Opinion
104915/05.
Decided March 12, 2008.
Plaintiff was represented by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158, (212) 687-3860, Derek A. Wolman, Esq.
Defendants were represented by Warner Scheuerman, 6 West 18th Street, New York, NY 10011, (212) 924-7111, Jonathon D. Warner, Esq.
Defendants Christopher Moskal and Brian Ferdinand move to dismiss the complaint as asserted against them individually, CPLR 3211(a) (7). Plaintiff Charles Kim cross-moves to dismiss defendants' counterclaims, CPLR 3211 (a) (3) and (7), and for Rule 130 sanctions.
Background
This action arises out of a dispute between the owners of defendant Ferdinand Capital LLC ("F.C."), a Delaware LLC.
Plaintiff Charles Kim joined F.C. in March 2003 as a stock trader. At that time, defendant Brian Ferdinand was sole owner of the company. Kim alleges that in August 2003, he and Ferdinand agreed that he would receive a 40% equity interest in the company while Ferdinand would retain a 60% interest. Kim alleges that, in September of 2003, he and Ferdinand agreed that defendant Christopher Moskal would receive a 10% interest in the company. It is alleged that on October 1, 2003, the parties entered into a written agreement, whereby plaintiff received a 39% interest, Ferdinand received a 51% interest, and Moskal a 10% interest.
As proof of this agreement, Kim submits a document in which, adjacent to the above-mentioned names, is listed their alleged respective percentages (Wolman Aff., Exh. B). The document contains no words or language, other than the names and percentages ( id.). Kim alleges he contributed capital in the amount of $21,752, that he was entitled to receive certain distributions and that Ferdinand, who he alleges had management control of the company, was responsible for the timing of such distributions.
Kim claims that despite the company's growth in revenue, he received only sporadic distributions.
It is alleged that on September 25, 2004, Ferdinand and Moskal unlawfully excluded Kim from the company. He claims he was denied all benefits of membership, including his share of distributions from that day forward, as well as access to the company's books and records. Additionally, Kim alleges that he incurred expenses in the amount of $2,000 on behalf of the company, for which he was not recompensed. Kim also claims that Ferdinand, who had management control of the company, used it for his own pecuniary gain in contravention of the interests and rights of the other members by, for example, arranging cash payments to himself from the company's trader and improperly depleting the company's assets.
Defendants deny that Kim ever obtained an equity interest in the company, alleging that only they hold equity, as evidenced by F.C.'s November 1, 2003 operating agreement. Rather, defendants allege that, Kim worked as a trader for and was a Class B shareholder of Echo Trade LLC, a company for which F.C. provided operating agent services, which included obtaining and maintaining Echo Trade's office space and computer network. Further, defendants allege that Kim was occasionally compensated for providing clerical and support services to F.C., but claim that he was never a member of the LLC. They claim that Kim misrepresented himself as "manager" to certain floor brokers of the American Stock Exchange, in order to enable him to execute certain floor agreements on behalf of Echo Trade. Additionally, defendants allege that Kim entered into an unauthorized trade by entering an order to purchase 50,000 shares of the NASDQ 100 Index Tracking stock on Echo Trade's account. As a consequence of his actions, defendants allege that Echo Trade decided to restrict its proprietary traders' trading activities, specifically by no longer permitting them to place orders directly from the trading floor of various stock exchanges. Defendants allege that this affected Echo Trade's volume of trades and that the amount of compensation paid by Echo Trade to Ferdinand Capital was specifically tied to that volume of trades, thus reducing Ferdinand Capital's revenues.
Additionally, defendants claim that contrary to Kim's agreement with Echo Trade plaintiff aided certain Class B shareholders in making unauthorized transfers of funds from their Echo Trade Proprietary accounts. Also, defendants claim that he enticed certain class B shareholders away from Echo Trade. Defendants claim that these actions resulted in debits in those proprietary trading accounts. Defendants allege that Kim was required to reimburse Echo Trade for losses to those proprietary trading accounts (see McGuire Aff., Exh. C, E, F, G).
