Brunetti v Musallam

[*1] Brunetti v Musallam 2008 NY Slip Op 50721(U) [19 Misc 3d 1115(A)] Decided on March 25, 2008 Supreme Court, New York County Bransten, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 March 25, 2008
Supreme Court, New York County

Joseph Brunetti, Plaintiff,

against

Rami Musallam, Stephen Zimmerman, William Nachtigal, Igor Klener, and ThruPOINT, Inc., Defendants.



601769/01

Eileen Bransten, J.

Defendants Rami Musallam ("Mr. Musallam"), Igor Klener ("Mr. Klener") and ThruPOINT, Inc. ("ThruPOINT") (collectively, "the Defendants") move for leave to amend their answer under CPLR 3025(b) to assert a setoff defense pursuant to GOL § 15-108. ThruPOINT individually moves for summary judgment pursuant to CPLR 3212 dismissing the complaint against it.[FN1] Plaintiff Joseph Brunetti ("Mr. Brunetti") opposes both motions, and cross-moves pursuant to CPLR 3025(b) to amend his complaint.

BACKGROUND

In 1993, Mr. Brunetti founded ThruPOINT, a corporation organized under New York law. See, Gotlieb Aff'd, Ex. A, Original Complaint at 1, ¶ 2. In 1996 Mr. Brunetti, Mr. Musallam, Mr. Klener, Barry Rich ("Mr. Rich"), Stephen Zimmerman ("Mr. Zimmerman"), and William Nachtigal ("Mr. Nachtigal") executed a shareholders agreement and became ThruPOINT's shareholders and directors. Id.

In April 1998, Mr. Brunetti alleges that Mr. Musallam represented to him that non-party Morgan Stanley had agreed to make an equity investment in ThruPOINT provided that he transfer approximately 70 percent of his equity interest in the company to the other shareholders, resign from the board of directors, and surrender his employment rights and [*2]become an at-will employee. Id., at 2, ¶¶ 9-10. An Agreement was executed by all of ThruPOINT's shareholders, ThruPOINT by Mr. Zimmerman, and Morgan Stanley on August 20, 1998. See, O'Flaherty Aff'd, Ex. B. Mr. Brunetti transferred 2,174,940 shares of ThruPOINT stock in unequal shares to Messrs. Musallam, Zimmerman, Nachtigal, Klener, and Rich. Id. The agreement also gave all signatories the right to purchase ThruPOINT at two cents per share.

Mr. Brunetti was terminated, allegedly without cause, on January 31, 2001 and commenced this action the same year. See, Gotlieb Aff'd, Ex. A, Original Complaint at 4, ¶ 22. He alleges that the other shareholders breached their fiduciary duty to him and committed a fraud by falsely representing that Morgan Stanley put conditions on its equity financing. Id., at 5, ¶¶ 29, 32, 33. He also alleges that he was denied the opportunity to exercise his right to purchase ThruPOINT stock at two cents per share. Id., at 4, ¶ 19. He seeks the return of all the shares he transferred to the other shareholders pursuant to the agreement. Id., at 5, ¶ 30, at 6, ¶ 34.

In 2001, before Mr. Brunetti commenced this action, Mr. Rich settled with him by returning the 337,166 shares that he received. [FN2] In 2002, the Defendants moved for summary judgment, which the Court (Moskowitz, J.) granted. The Appellate Division, First Department reversed that decision, finding that triable issues of fact remained, and reinstated this case to the calendar. Mr. Zimmerman and Mr. Nachtigal settled with Mr. Brunetti in 2006 when they each gave Mr. Brunetti $25,000.00.[FN3] Mr. Brunetti filed the Note of Issue on July 5, 2007.

The Defendants now move pursuant to CPLR 3025(b) to amend their answer to assert a defense under GOL § 15-108, arguing that any recovery Mr. Brunetti receives should be offset from the settlements with Messrs. Rich, Zimmerman, and Nachtigal. ThruPOINT moves for summary judgment disposition under CPLR 3212, arguing that there are no triable issues of fact that it did not breach a duty or commit a fraud upon Mr. Brunetti. Mr. Brunetti opposes both motions, and cross-moves to amend his complaint under CPLR 3025(b) to add direct claims against ThruPOINT.

DISCUSSION

The Defendants' Motion to Amend their Answer

It is well-settled that leave to amend a pleading pursuant to CPLR 3025(b) is left to the sound discretion of the trial court. See, Edenwald Contracting Co., Inc., v. City of New [*3]York, 60 NY2d 957, 959 (1983). "A party may amend its pleadings to raise [GOL] § 5-108 as a defense at any time * * * provided that the late amendment does not prejudice the other party." Whalen v. Kawasaki Motors Corp., 92 NY2d 288, 293 (1998). Prejudice requires "some indication that the [opposing party] has been hindered in the preparation of [the] case or has been prevented from taking some measure in support of [her/his] position." Cherebin v Empress Ambulance Service, Inc., 43 AD3d 364 (1st Dept. 2007).

