Opinion
Index 654538/2019
01-19-2022
GABRIEL LAZAR, INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF ATTENA LLC, HEMERA LLC AND NESSA LLC, JOEL SHEINBAUM, INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF ATTENA LLC, HEMERA LLC and NESSA LLC, Plaintiffs, v. ARIK MOR and URIEL ZICHRON, Defendants.
Unpublished Opinion
DECISION+ORDER ON MOTION
ANDREA MASLEY, J.S.C.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106 were read on this motion to/for DISMISS
In motion sequence number 002, defendants move to dismiss plaintiffs' amended complaint, in its entirety, pursuant to CPLR 3211 (a) (1), (a) (3), (a) (5), and (a) (7).
Background
This action involves a dispute among real estate investors. Plaintiffs Gabriel Lazar and Joel Sheinbaum are residents of the State of Israel and are co-managing members of Attena LLC (Attena), Hemera LLC (Hemera), and Nessa LLC (Nessa, and with Attena and Hemera, the LLCs). (NYSCEF Doc. No. [NYSCEF] 48, Amended Complaint [AC] ¶¶ 4-5.) Defendants Arik Mor and Uriel Zichron are also residents of Israel and co-managing members of the LLCs. (Id. ¶¶ 6-7.)
The amended complaint indicates that the LLCs are active New York Limited Liability Companies, maintaining a registered address at 174 Fifth Avenue, Suite 301, New York, New York. (NYSCEF 48, AC ¶¶ 8-10.) The records with the Secretary of State indicate that Nessa became inactive as of December 5, 2018, because of its voluntary dissolution. (New York Department of State, Corporate Database https://apps.dos.nY.gov/public inquiry/ [last accessed on January 18, 20221.)
"Attena was formed in 2011, Hemera was formed in 2012, and Nessa was formed in 2013" for the purpose of acquiring multi-family properties in Manhattan. (Id. ¶ 12.) Defendants identified investment properties, arranged bank financing, attended closings, hired attorneys, and selected a management company. (Id.) Plaintiffs allege that defendants first approached them in 2011 to solicit their investment in two multi-family properties in Manhattan, each of the four making equal capital contributions and taking equal ownership interests in the properties. (Id. ¶13.) Plaintiffs wired funds to defendants to acquire properties at 515-519 West 156th Street (156th Street) and 22 Bradhurst Avenue (Bradhurst). (Id. ¶ 15.) These acquisitions closed on February 6, 2012. (Id.) Attena was the holding company for these properties. (Id. ¶16.)
After this initial acquisition, defendants identified properties at 118-120 West 137th Street (137th Street) and 243 West 135th Street (135th Street) as potential investments, again with all four making equal contributions and owning equal stakes. (Id. ¶ 17.) Plaintiffs wired money to fund the purchase. (Id.) Defendants closed on 137th Street in June 2012 and 135th Street in August 2012. (Id. ¶ 18.) Hemera was the holding company for these properties. (Id. ¶ 19.)
In June 2013, defendants purchased a multi-family property located at 210 West 133rd Street (133rd Street) through 210 West 133rd Street LLC, which was owned by Hemera and Nessa, holding 60% and 40% interest respectively. (Id. ¶ 20.)
In the early summer of 2013, defendants made a deposit on a multi-family property located at 100 West 143rd Street and asked plaintiffs to provide additional funding for its purchase. (Id. ¶ 21.) Plaintiffs invested 15% of the total purchase price. (Id.) The parties purchased the property in October 2013 through 100 West 143rd Street LLC; plaintiffs were members of 100 West 143rd Street LLC, but not managing members. (Id. ¶21.)
In late 2014 or early 2015, defendants informed plaintiffs that they wished to sell the properties to which plaintiffs agreed. (Id. ¶ 26.) On December 7 and 8, 2015, the sale closed. (Id.) Plaintiffs allege that, after the sale, defendants took control over the sales proceeds and all accounting and tax preparation functions for the LLCs. (Id. ¶ 27.)
Plaintiffs allege that, from the date of their first acquisition, Mor controlled the LLCs' accounting, tax and financing functions, and that he hired a New York-based accounting firm, Arik Eshel & Partners (AEP), to provide accounting and tax preparation services to the LLCs. (Id. ¶ 23.) AEP serviced the LLCs from early 2012 until 2014, when its successor firm, Eshel Aminov & Partners (EAP), assumed that role, continuing through the date on which this action was commenced. (Id.)
