Salm v Feldstein

[*1] Salm v Feldstein 2004 NY Slip Op 50959(U) Decided on August 20, 2004 Supreme Court, Nassau County 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 August 20, 2004
Supreme Court, Nassau County

ARTHUR SALM, Plaintiff,

against

NEIL FELDSTEIN, Defendant.



11940-03



COUNSEL FOR PLAINTIFF

Margolin & Pierce, LLP

111 West 57th Street

New York, New York 10019

COUNSEL FOR DEFENDANT

Ackerman, Levine, Cullen, Brickman & Limmer, LLP

175 Great Neck Road

Great Neck, New York 11021

Leonard B. Austin, J.

Defendant Neil Feldstein ("Feldstein") moves for summary judgment dismissing the complaint pursuant to CPLR 3212.

Plaintiff Arthur Salm ("Salm") cross-moves, pursuant to CPLR 3124, to compel Defendant to respond to Plaintiff's request for discovery dated November 11, 2003.

The dispute between Plaintiff and Defendant, who Plaintiff, in the complaint described as former "business associates," "co-venturers" and "long standing close friends" originated in June, 2003. At that time, in connection with Defendant's purchase of Plaintiff's interest in two automobile dealerships: one Honda dealership and one Toyota dealership, (collectively "the Nassau County Dealerships"), Defendant allegedly willfully misrepresented the value of those dealerships and improperly withheld information vis-a-vis the potential resale of the Honda dealership, at a higher price. The potential resale was to non-party John Staluppi ("Staluppi") who had previously purchased a Hyundai/Isuzu dealership located in Hempstead, New York from the parties in January, 2000.

BACKGROUND

Since in or about September, 1997, Salm and Feldstein conducted business and owned the buildings housing their automobile dealerships through a series of limited liability companies. In addition to his ownership interest in the Nassau County Dealerships, Feldstein individually owned a number of other dealerships located in Suffolk County in which Salm had no interest. In the course of time, the combined

dealerships incurred an aggregate indebtedness of approximately $90 million which was consolidated into one loan with Toyota Motor Financial Corporation. The consolidation loan was secured by dealership assets as well as the parties' personal guarantees. Plaintiff's guarantee, however, was limited to the indebtedness of the Nassau County Dealerships while Defendant's guarantee was unlimited.

Because of poor operating performance, in early 2003, the Honda dealership located in Hempstead, New York was notified by its franchisor of a working capital deficiency in excess of $335,000.00 as of the end of 2002. The Toyota dealership, located in Valley Stream, New York, was later notified of a working capital deficiency requiring the infusion of approximately $560,000.00. According to Feldstein, Salm was unable and unwilling to make the contributions necessary to alleviate the situation leaving Feldstein as the only practical source of funds to remedy the working capital deficiencies and to satisfy the parties' mutual obligations under their respective personal guarantees securing the Toyota financing.

Although Plaintiff allegedly attempted to convince Defendant to sell the Honda Dealership in order to refinance the Toyota Dealership, and to concentrate their efforts on improving its financial performance, Plaintiff maintains that Defendant was not interested in taking any steps to resolve the Toyota Dealership's financial problems. As a result, Plaintiff [*2]claims that he finally agreed to sell his interest in both dealerships to Defendant rather than put any more money into the Toyota Dealership. Defendant then

purchased Plaintiff's interest in both dealerships pursuant to the Redemption and Settlement Agreement ("Settlement Agreement") dated June 2, 2003 for the sum of $3,750,000.00 plus a 5 year consulting agreement which paid Plaintiff $22,500.00 per month or an aggregate of $1,350,000.00 plus fringe benefits, for a total consideration of $5.1 million. Shortly thereafter, Defendant sold the Honda dealership to Staluppi for $16 million.

Salm's complaint asserts two causes of action sounding in breach of fiduciary duty and fraud. The breach of fiduciary duty claim is based upon Feldstein's alleged failure to disclose the existence, "prior to May 31, 2003," of a "firm offer" from Staluppi to purchase the Honda dealership for $16 million.

The fraud cause of action is predicated on the following oral misrepresentations, among others, allegedly made by Defendant to induce Plaintiff to enter into the Settlement Agreement:

the Honda Dealership was not for sale; if Defendant purchased Plaintiff's interest in their affiliated companies, Defendant would retain the Honda Dealership;

the Honda Dealership was worth between $5 and $6 million.

Plaintiff maintains that, contrary to these representations, Defendant concealed the fact that the Honda Dealership was worth more than $5 or $6 million and in fact, he intended to sell it to Staluppi for $16 million as soon as their deal was consummated.

