Glaubach v PricewaterhouseCoopers, LLP

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Glaubach v PricewaterhouseCoopers, LLP 2018 NY Slip Op 30875(U) May 9, 2018 Supreme Court, New York County Docket Number: 157993/2016 Judge: O. Peter Sherwood Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 1] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 SUPREME COURT OF THE ST ATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 49 ------------------------------------------~---------------------------){ FEU:X: GLAUBACH, indh·idually and derivatively on hehaU of PERSONAL TOlJCH HOLDING CORP., DECISION AND ORDER Index No.: 157993/2016 Plaintiff, Mot. Seq. Nos.: 003-004 -against- PRICEWATERHOUSECOOPERS, LLP and GREATBANC TRUST COMPANY, Defendants. -----------------------------------------------------------------------" 0. PETER SHERWOOD, J.: Motion sequence Nos. 003 and 004 arc consolidated for disposition, and are disposed of in accordance with the follmving decision and order. Defendant GreatBane Trust Company (GTC) moves, pursuant to CPLR 3211 (a) (7), for an order dismissing plaintiffs Felix Glaubach's (Glaubach) and Personal Touch Holding Corp. 's (Personal Touch) first amended complaint (motion seq. No. 003). Defendant PricewatcrhouseCoopers LLP ( PwC) moves for an order, pursuant to CPL!{ 32 l l (a) (I), (3 ), and (7), dismissing the first amended complaint against it. Plaintiffs cross-move for leave to amend the complaint. BACKGROUND As these arc motions to dismiss, the fact allegations in the complaint are assumed true. Glaubach is the founder, former president, and a minority shareholder, holding over 27% of the shares of outstanding stock of Personal Touch, a home health services company (exhibit A to April 26, 2017 Affim1ation of Nick Wilder, first amended complaint [amended compll. 2 of 22 iii! 1,4). [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 2] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 GTC, the trustee of the company's employee stock ownership plan, owns 31 %1 of the outstanding shares of the company, and is its largest shareholder (id.,, 3). PwC vvas retained by Personal Touch to independently audit the company's financial stalements (id., ii 2 ). Glaubach also al legcs that PwC directly and personally advised him at his office (id.). In 20 l 0 through 2011. while Glaubach took a medical leave of absence from the company, numerous Personal Touch cxecuti ves, particularly chief executive officer David Slifkin (Slifkin), executive vice-president and general counsel Robe11 Marx (Marx), and vice-president Gertrude Balk (Balk), engaged in fraud, theft, looting, breach of fiduciary duty, corporate waste and mismanagement (id.. ii 8). These executives fraudulently caused millions of dollars of payments to he made by the company to them, \Vhich were then reported as '"continuing legal education· reimbursements" (id.. 1 25, 27). When Glauhach recovered from his illness and returned to Personal Touch, he ·'blt:w the whistle on the fraud and improprieties'' (id., 1 39). In 2013, the Internal Revenue Service (IRS) audited the company. Personal Touch hired Schlam Stone & Dolan to represent it in the audit. The firm discovered the fraud, and advised Glaubach of it (id,~! 26). Glaubach personally paid $827,759 to the IRS and the New York State Treasury to "1T'end the problems created by these others pai1ies'' On July 2, 2013, Slifkin resigned from the board of directors. Around the same time, Balk. his wife, resigned from the company, and Slifkin came up with an exorbitant severance package for her (id., ~; 38). In order to ·'negate his voice'' at Personal Touch, Glaubach asserts that the board was stacked \Vith people with tics to Slitkin. In July 2014, the board was expanded to include four new directors {id, ii39). In a July ~ l, 2014 letter to the board, Glaubach demanded that the newly 2 3 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 3] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 expanded or "packed" board take action with regard to the financial improprieties (id,~[ 41 ). In an October 30, 2014 letter, Glaubach demanded that the board deal with the fraud by Slifkin and Balk (id, ir 42). Again, by letter dated January 22, 2014, he demanded that the board take action against Marx. Slifkin, :md Balk (id.). In a March 30, 2015 email, Glaubach wrote to a board member complaining that the Audit Committee was not taking the problems seriously (id, ~143 ). Subsequently, Sliikin and Balk ''spearheaded a barrage of false sexual harassment claims" against him. and Glaubach was terminated as president and prohibited from coming to the company offices (hi. iii! 44-45). In March 2015, Glaubach commenced a derivative action in Supreme Court, Queens County, entitled Glaubach derivatively on hehalf"<dPersonal Touch Holding Cv. v Sl~fkin et al (index No. 702987/2015), in \vhich he asserted claims against all of the members of the board and company officers (see exhibits C and D to April 26, 2017 A111rmation of Nick Wilder). 1k claims that he incurred $5 million in legal expenses in that action (amended In September 2016, a m<~ority comp!.