Schindler v Rothfeld

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Schindler v Rothfeld 2016 NY Slip Op 31959(U) October 12, 2016 Supreme Court, New York County Docket Number: 653161/2015 Judge: Eileen Bransten 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: PART 3 - - - - - - - - - - - - - --- _. - - - - - - - - - - - - - - - - - - - - - - -)( HEATHER THOMAS SCHINDLER, JONATHAN SCHINDLER and MICHELLE MOORING DARAY, Plaintiffs, Index No. 653161/2015 Motion Seq .. Nos. 008, 009 Motion Date': 5/25/2016 -against- ERIC ROTHFELD, REI CAPITAL, LLC, RICHARD ROTHFELD, and THE RF TRUST, Defendants, -andTIMES THREE CLOTHIER, LLC, Nominal Defendant. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -)( REI CAPITAL, LLC and TIMES THREE CLOTHIER, LLC, Third-party Plaintiffs, Index No. 595917/2015 -againstWENDY HERMAN and FASHION 360, LLC, Third-Party Defendants. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -)( BRANSTEN, J.: Motion sequence nos. 008 and 009 are consolidated herein for disposition. In I motion sequence no. 008, plaintiffs Heather Thomson Schindler, Jonathan:schindler, and Michelle Mooring Daray seek dismissal of the amended counterclaims brought by defendant REI, individually and on behalf of Times Three Clothier, LLC d/b/a Yummie 2 of 19 [* 2] ·, Index Schindler v. Rothfeld No. 653161/2015 Page 2of18 ' by Heather Thomson ("Yummie" or the "Company"), on the grounds that they fail to state a cause of action and are refuted by documentary evidence. In motion sequence no. 009, defendants seek to modifythe September 21, 2015 temporary restraining order (the "TRO") issued by the Court, which required two signatories to the Company's accounts -Eric Rothfeld and Wendy Herman. Plaintiffs cross-move for an order: (1) directing defendants to provide plaintiffs with,full and . ., complete access to the books and records of the Company; (2) directing defendants to provide plaintiffs with monthly financial statements; (3) granting plaintiffsthe right to approve the hiring or firing of Yummie employees or consultants; and, (4) granting plaintiff Jonathan Schindler the power to approve all payments in place of Herman. For the reasons set forth below, plaintiffs motion to dismiss is granted. With respect to motion sequence no. 009, both the motion and the cross-motion are denied. I. Background Plaintiffs Heather Thomson Schindler, Jonathan Schindler, and Midhelle Mooring Daray are the majority owners ofYummie. Defendant Eric Rothfeld, through defendant REI Capital, LLC ("REI"), loaned $1,000,000 to the Company. Pursuant to the Second Amended and Restated Limited Liability Company Operating Agreement (the "Operating Agreement"), Rothfeld was appointed the Company's manager. Under Section 8.1 of the 3 of 19 [* 3] I Index No. 653161/2015 Page 3of18 Schindler v. Rothfeld Operating Agreement, Rothfeld could be replaced as manager upon repayment of the loan, and REI's approval of the replacement manager was "not to be unreasonably withheld." (Affirmation of John Reichman Ex. 4 § 8.1.) Plaintiffs now allege that the loan has been repaid. Accordingly, they seek to replace Rothfeld with Wendy Herman, who served as president of the Company, over REI's allegedly unreasonable objections. Defendants counter that the attempt to remove Rothfeld as manager was improper and in violation of Section 8.1 of the Operating Agreement. In addition, defendants claim that plaintiff Heather Schindler's appearance on the third season of a reality show television program violated Section 2.1 O(b) of the Operating Agreement, which required her to devote her full time services exclusively to the Company. While Heather Schindler entered into an agreement with the Company to allow her to participate for two seasons in the Real Housewives of New York ("RHONY") program, this so-called Rj-IONY Agreement required Heather Schindler to pay a certain percentage her appearance fees to the Company. Since she allegedly failed to make the payments required for her first two seasons on the show, Defendants purportedly required that Heather Schind,ler enter into a :! new agreement with them in order to appear in a third season of the show., This new agreement required Heather