Opinion
No. 3005–12.
02-14-2014
Louis MORIZIO, Plaintiff, v. Gregory A. ROEDER, Matthew P. Reiner and Adirondack Research and Management Inc., Defendants.
Lombardi, Walsh, Wakeman, Harrison, Amodeo, & Davenport, P.C., (Richard P. Walsh, Jr. and Paul E. Davenport, of counsel), Albany, Attorneys for Plaintiff. Hacker Murphy, LLP, (James E. Hacker and Thomas J. Higgs, of counsel), Latham, Attorneys for Defendants.
Lombardi, Walsh, Wakeman, Harrison, Amodeo, & Davenport, P.C., (Richard P. Walsh, Jr. and Paul E. Davenport, of counsel), Albany, Attorneys for Plaintiff.
Hacker Murphy, LLP, (James E. Hacker and Thomas J. Higgs, of counsel), Latham, Attorneys for Defendants.
Opinion
RICHARD M. PLATKIN, J.
Plaintiff Louis Morizio, a shareholder and alleged former employee of defendant Adirondack Research and Management, Inc. (“ARMI”), brings this commercial action seeking to recover for breach of contract, fraud, tortious interference with contract, breach of fiduciary duty and unjust enrichment. Plaintiff also alleges a cause of action for the judicial dissolution of ARMI under Business Corporation Law (“BCL”) § 1104–a. Defendants move to dismiss the non-dissolution causes of action alleged in the Amended Verified Complaint (“Complaint”) pursuant to CPLR 3211(a)(1) and (7). Defendants also move separately for an order allowing a late election under BCL § 1118. Plaintiff opposes the motions and cross-moves pursuant to BCL § 1116 for an order allowing him to withdraw his claim for dissolution under BCL § 1104–a if the Court intends to allow a late election.
BACKGROUND
According to the Complaint, ARMI was incorporated in 2005 to serve as an investment advisor to a certain small-cap mutual fund, the Adirondack Small Cap Fund (“Fund”), and to manage individual and institutional accounts. Initially, ARMI issued 30 shares of common stock to defendant Gregory Roeder.
Pursuant to an Agreement dated April 17, 2005 (“Shareholder Agreement”), plaintiff and the two individual defendants agreed to become equal owners of ARMI. Among other things, the Shareholder Agreement allegedly provided that plaintiff's base pay would be computed pursuant to a schedule tied to assets under management.
At the time, plaintiff allegedly controlled substantial financial assets in an advisory firm he owned: The Center For Financial Planning (“TCFP”). Following execution of the Shareholder Agreement, plaintiff arranged for TCFP assets to be managed by ARMI and invested in the Fund. According to plaintiff, TCFP assets initially comprised the bulk of the monies invested in the Fund and managed by ARMI, and such funds were the principal generator of revenues for ARMI during its first three years of operation—the critical period in which a new mutual fund must be in existence in order to be rated by an independent organization. Plaintiff also claims to have conferred additional financial benefits upon ARMI by providing it with discounted office space and facilitating placement of the Fund on Charles Schwab's platform without the payment of the standard fee.
Plaintiff alleges that in April 2006, ARMI obtained sufficient assets to trigger the base pay provisions of the Shareholder Agreement and require the corporation to distribute profits to him. Defendants allegedly refused to pay compensation or distribute profits to plaintiff.
On December 15, 2006, plaintiff allegedly entered into a new Compensation Agreement with ARMI. Under the terms of this agreement, plaintiff was to receive a specified percentage of monies invested in the Fund, one-half of the total fees charged for managing the investment assets of individual clients and twenty percent of the total fees charged for managing institutional accounts. The compensation was to be paid on a monthly basis, and ARMI was required to provide plaintiff a quarterly statement detailing the calculation of his compensation. Plaintiff also was to be provided reasonable access to ARMI's books and records to verify said calculations. Also on December 15, 2006, the parties entered into a Buy–Sell Agreement that, inter alia, provided for the payment of compensation to any shareholder for his equity interest upon the happening of certain events, including a shareholder's termination of employment from ARMI.
