Sheppard v Advanced Acoustic Concepts, Inc.
Annotate this CaseDecided on January 21, 2009
Supreme Court, Nassau County
Paula A. Sheppard, individually and as the Executrix of the Estate of STEVEN B. SHEPPARD, , Plaintiff,
against
Advanced Acoustic Concepts, Inc., and Michael Carnovale, Defendants.
2936-08
COUNSEL FOR PLAINTIFF
Spence & Davis, LLP
400 Garden City Plaza, Suite 450
Garden City, New York 11530
COUNSEL FOR DEFENDANTS
(for Advance Acoustic Concepts)
Morritt Hock Hamroff & Horowitz, LLP
400 Garden City Plaza
Garden City, New York 11530
McLeod Watkinson & Miller, Esqs.
One Massachusetts Avenue NW
Suite 800
Washington, D.C. 20001
Leonard B. Austin, J.
Defendant, Advanced Acoustic Concept, Inc. ("AAC"), moves for an order
pursuant to CPLR 3211(a)(1),(5) and (7) dismissing the first, third and fourth causes of action
asserted against it in the amended verified complaint of Plaintiff Paula A. Sheppard, individually
and as the Executrix of the Estate of Steven B. Sheppard ("Paula").
BACKGROUND
Paula is one of the shareholders and owners of AAC, which is domestic
corporation formed on May 4, 1989. Defendant Michael Carnovale ("Carnovale") is one of the
shareholders of AAC.
According to the amended complaint, Paula's husband, Steven B. Sheppard ("Steven") was one of the founders of AAC and held the title of President until the time of his passing on July 13, 2001. At the time of his death, Steven owned 23.554% of the outstanding shares of AAC.
When AAC was formed, the three founding shareholders, Steven, Kevin Scalia ("Scalia") and Charles Headley ("Headley"), entered into a shareholders' agreement.
At the time of Steven's death in 2001, Paula alleges that she inherited the full legal right to title and ownership in Steven's shares of stock. She maintains that she has done nothing to cancel, modify or abrogate the shareholders' agreement entered into by the three founding shareholders.
In 2001, Paula was advised that AAC's annual Board of Directors meeting would be held in Baltimore, Maryland as opposed to Long Island where it has been held in previous years. The amended complaint maintains that Paula, still grieving from the loss of her husband, opted to not attend the 2001 meeting.
Prior to the 2001 annual meeting, Paula was contacted by letter from Carnovale dated November 30, 2001, giving notice of the meeting. The notice indicated that "(t)he meeting is expected to take no longer than 1 hour and will follow the enclosed Agenda. Also enclosed is a proxy. Please complete and mail back to AAC if you are unable to attend the meeting." (Sheppard aff. Ex. B). The Agenda disclosed the following items: vote for 2002 Board of Directors with the nominees being Carnovale, Brian Boyle ("Boyle") and Richard Lawless ("Lawless"); review of the September 2001 financial statements; review of the projected December 2001 financial statements; discussion on projected 2002 business and "other business/open discussion". (Id.)
The agenda made no specific mention of the issuance of any shares of stock, specifically, the creation of a new class of "B" non-voting common stock.
Paula alleges that, as a courtesy, she gave her proxy to Carnovale which authorized and appointed Carnovale vote her shares of AAC at the 2001 annual meeting in favor of electing Carnovale, Boyle and Lawless as 2002 board members. In addition the proxy, executed by Paula on December 12, 2001, gave Carnovale authority "to vote as my Proxy upon any other matter that may properly come before the meeting." (Id.)
Paula alleges that unbeknownst to her, at the AAC 2001 annual meeting, an item was added to the agenda to create the new class of "B" common stock in order to create a stock option plan for employees. In the minutes of the 2001 annual shareholders' meeting it states, "(w)hile speaking of other business it was agreed that [*2]the Nonqualified Stock Option Plan... must begin to take effect and new Option Agreements... need to start to be distributed by the Board of Directors in January 2002." Williams aff. Ex. B). It was "(f)urther resolved, by unanimous vote (including by Proxy), the Board of Directors is obligated to enforce the attached plan and start distributing Option Agreements for the Class B stock." (Id.) The minutes of AAC's annual board of directors meeting, which was held on December 15, 2001 immediately after the shareholders' meeting, show that the board members continued to discuss the new stock options agreements. According to the minutes of the board members' meeting, "(i)t was decided that the new stock option agreements would begin to be distributed to certain employees after the holidays and before 1/31/02." (Williams aff. Ex. C).