Schindler to pay the Company its past-due share of her RHO NY income, as well as pay the Company 50% of her income from the third RHO NY 4 of 19 [* 4] Schindler v. Rothfeld ) Index No. 653161/2015 Page 4of18 season. Heather Schindler disputes that she entered into this new agreement with the Company and therefore she did not make these payments. A. The Prior Motions Plaintiffs commenced this action by filing a verified complaint and order to show cause seeking a TRO appointing Herman as manager of the Company (motion sequence no. 001). On September 21, 2015, the Court issued a TRO directing the parties to maintain the status quo and ordering that all payments by the Company must be approved jointly by Herman and Rothfeld. Subsequently, plaintiffs filed a verified amended complaint and an order to show cause (motion sequence no. 003), seeking a preliminary injunction to enforce the TRO and prohibit defendants from interfering with Herman's day-to-day running of the Company. Defendants then filed their own motions seeking a preliminary injunction to prohibit both violations of the TRO and interference with Rothfeld' s management of the Company (motion sequer:ice no. 004 ). In addition, Defendants sought dismissal of the verified amended complaint (motion sequence no. 005). On February 5, 2016, the Court: (1) denied plaintiffs' motion for a preliminary injunction but continued. the TRO in place, (2) denied defendants' motion for a preliminary injunction, and (3) largely denied defendants' motion to dismiss, only 5 of 19 [* 5] Index No. 653161/2015 Page 5of18 Schindler v. Rothfeld dismissing Heather Schindler's Labor Law claim and the two derivative claims on the ground that demand futility had not been adequately pleaded. B. The Counterclaims In December 2015, defendants filed counterclaims against plaintiffs, as well as third-party claims against Herman and Fashion 360, LLC ("Fashion 360");:an entity owned by Herman. After plaintiffs sought dismissal of the counterclaims, defendants then served the following amended counterclaims, which are the subject of the instant motion to dismiss: breach of the Operating Agreement and the RHONY Agreement; breach of fiduciary duty; and, a request for a permanent injunction. C. Recent Events By letter dated February 11, 2016, Heather Schindler and Daray resigned from the Company. A little over one week later, Herman provided the 90-day notice of her resignation required by her consulting agreement. On April 26, 2016, this Court so-ordered the parties' stipulation, modifying the TRO so that Jimmy Yao replaced Herman as a required signatory on Company accounts. The Court further ordered that, in all other respects, the TRO would continue, pending the hearing and determination of the within motions. 6 of 19 [* 6] Index No. 653161/2015 Page 6of18 Schindler v. Rothfeld IL Discussion A. Motion to Dismiss Counterclaims (Motion Sequence No. 008) Plaintiffs now seek dismissal of each of the amended counterclaims. For the reasons that follow, plaintiffs' motion is granted. 1. Motion to Dismiss Standard On a motion to dismiss for failure to state a cause of action, all factual allegations must be accepted as truthful, the complaint must be construed in a light most favorable to the plaintiffs and the plaintiffs must be given the benefit of all reasonable inferences. Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 13 A.D.3d 172, 174 (1st Dep't 2004). "We ... determine only whether the facts as alleged fit within any cognizable legal theory." Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994). This Court must deny a motion to dismiss, "if from the pleadings' four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law." 511 W 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 152 (2002) (internal quotation marks and citations omitted). However, on a CPLR 321 l(a)(l) motion, "[i]t is well settled that bare legal conclusions and factual claims, which are either inherently incredible or flatly contradicted by documentary evidence ... are not presumed to be true on a motion to 7 of 19 [* 7] Index No. 65316112015 Page7of18 Schindler v. Rothfeld dismiss for legal insufficiency." O'Donnell, Fox & Gartner v. R-2000 