Ferdinand Capital claims that it, in turn, guaranteed the fulfillment of all of Kim's obligations to Echo Trade. The document that defendants claim is the guarantee is labeled "Class C Addendum for Class B Members" and states "The undersigned Class C Member or Members agree to contribute capital to the company in the total amount of [$5,000] for trading capital in the Designated Trading Account or Accounts assigned to the following Class B Member. The undersigned Class C Member or Members shall have a Special Allocation Percentage Interest or Interests, equal to 100% minus the Percentage Interest of such Class B Member" ( id., Exh. D). The document lists plaintiff as the Class B Member, and contains the signature of the Class C Member ( id.). Defendants claim that the Class C Member who signed the document is defendant Brian Ferdinand.
Kim asserts seven causes of action: 1) Breach of Contract by all defendants, for unlawfully excluding plaintiff, not paying plaintiff his earned distributions, not reimbursing plaintiff for expenses he incurred, denying plaintiff access to the company records and declaring plaintiff's membership's interests forfeited; 2) Breach of implied covenant of good faith and fair dealing by Ferdinand and Moskal, for the same actions as constituted the breach of contract; 3) Breach of Fiduciary duty by Ferdinand and Moskal, for the same actions as constituted the breach of contract; 4) Breach of Fiduciary Duty by Ferdinand, which cause of action is brought on behalf of the company, this derivative action is based on Ferdinand's alleged misappropriation of company assets and his breach of his duty to exercise due care and diligence in the management of the company; 5) Attorney's fees sought from Ferdinand, as plaintiff claims that Ferdinand is responsible for attorney's fees because of his misappropriation of company assets; 6) Constructive Trust, against all defendants, to preserve plaintiff's 39% interest from the harm done by his unlawful exclusion; and 7) an Accounting, because plaintiff was denied access to company records.
Defendants counterclaimed against Kim, asserting six causes of action: 1) Tortious interference with prospective business relations, as defendants claim that plaintiff's unlawful activities resulted in Echo Trade receiving trading restrictions, which in turn reduced Ferdinand Capital's Revenue; 2 3) Indemnification, as defendants claim that plaintiff directed the unauthorized transfer of funds from Echo Trade proprietary accounts, resulting in debits to those accounts, which Ferdinand Capital was required to reimburse pursuant to its guarantee and for which defendants are entitled to indemnification; 4 5) Indemnification, as defendants claim that plaintiff violated his agreement with Echo Trade by enticing certain Class B shareholders to leave the company, and claim that they were required to reimburse Echo Trade for this loss, pursuant to their guarantee, for which, again, they are entitled to indemnification; and 6) Attorney's fees.
Discussion: Motion to Dismiss
Defendants argue that the causes of action must be dismissed to the extent they are asserted against defendants Christopher Moskal and Brian Ferdinand, individually. Defendants offer two reasons for such dismissal. First, they argue that plaintiff does not have standing to maintain an action as an individual or a derivative action because, they argue, he is not a shareholder of Ferdinand Capital. Defendants deny the existence of any agreement giving plaintiff an equity interest. Specifically, they argue that the existence of the operating agreement, dated November 1, 2003, which makes no mention of plaintiff's holding an equity interest, proves that plaintiff owned no such interest.
However, as plaintiff has alleged the existence of an agreement between himself and the individual defendants, and submitted a document, albeit an amorphous one, there is a factual issue not appropriate for resolution on a motion to dismiss. The existence of the operating agreement does not by itself resolve the issue.
Second, defendants assert that as plaintiff seeks to recover for actions taken by the individual defendants on behalf of the corporation, plaintiff must allege facts sufficient to pierce the corporate veil. However, plaintiff has alleged that there was an agreement between plaintiff and defendants in their individual capacities. Thus, piercing of the corporate veil may not be necessary. Additionally, defendants' argument does not address the cause of action for breach of fiduciary duty. It may be determined that there was no agreement to contractually bind Ferdinand and Moskal, or to make Kim an equity owner. The court notes the ambiguity of the document submitted by Kim in support of the existence of the alleged agreement, which may result in the dismissal of this action at a later time. However, on a CPLR 3211 motion to dismiss, these issues can not be resolved.