In January 2008, plaintiff sold TCFP to Berkshire Bank (“Berkshire”), allegedly intending to transition his employment to ARMI pursuant to the Compensation Agreement. Plaintiff remained in control of TCFP's assets through the end of 2009 pursuant to an employment agreement with Berkshire, and the assets remained invested in the Fund under the management of ARMI. As of January 1, 2010, plaintiff no longer was employed by Berkshire, but was subject to a non-compete agreement that carved out continued employment with ARMI pursuant to the Compensation Agreement.
The Complaint alleges seven causes of action. First, plaintiff alleges that ARMI breached the Compensation Agreement by failing to pay monies owed thereunder. In this connection, plaintiff further alleges that the individual defendants violated their duty of good faith and fair dealing by interfering with plaintiff's performance of said agreement, such as by refusing to accept certain investors obtained by plaintiff into the Fund. The second cause of action seeks an accounting with respect to plaintiff's compensation. Third, plaintiff contends that he was defrauded by the individual defendants. The fourth cause of action, also alleged against the individual defendants, claims breaches of fiduciary duty. Fifth, plaintiff alleges that the individual defendants tortiously induced ARMI to breach its contractual agreements with plaintiff. The sixth cause of action seeks recovery in quantum meruit. Finally, plaintiff sues for dissolution of ARMI under BCL § 1104–a.
Defendants seek dismissal of the Complaint, other than the cause of action for dissolution. With respect to such cause of action, defendants move separately for an order allowing a late election under BCL § 1118. Plaintiff opposes the motions for dismissal and a late election and cross-moves for an order allowing him to withdraw his claim for dissolution under BCL § 1104–a if the Court intends to authorize an untimely election.
MOTION TO DISMISS
The Court begins with defendants' motion pursuant to CPLR 3211(a)(1) and (7), seeking dismissal of the non-dissolution causes of action alleged in the Complaint. Under CPLR 3211(a)(1), dismissal is warranted if documentary evidence conclusively establishes a defense as a matter of law (Haire v. Bonelli, 57 AD3d 1354, 1356 [3d Dept 2008], citing Beal Sav. Bank v. Sommer, 8 NY3d 318, 324 [2007];see Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 [2002];Angelino v. Michael Freedus, D.D.S., P.C., 69 AD3d 1203 [3d Dept 2010] ). On such a motion, “affidavits submitted by a defendant do not constitute documentary evidence upon which a proponent of dismissal can rely” (Crepin v. Fogarty, 59 AD3d 837, 838 [3d Dept 2009] ).
On a motion pursuant to CPLR 3211(a)(7) to dismiss for failure to state a claim, “the Court must afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference” (EBC 1, Inc. v. Goldman, Sachs & Co., 5 NY3d 11, 19 [2005] ). The Court's “sole criterion is whether the pleading states a cause of action” (Polonetsky v. Better Homes Depot, 97 N.Y.2d 46, 54 [2001] [internal quotations omitted] ). However, the Court need not “accept as true legal conclusions or factual allegations that are either inherently incredible or flatly contradicted by documentary evidence” (1455 Washington Ave. Assoc. v. Rose & Kiernan, 260 A.D.2d 770, 771 [3d Dept 1999] [internal citations omitted] ). As with a motion under CPLR 3211(a)(1), the Court must “ignore the affidavits submitted by defendants” (Henbest & Morrisey Inc. v. W .H. Ins. Agency, 259 A.D.2d 829, 830 [3d Dept 1990] ).
A. Breach of Contract
Defendants contend that the cause of action for breach of the Compensation Agreement must be dismissed because the “alleged claim rests upon a non-enforceable contract....” The Compensation Agreement was signed by plaintiff and an individual named Nicholas J. Audi, and defendants assert that Audi “has never been employed by ARMI ... and, therefore, had no legal capacity and/or ability to contract on its behalf.” In support of this argument, defendants rely upon a two-sentence affidavit from Roeder, who avers that “[s]ince the formation of ARMI, no one by the name of Nicholas J. Audi has ever been an employee of ARMI.” In addition, defendants submit certain regulatory filings allegedly establishing that the Fund did not disclose plaintiff as an ARMI employee and that plaintiff did not consider himself an ARMI employee.
