Opinion
18336-05.
Decided July 10, 2006.
Stepehn Latzman, Esq., New York, New York, COUNSEL FOR PLAINTIFFS.
Trop Spindler, Esqs., Whitestone, New York, COUNSEL FOR DEFENDANTS, (for Parke and Dori Group, Inc.)
Zenith T. Taylor, Esq., Forest Hills, New York, (for Nam).
Plaintiffs Dong Wook Park ("Dong") and So Me Group, Inc. ("So Me") move for summary judgment directing Defendant Michael Parke ("Michael") to provide an accounting for all sums received from Plaintiff Dong Wook Park ("Dong") and Plaintiff So Me Group, Inc. ("So Me") for use in the business of PNP Group, Inc. ("PNP"). PNP moves for summary judgment directing Michael to provide an accounting for all money he received in connection with the operation of PNP while Michael was in control of PNP.
Defendants cross-move pursuant to CPLR 3211(a)(3) and (7), CPLR 3013 and CPLR 3024(b) to dismiss the complaint.
BACKGROUND
This action arises from a business relationship between Dong and Michael.
PNP was incorporated in February 2004 to engage in the business of importing and selling wholesale and retail Japanese household products. PNP uses the trade name "Dori" to identify its products. PNP rents premises at 430 Hillside Avenue, Williston Park as its principal place of business. Dong alleges that between PNP's incorporation and June 6, 2005, Michael and he were equal shareholders of PNP.
Dong asserts that he, personally, and So Me, a corporation in which Dong is the sole principal, provided significant sums of money to Michael for use in the business of PNP. This money has seemingly disappeared. Dong has repeatedly requested Michael to advise him how and for what purposes this money was used. Michael has never responded to these inquiries.
Plaintiffs allege that prior to June 6, 2005, more than thirty (30) retail outlets paid an "Installation Fee" of between $20,000 and $70,000 to become Dori Japanese Product outlets. This money has also allegedly disappeared.
Michael was president of PNP from the time of its incorporation to June 6, 2005.
Dong and Michael were also business partners in Smile Video, which operates a business on Bell Boulevard in Bayside. Michael and Dong purchased Smile Video in March 2005. Dong paid one half of the purchase price for the business.
By agreement between Dong and Michael dated June 6, 2005 ("Agreement"), Michael agreed to transfer to Dong all of his interest in PNP in exchange for all of Dong's interest in Smile Video.
Michael agreed to deliver to Dong all of the corporate books and records of PNP.
Michael represented that he would transfer to Dong the sum of $56,500 in PNP's bank account at HSBC which constituted PNP's working capital.
The Agreement provided for Dong to assume the lease for the Hillside Avenue premises.
Dong alleges that Michael violated the Agreement almost from the outset. Dong alleges that PNP did not have $56,500 on deposit in the account at HSBC on the closing date. The working capital of PNP has never been transferred to him.
In addition, the lease to the Hillside Avenue store contained a provision which required the landlord's consent to the transfer of the lease. The consent of the landlord was not obtained either prior or subsequent to the closing. Thus, Dong cannot occupy the premises or operate the business of PNP from the Hillside Avenue location.
Michael has not transferred his interest in PNP to Dong and continues to hold himself out as president of PNP. Michael continues to operate the business previously operated by PNP using the Dori Group, Inc. ("Group") as the means for conducting that business. Michael continues to use the trade name Dori in connection with his business which is alleged to be competing with PNP.
As part of the deal, Michael agreed to resign as an officer and director of PNP. He was also to be removed as a signatory to all of PNP's bank accounts and credit cards. He has done neither.
In further reliance upon the June 6, 2005 Agreement, Dong asserts he expended $200,000 to renovate the Hillside Avenue premises.
Based upon these allegations, Plaintiff alleges nine causes of action against Michael and the Dori Group. Plaintiffs seek summary judgment on the first and second causes of action. Michael and Dori Group move to dismiss the causes of action that seek relief against them.
The tenth and eleventh causes of action assert claims against Defendant William Nam. These actions are not the subject of this motion.
