Lotito v Biden

[*1] Lotito v Biden 2007 NY Slip Op 52061(U) [17 Misc 3d 1118(A)] Decided on September 10, 2007 Supreme Court, New York County Fried, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 September 10, 2007
Supreme Court, New York County

Anthony V. Lotito, JR., Individually And Derivatively In The Name And Right Of LBB HOLDINGS USA, LLC, Plaintiff,

against

R. Hunter Biden, JAMES B. BIDEN, PARADIGM CAPITAL MANAGEMENT, INC., PARADIGM FOUNDERS, LLC, PARADIGM EPC LLC, PARADIGM COMPANIES, LLC, BG EQUITY PARTNERS, LLC, BG EQUITY INVESTORS, LLC, BGPC ADVISORS, LLC, LLB HOLDINGS USA, LLC, and JOHN DOES NOS. 1-10, Defendants.



600045/07



Attorneys for Plaintiff:

Kostelanetz & Fink, LLP

Brian C. Wille

530 Fifth Avenue

New York, NY 10036

Attorney for Defendant:

Boies, Schiller & Flexner LLP

Nicholas A. Gravante, Jr.

Amy L. Neuhardt

575 Lexing ton Avenue

New York, NY 10022

Bernard J. Fried, J.

Plaintiff seeks redress for individual and derivative wrongs allegedly incurred at the hands of former partners in this action for rescision and a declaratory judgment. In furtherance of his claims, plaintiff has moved for summary judgment on the first cause of [*2]

action for rescision, and partial summary judgment as to liability on the second and third causes of action for fraud and breach of fiduciary duty, and dismissal of defendants' counterclaims (Sequence No.001). Defendants have cross-moved to disqualify plaintiff's counsel (Sequence #002). Both motions are consolidated for disposition.

The complaint alleges 10 causes of action, all of which turn on a "side-deal" allegedly entered into between defendants and the merger target, to the exclusion of plaintiff.

Defendants have counterclaimed, alleging that plaintiff fraudulently misrepresented his experience and qualifications and his lawyer's reputation for integrity, and wrongfully induced defendants to enter into the venture with him, with representation by his lawyer, to the defendants' damage.

Plaintiff Anthony V. Lotito, Jr. (Lotito) alleges that in April 2006, he and defendants R. Hunter Biden (Hunter Biden) and James Biden formed LBB Holdings, USA, LCC (LBB), a limited liability company. LBB's sole asset consisted of the right to purchase a controlling interest in a series of hedge funds operated by Paradigm Companies, LLC (PCL). Only weeks after the merger agreement was executed, the Bidens are alleged to have cut a secret deal with PCL's parent company to purchase the same assets, on more favorable terms. As part of this plan, the Bidens are alleged to have secretly terminated LBB's rights under the merger agreement, and fraudulently induced Lotito to renounce his interest in LBB.

Lotito now sues, individually and derivatively, for the diversion of LBB's corporate opportunities, and for the fraud alleged to have been perpetrated on Lotito in concealing these acts.

The complaint alleges that defendant PCL and its related entities are Delaware corporations. Defendant BG Equity Partners (BG Partners) and its related entities are Delaware limited liability companies, formed by Hunter Biden and James Biden. On August 4, 2006, PCL and BG Equity Investors (BG Investors) formed BGPC. On August 11, 2006, PCL purported to contribute all of its right, title and interest in the Paradigm Companies to BGPC. It is this transfer of assets which forms the crux of plaintiff's complaint.

According to the complaint, LBB, a nominal defendant, is a limited liability company organized and existing under the laws of the State of Delaware. LBB was created for the purpose of acquiring a controlling interest in PCL.

On September 14, 2006, Lotito executed a Settlement and Buy-Out Agreement pursuant to which he sold his interest in LBB to the Bidens, renounced his rights under the previously executed Engagement and Services Agreements, and exchanged mutual general releases with the Bidens, LBB and the Paradigm Companies. Lotito further alleges that the Bidens are currently running the Paradigm Hedge Funds, by virtue of their ownership interest in the BG companies.