~ 46). of the board voted to delegate all of its authority to conduct its responsibilities to an executive committee. consisting of all board members except Glaubach (id.. ~: 47). Thal resolution declared the board and Glaubach to be "adverse'' and "hostile," and included a provision that Glaubach not be privy to any information from that committee (id.). with regard to GTC Glaubach alleges that, in a meeting on July 21, 2014, he made earnest efforts to inform GTC, as the largest shareholder, of what was going on, and urged OTC to use its control to help reconstitute the board. He states that GTC '·allied with Slifkin and Marx," and told him not to communicate \Vith it (id, ~l 50). From late July 2014 through December 2015, Glaubach made several other attempts to get GTC to act, but GTC failed to reconstitute the board, and voted to re- 3 4 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 4] INDEX NO. 157993/2016 NYSCEF DOC. NO. 109 RECEIVED NYSCEF: 05/10/2018 elect all of the same board members \vho ignored the fraud (id., iii! 51-52). In Pcbrnary 2015, the board appointed a committee consisting of newly appointed board members to investigate the allegations Ud., i.53). During this entire time, PwC continued to perform independent audits of Personal Touch· s consolidated financial statements, and issued opinion letters certi(ying the financials for the years (id, ii 55). Glaubach asserts that for years he had a "direct relationship of trust" with PwC, and that each year PwC discussed the financial health of the company with Glaubach at Personal Touch's offices (id., il 57). He also asserts that he discussed with PwC his role as 27% shareholder, as a !ender of $I 0 million. and the importance of the audits to his ovvn financial decisions (id). Jn 2013. PwC v.'as told of the fraud and improper activities. and following this, PwC reexamined and reevaluated the previous years' financial statements. purporting to address these issues (id, ~i 60). Glaubach asserts that since the fraud. looting. and accounting malpractice, the value of the company has severely declined, and the value of his shares have plummeted. He states that he loaned millions of dollars to the company, and that he has spent millions of dollars in legal foes to try to repair the damage to the company, and to bs O\"ln reputation (id., ii 6:2). Glaubach commenced this action against 1'\vC, asserting one derivative claim for accounting malpractice (first cause of action), and the remaining claims as direct claims for aiding and abetting breach of fiduciary duty. fraud, aiding and abetting fraud, fraudulent misrepresentation, negligent misrepresentation, and promissory cstoppcl (second through seventh causes of adion). Glaubach asserted only direct daims against GTC for negligence, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty (eighth through tenth causes of action). For the first derivative 4 5 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 5] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 cause of action, Glaubach seeks the diminution in the value of shares for all holders of the company's stock, and $2,290,000 for the money fraudulently taken as reimbursement for educational expenses. For the second through tenth direct causes of action, he seeks damages of $827, 759 for monies he personally paid to regulators to remedy the company's problems: $13.2 million for the decline in his share value; $812,500 for 15 months of lost salary; $5 million he spent in attorneys' fees; and money damages for the harm to his reputation. PwC moves to dismiss, contending that plaintiffs' direct claims against it are actually dcrivati ve, and that it did not owe any duty to G laubach i ndepcndent of any duty it owed to Personal Touch. It contends that the nature of the damages Glaubach seeks demonstrates that the claims arc derivative. As to the derivative claim, PwC contends lhat plaintiffs fail to sufficiently plead demand futility. Plaintiffs cross move to add a new category of damages to each of their claims against PwC in the amount of two loans Glaubach made to Personal Touch in 2010 and 2012. GTC moves to dismiss the direct claim~ against it on the ground that it owed no duty to Glaubach. It asserts that it was not a controlling shareholder, and plaintiffs' conclusory allegations that it comprised a control group ( RECEIVED NYSCEF: 05/10/2018 \Vi th Marx and Sliikin are insufficient as a matter of law. DISCUSSION Both motions to dismiss are granted and the cross motion for leave to amend is denied. PwC's ftfotion to Dismiss Glaubach' s first cause of action for accounting malpractice is asserted derivatively. Since Personal Touch is incorporated in Dela\vare, Deb.ware law applies to the issue of whether Glaubach has adequately pleaded that he demanded that the company bring the claim, or that such demand would he futile for the purposes of his derivative claims (see Asbestos Workers Phi/a. Pension Fund 5 6 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 6] NYSCEF DOC. NO. 109 v Rell, 137 AD3d 680, 681 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 p' 1 Dept 2016j). Under Delaware law, and Delaware Chancery Court Rule 23.1. tu have standing to pursue a derivative claim on behalf of a company, a plaintiff ''must make a pre-suit demand that the board pursue the contemplated action" (id. at 681-682 ). Such a pre- suit demand '·may be excused, however, if such a demand would have been futile" (id. [internal quotation marks and citation omittcdl). Either presuit demand or demand futility must