Zalmanov v Shabat, LLC

[*1] Zalmanov v Shabat, LLC 2012 NY Slip Op 50125(U) Decided on January 16, 2012 Supreme Court, Kings County Demarest, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 January 16, 2012
Supreme Court, Kings County

Samuel Zalmanov, Plaintiff,

against

Shabat, LLC, Nediva SCHWARTZ, and Joseph JUSEWITZ, Defendants.



10857/11



Attorney for Plaintiff:

Howard Schneider

173 Wallabout Street

Brooklyn, NY 11206

Attorney for Defendants:

Jeremy Rosenberg

30 Broad Street, 27th Floor

New York, NY 10004

Carolyn E. Demarest, J.

Defendants Shabat LLC ("Shabat" or the "LLC"), Nediva Schwartz, and Joseph Jusewitz move to dismiss plaintiff Samuel Zalmanov's complaint pursuant to CPLR 3211 (a) (5) and (7). Although the complaint is inartfully drafted and the four causes of action are not specifically identified, the first claim sounds in both fraudulent inducement and breach of contract, the second in fraudulent inducement, the third in breach of contract, and the fourth in breach of fiduciary duty. Defendants argue that plaintiff fails to state a cause of action and thus the Court should dismiss his entire complaint. Defendants also contend that plaintiff's breach of fiduciary duty claim is barred by the statute of limitations.

BACKGROUND [*2]

The instant case arose from a real estate transaction involving the purchase of an apartment building at 517-525 West 45th Street, New York, NY 10036 (the "Property") by Shabat, a New York limited liability company that Schwartz and Jusewitz established. On or about February 14, 2007, the day before closing, defendants' real estate broker approached plaintiff and informed him that defendants were purchasing the Property for $8,600,000, that they intended to make a down payment of $2,000,000 of their own funds, and that they were seeking an outside investor to contribute an additional $2,000,000 in exchange for a 50% ownership interest in Shabat and the right to be a co-managing member. The following day, plaintiff entered into a written agreement with defendants (the "Contract") incorporating the broker's proposed terms, and he immediately wired $2,000,000 to the attorney representing Shabat in the real estate transaction. Plaintiff alleges that Schwartz and Jusewitz did not, and never actually intended to, contribute their own $2,000,000 toward the purchase. To support this allegation, he contends that defendants secured a mortgage against the Property and other collateral in the amount of $7,500,000 prior to signing the Contract and closing on the Property. Plaintiff states that, had he known about the mortgage amount, he would not have invested $2,000,000 in Shabat.

The Contract provided a "Right to Cancel" option, under which plaintiff could withdraw his interest in the LLC within 20 days of the closing and receive his initial investment, plus a cancellation fee of $41,666, in immediately available funds. The Contract also included a "Buy-Out Right," under which defendants could repurchase plaintiff's interest in Shabat for $3,000,000 on or before February 14, 2008. Plaintiff did not exercise his Right to Cancel within the applicable time period. He alleges that defendants advised him, within a few days of the closing, that a group of investors would purchase his interest in the LLC. Plaintiff claims that defendants requested that he not insist that they exercise their Buy-Out Right so that he could sell his interest to the investors. No such group ever appeared, and defendants never identified the investors. On or about March 19, 2007, following the lapse of plaintiff's cancellation option, plaintiff and defendants signed an amendment to the Contract, assigning all responsibility for broker's fees to Schwartz and Jusewitz and changing the Buy-Out amount to $2,662,500.[FN1]

On or about October 7, 2007, Schwartz and Jusewitz informed plaintiff that they would be exercising their Buy-Out Right, but they did not put the terms of the repurcahse in writing until February 17, 2008, when Jusewitz, but not Schwartz, signed a brief letter agreement with plaintiff (the "Letter Agreement"). Jusewitz informed plaintiff that he was signing the agreement on behalf of both himself and Schwartz. Under the Letter Agreement, plaintiff was to receive $887,500 "within a few weeks" and $1,775,000 in monthly installments over the course of two years at 7% interest. After all payments were received, plaintiff would surrender his interest in the LLC. Plaintiff alleges that he has never received any of these payments. Plaintiff also claims that he has never received any documentation evidencing his membership in Shabat and has never been involved in the company's decision making.