Here, Mr. Brunetti will not be prejudiced if the Defendants are granted leave to amend their answer. Indeed, this affirmative defense's addition will not affect Mr. Brunetti's prosecution of this case, as it does not raise new issues which may require him to re-tune his legal strategy. Rather, it is only concerned with the financial award he could obtain from these remaining Defendants should he ultimately prevail in this litigation.

G.O.L. § 15-108 deals with the effect that a settlement between an injured party and a tortfeasor has on related claims by or against joint tortfeasors who do not participate in the settlement. The statute provides "that such a settlement reduces a nonsettling tortfeasor's liability to the injured party by the greater of the amount of consideration the settling tortfeasor paid for its release, or, alternatively, the amount of the settling tortfeasor's equitable share of the damages under CPLR article 14 (emphasis added)." The Chase Manhattan Bank v. Akin, Gump, Struass, Hauer & Feld L.L.P., 309 AD2d 173, 174 (1st Dept. 2003). The statute "is concerned with ensuring equity," and therefore provides that "nonsettling defendants should not bear more than their fair share of a plaintiff's loss." Whalen v Kawasaki Motors Corp., U.S.A., 92 NY2d 288, 292 (1998). "[T]he equitable share of the released tortfeasor under General Obligations Law § 15-108 is to be determined not by assessing the wrongful acts committed by each but by assessing the damage inflicted by each." Hill v. St. Clare's Hospital, 67 NY2d 72, 85 (1986).

In this case, Mr. Brunetti's settled with Messrs. Rich, Zimmerman, and Nachitgal, who are the recipients of 1,337,558 or 61.5% of the 2,174,940 shares of stock that he transferred under the agreement. It is the amount of the transferred stock received by each settling wrongdoer that provides the measure of the injury caused by each one with respect to Mr. Brunetti's claims for damages for breach of fiduciary duty and fraud. The only equitable way to apply the statute in this type of commercial tort case, where the alleged tortfeasors each benefitted from their alleged wrongdoing in a distinct and easily calculable manner, is to reduce any award of damages for the loss of Mr. Bruentti's ThruPoint stock by 61.5%.

ThruPOINT's Motion for Summary Judgment/ Mr. Brunetti's Cross-Motion to Amend

To obtain summary judgment, the movant must establish its cause of action sufficiently to warrant the court as a matter of law in directing judgment in its favor and it must set forth evidence that there is no factual issue requiring an adjudication on the facts. See, Forrest v Jewish Guild for the Blind, 3 NY3d 295, 315 (2004). To defeat a summary judgement motion, the opposing party must "show facts sufficient to require a trial of any issue of fact" CPLR 3212 (b). [*4]

ThruPOINT argues that the complaint facially requires summary judgment in its favor because Mr. Brunetti does not allege that it breached a duty or committed a fraud against him

nor are there any facts in dispute that it in fact did. In his claims for breach of fiduciary duty and fraud, Mr. Brunetti alleges that:

"Each of the Defendants, individually and collectively, owed a fiduciary duty to Plaintiff at the time of the transactions referred to above. * * * The Defendants breached their fiduciary duty and knowingly and willfully deprived Plaintiff of the financial benefits of his ownership * * * . The statements made to Plaintiff to induce him to execute the * * * agreement were material statements of fact; were made knowingly; were false and misleading; were known to be false and misleading"

Gotlieb Aff'd, Ex. A, Original Complaint at at 5, ¶¶ 28,29,32.

The genesis of Mr. Brunetti's complaint is that he was duped into relinquishing the majority of his ownership in and management of ThruPOINT. None of his stock, which is indeed the key to corporate ownership, was transferred to ThruPOINT. See, O'Flaherty Aff'd, Ex. B; Rich Aff'd. If Mr. Brunetti prevails, ThruPOINT cannot comply with the portion of the damages that seeks the stock's retransfer because it does not have any in its possession.

Under New York Law, it must be demonstrated that the corporate officers acted on the corporation's behalf and in furtherance of its goals in order for it to be liable. See, Solow v. New Northern Brokerage Facilities, 255 AD2d 198 (1st Dept. 1998). Mr. Brunetti does not plead that Mr. Musallam or any of the other shareholder-defendants acted in furtherance of ThruPOINT when they perpetrated this alleged scheme against him.

Mr. Brunetti attempts to demonstrate that an issue of fact exists by proffering the depositions of himself, Mr. Musallam, and non-party Kenneth Alberstad, but these are insufficient. See, Einstein Aff'd, Ex. A., B., and C. Rather, contained therein are statements that Mr. Musallam believed that Morgan Stanley's capital financing would be good for ThruPOINT. See, Ex A. at 105, ¶¶ 18-2; Ex B. at 101, ¶¶ 15-18. Mr. Musallam's subjective belief about the capital infusion's benefits does not raise the specter of ThruPOINT's liability. He also denied that he averred Morgan Stanley put conditions on its financing. Id.

