Opinion
Index No. 652555/2018
05-20-2024
DPB FAMILY LLC, BMCPS LLC, DEA ASTON LLC, ARISTOTLE DEFTEREOS, SPIROS DEFTEREOS, STAVROS KALOGEROPOULOS, EDWIN PINTO, FIDI DISTRICT LLC, COLUMBUS VILLAGE LLC, NGM MANAGMENT GROUP LLC, Plaintiffs, v. EUTYCHIA GROUP LLC, EL TORO GROUP LLC, FIDI DISTRICT LLC, COLUMBUS VILLAGE LLC, NGM MANAGEMENT GROUP LLC, Defendants.
Unpublished Opinion
PRESENT: HON. JENNIFER G. SCHECTER, Justice.
DECISION AFTER TRIAL
JENNIFER G. SCHECTER, JSC
Plaintiffs are Class B members of NGM Management Group LLC (NGM), FiDi District LLC, and Columbus Village LLC (collectively, the Companies), which each owned and operated a Bareburger restaurant. Defendant Eutychia Group LLC (Eutychia) was the managing member of the Companies. Plaintiffs claim that Eutychia engaged in certain actions without first obtaining the requisite consents under the Companies' operating agreements and breached its fiduciary duty of loyalty to the Companies through such acts as committing corporate waste by spending corporate funds on other Bareburger locations in which the Companies had no interest. The latter set of claims were addressed in an accounting (Dkt. 382), to which plaintiffs filed objections (Dkt. 422). Plaintiffs further claim that defendant El Toro Group LLC (El Toro), the entity through which Eutychia attempted to consolidate ownership of the Companies and other Bareburger restaurants as part of a plan to eventually franchise the restaurants, aided and abetted Eutychia's breaches of fiduciary duty. As the court previously held, plaintiffs' claims concern harm to the Companies, so they are derivative, with any recovery belonging to the Companies (see Dkt. 298 at 2-4; see also Dkt. 292 at 2).
A bench trial was held from September 18-21, 2023 (see Dkts. 454-457), after which the parties filed post-trial briefs (see Dkts. 459, 460). For the reasons that follow, the court finds that surcharges totaling $534,157.33 are warranted due to (1) money diverted to the Florida location and the two New York locations in which the Companies did not have an interest; (2) NGM funds for which defendants did not account; and (3) improper travel and dining expense charges-but that plaintiffs failed to prove that the Companies suffered any harm from the alleged ultra vires actions and that they have not proven that the Companies were harmed by any of the other alleged fiduciary-duty breaches.
Plaintiffs were reminded on numerous occasions that they must demonstrate clear proof of damages and provide explanations for each of their objections to the accounting (see Mohinani v Charney, 208 A.D.3d 404, 405 [1st Dept 2022] ["Damages are 'an essential element' of a cause of action for breach of fiduciary duty"]). As discussed below, they largely have not done so. They failed to submit useful admissible expert evidence, proffered damages theories that have no legal basis, and their post-trial brief fails to meaningfully address many of their objections to the accounting. Moreover, plaintiffs did not clearly or carefully respond to many of the points in defendants' detailed 39-page brief (their post-trial brief was filed just one day after defendants' despite having several weeks to address defendants' points [see Dkt. 453]). The court's review is limited to the scope of plaintiffs' objections and the arguments made in their brief about why those objections should be sustained (see Matter of Kalik, 117 A.D.3d 590, 592 [1st Dept 2014] ["The referee correctly found that he abandoned any objections as to which he presented no proof']; see also Grgurev v Licul, 2023 WL 4765885, at * 1 [Sup Ct, NY County July 26, 2023], citing Donati v Marinelli Constr. Corp., 21 A.D.3d 440, 441 [2d Dept 2005]; see also Schulman v Levy, Sonet & Siegel, 302 A.D.2d 321 [1st Dept 2003] ["These objections were not supported by evidence showing, prima facie, that defendant's accounting of these items was inaccurate or incomplete. Accordingly, the burden of coming forward with countervailing evidence never shifted to defendant"]). Plaintiffs' other objections to the accounting-which, to be sure, the court found unpersuasive-are overruled.