Plaintiffs allege that, because Mor was designated as the LLCs' "Tax Matters Partner," Tariel Aminov, the EAP partner principally responsible for the LLCs' accounting and tax preparation services, decided to accept direction only from Mor, refusing to provide information concerning the LLCs to plaintiffs without Mor's prior authorization, even though the LLCs entrusted equal management authority in their three other co-managing members, including plaintiffs. (Id. ¶ 24; see, e.g., NYSCEF 75, Attena LLC's Amended and Restated Operating Agreement Article III, ¶ 1.)
Plaintiffs allege that Mor abused his position as co-managing member of the LLCs, concealing material facts and information from plaintiffs, benefiting himself and Zichron at the expense of the LLCs and its members. (NYSCEF 48, AC ¶ 25.) Plaintiffs allege that defendants' wrongful acts include:
• incurring a debt to Hemera totaling $271,076, which plaintiffs first learned of in or about early 2015, which had been "zeroed out at the end of 2015" on Hemera's tax return without explanation. Plaintiffs deny knowledge of this debt and its repayment and assert that defendants refuse to provide information to them about this matter (id. ¶¶ 28-29);
• incurring a debt to Attena totaling $116,727, which first appeared on Attena's 2015 tax return but not on Attena's 2016 tax return. As in the case of the Hemera debt, defendants refuse to explain the debt's appearance and disappearance in Attena's returns and refuse to provide any further information about the matter (id. ¶¶ 30-31);
• drawing $290,000 from Hemera's account to fund the deposit for their purchase of 100 West 143rd Street, after having told plaintiffs that they sourced their deposit from their personal funds, and failing to repay Hemera even though the 100 West 143rd Street property was sold to a third party in December 2015 (id. ¶¶ 34-35);
• refusing to provide LLC financial documents plaintiffs requested and purposely interfering in plaintiffs' attempts to obtain such documents from the LLCs' accountants, EAP, eventually making it necessary for plaintiffs to sue EAP, to provide plaintiffs documents they were entitled to as members of the LLCs (id. ¶¶ 39-46);
• using Hemera funds to pay EAP's legal fees in the suit brought against EAP by plaintiffs to compel disclosure of LLC financial records and refusing to pay plaintiffs' legal fees as prevailing party in the EAP suit (id. ¶¶47-49);
• diverting funds to Shlaf LLC, a company controlled by defendants, from Attena and Nessa accounts in the amounts of $3,500 and $655.54, respectively (id. ¶¶56-59); and
• misrepresenting the actual purchase prices for LLCs' acquisition of the Bradhurst Avenue, 156th Street, 135th Street, and 137th Street properties. (Id. ¶¶64-66.)
Plaintiffs assert 23 causes of action for: breach of fiduciary duty (causes of action numbered 1, 4, 7, 10, 11, 14, 16, 19, and 22), breach of implied contract (numbered 2 and 5), unjust enrichment (numbered 3, 6, and 9), breach of contract (numbered 8), conversion (numbered 12, 13, and 15), fraud (numbered 18 and 21), and conspiracy (numbered 20 and 23).
At oral argument, plaintiffs withdrew their causes of action for conversion (numbered 12, 13, and 15). (NYSCEF 106, Tr. at 34:20-21.)
Dismissal Standards
When a court rules on a motion to dismiss under CPLR 3211, it "must accept as true the facts as alleged in the complaint and submissions in opposition to the motion, accord plaintiffs the benefit of every possible favorable inference and determine only whether the facts as alleged fit within any cognizable legal theory." (Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Servs., Inc., 20 N.Y.3d 59, 63 [2012] [internal quotation marks and citation omitted].) On a motion to dismiss under CPLR 3211 (a) (7), "the sole criterion is whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail." (Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 [1977] [citations omitted].)
However, "bare legal conclusions, as well as factual claims which are either inherently incredible or flatly contradicted by documentary evidence" cannot survive a motion to dismiss. (Summit Solomon & Feldesman v Lacher, 212 A.D.2d 487, 487 [1st Dept 1995] [citation omitted].) Where a defendant seeks dismissal upon documentary evidence under CPLR 3211 (a) (1), the motion will succeed only if "the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." (Goshen v Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 [2002] [citation omitted].) "The documents submitted must be explicit and unambiguous." (Dixon v 105 W. 75th St. LLC, 148 A.D.3d 623 [1st Dept 2017] [citation omitted].)
