism., 49 NY2d 981 (1980). Any claim against OL Moriches or Managing Member that it interfered with its own operating agreement cannot stand.

However, Plaintiff's claim for tortious interference with contract as against the individual Defendants, Ornstein and Leyton, survives.

Although Defendants purport to move to dismiss certain derivative and direct causes of action pursuant to CPLR 3211(a)(1), (3) and (7), no argument is made in Defendants' moving papers concerning dismissal for any of the causes of action on CPLR 3211(a)(1) grounds. Furthermore, with respect to moving to dismiss the direct causes of action pursuant to CPLR 3211(a)(3), Defendants fail to address how Plaintiff lacks the capacity to sue on those causes of action. Consequently, Defendants' motion to dismiss the derivative causes of action on the basis of CPLR 3211(a)(1) and the direct causes of action pursuant to CPLR 3211(a)(1) and (3) must be denied.

Accordingly, it is,

ORDERED, that Defendants' motion to dismiss this action and compel arbitration is denied; and it is further,

ORDERED, that Defendants' motion to dismiss all derivative claims is denied; and it is further,

ORDERED, that Defendants' motion to dismiss all causes of action duplicative of [*7]Plaintiff's breach of fiduciary duty claims is denied except with regard to the twelfth cause of action as against Managing Member only; and it is further,

ORDERED, that counsel for the respective parties are directed to appear for a status conference on October 31, 2008 at 9:30 a.m.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY

October 10, 2008

_____________________________

Hon. Leonard B. Austin, J.S.C.