North Coast Outfitters, Ltd. v Darling

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North Coast Outfitters, Ltd. v Darling 2012 NY Slip Op 33087(U) December 17, 2012 Sup Ct, Suffolk County Docket Number: 11-38972 Judge: Thomas F. Whelan Republished from New York State Unified Court System's E-Courts Service. Search E-Courts (http://www.nycourts.gov/ecourts) for any additional information on this case. This opinion is uncorrected and not selected for official publication. [* 1] fNDEX NO .. 11-38972 SHORT FORM ORDER SUPREME COURT - STATE OF NEW YORK I.A.S. PART 45 - SUfFOLK COUNTY PRESENT: HOll. THOMAS F. WHELAN Justice ofthe Supreme Court x NORTH COAST OUTFIlTERS, LTD., MOTION DI\ TE: 8-10-12 ADJ. DATE: 10-26-12 MOl S~q_ 002-MD 003-MD 004-MotD Plaintiff, WICKHAM, BRESSLER, GORDON GEASA, PC Attorneys for Plaintiff 13015 Main Road, P.O. Box 1424 Mattituck, New York 11952 -against- CHARLES W. DARLING rIl, and CHARLlES HORSE, INC, Defendant. x HALEY WEINBLAIT & CALCAGNI, Attorneys for Defendants 1601 Veterans Highway, Suite 425 Islandia, New York 1 J 749 & LLP Upon the following papers numbered 110 121 read on this motion to dismiss; Notice of Mati on/Order to Show Cause and supporting papers I - 40. 85 - 94 . 106 - III ; Notice OfeTa'>S Motion and supporting papers ; AnsweringAffidavits and supporting papers 41 - 59. 95 - 103. 112 - 119 ; ReplyingAffidavits and supporting papers 60 - 84, 104 - 105, 120 - 121 ; Other ; (and ,Ift'l kill illS cMnsel ill StiPPOlt tllid t'lpp~~cd to the Iilt'ltit'lii) it is, ORDERED that the motion (002) by the plaintiff for an order restraining the defendant Charles W. Darling, III from voting his shares in the plaintiff company at any meeting or otherwise in favor of his election, or his designee(s) to any office of plaintiff or as a director of plaintiff, or occupying any office of the plaintiff or acting as a director of the plaintiffis denied; and it is further ORDERED that the Illation (003) by the defendants to disqualify the law firm Wickham, Bressler, Gordon & Geasa. P.C. as attorneys for Steven Allison, William J. Mills, Ill, and Robert L Mills, II is denied; and it is further ORDERED that the motion (004) by the plaintiff for an order pursuant to CPLR 3014 and 3024 compelling the defendants to provide a more definite pleading and to dismiss the amended counterclaims is granted to the extent that the ninth through the twentieth counterclaims are dismissed; and it is further ORDERED that the parties are directed to appear at a prelimillaJY conference on Friday, [* 2] North Coasl Outfitters. Ltd. v Darling. et al Inuc'\ No. 11-389T2 Page No.2 January 25. 2013 at 9:30 a.m. In this breach of contract action. the plaintiff North Coast Oul1itters, Ltd .. a New YorK Corporation. seeks, among other Ihmgs. damages. an accounting, and a constructive trust from lhe defendants Charles W. Darling. III and Chadies llorse. Inc. for alleged breach of fiduciury dUly. conversion. unjust l;nrichment. and unfair competition. The record reveals that the delCndant Darling formed the plaintiff corporation on February 26. 1998. as the sole stockholder. officer. and director. On December 18. 1998. William J. Mills. III. Robert L. Mills. II. Steve Allison. Robert I.ogomasini. Maria La France. and Jack Tinelli became directors and shareholders. Darling developed products which were patented and trademarked, lhe expenses of which were paid by the plaintitT. Sometime in 1998. Darling agreed to assign his rights in the patents and lrademarks upon the payment of a percentage of sales of the products, and granted a license 10 the plaintiff to utilize the patenls and trademarks. [n 2000, the plaintiff and Darling entered into employment agreements employing Darling as chief executive olTicer and president for compensation. The most recent agreement was entered into on October 30, 2009 for a term of three years. The employment agreement contained a covenant whereby the plaintiff agreed not to sue Darling for any matter arising out of his ownership or management orthe plaintiff unless it arose out of gross negligence or deliberate malfeasance. and provided for attorneys fees. The employment agreement required Darling to devote his primary working time and best efTorts to the performance of his duties and prohibited Darling from taking any action contrary to the best interests of the plaintitr. The record retlects that in or around October. 