Moyal v Sullo

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Moyal v Sullo 2016 NY Slip Op 31559(U) August 16, 2016 Supreme Court, New York County Docket Number: 157850/2014 Judge: Jeffrey K. Oing Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various state and local government websites. These include the New York State Unified Court System's E-Courts Service, and the Bronx County Clerk's office. This opinion is uncorrected and not selected for official publication. [* 1] SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IAS PART 48 -----------------------------------~-----x DAVID MOYAL, Suing Individually and on Behalf of Circle Press, Inc., Plaintiffs, Index No. 157850/2014 -agains,tMtn Seq. Nos. 009 & 010 JOSEPH SULLO, ROBERT MALTA and GMO 444 LLC, DECISION AND ORDER Defendants, CIRCLE PRESS, INC., As Nominal Defendant. -----------------------------------------x JEFFREY K. OING, J. : Mtn Seq. No. 009 Defendant/cross-claim defendant Joseph Sullo ("Sullo") moves for an orde:: pursuant to CPLR 7501 and 7503(a), compelling rlefendants Robert Malta ("Malta") and GMO 444 LLC ("GMO") (together, the "Malta defendants") to arbitrate the cross claims asserted against Sullo and staying this action pending the conclusion of the arbitration; or, in the alternative, dismissing the cross claims, pursuant to CPLR 3211. Mtn Seq. No. 010 Plaintiff David Moyal ("Moyal") moves: pursuant to CPLR 3211, to dismiss the third and seventh counterclaims asserted by the Malta defendants, or, in the alternative, to stay this action until the conclusion of the arbitration, and, pursuant to CPLR 2 of 18 [* 2] Page 2 of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 17 3204, to require the Malta defendants to provide a more definite statement of claims devoid of allegations related to arbitrable matter. Mtn seq. nos. 009 and 010 are consolidated for disposition. FACTS This action arises out of a business venture in which the parties invested in a Manhattan building located at 121 Varick Street (the "Building"). The Building is a 12-story commercial building owned by nonparty 121 Varick Street Corp. (the "Co-op"). The Co-op owns the ground floor of the Building, and floors 2-12 are owned by the proprietary lessees of those floor's lessee owning 9.0~% floo~s, with each of the outstanding stock of the Co- op. In early 2008, Moyal's company, One20ne, owned the third, and sixth floors. Another of his companies, 1-800-Postcards, was the tenant occupying the ground floor of the Building. A third company of his, Next Printing, leased the fourth floor from its owner, nominal defendant Circle Press, Inc. ("Circle Press"). Moyal agreed with the owners of Circle Press to buy their shares in Circle Press, which owned the fourth, floors of the Building. seventh and eighth At the same time, 'Moyal reached an agreement to buy 100% of the stock of the company that owned the twelfth floor of the Building. These transactions would result 3 of 18 [* 3] Page 3·of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 17 in Moyal securing control of six of the Building's eleven floors that the Co-op did not own and also obtaining control of the Coop. According to Sullo, Moyal approached Sullo and proposed a joint venture (the "Joint Venture") to finance the transactions. Specifically, Moyal sought the acquisition and exploitation of floors 4, 7, s·and 12 (the "JV floors"). Moyal and Sullo each contributed an equal amount of cash to close the Joint Venture's purchase of the four floors. The assets were held in two single- purpose entities -- Circle Press and 121 Varick Street Twelfth Floor, LLC (''Vl2 LLC") (together V12 LLC and Circle Press are referred to as the "JV Companies"). Vl2 LLC became the owner of the 4th and 12th floor assets, and Circle Press became the owner of the 7th apd gth floor assets (the assets consisted of th.e Co-op shares and the proprietary leases). At the same time, Moyal and Sullo executed governance documents for Vl2 LLC and Circle Press. The original operating agreement governing Vl2 LLC designated Sull6 as its sole "Manager"; however, according to Sullo, his authority was wholly delegated to Moyal, and Moyal was solely responsible for managing the assets of the Joint Venture. Circle Press was gov~rned by a shareholder sales agreement and by· its bylaws. 