Motion to Dismiss Counterclaims
Tortious Interference with Prospective Business Relations — 1st Counterclaim
To maintain a cause of action for tortious interference with prospective business relations, a plaintiff must allege that it would have entered or continued its business relations with a non-party, but for the defendants' wrongful conduct ( Vigoda v DCA Productions Plus Inc., 293 AD2d 265, 266-67 [1st Dept 2002]). "As a general rule, the defendant's conduct must amount to a crime or an independent tort." ( Carvel Corp. v. Noonan, 3 NY3d 182, 190. "Conduct that is not criminal or tortious will generally be lawful' and thus not sufficiently culpable' to create liability for interference with prospective contracts or other nonbinding economic relations" ( John Hancock Life Insurance Company v. 42 Delaware Avenue Associates, LLC, 15 AD3d 939, 940 [4th Dept. 2005]. An exception to this general rule exists when defendants acted with malice or "for the sole purpose of inflicting emotional harm on plaintiffs" ( Carvel, 3 NY3d at 190). Additionally, there may exist an exception where defendants applied "extreme and unfair" economic pressure onto the party with which the plaintiff sought to have a relationship ( id. at 190-91). However, the Court of Appeals has specifically declined to state that this exception or any exception to the general rule besides malice exists ( id.).
Here, defendants (counterclaim plaintiffs) allege that plaintiff (counterclaim defendant)'s wrongful conduct directed at Echo Trade caused Echo Trade to restrict its proprietary traders, thus limiting its trading volume, and consequently reducing the compensation paid to Ferdinand Capital for the services it provided to Echo Trade. However, defendants have not alleged any conduct amounting to a crime or independent tort. Rather, defendants have only alleged that plaintiff misrepresented himself to American Stock Exchange brokers or entered into an unauthorized trade in breach of his agreement with Echo Trade. In fact, defendants have not alleged that Echo Trade suffered any damages as a result of plaintiff's conduct, but rather that because Echo Trade was subjected to enormous trading risk, it decided to restrict its proprietary traders. Additionally, even if an exception to the general rule does exist, these allegations do not amount to the "sort of egregious wrongdoing" that would be needed to apply such an exception ( see Carvel, 3 NY3d at 189). The allegations that plaintiff misrepresented himself to American Stock Exchange brokers or entered into an unauthorized trade in breach of his agreement with Echo Trade certainly do not amount to extreme and unfair economic pressure. Therefore, the first counterclaim is dismissed.
Indemnification — 2nd, 3rd, 4th, and 5th Counterclaims
A party is entitled to full indemnification for sums paid pursuant to a guarantee by that party ( Leghorn v Ross, 53 AD2d 560 [1st Dept 1976]). However, General Obligations Law 507-1 provides that "a special promise to answer for the debt, default or miscarriage of another person" is covered by the Statute of Frauds. Defendants have alleged that Ferdinand Capital was required to reimburse Echo Trade for its losses, pursuant to a guarantee made to plaintiff. However, this alone is not sufficient, and defendants must produce a writing. Defendants have produced a writing that they assert is their guarantee of all of plaintiff's obligations to Echo Trade (see McGuire Aff., Exh. D). It is not clear from the face of the document whether it is, in fact, a guarantee. This determination of fact is not appropriate for a motion to dismiss. Thus, defendants can maintain their second through sixth counterclaim causes of action. What is clear, however, is that if the document is in fact a guarantee, it is limited to $5,000 and does not extend to all of plaintiff's obligations to Echo Trade.
Attorney's Fees-Sixth Cause of Action
Plaintiff has presented no reason why this cause of action should be dismissed.
Motion for Sanctions
Defendants' counterclaims are not frivolous, and thus plaintiff's application for sanctions is denied. Accordingly, it is
ORDERED that the motion to dismiss the complaint is denied; and it is further
ORDERED that the motion to dismiss the counterclaims is granted as to the first counterclaim, and denied as to the second through sixth counterclaims; and it is further
ORDERED that the plaintiff's application for sanctions is denied; and it is further
ORDERED that the clerk shall enter judgment accordingly.