2009. lhe patents were assigned to non~party Valiant Rock. LLC, instead oCthe plaintifL In May, 2011, Darling resigned as president and CEO of the plaintiff effective July 20, 2011. Darling began to utilize a new website called Charlieshorse.co, which is very similar to the original website. Charlicshorse.co111. Shortly thereafter. Darling allegedly removed all emails. corporate minutes and records and documents from the corporate offices. The instant action was subsequently commenced by filing on December 24, 20 II. The complaint contains twelve causes of action, alleging breach of fiduciary duty. unjust enrichment. breach of contract. UnraH competition. and seeking an accounting. a declaratory judgmellt. constructive trust. and removal from the company. The defendants served their answer and asserted twenty counterclaims against the plaintitT and directors Steven Allison. William J. Mills. Ill. and Robert L. Mills. If (hereinalicr ..the directors"). Thc plaintiff now moves for an order restraining and enjoining the defcndant Darling from voting his shares in plaintifT at any l11l'ctingm otherwise in hlvor of the electioll of Darling or his designee to any office or plainti ITor as a dirc<.:loror piDintifL and o(;cupying allYorlice oj' plainti!T or acting as a director of plailltilT. In his allirmaiion. the plainti IT's attorney also seeks to amend the Cllmpl<lil11.Ilo\Vever. no notice of such application to amend was provided in the order to show [* 3] North Coast Outfitters. Ltd. v Darling, ct al Index No. 11-38972 Page No.3 cause and is therefore denied (CPLIt 22141al). The defendants move to disqualify the law linn Wickham, Bresslt.::r,Gordon & Geasa, P.c. (hercinafter'·the Wickham firm") from rt;:presenting the direct())"sin connection vviththe counterclaims asserted against lhem by the delcndants. The plaintiff moves for an order compelling the defendants to serve a more concise pleading ill substitution for the amended answer with coul1\erelmt11s,and dismissing the third-party complaint. Turning to the Illotion lor a preliminary injunction against Darling. in support or its motion, the plaintiff submits. among other things. the personal affi.davits orGeorge T, Beatty and Frank Fcis, Beatty avers in his afli.davit. dated May 29,2012, that he is the president of the plaintilfand that the gravamen or the action is that Darling through his acts and omissions as a prior director and president or the plaintiJrbrcached his fiduciary duty to the plainti ff unjustly enriched himself at the expense of the plaintiff. converted the assets orthe plaintiff and other\oviseacted to the detnment of the plaintil'i' Beatty states that Darling soliclled and obtained substantial funds and other property from third parties in relllrn for minority interests in the plaintiff increasing the value of the plaintiff. Darling thereafter looted the plaintiff and otherwise deprived it of its assets and sought to drive the plaintiff into bankruptcy or otherwise end the plaintifr s existcncc. l3eatty stites that the continued viability orthe plaintifl is now threatened by the upcoming annual meeting or stockholders on May 3 L 2012. at which time, he stales that Darling will use his majority status to reestablish himselfas a director and president and remove current management, which, in his opinion, will irreparably hall11the plaintiff. Frank Feis avers that he is a certified public accountant and the principal orthe fi.nn Fcis & Associates, PI.LC. His firm was retained by the plaintiff, and he performed a limited analysis orthe transactions between the plaintiff and Darling. I-Ie concludes that numerous improper and questionahk: transactions occurred between the rlaintilfand Darling. 