Agency Assoc., Inc. v John R. Sauer, Inc.

[*1] Agency Assoc., Inc. v John R. Sauer, Inc. 2008 NY Slip Op 52400(U) [21 Misc 3d 1136(A)] Decided on November 6, 2008 Supreme Court, Nassau County Warshawsky, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 November 6, 2008
Supreme Court, Nassau County

Agency Associates, Inc., on behalf of LANDMARK PLANNING GROUP LTD., Plaintiff,

against

John R. Sauer, Inc., THOMAS M. FREY, RISK & SAFETY MANAGEMENT CORP., BUILDING MATERIALS DEALERS ASSOCIATES, INC. and FREY FAMILY LIMITED PARTNERSHIP, Defendants.



Agency Associates, Inc., on behalf of LANDMARK PLANNING GROUP, LTD., Plaintiff,

against

Risk & Safety Management Corp., BUILDING MATERIALS DEALERS ASSOCIATES, INC. and FREY FAMILY LIMITED PARTNERSHIP, Defendants.



006708/2005



Attorney for plaintiffs:

Mark Bradley Roth, Esq.

55 Post Ave

Westbury, NY 11590

Attorney for Defendants:

Gordon & Hafner, LLP

Attn: David Gordon,Esq.

480 Mamaroneck Ave.

Harrison, NY 10528

Ira B. Warshawsky, J.

Motion by defendants for summary judgment dismissing the complaint is granted in part and denied in part. Cross-motion by plaintiff for partial summary judgment is denied. Cross-motion by plaintiff for an award of attorney's fees is granted to the extent indicated below.

This is an action by a shareholder to recover expenses and other monies due the corporation.Landmark Planning Group, Ltd. is a corporation which was formed in 1988 by three insurance brokers to provide office space, equipment and various services to their insurance agencies. In addition to providing support services, Landmark collected the premiums on policies written by the brokers, processed claims, and distributed the brokers' commissions.

The original stockholders of Landmark were defendant Thomas Frey, as well as two other individuals, Douglas Flindt and Frank Giovannotto, who are not parties to the action. Frey held the stock in the name of his wholly-owned company, John R. Sauer, Inc., and Flindt held his stock in the name of his company, Douglas Flindt Associates. Plaintiff Agency Associates, Inc. subsequently became a 25% stockholder in Landmark and currently is a 50% stockholder. The other 50% of the Landmark stock is currently owned by Frey through John R. Sauer. Frey is also the sole shareholder of defendants Risk & Safety Management Corp. and Building Materials Dealers Associates, Inc. John R. Sauer, Risk & Safety, and Building Materials were all insurance brokers which utilized the services provided by Landmark.

In May 1992, while Agency still held only a 25% interest, the stockholders of Landmark entered into a shareholder agreement. Pursuant to the shareholder agreement, Landmark was to provide each party with an "accounting of all insurance business" during the preceding month and remit the party's commissions. The agreement further provided that the parties would share the monthly expenses of Landmark in the same proportions as their monthly commissions. If any party did not pay its share of the expenses by the third business day of the month, the party had to pay 125% of its expense share. After the "first delinquent 30 days," the party had to pay 150% of its share of expenses, and if its share was not paid within "the next delinquent 30 days," 175% of its share.

According to Robert Henken, the sole shareholder of Agency Associates, it was understood that Risk & Safety, and other companies controlled by Frey, would pay their proportionate shares of the expenses, even though they were not parties to the shareholder agreement. Risk & Safety placed insurance business with the State Insurance Funds, which [*2]paid the broker a set fee rather than a commission as a percentage of premiums. It appears that Landmark was not able to determine the net fee based upon the information at its disposal. In any event, Frey was on the "honor system" to report what Risk & Safety "actually made" in order to calculate its share of the expenses. Plaintiff alleges that for the years 2000-2003, Frey understated the monthly fees and commissions earned by Risk & Safety and Building Materials in order to reduce their shares of the monthly expenses.

Action No. 1 was commenced by Agency Associates on behalf of Landmark against John R. Sauer and Frey on April 29, 2005. Plaintiff subsequently served a supplemental summons in action # 1, naming Risk & Safety, Building Materials, and the Frey Family Limited Partnership as additional defendants.[FN1] Action # 2 was commenced by Agency Associates on behalf of Landmark against Risk & Safety, Building Materials, Frey, and the Limited Partnership on March 1, 2007. Pursuant to a so-ordered stipulation, the two actions were consolidated with the complaints remaining as separate pleadings.

