Greenhaus v Gersh

[*1] Greenhaus v Gersh 2019 NY Slip Op 51230(U) Decided on July 23, 2019 Supreme Court, Suffolk County Emerson, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 23, 2019
Supreme Court, Suffolk County

Ellynn Greenhaus AND LAURIE GERSH, DERIVATIVELY ON BEHALF OF THEMSELVES AND ALL OTHER SIMILARLY SITUATED SHAREHOLDERS OF WEST HILLS DAY CAMP, INC., Plaintiffs,

against

Kevin Gersh, GERSH ACADEMY, INC., WEST HILLS MONTESSORI SCHOOL, INC., AND GERSH MANAGEMENT SERVICES, INC., Defendants.



605905-15



CAMPOLO, MIDDLETON & McCORMICK, LLP

Attorneys for Plaintiffs

4175 Veterans Memorial Highway, Suite 400

Ronkonkoma, New York 11779

HARFENIST KRAUT & PERLSTEIN, LLP

Attorneys for Defendants

3000 Marcus Avenue, Suite 2E1

Lake Success, New York 11042
Elizabeth H. Emerson, J.

Upon the following papers read on this motionfor preliminary injunction and cross-motion for summary judgment ; Order to show Cause and supporting papers 21-31 ; Notice of Cross Motion and supporting papers 34-59 ; Answering Affidavits and supporting papers60-70 ; Replying Affidavits and supporting papers71-75 ; Other76 ; it is,

ORDERED that the motion by the plaintiffs for a preliminary injunction, for the appointment of a receiver, for an order of attachment, and for a trial preference is denied; and it is further

ORDERED that the temporary restraining order contained in the order to show cause dated July 25, 2018, is vacated; and it is further

ORDERED that the cross motion by the defendants for summary judgment is granted solely to the extent of dismissing the third, fifth, seventh, and eighth causes of action; and it is further

ORDERED that the issue of compliance with Business Corporation Law § 626 (c) is referred to a framed-issue hearing, which shall be held on October 15, 2019, at 9:45 a.m., Supreme Court, Courtroom 7, Arthur M. Cromarty Criminal Court Building, 210 Center Drive, Riverhead, New York 11901; and it is further

ORDERED that the cross motion is otherwise denied.

The plaintiffs and the defendant Kevin Gersh are half-siblings. Their father, Edward Gersh, incorporated West Hills Day Camp, Inc. ("West Hills") in 1986. It operates a summer day camp for children located in Huntington, New York. Edward Gersh was the president, sole director, and sole shareholder of West Hills from its incorporation until 2007, when he gave 45 non-voting shares to each of his children: the defendant Kevin Gersh, the plaintiffs, and Roxanne Gersh (who is not a party to this action). In April 2014, the plaintiffs and the defendant Kevin Gersh were elected to West Hills' board of directors, and Kevin was elected West Hills' president. After Edward died in June 2014, his 20 voting shares of West Hills' stock were transferred to Kevin.

Kevin is the sole shareholder of the three corporate defendants: Gersh Academy, Inc. ("Gersh Academy"), West Hills Montessori School, Inc. ("West Hills Montessori"), and Gersh Management Services, Inc. ("Gersh Management"). Gersh Academy operates private schools for autistic children within and outside of New York State. Some of Gersh Academy's students attend West Hills' summer day camp and are known as "Comanche Campers." West Hills Montessori operates a private school for children through the sixth grade and leases a portion of the West Hills' summer day camp premises. Gersh Management performs the day-to-day and administrative tasks associated with running a summer day camp.

The plaintiffs commenced this derivative action on June 5, 2015, alleging that Kevin had diverted and misappropriated West Hills' funds for his own benefit and for the benefit of Gersh Academy, West Hills Montessori, and Gersh Management (collectively the "Gersh entities"). The plaintiffs' forensic accountant calculated that, during the period from June 5, 2009, through October 15, 2016, West Hills suffered damages in the amount of approximately $3.8 million due [*2]to: (1) lost revenue from the Comanche Campers ($2.472 million), (2) West Hills Montessori start-up costs paid by West Hills ($119,227), (3) additional West Hills Montessori expenditures paid by West Hills ($111,351), (4) Gersh Academy expenditures paid by West Hills ($76,657), (5) excess management fees paid to Kevin Gersh and Gersh Management ($468,338), (6) additional Gersh Management disbursements ($266,479), (7) barn rent paid by West Hills ($23,000),[FN1] (8) other non-West Hills expenditures paid by West Hills ($184,467), (9) camper discounts ($116,607), and (10) interest-free loans ($27,912). The complaint contains causes of action for breach of fiduciary duty, fraudulent concealment, unjust enrichment, a constructive trust, conversion, an accounting, self-dealing, and the appointment of a receiver.