In the first cause of action, Lotito seeks a declaration that the Settlement and Buy-Out Agreement is void. The second cause of action alleges a common-law claim of fraud against Hunter Biden and James Biden. The third cause of action alleges an individual and derivative claim of breach of fiduciary duty against the Biden defendants. The fourth cause of action is a derivative claim for usurpation of a corporate opportunity, against the Bidens. The fifth cause of action alleges unjust enrichment as an individual and derivative claim against the Bidens. The sixth cause of action alleges tortious interference with contract, derivatively, against all defendants. The seventh and [*3]eighth causes of action, for breach of contract, are derivative claims against Paradigm Capital Management, Inc. (PCMI), Paradigm Founders, LLC and Paradigm EPC, LLP. The ninth cause of action seeks an accounting for money due under the Service Agreement. The tenth cause of action is a derivative claim for a constructive trust against the Bidens and the BG companies (BG Partners, BG Investors, and BGPC).

In addition to seeking rescision of the Settlement and Buy-Out Agreement, Lotito seeks $20 million in damages, and punitive damages in connection with the claim of fraud.

Defendants' answer contains four counterclaims based on Lotito's alleged fraud.According to defendants, James Biden first met Lotito in 2002, participated with him as investors in 2005, and later introduced him to Hunter Biden. Lotito repeatedly represented that he was a financial consultant and a knowledgeable and properly accredited securities industry professional with extensive experience advising public and private pension funds on how to invest funds, advising hedge funds on how to secure funds from investors to manage, and obtaining investors for hedge funds. Lotito allegedly further represented himself as properly licensed to engage in these activities. Lotito is also alleged to have represented himself as a creditworthy businessman.

The Bidens allege that in 2006, they learned of an opportunity to acquire an interest in the company that managed the Paradigm hedge funds. When they discussed this opportunity with Lotito, he expressed an interest in joining with them, representing that he had the ability to find substantial investors for the transaction. Based on Lotito's representation about himself and his abilities, the Bidens agreed to further explore, and ultimately to participate in the transaction with him.

In furtherance of the acquisition of Paradigm, Lotito introduced the Bidens to John E. Fasciana, a New York attorney, to represent defendants in the acquisition of Paradigm. However, Lotito did not tell the Bidens that Fasciana was awaiting sentencing on a conviction for fraud and money laundering.

Defendants claim that had Lotito revealed Fasciana's record to them, and his close familiarity with Fasciana, they never would have retained Fasciana, and probably would not have pursued the acquisition with Lotito as a partner.

Nevertheless, in May 2006, LBB entered into a Merger Agreement to acquire a controlling interest in Paradigm. LBB needed to raise approximately $21 million by October 31, 2006 to complete the acquisition. In an Engagement Agreement, LBB hired Lotito as a consultant at $25,000/month to secure equity investors for the venture. Lotito failed to secure even one investor, according to defendants.

Lotito and James Biden entered into a Service Agreement with Paradigm Companies, LLC, to obtain investors for the Paradigm hedge funds.

Plaintiff seeks summary judgment on his first cause of action, in which he seeks a declaration that the Settlement and Buy-Out Agreement is void, and partial summary judgment as to liability on the second and third causes of action, for fraud and breach of fiduciary duty, both individually, and as a derivative claim. Plaintiff has also moved for relief pursuant to CPLR 3211 (a) (1) and (7), seeking dismissal of defendants' counterclaims based on documentary evidence and failure to state a cause of action.

A movant's burden on a motion for summary judgment is to establish that there are no [*4]material issues of fact. Zuckerman v City of New York, 49 NY2d 557 (1980). Once a movant has met this burden, the party opposing the motion must come forward with proof of the existence of a triable issue. Indig v Finkelstein, 23 NY2d 728 (1968).

To succeed on a motion to dismiss defendants' counterclaims pursuant to CPLR 3211 (a) (1), the documentary evidence that forms the basis of the plaintiff's motion must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the defendants' counterclaims. See Scadura v Robillard, 256 AD2d 567, 567 (2d Dept 1998).

In support of the branch of the motion which seeks summary judgment, Lotito argues that the record presents a narrow legal question, "whether, under the law, anything less than actual notice by the Bidens of their secret side-deal (and its terms) can relieve them of liability" on Lotito's claims. Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment and to Dismiss, dated March 1, 2007, at 15. Co-venturers in a partnership, joint venture or limited liability company stand in a fiduciary relationship to each other, claims Lotito, which duty continues up to the moment fiduciaries cease to be co-venturers, citing Blue Chip Emerald LLC v Allied Partners, Inc. (299 AD2d 278 [1st Dept 2002]). This duty bars self-dealing among co-venturers, and requires complete and unfettered disclosure of all facts that might bear on the fiduciary's actions, argues Lotito.