CPLR 3211 (a) (3) provides that "[a] party may move to dismiss one or more causes of action asserted against him on the ground that... the party asserting the cause of action has not legal capacity to sue." Here, defendants seek to dismiss the causes of action plaintiffs have asserted on behalf of the LLCs and other members on the ground that plaintiffs failed to make the necessary pre-suit demand on the LLCs' managing members and failed to show that such demand was excused because of futility or the egregiousness of defendants' conduct.
Defendants also seek to dismiss certain causes of action as barred under the applicable statute of limitations.
"On a motion to dismiss a cause of action pursuant to CPLR 3211 (a) (5) on the ground that it is barred by the statute of limitations, a defendant bears the initial burden of establishing, prima facie, that the time in which to sue has expired. In considering the motion, a court must take the allegations in the complaint as true and resolve all inferences in favor of the plaintiff. Further, plaintiff's submissions in response to the motion must be given their most favorable intendment."(Norddeutsche Landesbank Girozentrale v Tilton, 149 A.D.3d 152, 158 [1st Dept 2017] [internal quotation marks and citation omitted].)
Discussion
Statute of Limitations
Defendants move to dismiss plaintiffs' causes of action numbered 18 through 23, relating to defendants' alleged breach of fiduciary duty premised on fraud, on the ground that they are untimely under CPLR 213 (8), which states such causes of action sounding in fraud must be brought within "the greater of six years from the date the cause of action accrued or two years from the time that plaintiff discovered the fraud or could with reasonable diligence have discovered it."
"A cause of action for breach of fiduciary duty based on allegations of actual fraud is subject to a six-year limitations period. An exception to this rule exists if the fraud allegation is only incidental to the claim asserted. Thus, where an allegation of fraud is not essential to the cause of action pleaded except as an answer to an anticipated defense of Statute of Limitations, courts look for the reality, and the essence of the action and not its mere name." (Cusimano v Schnurr, 137 A.D.3d 527, 529 [1st Dept 2016] [internal quotation marks and citations omitted].) Causes of action 18-23 are based on allegations of actual fraud.
Defendants assert that the misrepresentations they are alleged to have made, regarding the prices paid to acquire the LLC properties, were made, at the latest, in June 2012 (NYSCEF 48, AC ¶¶ 13, 15-18, 175, and 199), and thus, plaintiffs' six-year limitations period to bring suit on these causes of action elapsed in June 2018. Defendants contend that, as plaintiffs did not file the original complaint in this action until August 9, 2019 (NYSCEF Doc No. 1), their fraud-based claims must be dismissed as untimely. Defendants further assert that, even if plaintiffs invoke the 2-year discovery provision, their fraud claims are still barred because the purchase prices for all the LLC properties were readily verifiable by plaintiffs through an online search of the City of New York's Automated City Register Information System (ACRIS). Plaintiffs counter that defendants fail to conclusively show that plaintiffs had sufficient knowledge of facts from which they could have reasonably inferred they had been defrauded in or before August 2017.
Under the 2-year discovery rule, "[a] plaintiff will be held to have discovered the fraud when the plaintiff has knowledge of facts from which the fraud could be reasonably inferred." (Cusimano v Schnurr, 137 A.D.3d at 531 [citations omitted].) "'Generally, knowledge of the fraudulent act is required, and mere suspicion will not constitute a sufficient substitute.'" (Sargiss v Magarelli, 12 N.Y.3d 527, 532 [2009], quoting Erbe v Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 [1957]; see also Aozora Bank, Ltd. v Deutsche Bank Sec. Inc., 137 A.D.3d 685, 689 [1st Dept 2016] [inquiry notice arises "where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded"] [citations omitted and emphasis added].)
Plaintiffs admit that serious concerns arose after viewing the 2015 and 2016 tax returns, and thus, they set up a meeting with Aminov in March 2017. They alleged that at this meeting it was agreed that the financial accounts of the LLCs were incomplete and deficient. (NYSCEF 48, AC ¶ 32.) Aminov agreed to reconstruct the accounts using the "original closing documents, including original purchase closing statements, bank statements, deposit and withdrawal slips and checks." (Id.) Also, during this meeting, plaintiffs demanded that defendants provide documentary evidence as to the source of their contributions, which defendants refused to do. (Id. ¶ 33.) Plaintiffs allege that since the inception of the LLCs, Mor has refused to provide source document; instead, providing spreadsheets of dubious validity. (Id. ¶ 36.) In August 2017, plaintiffs complained that their requests for the original purchase statements remained unanswered. (NYSCEF 73, Sheinbaum E-Mail [August 11, 2017].)