4 of 18 [* 4] Page 4 of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 17 In October 2011, GMO invested in the JV Companies, thereby joining the Joint Venture. GMO allegedly paid $2.5 million for its one-third share in the Joint Vefiture, $800,000 of which was to be used by the JV Companies for future operating needs. The operating agreement for Vl2 LLC and the shareholder agreement for Circle Press were both updated at the time that GMO purportedly made its investment. Under the updated operating agreement, Moyal was formally designated as manager of V12 LLC, the position that, according to Sullo, he held since 2008. be designated as president of Circle Press. Moyal continued to Thus, under these circumstances, his exclusive management authority over the Jbint Venture continued when GMO became a co-venturer. In September 2012, Malta, GMO's managing member, entered into a promissory note agreement with Sullo, pursuant to which Malta received a $500,000 loan. Malta contends that in executing the note he relied on representations that Sullo and Moyal made in October 2011 in which they stated that Malta would be receiving $10,000 a month as dividends on the investment, and that the Building would be sold within 18 months. Malta never received any dividend, and no effort was made to sell the Building. Rather, according to Malta, in February 2014, Sullo and Moyal entered into a secret agreement providing that any monetary shortfalls for the JV Companies would not be Sullo's 5 of 18 [* 5] Page 5 of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 responsibility. 17 This purported agreement resulted in requiring Malta to shoulder substantially more than his proportionate share .of the costs, and provided a pretext to dilute Malta's ownership interest .. I~ early 2014, Malta asked to inspect the books and records of the JV Companies in response to a capital call. Given there was no significant change in the tenant structure, and no capital call had been contemplated when Malta invested in the Joint Venture, Malta believed that a negative cash flow requiring a capital call did not make sense. Moyal allegedly responded by diluting GMO's interest in the JV Companies. In July 2014, believing that Moyal was guilty of miscdnduct, GMO and Sullo executed resolutions and certificates removing Moyal as manager of V12 LLC, installing Sullo as manager, declaring that GMO and Sullo would take over Circle Press's management~ and designating Sullo as agent of the majority for that purpose, thereby making Sullo de facto manager of Circle Press. Moyal commenced two actions seeking to be restored to power. The instant action is the second of those actions. seeks: Moyal (1) injunctive relief against Sullo, Malta and GMO (a) .restraining them from alleged continued violation of the bylaws of Circle Press, (b) restraining them from alleged continued violation of the terms of the second amended shareholders 6 of 18 [* 6] Page 6 of Index No .. 157850/2014 Mtn Seq. Nos. 009 & 010 agreement of Circle Press, -17 (c) restraining them from acting in the capacity of a manager of Circle Press, (d) restraining them from removing Moyal from corporate bank accounts or otherwise taking over Moyal's responsibilities, and (e) declaring Moyal president of Circle Press (first cause of action) ; ( 2) declaratory judgment•declaring that Sullo and GMD do not have the ability to remove Moyal from the responsibilities and authority vested in him as president of Circle Press (second cause of action); (3) declaratory judgment on behalf of Circle Press declaring that Sullo and GMD cannot eliminate Moyal as a signatory on any of the corporate accounts of Circle Press (third cause of action); (4) d~claratory judgment declaring that Sullo and GMD do not have the ability to designate Sullo as the exclusive manager of the company (fourth cause of action) ; ( 5) declaratory judgment declaring that Moyal shall continue to serve as president of Circle Press (fifth cause of action); of Sullo and Malta as directors of Circle Ptess (6) removal (sixth cause of action); and (7) relief for breach of the shareholder agreement (seventh cause of action). GMD, Malta and Sullo served an answer and counterclaims to those actions. They interposed counterclaims for: fiduciary duties, seeking damages for (a) allegedly converted by Moyal, (1) breach of funds that were (b) Moyal allegedly failing to 7 of 18 [* 7] Page 7 of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 17 ensure compliance with Small Business Association loans, and (c) Moyal concluding a sweetheart extension of an agreement that caused the Joint Venture to lose money (first counterclaim) ; breach of fiduciary, ( 2) seeking an accounting (second counterclaim); (3) breach of contract, seeking damages (third counterclaim); and (4) cancellation of the sweetheart extension (fourth counterclaim) . ciuring the pendency of this action, Sullo's relationship with Malta soured to the point where they were now adverse to each other's interest (NYSCEF Doc. No. 181). After Moyal and Sullo jointly moved to discontinue the action as