Waxman Real Estate LLC v Sacks

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[*1] Waxman Real Estate LLC v Sacks 2011 NY Slip Op 51667(U) Decided on September 7, 2011 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 7, 2011
Supreme Court, New York County

Waxman Real Estate LLC, Plaintiffs,


Jacob C. Sacks, Defendants.



For Plaintiffs:

William F. Sondericker, Esq.

Chloe D. Caraballo, Esq.

Carte Ledyard & Milburn, LLP

2 Wall Street

New York, New York 10005

For Defendants:

David J. Pfeffer, Esq.

Jonathan A. Grippo, Esq.

Tarter Krinsky & Drogin LLP

1350 Broadway

New York, New York 10018

Bernard J. Fried, J.

Defendants Jacob C. Sacks, James P. Wiseman, Ghostrider LLC ("the Company"), Cayuga Capital Management LLC ("Cayuga"), and CCM Ventures 9 LLC ("CCM Ventures") move to dismiss the complaint pursuant to CPLR §§ 3211(a)(1) and (7), or, in the alternative, to compel arbitration and stay these proceedings based on the arbitration clause in the Company's April 9, 2008 Operating Agreement, pursuant to CPLR § 7503(a).

Plaintiffs Waxman Real Estate LLC ("Waxman") and Michael Feirstein, suing individually and derivatively on behalf of the Company, cross-move for a preliminary injunction under Article 63 of the CPLR, removing Sacks, Wiseman, and Cayuga as principals and manager, respectively, of the Company, and an order under LLC Law §§ [*2]409 and 414 (a) removing Sacks and Wiseman as principals and managers of the Company and designating or confirming their replacement by plaintiffs as managers of the Company; and (b) directing defendants to deliver to plaintiffs the closing binders, including any opinions of counsel, issued in connection with a loan from Signature Bank.

The Company's Operating Agreement (the "Agreement") is between Waxman, Feirstein, Cayuga, and two non-parties affiliated with Sacks and Wiseman: CCM Property Fund III LLC ("CCM Fund") and CCM Affiliate Investors LLC ("CCM Affiliate"). Four of these five—Waxman, Feirstein, CCM Fund, and CCM Affiliate—are "Members" of the Company. Cayuga is the Manager. The complaint alleges that plaintiffs are investors in and the principal members in the Company, owning a majority interest in it. Wiseman signed the Agreement as principal of Cayuga, CCM Fund, and CCM Affiliate. In the Agreement, both Sacks and Wiseman accepted appointments as principals of the Company. The complaint alleges that Sacks and Wiseman had de facto powers to manage the Company. The complaint also alleges that Sacks and Wiseman control CCM Fund. According to the complaint, defendant CCM Ventures has the same address as the Company, and the Company is its sole Member. The complaint alleges that all defendants are alter egos of each other.

In July 2008, through CCM Ventures, the Company bought a real property in Brooklyn (the "Premises") for investment, development, and sale (the "Project").

Plaintiffs allege that they were induced into entering the Agreement in or about February and March 2008 as a result of certain intentional misrepresentations and failures of disclosure by Sacks and Wiseman. Such alleged misrepresentations and omissions included the following: a failure to disclose plans for additional work on the Premises that would result in material increases in cost and render the budget for the Project misleading; omission from the budget certain "soft costs"; and misrepresenting the internal rate of return for the first five years of the Project.

Plaintiffs also allege that, upon their entering into the Agreement, Sacks and Wiseman engaged in deceitful conduct in violation of the terms of the Agreement, resulting in mismanagement of the Company as well as breaches of their duties as managers of the Company and as fiduciaries. Such alleged conduct included distributing false and misleading progress reports to investors and engaging in undisclosed borrowing at interest rates in excess of market value without the knowledge or consent of Plaintiffs.

The complaint alleges five causes of action: (I) breach of contract, (II) unjust enrichment, (III) fraud in the inducement, (IV) breach of fiduciary duties, an accounting, and a declaratory judgment, and (V) a preliminary and permanent injunction.