The Court concludes that the present record fails to establish as a matter of law that the Compensation Agreement is unenforceable. Plaintiff has properly pleaded a cause of action for breach of contract, and, as stated above, an affidavit is not documentary evidence upon which a proponent of dismissal may rely under CPLR 3211(a)(1). In any event, the mere fact that Nicholas J. Audi never was an “employee” of ARMI does not, standing alone, establish that Audi lacked actual or apparent authority to bind ARMI to the Compensation Agreement. Moreover, the record compiled by defendants does not conclusively foreclose the possibility that ARMI ratified an otherwise unenforceable contract with plaintiff. Finally, the regulatory filings relied upon by defendants fail to conclusively establish the invalidity or unenforceability of the Compensation Agreement. Accordingly, the branch of the motion seeking dismissal of the first cause of action is denied.
B. Accounting
In seeking dismissal of the cause of action for an accounting, defendants first contend that plaintiff has had the opportunity to review ARMI's financial documentation in his capacity as a trustee of the Fund. While this may well be true, it does not negate plaintiff's alleged contractual right of access to ARMI's financial books and record. Defendants also argue that the Complaint fails to demonstrate that plaintiff actually demanded access to ARMI's books and records and that such a demand was denied. However, as defendants concede, the Complaint clearly alleges the denial of numerous demands for access, and defendants have failed to cite any authority establishing that additional specificity must be pleaded. Accordingly, the branch of the motion seeking dismissal of the second cause of action is denied.
C. Fraud
Defendants seek dismissal of the fraud claim for non-compliance with the heightened pleading requirements of CPLR 3016(b) and for failure to state a cause of action. A cause of action for fraud requires plaintiff to allege a misrepresentation or concealment of a material fact, falsity, scienter, justifiable reliance on the deception, and resulting injury (Lusins v. Cohen, 49 AD3d 1015, 1017 [3d Dept 2008] ). The circumstances constituting the fraud must be stated in detail (CPLR 3016[b] ).
Here, the Complaint alleges seven specific instances of fraud on the part of defendants: (1) misrepresenting that plaintiff would be compensated under the Shareholder Agreement; (2) misrepresenting that plaintiff would be compensated under the Compensation Agreement; (3) falsely representing that plaintiff would have access to ARMI's books and records; (4) refusing to accept assets generated by plaintiff; (5) refusing to allow plaintiff to perform his employment functions after the Fund was in operation for three years and received an independent rating; (6) failing to allow plaintiff to perform his employment duties but refusing to comply with the Buy–Sell Agreement; and (7) diluting plaintiff's equity interest in ARMI by improperly issuing shares. The Complaint goes on to allege that defendants never intended to adhere to their representations and, instead, used the misrepresentations to induce plaintiff to place TCFP assets with the Fund during its critical three-year startup period.
As an initial matter, the Court concludes that the latter four instances of fraud (Complaint ¶ 65[D–G] ) must be rejected due to the absence of any allegations of fraudulent misrepresentations or concealment. Even accepting plaintiff's contention that defendants breached their contractual and/or fiduciary obligations to him by refusing to accept assets he generated, interfering with his employment duties, failing to comply with the Buy–Sell Agreement and/or improperly diluting his equity interest in ARMI, the Complaint fails to articulate actionable misrepresentations or concealment of material fact so as to support a viable claim for common-law fraud.
The remaining allegations of fraud center on allegations that defendants misrepresented their intention to perform under the Shareholder Agreement and Compensation Agreement. To establish a fraud claim arising in connection with a contractual relationship, “the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties” (Krantz v. Chateau Stores of Canada, 256 A.D.2d 186, 187 [1st Dept 1998] ; see Cole, Schotz, Meisel, Forman & Leonard, P.A. v. Brown, 109 AD3d 764 [1st Dept 2013] ). In other words, where the alleged misrepresentation concerns a promise of future contractual performance, the representation must concern a matter “sufficiently discrete from that underlying the breach of contract claim” (Kosowsky v. Willard Mtn., Inc., 90 AD3d 1127, 1129 [3d Dept 2011] ).