Corp., 198 A.D.2d 154, 154 (1st Dep't 1993). The Court is not required to accept factual allegations that are contradicted by documentary evidence or legal conclusions that are unsuppc?rted in the face of undisputed facts. See Zanett Lombardier, Ltd. v. Maslow, 29 A.D.3d 495, 495 (1st Dep't 2006) (citing Robinson v. Robinson, 303 A.D.2d 234, 235 (1st Dep't 2003)). Ultimately, under CPLR 321 l(a)(l), "dismissal is warranted only ifthe documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law." Leon, 84 N.Y.2d at 88. I 2. Fraud and Breach of Fiduciary Duty (Third and Fifth Counterclaims) In support of their fraud counterclaim, defendants allege that Daray:.breached the Operating Agreement by: (1) refusing to assist Rothfeld in determining markdown values for company inventory and failing to sell such inventory (Am. Counterclaims iii! 209211 ); (2) telling Rothfeld that the information he was demanding was cou~terproductive, time consuming and unreasonable (id. Rothfeld's instructions (id. iJ 215), and (3) refusing or countermanding iii! 221-225). In essence, defendants assert that;Daray "concealed" from Rothfeld "massive" inventory which Rothfeld could have sold for a higher price had he known about it earlier. 8 of 19 [* 8] Index No. 653161/2015 Page 8of18 Schindler v. Rothfeld a. Duplicative Claims Assuming for the sake of argument that Daray breached the Operatitlg Agreement, those breaches nonetheless could not form the basis for a fraud or breach of fiduciary " claim. It is a well-established that breach of contract is not a tort "unless a .legal duty independent of the contract itself had been violated." Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co., 70 N.Y.2d 382, 388 (1987); see also Caniglia v. Chicago Tribune-NY. News Syndicate, 204 A.D.2d 233, 234 (1st Dep't 1994) ("It is well settled that a cause of action for fraud does not arise, where, as here, the only fraud alleged merely relates to a .; contracting party's alleged intent to breach a contractual obligation"). "A fraud claim may coexist with a breach of contract cause of action only where the alleged fraud constitutes the breach of a duty separate and apart from the duty to abide by the terms of the contract." Verizon NY., Inc. v. Optical Commune 'ns Group, Inc., 91A.D.3d176, 179180 (1st Dep't 2011). Similarly, a breach of fiduciary duty claim cannot be founded upon the breach of an employment agreement and/or the duty of loyalty owed an employer. See Western Elec. Co. v. Brenner, 41N.Y.2d291, 295 (1977). "A cause of action for b~each of fiduciary duty which is merely duplicative of a breach of contract claim cannot stand." William Kaufman Org. v. Graham & James, 269 A.D.2d 171, 173 (1st Dep't 2000); see also Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600, 600 (1st Dep't 2014) 9 of 19 [* 9] Index NC?. 653161/2015 Page 9of18 Schindler v. Rothfeld (breach of fiduciary duty claim dismissed as "duplicative of the breach of c~'.mtract claim, since the claims are premised upon the same facts and seek identical damages"). Here, defendants' counterclaims are based upon an alleged, intentional violation of the Operating Agreement. Indeed, as defendants alleged in their initial counterclaims, "Ms. Daray and Ms. Herman had the contractual and. fiduciary duty" to disclose information to him. (Am. Counterclaims iJ 253). A party cannot transform fl breach of contract claim into a tort claim by saying that a breach was intentional. Stefnberg v. DiGeronimo, 255 A.D.2d 204, 204 (1st Dep't 1998). However, this is preCisely what REI is attempting to do here. In opposition to the motion, defendants contend that the fraud and breach of fiduciary duty claims are independent of the Operating Agreement because, the "third counterclaim, unlike the breach of contract counterclaims focuses" on Daray allegedly falsifying inventory reports. See Defs.' Br. at 12. This argument completely lacks merit, as Rothfeld has repeatedly argued that Daray had a contractual duty to disclose the supposedly falsified information to Rothfeld. For example, in their briefing, defendants claim that Daray breached the contract by refusing to follow Rothfeld's in~tructions and i that those instructions