Defendant seeks summary judgment dismissing the complaint as barred by

various disclaimers and representations contained in the Settlement Agreement governing the sale of Plaintiff's interest in the Nassau County Dealerships which directly contradict Plaintiff's allegations.

DISCUSSION

A.Fraud - Second Cause of Action

In order to sustain a cause of action sounding in fraud, a Plaintiff must show (1) a misrepresentation or a material omission of fact which was false and known to be false by the Defendant; (2) which representation was made for the purpose of inducing the Plaintiff to rely upon it; (3) justifiable reliance by the Plaintiff on the misrepresentation or material omission; and (4) injury. Cerabono v Price, 7 AD3d 479 (2nd Dept. 2004); and Shao v 39 College Point Corp., 309 AD2d 850, 851 (2nd Dept. 2003). See also, Channel Master Corp. v. Aluminum Limited Sales, Inc., 4 N.Y.2d 403 (1958).

A key point of analysis in determining whether a fraud cause of action can be sustained is whether there has been justifiable or reasonable reliance on defendant's misrepresentation by plaintiff. That is, if Salm could have reasonably ascertained the bona fides of Feldstein's claimed misrepresentation then he bears the responsibility for failing to do so. See, Stuart Silver Assocs. v. Baco Dev. Corp., 245 A.D.2d 96 (1st Dept. 1997), where the Appellate Division held, at pp. 98-99:

"Where a party has the means to discover the true nature of the transaction by the existence of ordinary intelligence, and fails to make use of those means, he [or she] cannot claim justifiable reliance on [the] defendant's misrepresentations."

Here, Plaintiff cannot establish the required element of justifiable reliance. See also, Breco Environmental Contractors, Inc. v. Town of Smithtown, 307 A.D.2d 330 (2nd Dept. 2003); Philip Credit Corp. v, Regents Health Grp. Inc., 953 F. Supp. 482 (SDNY 1997); Pappas v. Harrow Stores, Inc., 140 A.D.2d 501 (2nd Dept. 1988); and Schumaker v. Mather, 133 N.Y. 590, 596 (1892).

The express language of the disclosures contained in the Settlement Agreement details Plaintiff's specific acknowledgment of Defendant's intention to sell one or both of the Nassau County Dealerships - - possibly at a price greater than that paid to Plaintiff under the Settlement Agreement. This negates Plaintiff's fraud claim.

The pertinent disclosures contained in Article III ¶ 3.01 (g) of the Settlement Agreement provide, in the context of each party having had a full and adequate opportunity to investigate and evaluate the assets, operation, books and records, financial condition, prospects and other aspects of the Companies [Nassau County Dealerships] and their respective businesses: Feldstein has from time to time received and entertained (and may continue to receive and entertain) offers from various third parties to buy all or some of the [Nassau County Dealerships] or their respective assets; such offers have included, and may in the future include, offers to purchase the [Nassau County Dealerships], or their respective assets at valuations in excess of the valuation implied by the Redemption Consideration being paid to [Salm] hereunder; the Redemption Consideration hereunder has been negotiated among [Salm], the [Nassau County Dealership] and [Feldstein] and is not based upon and may be less than or greater than the true value of the [Nassau County Dealerships], asserts or good will of the [Nassau County Dealerships] or any traditional indices of value; [Feldstein] has received multiple offers over the past 18 months to purchase either or both of the [Nassau County Dealerships] and associated assets owned by one or another of the [Nassau County Dealerships]; [Feldstein] will likely continue to explore such offers and other third party offers in the future;[*3] [Feldstein] expects to sell one or more of the [Nassau County Dealerships] or their respective assets in the near term and such sale may be at a valuation in excess of the valuation implied by the Redemption Consideration being paid to [Plaintiff] hereunder; [Feldstein] has offered [Plaintiff] the opportunity to retain his Membership Interests in the [Nassau County Dealerships] and to participate with [Defendant] in [Defendant's] effort to conclude one or more of such proposed sales at a higher value than that implied by the Redemption Consideration and, notwithstanding such offer by [Defendant], [Plaintiff] has nonetheless declined such opportunity and [Plaintiff] has determined to proceed with the transfer and assignment of his Membership Interests pursuant to the provisions of this Agreement; and prior to reaching the understandings embodied in this Agreement, [Salm] solicited one or more prospective purchasers of automobile dealerships regarding their interest in purchasing [Salm's] Membership Interests in the [Nassau County Dealerships].