The first category of fraud alleged in the Complaint (Complaint ¶ 65[A] ) asserts that defendants falsely represented their intention to perform under the Shareholder Agreement. As this allegation pertains directly “to the manner in which defendant agreed to perform under [a contract]” and the alleged misrepresentation concerns “promises to perform in the future pursuant to [the] contract”, it must be rejected as duplicative of a breach of contract claim (Reiser Inc. v. Roberts Real Estate, 292 A.D.2d 726, 727–728 [3d Dept 2002] ).
While plaintiff's second and third categories of fraud (Complaint ¶ 65 [B–C] ) are vulnerable to dismissal on the same basis—since the alleged misrepresentations concern defendants' future performance under the Compensation Agreement—defendants deny the existence of such a contractual relationship. Under the circumstances, the fraud allegations have not been shown to be duplicative.
Finally, while CPLR 3016 requires the circumstances constituting the fraud to be stated in detail, the Court is satisfied that the allegations of the Complaint are set forth in adequate detail to clearly inform defendants of the incidents complained of and suffice to permit a reasonable inference of fraudulent conduct (Paolucci v.. Mauro, 74 AD3d 1517, 1519 [3d Dept 2010] ).
Based on the foregoing, the fraud claim, as limited herein, is not subject to dismissal at this juncture.
D. Breach of Fiduciary Duty
Defendants move for dismissal of the breach of fiduciary duty claim as lacking the requisite specificity. “The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct” (Rut v. Young Adult Inst., Inc., 74 AD3d 776, 777 [2d Dept 2010] ). “A cause of action sounding in breach of fiduciary duty must be pleaded with the particularity required by CPLR 3016(b) ” (Palmetto Partners, L.P. v. AJW Qualified Partners, LLC, 83 AD3d 804, 808 [2d Dept 2011] ).
It is apparent that the breach of duty claim fails to comply with the heightened pleading requirement of CPLR 3016(b). The cause of action rests upon the highly conclusory allegations that “Roeder and Reiner owe to the Plaintiff Morizio a fiduciary duty” and “the acts and conduct set forth [in the Complaint] breached” this duty (Complaint ¶¶ 73–74). While plaintiff purports to incorporate by reference all of the prior allegations in the Complaint, his pleading fails to particularize the facts allegedly giving rise to fiduciary duties and the specific misconduct by defendants that are said to represent a breach of those fiduciary duties. Moreover, in the absence of this particularization, defendants (and the Court) have no basis for assessing the legal sufficiency of the allegations under CPLR 3211(a)(7). Based on the foregoing, the claim for breach of fiduciary duty is dismissed under CPLR 3016(b).
E. Interference With Contract
Defendants challenge the legal sufficiency of the claim for tortious interference with contract. To succeed on such a claim, plaintiff bears the ultimate burden of demonstrating “the existence of a valid contract between [ARMI] and [plaintiff], [the individual defndants'] knowledge of the contract, [their] intentional procurement of [ARMI's] breach of the contract without justification, actual breach of the contract, and damages resulting therefrom” (Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 424 [1996] ).
Even assuming for purposes of this analysis that the Compensation Agreement represents a binding and enforceable contract, the Complaint fails to state a viable claim upon which relief can be granted. As the Appellate Division, Third Department has held, “a claim for tortious interference with contract envision[s] acts by a third party and [the individual defendants, as officers of ARMI] are not third parties unrelated to the contract (Angelino v. Freedus, 69 AD3d 1203, 1204 [3d Dept 2010] [internal citations and quotations omitted] ). Further, the Complaint is devoid of non-conclusory allegations of fact that would support the inference that the individual defendants induced ARMI to breach its alleged contracts with plaintiff in any capacity other than that of officers, directors and/or employees of ARMI. Accordingly, the cause of action for tortious interference is dismissed under CPLR 3211(a)(7).