be pleaded \vith particularity in order for a derivative claim to survive a dismissal motion (see Brehm v fasner, 746 A2d 244, 254 l Del 2000]). ln the instant case, the amended complaint fails to allege that Glaubach ever demanded that the Personal Touch board pursue an audit malp;acticc claim against P\VC. or that such a demand would have been futile. First, while Glaubach alleges ''demands'' that he made on the board of directors. his demands were for the Board to investigate alleged \.Vrong doing of certain company executives. not lo investigate and commence an action against PwC for auditing malpractice (amended comp!, ,;ir 40-44). Specifically, he demanded that the Board take ''action against all parties who received monies fraudulently characterized as 'educational expenses''' (id. if 43 ). This fai Is to satisfy Ddaware's presuit demand requirement for the derivative accounting malpractice claim. Moreover, the complaint fails to sufficiently allege demand futility. Where the ·'subject of the derivative suit is nol a business decision of the board" but, instead, is a wrong committed against the company by a third party, or the board's inaction. demand is only excused when the plaintiff alleges particularized facts "rnis[ingj a reasonable doubt that, as of the time the complaint is filed. the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand" (Ra/es\' Blasband, 634 A2d 927. 934 [Del 1993 j; see Jn re Bristol-JZvers Squibb Derivativ1: Utig, 2007 WL 959081, 7 of 22 * 8, 2007 lJS Dist LEXIS 25255. * 25 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 7] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 [SD NY 20071 L No. 02 CIV 85 71 (LAP)]; Ashestos Workers Phi/a. Pension Fund v Rell, 13 7 AD3d at 682). A claim that the hoard failed to act, sometimes referred to as a ·'lack of oversight'. claim, is "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment" (Asbestos Workers Phi/a. Pension Fund v Bell, 137 AD3d at 684 [internal quotation marks and citation omitted]). In order ''to rebut the presumption of disinterestedness I under the Ra/es test!, the plaintiff must plead particularized facts that, if proved, would establish that a m~jorily of the directors face a 'substantial likelihood' of personal liability for the vvrongdoing alleged in the complaint"" (Wandel v Dimon, 135 AD3d 515, 517 [ l" Dept 2016]). Demand futility is examined with respect to the board's membership at the time the amended complaint is filed, unless the alleged claims were validly being litigated at the time of the original pleading (see Braddock v Zimmerman, 906 A2d 776, 785 [IJel 2006)). Herc, the amended complaint fails to meet the requirements of demand futility. Glaubach's claim is that the board violated their oversight duties. There are, however. no particular facts establishing that a majority of the board at the time plaintiffs commenced this action was interested or lacked independence. Plaintiffs fail to allege that any, much less a majority, of the directors faced a substantial likelihood ofliability for PwC's alleged malpractice. The complaint foils to allege that there were direct tics between PwC and Personal Touch's board members, or any allegations that the board was dominated by a director or officer who condoned PwC's alleged improper wnduct (see H'ande/ v Dimon, 135 AD3d at 517; In re Bristol-Afyers Squibb Derivative Lilig., 2007 WI. 959081, at* 8). The amended complaint does not even detail the size of the board or its current composition, or that a majority of them were involved in, or even stood to gain by any alleged fraudulent conduct, or other improper conduct by PwC. lt fails to meet the heightened pleading standard set forth in 7 8 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 8] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 Delaware Chancery Court Rule 23 .1, as it fails to plead in a "director-by-director" fashion. instead, asserting conclusory and speculative statements about the board (see Khanna v A4cAfinn, 2006 \VL 1388744, at* 12. 14-15, 2006 Del Ch LEXIS 86, * 54 [Del Ch May 9, 2006] tNo. 20545-NCl). The Personal Touch executives Glaubach asserts were looting the company for their personal benefit, Slitl:in, nalk, and rvfarx, were not a majority. In fact, Slifkin resigned from the Board in July 2013 (amended compL ii 38), and these executives were not alleged to have control over the board. Glaubach 's conclusory allegations that the board is populated by persons with "ties to'' one of the alleged \vrongdoers, falls far short of the requirement of particularized allegations that a majority of the board would face a substantial likelihood of personal liability. Accordingly, this first claim is dismissed for Glaubach's lack of standing (CPLR 321 l La] [3]). The remaining claims against PwC also arc dismissed on the grounds of Glaubach' s lack of standing. The second through seventh causes of action al I are asserted as direct claims against PwC. I lowever, these claims all belong to Personal Touch, not to Glaubach, and should have been pleaded as derivative daims. and \Vere required to meet the demand requirements set forth above. \Vhere the wrong is against a corporation. the shareholder does not have an individual claim. even if the shareholder loses the value of his or her shares, or incurs personal liability in an attempt to keep the corporation solvent (see Ahrams v Donati, 66 NY2d 951, 953 [ 19851: Serino v Lipper, 123 AD3d 34. 