Under CPLR § 3211(a)(7), "a party may move for judgment dismissing one or more causes of action asserted against him on the ground that the pleading fails to state a cause of action." "In the context of a motion to dismiss pursuant to CPLR 3211, the court must afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference. Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss." EBC I, Inc. v. Goldman Sachs & Co., 5 NY3d 11, 19 (2005) (citations omitted). Allegations made upon information and belief "are to be considered true for the purposes of a motion to dismiss pursuant to CPLR 3211(a)(7)." Roldan v. Allstate Ins. Co., 149 AD2d 20, 40 (2d Dept. 1989) (citations omitted). However, "factual allegations which fail to state a viable [*3]cause of action, that consist of bare legal conclusions, or that are inherently incredible or unequivocally contradicted by documentary evidence, are not entitled to such consideration." Leder v. Spiegel, 31 AD3d 266, 267 (1st Dept. 2006) aff'd, 9 NY3d 836 (2007) (citations omitted).

On a motion to dismiss under CPLR § 3211(a)(1), "a party may move for judgment dismissing one or more causes of action asserted against him on the ground that a defense is founded upon documentary evidence." Such a motion "may be appropriately granted only where the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." Goshen v. Mut. Life Ins. Co. of NY, 98 NY2d 314, 326 (2002). Documentary evidence includes "judicial records, as well as documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are essentially undeniable' . . . [T]o be considered documentary,' evidence must be unambiguous and of undisputed authenticity." Fontanetta v. Doe, 73 AD3d 78, 84-86 (2d Dept. 2010) (citations omitted).

Defendants raise a number of arguments in favor of dismissal. I will address them in turn.

First, defendants argue that the entire complaint against Sacks, Wiseman, and Cayuga is barred by the exculpation clause in the Operating Agreement, which exempts any member or manager of the Company from liability for any act or omission, other than "Objectionable Conduct," which is defined as "fraud, deceit, willful misconduct, gross negligence or bad faith." (Agt. §§ 1.9, 10.1.) The complaint alleges various acts by Sacks and Wiseman that could be found by a fact-finder to satisfy this definition. Defendants insist, however, that the evidence will show that their alleged conduct was motivated by the appropriate exercise of business judgment, rather than intentional wrongdoing. The application of the exculpation clause cannot be decided as a matter of law at this stage; it depends on the resolution of disputed issues of fact.

Defendants also argue that the second cause of action for unjust enrichment is barred by the existence of a valid, enforceable written contract. As plaintiffs do not contest this claim in their opposition papers, the second cause of action will be dismissed.

Defendants also contend that the fraud cause of action must be dismissed, because plaintiffs have failed to plead fraud with particularity, as required under CPLR § 3016(b). Upon review of the complaint, I am satisfied that plaintiffs have alleged the elements of fraud with sufficient detail to satisfy § 3016(b). The issue of whether defendants in fact committed fraud is not a matter to be resolved on this motion.[FN1]

Defendants also move to dismiss the fourth cause of action, which alleges breaches of fiduciary duties, and also seeks an accounting and a declaratory judgment. It alleges that Sacks and Wiseman acted in bad faith, violating section 409 of the LLC Law, by engaging in all of the conduct elsewhere alleged in the complaint as constituting Objectionable Conduct under the Agreement. It also seeks removal of Sacks and [*4]Wiseman as directors and their replacement by plaintiffs, under section 3.4 of the Agreement. This count also alleges that demand on the Company would be futile, since Sacks and Wiseman are the principal wrongdoers, and they control the Company as its de facto managers.

In order to establish a breach of a fiduciary duty, "a plaintiff must prove the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant's misconduct." Kurtzman v. Bergstol, 40 AD3d 588, 590 (2d Dept. 2007).

Defendants maintain that the breach of fiduciary duty count should be dismissed as duplicative of the breach of contract count. They also argue that the parties expressly waived any fiduciary relationship in section 11.2(a) of the Agreement. Section 11.2(a) states that the Members "are independent third parties acting on an arm's-length basis" and "do not intend to establish a trust, common law fiduciary or other similar trust arrangement."