Had plaintiffs taken the time to more carefully and clearly explain their positions in a manner that actually addressed defendants' arguments, perhaps they could have persuaded the court that additional surcharges are warranted. After all, while defendants have the burden to account, the court does not sua sponte critique an accounting (see Matter of Estate of Schnare, 191 A.D.2d 859, 860 [3d Dept 1993] ["the party submitting objections bears the burden of coming forward with evidence to establish that the account is inaccurate or incomplete"]).
At trial the parties focused a significant amount of attention on irrelevant matters, which the court does not address.
At the outset, defendants' absurd suggestion that the Companies' lack of profitability could negate their liability for corporate waste is, of course, rejected (Dkt. 459 at 14; see Aronoff v Albanese, 85 A.D.2d 3, 5 [2d Dept 1982] ["use of corporate property given to a foreign corporation without consideration" is corporate waste]; cf. Rapoport v Schneider, 29 N.Y.2d 396, 403 [1972], accord Ault v Soutter, 204 A.D.2d 131 [1st Dept 1994]). That was not the holding of SantiEsteban v Crowder (92 A.D.3d 544 [1st Dept 2012]), which merely reiterated that a director could disprove a waste claim by demonstrating entire fairness and could challenge the amount of damages by proving that a corporate benefit was created (see id. at 546). As explained below, defendants have not proven either. There is no basis not to permit a derivative remedy for looting money from an unprofitable company (see Talking Capital Windup LLC v Omanoff, 2022 WL 6353293, at *1 [Sup Ct, NY County Oct. 4, 2022] [addressing importance of claim against defunct company's disloyal member so its creditors could be paid]; see also Bamford v Penfold, L.P., 2022 WL 2278867, at *54-55 [Del Ch June 24, 2022] [debts owed to creditors is a factor supporting traditional derivative rather than investor level recovery]). After all, many early-stage companies may lose money for years before turning a profit. There is no support for immunizing a fiduciary from liability after stealing money from a company that ultimately fails for other reasons. In fact, that would be inconsistent with the law governing the behavior of fiduciaries of insolvent companies (see, e.g., Matter of CIT Group/Commercial Servs., Inc. v 160-09 Jamaica Ave. Ltd. Partnership, 25 A.D.3d 301, 303 [1st Dept 2006] ["Transfers to a controlling shareholder, officer or director of an insolvent corporation are deemed to be lacking in good faith and are presumptively fraudulent"]). The Companies' financial problems are thus no defense to defendants' corporate waste.
Turning to the merits, the credible evidence established that plaintiffs' investment in the Companies was for participation in specific restaurants and not an investment in any larger Bareburger business. Indeed, plaintiffs explicitly rejected defendants' offer to convert their interests to such a broader investment (see Dkt. 427 at 3 ¶ 13); thus, the Companies' money could not be used to develop an additional location in Florida in which the Companies had no interest. While defendants claim that the Companies might have benefitted if plaintiffs had agreed to invest in El Toro and there was a franchise, using corporate funds for that purpose was not a legitimate exercise of business judgment under these circumstances. Defendants clearly understood that they needed plaintiffs' consent to embark on their franchise strategy using the Companies' money and, after they failed to obtain that consent, they did it anyway. That was a breach of fiduciary duty.
Defendants, moreover, did not submit credible proof that the Companies actually owed money to the Florida business and the two other New York locations in which the Companies had no interest. While the accounting purports to reflect these debts (see, e.g., Dkt. 382 at 24), defendants failed to provide clear and compelling explanations for how this supposed net balance came to be owed. To the extent defendants rely on Michael Pitsinos' testimony regarding the legitimacy and existence of such a balance, the court did not find his testimony to be credible. Merely listing such a balance on an accounting without any clear backup or compelling testimony to support it is insufficient to carry defendants' burden to account for the Companies' money that was used for the other restaurant locations (see Sexter v Kimmelman, Sexter, Warmflash & Leitner, 19 A.D.3d 298, 299 [1st Dept 2005]). Thus, Eutychia is surcharged for the Companies' money that was used to pay the Florida restaurant's rent without any offset for the amounts supposedly owed to that restaurant. Likewise, Eutychia is surcharged for the money spent on the two New York locations in which the Companies lacked an interest. The total surcharge for these diversions is $225,045.43 (see Dkt. 460 at 21).