11isanalysis reveals, among other things, an overpayment of$1 ,008A27 in royalties by the plainti Ilto defendant Charlies I-fors~, Ine- and Valiant Rock., LLC In opposition, Darling avers in his atlidavit that he is the founder and holder or 51 % of the outstanding capital stock or the plaintiff. From February 1998 through his resignation in August 1011. he was the president and chief executive officer of the plainliH-~and from the company's inception in 1998 until June 201 L he was chairman or the hoard of directors. Darling denies Beatly's assertions that he is looting the plaintiff and never stated an intent to re-install himself as president and director of the plaintiff or to remove its current management. Ilowevcr. should he desire to do so, he believes it is his right as a 51% owner of the plaintiff. He states he has been diagnosed with chronic inllammatory demyelinating polyneuropathy. a progressively debilitating disease tll'll attacks the peripheral nervous system, and as a result, he is physically unable to resume his ronner position as president. Darling states that there is a conspiracy by l'()uror the minority shareholders ()f the plai ntiITto extort /l·om him monies that he rigilt full y rccci ved 11'0111 the plai nti fr. Darling further denies that he took the corporate agreements and documents. He slates that all rennbursed business e:-.:pcnses''''ere properly incurred In furtherance o1'the plaintiJrs business, [* 4] North Coast Outfiuers, Index No. I 1-38971 Ltd. v Darling, et al Page No_ ~ To be cntitled to a preliminary injunction, the moving pany has the burden of demonstrating: (I) a likelihood or success on the merits~ (2) irreparable injury abscnt granting the prehminary injunction; and (3) a balancing oCthe equities in the movant's Cavor (S'I.:I.: CPIJ~ 6301 ,AetIW!IIS. Co. v Capasso, 75 NY2d 8W. H62, 552 NYS2d 918 l1990J: Dixoll v Malouf, () 1 I\D3d 630. 630, R75 NYS2d 91 R 12d Dept 20U9J; CoillllJach Corp. v Alley Poud OWllers Corp .. 251\D3d 642. 643, 808 NYSld 418 12d Dcpt2006]). A plmntiffhas not suffered irreparable harm warranting injunctive rcliefwhcre its alleged injuries are compensable by money damages (See While Bay Eulrs., LId. l'NewsdllY. Inc .. 258 AU2d 520. 685 NYS2d 257 [2d Dcpt. 1999]). The purposr.: of a preliminary injunction is to mamtain the status quo and prevent the dissipation ofpropeny that could rr.:nder a judgment inctlCctual (see DL\'oll v Malouf. supra: Ruiz v Melolley. 26 AD3d 485. 486, 810 NYS2d 216 12d Dr.:pt 2006]; fillg FUllg Moy v 1/ohi UlIle"i. 10 ADJd 604, 781 :"JYS2d 68412d Oept 2004[). The decision to grant or deny a preliminary injunction rests in the sound discretion orthe court (see DLwJII v il1a/ouf, supra: RlIiz v Mdolley. supra). Under the circumstances presented, at this juncture, the plaintiff has failed to demonstrate that it would be successful on the merits, and the complaint seeks money damages 101'the alleged inj uries. In any event, the date oCthr.:annual meeting has passed, rendering the application untimely. Accordingly. the motion seeking a temporary restraining llrder is denied. Turning to the defendants' mOlion seeking to disqualify the Wickham finn as counsel Jor the directors. in support of their motion. the defendants submit the personal aflidavit of the defendant Charles Darling. Darling avers that he is the founder. treasurer and holder of 51 % or the outstanding capital stock of the plaintiff He states that Steven Allison, Roben Mills and William Mills arc the current members of the board of directors of the plaintiff. They arc also minority shareholders of the plaintiff. with Steven I\llison o\,vning 14.5%. and William Mills and Robert Mills each owning 9.5% oCthc outstanding capital stock. Darling states that the representation of the plaintiffand the directors by the Wickham I'irm constitutes un impermissible conllict of interest pursuant to Rule 1.7 l)fthe Ruks of Professional Conduct in that the plaintitfis a party in this litigation and that Darling may institute cross claims against the directors on behalfofthe plaintIff In opposition. th~ directors contend that Ihere was no prior representation orthe plaintiJTby the Wickham finn, and that they have consented to the represe11lation. In support the directors submit, among other things, the personal affidavits of William J. Mills and George T. Beatty. Mills avers that he is a director of North Coast Outfitters. Ltd. and that he consents to the representation ofhimsclfancl the plaintirrby the Wickham firm. He states that there is no connict of interest or rr.:presentation ordiffering interests. Bealty avers 1hat he is the president and chicI' executive orficr.:r orthc plaintilYand also slaWs that he consents to lhe reprcsent8.tion of himself and the plamtilTby thl' Wickham firm. Rule 1 7 (a) of the Rules of Professional Conduct prohibit an attorney from representing a cllcnt ··if the represclltation wi II involve the lawyer in representing ditTering