between them, in July 2015, the Malta defendants cross-moved for leave to amend their answer, and brought cross claims against Sullo for breach 0£ fiduciary duty (first cross claim); breach of contract (second cross claim); and fraudulent inducement to contract (fourth cross claim against Sullo and seventh counterclaim against Moyal). This Court denied leave to assert the third cross claim against Sullo and the sixth counterclaim against Moyal for usurious loan (NYSCEF Doc. No. 181 at pp. 26-47). On October 8, 2015, this Court granted plaintiff's motion to compel arbitration of the counterclaims as they relate to Vl2 LLC, based, in part, upon an earlier decision in the related case that determined that all V12 LLC claims must go to arbitration, 8 of 18 [* 8] Page 8 of Index No. 157850/2014 Mtn Seq. •os .. 009 & 010 17 and imposed a stay of all V12 LLC claims (Moyal v Sullo, Index No. 156790 [Haglei, J.]}". remain in this Court. counterclaim~for Any claims of Circle Press would This Court also dismissed the fifth injunctive relief finding that defendants did not adequately plead irreparable harm. The Malta defendants filed a statement of claim with the American Arbitration Association following this Court's decision in October 2015. DISCUSSION Motion to Dismiss the Cross Claims and Counterclaim First Cross Claim Sullo seeks to dismiss the breach of fiduciary duty cross claim based on the Malta defendants' lack of standing. He points out that Malta is not a shareholder in Circle Press, or a member of V12 LLC. In addition, while acknowledging that GMO is a shareholder in Circle Press and a member of V12 LLC, Sullo contends that GMO, tooj lacks standing because any alleged wrong was committed against the JV Companies, not against GMO. such, Sullo argu~S that the claim does not belong to GMO. As Sullo further argues that he dld not owe any fiduciary duty to GMO prior to July 2014 because he was a non-managing member until that time. 9 of 18 [* 9] Page 9 of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 17 Given that all the issues related to V12 LLC are subject to arbitration, the question of whether Malta has standing to bring those claims should be determined by the arbitrator. Sulla is correct in stating that Malta does not have standing to assert this cross claim -- Malta was not a shareholder in Circle Press. Rather, his company, GMO, held this position. Therefore, the first cross claim insofar as it is brought by Malta and concerns Circle Press is dismissed for lack of standing. With respect to GMO, there are allegations that some of the I' alleged wrongs were against GMO, not only against the Joint Venture. In particular, the allegations that Sulla conspired with Moyal to dilute GMO's interest in Circle Press, and their failure to pay GMO its share of profits, are direct claims rather than derivative claims. As such, to the extent this cross claim is asserted on behalf of GMO, it will continue. Accordingly, that branch of Sulla's motion to dismiss the first cross claim is granted to the extent of dismissing that portion of the cross claim asserted by Malta as it concerns Circle Press for lack of standing, and is otherwise denied. Second Cross Claim and Third Counterclaim The second ctoss claim and the third counterclaim allege the breach of two contracts -- the shareholder agreement for Circle 10 of 18 [* 10] Page 10 of Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Press, and the V12·LLC operating agreement. 17 To the extent that they involve V12 LLC, these claims are subject to arbitration. Sullo maintains that the Malta defendants fail to set forth any facts, and in particular, fail to include the specific provisions of the c6ntract upon which they base liability. Sul lo further asserts that a review of the contracts shows that there were no obligations in those agreements that could be said to have been breached by the conduct alleged by the Malta defendants. Moyal also seeks dismissal based on virtually the same arguments. The Malta defendants counter that the breach of contract cross claim and counterclaim are premised on the breach of section 4.0 of the shareholder sales agreement, and on Sullo's breach 0£ Circie Press's operating agreement by allegedly improperly diluting Malta's shares and withholding his share of profits proportionate to his shares. Although the amend~d answer does not "set forth the terms of the agreement upon which liability is predicated" with respect to Sullo (Chrysler Capital Corp. v Hilltop Egg Farms, Inc., 129 AD2d 927, 928 [3d Dept 1987]), the Malta defendants refer to Circle Press's shareholder sales agreement, section 4.0, and the letter signed by Sullo advising the participants in the JV Companies of a capital call and its warning of dilution if the funds were not 11 of 18 [* 11] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Page 11 of forthcoming signed by Sullo. 