Similarly, while the court credits Pitsinos' testimony that reimbursement of his personal expenses in Greece was related to business meetings in furtherance of the franchise opportunity, there is no credible evidence that such meetings benefitted the Companies rather than the franchise entity. The same is true of similar expenses charged by Hadjipanayi. Thus, Eutychia is surcharged $12,712.01 (see Dkt. 459 at 35).
Finally, Eutychia failed to account for $296,399.89 in withdrawals, electronic payments and transfers from NGM's bank account ending in 7700 (see Dkt. 460 at 15-18). Plaintiffs' objections explicitly noted that the accounting fails to address this money (see Dkt. 422 at 6 ["the report omitted revenues and expenses for an entire bank account, Chase NGM ending in 7700 for almost 2 years"]). And defendants clearly understood the importance of this account at trial (see, e.g., Dkt. 455 at 210-11; Dkt. 457 at 216). While their post-trial brief contains detailed explanations of how the Companies' money was spent, it does not do so with respect to the 7700 account.
While not explicitly referring to this account, defendants suggest that they should not be held liable for any unexplained transactions due to serious deficiencies in the proof submitted by plaintiffs and their expert (see Dkt. 459 at 33-34; see also id. at 35 ["despite having received over 60,000 pages of documents (mostly financial records) including the personal bank records of Mr. Pitsinos, Plaintiffs failed to provide any evidence of corporate funds going into the personal pocket of any Class A member, and particularly Mr. Pitsinos"]). Though, as the court has made clear, defendants are not wrong about problems with plaintiffs' evidence, it is defendants that have the burden to account for how they spent NGM's money. Plaintiffs put defendants on notice that they were taking the position that NGM's funds appeared to be misappropriated; thus, defendants had the affirmative obligation to explain how this money was spent. They never did so. In the absence of such explanations, plaintiffs did not need to prove what happened to the money. While plaintiffs tried to do so (see Dkt. 460 at 16-18), this was not their burden. Eutychia never accounted for this money and so it is surcharged accordingly.
Nor did defendants provide credible testimony or evidence at trial to substantiate that Eutychia was owed more than this sum, such that even if it cannot specifically account for these funds, they were not really misappropriated since they should be considered to have satisfied outstanding debts. The nonpayment of management fees is not a defense to misappropriating funds or failing to account. As a faithless servant, Eutychia certainly has no right to seek such compensation and the court will not credit it with fees it theoretically might have been owed with unaccounted funds.
Aside from these surcharges, all of plaintiffs' other claims and objections are rejected and overruled. Plaintiffs ultimately failed to prove entitlement to recovery of anything more.
The first section of plaintiffs' brief is titled "Breaches of the Operating Agreement with Ultra Vires Acts: Approving Misuse of Funds, Taking Bad Loans, False Bankruptcy, Amendments to the Operating Agreements and Other Bad Acts" (Dkt. 460 at 6). This section addresses allegations that defendants "took over $1 million in loans in 2016 which did not go to the entities that borrowed the funds" and that they "signed resolutions to approve the misuse of funds in 2017 and to file for bankruptcy and amend the operating agreements in 2019" (see id. at 7). Plaintiffs have not proven, and indeed their brief does not cogently explain, the damages that the Companies suffered as a result of these alleged breaches. For instance, at the outset of the case, plaintiffs alleged that the terms of the loans made by Pitsinos and Messados were unfair (see Dkt. 30 at 4), but at trial they did not provide proof of what a fair interest rate would be or explain how much the Companies overpaid by virtue of the unfair terms (e.g., damages based on the spread between the rates at which the Companies borrowed and market rates for such a loan). Merely arguing that the loans were part of a larger scheme is no substitute for actually explaining the amount of the Companies' harm (see Dkt. 460 at 10). Regardless of whether the loans were improperly made (either without plaintiffs' consent or because they fail entire fairness scrutiny), plaintiffs have not proffered a proper damages theory to remedy this alleged breach. Thus, even assuming plaintiffs are correct that their consent was required for Major Decisions, plaintiffs have failed to prove damages (and thus there is no need to resolve this contractual interpretation dispute).