DISCUSSION
A. Plaintiffs Motion for Summary Judgment
1. Standard
The party seeking summary judgment must establish a prima facie entitlement to judgment as a matter of law. Winegrad v. New York University Med. Ctr., 64 NY2d 851 (1985); and Zuckerman v. City of New York, 49 NY2d 557 (1980). If the party seeking summary judgment fails to make a prima facie showing of entitlement to judgment as a matter of law, the motion must be denied. Winegrad v. New York University Med. Ctr., supra; Widmaier v. Master Products, Mfg., 9 AD3d 362 (2nd Dept. 2004); and Ron v. New York City Housing Auth., 262 AD2d 76 (1st Dept. 1999).
2. First Cause of Action
The first cause of action seeks to compel Michael to account for money given to him by Dong and So Me. Dong alleges that So Me and he provided significant sums of money to Michael to be used in the operation of PNP.
The right to an accounting rests upon the existence of a fiduciary relationship in connection with the subject matter in question. Town of New Windsor v. New Windsor Volunteer Ambulance Corps., Inc., 16 AD3d 403 (2nd Dept. 2005); Chalasani v. State Bank of India, New York Branch, 235 AD2d 449 (2nd Dept. 1997); and Grossman v. Laurence Handprints-NJ, Inc., 90 AD2d 95 (2nd Dept. 1982).
A fiduciary relationship exists when one party ". . . reposes confidence in another and relies on the other's superior expertise or knowledge (citations omitted)." WIT Holding Corp. v. Klein, 282 AD2d 527, 529 (2nd Dept. 2001). See also, Doe v. Holy See (State of Vatican City), 17 AD3d 793 (3rd Dept. 2005) Arm's length business transactions do not give rise to fiduciary relationships. Id. at 529. See also, Wiener v. Lazard Freres Co., 241 AD2d 114 (1st Dept. 1998).
So Me has failed to establish the existence of a fiduciary relationship between it and Michael. Thus, Michael cannot be compelled to account to So Me.
So Me is a corporation in which Dong is the sole principal. Michael never had an interest in So Me. The claim made by So Me is much more akin to a cause of action for restitution than one for a breach of fiduciary duty. Id.
Michael did owe a fiduciary duty to Dong as a shareholder in PNP. See, Quasha v. American Natural Beverage Corp., 171 AD2d 537 (1st Dept. 1991), which holds that corporate officers and directors owe a fiduciary duty to shareholders.
If Dong has given the money to PNP, Michael would have been obligated to use it for corporate purposes. See, Hastings v. Brooklyn Life Ins. Co., 138 NY 473 (1893); and Odell v. 704 Broadway Condominium, 284 AD2d 52 (1st Dept. 2001). Had Michael failed to use the money for corporate purposes, Dong might have been able to bring a shareholder derivative action against Michael for misuse of corporate funds. However, Dong never gave any of the money he seeks to recover in this action to PNP. By his own admission, he gave the money to Michael.
Michael did not have a fiduciary duty to Dong. Michael and Dong had a business relationship in which they were equal shareholders in a corporation. Since Michael and Dong did not have a fiduciary relationship, the Court cannot direct an accounting.
Plaintiff also fails to make a prima facie showing that Michael misused the money. Plaintiffs assume that Michael misused the money because Michael has failed to account for its use. Dong and So Me had the burden of establishing that the money was misused. They have failed to place before the Court any evidence of the use or misuse of these funds.
The other issue is whether an accounting would be the appropriate relief. A party successfully establishing a claim for breach of fiduciary duty is awarded money damages in the amount of the loss sustained. Gibbs v. Breed, Abbott Morgan, 271 AD2d 180 (1st Dept. 2000); and 105 East Second Street Assocs. v. Bobrow, 175 AD2d 746 (1st Dept. 1991).
In this action, Dong and So Me are seeking an accounting. Since Plaintiffs have not made a prima facie showing that Michael misused the funds and are seeking relief which cannot be granted, the motion for summary judgment on the first cause of action must be denied.
3. Second Cause of Action
The second cause of action seeks an accounting of all money received by Michael during the time he controlled PNP.