According to Lotito, the undisputed facts show that Lotito was a partner in LBB; that Hunter Biden and James Biden executed a side-deal with PCL which secured for themselves the same assets which LBB had already contracted to purchase and cancelled LBB's rights under the Merger Agreement; and that defendants concede that they never revealed these actions to Lotito prior to execution of the Settlement and Buy-Out Agreement.

Contrary to plaintiff's claim of undisputed facts, the defendants argue that plaintiff received actual and/or constructive notice of the "side-deal" prior to execution of the Settlement and Buy-Out Agreement. They claim to have instructed their previous attorney to finalize the details of Lotito's buy-out "in such a manner as to satisfy all fiduciary obligations to Lotito," that the agreement which memorialized their "side-deal" with Paradigm was executed after the Settlement and Buy-Out Agreement was executed, and then back-dated to the date of settlement with Lotito, and that questions of fact exist which preclude summary judgment to plaintiff, and which require further discovery in support of these defenses.

A plaintiff's evidence in opposition to a defendant's summary judgment motion need not conclusively prove her case. The motion court's proper role is merely issue finding, not issue determination and the court must draw all reasonable inferences in the opposing party's favor.

Rose v Da Ecib USA, 259 AD2d 258, 259 (1st Dept 1999) (Internal citations omitted).

Even assuming that plaintiff has established a prima facie case of entitlement to summary judgment as a matter of law, defendants have successfully set forth sufficient evidence to raise a triable issue with respect to the claim that plaintiff received all the notice that he was entitled to before they proceeded to close on a side-deal involving Paradigm's assets. Arguably, defendants will have problems of sufficiency and credibility in actually proving their defenses at trial, but at a minimum, defendants are entitled to further discovery before judgment may be entered on this case.

Plaintiff's application for partial summary judgment is also denied since the issues on which defendants seek disclosure are inextricably intertwined with plaintiff's claims of fraud and breach of fiduciary duty.

On a motion to dismiss for failure to state a cause of action, every fact alleged must be [*5]assumed to be true, and the complaint is to be liberally construed, giving the pleading party the benefit of every favorable inference. EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 (2005). The inquiry is whether the facts as alleged fit within any cognizable legal theory. Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 (2001); Williams v Sidley Austin Brown & Wood, L.L.P., 15 Misc 3d 1125(A) (Sup Ct, NY County 2007), Slip Copy. Additional submissions by the party may be used to supplement the pleadings, and must also be given the benefit of every favorable inference. Cron v Hargro Fabrics, 91 NY2d 362, 366 (1998).

In their answer, defendants alleged three "conditional" causes of action for rescision of their agreements with Lotito "in the event that this Court grants relief to plaintiff on his First Cause of Action ... ." The fourth counterclaim alleges fraud based on Lotito's misrepresentations.

The allegations on which these four counterclaims are based are, in relevant part, that Lotito falsely informed the Bidens that he was a licensed, credentialed securities professional and a licensed, accredited financial advisor; that Lotito misrepresented that his credit history and credit rating were sufficient to obtain financing for a sophisticated business transaction; that Lotito had failed to tell the Bidens that he had judgments, liens, defaults, and foreclosure proceedings against him; and that Lotito had failed to tell the Bidens and LBB that Fasciana was a convicted felon, awaiting sentencing on money laundering charges.

On the basis of all of these allegations, defendants seek to void all of their agreements with Lotito, but only in the event that Lotito is granted the declaratory and rescission relief he requests in the main complaint.

To properly plead a cause of action for fraud, plaintiff must allege defendants' misrepresentation of a material fact, falsity, scienter, reliance and injury. See Simcuski v Saeli, 44 NY2d 442, 445 (1978). The misrepresentations alleged must be the direct and proximate cause of the losses claimed. Laub v Faessel, 297 AD2d 28 (1st Dept 2002).

To establish causation, plaintiff must show both that defendant's misrepresentation induced plaintiff to engage in the transaction in question ... and that the misrepresentations directly caused the loss about which plaintiff complains ... .

Id. at 31.

" An essential element of the plaintiff's cause of action for ... any ... tort, is that there be some reasonable connection between the act or omission of the [plaintiff] and the damage which the [defendants have] suffered.'" Id. at 31(citation omitted).

Defendants' answer fails to allege any monetary injury. However, in opposition to plaintiff's motion for summary judgment, defendants assert that they incurred nearly a million dollar debt and hundreds of thousands of dollars of questionable attorneys' fees, entered into personal guarantees to prevent legal action against Paradigm Hedge Funds, and personal guarantees on convertible debt to fund the continued operation of the funds, and paid for repeated, unsuccessful business trips by Lotito.