The following claims have been summarized from the second amended complaint in action # 1. In its first cause of action, plaintiff seeks to recover $39,233.42 from Sauer, as unpaid expenses which Sauer avoided paying by understating its commissions. Plaintiff also seeks to recover an additional sum of $176,550.40 from Sauer pursuant to the 90-day delinquency provision.

In the second cause of action, plaintiff seeks to recover $45,498.32 from Risk & Safety and Building Materials, as unpaid expenses which these defendants avoided paying by failing to state their commissions accurately. Although the complaint does not allocate this sum as between the two defendants, plaintiff seeks to recover an additional $204,742.44 pursuant to the delinquency provision.

The shareholder agreement provided that if the insured failed to pay the premium within 45 days of the billing date, the shareholder-broker would pay the premium, unless it had previously instructed Landmark to cancel the policy. In the event that the policy was cancelled for non-payment of premium, the shareholder was responsible for any portion of the premium which was earned before the policy was cancelled. In the third cause of action, plaintiff seeks to recover from Sauer $58,340.64 in premiums which were not paid by its clients.

In the fourth cause of action, plaintiff seeks to recover from Frey $53,280.02 which Landmark advanced to pay the premiums on his medical insurance. In the fifth cause of action, plaintiff seeks to recover from Frey $58,094.98 as the outstanding balance on loans which were made to him by Landmark. In the sixth cause of action, plaintiff seeks to recover from Frey $524,365.22 in fraudulent conveyances made by Sauer, Risk & Safety, and Building Materials. Plaintiff alleges that the three corporations have inadequate capital to satisfy a judgment against them and failed to observe corporate formalities. In the seventh cause of action, plaintiff seeks to recover against Sauer, Risk & Safety, Building Materials, and Frey for prima facie tort.

In the eighth cause of action, plaintiff seeks to recover $150,518 from Sauer, Risk & Safety, Building Materials, Frey, and the Limited Partnership for conversion of Landmark's funds. Pursuant to an order dated May 29, 2007, the court, finding that defendants Frey and Sauer had removed $150,518 from Landmark's bank account, directed them to return that sum to [*3]Landmark plus interest. The court notes that defendants have returned the funds to the corporation.

In the ninth cause of action, plaintiff seeks to recover $732,978.20 from Sauer, Risk & Safety, Building Materials, and Frey based on unjust enrichment. In the tenth cause of action, plaintiff seeks to recover $150,518 from Sauer, Risk & Safety, Building Materials, Frey and the Limited Partnership based on unjust enrichment. Thus, the tenth cause of action also relates to the funds wrongfully removed from Landmark's bank account. In the eleventh cause of action, plaintiff seeks an accounting from defendants Sauer, Frey, Risk & Safety, and Building Materials. In the twelfth cause of action, plaintiff seeks to recover $150,518 from Frey, alleging that he breached his fiduciary duty to Landmark by transferring the funds to his own use.

The following claims have been taken from the amended complaint in action # 2. In the first cause of action, plaintiff seeks to recover from Risk & Safety and Building Materials $45,498.32 as unpaid expenses which these defendants avoided paying by failing to state their commissions accurately. Plaintiff seeks to recover an additional $250,240.76 from these defendants based upon the delinquency provision. In the second cause of action, plaintiff seeks to recover from Risk & Safety, Building Materials, and Frey for prima facie tort. In the third cause of action, plaintiff seeks to recover $150,518 from Frey, Risk & Safety, Building Materials, and the Limited Partnership, alleging that they converted Landmark's funds. In the fourth cause of action, plaintiff seeks to recover from Risk & Safety and Building Materials for unjust enrichment. In the fifth cause of action, plaintiff seeks to recover from Risk and Safety, Building Materials, Frey, and the Limited Partnership for unjust enrichment. In the sixth cause of action, plaintiff seeks to recover $150,518 from Frey, alleging that he breached his fiduciary duty to Landmark by transferring the funds to his own use. In the seventh cause of action, plaintiff alleges that defendants Risk & Safety, Building Materials, Frey, and the Limited Partnership entered into a scheme to deprive Landmark of its money by transferring $150,518 to the State of Vermont. In the eighth cause of action, plaintiff seeks an accounting from defendants Risk & Safety, Building Materials, and Frey.

Plaintiff alleges that it has not demanded that Landmark bring an action on its own behalf because Henken and Frey are the sole officers and directors of Landmark. Plaintiff further alleges that because Sauer is a 50% shareholder of Landmark and Frey is the sole shareholder of Sauer, a demand upon Landmark would be futile.