40l2014]). "The distinction between derivative and direct claims is grounded upon the principle that a stockholder does not have an individual cause of action that derives from harm done to the corporation, but may bring a direct claim when 'the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation .. , (Accredited Aides Plus, Inc. v. Program Risk }..,1gmt.. Inc., 147 AD3d 122, 132 (3d Dept 20171, quoting Serino 9 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 9] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 v Lipper. 123 AD3d at 39; see Lawrence Ins. Group v KPA1G Peal A1arwick, 5 AD3d 918, 919 I 3d Dept 2004 J). In determining whether a claim is direct or derivative, a "court must look to the nature or the wrong and to whom the relief should go'' (Tooley v Donaltisun. J,u.fkin & .Jenrette, Inc., 845 J\2d I 031, 1038 fDd 2004 l). Specifically, the court should consider"( l) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who w·ould receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)" ( fudel! v Gilbert, 99 AD3d 108, 114 [!'1 Dept 20121 [internal quotation marks and citations omitted]; see Maldonado v DiRre. I 40 AD3d 150 L 1503-1504 [3d Dept 20161). To detcrrnine the sut1ieiency of the allegations in a complaint. ·'lt Jhc pertinent inquiry is whether the thrust ofthc plaintiffs action is to vindicate his [or her] personal rights as an individual and not as a stockholder on behalf of lhe corporation'' (Alaldonado v DiBre. 140 AD3d at 1504 pnternal quotation marks and citation omitted]). The plaintiff must show that the duty allegedly breached was owed to the shareholder, and that he or she can prevail without shmving an injury to the corporation (Yudell v Gilherl, 99 AD3d at 114). If the individual claim of harm is "confused \Vi th or embedded" within the harm to the corporation. then it must be dismissed (Serino v Lipper, 123 AD3d at 40; see Ahrams v Donati, 66 NY2d al 953-954; Pallerson v Calogero, 150 AD3d 1131, 1133 [2d Dept 2017] [even where individual harm is claimed, if it is confused with or embedded in the harm to corporation, it cannot stand separately]: Alaldonado v. DiBre, 140 ADJd at 1504: Yudell v Gilbert. 99 AD3d at 115). Here, Glaubach's claim for damages based on the lost value of his shares is derivative ... The lost value of an investment in a corporation is quintessentially a derivative claim by a shareholder" (S'ehno v Lipper, 123 AD3d at 41; Kramer v Western PucUrc Indus .. Inc., 546 A2d 348, 353 [Del 1988] (actions involving claims of vvaste and mismanagement which cause a depression in the value 9 10 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 10] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 of stock allege a wrong to the corporation Lo be enforced by a derivative action!). Because Glauhach's alleged damage for lost share value is not any different from the losses suffered by any other shareholder. and his claim is supported by the identical proof, it is not viable as a di reel claim, as a matter of law (Serino "Lipper, 123 AD3d at 41 [dismissing lost share value claim despite plaintitTs personal individual relationship with PwC]). All of the shareholders of Personal Touch are harmed by P\vC's alleged auditing failures and vvould recover pro rata in proportion with their ownership of the company·s stock because they arc stockholders. Thus. the claims are derivative (see El Paso Pipeline GP Co., LLC. v Brinckerhoff; 152 A3d 1248, 1261 [Del 20161). Glaubach·s unsupported allegations that PwC made misrepresentations to him personally, or that Pv,·C kI1c\v that he had a finam:ial interest in the wmpany, are insufficient lo convert this to a direct claim (see Serino v Lipper, J 23 AD3d at 40). In addition, his claim for damages in the amount of $2.2 million for the allegedly false continuing education reimbursements clearly alleges injuries suffered by the company, which \vould receive the benefit of any recovery, not the individual shareholders (see Yudell r Gilbert. 99 /\D3d al 114). Similarly, his claims for irreparable darr.ages to his reputation "as a pioneer in the health services industry" and for lost earnings (amended comp! at p 34) are barred, because they are inextricably intertwined within the derivative claim (Serino v lipper, 123 AD3d at 41 ). While Personal Touch docs not have any right to recover fi.Jr damage to Glaubach's reputation in the health services community, it is the financial di11iculties that the company suffered as a result of the financial mismanagement and purported looting that could have negatively impacted his reputation (id). His claim that. bad PwC informed him about the financial irregularities, he could have 10 11 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 11] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 stemmed the damage, is indistinguishable from the embedded claims the First Department knmd in Serino v lipper ( 123 AD3d at 4 I). In that case, the Court held that damages to the reputation of the principal and founder of the hedge funds upon the overvaluation and alleged mismanagement was part of the derivative claim against Pv.