The purpose of this new class of stock was to create a stock option plan for employees. Paula alleges that the effect of this new class of stock would be to dilute the shares of Class "A" stock, the voting stock originally issued by AAC, in part, the stock owned by Paula. Paula also alleges that she was not made aware of, and Carnovale did not disclose, that this item was being considered by the Board of Directors at the 2001 annual meeting.
Paula alleges that the shareholders' agreement mandates that no new class of stock be issued unless written approval was given by Steven. Consequently, as the legal owner of his shares, she alleges that no new class of stock could have been created unless it was she approved it in writing. She also asserts that "the action of the Board to pass a resolution to create the new class of stock was illegal as the shareholder's agreement required such approval to be made in writing." (Amended Complaint ¶25).
Paula alleges that upon being notified of the creation of the new class of stock by the Board, she noted her objection.
Paula also claims that, on March 14, 2002, Carnovale, Boyle, AAC's Senior Vice President and Secretary, Scott Williams ("Williams"), AAC;s CFO, and Lawless, owners of Class "A" stock, received shares of Class "B" non-voting stock. As a result of the issuance of the Class "B" stock on the alleged date of March 14, 2002, Paula states that her share of ownership in AAC was reduced from the 23.554% to 12.09%, a reduction of nearly half of her ownership percentage, and that Boyle and Carnovale each increased their ownership from 25.06% to 32.303% after the issuance of the Class "B" stock to themselves.
In the amended complaint, Paula also asserts that the Board continues to issue more Class "B" shares to which she continues to note her objection.
On June 4, 2008, Plaintiff served an amended verified complaint alleging the following causes of action: (1) breach of the shareholders' agreement against AAC as a result of the "illegal action of the Board in issuing the Class "B" shares of stock without the Plaintiff's express authorization" for which Paula seeks monetary damages or to have all prior stock transactions declared void and have the stock transferred back to AAC; (2) breach of fiduciary duty against Carnovale seeking monetary damages; (3) an injunction against AAC enjoining its board of directors from issuing any further shares of stock in contravention of the shareholders' agreement since Paula alleges that AAC does not have the assets to correct the continued dilution of her ownership; and (4) [*3]fraudulent inducement against Carnovale and AAC seeking monetary damages.In response to the amended complaint, AAC filed this motion pursuant to CPLR 3211 to dismiss the first and third causes of action on the grounds that documentary evidence warrants dismissal, that they are time-barred by the applicable statute of limitations and that Plaintiff fails to state a cause of action. With regard to the fourth cause of action against AAC, AAC moves to dismiss because the claim is time-barred.
Paula contends that if she had been aware that such an item was to be considered and voted on by the Board of Directors, she would not have given her proxy to Carnovale and would have attended the 2001 Annual meeting in person, through another proxy or she would not have given her approval to such a resolution. Paula further contends that the action of the Board issuing the new class of stock on March 14, 2002 breached the shareholders' agreement since the shareholders' agreement required approval of the issuance of additional shares to be made in writing. According to ¶ 1(c) of the shareholders' agreement, "except as provided in this Agreement, the Corporation shall not issue any additional shares of, or options to acquire, the Stock nor shall the Corporation reissue any Stock held as treasury stock of the Corporation without the prior written consent of the Shareholders." (Sheppard Ex. A).
Furthermore, she argues that there are factual issues that must be decided before this Court can decide whether her proxy and the corporate minutes comply with or constitute a waiver of the requirements of the shareholders' agreement.
In addition, she argues her allegations that her proxy were obtained through fraud requires denial of AAC's motion pursuant to CPLR 3211 and that she did not discover she had a claim for fraudulent incurment until June of 2007 when she met with her attorney who advised her of that fact.
With respect to her injunction cause of action, she argues that her amended complaint clearly alleges irreparable harm and the lack of an adequate remedy at law.