F. Quantum Meruit
Defendants also challenge the legal sufficiency of the quantum meruit cause of action. To state a cause of action for quantum meruit, “plaintiff must allege (1) the performance of services in good faith, (2) the acceptance of the services by the person to whom they are rendered, (3) an expectation of compensation therefor, and (4) the reasonable value of the services” (Fulbright & Jaworski, LLP v. Carucci, 63 AD3d 487, 488–489 [1st Dept 2009] ). As a fair reading of plaintiff's Complaint establishes the necessary elements of quantum meruit, this branch of the motion to dismiss is denied.
G. Dissolution
As stated above, defendants do not move for dismissal of the cause of action for dissolution, which alleges that Roeder and Reiner have engaged in illegal, fraudulent and oppressive acts directed at plaintiff and have wasted and/or diverted the property and assets of ARMI. Rather, defendants move separately for leave to invoke the buy-out provisions of BCL § 1118, an issue discussed below. However, in connection with the motion to dismiss, defendants argue that the non-dissolution claims necessarily would be subsumed into the BCL § 1118 valuation proceeding if leave for a late election is granted. The Court disagrees.
Defendants have failed to demonstrate that the ordinary contractual obligation of ARMI to pay compensation pursuant to contract—even to shareholder—represents an “adjustment or surcharge” that must necessarily be effectuated in the context of a BCL §§ 1104–a / 1118 proceeding. Nor have defendants shown that a related claim of fraud is subsumed in the valuation proceeding. To be sure, the claims are closely intertwined, since the outstanding liabilities and obligations of ARMI may well bear on the corporation's value, and properly are adjudicated in tandem.
BCL § 1118 ELECTION/WITHDRAWAL OF BCL § 1104–a CLAIM
Defendants move separately for leave to invoke BCL § 1118, which allows the corporation or a majority of its shareholders to respond to a claim for dissolution under BCL § 1104–a by making a binding election to purchase plaintiff's shares at their fair value. Such an election may be made as of right within ninety days after the filing of the dissolution pleading or at such later time as the Court in its discretion may allow (BCL § 1118[a] ). The fair value of the corporation shall be determined as of the day prior to the date on which said pleading was filed (id. [b] ). “The buyout election accommodates the interests of the respective parties in ensuring the continued functioning of the business, while also protecting the financial interest of the shareholders and creditors” (Ferolito v. Vultaggio, 99 AD3d 19, 25–26 [1st Dept 2012] [internal quotation marks omitted] ).
Here, the Complaint was filed and served on or about October 9, 2012. Thus, defendants' attempt to invoke BCL § 1118 falls well outside the statutory period in which an election may be made as of right. In support of their motion, defendants argue principally that allowing a late election would serve the best interests of ARMI while causing no identifiable prejudice to plaintiff. Indeed, defendants asserts that plaintiff has long sought to be bought out from ARMI.
In opposing the motion, plaintiff argues that the motion for late election should be denied because “it is nothing more than an attempt by Defendants to ambush the Plaintiff with their claim that his Compensation Agreement was unenforceable.” Plaintiff complains that defendants seek to deny him both the compensation he believes he earned and his share of the post-commencement appreciation in ARMI. Plaintiff further asserts that defendants deliberately refrained from making an election until after the value of ARMI increased.
Alternatively, plaintiff moves for leave to withdraw his dissolution claim pursuant to to BCL § 1116, which authorizes discontinuance of a “special proceeding for the dissolution of a corporation ... when it is established that the cause for dissolution did not exist or no longer exists.” Upon such a showing, the Court may exercise its discretion to authorize discontinuance of the proceeding “upon terms and conditions, as the court deems proper” (CPLR 3217[b] ; see Matter of Astoria Sports Complex, 5 AD3d 681, 681 [2d Dept 2004] ). A voluntary discontinuance generally is without prejudice (see CPLR 3217[c] ; Wells Fargo Bank, N.A. v. Fisch, 103 AD3d 622 [2d Dept 2013] ; Brenhouse v. Anthony Indus., 156 A.D.2d 411 [2d Dept 1989] ). In addition to the equitable and financial arguments made in opposition to defendants' motion for a late election, plaintiff asserts that his principal objective in suing for dissolution under BCL § 1104–a was to obtain the disclosure of financial information he had been seeking for years from ARMI without success and that objective can be accomplished through fact discovery on his remaining non-dissolution claims.