Michael, as a corporate officer and director, had a fiduciary duty to PNP. See, Lindner Fund, Inc. v. Waldbaum's, Inc., 82 NY2d 219 (1993); and Busino v. Meachem, 270 AD2d 606 (3rd Dept., 2000). See also, Fleming v. Sarva, 5 Misc 3d 1017 (A), (Sup.Ct. Nassau Co. 2004), aff'd., 29 AD3d 626 (2nd Dept. 2006).
Like the first cause of action, Plaintiffs fail to establish that Michael misused corporate funds. The burden of establishing the misuse of the money lies with Plaintiffs. As with the first cause of action, the remedy for a claim of breach of fiduciary duty is an award of money damages, not an accounting. Gibbs v. Breed, Abbott Morgan, supra; and 105 East Second Street Assocs. v. Bobrow, supra.
Since Plaintiffs failed to establish a prima facie entitlement to judgment as a matter of law and seek improper relief, the motion must be denied.
B. Defendants' Cross-Motion
1. Standard
Defendant seeks to dismissal pursuant to CPLR 3211(a)(3)(7) and CPLR 3013 and CPLR 3024(b).
CPLR 3013 requires a pleading to be sufficiently specific to give the court and the other party notice of the transactions or occurrences intended to be proved and the necessary elements of each cause of action. However, the remedy for a pleading that is poorly drafted or which fails to allege material elements of a cause of action is to grant Plaintiff leave to replead. See, Brickner v. Linden City Realty, Inc., 23 AD2d 560 (2nd Dept. 1965); Shapolsky v. Shapolsky, 22 AD2d 91 (1st Dept. 1964); and Siegel, New York Practice 4th § 208. Therefore, CPLR 3013 does not provide a basis for dismissal.
CPLR 3024(b) does not provide for dismissal. CPLR 3024(b) permits the court ". . . to strike any scandalous or prejudicial matter unnecessarily inserted in a pleading."
CPLR 3024(c) requires that a motion made pursuant to CPLR 3024(b) be made within 20 days of service of the challenged pleading.
In this case, the exact date of the service of the challenged pleading, the complaint, is not stated. Thus, the Court cannot determine whether the motion is timely.
Although CPLR 3024(c) appears to bar a motion to strike prejudicial and scandalous material made more than 20 days after service of the challenged pleading, the court has discretion to consider a motion that is made more than 20 days after service of the challenged pleading. See, C.B. Foods, Inc. v. Quarex Co., 204 AD2d 504 (2nd Dept. 1994) and Szolosi v. Long Island Rail Road Co., 53 Misc 2d 1081 (Sup.Ct., Suffolk Co. 1967).
In order to strike portions of a pleading, the allegations must be scandalous or prejudicial and not merely unnecessary or irrelevant. Card v. Budini, 29 AD2d 35 (3rd Dept. 1967); Matter of Emberger, 24 AD2d 864 (2nd Dept 1965); and Siegel, New York Practice 4th § 230.
Material is scandalous if it is both immaterial and reproachful or capable of producing harm without justification. Hurley v. Hurley, 266 App. Div. 701 (3rd Dept. 1943); Matter of Stevens, 101 Misc 2d 1013 (Fam.Ct. Monroe Co. 1979); and Burr v. Carvel Dari-Freeze Stores, Inc., 21 Misc 2d 877 (Sup.Ct. Suffolk Co. 1959).
Material is prejudicial when it impairs a substantial right of a party or causes harm to the party and is not necessary to the party's pleading. 1 NY Civil Practice: CPLR ¶ 3024.13. See also, JC Manufacturing, Inc. v. NPI Electric, Inc., 178 AD2d 505 (2nd Dept. 1991); and Schlachter v. Massachusetts Protective Assoc. Inc., 30 AD2d 540 (2nd Dept., 1968).
CPLR 3024(b) provides only for the striking of the prejudicial and unnecessary allegations; not the dismissal of the complaint.