The plaintiffs move for a preliminary injunction enjoining Kevin from using West Hills' funds to pay salary or expenses to himself and any of the Gersh entities, from using West Hills' funds for projects or expenses that are not directly related to West Hills, from using West Hills' property as collateral for any loans or mortgages, and from using any West Hills' funds without approval by the shareholders and/or a temporary receiver. The plaintiffs seek the appointment of Schmuel Greenhaus, the plaintiff Ellynn Greenhaus's husband, as a temporary receiver. They also seek an order of attachment and a trial preference. The defendants oppose the plaintiffs' motion and cross move for summary judgment dismissing the complaint on the ground that the plaintiff has failed to meet the requirements of Business Corporation Law § 626 (c). Alternatively, the plaintiffs seek dismissal of the first, second, third, fifth, seventh, and eighth causes of action as barred by the statute of limitations and the business judgment rule and for failing to assert a valid claim for breach of fiduciary duty. The court will consider the summary-judgment issue first.

The court's main function on a motion for summary judgment is issue finding rather than issue determination (Sillman v Twentieth Century-Fox Film Corp., 3 NY2d 395, 404). Since summary judgment is a drastic remedy, it should not be granted when there is any doubt as to the existence of a triable issue (Rotuba Extruders, Inc. v Ceppos, 46 NY2d 223, 231). Thus, when the existence of an issue of fact is even arguable or debatable, summary judgment should be denied (Kuang v Board of Managers of the Biltmore Towers Condominium Assoc., 22 Misc 3d 854, 865 [and cases cited therein], affd 70 AD3d 1004). In reviewing a motion for summary judgment, the court must accept as true the evidence presented by the nonmoving party and must deny the motion if the existence of an issue of fact is even arguable or debatable (Id.).

Business Corporation Law § 626 (c)

In order for a plaintiff to obtain standing to commence a shareholder derivative action, a shareholder must make a demand upon the corporation's board of directors to pursue the claim. Business Corporation Law § 626 (c) requires that the complaint in a derivative action "set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort" (Bansbach v Zinn, 258 AD2d 710, 712, affd as mod 1 NY3d 1). No demand is necessary if the complaint alleges acts for which a majority of the [*3]directors may be liable and the plaintiff has reasonably concluded that the board would not be responsive to a demand (Marx v Akers, 88 NY2d 189, 200). To justify the failure to make a demand, it is not sufficient merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by the wrongdoers (Id. at 199-200). Allegations of wrongdoing and control must be made with particularity, and conclusory allegations are insufficient to circumvent the requirement of a demand (see, Bansbach v Zinn, supra at 11).

A demand is futile and will be excused when the directors are incapable of making an impartial decision as to whether to bring suit (Bansbach v Zinn, 1 NY3d at 9). This occurs in three circumstances: (1) a majority of the board of directors is interested in the challenged transaction either because of self-interest or because a director with no direct interest in the transaction is controlled by a self-interested director, (2) the board members did not fully inform themselves of the challenged transaction to the extent reasonably appropriate under the circumstances, or (3) the challenged transaction is so egregious on its face that it could not have been the product of sound business judgment (Id., citing Marx v Akers, supra at 200-201).

The defendants have established, prima facie, that the plaintiffs failed to comply with Business Corporation Law § 626 (c). The defendants have produced evidence that West Hills had three directors when this action was commenced (Kevin Gersh, Eden Mauro, and Karen Bronzert) and that the plaintiffs failed to make a demand on them prior to commencing the action. In opposition, the plaintiffs have raised a triable issue of fact regarding whether the demand is excused because Eden Mauro and/or Karen Bronzert are under the control of an interested director, i.e., Kevin Gersh. Since compliance with Business Corporation Law § 626 (c) is a condition precedent to the maintenance of a shareholder derivative action (Bansbach v Zinn, 294 ADd2d at 763), this issue is referred to a framed-issue hearing, which shall be held on the first day of the trial of the action (October 15, 2019). Accordingly, the court reserves decision thereon until after the hearing.

Statute of Limitations

The defendants contend that the plaintiffs' first and second causes of action for breach of fiduciary duty and fraudulent concealment are partially time-barred by the three-year statute of limitations found in CPLR 214 (4). The defendants contend that the three-year statute of limitations applies when, as here, the remedy sought is money damages and the fraud is merely incidental to the breach-of-fiduciary-duty claim. The defendants contend that the statute of limitations bars all claims from 2010 through 2013.

Ordinarily, the three-year statute of limitations found in CPLR 214 (4) governs tort claims for money damages against a wrongdoer who has injured the plaintiff's property interests (Vincent C Alexander, 2011 Supp Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C213:7, 2019 Cum Supp at 10). However, when the plaintiff is a corporation suing a present or former director, officer, or shareholder, CPLR 213 (7) extends the period to six years (Id.). The exact language of CPLR 213 (7) is as follows:

"The following actions must be commenced within six years:* * *"7.an action by or on behalf of a corporation against a present or former director, officer or stockholder for an accounting, or to procure a judgment on the ground of fraud, or to enforce a liability, penalty or forfeiture, or to recover damages for waste or for an injury to property or for an accounting in conjunction therewith (emphasis added)."