In the exercise of its discretion, the Court grants defendants' motion for leave to make a late BCL § 1118 election and denies plaintiff's cross-motion for leave to withdraw his BCL § 1104–a claim for dissolution.
Plaintiff has not demonstrated that “the [alleged] cause for dissolution ... no longer exists” (BCL § 1116 ). Even if the BCL § 1104–a cause of action were withdrawn, the parties would remain embroiled in litigation in which plaintiff accuses the corporation and its majority shareholders of a persistent course of wrongful conduct. This concern is underscored by the equivocal nature of plaintiff's cross-motion, which apparently seeks to leave plaintiff free to pursue the dissolution of ARMI if defendants are denied leave to invoke BCL § 1118.
Moreover, the Court finds the equities of the case support allowing the requested late election. Through the execution of the Buy–Sell Agreement, plaintiff expressly contemplated and agreed that a shareholder no longer actively involved in ARMI would divest his equity in the corporation. And even if the value of ARMI has increased substantially since the filing of the Complaint, there has been no showing that any post-filing appreciation is due to plaintiff's ongoing contributions.
Finally, in exercising its discretion to allow the late election, the Court declines to attach any significant weight to the parties' dispute regarding the validity and enforceability of the Compensation Agreement. Plaintiff's potential inability to establish his legal or equitable entitlement to the compensation he sues for herein does not implicate the interests protected by BCL § 1118 in any meaningful respect. And a ruling adverse to plaintiff on his non-dissolution claim for damages may well result in an increased fair value of the corporation.
Conversely, insofar as the Compensation Agreement is valid and enforceable, it was and remains an outstanding liability of ARMI that may diminish its fair value.
CONCLUSION
The Court has considered the parties' remaining arguments and contentions but finds them unavailing or unnecessary to the disposition ordered herein.
ORDERED that defendants' motion to dismiss plaintiff's complaint is granted in part and denied in part in accordance with the foregoing; and it is further
ORDERED that plaintiff's cross-motion to withdraw his cause of action for dissolution under BCL § 1104–a is denied; and it is further
ORDERED that defendants' motion to authorize a late election under BCL § 1118 is granted; and finally it is
ORDERED that prior to the next conference in this case, counsel shall meet-and-confer pursuant to Commercial Division Rule 8 regarding, inter alia, fact discovery, valuation of the corporation and a schedule for further proceedings in this action.
This constitutes the Decision & Order of the Court. This Decision & Order is being transmitted to defendants' counsel for filing and service. The signing of this Decision & Order shall not constitute entry or filing under CPLR Rule 2220, and counsel is not relieved from the applicable provisions of that Rule respecting filing, entry and Notice of Entry.
Papers Considered:
Notice of Motion, dated September 20, 2013;
Affidavit of Thomas J. Higgs, Esq., sworn to September 13, 2013, with attached exhibits A–M;
Affidavit of Gregory A. Roeder, sworn to September 20, 2013;
Defendants' Memorandum of Law, dated September 20, 2013;
Notice of Motion, dated September 20, 2013;
Affidavit of James E. Hacker, Esq., sworn to September 20, 2013, with attached exhibits A–G;
Notice of Cross–Motion, undated;
Plaintiff's Memorandum of Law, undated;
Affidavit of Richard P. Walsh, Esq., sworn to November 14, 2013, with attached exhibits A–C;
Affidavit of Louis Morizio, sworn to November 14, 2013, with attached exhibits A–H;
Affidavit of Thomas J. Higgs, sworn to December 13, 2013, with attached exhibits A–G;
Defendants' Reply Memorandum of Law, dated December 13, 2013.