The test as to when fraud should with reasonable diligence have been discovered is an objective one." (Gutkin v Siegal, 85 A.D.3d 687, 688 [1st Dept 2011] [internal quotation marks and citation omitted].) "Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him." (Aozora Bank, Ltd., 137 A.D.3d at 689 [citation omitted].)
Plaintiffs were put on notice of defendants' alleged fraudulent activities involving the LLCs and their purchase of the properties in March 2017 at the latest. Plaintiffs had serious concerns and yet did not pursue the agreement to reconstruct the accounts using the original closing documents, including original purchase closing statements. Plaintiffs could have easily reviewed the public purchase records for the properties by consulting ACRIS, but instead continued to acquiesce defendants' repeated refusal to provide basic documents. Plaintiffs' assertion that they had no reason to question defendants' representations with respect specifically to the LLC property purchase prices until after this action was commenced does not establish that, even with reasonable diligence, they would not have discovered the basis for these claims prior to August 9, 2017. (CIFG Assur. N. Am., Inc. v Credit Suisse Sec. (USA) LLC, 128 A.D.3d 607, 608 [1st Dept 2015] [finding that, on a motion to dismiss, plaintiff failed to meet its burden of establishing that even with the exercise of reasonable diligence, it could not have discovered the basis for its claims two years prior to commencement of the action].) "Plaintiffs possessed knowledge of facts from which they reasonably could have discovered the alleged fraud soon after it occurred, and in any event more than two years prior to the commencement of the action." (Beacon Estates, LLC v Ingrassia, 177 A.D.3d 1305, 1306-1307 [4th Dept 2019] [internal quotation marks and citations omitted].)
Accordingly, defendants' motion to dismiss plaintiffs' causes of action numbered 18 through 23 for being time-barred is granted.
Demand Requirement
A plaintiff shareholder may bring a derivative action on behalf of the company, but it must set forth in his complaint, with particularity, the actions it took to convince the company's board to initiate such an action on behalf of shareholders or the reasons for not making such an effort. (Barone v Sowers, 128 A.D.3d 484, 484 [1st Dept 2015], citing Business Corporation Law [BCL] § 626 [c].) "The demand requirement of Business Corporation Law § 626 (c) also applies to members of New York limited liability companies." (Id., citing Najjar Group, LLC v West 56th Hotel LLC, 110 A.D.3d 638, 639 [1st Dept 2013].)
Defendants assert that plaintiffs fail to provide a particularized description of any demand they made upon the LLCs' managers to commence litigation against defendants on behalf of the LLCs, or allegations adequate to show that such a demand must be excused on the ground of futility, as required by the BCL.
Plaintiffs counter that they alleged futility in the AC, reasoning that defendants' control of over 50% of the membership interests in Attena and Hemera, 50% of the membership interest in Nessa, and 50% of the LLCs' managing member positions gave defendants veto power over any request to file suit which plaintiffs may have made. (NYSCEF 48, AC ¶ 70.)
BCL § 626 provides, in pertinent part,
"(a) An action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.
(b) In any such action, it shall be made to appear that the plaintiff is such a holder at the time of bringing the action and that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law.
(c) In any such action, the complaint shall 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."(Emphasis added).
New York "courts have looked to [the state's] statutory and common law on partnerships and corporations in determining certain questions arising in the LLC context. For example, it has been held necessary for a plaintiff suing derivatively on behalf of an LLC to allege presuit demand or demand futility, by analogy to section 626 (c)" of the BCL. (LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 154 A.D.3d 109, 113 [1st Dept 2017] [citations omitted].)
The Court of Appeals addressed the demand/futility rule under BCL § 626 (c) in Marx v Akers (88 N.Y.2d 189 [1996]). In Marx, a shareholder commenced a derivative suit against International Business Machines Corporation (IBM) and its board of directors, alleging that the board had wasted corporate assets, thereby breaching their fiduciary duties by awarding excessive compensation packages to certain IBM executives and outside directors.