While Kevin Gersch did not become an officer and director of West Hills until April 2014, he has been a shareholder since 2007.[FN2] Moreover, the shareholders of closely held corporations owe fiduciary duties to one another (Unitel Telecard Distrib. Corp. v Nunez, 90 AD3d 568, 569). Accordingly, the court finds that the first and second causes of action are not time-barred.

Business Judgment Rule

The business judgment rule bars judicial inquiry into the actions of corporate directors taken in good faith, in the exercise of honest judgment, and in the lawful and legitimate furtherance of corporate purposes (Auerbach v Bennett, 47 NY2d 619, 629). The business judgment rule is necessary to avoid judicial second-guessing of corporate decisions and provides protection to directors when a decision is made in good faith and after reasonable investigation (Shapiro v Rockville Country Club, 2 Misc 3d 1002[A], at *9, citing Auerbach v Bennett, supra). Absent a showing of breach of fiduciary duty to the corporation, judicial inquiry into the actions of corporate directors is prohibited, even though the results show that what the directors did was unwise or inexpedient (see, Jones v Surrey Coop. Apts., 263 AD2d 33, 36).

The court finds that there are triable issues of fact regarding whether Kevin Gersch breached his fiduciary duty to West Hills and, therefore, whether his actions are protected by the business judgment rule. Moreover, there are triable issues of fact regarding the role that Edward Gersch played in the management of West Hills before he died and the role that Kevin Gersch played when his father was still alive. Accordingly, the court declines to dismiss the first and second causes of action.

Unjust Enrichment

The defendants seek dismissal of the third cause of action for unjust enrichment on the ground that it is duplicative of the first cause of action for breach of fiduciary duty. As the defendants correctly contend, an unjust-enrichment claim is not available when it simply duplicates, or replaces, a conventional contract or tort claim (Corsello v Verizon NY, Inc., 18 NY3d 777, 790). The third cause of action for unjust enrichment arises from the same facts as the plaintiffs' breach-of-fiduciary-duty claim. Moreover, it does not allege any distinct or different damages (see, Town of Wallkill v Rosenstein, 40 AD3d 972, 974). Accordingly, it is [*4]dismissed.

Conversion

The plaintiff's conversion claim is also duplicative of the first cause of action. It is based on the same facts and seeks the same damages. In addition, it does not seek to recover money from a discreet, identifiable fund (see, Horn v Toback, 44 Misc 3d 42, 46 [App Term]).

Conversion is the unauthorized assumption and exercise of the right of ownership over specifically identified property or goods belonging to another to the exclusion of the owner's rights (Vigilant Ins. Co. of Am. v Housing Auth. of City of El Paso, Tex., 87 NY2d 36, 44; Republic of Haiti v Duvalier, 211 AD2d 379, 384). While money may be the subject of a conversion claim, it must be specifically identified and segregated, and there must be an obligation to return or otherwise treat a specific fund in a particular manner (Bahiri v Madison Realty Capital Advisors, LLC, 30 Misc 3d 1208[A] at *2 [and cases cited therein]). When, as here, the claim merely alleges an obligation to pay the plaintiffs money that they are owed, a conversion is not alleged (Id.; Horn v Toback, supra). Accordingly, the fifth cause of action for conversion is dismissed.

Self-Dealing

The seventh cause of action for self-dealing is also based on the same facts and seeks the same damages as the first cause of action for breach of fiduciary duty. In addition, the court is not aware that New York recognizes self-dealing as a separate cause of action. Accordingly, the seventh cause of action is dismissed.

Appointment of a Receiver

The eighth cause of action is for the appointment of a receiver pursuant to CPLR 6401. While the notice of cross motion indicates that the defendants seek summary judgment dismissing this cause of action, they make no arguments in support thereof. In any event, the appointment of a receiver is a provisional remedy (see, CPLR 6401) and not a cause of action. Accordingly, the eighth cause of action is dismissed.

Provisional Remedies

The plaintiffs seek three provisional remedies: a preliminary injunction pursuant to CPLR 6301, the appointment of a receiver pursuant to 6401, and an order of attachment pursuant to CPLR 6201. The plaintiffs contend that such extraordinary relief is needed because Kevin Gersh is planning to open three new Gersh Academy schools, two of which are located outside of New York State. The plaintiffs contend that, given the findings of their forensic accountant, it is likely that Kevin will use West Hills' funds to finance the new schools, thereby frustrating the enforcement of any money judgment that may be rendered in their favor.