17 Under these circumstances, the second cross claim and the third counterclaim sufficiently sets forth facts to support the contention that Sullo was involved in the dilution of GMD's shares. Thus, at this juncture, dismissal of these claims is not warranted. Accordingly, that branch of Sulla's motion to dismiss the second cross claim, and that branch of Moyal's motion to dismiss the third counterclaim are denied. Fourth Cross Claim and Seventh Counterclaim Th~ Malta defendants contend that Malta was fraudulently induced to sign a note and security agreement in September 2012 in reliance on two misrepresentations and a concealment. The specific misrepresentations and omissions alleged are that in October 2011, a year earlier, Sullo told Malta that Malta would receive $10,000 in monthly dividends from his investment in the JV Companies; that in October 2011 Sullo~told Malta that the Building would be sold in 18 months; and that in September 2012 Sullo concealed the fact that Moyal funded one half of Sulla's $500,000 loan td Malta. This claim does not implicate the JV Companies, except to the extent that Malta alleges that the loan included proceeds that he invested in the JV Companies. In order to state a claim for fraudulent inducement, a plaintiff must plead facts demonstrating that the representation 12 of 18 [* 12] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Page 12 of 17 or omission was "false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury" (Lama Holding Co. v Smith Barney, 88 NY2d 413, 421 [1996]). Where the claim is based on fraudulent concealment, the plaintiff must also allege facts to support the conclusion "that the defendant had a duty to disclose material information and that it failed to do so" (P.T. Bank Cent. Asia, N.Y. Branch v ABN AMRO Bank N.V., 301 AD2d 373, 376 [pt Dept 2 0 0 3] ) . Heie, Sulla's alleged misrepresentation that Malta would receive $10,000 a month was not a representation upon could reasonably rely. wh~ch Malta 'Initially, a projection of that sort is in the nature of future expectation, which cannot support a claim for fraud (International Fin. Corp. v Carrera Holdings Inc., 82 AD3d 641, has th~ 641-642 [l5t Dept 2011]). Furthermore, where a party ability to determine the truth or falsity of a representation, that party must make use of such ability, or the reliance is not justifiable. Here, the representation was made nearly a year prior to Malta's alleged reliance. \ During that time, Malta did not receive any monthly payments of $10,000. Therefore, Malta's reliance on such a projection was unreasonable as a matter of law (ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 13 of 18 [* 13] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Page 13 of 25 NY3d 1043, 1044 [2015]). 17 Additionally, there was no indication that there was any attempt to sell the Building. Malta could not have reasonably relied on these representations without making additional inquiry, and there are no allegations that such additional inquiry was made. Further, Malta does not provide any basis to conclude that the representations made in October 2011 were intended to induce a year later Malta to enter into a loan agreement in September 2012. With respect to the alleged concealment, Malta fails to allege loss causation. In order to plead fraud, Malta must show that Sullo's misrepresentation or concealment not only induced him to borrow the money, but that it directly caused the loss (Water St. Leasehold LLC v Deloitte & Touche LLP, 19 AD3d 183, 185 [1st Dept 2005]). Malta does not allege how the concealment of Moyal's participation in lending the money caused any damage to him. Lastly, Malta fails to plead actual damages. The absence of pleading out-of-pocket damages is fatal to the claim (Connaughton v Chigotle Mexican Grill, Inc., 135 AD3d 535, 540 [1st Dept 2016]). Accordingly, that branch of Sullo's motion to dismiss the fourth cross claim, and that branch of Moyal's motion to dismiss the seventh counterclaim are granted and they are dismissed. 