In her amended complaint, Marx asserted that she "made no demand upon the directors of IBM . . . because such demand would be futile," inasmuch as "each of the directors authorized, approved, participated and/or acquiesced in the acts and transactions complained of." (Id. at 201.) Marx appealed orders from the Second Department and Westchester County Supreme Court which dismissed her amended complaint and ruled that demand under BCL § 626 (c) was not excused because she had not pleaded demand futility with sufficient particularity. (See Marx v Akers, 215 A.D.2d 540, 540-41 [2d Dept 1995], order affd, 88 N.Y.2d 189 [1996].)
The Court of Appeals affirmed the Second Department's decision, dismissing Marx's amended complaint, stating that it found "it necessary to offer the following elaboration of [the] demand/futility standard," which it had adopted in Barr v Wackman (36 N.Y.2d 371 [1975]):
"(1) Demand is excused because of futility when a complaint alleges with particularity that a majority of the board of directors is interested in the challenged transaction. Director interest may either be self-interest in the transaction at issue, or a loss of independence because a director with no direct interest in a transaction is 'controlled' by a self-interested director. (2) Demand is excused because of futility when a complaint alleges with particularity that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances. The long-standing rule is that a director does not exempt himself from liability by failing to do more than passively rubber-stamp the decisions of the active managers. (3) Demand is excused because of futility when a complaint alleges with particularity that the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors.(Marx, 88 N.Y.2d at 200-01 [emphasis added; internal quotation marks, citations, and footnote omitted].)
Defendants assert that plaintiffs' failure to make the requisite demand cannot be excused because plaintiffs cannot show that Mor and Zichron constitute a majority of the managing members of the LLCs. (See NYSCEF 74, Amended Hemera Operating Agreement, Article III, ¶ 1; NYSCEF 75, Amended Attena Operating Agreement, Article 3, ¶ 1 [provisions to Amended Operating Agreements of Hemera and Attena, respectively, designating plaintiffs Lazar and Sheinbaum and defendants Mor and Zichron "as the Managing Members," sharing the "sole and exclusive authority to conduct the day to day operation" of each LLC].)
In the AC, plaintiffs allege that additional members were brought into the LLCs to provide additional capital and provide the following membership chart:
| Lazar | Sheinbaum | Mor | Zichron | Other Members | |
| Attena | 21.5% | 21.5% | 21.5% | 21.5% | 14% |
| Hemera | 25% | 17.214% | 15% | 15% | 27.786% |
| Nessa | 25% | 25% | 25% | 25% | --- |
| 100 West 143rd St LLC | 7.5% | 7.5% | 7.5% | 7.5% | 70% |
"The demand requirement insures that person or persons entrusted with the management of a corporation have an opportunity to address the alleged abuses without resort to the courts." (Fine v NY Community Bank, 33 Misc.3d 1215[A], 1215A, 2011 NY Slip Op51935[U], *3 [Sup Ct, Queens County 2011], citing Bansbach v Zinn, 1 N.Y.3d 1, 8-9 [2003].) Thus, any demand would be made on the Managing Members of the LLCs. (See id.)
Here, there is no majority of Managing Members. Plaintiffs and defendants are deadlocked. That lack of a majority, and the resulting deadlock, render Marx's majority demand/futility rule inapposite. Pre-suit demand upon these defendants for the commencement of an action under the circumstances plainly would have been futile and so must be excused.
Considering this result, the court need not reach the question of whether defendants' alleged misconduct was sufficiently egregious to excuse plaintiffs from demanding that defendants commence suit.
Derivative v Direct
Plaintiffs assert their 23 causes of action in the amended complaint both individually and derivatively, as members on behalf of the LLCs. Defendants allege that plaintiffs cannot maintain individual claims against them because the claims plaintiffs assert are premised on harms allegedly suffered by the LLC. Plaintiffs do not address this issue in their opposition.