interests." However. ··lnotwithstandingj the cxistencr.: or a concurrent connict of interest under paragraph (a). a lawyer [* 5] North Coast Outfitters. Ltd. v Darling. et al im1t·x No. ] 1-38972 P~ge No.5 may represent a client i1': (I) the lawyer rcasonably believes that the lawyer will be able to provide compdenl and diligel11representation to each arfectcd client; (2) the representation is not prohibited by law: (3) the representation docs not invol ve the assertion ora claim by Olleclient against another clil:llt n::pn::sentcd by the lawyer in the stlme litigation or other proccl:c\ing before a tribunal; and (4) each alTcckd client giws informed consent confirmed in writing. Where the Rules of Profesional Conduct (22 NYCRR ] 200.00) are invoked in the litigation, courts "are not constrained to read the rules literally or effectuate the intent of the drafters, but look to the rules as guidelines to be applied with due regard for the broad range ofthc interests at stakc" (Neisig I' TellJll I. 76 NY2d 363. 369-370, 559 NYS2d 493 [19901: see S & S Hotel Ventures Ltd. PftTtllerslIip v 777 S. fl. Corp., 69 NY2d at 43). It is the Supreme Court's responsibility to balance the competing interests, and ..the disqualification oran attorney is a matter thaI rests within the sound discrction of the Supreme Court" (Folk v Gallo, 73 AD3d 685. 901 NYS2d 99 12010J: see Cardinale v Golinello. 43 NY2d 28&.292. 40 I NYS2d 19] l] 977]; Natiollscredit Fill. Servs. Corp. V Turcios. 41 i\D3d 802. &39NYS2d 523 rz007]: Schmidt v Magnetic Head Corp.. 10] AD2d 268, 277. 476 NYS2d 151 [I984J). The Court fi.nds.in its discretion. that under the circumstances presented. the defendants have railed to meet their burden that the Wickham firm'$ removal is warranted. There is no evidence that the pbintilT and the directors have differing interests. but even if they do, the Wickham lirm has produced affidavits which conscnt to the .ioint representation. In addition, the Wit:kham finn aHirms (hat it is conficknt that it can competently represent both the plaintiff and directors withoul all)' conllid mtcrest. This helicf expressed by the Wickham firm is reasonable. the representation is not prohibited by law, there are no cross claims between the pJumtiffand the directors. Accordingly, thl.:motion to disqualify the Wickham firm is denied. Dr Turning to the plaintifrs motion to compel repleading and to dismiss the counterclaims, the gravamcn of the motion is that the defendants railed to state a cause of action. The plaintiff and the directors also contend that the assertion of counterclaims against the directors as counterclaim defendants which were styled as a third-party action is unauthorized by the CPLR in that the defendants have not complied with the service requirements ofCPLR 1007. In addition, the claims or tortious lllterferCllCI.: ith contract against the directors may not lie for inducing breach by the w corporation itself while they acted in their corporate capacities. Moreover. the directors assert that the claims for breach or liduciary duty do not set forth the circumstances or the alleged v,mmg in ddail. With regard In thl.:hranch of the motion seeking to compel repleading. the plaintilfand the [* 6] North Coast Outfitters. Index No. 11-38971 Ltd. v Darling, et al Page No.6 directors contend that the amended answer. counterclaims. and third-party complaint is a voluminous. rambllllg and irrelevant pleading, and seek to compel repleading in plain and concise statements pursuant to CPLR 3014 and 3024. Under the circulllstances presented. the Court finds that the answer and counterclaims arc no! so vague or ambiguous that a response could not be made and declines to compel repleading. The standard lor determining a CPLR 3211 (a) (7) motion is well settled. If a "plail11iffis entitled to a recovery upon any reasonable vie\-\' of the stated facts". the complaint is legally sufficient and the motion must be denied. (219 Broadway Corp. v Alexamler's, Inc .. 46 NY2d 506. 