Plaintiff filed the instant action on April 14, 2011. For his first cause of action, plaintiff alleges that defendants breached the Contract and defrauded him by signing it without ever intending to comply with its terms. For his second cause of action, plaintiff alleges that defendants defrauded [*3]him by securing an excessive mortgage on the Property rather than contributing $2,000,000 of their own funds to the down payment. For his third cause of action, plaintiff alleges that defendants breached the Letter Agreement. Finally, for plaintiff's fourth cause of action, he alleges that defendants breached their fiduciary duty by mismanaging the Property and excluding him from the LLC's management decisions. Defendant moves to dismiss plaintiff's complaint in its entirety.

DISCUSSION

Defendants move, pursuant to CPLR 3211 (a) (5) and (7), to dismiss plaintiff's complaint. Under CPLR 3211 (a) (7), a "party may move for judgment dismissing one or more causes of action asserted against him" because "the pleading fails to state a cause of action." In ruling on a 3211 motion, "the court must afford the pleading a liberal construction, accept all facts as alleged in the pleading to be true, accord the plaintiff the benefit of every possible inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (Breytman v Olinville Realty, LLC, 54 AD3d 703, 703-04 [2d Dept 2008]). However, the Court may only consider allegations of fact and not "bare legal conclusions" (id). Furthermore, the Court will afford no deference to allegations that are "inherently incredible or flatly contradicted by documentary evidence" (Ullmann v Norma Kamali, Inc., 207 AD2d 691, 616 [1st Dept 1994]).

It is unclear whether plaintiff's first cause of action alleges breach of contract or fraudulent inducement. CPLR 3014 mandates that "separate causes of action . . . be separately stated and numbered." Therefore, plaintiff may not seek damages for both breach of contract and fraudulent inducement under a single cause of action. Nonetheless, defendant has characterized plaintiff's first cause of action as a fraud claim, and plaintiff has not challenged this description in his opposition papers. Plaintiff states that defendants represented, in the Contract, that they would granted him ownership in and an equal right to manage the LLC, as well as a cancellation option, when they never actually intended to offer any of these benefits. Defendants argue that this is merely duplicative of a breach of contract claim and thus should be dismissed. Ordinarily, an "alleged breach of contractual duties" may not serve as grounds for fraud (McKernin v Fanny Farmer Candy Shops, Inc., 176 AD2d 233 [1st Dept 1991]; see First Bank of Americas v Motor Car Funding, Inc.,257 AD2d 287, 291 [1st Dept 1999]; Mastropieri v Solmar Const. Co., 159 AD2d 698 [2 Dept1990]). However, the Appellate Division has asserted that "[a] fraud claim will be upheld when a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, even though the same circumstances also give rise to the plaintiff's breach of contract claim" (MBIA Ins. Corp. v Countrywide Home Loans, Inc., 87 AD3d 287, 293 [1st Dept 2011]; see First Bank of Americas, 257 AD2d at 291 ["[A] cause of action for fraud may be maintained where a plaintiff pleads a breach of duty separate from, or in addition to, a breach of the contract."]).

To maintain a cause of action for fraudulent inducement, "a plaintiff must assert the misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury" (Braddock v Braddock, 60 AD3d 84, 86 [1st Dept 2009]; see Gaidon v Guardian Life Ins. Co. of Am., 94 NY2d 330, 348 [1999]). Additionally, a plaintiff alleging fraud must state "the circumstances constituting the wrong . . . in detail" (CPLR 3016 [b]). The Court of Appeals has held that CPLR 3016 (b) requires a plaintiff claiming fraud to "allege the basic facts to establish the elements of the cause of action"; the plaintiff need not provide "unassailable proof" (Pludeman v N. Leasing Sys., Inc., 10 NY3d 486, 492 [2008]). A pleading will be proper under this standard "when the facts are sufficient [*4]to permit a reasonable inference of the alleged conduct" (id).