"Under New York law, a shareholder lacks standing to pursue a direct cause of action to redress wrongs suffered by the corporation." (Sajust, LLC v Mendelow, 198 A.D.3d 582, 582 [1st Dept 2021], citing Abrams v Donati, 66 N.Y.2d 951, 953 [1985].) "Rather, such claims must be asserted as derivative claims for the benefit of the corporation." (Id.) "In determining whether a claim is derivative or direct, a court should consider (1) who suffered the alleged harm (the corporation or the suing stockholders, individually) and (2) who would receive the benefit of any recovery or other remedy the corporation or the stockholders, individually." (Id. [internal quotation marks and citation omitted].) Thus, "allegations of mismanagement or diversion of assets by officers or directors for their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually." (Abrams, 66 N.Y.2d at 953 [citations omitted].) "A complaint the allegations of which confuse a shareholder's derivative and individual rights will, therefore, be dismissed, though leave to replead may be granted in an appropriate case." (id. [citations omitted].)
As in the case of the original complaint, plaintiffs' allegations in the amended complaint (which repeats the first thirteen causes of the original complaint in sum and substance, if not verbatim), describe harm defendants caused directly to the LLCs. Plaintiffs concede that their claims for relief are all derivative by not submitting opposition on this point. As plaintiffs have not identified how any of their individual rights has been violated, there is no possibility of confusing such individual rights with plaintiffs' derivate rights as LLC members, and so there is no need to dismiss plaintiffs' entire amended complaint and grant leave to replead. (Id.)
Accordingly, defendants' motion to dismiss for lack of legal capacity, pursuant to CPLR 3211 (a) (3), is granted with respect to plaintiffs' individual claims, but is otherwise denied.
Failure to State a Cause of Action
According to defendants, plaintiffs' causes of action for breach of implied contract (causes of action numbered 2, 5 and 8), breach of fiduciary duty (causes of action numbered 1, 4, 7, 10, 11, 14, and 16), unjust enrichment (causes of action numbered 3, 6 and 9), and conversion (causes of action numbered 12, 13, and 15) must be dismissed because plaintiffs purportedly failed to state causes of action in their regard.
Breach of Fiduciary Duty
Defendants contend that plaintiffs failed to state causes of action alleging breach of fiduciary duty in causes of action numbered 1, 4, 7, 10, 11, 14, and 16. Specifically, defendants assert that plaintiffs fail to plead the breach with the particularity required by CPLR 3016 (b) and fail to specify which wrongful acts were committed by which defendant. Defendants further assert that the harms alleged in causes of action numbered 1, 4 and 7, premised on defendants' failure to pay LLC debts, are duplicative of plaintiffs' implied breach of contract claims and based on nonexistent debts, and so could cause no legally cognizable damages.
"To state a claim for breach of fiduciary duty, plaintiffs must allege that (1) defendant owed them a fiduciary duty, (2) defendant committed misconduct, and (3) they suffered damages caused by that misconduct." (Burry v Madison Park Owner LLC, 84 A.D.3d 699, 699-700 [1st Dept 2011] [citations omitted].) Managing members of an LLC owe fiduciary duties to the LLC and to their fellow LLC members. (Out of the Box Promotions, LLC v Koschitzki, 55 A.D.3d 575, 578 [2d Dept 2008] [citations omitted].) A breach of fiduciary duty claim must be pleaded with particularity. (CPLR 3016 [b]; Parker Waichman LLP v Squier, Knapp & Dunn Communications, Inc., 138 A.D.3d 570, 571 [1st Dept 2016].)
Plaintiffs allege that, in violation of their duties as managing members, defendants engaged in self-dealing conduct by purportedly diverting funds from the LLCs to themselves, causing the LLCs damage by diminishing their value. Plaintiffs further allege that, to hide evidence of these misappropriations, defendants refused to provide plaintiffs access to the LLCs' banking and other financial records, despite their obligation to provide that access as managing members of the LLCs under the Operating Agreements.
Defendants assert that plaintiffs failed to state their claims with particularity by not drawing sufficient distinction between the defendants themselves. In doing so, defendants cite authority involving much different circumstances. For instance, in CIFG Assur. North Am. Inc. v. Bank of Am., N.A. (2013 NY Slip Op 51565 [U], *3 [Sup Ct, NY County, Sept 23, 2013] [citation omitted]), Justice Charles E. Ramos found that generalized allegations which did "not distinguish between three sets of corporate defendants and the distinct roles they each played as originators, sponsors, depositors, underwriters, and servicers, and [did] not identify what roles they played in the alleged fraud" did not satisfy the particularity requirements of CPLR 3016 (b).