CPLR 3211(a)(3) provides for the dismissal of actions in which Plaintiff lacks capacity to sue. Capacity to sue relates to whether the party has the legal ability to bring the cause of action and not whether Plaintiff is entitled to or is the proper party to seek the relief requested. Kittinger v. The Churchill Evangelistic Assoc., Inc., 239 A.D. 253 (4th Dept. 1933). See also, Siegel New York Practice 4th § 261.
Dong is a competent adult. PNP and So Me are both viable domestic corporations. They have the legal ability to bring the action. Defendants challenge whether Dong and So Me are the proper party to seek the relief requested, not their legal capacity to seek such relief. A cause of action seeking relief on behalf of one not legally entitled to such relief fails to state a cause of action and would be subject to dismissal pursuant to CPLR 3211(a)(7). See, Siegel, New York Civil Practice 4th § 261.
CPLR 3211(a)(7) permits the court to dismiss a claim that fails to state a cause of action. When deciding a motion to dismiss for failure to state a cause of action, the court must determine whether the pleader has a cognizable cause of action and not whether the action has been properly plead. Guggenheimer v. Ginzburg, 43 NY2d 268 (1977); Rovello v. Orofino Realty Co., 40 NY2d 633 (1976); and Well v. Yeshiva Rambam, 300 AD2d 580 (2nd Dept. 2002). The court must accept as true all of the facts alleged in the complaint. 511 West 232rd Street Owners Corp. v. Jennifer Realty Co., 98 NY2d 144 (2002); and Sokoloff v. Harriman Estates Development Corp., 96 NY2d 409 (2001). The complaint must be liberally construed, and the plaintiff must be given the benefit of every favorable inference which can be drawn from the complaint. Leon v. Martinez, 84 NY2d 83 (1994); and Paterno v. CYC, LLC, 8 AD3d 544 (2nd Dept. 2004).
If, from the facts alleged in the complaint and the inferences which can be drawn from the facts, the court determines that the pleader has a cognizable cause of action, the motion must be denied. Sokoloff v. Harriman Estates Development Corp., supra; and Stucklen v. Kabro Assocs., 18 AD3d 461 (2nd Dept. 2005).
2. First Cause of Action — Accounting
The first cause of action seeks an accounting of money given by Dong and So Me to Michael. An accounting is inappropriate relief. The proper relief for a claim for breach of fiduciary duty is money damages. Gibbs v. Breed, Abbot Morgan, supra.
It appears that Dong and So Me are attempting to use THIS cause of action for an accounting to obtain discovery in an action for money damages. Dong and So Me allege that they gave money to Michael that was to be used for the business of PNP.
So Me alleges that it gave money directly to PNP. They do not know, and have been unable to determine, what happened to these funds.
An accounting is an equitable remedy. See, 1 NY Jur.2d Accounts and Accountings § 33. To obtain an accounting, the party seeking the relief must establish the existence of a fiduciary or trust relationship relating to the subject matter in controversy. See, 1 NY Jur2d. Accounts and Accountings § 34. Plaintiffs are not entitled to an accounting where the amount they seek to recover is known. Id.
So Me and Michael do not have a fiduciary or trust relationship. Even if a fiduciary relationship existed between Michael and Dong, Dong would not be entitled to an accounting. Dong is seeking to recover all the money he gave to Michael for use in PNP. Since he knows the amount he is seeking, he is not entitled to an accounting.
Since this cause of action seeks relief which cannot be granted, this cause of action must be dismissed.
3. Second Cause of Action — Accounting
In the second cause of action, PNP seeks an accounting of Michael's transactions during the time that Michael controlled PNP.
This is not the proper method for obtaining this relief. Michael, as President of PNP owed the corporation a fiduciary duty. See, Meinhard v. Salmon, 249 NY 458 (1928). See also, Birnbaum v. Birnbaum, 73 NY2d 461 (1989). However, the relief, should it be determined that Michael violated his fiduciary duty, is not an accounting. It is a money judgment in an action for money damages for breach of fiduciary duty.
As with the first cause of action, PNP is using the term accounting as a means for obtaining discovery that would be available in an action brought by PNP against Michael for breach of fiduciary duty. This is an improper use of the equitable cause of action for an accounting. Therefore, the second cause of action fails to state a claim upon which relief can be granted and must be dismissed.