·C that should be dismissed (id.). Contrary to G laubach 's contentions, the amended complaint fails to allege and seek recovery for any personal damages for an individual, personal contractual relationship with PwC. Glaubach does not allege that he ever hired or paid PwC to perfonn any services for him individually. The amrnal engagement letters demonstrate that PwC was retained by Personal Touch, not (ilaubach, and that it was for services for the company, not for him personally (see exhibits E-K of atlirmation of Alvin Lee in support of PwC~ cf Serino v Upper, I ~3 AD3d at 41 [plaintiff alleged that he retained and paid PwC for individual financial services, and only those claims were held to be direct!). Glaubach \Vas not a party to a commercial contr'.lct \vi th Pw·C that he was seeking to enforce in his own right ((/ NA F Holdings. LLC v U & Fung 1 Trading] Ltd.. 118 A3d 17 5, l 79 n9, 182 [Del 2015] lplaintiff s claim based on contractual duty O\Ved directly to it by defendant]). His allegations that he made personal financial decisions in reliance upon PwC"s audits of Personal Tnuch do not convert these derivative claims into direct claims. Glaubach's claim for payments he made to the IRS and attorneys in an attempt to remedy the ham1 allegedly caused by the Personal Touch executives, and to address the fraud in the company. also does not give him standing. An individual sl•areholdcr lacks standing to bring a claim on behalf of a company even where he or she "incurs personal liability in an effort to maintain the solvency of the corporation'' (Abrams v Donati, 66 NY2d at 953; see Serino v Upper, 123 AD3d at 39). I !is proposed additional claim for damages ti:>r $10 million in personal loans he made to the company 11 12 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 12] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 in 2010 and 1012, purportedly in reliance on PwC's audits, are subject to dismissal based on the statute of limitations, as discussed further below. Glaubach's reliance on Citigroup Inc. v AHif'' lnv. Pannership (140 A3d I 125 [Del 2016]) is misplaced. In Ciligroup, the court analyzed "holder'' claims in which the stockholder alleges that its decision not to sell shares was based on its reliance on the corporation's misstatements about its true financial condition as the stock diminished in value (id al 1128). The Delaware Supreme Court held that under the laws of either New York or Florida. which governed the claim, the corporation could not pursue this claim because it was not hanned by the wrongdoing. Instead, the corporation was the wrongdoer. the primary defendant, and not a holder, and the claim only belonged to the shareholder who did not sel I in reliance on the corporation· s misrepresentations (id. at 1126 ). Thus, the holder claims., like the commercial contract claims in NAF Holdings. L/,C v Li & Fung /Trading] Ltd ( 118 A3d 175), were direct claims, because only the holders could assert them, not the issuing corporation (id at 1138). Here, in contrast, Glaubach's claims are not holder claims, that is, he is nol claiming that he held onto shares based on misrepresentations by the company. In fact, he asserts that he personally was aware of the fraud since 2013, and still did not sell his shares (plaintiffs' memorandum in opposition at 27). Personal Touch was not the \vrong<locr, all of the shareholders have su11ered. and Glaubach is not the only one who could asserts the claims against PwC, Personal Touch could as \Veil. Glauhach's contention that his claim is direct because the misrepresentations were made to him after the damage to the company was already done (id at 31-32) fails to support his claim. As in Serino v Lipper ( 123 AD3d at 38-39), the assertion that. if he knew of the problem earlier, he could have acted to stem the losses (plaintiffs' memorandum in opposition at I 8), shows that the 12 13 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 13] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 claim is not direct but instead, is derivative. The waste and mismanagement by Personal Touch's officers and directors, which \Vas allegedly permitted to continue by PwC's failure to uncover and disclose the improper educational expenses, resulting in the decrease in the value ofcorporate shares. is suffered by the corporation as a whole. Thus. it is a derivative claim (see Feldman,. Cutaia, 951 A2d 727, 734-735 [Del 2008j: In re lvfassey Energy Co. Derivative and Class Action Litig., 160 A3d 484. 503 lDcl Ch 2017]). Plaintiff's Cross Nlotion for Leave to Ame11d Glaubach 's cross motion for leave to amend is denied. While leave to amend shall be freely granted. where the amended pleading seeks to assert claims that are "plainly without merit." or insufficient as a matter oflav-<', it should be denied (see Prestige Caterers v Km!lman, 290 AD2d 295. 295 [ 1'1 Dept 2002]; Rivera v New York City Tr. Auth, 141 AD3d 441, 441 1 L1' Dept 2016); 1 Aerolineas Galapagos, S.A. v Sundowner Alexandria, LLC, 74 AD3d 652, 652 [1' Dept 20101). Glaubach's proposed second amended complaint (exhibit E to April 26. 2017 Affirmation of Nick Wilder) seeks to add allegations that he relied on advice from PwC about the financial condition of the company in making loans to the company in 20 l 0 and 2012 and that, Personal Touch has defaulted on interest payments on those loans. Plaintiff also seeks the entire principal amount on the loans ($10 million) as damages from PwC. (Id, iJ 78.) While Glaubach mw.