Plaintiffs insist that the breach of fiduciary duty claim is based, not on breaches of the Agreement, but on breaches of defendants' statutory duties under LLC Law § 409. Section 409(a) provides that "[a] manager shall perform his or her duties as a manager, including his or her duties as a member of any class of managers, in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances." The Appellate Division has cited section 409(a) for the proposition that a manager of a company "owe[s] a fiduciary duty" to its shareholders. Out of Box Promotions, LLC v. Koschitzki, 55 AD3d 575, 578 (2d Dept. 2008). Defendants have not cited to any First Department authority controverting this principle of law or supporting a conclusion that parties could waive their statutory duties under section 409(a) by contractual agreement. Therefore, I conclude that section 11.2(a) of the Agreement does not bar a claim based on LLC Law § 409(a). I further conclude that plaintiffs have adequately stated a claim for breach of fiduciary duty, insofar as it is based on section 409(a).[FN2]

Defendants' further argument that Sacks and Wiseman are protected by the business judgment rule, and their remaining arguments in favor of dismissing this count, raise issues of fact that cannot be decided on this motion. Defendants also move to dismiss the fifth cause of action seeking a preliminary and permanent injunction removing Sacks and Wiseman as managers of the Company, and seeking the production of the closing binder and opinion letter issued in connection with a loan from Signature Bank. Plaintiffs' cross-motion seeks the requested relief on a preliminary injunctive basis.

As a preliminary matter: defendants maintain that LLC Law § 414 does not apply here, where there has been no vote or meeting called by Members to remove Cayuga as [*5]Manager of the Company. Indeed, section 414 does not authorize a court to remove an LLC Manager.

I therefore address this motion and cross-motion under CPLR § 6301. Under the familiar tripartite test, a party seeking a preliminary injunction pursuant to § 6301 must show: "(1) a likelihood of success on the merits, (2) irreparable injury if provisional relief is not granted, and (3) that the equities are in his favor." J.A. Preston Corp. v. Fabrication Enterprises, Inc., 68 NY2d 397, 406 (1986).

I will first address plaintiffs' cross-motion. Upon review of the papers submitted, it appears that there is an issue of fact as to plaintiffs' likelihood of success. I also disagree with plaintiffs that defendants waived any defense on the basis that monetary damages are adequate in section 11.7 of the Agreement. Section 11.7, while it authorizes the parties to seek injunctive relief in the event of a breach of the Agreement, does not require me to grant such an application before a final determination of the merits in this action. Finally, the production of documents requested by plaintiffs can be addressed in the ordinary course of discovery. Consequently, the cross-motion will be denied, except for the request for production of documents, which is denied without prejudice.

As for defendants' motion to dismiss the fifth count: Defendants contend that plaintiffs have failed to allege that irreparable harm will ensue if relief is not granted, as it is evident as a matter of law that money damages would be an adequate remedy. I decline to make this finding as a matter of law, before a record has been developed. Accordingly, the motion to dismiss this count will be denied.

Defendants also move to dismiss any derivative claims raised in the complaint, because: (a) the complaint does not allege that the Company suffered harm as a result of defendants' alleged misconduct, (b) plaintiffs have failed to plead sufficiently a demand made on the board of the Company or the reasons why a demand would be futile, and (c) plaintiffs have improperly mingled their individual claims with their derivative claims.

I am satisfied that the complaint alleges harm to the Company. (See, e.g., Compl. ¶¶ 16, 19.) Whether or not the alleged harm will be proven remains to be seen.

Furthermore, the complaint sufficiently pleads the reason that demand would be futile, for purposes of Bus. Corp. Law 626(c). See Wandel ex rel. Bed Bath & Beyond, Inc. v. Eisenberg, 60 AD3d 77, 80 (1st Dept. 2009). It alleges that Sacks and Wiseman, the alleged wrongdoers, allegedly control the Company. Plaintiffs might "reasonably conclude[]" that Sacks and Wiseman "would not be responsive to a demand" that they be named as defendants in a lawsuit. See Barr v. Wackman, 36 NY2d 371, 377 (1975).