4. Third Cause of Action — Rescission
Rescission is permitted for failure of consideration, fraud in the making of the contract, inability to perform after the contract is made, repudiation of the contract or for a breach that substantially defeats the purpose of the contract. Callanan v. Keeseville, Ausable Chasm and Lake Champlain Railroad Co., 199 NY 268 (1910). Rescission may be obtained for breaches that are willful and material, or if not willful, for breaches that are so substantial and fundamental as to defeat the purpose for which the parties entered into the contract. Id; and RR Chester, LLC v. Arlington Building Corp., 22 AD3d 652 (2nd Dept. 2005).
The Agreement whereby Michael transferred his interest in PNP to Dong envisioned Dong being able to occupy the premises at which PNP conducted its business. The Agreement specifically requires Michael to surrender the leasehold to Dong. The Agreement also provided for Michael to turn over PNP's working capital to Dong. Michael was also supposed to take action to divest himself of his interest in PNP.
The Hillside Avenue lease contains a provision that requires the consent of the landlord to the assignment of the lease. The consent of the landlord to the assignment of the leasehold was never obtained.
Dong's seeking to recover money invested in the leasehold does not bar the claim for rescission. Plaintiff may plead in the alternative or inconsistent causes of action. Raglan Realty Corp. v. Tudor Hotel Corp., 149 AD2d 373 (1st Dept., 1989); and CPLR 3014.
Dong alleges that he cannot tender the $56,500 allegedly transferred to PNP in connection with the transaction. Dong alleges the HSBC account did not have such funds on deposit on the date of the transfer.
Dong has been unable to occupy the premises in which PNP conducts it business. Dong's ability to occupy PNP's business premises and conduct its business were a fundamental and essential purpose of the June 6, 2005 agreement. That purpose has been frustrated by Dong's failure to obtain the landlord's consent to the assignment of the lease. Therefore, Dong has sufficiently plead a cause of action for rescission.
Michael challenges the merits, not the substance, of this cause of action. In deciding a motion to dismiss, the court must determine whether Plaintiff has alleged a cause of action and not whether Plaintiff will ultimately prevail. Jacobs v. Macy's East, Inc., 262 AD2d 607 (2nd Dept. 1999). Since the complaint states a claim upon which relief can be granted, it cannot be dismissed.
5. Fourth Cause of Action
This action seeks to recover the money Dong invested in PNP's premises in reliance upon the June 6, 2005 agreement. The precise theory of recovery is not readily apparent from a reading of the complaint. Dong asserts that in the event he is successful on his rescission action, this action will equalize Michael and Dong's interest in PNP.
Dong invested money in PNP, a corporation in which he is presently the sole shareholder, officer and director. If Dong is successful in his rescission action, he will be a 50% shareholder in PNP.
Dong has failed to place before the Court any cognizable theory why he should be permitted to recover money he invested in PNP from the Defendants. Therefore, the fourth cause of action must be dismissed.
6. Fifth Cause of Action — Breach of Fiduciary Duty
The fifth cause of action alleges that Michael breached his fiduciary duty to PNP. While he was the president and a director of PNP, Michael owed PNP a fiduciary duty. See, Lindner Fund, Inc. v. Waldbaum's, Inc., 82 NY2d 219 (1993); and Busino v. Meachem, 270 AD2d 606 (3rd Dept., 2000). If he misused corporate or misappropriated corporate funds during his tenure as a corporate officer, he breached his fiduciary duty.
Defendants' primary problem with the complaint with regard to this cause of action that it is so vague that it does not give them notice of the transactions or occurrences upon which Plaintiff relies to establish a breach of fiduciary duty.
If a cause of action is so vague or jumbled that the defendant cannot frame a reasonable response, Defendants' remedy is to move for a more definite statement. CPLR 3024(a). See also, 1 New York Civil Practice: CPLR ¶ 3024:04. If the complaint states a cognizable cause of action to which Defendant can interpose an answer, Defendant's remedy is to seek amplification of the claim through a bill of particulars or discovery. Siegel, New York Civil Practice § 230.