509.414 NYS2d 889 [1979]). ··Whatever an ultimate trial may disclose as to the truth of the allegations. on such a motion. a court is to take them as true and resolve all inlcrences which reasonably tlow therefrom in t~tvor of the pleader." (SllIulers \I Winship, 57 NY2d 391, 394, 456 NYS2d no 11982J; see a/so. Barr v WackllulIl, 36 NY2d 37 I. 375, 368 NYS2d 497 [1975"]). ThG ddcndanb assert twenty counterclaims against the plainti1fand the directors. The Court finds that the fi.rst through the eighth counterclaims asselted against the plaintiff slate a cause of action inasmuch as they allege that the plaintilTviolated the terms of the 2004 Agreement, the 2009 Agreement and the 2009 Trademark Licensing Agreement. With regard to the counterclaims asserted against the directors, who arc non-parties to the action. the third party pleading is improper. Third party practice is allowed when a person not a party is or may be liable to that defendant for all or part ofthe plaintiffs claim against that defendant pursuant to 304 (CPLR 1007). Here, the defendant alleges different claims than those asserted J.gainst the plaintitT, that the directors induced the corporation to breach its contracts with the defendants. and that the directors breached their fiduciary duty to the corporation. In addition, the plaintilTand the directors contend that they were not properly served pursuant to CPLR 1007. [n any event. the commencement of a third party action is immaterial under these circumstances inasmuch as the defendants have J11iled to Slate a cause of acli(lll against the directors in the ninth through twentieth causes of action. cruz The l.:Ounterclaims which allege that the directors tortiously interfered with the plaintiffs contracts with the defendants are dismissed. The geneml rule is that a corpomtioll exists independently of its owners. who arc not personally liable for its obligations. and thaI individuals may incorporate for the cxpress purpose of limiting. their liability (see Bartle v Home Owners Cooperative, fllc .. 309 NY 103. 106.309 NY (N. Y.S.) 103 [1955·1; Seuter v Liebernwll, 229 AU2d 386. 387. 644 NYS2d 566 [2e1 Dept 1996]). The ninth. eleventh. thirteenth. fi.fteenth, alld seventeenth causes of action which allege that the directors induced the plaintilfto breach ccrtain contracts with the defendants. arc dismissed, i nasll1uch as the directors of a corponltion may not be held li~lblc Cor tortious intcr!(:rel1ce with eonlract hy virtue of their actions as directors U1lajeslic Farms Supply, Ltd. v Service Riding Apparel, Ltd .. 137 AD2d SOL 524 NYS2d 245 [2d Dept 19881>. In addition. none of the defendants' factual assertions reneet the commiSSIOn by the [* 7] North Coast Outliners. Ltd. v Darling. et al Index No. 11-38972 Page No.7 directors oran independcnt torl. separate and distinct frol11their actions as directors ofthe corporate plalntllI Moreover. Iht.:delendants failed to allege any bad faith by the direclors while carrying out theIr corporate duties (Murtha v Yonkers Child Care A~-~·'Il. NY2d 913. 915. 411 NYS2d 219 45 [19781:see Buckley v 112 Cellt. Park SOllth, Jlle.. 285 App Div 331. 334. 136 NYS2d 233l1954.1; see (/lso SduJIlillger v Yardarm Beach Homeowllers' Asso .. 134 AD2d 1,523 NYS2d 523 [2d Dcpt 19X7]). The counterclaims which allege that the directors breached their fiduciary duty arc also dismissed. In order to estublish a breach of fiduciary duty. a plaintiff must prove the existence oj" a liduciary relationship. misconduct by the defendant. and damages that were directly caused by the deJ-endant's misconduct (Kurtzman v Bergsto/, 40 AD3d 588, 590. 835 NYS2d 644 [2d Dept 2007]). Directors or officers 01" a corporation stand in a fiduciary relationship 10 the corporation. must act in good faith and "owe the corporation their undivided loyalty and are not permitted to derive personal profit at the expense 01" the corporation." (Yu Hall Young v Chill, 491\D3d 535,536, 853 NYS2d 575 [2d Oep! 2008]: Schachter v Kulik, 96 A02d 103X, 1039.466 NYS2d 444 [2d Oep! 1(831). Inasmuch as the defendants have failed to allege damages that were directly caused by the directors' alleged misconduct. the tenth. tweJnh, lourteenth. sixteenth. eighteenth, nineteenth and twentieth counterclaims are dismissed. Accordingly. the plaintiffs motion seeking a preliminary injullction is denied, the motion to disqualil)' the Wickham linn from representing the plaintilTand the directors is denied. and the motion seeking to compel repleading of thc counterclaims and to dismiss the counterclaims is granted to the extent that the ninth through the twentieth counterclaims are dismissed. I)ated: Ji10P ! . l:\ I' TH ! 1/ H:LAN, .J.S.c.

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