Plaintiffs allege that defendants misappropriated money from the LLCs and refused to make disclosures, to hide their thefts. Plaintiffs do note that Mor directed the actions of the LLCs' accounting firm, but they otherwise have no knowledge about the role each defendant played in the alleged fraud. (See Miami Firefighters' Relief & Pension Fund v Icahn __ A.D.3d__ 2021 NY Slip Op 06446, *2 [2021] [finding that "the facts that would support the breach of fiduciary duty and breach of contract claims are peculiarly within the [] defendants' knowledge," upholding the claim in the early pleading stage].)
Defendants also seek dismissal of plaintiffs' breach of fiduciary duty claims set forth in cause of action numbered 11, relating to payment of EAP's legal fees, and causes of action numbered 14 and 16, relating to transfer of $4,155.54 from Ness to Shalf for defendant Mor's travel costs, based on defendants' assertion that these charges were valid and plaintiffs' responsibility. On a dismissal motion, however, "the court is not authorized to assess the merits" of plaintiffs' claims against defendants' opposing allegations, "but only to determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action." (Skillgames, LLC v Brody, 1 A.D.3d 247, 250 [1st Dept 2003] [citation omitted].)
Finally, defendants argue that plaintiffs' conspiracy to breach fiduciary duty cause of action numbered 17 must be dismissed because it repeats the same allegations as plaintiffs' other claims for breach of fiduciary duty. Plaintiffs offer no opposition with respect to this point, and thus, this cause of action is dismissed as abandoned.
Accordingly, defendants' motion to dismiss plaintiffs' causes of action for breach of fiduciary duty for failure to state a cause of action is granted with respect to cause of action numbered 17 but is otherwise denied.
Implied Contract
Defendants claim that plaintiffs' causes of action numbered 2, 5, and 8, asserting breach of implied contract, must be dismissed for failure to state a cause of action. Plaintiffs' causes of action numbered 2 and 5 are premised on implied loan agreements defendants purportedly entered with Attena and Hemera. Hemera's 2015 tax return showed that, at the beginning of 2015, it was owed $271,076 by defendants, attributed to such loan agreement, but that the debt "had been zeroed out" by the end of 2015. (NYSCEF 48, AC ¶ 79.) Attena's 2015 tax return shows that Attena was owed $116,727 by defendants but that debt did not appear in Attena's 2016 tax return. (Id. ¶ 93.) Plaintiffs allege that they were unaware of any shareholder debts incurred by defendants or repaid by them and demanded information from defendants regarding these purported loans, which defendants refused to provide. (Id. ¶¶ 28-31.)
As to cause of action numbered 8, plaintiffs further allege that in 2013 defendants told them that defendants had used their own funds to make a deposit to acquire another multifamily property at 100 West 143rd Street and solicited plaintiffs' investment in that property. (Id. ¶ 21.) Plaintiffs agreed and provided 15% of the purchase price. At some time after plaintiffs and defendants met in New York in March 2017, however, plaintiffs learned that defendants funded their down payment for the purchase of 100 West 143rd Street with a $290,000 check drawn on Hemera's account, which amount defendants never repaid. (Id. ¶¶ 34-35.)
Defendants assert that no action will lie against them for the alleged loan agreements because they and Aminov deny that defendants ever incurred such debts and because Hemera and Attena bank statements for the relevant periods show that there were no transfers in those amounts to defendants. As to the $290,000 Hemera check, defendants confirm that they received $290,0000 from Hemera in 2013 but assert that the amount was not a loan, as plaintiffs suggest, but rather a capital distribution, which amount defendants used as a down payment for the 100 West 143rd Street property.
Plaintiffs, citing Ellis v Provident Life & Ace. Ins. Co. (3 F.Supp.2d 399, 409 [SD NY 1998] [construing New York law] [citations omitted]), contend that an implied-in-fact contract may be found here considering the circumstances and the parties' intent, as indicated by their conduct. "The elements of an implied-in-fact contract are the same as the elements of an express contract: 'consideration, mutual assent, legal capacity and legal subject matter.'" (Lapine v Seinfeld, 31 Misc.3d 736, 741 [Sup Ct, NY County 2011], quoting Maas v Cornell Univ., 94 N.Y.2d 87, 93-94 [1999].) "A contract cannot be implied in fact when there is an express contract governing the subject matter involved." (Julien J. Studley, Inc. v New York News, Inc., 70 N.Y.2d 628, 629 [1987], citing Miller v Schloss, 218 400, 406-07 [1916].)