The Settlement Agreement also contains a merger clause wherein the parties acknowledged and agree that, except what is set forth in the Agreement, there are no other representations, warranties, covenants or agreements. Feldstein maintains that he made no representations to Salm at all except those set forth in the Article III, ¶ 3.01 (g) in which Salm acknowledged Feldstein's intentions to consider selling the Nassau County dealerships, the solicitation of potential buyers and the possibility of resale at a higher price.

Under these circumstances, Plaintiff cannot be said to have reasonably relied upon any representations made by Defendant outside of the agreement. Thus, the second cause of action must be dismissed.

B.Fiduciary Duty - First Cause of Action

The limited liability company is a unique legal construct which resembles both a corporation insofar as it provides an umbrella of limited liability to its owners and a partnership. Salm asserts that Feldstein breached his fiduciary duty by failing to inform him, before May 31, 2003, of a firm offer by Staluppi to purchase the Honda Dealership for $16 million. Salm, however, pleads no facts, and proffers no

documentary evidence of any kind, to support this assertion.

As confirmed by the affidavit of John Staluppi, negotiations between Defendant and [*4]Staluppi regarding the sale of the Honda dealership, as opposed to the sale of both the Honda and Toyota Dealerships together, did not commence until after Plaintiff and Defendant closed their transaction. No firm offer for the purchase of the Honda dealership was made until after the Settlement Agreement was executed.

Defendant maintains that a fiduciary duty does not lie between partners or managers in a limited liability company. Notwithstanding the fact that the Limited Liability Company Law gives broad discretion to the parties to shape their operating agreement, it has no provision which explicitly imposes or negates a fiduciary duty. However, the law does provide that a "manager shall perform his or her duties as a manager * * * in good faith and with the degree of care that an ordinary prudent person in a like position would use under similar circumstances." Limited Liability Company Law §409(a).

In addition, partners in joint ventures, however constituted, owe one another a fiduciary duty of loyalty. The duty includes an obligation not to favor one's own interests over those of the joint venture, to unfairly manipulate or control corporate processes to retain control or to appropriate for oneself an opportunity that belongs to the joint venture. A partner has a fiduciary obligation to other partners in the organization and owes a duty of individual and undiluted loyalty to those whose interests the fiduciary is

to protect. Drucker v. Mige Assocs. II, 225 A.D.2d 427, 428 (1st Dept.), lv. app. den. 88

N.Y.2d 807 (1996); and Birnbaum v. Birnbaum, 73 N.Y.2d 461, 466, rearg. den., 74 N.Y.2d 843 (1989). This is an inflexible rule of fidelity which bars not only blatant self-dealing but also requires avoidance of situations in which a fiduciary's personal interest might possibly conflict with the interests of those to whom the fiduciary owes a duty of loyalty. Birnbaum v. Birnbaum, supra at 466. Even assuming the existence of a fiduciary relationship between Plaintiff and Defendant as "co-venturers" (Blue Chip Emerald, LLC v. Allied Partners, Inc., 299 A.D.2d 278 [1st Dept. 2002]), Plaintiff has failed to raise any factual issue as to whether Defendant breached a fiduciary duty to him. The record is devoid of any evidence to support the allegation that non-party John Staluppi had made a firm offer to purchase the Honda Dealership, which Defendant improperly failed to make known to Plaintiff, prior to execution of the Settlement Agreement herein. Thus, the first cause of action must fail.

C.Cross-Motion for Discovery

While pursuant to CPLR 3212(f), a motion for summary judgment may be denied to permit disclosure to be had where "it appears from affidavits submitted in opposition that facts essential to justify opposition may exist, but cannot then be stated," Plaintiff's papers in opposition to this motion do not set forth any reason to believe or a good faith basis that further discovery would produce evidence of fraud or breach of fiduciary duty by Defendant. Connecticut Indemnity Co. v. Travelers Ins. Co., 300 A.D.2d 530 (2nd

Dept. 2002). Denial of a motion for summary judgment pursuant to CPLR 3212(f) must

be supported by something more than mere suspicion, surmise or conjecture. Bailey v. New York City Transit Auth., 270 A.D.2d 156, 157 (1st Dept., 2000). Indeed, the mere hope of discovering some evidence during further discovery cannot suffice to defeat summary judgment. Kershis v. City of New York, 303 A.D.2d 643 (2nd Dept. 2003). [*5]

Accordingly, it is,

ORDERED, that Defendant's motion for summary judgment dismissing the complaint is granted; and it is further,

ORDERED, that Plaintiff's cross-motion to compel discovery is denied.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY _____________________________

August 20, 2004 Hon. LEONARD B. AUSTIN, J.S.C.

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