supposedly consisted of putting slow selling inventory into a phaseout report. See Defs.' Br at 7. In their amended counterclaims, defery.dants also repeatedly allege that Daray had contractual obligations to mark down andisell inventory 10 of 19 [* 10] Index No. 653161/2015 ·Page 10of18 Schindler v. Rothfeld • and to follow Rothfeld's instructions in this regard. Daray allegedly breached the Operating Agreement by: (1) refusing to assist Rothfeld in determining ma~kdown value for company inventory and failing to sell such inventory (Am. Counterclairps iii! 209,, 211 ); (2) telling Rothfeld that the information he was demanding was counterproductive, time consuming and unreasonable (id. if 215); and, (3) refusing or counte~anding Rothfeld's instructions (id. iii! 221-225). These allegations belie defendants'a ssertion ' that the fraud and fiduciary duty claims are independent of the breach of contract claim. Moreover, it is clear that the failure of an employer to perform assig~ed tasks does not give rise to an action for fraud or breach of fiduciary duty. Cerciello v. Admiral Ins. Brokerage Corp., 90 A.D.3d 967, 968 (2d Dep't 2011). "Rather, the employee's misuse of the employer's resources to compete with the employer is generally required." Id. at 968. There is no such allegation here. b. Damages Finally, REI' s third and fifth counterclaims also fail because REI ha'~ not alleged a cognizable damage theory. While REI claims that if Rothfeld would have sold the concealed inventory at a higher price had he known about it earlier, this th~ory is foreclosed by the out-of-pocket rule. Under this rule, "[d]amages are to be!calculated to compensate plaintiffs for what they lost because of the fraud, not to compepsate them for 11 of 19 [* 11] Index No. 653161/2015 Page 11of18 Schindler v. Rothfeld what they might have gained. Under the out-of-pocket rule, there can be no recovery of . ' profits which would have been realized in the absence of fraud." Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996) (internal citations omitted). For example, in Starr Foundation v. American International Group~ Inc., 76 · A.D.3d 25 (1st Dep't 2010), plaintiffs primary asset was publicly-traded shares in defendant AIG. Plaintiff alleged that AIG's misrepresentations caused it to hold onto its shares longer than it otherwise would have otherwise. Id. at 26. In affirming the dismissal of the complaint, the First Department stated that the plaintiffs claim was "virtually the paradigm of the kind of claim barred by the out-of-pocket rule." Id. at 28. The Court identified several "cumulative layers of uncertainty," which together "take the claim out of the realm of cognizable damages." These "layers of uncertainty" included: (1) whether the plaintiff would have sold the shares absent the misreprese~tations; (2) the time frame for the supposed sale or sales of the shares; and (3) in the event of a sale (or. sales) how many shares the plaintiff would have sold. Id. at 29-30. There are similar layers of uncertainty to REI' s damage claim. Thus, it is completely speculative as to whether: (1) the Company would have sold the allegedly excess inventory; (2) the time frame (or time frames) during which the excess inventory ,, would have been sold; and (3) how much inventory would have been sold,.and at what 12 of 19 [* 12] Schindler v. Rothfeld Index No. 653161/2015 Page 12of18 pnce. Consequently, REI's damages claims are barred by the out-of-pocket rule., Accordingly, the third and fifth counterclaims must be dismissed. 3. Breach of Contract Claim (First Counterclaim) In its first counterclaim, REI alleges that Heather Schindler breached the Operating Agreement by appearing in the third season of the Real Housewives program without fulfilling the conditions imposed by the Company for her appearance. As already noted, Section 2.1 O(b) of the Operating Agreement requires Heather Schindler to devote her full time services "exclusively" to the Company as long as (1) the REI loan remains outstanding and (2) she accepts a consulting fee or salary from the Company. See Affirmation of John H. Reichman Ex.