Here, the parties' relationships and their interest in the LLCs are governed by the LLCs' operating agreements, including those for Attena and Hemera. (See NYSCEF 69, Hemera original Operating Agreement; NYSCEF 74, Hemera Amended Operating Agreement; NYSCEF 75, Attena Amended Operating Agreement.) These LLC operating agreements govern the rights and obligations of managing members and members, including such issues as disposition of company assets. (NYSCEF 74, Hemera Amended Operating Agreement, Article III, ¶ 8 [b] [ii]), members' rights and prerequisites to obtain distributions from the LLC (id., Article III, ¶ 8 [b] [ix]), and to transfer their "Membership Interests" in the LLCs. (Id., article III, ¶ 9].) Accordingly, plaintiffs' causes of action for breach of implied contract are dismissed.
Unjust Enrichment
Defendants also assert that plaintiffs have failed to state a cause of action with respect to their unjust enrichment causes of action, numbered 3, 6, and 9, which address the purported loans to defendants from Hemera and Attena, and the $290,000 "distribution" from Hemera. "It is well-established that to successfully plead unjust enrichment a plaintiff must allege that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered." (Metropolitan Bank & Tr. Co. v Lopez, 189 A.D.3d 443, 444-45 [1st Dept 2020] [internal quotation marks and citations omitted].)
Defendants raise two arguments to support dismissal of plaintiffs' unjust enrichment claims. First, they contend that no such claims will lie because defendants owe the LLCs no debts and that the $290,000 paid to defendants was a capital distribution, properly accounted for and fully disclosed to plaintiffs. The court finds that addressing the merits of plaintiffs' allegations is inappropriate on a motion to dismiss. (Skillgames, LLC, 1 A.D.3d at 250 [citation omitted] [on dismissal motion, "the court is not authorized to assess the merits of a complaint or any of its factual allegations, but only to determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action"].)
Second, they argue that the unjust enrichment claims must be dismissed because they are duplicative of plaintiffs' implied contract claims. As plaintiffs' implied-in-fact contract claims have been dismissed, this argument is moot, and defendants' motion to dismiss plaintiffs' cause of action for unjust enrichment must be denied.
Documentary Evidence
In its reply, defendants argue that plaintiffs' causes of action numbered 1 through 6 involving loans defendants allegedly took from Attena and Hemera, numbered 7 through 9 relating to defendants' $290,000 "distribution" from Hemera, and cause numbered 11, relating to Hemera's payment of EAP's attorneys' fees, must be dismissed upon documentary evidence, pursuant to CPLR3211 (a) (1). "Arguments raised for the first time in reply are not to be considered." (Bransten v State, 40 Misc.3d 512, 527 [Sup Ct, NY County 2013], affd, 117 A.D.3d 455 [1st Dept 2014] [citations omitted].)
For the foregoing reasons, it is hereby
ORDERED that defendants' motion to dismiss plaintiffs' causes of action numbered 18 through 23 on the ground they are untimely under CPLR 3211 (a) (5) is granted and those causes of action are dismissed; and it is further
ORDERED that defendants' motion to dismiss plaintiffs' causes of action on the ground that they lack legal capacity, under CPLR 3201 (a) (3) is granted to the extent they are plead as individual claims; and it is further
ORDERED that defendants' motion to dismiss plaintiffs' causes of action numbered 1, 4, 7, 10, 11, 14, 16, and 17, for failing to state a cause of action regarding defendants' alleged breach of fiduciary duty is granted, in part, and cause of action number 17 is dismissed; and it is further
ORDERED that defendants' motion to dismiss plaintiffs' causes of action numbered 2, 5, and 8, for failing to state a cause of action regarding defendants' alleged breach of implied contract is granted and cause of action 2, 5 and 8 are dismissed; and it is further
ORDERED that defendants' motion to dismiss plaintiffs' causes of action numbered 3, 6, and 9, for failing to state a cause of action regarding defendants' alleged unjust enrichment is denied; and it is further ORDERED that plaintiffs' claims for conversion, numbered 12 and 13, are withdrawn; and it is further
ORDERED that defendants shall an answer within 20 days of service of this decision and order with notice of entry; and it is further
ORDERED that the parties shall submit a proposed PC order within 30 days of this decision and if they cannot agree to dates for the PC order, then they may submit competing PC orders.