There is, in fact, nothing in the record that Mr. Musallam acted on ThruPOINT's behalf when he allegedly lead the campaign that eventually resulted in Mr. Brunetti's ouster from the company. Mr. Brunetti acknowledges this when he states, "As drafted, the Complaint did not specifically assert a claim against ThruPOINT as a participant in the breach of fiduciary duty." Plaintiff's Reply Memorandum at 6. He now attempts to rectify this by cross-moving under CPLR 3025(b) to amend his complaint to assert that [*5]Mr. Musallam acted on behalf of ThruPOINT. See, Einstein Aff'd., Ex D, Proposed Amended Complaint at 3, ¶ 12. He also seeks to add a new damage claim based on his alleged failure to exercise stock options at two cents a share, and a wholly new third cause of action against Mr. Musallam for breach of fiduciary duty by his alleged failure to offer Mr. Brunetti the opportunity of participating in a private sale of ThruPoint stock arranged by him in July 2000.

It is well-settled that leave to amend a pleading pursuant to CPLR 3025(b) is left to the sound discretion of the trial court. See, Lebowitz v. Mt. Sinai Hospital, 296 AD2d 340 (1st Dept. 2002). "While leave to amend is freely given, [the First Department] has consistently held that, in order to conserve judicial resources, an examination of the underlying merits of the cause of action is warranted." Megaris Furs Inc v. Gimbal Bros. Inc, 172 AD2d 209 (1st Dept. 1991).

Mr. Brunetti's new damages claim under his allegation that he was denied his exercise right to purchase ThruPOINT stock at two cents per share is wholly without merit. According to the unrebutted affidavit of Thomas O'Flaherty, ThruPoint's Chief Financial Officer, subsequent to the issuance of these options to both Mr. Brunetti and other employees, the company's auditors, Ernst & Young LLP, determined that five cents a share was an appropriate fair market value. Thus, absent some claim that Mr. Brunetti was signaled out for unfair treatment or that the $.02 value promised him in April 1998 or the subsequent adjustment of the exercise price to $.05 was not made in good faith by the plan administrator, this new damage claim lacks any merit.

Equally without merit is the proposed claim that Mr. Musallam breached his fiduciary duty because he did not offer Mr. Brunetti the opportunity to participate in a private sale of ThruPOINT stock arranged in July 2000. The Third Amended and Restated Shareholders' Agreement in effect at the time, dated February 29, 2000, provided for a right of co-sale; i.e, the right to participate in another shareholder's proposed sale, only for certain Morgan Stanley entities, KPMG entities, and Cisco Systems, Inc who had invested in ThruPOINT. Mr. Brunetti was not a party to this agreement, and therefore did not possess any right to participate in the private sale.

The proposed claim that Mr. Musallam acted on ThruPOINT's behalf must be denied because "it is based on facts that would contradict [plaintiff's] original theory." Peso v American Lesiure Facilities Management Corp., 277 AD2d 48, 49 (1st Dept. 2000). The original complaint, by Mr. Brunetti's own admission, lacked allegations against ThruPOINT. Rather, it pled that Mr. Musallam acted on his own behalf and in concert with the other shareholders to deprive Mr. Brunetti of his ownership in and management of ThruPOINT. Now, Mr. Brunetti purports that ThruPOINT is liable. Moreover, the only viable damages claim relates to the stock that was transferred pursuant to the agreement. As articulated, supra, ThruPOINT did not acquire any of its own stock under the agreement and therefore cannot comply with the damages should Mr. Brunetti prevail. [*6]

Moreover, the Appellate Division, First Department has held that when the plaintiff seeks leave at a late stage to plead new facts, "the motion must be supported by an affidavit of merits * * * that could be considered on a motion for summary judgment." Non-Linear Trading Co., Inc. v Braddis Associates, Inc., 243 AD2d 107 (1st Dept. 1998), citing Nab Term Constructors v. City of New York, 123 AD2d 571 (1st Dept. 1986). Furthermore, a reasonable excuse for waiting until the eve of trial to amend the complaint must be established by the movant. See, Oil Heat Institute of Long Island Ins. Trust v. RMTS Assoc., LLC, 4 AD3d 290 (1st Dept. 2004). Mr. Brunetti does not proffer an affidavit from someone with personal knowledge nor does he present a valid excuse for delaying this exercise until after ThruPOINT moved for summary judgment.

Accordingly, it is hereby

ORDERED that the Defendants' motion to dismiss the third cause of action is GRANTED; and it is further

ORDERED that the Defendants' motion to amend their answer to include an affirmative defense under GOL 15-108 is GRANTED; and it is further

ORDERED that ThruPOINT's motion for summary judgment is GRANTED; and it is further

ORDERED that Mr. Brunetti's motion to amend his complaint is DENIED.

This constitutes the Judgment, Decision, and Order of the Court.

Dated: New York, New York

March 25, 2008

E N T E R

Hon. Eileen Bransten Footnotes

Footnote 1:The Defendants also move for summary judgment dismissing the third cause of action for rescission in its entirety. Mr. Brunetti does not oppose this, and it is therefore granted.

Footnote 2: Despite the settlement and the fact that Mr. Rich was not sued in this action, the complaint seeks to recover the value of Mr. Rich's shares. See, Gotlieb Aff'd, Ex. A, Original Complaint, ¶¶ 15, 30, 34.

Footnote 3: Messrs. Zimmerman and Nachitgal had each received 500,236 shares of Mr. Brunetti's stock under the agreement.