- 4 at § 2.10. According to REI, Schindler sought the Company's permission to appear for a third season of the show and thus not devote her efforts full time to the Company. This permission was granted with certain conditions. Among the alleged conditions was the requirement that Schindler pay the Company 50% of the income she received for the third season. As REI states in its amended counterclaims, this permission --'- and the conditions imposed - constituted the granting of an "exception to her obligation to provide her services on a full time basis exclusively to the Company under Section 2.lO(b) of the Operating Agreement." (Am. Counterclaims if 233.) 13 of 19 [* 13] Index No. 653161/2015 Page 13of18 Schindler v. Rothfeld Nevertheless, such an.amendment to the terms of the Operating Agreement could only be done with the written consent of the Company's Members. See Operating Agreement§ 14.1. REI does not allege any such written amendment. Moreover, the RHONY Agreement, which provided the/'exception" to the Operating Agreement allowing for Heather Schindler' s first two seasons on the Real Housewives ;program, explicitly only applies to those two seasons and not the third season at issue here. See Reply Affidavit of Eric Rothfeld Ex. M at 3 (attached as Exhibit 2 to the Affirmation of Donald S. Zakarian) ("Based upon you and Jonathan [Schindler] signing arid returning a copy of this letter ... [the Company] hereby approves your participation in the [Real Housewives] series ... for the Initial Cycle and one Additional Cycle only."). Therefore, the RHONY Agreement fails to provide a basis for REI's breach claim. Accordingly, the first counterclaim is dismissed. 4. Breach of Contract (Second Counterclaim) In the second counterclaim for breach of contract, REI alleges that all plaintiffs breached "Article VIII" of the Operating Agreement by seeking to replace Rothfeld with an "unqualified" manager and by not following his instructions. However, REI fails to identify any specific provision in Article VIII that was breached. 14 of 19 [* 14] Schindler v. Rothfeld Index No. 653161/2015 , Page 14of18 . It is well established that "[i]n order to plead a breach of contract cause of action, a complaint must allege the provisions of the contract upon which the claim is based" Atkinson v. Mobil Oil Corp., 205 A.D.2d 719, 720 (2d Dep't 1994); see also Matter of Sud v. Sud, 211A.D.2d423, 424 (1st Dep't 1995). Defendants fail to allege which provision in Article VIII of the Operating Agreement that each of the plaintiffs allegedly breached. Article VIII includes many different provisions, including plaintiffs' right to replace Rothfeld as manager. Defendants respond that plaintiff have "misrepresented" their counterclaim, and that the alleged breach of Article VIII consists of: (1) failing to comply with notice and meeting requirements in the Operating Agreement when they sought to remove Rothfeld as Manager; and (2) not following Rothfeld's instructions. The notice and meeting requirements, however, are set forth in Article VI of the Operating Agreement - not Artiele VIII. Further, this Court has already rejected the claim that plaintiffs did not follow the notice and meeting requirements in tl,ie course of denying defendants' motion for a preliminary injunction: Accordingly, the Court concludes that Section 6.9 does not contradict Section 8.1 (e) and merely provides for an "Information Action" waiving the meeting requirements as long as a majority of the Members agreed on the action to be taken. As a result plaintiffs exercise of the removal rights was proper. 15 of 19 [* 15] Schindler v. Rothfeld Index No. 65316112015 Page 15of18 (Affirmation of David Yeger Ex. 8 at 11.) This ruling constitutes the law of the case, and the issue therefore cannot be relitigated. Chanice v. Fed. Express Corp., 118 A.D.3d 634, 635 (1st Dep't 2014). In addition, in making the argument that plaintiffs breached Article VIII by not following Rothfeld' s instructions, they still fail to specify which provision 6f Article VIII. was breached. See Sud, 211 A.D.2d at 423. Accordingly, the second counterclaim for breach of contract must be dismissed. 