· alleges that Personal Touch is failing to pay interest on !i1e 2012 loan, and has defaulted on the 20 l 0 loan, he does not allege that the company is incapable of paying him, or that PwC has any responsibility for making sure that the company makes the loan payments. In any event, these claims are barred by the statute of limitations. 13 14 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 14] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 The essence of all plaintiffs' claims against PwC arc accountant malpractice (see Meyer v Shearson Lehman IJros., 211 AD2d 541, 542 applying statute of limitationsl). 11 ' 1 Dept 1995] [look to essence of claim, not label in Under CPLR 214(6), the limitations period applicable to accounting malpractice is three years, \\'·hich period may not he circumwnted by framing the claim as a negligence or fraud claim (see lv!atter ol R.M. Kliment & Frances Halshand, Architects {lvfcKinsey & Co, inc.], 3 NYJ<l 538, 54212004] [professional malpractice claim is subject to three year limitations period]: Kinherg v Garr, 60 AD3d 597, 597f1 ' 1 Dept 2009] [contract and fraud claims are essentially legal malpractice, subject to three-year limitations period j). I !ere. Glaubach · s claims against PwC arc essentially malpractice in that they seek to hold PwC liable for allegedly faulty audits. for example, the proposed second amended complaint alleges that PwC advised him ··ctirectly and personally at his offices regarding their opinions and finding from their audits," and Pw'(' ••failed to meet [applicable auditing] standards'' (exhibit E to April 26, 2017 Affirmation of Nick Wilder_ iii! 2, 7). Such a claim "accrues upon the client's receipt of the accountant's vmrk product since this is the point that a client reasonably relies on the accountant's skill and advice'' ( William.wm 1· PricewaterhouseCoopers LLP. 9 NY3d J, 8 [2007] [internal quotation marks and citation omitted j). The advice upon which the 2010 and 2012 loans were made occmTcd, at the latest, on the dates upon which those loans were made. The limitations periods for the claim \Vith regard lo the 2010 loan ran in 2013, and. for the 2012 loan, in 2015. Because this action was not commenced until September 2016, Glaubach's malpractice claims based on these additional 14 15 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 15] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 allegations are time-barred. 1 Therefore. leave to amend is denied as the addition of a untimely claim ror these damages is plainly without merit. GTC's Motion to Di~·miss GTC's motion to dismiss the eighth, ninth, and tenth causes of action against it for faj]urc to stale a claim is granted. All of these claims arc pleaded as direct daims against UTC for negligence, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty. They are all based on the allegations that GTC, as 31% minority shareholder, owed a duty to Glaubach, a 27% minority shareholder, because GTC was the largest and allegedly a "controlling·· shareholder. and that GTC ""in conjunction v.;ith"' shareholders Marx and Slitkin formed a controlling 62% block (amended compL ii~ 129, 139-140). All of these claims arc based on Glaubach's assertion that GTC owed a fiduciary duty to him. Delaware Jaw, which controls in cases where the internal affairs of a Delaware corporation are at issue, recognizes two possible situations in which one shareholder may owe a fiduciary duty to another shareholder: (1) where the shareholder owns a majority of the shares; or (2) where the shareholder actually dominates lhe board (In re Morton's Rest. Group, Inc. Shareholders Lilig, 74 A3d 656. 664-665 [Del Ch 2013]). 1 Plaintiffs did not file a reply to PwCs opposition to the cross motion, and indicated in a phone conference \-Vith all counsel that the decision not to reply was intentional. Plaintiffs then filed an untimely reply, without court pen11ission. asserting for the first time a continuous representation doctrine toll. Even if this court were to consider this late argument, plaintiffs fail to show that there v.ras any mutual understanding between Glaubach and J>wC for the need Ll)r further representation of him directly on the specific subject matter of PwC' s alleged advice regarding these loans (see Williamson v PricewaterhouseCoopers LLP, 9 NY3d at IO; Apple Rank.for Sav. r PricewaterhouseCoopers LLP. 70 AD3d 438, 438 1l st Dept 20101). Again, Glaubach also has not pleaded that he directly hired PwC, or that they agreed to do accounting wmk directly for him. 15 16 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 16] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 ·'\Vben a stockholder owns less than 50% of the corporation's oulstanding stock, a plaintiff must allege domination by a minority shareholder through actual control of corporate conduct. The bare conclusory allegation that a minority shareholder possessed control is insufficient. Rather, the Complaint must contain well-pied facts sho\~.:ing that the minority stockholder exercised actual domination and control over ... [thej directors" (id. [internal quotation marks and citations omitted I). Thus. a minority shareholder is not considered controlling ''unless it exercises such formidable voting and managerial power that [it] as a practical matter, [isj no differently situated than if [itJ had majority voting control" (id. at 665 [internal quotation marks and citations omitted]). Its power musl be '"so potent that independent directors . . . cannot freely exercise their judgment, fearing retribution" from the controlling minority shareholder (id [internal quotation marks and citations omitted]). When evaluating such assertions, ''at the pleading stage, the facts pied in the complaint must, if true, imply actual control. If such facts arc lacking in the complaint, then the control question can be determined as a matter of lavv on a motion to dismiss'' (111 re Rouse Properties, Inc., 2018 WL 1226015, *12. 