In reply, AAC argues that Plaintiff's allegations in her amended compliant and her opposition papers set the date of the breach as December 15, 2001. Furthermore, it argues that Paula seeks to set the date of the breach as March 14, 2002, "the date on which the Board took the ministerial step of distributing the option agreements to employees that it had directed three months earlier, in December 2001," which is the date of Paula's injury which flowed from any alleged breach. (AAC Reply Memorandum p. 2). AAC also argues that ¶ 1(c) of the shareholders' agreement does not pertain to issuance of "common stock" but pertains to Class A voting stock held by the original shareholders.
As for Paula's fraudulent inducement claim, AAC argues that Paula's claim to rescind the proxy more than six years after she executed it should be denied by reason of laches since there has been undue delay and prejudice. In addition, AAC argues that Plaintiff's knowledge of the facts which underlie her fraudulent inducement claim serves to start the statute of limitations running; not her knowledge of the elements of the legal theory.
Finally, AAC argues that Paula's failure to elaborate on her claims of irreparable harm and
failure to have an adequate remedy at law mandates dismissal of her claim for injunction.
[*4]DISCUSSION
A.Motion to Dismiss Legal Standard
1.CPLR 3211(a)(1)
CPLR 3211(a)(1) permits the defendant to seek and obtain a dismissal of one or more causes of action asserted against it on the ground that the defendant has a defense founded upon documentary evidence. When a motion to dismiss based upon documentary evidence is made pursuant to CPLR 3211(a)(1), the defendant must show that "the documentary evidence upon which the motion is predicated resolves all factual issues as a matter of law and definitely disposes of the plaintiff's claim." Unadilla Silo Co. v. Ernst & Young, 234 AD2d 754 (3rd Dept. 1996). See also, Leon v. Martinez, 84 NY2d 83 (1994); Sheridan v. Town of Orangetown, 21 AD3d 365 (2nd Dept. 2005); and Roth v. Goldman, 254 AD2d 405 (2nd Dept. 1998).
2.CPLR 3211(a)(5)
CPLR 3211(a)(5) permits the defendant to seek and obtain a dismissal of one or more causes of action asserted against it on the ground that the cause of action is barred by the statute of limitations.
An action for breach of contract is governed by a six-year statute of limitations. CPLR 213(2).
An action based upon fraud is to be commenced within the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it. CPLR 213(8).
With respect to actions for which no limitations is specifically prescribed by law, a six year statute of limitations is applied. CPLR 213(1). Such is the case with a cause of action seeking a permanent injunction.
Furthermore, CPLR 203(a) provides that the time in which a proceeding must be commenced is determined from the time the cause of action accrues.
3.CPLR 3211 (a)(7)
CPLR 3211(a)(7) permits the defendant to seek a dismissal of a cause of action asserted against it when the plaintiff allegedly fails to state a cause of action in the pleading.
In deciding a motion made pursuant to CPLR 3211(a)(7), the court must determine whether the pleader has a cognizable cause of action. Leon v. Martinez, supra; and Well v. Yeshiva Rambam, 300 AD2d 580 (2nd Dept. 2002). In so doing, the complaint must be liberally construed in the light most favorable to the plaintiff, and all allegations must be accepted as true. 511 West 232nd Street Owners Corp. v. Jennifer Realty Co., 98 NY2d 144 (2002); Well v. Yeshiva Rambam, supra; and Morad v. Morad, 27 AD3d 626 (2nd Dept. 2006). If, from the facts alleged in the complaint and the inferences which can be drawn from the opposition to the motion, the court determines that the pleader has a cognizable cause of action, the motion to dismiss must be denied. Sokoloff v. Harriman Estates Development Corp, 96 NY2d 409 (2001); and Stucklen v. Kabro Assocs., 18 AD3d 461 (2nd Dept 2005).
B.First Cause of Action- Breach of the Shareholder's Agreement [*5]
The elements of a cause of action for breach of contract are the existence of a contract between the plaintiff and defendant, consideration, performance by the plaintiff, breach by the defendant and damages resulting from the breach. Furia v. Furia, 116 AD2d 694 (2nd Dept. 1986). Plaintiff must establish the provisions of the contract the defendant is alleged to have breached. Sud v. Sud, 211 AD2d 423 (2nd Dept. 1995); and Atkinson v. Mobil Oil Corp., 205 AD2d 719 (2nd Dept. 1994).
The first cause of action alleges that AAC breached the shareholders' agreement as a result of the "illegal" action of the Board in issuing the class "B" shares of stock without the Plaintiff s express authorization. The issuance of the stock resulted in a dilution of the Plaintiff s shares of stock in AAC.