The same is largely true of the breaches discussed in the next two sections of plaintiffs' brief (see id. at 7-14). Rather than tether a proposed damages amount to any specific breach, plaintiffs contend that the court should award them more than $25 million based on the destruction of the business (see id. at 14, 37-38). There is no basis in the evidence admitted at trial for such an award, which is not supported by expert testimony. Significantly, the report of plaintiffs' expert, Harold Dieters, is not in evidence. Dieters merely filed a four-page direct-testimony affidavit (Dkt. 429) that lacks any meaningful analysis and fails to sufficiently set forth a basis for his expert opinions (other than referencing his inadmissible report). Thus, the court does not find there to be a credible basis for any damages award based on Dieters' testimony. In light of the way in which Dieters was employed by plaintiffs in this action and given his uncompelling live testimony, the court declines to credit any of his testimony or rely on it as a "framework for damages calculations" (see Dkt. 460 at 19). The problem with relying on a theory of damages predicated on defendants' actions having destroyed the value of the Companies is that this case is not about whether defendants are responsible for the failure of the restaurants or the relative culpability of the franchisor or their disputes with it in related litigation. Rather, it is about discreet challenged transactions.
Yet, even assuming that plaintiffs had proven that defendants destroyed the business and that an award of lost profits was warranted, plaintiffs have not submitted proof of lost profits based on the requisite expert testimony. Instead, their counsel posits a theory of how much the Companies would have made had things gone well (see Dkt. 460 at 22-23). To lend credence to this approach, plaintiffs cite two of this court's cases where lost profits were awarded based on projections. However, in both of those cases, the projections were made by experts whose testimony and analysis the court found credible (see Indeck Energy Sers., Inc. v Merced Capital, L.P., 2020 WL 6081952, at *7-10 [Sup Ct, NY County Oct. 15, 2020], affd 200 A.D.3d 455 [1st Dept 2021]; see also O'Mahony v Whiston, 2023 WL 2020049, at *2-4 [Sup Ct, NY County Feb. 15, 2023], affd 224 A.D.3d 609 [1st Dept 2024]). Plaintiffs lack any such evidence. Off-the-cuff projections made by counsel in a post-trial brief based on variables that have not been proven to be convincing are not a legitimate substitute for an expert's discounted cash flow projections. Thus, even assuming that plaintiffs' theory of lost profits was the proper measure of damages, there simply is no foundation for the amounts sought.
Furthermore, while plaintiffs had a potentially meritorious claim to disgorge some of Eutychia's compensation under the faithless servant doctrine by virtue of the now-adjudicated breaches (see Visual Arts Found., Inc. v Egnasko, 91 A.D.3d 578, 579 [1st Dept 2012]), plaintiffs did not properly explain exactly how much of their compensation should be disgorged. Merely stating, without any analysis or citation to evidence, that the amount "is not less than $1 million per entity for each Defendant" is insufficient (Dkt. 460 at 38). The accounting and defendants' brief contained data that was more than sufficient for plaintiffs to calculate the amount of compensation that should be disgorged during the period of disloyalty. While an aspirational ad damnum clause may be acceptable in a complaint, a post-trial brief must cite evidence and do the math. Plaintiffs' faithless servant claim is therefore limited to rejection of Eutychia's attempt to offset its liability for unaccounted funds by an amount it claims it is owed for management fees. Plaintiffs' claim for further disgorgement is rejected.
Plaintiffs also have failed to prove their claim for aiding and abetting breach of fiduciary duty against El Toro. The following is the entirety of plaintiffs' analysis in their post-trial brief:
"Mr. Messados was asked about the RCF loans, the separate Chase accounts and the commingling and whether he approved it. He testified he knew about it later on and alternately that he did not know. With a fiduciary duty as a majority and managing member of El Toro through Medallion Capital Partners, Mr. Messados cannot 'not know' about what his Class 'A' partners are doing as he approved the amendments and signed the resolutions including the bankruptcy of CV, Fidi and NGM" (Dkt. 460 at 14).
Even assuming these facts sufficed to establish substantial assistance (see Kaufman v Cohen, 307 A.D.2d 113, 126 [1st Dept 2003]), these alleged predicate breaches are not among those for which the court has found Eutychia to be liable. Thus, the aiding and abetting claim based on these allegations necessarily fails (see Karipaparambil v Polus, 195 A.D.3d 515, 516 [ 1 st Dept 2021 ]). Plaintiffs have waived any claim seeking to hold El Toro liable for aiding and abetting the adjudicated breaches since El Toro's culpability in those breaches was not addressed in plaintiffs' brief. The claims against El Toro are dismissed.