Despite these losses allegedly suffered by defendants, the connection between Lotito's alleged misrepresenations and the losses alleged to have been incurred by defendants is tenuous at best. Unsuccessful business trips, questionable attorney's fees, and high debts incurred in furtherance of the joint venture, without demonstrating that plaintiff's alleged misrepresentations caused defendants to incur these costs, fail to satisfy the damage element of defendants' claims. Since defendants only [*6]seek recision of their agreements with Lotito if the court grants Lotito rescision of the buyout agreement, these allegations of monetary injury, absent allegations of causation, require the dismissal of these counterclaims without prejudice to repleading.

Defendants also assert, in opposition to the summary judgment motion, that Paradigm Hedge Funds had only two to three million dollars under management, not the $500 million represented by Lotito; that returns on the funds were not as represented; that the companies in which LBB would be investing had extensive debt; that a primary manager of the funds had an apparent substance abuse problem and had been an absentee manager for several years; that the allocation of equity ownership in the funds was in dispute; and that a large portion of the $9 million gross annual revenue for the funds was attributed to administrative fees charged by a subsidiary.

To the extent that defendants' counterclaims rest on an alleged breach of fiduciary duty by Lotito, a sophisticated business person typically cannot establish that it entered into an arm's-length transaction in justifiable reliance on alleged misrepresentations if that party failed to use available means to discover the true nature of the transaction by the exercise of ordinary intelligence. Valassis Communications v Weimer, 304 AD2d 448, 449 (1st Dept 2003); Stuart Silver Associates v Baco Development Corp., 245 AD2d 96, 98 - 99 (1st Dept 1997); see also Andersen v Weinroth, 13 Misc 3d 1204(A) (Sup Ct, NY County 2006) (unpublished).

Claims that the LBB merger target was overvalued by plaintiff, that returns were not as represented, that debt, administrative fees, and equity allocations were not as favorable as expected, or that a manager had a substance abuse problem raise the issue of what due diligence, if any, defendants engaged in when LBB was created. The absence of such allegations defeats a claim of justifiable reliance by defendants upon plaintiff.

Turning to defendants' cross motion to disqualify plaintiff's attorney.

Defendants cite New York's Code of Professional Responsibility, DR 5-102, 22 NYCRR 1200.21. This rule states, in relevant part:

(a) A lawyer shall not act, or accept employment that contemplates the lawyer's acting, as an advocate on issues of fact before any tribunal if the lawyer knows or it is obvious that the lawyer ought to be called as a witness on a significant issue on behalf of the client ... .

***

(d) If after undertaking employment in contemplated or pending litigation, a lawyer learns or it is obvious that the lawyer or a lawyer in his or her firm may be called as a witness on a significant issue other than on behalf of the client, the lawyer may continue the representation until it is apparent that the testimony is or may be prejudicial to the client at which point the lawyer and the firm must withdraw acting as an advocate before the tribunal. [*7]

Although this rule is applicable, in part, to conflicts arising after the attorney already has undertaken the representation and requires withdrawal where it is apparent that the attorney's testimony "is or may be prejudicial to the client," this rule may not be used to "disqualify an opponent's attorney by the simple expedient of calling him as a witness." However, " the best interests of the client and fairness to all the parties concerned require that all doubts be resolved in favor of the lawyer testifying and against his continuing as an advocate'. (citation omitted)." Emerald Green Homeowners' Assn. v Aaron, 90 AD2d 628, 628 (3d Dept 1982) (attorney who had been plaintiff's secretary for two years was disqualified where he knew a great deal about the salient facts). Where a partner in plaintiff's law firm made certain averments in documents which clearly demonstrated that his testimony may have been prejudicial to his client, the court disqualified the attorney, and his firm, pursuant to DR 5-102 (b) (lawyer may be called as a witness on a significant issue, other than on behalf of his client). Fairview at Old Westfield, L.P. v European American Bank, 186 AD2d 238, 239 (2d Dept 1992).

Defendants claim that Lotito knew, either directly, or by virtue of information in the possession of his counsel, that the Bidens were in negotiations for the purchase of an ownership interest in the Paradigm hedge funds at the time that the Settlement Agreement was entered into between Lotito and the Bidens, since they had advised their former attorneys to finalize the details of Lotito's buy-out "in such a manner as to satisfy all fiduciary obligations to Lotito." Defendants assert that this instruction to their own counsel put Lotito's attorney on notice that defendants intended to purchase PCL for themselves. It is this "notice," defendants claim, which requires that Lotito's counsel be disqualified from further representation of plaintiff.