Defendants move for summary judgment dismissing the first, second, seventh, eighth, ninth, tenth, and eleventh causes of action in action # 1 and the entire amended complaint in action # 2. Defendants assert that Risk & Safety and Building Materials are not parties to the shareholder agreement. Defendants argue that Landmark did not sustain any damages because it collected the full amount of its expenses. Alternatively, defendants argue that Risk & Safety and Building Materials did not breach the shareholder agreement because it was the obligation of Landmark to report shareholder commissions under the terms of the contract. Defendants argue that the late payment charges are penalties and are unenforceable. Defendants argue that plaintiff's prima facie tort, conversion, and unjust enrichment claims are insufficient as a matter of law. Defendants further argue that the prima facie tort claim is barred by the 1-year statute of limitations. Finally, defendants argue that because defendants Risk & Safety and Building Materials were not under a fiduciary duty to Landmark, plaintiff may not seek an accounting.[*4]

Plaintiff cross-moves for partial summary judgment as to its first cause of action in action # 1. Plaintiff also cross-moves for an award of attorney's fees pursuant to § 626(e) of the Business Corporation Law.

On a motion for summary judgment, it is the proponent's burden to make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact(JMD Holding Corp. v. Congress Financial Corp., 4 NY3d 373, 384 [2005]). Failure to make such a prima facie showing requires denial of the motion, regardless of the sufficiency of the opposing papers(Id). However, if this showing is made, the burden shifts to the party opposing the summary judgment motion to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial(Alvarez v. Prospect Hospital, 68 NY2d 320, 324 [1986]).

The court interprets the first and second causes of action in action # 1 and the first cause of action in action # 2 as alleging claims for breach of contract on the theory that defendants breached the provision in the shareholder agreement requiring the parties to pay their proportionate share of expenses. The court does not interpret these causes of action as sounding in unjust enrichment because claims for unjust enrichment have been asserted in separate causes of action. The elements of a cause of action for breach of contract are 1) formation of a contract between plaintiff and defendant, 2) performance by plaintiff, 3) defendant's failure to perform, and 4) resulting damage. (PJI 4:1; Noise in the Attic Productions v. London Records, 10 AD3d 303, 307 [1st Dep't 2004]).

Defendants Risk & Safety and Building Materials were not parties to the expense-sharing agreement with Landmark. Moreover, Landmark did not sustain "expense damages" because it was reimbursed for all its expenses, regardless of whether the insurance brokers contributed in the proper proportions. Thus, plaintiff has not stated a claim for breach of contract against any defendant by alleging that it failed to pay its fair share of expenses.

Accordingly, defendants' motion for summary judgment is granted to the extent that the first and second causes of action in action # 1 and the first cause of action in action # 2 are dismissed.

The ninth and tenth causes of action in action # 1 and the fourth and fifth causes of action in action # 2 allege claims for unjust enrichment. The theory of an action for unjust enrichment "rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. It is an obligation which the law creates, in the absence of any agreement, when and because the acts of the parties or others have placed in the possession of one person money, or its equivalent, under such circumstances that in equity and good conscience he ought not to retain it"(New York v. Barclays Bank, 76 NY2d 533, 540 [1990]). "[W]hether there is unjust enrichment may not be determined from a limited inquiry confined to an isolated transaction. It must be a realistic determination based on a broad view of the human setting involved"(McGrath v. Hilding, 41 NY2d 625, 629 [1977]). To prevail on a claim of unjust enrichment, plaintiff must establish that defendant benefitted at plaintiff's expense and that equity and good conscience require restitution (Whitman Realty Group v. Galano, 41 AD3d 590, 592-93 [2d Dep't 2007]).

If John R. Sauer, Risk & Safety, or Building Materials received services from Landmark [*5]and did not pay its proportionate share of expenses, that broker received a benefit at the expense of Agency Associates, to the extent that Agency paid more than its proportionate share. This claim for unjust enrichment is not a derivative claim belonging to Landmark but may be pursued by Agency Associates in its own right.

That Sauer may have been under a fiduciary duty to Agency Associates confirms that in equity and good conscience Sauer should make restitution for any benefit which it received at Agency's expense. A majority shareholder in a close corporation owes a fiduciary duty to minority shareholders(O'Neill v. Warburg, Pincus & Co., 39 AD3d 281 [1st Dep't 2007]). Fiduciary relationships are "necessarily fact-specific"(EBC I, Inc. v. Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]). However, as a 50% stockholder in Landmark, Sauer arguably owed a fiduciary duty to Agency Associates, the other "50% partner."