Eutychia's actions were not sufficiently egregious to support an award of punitive damages (Nardelli v Stamberg, 44 N.Y.2d 500, 503 [1978], accord Vandashield Ltd. v Isaacson, 146 A.D.3d 552, 555 [1st Dept. 2017]; see Don Buchwald & Assocs., Inc. v Rich, 281 A.D.2d 329, 330 [1st Dept 2001]; see also Huang v Sy, 62 A.D.3d 660, 662 [2d Dept 2009]). The actions for which damages are awarded were wrongful, but defendants proffered colorable-albeit erroneous-justifications.
For the avoidance of doubt, plaintiffs' claim for an accounting is not moot (see Dkt. 459 at 43), but rather is resolved in accordance with this decision.
Because plaintiffs prevailed on certain derivative claims they are entitled to a fee award from the Companies (BCL § 626[e]; see Glenn v Hoteltron Sys., Inc., 74 N.Y.2d 386, 393 [1989]). Since many of their claims largely failed, plaintiffs should not necessarily expect the award to cover all of their fees in this action. Their fee application should explain what portion of the fees incurred are commensurate with the corporate benefit they created. The parties are of course encouraged to confer on whether they can reach an agreement on the amount of fees.
Plaintiffs' other arguments are unavailing, including the request made in their post-trial brief to amend the complaint to add Medallion Capital Partners LLC as a defendant (see Dkt. 460 at 14). The court previously denied leave to amend and explained the prejudice of belatedly adding other proposed new parties and theories of liability (Dkt. 180). It is beyond cavil that adding a party that was never served in this action as a defendant after trial would be prejudicial, and plaintiffs do not cite any authority suggesting that this is permitted by CPLR 3025(c) (see Lee v 401-403 57th St. Realty Corp., 306 A.D.2d 108, 109 [1st Dept 2003]; see also W. & M. Operating, L.L.C. v Bakhshi, 2020 WL 6378958, at *2 n 4 [Sup Ct, NY County Oct. 30, 2020]).
In the end, though plaintiffs may well have grounds to dispute more of Eutychia's accounting-as much of what defendants submitted was unpersuasive and lacked credibility-it was incumbent upon plaintiffs to carefully parse the deficiencies in the accounting and provide the court with a proper basis to remedy each of the allegedly problematic entries so the court could determine the appropriate amount of the surcharges. They largely failed to do so. Moreover, despite plaintiffs successfully mounting a vigorous defense of their expert prior to trial given how crucial his opinions appeared to be, plaintiffs' expert submitted a terse direct-testimony affidavit that was mostly useless. Making matters worse, plaintiffs filed a post-trial brief that did not meaningfully respond to defendants' brief and relied far too much on rhetoric, theories about who is responsible for the Companies' losses and lost-profits calculations, none of which were legally or factually supported by credible admissible evidence. The court, nonetheless, carefully reviewed and tried to understand plaintiffs' objections and post-trial brief to see if there are grounds for a greater surcharge given the serious alleged improprieties. Based on plaintiffs' submissions and proof, the amounts awarded were all that could be justified.
The court will direct entry of judgment after considering the fee application and the parties' forthcoming submissions addressing two other important issues. First, the parties must address the dates from which pre-judgment interest should run. The court will apply the default statutory 9% rate since the parties waived any argument that a different equitable rate should be applied by failing to make such an argument in their briefs. The parties also must address which of the Companies are entitled to each surcharge. A judgment in favor of all of the Companies would be improper. For instance, the diversion of NGM's money must result in recovery solely by NGM (see also Dkt. 459 at 35 [indicating amounts charged to each of the Companies for travel expenses]). The parties' submissions shall be strictly limited to addressing these issues.
Accordingly, it is ORDERED that the parties shall promptly confer on the amount of plaintiffs' attorneys' fees and the other outstanding issues, and if they reach an agreement they shall e-file and email the court joint letter and a proposed order directing the entry of judgment; and if they are unable to reach an agreement, by June 7, 2024, plaintiffs shall e-file a fee application (including billing records) and a three-page letter addressing the proper allocation of the surcharges and pre-judgment interest, and defendants shall e-file any objections to the fee application and a responsive three-page letter by June 21, 2024.