Since this cause of action states a cognizable claim, Defendants' motion to dismiss must be denied.
7. Sixth Cause of Action — Injunction
This cause of action seeks to enjoin Michael and the Dori Group, Inc. from using the name Dori in connection with its business.
PNP uses the name Dori to sell its products. Although not alleged as such, Michael and Dori Group could be enjoined under both the Lanham Act and General Business Law § 133 from using the name Dori in connection with their business.
It is unclear from the pleadings how "Dori" is used in connection with PNP's business. If Dori is a mark, then it may be entitled to protection under the Lanham Act.
"The Lanham Act prohibits the use of any reproduction, counterfeit, copy or colorable imitation of a registered mark' where such use is likely to cause confusion or to cause mistake or to deceive.' 15 U.S.C. § 1114(1)(a)." Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 256 (2nd Cir. 1987). The Lanham Act also provides protection to unregistered marks. Time, Inc. v. Petersen Publishing Co., L.L.C., 173 F.3d 113 (2nd Cir. 1999); Hasbro, Inc. v. Lanard Toys, Ltd., 858 F.2d 70 (2nd Cir. 1988); and 15 U.S.C. § 1125(a)(1)
The court may enjoin a violation of the Lanham Act. Park N Fly, Inc. v. Dollar Park N Fly, Inc., 469 U.S. 189 (1985); and 15 U.S.C. § 1116.
General Business Law § 133 prohibits an individual, firm or corporation from using a name "with intent to deceive and mislead the public." See, Edward F. Hallanan, Inc. v. Hallanan, McGuinness Lorys, Ltd., 275 AD2d 691 (2nd Dept. 2000). Simply adopting and using a similar name is not sufficient. Id. See also, Sung v. Paolucci, 170 AD2d 596 (2nd Dept. 1991). The court may permanently enjoin violations of General Business Law § 133. Staten Island Board of Realtors, Inc. v. Smith, 298 AD2d 592 (2nd Dept. 1998).
The party seeking relief under General Business Law § 133 must establish that the use of the mark is intentional and is likely to cause confusion, mistake or deception. Frank's Restaurant, Inc. v. Lauramar Enterprises, Inc., 273 AD2d 349 (2nd Dept. 2000).
Even though the sixth cause of action does not specifically allege violation of either the Lanham Act or General Business Law § 133, such causes of action are cognizable and would be appropriate under the circumstances alleged.
Defendants attack the merits and the sufficiency of the complaint. It may very well be that Plaintiffs will be unable to establish the existence of such causes of action. However, dismissal on that basis would be the subject of a motion for summary judgment made pursuant to CPLR 3212; not a motion to dismiss made pursuant to CPLR 3211(a)(7).
8. Seventh Cause of Action — Injunction
In this cause of action, Plaintiff seeks to enjoin Michael from holding himself out as president of PNP and from indicating that he has any affiliation with PNP. This action is contingent upon the rescission action. If Plaintiff prevails on the rescission action, this action must fail.
If Michael is not an officer, shareholder or director of PNP, he should be enjoined from holding himself out as having a relationship with that corporation.
The seventh cause of action states a claim upon which relief can be granted.
9. Eighth Cause of Action
The eighth cause of action is directly related to the sixth cause of action. This cause of action seeks money damages for Defendants' misuse and misappropriation of the "Dori" name. As with, the sixth cause of action, this cause of action states a claim upon which relief can be granted.
10. Ninth Cause of Action — Punitive Damages
The ninth cause of action must be dismissed. New York does not recognize a separate cause of action for punitive damages. Rocanova v. Equitable Life, 83 NY2d 603 (1994); and Wo v. Chan, 17 AD3d 356 (2nd Dept. 2005).
Accordingly, it is,
ORDERED, that Plaintiffs' motion is denied in its entirely; and it is further,
ORDERED, that Defendants' motion is granted to the extent of dismissing the first, second, fourth and ninth causes of action and is otherwise denied; and it is further,
ORDERED, that counsel for the parties are directed to appear for a preliminary conference on August 22, 2006 at 9:30 a.m.
This constitutes the decision and Order of the Court.