Preliminarily the court notes that, it is a rare case in which a plaintiff will be permitted to [*5]employ more than one provisional remedy (30 NY Jur 2d, Creditors' Rights§16, citing Todd-Buck v Smith, 118 Misc 102, affd 202 App Div 774). In any event, the plaintiffs have failed to establish their entitlement to any of the provisional remedies requested.

To establish entitlement to a preliminary injunction, the movant must demonstrate by clear and convincing evidence (1) a likelihood or probability of success on the merits, (2) irreparable harm in the absence of an injunction, and (3) a balance of the equities in favor of granting the injunction (Family-Friendly Media, Inc. v Recorder Tel. Network, 74 AD3d 738, 739; Di Fabio v Omnipoint Communications, Inc., 66 ADd3d 635, 636). Irreparable injury, for purposes of equity, has been held to mean any injury for which money damages are insufficient (Id. at 636-637). Conversely, economic loss, which is compensable by money damages, does not constitute irreparable harm (Id. at 637).

The gravamen of the plaintiffs' complaint is to recover damages for the defendants' alleged breach of fiduciary duty. Although the complaint contains causes of action for equitable relief, a money judgment is the true object of the action. The fourth cause of action, which seeks to impose a constructive trust on all of "West Hills' income, accounts, assets, and other benefits . . . ," is clearly incidental to and purely for the purpose of enforcement of the primary relief sought, a money judgment (see, Credit Agricole v Rossiyskiy, 94 NY2d 541, 548). Moreover, the sixth cause of action, which is for an accounting, is merely a method to determine the amount of the plaintiffs' monetary damages (Cadwalader Wickersham & Taft v Spinale, 177 AD2d 315, 316). Accordingly, the plaintiffs' request for a preliminary injunction is denied.

Prejudgment attachment is a provisional remedy to secure a debt by preliminary levy upon the property of the debtor in order to conserve that property for eventual execution (see, Sylmark Holdings Ltd. v Silicone Zone Intl. Ltd., 5 Misc 3d 285, 300-301 [and cases cited therein]. To obtain an order of attachment under CPLR 6201(3), the plaintiffs must demonstrate (1) that Kevin Gersh has assigned, disposed of, encumbered, or secreted his property; removed it from the state; or is about to do any of these acts and (2) that he has acted or will act with the intent to defraud his creditors or to frustrate the enforcement of a judgment that may be rendered in the plaintiffs' favor (Id.). Fraud is not lightly inferred, and the moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud (Id.). Affidavits containing allegations raising a mere suspicion of an intent to defraud are insufficient (Id.). It must appear that such fraudulent intent really exists in Kevin Gersh's mind. The mere removal, assignment, or other disposition of property is not grounds for an order of attachment (Id. at 301-302).

The plaintiffs have failed to meet their burden. The plaintiffs contend that, based on his past actions, it is likely that Kevin is using West Hills' funds to open the new Gersh Academy schools, including the two outside of New York State, in order to frustrate the enforcement of a judgment in this action. The court finds that these vague and conclusory assertions, without evidentiary facts indicating a fraudulent concealment of assets, are insufficient (Id. at 302) and merely raise a suspicion of an intent to defraud (Id.). Contrary to the plaintiffs' contentions, there are triable issue of fact regarding whether Kevin Gersch or his father, Edward Gersh, took the past actions on which the plaintiffs' claims are based and whether those actions are protected by the business judgment rule. Accordingly, the plaintiffs' request for an order of attachment is denied.

In view of the foregoing, the court finds that the plaintiffs have failed to submit clear and [*6]convincing evidence that the property of West Hills is in danger of being removed from the state, or lost, materially injured or destroyed (CPLR 6401[a]; Magee v Magee, 120 AD3d 637, 638). Accordingly, the plaintiffs' request for the appointment of a receiver is also denied.

Trial Preference

In view of the fact that the trial of this action is scheduled to begin on October 15, 2019, the plaintiffs' request for a trial preference is academic.

Conclusion

The plaintiffs' motion for provisional relief and a trial preference is denied. The defendants' cross motion for summary judgment is granted solely to the extent of dismissing the third, fifth, seventh, and eighth causes of action, and the issue of compliance with Business Corporation Law § 626 (c) is referred to a framed-issue hearing, which shall be held on the first day of trial.

Dated:July 23, 2019



J.S.C. Footnotes

Footnote 1:Kevin Gersh received rent from West Hills for the lease of a barn on property beneficially owned by him which is adjacent to the summer camp.

Footnote 2:The court notes that, when quoting CPLR § 213 (7) in their brief, counsel for the defendants omit therefrom the operative word, "shareholder," and argue that, because Kevin Gersch was not a West Hills officer or director until April 2014, CPLR § 213 (7) is inapplicable to claims arising before that date.