To be entitled to summary judgment with respect to plaintiff's claim of unjust enrichment, defendants must establish prima facie that they paid Landmark their proportionate shares of expenses and did not otherwise benefit at Landmark's expense. The court concludes that defendants have not met this burden. Accordingly, defendants' motion for summary judgment dismissing the ninth cause of action in action # 1 and the fourth and fifth causes of action in action # 2 is denied.

However, because the $150,518 was returned with interest, defendant did not obtain a benefit at Landmark's expense as alleged in the tenth cause of action. Accordingly, summary judgment is granted to defendants dismissing the tenth cause of action in action # 1. Furthermore, Sauer, Risk & Safety, and Building Materials did not receive a benefit at Agency Associates or Landmark's expense by failing to pay the delinquency penalties provided by the agreement. Thus, plaintiff cannot recover the delinquency penalties under an unjust enrichment theory.

The requisite elements of a cause of action for prima facie tort are 1) the intentional infliction of harm, 2) which results in special damages, 3) without any excuse or justification, 4) by an act or series of acts which would otherwise be lawful(Freihofer v. Hearst Corp., 65 NY2d 135, 142-43 [1985]). Prima facie tort is not a "catch-all alternative for every cause of action which cannot stand on its own legs"(Id). Where relief may be afforded under traditional tort concepts, prima facie tort may not be invoked as a basis to sustain a pleading which otherwise fails to state a conventional tort cause of action(Id). Similarly, prima facie tort should not be invoked to sustain an insufficient claim for breach of contract, particularly where plaintiff may proceed on an unjust enrichment theory.

While the understating of commissions by Risk & Safety or Building Materials may have been accidental, it may also have been for the intentional purpose of profiting at the expense of Agency Associates. Defendants suggest that economic self-interest is always a sufficient excuse or justification to avoid prima facie tort liability. However, the economic self-interest must be "legitimate," and whether self-interest is legitimate is frequently a factual issue(Bank of New York v. Berisford International, 190 AD2d 622 [1st Dep't 1993]). Economic justification is not a defense to a cause of action for interference with an existing contract(Havanna Central v. Lunney's Pub, Inc., 49 AD3d 70, 72-73 [1st Dep't 2007]). A fortiorari, economic self-interest should not be a defense to a claim for prima facie tort where the parties stand in a fiduciary relation. Thus, the court cannot dismiss plaintiff's claim for prima facie tort on the grounds that, [*6]as a matter of law, defendants acted in their legitimate self-interest. Nevertheless, plaintiff's claim for breach of contract is insufficient and relief in unjust enrichment is available. In these circumstances, plaintiff may not proceed on a prima facie tort theory.

Accordingly, defendants' motion for summary judgment is granted to the extent of dismissing the seventh cause of action in action # 1 and the second cause of action in action # 2.

Damages for conversion are usually the value of the property at the time of conversion (Sindhwani v. Coe Business Service, Inc., 52 AD3d 674, 676 [2d Dep't 2008]). Lost profits may be allowed where from the nature of the article or peculiar circumstances of the case, they might reasonably be supposed to follow from the conversion(Id). As noted, the $150,518 which was wrongfully withdrawn from Landmark's bank account was returned to the corporation with interest. Since Landmark has been compensated for the exact amount of money converted and the loss of use of its funds, it no longer has sustained any damages for conversion.

Accordingly, defendants' motion for summary judgment is granted to the extent of dismissing the eighth cause of action in action # 1 and the third cause of action in action # 2.

The basis for an equitable action for an accounting is the existence of a fiduciary relationship respecting the subject matter of the controversy(Bouley v. Bouley, 19 AD3d 1049, 1051 [4th Dep't 2005]). Such a relationship is created by plaintiff's entrusting to the defendant some money or property with respect to which the defendant is "bound to reveal his dealings"(Id). The money or property entrusted must be money or property in which plaintiff has an interest, or, money or property, which, in equity, ought to be divided between plaintiff and defendant(Sitar v. Sitar, 50 AD3d 667, 670 [2d Dep't 2008]).

Because Risk & Safety and Building Materials did not owe a fiduciary duty to Landmark, these defendants cannot be liable for an accounting. As discussed above, John R.Sauer, as a 50% shareholder, arguably owed a fiduciary duty to Landmark and to Agency Associates, the other 50% shareholder. If John R. Sauer owed a fiduciary duty to Landmark or Agency, such a duty would also have been owed by Frey, as Sauer's sole shareholder. However, the gravamen of plaintiff's claim is that Frey understated the monthly fees and commissions earned by Risk & Safety and Building Materials in order to reduce their share of expenses. Plaintiff does not allege that Landmark entrusted money or property to Frey or Sauer. The court concludes that plaintiff has not stated a cause of action for an accounting against any of the defendants.