5. Breach of Fiduciary Duty (Fourth Counterclaim) In its fourth counterclaim, REI alleges that Ms. Schindler breached her fiduciary duty to the Company by seeking "to impose an unqualified manager," and attempting to seize managerial contro.l, in violation of the Operating Agreement. Howev~r, as previously discussed, a breach of fiduciary duty claim must be based upon conduct that is independent of the conduct constituting a breach of contract. Here, defendant's breach of fiduciary duty counterclaim is based solely on an alleged breach of the Operating Agreement. Accordingly, the fourth counterclaim is dismissed as well. 16 of 19 [* 16] Schindler v. Rothfeld 6. Index No. 653161/2015 Page 16of18 Injunctive Relief (Sixth Counterclaim) Since each of the other substantive counterclaims has been dismisseq, the sixth counterclaim seeking the imposition of a permanent injunction 'is likewise dismissed. See, e.g., Weinreb v. 37 Apartments Corp., 97 A.D.3d 54, 58-59 (1st Dep't 2012) ("[I]njunctive relief is simply not available when the plaintiff does not hav~: any remaining substantive cause of action against those defendants. An injuncti,on is a remedy, a form of relief that may be granted against a defendant when its p~oponent establishes the merits of its substantive cause of action against that B. defenda~t. "). Motion to Modify TRO (Motion Sequence No. 009) In light of the resignations submitted by Heathe~ Schindler, Daray, a~d Herman, defendants now seek to modify the TRO so to eliminate both the dual-signature " requirement and the restriction on the authority of Rothfeld to terminate employees. As an initial matter, defendants' request to eliminate the dual-signature requirement is denied as moot. On April 26, 2016, the parties stipulated to ~ modification of the TRO, replacing Herman with Jimmy Yao. See NYSCEF No. 336. Fµrther, defendants' request to ~emove the restriction on Rothfeld's ability to fire erAployees is also denied. This Court is reluctant to change the status quo, especially in light of the fact 17 of 19 [* 17] Schindler v. Rothfeld Index No. 653161/2015 Page 17of18 that counsel for defendants represented during oral argument that the comp~ny is profitable and being well run. See 5/11/16 Oral Arg. Tr. at 34:21-24. 1 Plaintiffs' cross-motion likewise is denied. Jonathan Schindler's request for the power to approve payments in place of Herman is denied as moot, given Yab's appointment as signatory. Plaintiffs' request for access to the. books and records of the . Company, as well as the Company's monthly financial statements, is also denied as moot, as, during oral argument, defendants represented that they would fully comply with both of these requests. 2 See 5/11/16 Oral Arg. Tr. at 36:14-20. Finally, the Court denies plaintiffs' request for the right to approve t1ie hiring or firing of Yummie employees or consultants. This request is denied for the same reason ! that defendants' request to eliminate the restriction on termination was deni~d. See supra. The Court seeks to preserve the status quo during the pendency of this litigation. The Court has considered the remaining arguments and finds them to be without merit. 1 The May 11, 2016 Oral Argument Transcript is available on NYSCEF as document no. 364. 2 After this motion was argued, plaintiffs filed a motion to compel, arguing that defendants persisted in their refusal to allow plaintiffs full access to the Company's books and records notwithstanding defendants' statements on the May 11, 2016 record,. Th~ Court granted plaintiffs motion to compel on October 5, 2016. See Decision and Order on Motion Sequence .010. . 18 of 19 [* 18] Index No. 653161/2015 Page 18of18 Schindler v. Rothfeld · III. Conclusion Accordingly, it is ORDERED that plaintiffs' motion to dismiss the amended counterclaims (motion sequence no. 008) is granted, and the amended counterclaims are hereby dismissed; and it is further ORDERED defendants' motion and plaintiffs' cross-motion to modify the September 15, 2015 temporary restraining order (motion sequence no. 009)!1are both denied; and it is further ORDERED that the remainder of the action shall continue . . Dated: New York, New York October _iL, 2016 ENTER Hon. Eileen Bransten, J.S.C. 19 of 19

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