Defendants further claim that Lotito's attorney, Brian C. Wille, Esq. (Wille) while acting on behalf of Lotito, traded away any right Lotito may have had to further information from the Biden defendants in exchange for immediate acceptance of the terms of the settlement agreement. Since Wille was Lotito's principal negotiator for the settlement agreement, this, it is claimed, makes him a critical witness to the litigation, who will provide testimony in support of the Biden defendants and prejudicial to his own client, Lotito. Thus, the argument is that since the negotiation of the Settlement Agreement is the central event pleaded in Lotito's complaint, and Wille's testimony may be prejudicial to Lotito's interests, Wille and his firm must withdraw from further representation of Lotito.

There is no affidavit from defendants or defendants' former counsel regarding what they actually did or did not tell Lotito's attorney, allegedly because of a fee dispute between defendants and those attorneys. Defendants claim that their fee dispute with their former counsel is nearly at an end and that corroborating evidence regarding their theory of disqualification will be forthcoming. However, there is nothing in the record beyond defendants' hypothesis, which tends to establish that Lotito's attorney will need to be called as a witness against plaintiff's interests at trial. Wille has offered his own affidavit stating that he was never informed of any discussion that the Bidens were then having with PCL, of the existence of BG Entities, or of the fact that the Bidens had negotiated a side-deal to purchase the interests that LBB had previously contracted to purchase, and defendants have failed to counter this evidence.

As an alternate ground for disqualification of plaintiff's counsel, defendants claim that even if they are unable to establish that Wille's testimony will be adverse to plaintiff, it will be necessary testimony for plaintiff to establish the absence of disclosure by the defendants to plaintiff, as part of [*8]plaintiff's burden of proof on the complaint.

Defendants cite Sokolow, Dunaud, Mercadier & Carreras LLP v Lacher (299 AD2d 64 [1st Dept 2002]) and Korfmann v Kemper Natl. Ins. Co. (258 AD2d 508, 508 [2d Dept 1999]) to support disqualification based on the necessity of Wille's testimony to plaintiff's case in chief. In Sokolow, an attorney was disqualified from further representation of clients whose fee payments to him were directly in dispute in the litigation between respondent and another law firm. The Court applied the test to be applied for determining the necessity of testimony, as laid out in S & S Hotel Ventures Ltd. Partnership v 777 S. H. Corp. (69 NY2d 437, 446 [1987]):

Testimony may be relevant and even highly useful but still not strictly necessary. A finding of necessity takes into account such factors as the significance of the matters, weight of the testimony, and availability of other evidence.

In Sokolow, respondent's testimony was found necessary to explain why the clients' fees were properly paid to him. Sokolow, Dunaud, Mercadier & Carreras LLP v Lacher, 299 AD2d at 75. In Korfmann v Kemper Natl. Ins. Co. (258 AD2d 508, supra), it was clear that plaintiff's attorney had conducted negotiations with defendant insurance company, and was a necessary witness in an action against the insurance company based on bad faith.

None of the circumstances present in Sokolow or Korfmann are present in this case. Defendants' evidence is totally lacking in proof that plaintiff's counsel participated in a pivotal discussion that is claimed to have put plaintiff on notice of a pending transaction between defendants and the object of the parties' merger. Nor has plaintiff's counsel directly insinuated himself into the dispute between plaintiff and defendant, other than as plaintiff's attorney. Defendants have failed to submit any evidence to counter Wille's affidavit of lack of notice from defendants' attorney. Absent such evidence, there is no basis for finding that Wille will be a necessary witness on plaintiff's case in chief.

The ninth and tenth causes of action in plaintiff's complaint, for an accounting and a constructive trust, are dismissed, sua sponte. These claims fail to state a cause of action and seek only the ultimate relief to be imposed in the event that plaintiff's other claims are sustained.

I have considered all of the parties' other arguments and finds them to be without merit.

Accordingly, it is

ORDERED that the plaintiff's motion is granted in part, and the defendants' first, second, third, and fourth counterclaims are dismissed, without prejudice, and the motion is denied in all other respects; and it is further

ORDERED that defendants' motion to disqualify plaintiff's attorney is denied; and it is further

ORDERED that the parties are directed to appear for a conference in Part 60, on October 15, 2007 at 9:30 a.m.

Dated:_______________________

ENTER: [*9]

______________________________________

J.S.C.