Finally, while there is indeed "limited case law" on whether derivative claims brought on behalf of LLCs may be intermingled with individual claims, see Greenberg v. Falco Const. Corp., 29 Misc 3d 1202(A), 2010 WL 3781279, at *3 (Sup. Ct. Sept. 29, 2010), as such intermingling is not permitted in the case of corporations or partnerships, see, e.g., Abrams v. Donati, 66 NY2d 951, 953 (1985), it seems fair to extend this prohibition to LLCs. Therefore, the derivative claims will be dismissed without prejudice.

Finally, defendants maintain that this action should be stayed and proceed to arbitration, under section 11.11(a) of the Agreement, which provides that "[a]ll disputes among the Members relating to, arising out of or concerning" this Agreement, except for [*6]"Material Decisions," or the "alleged misconduct of any Member," must be submitted to binding resolution.

There is no dispute that none of defendants are named as Members of the Company in the Agreement. Plaintiffs, which are two of the four Members, did not name as defendants either of the other two Members of the Company: CCM Fund and CCM Affiliate. Defendants argue that all defendants can nonetheless be subject to the arbitration provision, because CCM Fund, a Member but a non-party to this lawsuit, is (according to the complaint) the alter ego of the other defendants and is controlled by Sacks and Wiseman, because of New York's policy favoring arbitration of disputes, and because Cayuga, the Company's Manager, has an active role in the dispute resolution process, under the Agreement.

In their opposition brief, plaintiffs do not challenge these arguments. Rather, plaintiffs rest their opposition on the argument that the arbitration provision expressly exempts from arbitration disputes relating to, arising out of, or concerning "Material Decisions." "Material Decisions" is defined in section 3.5(j) and (k) of the Agreement to include "[m]ak[ing] any expenditures for any budgeted items in excess of 110% of the amount allocated for such items in the annual budget," and "[b]orrow[ing], guaranty[ing] or otherwise becom[ing] obligated to pay . . . in excess of $25,000 in any 12-month period."

The Complaint sufficiently alleges that defendants made unauthorized expenditures and took out unauthorized loans on behalf of the Company—conduct that could be found by a fact-finder to constitute "Material Decisions." (See Compl. ¶¶ 11, 15, 17, 19.) Therefore, this dispute appears to fall outside of the application of the arbitration provision.

Defendants argue that arbitration is nonetheless warranted because plaintiffs' allegations concerning "Material Decisions" are inextricably bound to the other, arbitrable causes of action in the complaint. On the contrary, I find that the arbitration provision expressly shields disputes about Material Decisions from the scope of arbitrable disputes. Therefore, an order compelling arbitration would not be appropriate here.

Accordingly, it is

ORDERED that Motion Seq. No. 001 is GRANTED in part: the second cause of action is dismissed with prejudice, and the derivative claims are dismissed without prejudice to serve and file an amended complaint within 30 days, but the motion is otherwise DENIED; and it is further

ORDERED that the cross-motion is DENIED, except that the request for the production of certain documents is denied without prejudice; and it is further

ORDERED that the parties are directed to appear for a preliminary conference in Court on October 12, 2011 at 9:30 a.m.

Dated: 9/7/2011

J.S.C. Footnotes

Footnote 1:In their moving papers, defendants also stated, without citing to any supporting caselaw, that the fraud count merely restates the breach of contract count. As defendants failed to elaborate further on this argument or provide caselaw support for it either in their reply brief or at oral argument, I deem this argument to be abandoned.

Footnote 2:In a footnote in their reply brief, defendants maintain that section 409 does not apply to Sacks and Wiseman, because they are not managers of the Company, under the Agreement; rather, they allegedly control Cayuga, which is the sole Manager, under the Agreement. As this argument was raised in reply for the first time and was not debated at oral argument, I will not address it here.

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