In his first cause of action, plaintiff does not state a fraudulent inducement claim. Plaintiff provides a copy of a written agreement, which defendants signed, containing representations that he would become a 50% owner and co-managing member of the LLC. Plaintiff further states that defendants never intended to offer him these benefits at the time they signed the Contract and that he is therefore entitled to damages. However, plaintiff admits, in his opposing affirmation, that defendants "preferred to own the property themselves" and were merely seeking "an equity partner to invest an additional [$2,000,000]." Plaintiff acknowledges that this is the reason why defendants reserved a buyback option in the Contract. Therefore, plaintiff was on notice that defendants were seeking a short-term cash infusion rather than a long-term business partner. Under these circumstances, plaintiff can hardly claim that he justifiably relied on defendants' misrepresentations to his detriment. The complaint therefore fails to state a cause of action based upon fraudulent inducement.

However, plaintiff appears to plead a cause of action for breach of the Contract. The "essential elements of a cause of action to recover damages for breach of contract" are "the existence of a contract, the plaintiff's performance under the contract, the defendant's breach of that contract, and resulting damages" (JP Morgan Chase v J.H. Elec. of New York, Inc., 69 AD3d 802, 803 [2d Dept 2010]). Here, plaintiff alleges that he entered into a valid and enforceable agreement with defendants, that he performed by contributing $2,000,000 toward the purchase of the Property, that defendants breached the Contract by failing to grant him ownership in or the right to manage the LLC, and that he is entitled to damages. Therefore, in the interest of justice, the Court grants plaintiff leave to amend his complaint and replead his first cause of action.

For his second cause of action, plaintiff claims that Schwartz and Jusewitz misrepresented that they would contribute $2,000,000 toward the purchase of the Property to induce him to invest his own $2,000,000 in the LLC. As stated above, common-law fraudulent inducement requires a material misrepresentation that induces the plaintiff to agree to a contract, as well as scienter, reliance, and damages (Gaidon, 94 NY2d at 348). Here, plaintiff alleges that Schwartz and Jusewitz, both orally and in a written contract, represented that they would contribute $2,000,000 toward the purchase of the Property. Plaintiff further claims that, by the time they made this representation, defendants had already secured a mortgage on the Property, which enabled Shabat to purchase the Property without any funding from Schwartz and Jusewitz. Plaintiff also alleges that he is injured because, as a result, the Property, which he owns indirectly through his 50% interest in the LLC, is encumbered with a mortgage that is $2,000,000 greater than it should be under the parties' agreement. Plaintiff supplements the allegations in his complaint with his opposing affirmation, in which he asserts that he was ignorant of the mortgage amount when he signed the Contract and that, had he known that Schwartz and Jusewitz would not be contributing $2,000,000 of their own funds, he would not have made his investment in Shabat (see Rovello v Orofino Realty Co., 40 NY2d 633, 635 [1976] [stating that, in CPLR 3211 (a) (7) motions, "affidavits may be used freely to preserve inartfully pleaded, but potentially meritorious, claims"]).

Taken together, these allegations are sufficient to support a cause of action for fraudulent inducement and satisfy the heightened pleading requirement of CPLR 3013 (b). Assuming the truth of plaintiff's factual claims, as is required upon this motion pursuant to CPLR 3211 (a) (7), defendants made a material misrepresentation, upon which plaintiff relied, and which induced him [*5]to sign the Contract. The assertion that defendants secured an excessive mortgage that further encumbered the Property and diluted plaintiff's interest in Shabat creates an inference of both scienter and damages. Therefore, plaintiff's second cause of action properly states a fraudulent inducement claim.