AAC argues that since the alleged breach of the shareholder's agreement occurred, according to the amended complaint, at the December 15, 2001 meeting when "unbeknownst to Plaintiff, an item was added to the agenda to create the new class of B' common stock" (Amended Complaint ¶18), the statute of limitations has run.
A claim for breach of contract accrues upon the breach. See, Ely-Cruikshank Co. v. Bank of Montreal, 81 NY2d 399, 402 (1993). "[T]he Statute runs from the time of the breach though no damage occurs until later." Id. citing 6 Williston, Contracts § 2004, at 5641 [rev. ed. 1938]. See, Amirthmasebi v. Benyamini, 306 AD2d 363 (2nd Dept. 2003)(breach of contract cause of action for share of the proceeds of a real estate transaction accrued on the closing of the property not when the commission was paid almost two months later).
AAC has provided the Court with a copy of the amended complaint with the shareholders' agreement annexed to it, the minutes of the 2001 annual shareholders' meeting, the minutes of the 2001 annual board of directors' meeting and the proxy agreement signed by Paula and dated December 12, 2001.
The shareholders' agreement, dated August 17, 1989 defines "Stock" as the outstanding shares of common stock of the corporation issued to the three founding shareholders. Each initial shareholder, Steven, Scalia and Headley owned 33 1/3% of the "Stock" or ten shares of AAC at the time the shareholders' agreement was executed. Paragraph 1(c) of the shareholders' agreement pertains to "Issuance of Stock" and states that the "Corporation shall not issue any additional shares of, or option to acquire, the Stock...without the prior written consent of the Shareholders." Given the language of the shareholders' agreement, the "Stock" at issue in ¶ 1(c) is the stock issued to the initial shareholders and not the class of stock created by AAC at the 2001 annual meeting.
Furthermore, even if ¶ 1(c) does pertain to the new class of stock mandating written approval, the proxy signed by Paula clearly stated that once Paula signed the proxy, she expressly authorized and appointed Carnovale as her proxy to vote shares of AAC in her name at the AAC Special Shareholders' meeting held on December 15, 2001. The proxy form executed by Paula on December 12, 2001, specifically authorized Carnovale to vote as Paula's proxy for several agenda items and also "upon any other matter properly coming before the meeting." [*6]
The minutes from the 2001 AAC shareholders' and board of directors' annual meetings provide documentary evidence that the shareholders - both present and by proxy - unanimously voted to approve, the Non-qualified Stock Option Plan. Since the shareholders unanimously voted to approve this Non-qualified Stock Option Plan, the Board of Directors was obligated to enforce and start distributing the Option agreements for the Class B Stock. Both sets of minutes were signed by Carnovale, Boyle and Lawless.
Once meeting minutes are duly recorded and signed by the Board of Directors, this satisfies the provision in the shareholders' agreement requiring written consent by the shareholders to the issuance of Class "B" Stock. See, Karel v. Clark, 129 AD2d 773 (2nd Dept. 1987). Therefore, once the minutes of the 2001 annual AAC meetings were duly recorded and signed by the shareholders and Board of Directors, this satisfied the shareholders' agreement requirement for a signed writing.
In addition, Paula alleges in her amended complaint that the new class of "B" common stock was added to the agenda of the AAC 2001 annual meeting and that "pursuant to the shareholder's agreement, no new class of stock could be issued unless written approval was given by Steven and, as the legal owner of his shares, no new class o stock could have been created unless it was approved in writing by Plaintiff." (Amended Complaint ¶ 22). Furthermore, she alleges, "(t)he resolution for the creation of the Class "B" shares of stock could not have passed or have been considered without the Plaintiff's written approval" and that "(t)he action of the Board to pass a resolution to create the new class of stock was illegal as the shareholder's agreement required such approval to be made in writing." (Id. at ¶¶ 24, 25).
Consequently, Paula asserts that the Board's actions in December 2001, more than six years prior to commencement of this suit, constituted the breach upon which she premises her first cause of action since it is that action, in December, creating the new class of stock which required approval in writing. Thus, the breach occurred in December 2001.