Accordingly, defendants' motion for summary judgment is granted to the extent of dismissing the eleventh cause of action in action # 1 and the eighth cause of action in action # 2.

If a fiduciary engages in deliberate self-dealing or violates an "integral condition"of his trust, the beneficiary may recover the "lost profit" on the transaction(See Matter of Janes, 90 NY2d 41, 55 [1997] and Matter of Rothko, 43 NY2d 305, 321 [1977]). Similarly, if an officer or director of a corporation breaches his duty of loyalty by converting a corporate opportunity, the remedy is disgorgement of the officer or director's profit(Gomez v. Bricknell, 302 AD2d 107, 115 [2d Dep't 2002]).

In the sixth cause of action in action # 2, plaintiff alleges that Frey breached his fiduciary duty to Landmark by transferring the $150,518 to his own use. Had Frey used these funds to convert a corporate opportunity, plaintiff, on behalf of Landmark, would have been able to recover any profit which Frey realized on the transaction. However, it appears from the seventh [*7]cause of action that, rather than converting a corporate opportunity, Frey transferred the funds to the State of Vermont, presumably in payment of tax obligations. In any event, in the sixth and seventh causes of action, plaintiff seeks to recover only the $150,518 which has been returned to Landmark pursuant to the court's order.

Accordingly, defendants' motion for summary judgment is granted to the extent of dismissing the sixth and seventh causes of action in action # 2.

The court now turns to plaintiff's cross-motion for partial summary judgment with respect to its first cause of action in action # 1. As discussed above, the court interprets the first cause of action as alleging a claim for breach of contract. Since defendants' motion for summary judgment dismissing the first cause of action has been granted, plaintiff's cross-motion for partial summary judgment must, of course, be denied. In denying plaintiff's cross-motion with respect to the first cause of action, the court does not reach the merits of plaintiff's unjust enrichment claim. Nevertheless, the court notes that plaintiff has not established prima facie that Frey understated Risk & Safety's fees or commissions or otherwise arranged for the company to fail to pay its fair share of Landmark's expenses. Thus, plaintiff has not established prima facie that it is entitled to judgment on its unjust enrichment theory.

Plaintiff requests attorney's fees pursuant to BCL § 626(e) with respect to a number of causes of action, including the eighth cause of action in action # 1 and the third cause of action in action # 2. The court understands the basis of plaintiff's fee application to be the recovery of the $150,518, which was withdrawn from Landmark's account and returned to the corporation pursuant to the court's order.

Because attorney's fees and disbursements are considered to be "incidents of litigation," the prevailing party may not collect them from the loser, unless an award is authorized by agreement between the parties or by statute or court rule(Glenn v. Hoteltron Systems, 74 NY2d 386, 393 [1989]). Business Corporation Law § 626(e) allows for an award of attorney's fees and expenses to a successful plaintiff in a shareholder derivative action. The statute provides:

"If the action on behalf of the corporation was successful, in whole or in part, or ifanything was received by the plaintiff or plaintiffs...as the result of a judgment,compromise or settlement of an action..., the court may award the plaintiff...reasonableexpenses, including attorney's fees, and shall direct him or them to account to thecorporation for the remainder of the proceeds so received by him or them."

(Business Corporation Law § 626[e]). The basis for an award of attorney's fees in a shareholder derivative action is to reimburse the plaintiff for expenses incurred on the corporation's behalf. Although BCL § 626(e) provides that a successful plaintiff may recoup legal fees and expenses from the proceeds of a judgment, compromise, or settlement in favor of the corporation, it does not authorize the imposition of such expenses on the losing party(Glenn v. Hoteltron Systems, supra, 74 NY2d at 393).

Plaintiff was "successful" by virtue of the court's short form order, directing the return of the withdrawn funds, even though plaintiff's derivative claim was never reduced to a judgment. The court is not authorized by § 626(e) to grant plaintiff an award of attorney's fees to be paid directly by the defendant. Nevertheless, the court is authorized to grant plaintiff an award to be paid by Landmark from the $150,518 which was recovered. Such an award from the "common [*8]fund" is particularly appropriate in a derivative action brought on behalf of a close corporation, where the wrongdoer is a shareholder who will participate in the recovery(See Glenn v. Hoteltron Systems, supra, 74 NY2d 386).

Accordingly, plaintiff's application for an award of attorney's fees is granted to the extent that Landmark shall pay plaintiff an attorney fee of $5,000 from the funds which were recovered.

This shall constitute the decision and order of the court.

Dated: November 6, 2008

J.S.C. Footnotes

Footnote 1:The supplemental summons is dated April 18, 2007.