2018 Del Ch LEXIS 93, *28-29 IDel Ch March 9. 2018J). ln the first amended complaint, plaintiffs' allegations of GTCs control as a minority shareholder arc entirely conclusory. The complaint alleges that GTC ·'was and is the largest shareholder at Personal Touch and a controlling shareholder. GTC alone had dominant control, but in conjltnction with shareholders Marx and Slifkin GTC fom1cd a controlling shareholder block of ovcr62% control" (exhibit A to April 26, 2017 Affirmation of Nick Wilder, amended compL ~l~j 129, 140). These allegations lack any factual support at all, and clearly fail to meet the requiremcn1 of showing such "formidable voting and managerial power·' (In re Alorton 's Rest. Group. Inc. 16 17 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 17] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 S'Jwreholders Lilig.. 74 A3d at 665; Jn re Rouse ProperJies, inc., 2018 WL 1226015, at *12 ). (}laubach also fails to make sunicient allegations to support a claim that GTC was part of a ''control group"with Marx and Slifkin (see Dubroffv Wren !foldings. LLC, 2009 WL 1478697, *3, 2009 Del Ch LEXIS 99, * 11 I Del Ch May 22, 20091[CIVA3940-VCNJ). He fails to set forth any facts to show that GTC Marx and Slifkin were connected in a "legally significant vvay-c.g., by contract common ownership, agreement, or other arrangement-to work together toward a shared goal" (id.). An allegation that these parties simply had parallel interests is insufficient as a matter of lav.· to support an inference that they were part of a control group (id., 2009 Del Ch LEXIS 99, * 12). While Glaubach asserts in his opposition (plaintiff's memorandum in opposition to motion seq. No. 003 at 23 ). that there was such a relationship, pointing lo allegations in his complaint that GTC was ·'tied closely'' with Sliikin and another board member, and that it was "allied with Sliikin and Marx" (exhibit A to April 26, 2017 Affirmation of Nick Wilder, amended com pl, ilii 11, 50; see alsn ~ l '.?9). those allegations, again, lack any factual detail. He fails to identify or give the substance of any contract common ownership agreement or any other anangement. Moreover, most of the complaint paragraphs he refers to have no allegations at all about any relationship (see id ii, 9, 16. 18, 36, 3 7. 134. 136, and 156). Further, the fact that GTC voted its shares for directors whom Glaubach alleges engaged in wrongdoing, fails to establish a relationship. GTC as a shareholder was entitled to vote based on its own self-interest (see Duhn~flv Wren Holdings, LJ,C, 2009 \VL l 478697, *3. 2009 Del Ch I .EXIS 99, * 11 ). In sum, the amended complaint fails to allege any basis for the allegations that GTC actually controlled the board, or any basis for treating GTC as part of a control group of minority shareholders. Therefore, there is no fiduciary duty owed to Glaubach, and ninth cause of action for the breach of fiduciary is dismissed. 17 18 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 18] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 Similarly, Glaubach fails to sutficicntly allege a duty to support the negligem.:e claim. Glaubach's claim is based on GTC's alleged inaction: that it "fail[ed] to help the minority shareholder Dr. Glaubach to preserve ihe company" and ''failrcdj ... to reconstitute the new 'packed' Board which sanctioned the fraud" (exhibit A to April 26, 2017 A11lrmation of Nick Wilder, amended comp!. iii! 134-135). In order to allege a negligern.:e claim based on a failure to act. Glaubach must allege a special relationship between himself and GTC (sec Price r E. I. DuPont de Nemours & Co .. 26 A3d 162, I 67 fDcl 20 I I]; see also A4aller l!fl'./ew York City Ashestos Utig., 5 1\YJd 486, 493-494 l2005]). As with the fiduciary duty claim, Glaubach uses GTCs status as alleged ''controlling shareholder·' as the basis of this special relationship (amended compL ~ 131 ). As set forth above, however, Glaubach"s allegations of such a special relationship lack any factual support, and are insufficient to support this claim as well. Without a duty to act the eighth cause of action for negligence is insufficient as a malter of law. Finally, the tenth cause of action against GTC for aiding and abetting a breach of fiduciary duty is dismissed. This claim alleges that Personal Touch's officers and board members violated their fiduciary duties to Glaubach. and that GTC "provided substantial assistance" and "affirmatively assisted in the concealment and perpetration of the breaches of fiduciary" duties (id., ~ii 151-152). The elements ft)r a claim of aiding and abetting a breach of fiduciary duty include: (l} '"breach by a fiduciary ofobligations to another; (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff sulfrred damage as a result of the breach" (Km{/l110n v Cohen, 307 AD2d 113. 