Consequently, AAC's motion to dismiss the first cause of action pursuant to CPLR 3211(a)(1) and (5) must be granted. In light of the foregoing, it is not necessary for the Court to address AAC's motion with respect to the first cause of action pursuant to CPLR 3211(a)(7).
C.Plaintiff's Third Cause of Action Injunction
One of the elements of a cause of action for a permanent injunction, a drastic
remedy, is that plaintiff will suffer irreparable harm absent the injunction. Icy Splash Food & Beverage, Inc. v.
Henckel, 14 AD3d 595, 596 (2nd Dept. 2005). In addition to alleging irreparable injury,
plaintiff must allege that other remedies are inadequate and that a balancing of the equities favors
it. A & G Research, Inc. v. GC Metrics,
Inc., 19 Misc 3d 1136(A) at *13, (Sup. Ct. NY Co. 2008).
In her amended complaint, Paula alleges that AAC continued issuance of shares of class "B" stock dilutes her ownership in AAC and that, "(o)n information and belief, (AAC) does not have the assets to correct the continued dilution of the Plaintiff's [*7]ownership in AAC." In opposing AAC's dismissal motion, Paula simply states that her amended complaint alleges irreparable harm and the lack of an adequate remedy at law.
In viewing the allegations in the light most favorable to the non-movant and considering
Paula's submissions in opposing this motion, Paula's allegations do not establish a prima facie
case for a preliminary injunction. It appears that Plaintiff's damages would be monetary in
nature as is apparent by her prayer for monetary damages in connection with her first, second and
fourth causes of action. Thus, Paula's third cause of action must be dismissed pursuant to CPLR
3211(a)(7). In light of the foregoing, the Court will not address AAC's motion to dismiss the
third cause of action pursuant to CPLR 3211 (a)(1) and (5).
D.Plaintiff's Fourth Cause of Action Fraudulent Inducement
The fourth cause of action alleges that Carnovale and AAC fraudulently induced
Paula into signing the proxy for the 2001 annual shareholders meeting.
In order to assert a claim for fraud in the inducement, a plaintiff must establish that the defendant made material misrepresentations that were false, the defendant knew the representations were false when made, the misrepresentations were made with intent to deceive the plaintiff, the plaintiff justifiably relied upon these representations and plaintiff was damaged as a result of relying upon these misrepresentations. Leno v. DePasquale, 18 AD3d 514 (2nd Dept. 2005).
Fraud has a six year limitations period or a two year period from discovery whichever is longer. CPLR 213(8). With respect to using the two year "discovery" period, a plaintiff must show that he or she was "unaware of the facts surrounding the possible fraudulent conduct on the part of the defendants during the two years prior to the date the complaint was filed." Shannon v. Gordon, 249 AD2d 291, 292 (2nd Dept. 1998). "It is knowledge of facts not legal theories that commences the running of the two-year limitations period." TMG-II v. Price Waterhouse & Co., 175 AD2d 21, 23 (1st Dept. 1991).
"The test as to when a plaintiff should have discovered an alleged fraud is an objective one." Prestandrea v. Stein, 262 AD2d 621, 622 (2nd Dept 1999). "[W]here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him." Id. citing Higgins v. Crouse, 147 NY 411, 416 (1895).
Paula alleges that AAC is liable for Carnovale's actions in conveying the "fraudulent agenda" to her since Carnovale was acting within his authority as an officer of AAC. Carnovale sent Paula the agenda and proxy by letter dated November 30, 2001. Paula admits, in her opposing papers and her amended complaint, that she was apprised of the Board's December 2001 action of creating a new class of stock during the annual meeting and that her proxy voted in favor of the creation. Consequently, Paula was aware of the facts within the six year limitations period which began to run on [*8]December 15, 2001 or she should have been aware of the facts surrounding the alleged fraud more than the two year period prior to filing of the complaint in 2008. Thus, the fourth cause of action must be dismissed as against AAC.According, it is,
ORDERED, that the motion of Defendant, Advanced Acoustic Concepts, Inc., to dismiss the amended complaint against it is granted; and it is further,
ORDERED, that counsel for Plaintiff and Defendant Michael Carnovale shall appear for a Preliminary Conference on February 20, 2009 at 9:30 a.m.
This constitutes the decision and Order of the Court.
Dated: Mineola, NY______________________________
January 21, 2009Hon. LEONARD B. AUSTIN, J.S.C.
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