Plaintiff's third cause of action sounds in breach of contract based upon Schwartz and Jusewitz's purported failure to abide by the Letter Agreement to buy out plaintiff's interest in the LLC. As stated above, a plaintiff alleging breach of contract must assert the existence of a contract, plaintiff's performance, defendant's breach, and damages (JP Morgan Chase, 69 AD3d at 803). Plaintiff has sufficiently plead breach of contract against Jusewitz, but not against Schwartz. Plaintiff specifically alleged that he entered into a contract with Jusewitz to sell his interest in Shabat, that he never received any payment, and that he is entitled to damages. Although plaintiff did not specifically affirm that he performed under the contract, he was only required to transfer his ownership in the LLC after receiving payment. Therefore, plaintiff has stated a cause of action for breach of the Letter Agreement against Jusewitz.

Plaintiff has failed, however, to properly plead a breach of contract claim against Schwartz. Plaintiff alleges that Jusewitz advised him that he was signing the Letter Agreement "on behalf of both himself and defendant Schwartz." However, plaintiff has not alleged that Jusewitz had the authority to enter into a contract on Schwartz's behalf. Moreover, plaintiff has not alleged sufficient facts to support the inference that Jusewitz had apparent authority to bind Schwartz under the Letter Agreement. Apparent authority may only arise where the principal, through "words or conduct," creates the "appearance and belief that the agent possesses authority to enter into a transaction" (Hallock v State, 64 NY2d 224, 231 [1984]). Plaintiff does not allege that Schwartz made any sort of representation about Jusewitz's authority to repurchase plaintiff's interest in Shabat on her behalf. As a purported agent cannot create his own apparent authority, plaintiff has not asserted a cause of action against Schwartz for breach of the Letter Agreement. Therefore, plaintiff's third cause of action is dismissed as against defendant Schwartz.

Plaintiff's fourth cause of action sounds in breach of fiduciary duty. Under Limited Liability Company Law § 409 (a), a manager of a limited liability company has a duty to act "in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances." As it does for fraud claims, CPLR 3013 (b) requires that causes of action for breach of fiduciary duty be plead with particularity. Plaintiff alleges that defendants mismanaged the Property, intentionally excluded him from management of the LLC, and secured two subsequent additional mortgages on the Property. While plaintiff may in fact have a cause of action for breach of fiduciary duty, he does not state one with sufficient particularity to comply with 3013 (b) or to give defendants proper notice of his claim. Rather, plaintiff makes conclusory statements that defendants "devalued" the Property through their "activities in mismanaging" it. Moreover, plaintiff mentions, in passing, two additional mortgages that defendants placed on the Property subsequent to signing the Contract. These additional mortgages are not mentioned anywhere else in the complaint or in plaintiff's opposing affirmation. Because of plaintiff's lack of detail or specificity, his fourth cause of action may not survive as currently pled.

Defendants also argue that plaintiff's fourth cause of action should be dismissed pursuant to CPLR 3211 (a) (5) because it is barred by the statute of limitations. Although there is no single statute of limitations for breach of fiduciary duty claims, where a plaintiff seeks only money [*6]damages, courts will generally apply the three-year limitations period for "injury to property" (Kaufman v Cohen, 307 AD2d 113 [1st Dept 2003]; see CPLR 214 [4]). Defendants contend that the statute of limitations began to run in February of 2008 at the very latest. However, the Letter Agreement states that plaintiff would only relinquish his membership interest in the LLC once he received the final payment from defendants on March 20, 2010. As plaintiff alleges that he has never received any payment from defendants, he is purportedly still a member of Shabat and thus defendants would be liable for any breach of their fiduciary duties occurring during the three years prior to commencement of this suit. Therefore, in the interest of justice, the Court grants plaintiff leave to replead his fourth cause of action in accordance with CPLR 3013 (b).

CONCLUSION

Accordingly, defendants' motion is granted to the extent that plaintiff's first and fourth causes of action are dismissed. Plaintiff's third cause of action is also dismissed as against defendant Schwartz. Plaintiff is granted leave to amend the first and fourth causes of action in his complaint within twenty days of service upon him of a copy of this decision and order.

The foregoing constitutes the decision and order of the Court.

E N T E R :

HON. CAROLYN E. DEMAREST, J.S.C. Footnotes

Footnote 1: Plaintiff acknowledges that this new figure reflected "certain monies already returned to him" but fails to provide any further details concerning this part of the transaction.