125 [F Dept 2003]; see also Gatz v Ponsol~t, 925 A2d 1265, 1275 [Del 2007] [samcJ). "A person knowingly pai1icipales in a breach of fiduciary duty only when he or she provides subslantial assistance to the primary violator (Kal!fman v Cohen, 307 AD2d at 125 linlernal 18 19 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 19] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 quotation marks and citation omitted)). The de fondant must either aflirmativcly assist. help conceal or fail to act when obligated to do so (id; see Stanfield ()jl.~hore Leveraged Assets. J,Jd v Metropolitan Lile Ins. Co., 64 AD3d 472, 476 [1st Dept 20091). The participation must be meaningful (see Goldin v TAG Virgin Is .. Inc., 149 AD3d 467, 468 [1st Dept 2017]). "'[M]erc inaction or an alleged aider and abettor constitute substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff' (Kauf;nan v Cohen, 307 AD2d at 126). In "some circumstances, the terms of [a] negotiated transaction themselves Imay be] so suspect as to permit. if proven, an inference of knowledge of an intended breach of trust" (Gatz v Ponsoldt, 925 A2d at 1276 [internal quotation marks and citation omilled]). Nevertheless, even in the case of an inference, there must he some factual allegations from which '·knowing participation'' can be inferred (.!acksoll Natl. Ufe Ins. Co. v Kennedy. 741A2d377, 392 LDel Ch 1999]). A claim for aiding and abetting breach of fiduciary duty must be pleaded with particularity (see CPLR 3016 lb]; Roni LLC V Ar/£1, 72 AD3d 413, 413-414 [ 1'1 Dept 201 OJ, qfjd 15 NYJd 826 [2010]; Schroeder v Pinteresl. Inc., 133 /\D3d 12, 25 [I "1 Dept 2015 J). I !ere, Glaubach's claim against GTC fails to plead any facts showing that GTC knew about lhc alleged corporate waste and other misdeeds when they were occurring. I !is bare allegations that ""GTC knowingly provided substantial assistance to the primary violators of fiduciary duties'· (amen<lc:d compl, if 152). vvithout further detail, fails to meet the requirements for knowing participation. The amended complaint fails to contain any allegations suggesting that GTC vvas aware of the alleged fraud until Glaubach infonned it in July 2014. His allegation that GTC "helped !officers and board members I try to conceal or minimize the fraud and to remain in power" (id., i1 153 ). similarly provides no more factual detail regarding even the manner or timing of any alleged 19 20 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 20] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 assistance. Moreover, there arc no factual allegations that GTC undennined or prevented any investigation into the purported fraud (cf Gant/er 1· Stephens, 965 A2d 695, 709 [Del 2009] lddcndant corporate officers, \Nho were responsible for preparing due diligence materials for firms that expressed interest in acquiring company, attempted to sabotage the due diligence process, and, thus could be liable for breach of their fiduciary duties and for aiding and abetting chairman of board's breach I). The assertion that GTC "reelect[ed] known participants in fraud to the board'' (amended compL ~1 155), occurred well after the purported breaches of trust, and thus ''[e]ven if viewed in the light most favorable to the plaintiffisl ... do not support a claim that ldefondant] participated at all (let alone knowingly participated) in any .. violations" (Weinberger v Rio Grande Indus .. Inc., 519 A2d 116, 131 [Del Ch 1986 j). Since. as discussed above, GTC did not owe any fiduciary duty directly to Glaubach. any knowing participation cannot be satisfied by mere inaction. Therefore. because none of Glaubach 's conclusory allegations arc sufficient lo suppot1 an inference of knowing assistance. this cause of action is dismissed (see Roni LLC v At:f{1, 15 NY3<l at 827 Iconclusory allegations insunicient to give rise to an inference that defendants had actual knowledge]; Schroeder v Pin1erest Inc., 133 AD3d at 26; Brasseur v Speranza, 21 AD3d 297. 299 [1st Dept 20051 [bare allegations that defendant "knew or should have known,. insufficient to sustain claimJ; Kaufinan v Coht!n, 307 AD2d at 125-126, rabscnce of facts in complaint to infer actual knowledge of the fiduciary relationship warrant dismissafl). Therefore. GTC's motion to dismiss is granted. Accordingly, it is ORDERED that the motion to dismiss of defendant Greatbanc Trust Company (motion seq. No. 003) is granted and the complaint is dismissed in its entirety as against said defendant. with costs 21 of 22 [*FILED: NEW YORK COUNTY CLERK 05/10/2018 03:26 PM 21] NYSCEF DOC. NO. 109 INDEX NO. 157993/2016 RECEIVED NYSCEF: 05/10/2018 and disbursements !o said defendant as laxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor or said defendant; and it is further ORDERED that the motion to dismiss of defendant PricewaterhouseCoopers. LLP (motion seq. No. 004) is granted and the complaint is dismissed in its entirety as against said defendant with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant. This constitutes the decision and order of this courL Dated: May 9, 2018 ENTER, 12.P~... 0. PETER SHERWOOD 21 22 of 22 -.f .J.S.C.

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