14 of 18 [* 14] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Page 14 of 17 Motion to Compel Arbitration What remains for arbitration consideration are the first and second cross claims. Sullo seeks to compel the Malta defendants to arbitrate 'the cross claims asserted against him. The parties signed Vl2 LLC's operating agreement, which sets forth the following arbitration clause: Any controversy Agreement shall pursuant to the Associ~tion and (Sullo Aff., Ex. 4, arising out of or relating to this be resolved by arbitration in New York Rules of the American Arbitration laws of the State of New York. § 12.12(a)). Based on this arbitration clause, this Court granted Moyal's motion to compel arbitration of th~ Malta defendants' counterclaims against him to the extent the counterclaims concern Vl2 LLC. In the first and second cross claims, the Malta defendants assert that Sullo is~ued bogus capital calls to GMO in his capacity as the manager of Vl2 LLC. The capital call letters are written on Vl2 LLC stationery, and are written by Sullo in his capacity as managing member of Vl2 LLC. The fact that the cross · claims assert that Sullo failed to pay sums due on SBA loans does not alter this conclusion. The borrower on the loans is V12 LLC (Sullo Aff., Ex. 2, Exs. B, 0), and Sullo signed as manager of Vl2 LLC. Therefore, the alleged failure to pay sums due on the loans is also related to Vl2 LLC's operating agreement. 15 of 18 [* 15] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Page 15 of 17 The Malta defendants also assert that Sullo entered into and concealed from them an agreement with Moyal pursuant to which Moyal promised that "any monetary sh?rtfalls for Circle and [V12 LLC] would not be the responsibility of Sullo" (Moyal Aff., Ex. B, Cross Claim, !! 67-71). This alleged secret agreement concerns V12 LLC's members' responsibility for monetary shortfalls, which, again, implicates subject matter that is related V12 LLC's operating agreement. As such, the first and second cross claims concern a subject matter that is related to V12 LLC's operating agreement, and are, thus, subject to arbitration. Sullo also seeks to have this Court compel arbitration of all aspects of the cross claims, including those that allege a breach of duties related to Circle Press. As noted in the October 8, 2015 transcript, in which Moyal sought to compel arbitration of the counterclaims, there is no arbitration agreement regarding Circle Press. Therefore, there is no basis upon which arbitration can be compelled with respect to those aspects of the cross clai~s. Accordingly, that branch of Sulla's motion to compel arbitration of the first and second cross claim is granted, and those cross claims are subject to the underlying arbitration 16 of 18 [* 16] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 proceeding. Page 1.6 of 17 That branch seeking arbitration of all aspects.of the cross claims is denied. That branch of Sulla's and Moyal's motion seeking an order from this Court staying litigation of the Circle Press-related cross claims and counterclaims pending arbitration of the V12 LLC claims is appropriate. The determination in the arbitration proceeding could have a significant effect on the outcome of the related claims, and the specter of inconsistent findings in the absence of a stay is very real (Fedele v Ackerman, 20 AD3d 350 [l8t Dept 2005]; see also County Glass & Metal Installers, Inc. v Pavarini McGovern, LLC, 65 AD3d 940 [1st Dept 2009]). Under these circumstances, those cross claims and counterclaims that are not subject to arbitration are stayed pending final resolution of the underlying arbitration. That branch of Moyal's motion for a more definite statement is denied without prejudice to renew after final resolution of the underlying arbitration proceeding. CONCLUSION Accordingly, it is hereby ORDERED that branch of the motion of defendant Sullo (mtn seq. no. 00~) to dismiss the cross claims is granted to the extent of dismissing the fourth cross claim and that portion of 17 of 18 [* 17] Index No. 157850/2014 Mtn Seq. Nos. 009 & 010 Page 17 of 17 the first cross claim asserted by Malta as it concerns Circle Press for lack of standing; and it is further ORDERED that branch of the motion of defendant Sullo to compel arbitration is granted to the extent of directing that the first and second cross claims shall be arbitrated, and is otherwise denied; and it is further ORDERED that branch of defendant Moyal's motion (mtn seq. no. 010) to dismiss the third and seventh counterclaims is granted to the extent of dismissing the seventh counterclaim, and is otherwise denied; and it is further ORDERED that branch of defendant Moyal's motion for a more definite statement is denied without prejudice; and it is further ORDERED that branch of defendants Sullo's and Moyal's motion to stay this action pending arbitration of the claims is granted, I and this action is stayed pending final resolution of the underlying arbitration. This memorandum opinion constitutes the decision and order of the Court. Dated: HON. JEFFREy~·ot<NtfG, .!EFFRE ··~-- 18 of 18 · J.s.c. J.S.C .

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