Opinion
Index No. 651136/2022
08-25-2022
Uniloeb Holdings LLC, Plaintiff, v. Gareb Shamus, Stephen Shamus, Ace Universe, Inc., Ace Universe LLC, Ace Operating LLC (, Defendant and Nominal Defendant), Heromaker Studios, Inc., Heromaker Studios, LLC, Defendant.
PLAINTIFF BY: WHITMAN BREED ABBOTT & MORGAN LLC, DEFENDANTS BY: SPIRO HARRISON, ARENTFOX SCHIFF LLP,
Unpublished Opinion
PLAINTIFF BY: WHITMAN BREED ABBOTT & MORGAN LLC,
DEFENDANTS BY: SPIRO HARRISON, ARENTFOX SCHIFF LLP,
Andrew Borrok, J.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 32, 33, 34, 35, 36, 37, 106, 107, 109, 129, 130, 131 were read on this motion to/for DISMISSAL.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 39, 40, 108, 110, 128 were read on this motion to/for DISMISS.
Gareb Shamus and Stephen Shamus's (collectively, the Individual Defendants) motion to dismiss (Mtn. Seq. No. 002) must be granted solely to the extent of dismissing (i) the cause of action styled as a breach of the faithless servant doctrine (ninth cause of action) because Delaware law does not recognize this as a cause of action and (ii) the breach of contract cause of action for breach of the Operating Agreement against the Individual Defendants (seventh cause of action) because the Individual Defendants are not parties to the Operating Agreement. For the avoidance of doubt, however, disgorgement may proceed as a remedy for the breach of fiduciary duty claims (i.e., breach of the duty of loyalty and care) and breach of the Employment Agreements (hereinafter defined) claims. Dismissal of the other claims at this stage of the litigation is not however appropriate.
The gravamen of the well pled complaint is that the defendants breached their employment agreements (NYSCEF Doc. Nos. 36 and 37) and their duty of loyalty and care by misappropriating assets and a corporate opportunity that belonged to Ace Operating LLC (the Company) - the joint venture entity that owns the business that the defendants allegedly misappropriated to Heromaker (hereinafter defined). Dismissal simply is not appropriate based on the defendants' argument that they factually disagree with UniLoeb (hereinafter defined) as to the scope of the business opportunity that belonged to the Company. It is particularly concerning that assets have been transferred to Ace Universe (hereinafter defined), a company owned by the Individual Defendants, without proper explanation or information. Nor are the Individual Defendants entitled to dismissal based on the fact that they are not parties to the governing documents of the Company. They are alleged to have breached their Employment Agreements and otherwise breached their fiduciary duties to the Company.
Heromaker Studios, Inc. and Heromaker Studios, LLC (Heromaker) were the Individual Defendants' subsequently formed ventures that allegedly engaged in the business that belonged to the Company. Ace Universe Inc. (Ace Universe) is the Individual Defendants' other company and UniLoeb's partner in the Company which without explanation received assets from the Company, merely recording a receivable on the Company's books. Heromaker's motion to dismiss (Mtn. Seq. No. 003) must also be denied because according to the well pled complaint, Heromaker actively participated in the misappropriation of these assets and the Company's business opportunity.
The Relevant Facts and Circumstances
Reference is made to a certain (i) Amended and Restated Operating Agreement (the Operating Agreement; NYSCEF Doc. No. 35) for the Company, dated as of April 10, 2019, by and among UniLoeb Holdings LLC (UniLoeb), Ace Universe, and any Person subsequently admitted as a member of Ace; (ii) two Invention Assignment, Confidentiality, Non-Solicitation, and Non-Compete Agreements, one executed by Gareb Shamus and the Company (the Gareb Employment Agreement; NYSCEF Doc. No. 36) and one executed by Stephen Shamus and the Company (the Stephen Employment Agreement; the Gareb Employment Agreement, together with the Stephen Employment Agreement, hereinafter, collectively, the Employment Agreements; NYSCEF Doc. No. 37), both dated as of ___, 2019, whereby the Individual Defendants agreed, among other things, (x) to protect the Company's confidential information, (y) to refrain from soliciting the Company's present and future customers, licensors, or suppliers, and (z) to refrain from competing with the Company. Stephen Shamus signed the Gareb Employment Agreement on behalf of the Company as President, and Gareb Shamus signed the Stephen Employment Agreement on behalf of the Company as President.
UniLoeb is an investor in and a minority member of the Company. Gareb Shamus is the CEO of the Company and a member of its Board of Managers, and Stephen Shamus is the President of the Company and a member of its Board of Managers (Complaint, ¶ 1 [NYSCEF Doc. No. 1]). The Board of Managers of the Company consists of three people - the Individual Defendants, elected by Ace Universe, and Katharine Loeb, elected by UniLoeb (id., ¶ 25). The Individual Defendants are also the founders of Ace Universe (id., ¶ 1).
UniLoeb alleges that in 2018 Gareb Shamus solicited the principals of non-party Loeb Enterprises II LLC (LEII), an affiliate of UniLoeb, to invest in Ace Universe, a producer of Comic Con events (id., ¶ 2). In 2019, the Company was formed as a joint venture between Ace Universe and LEII (id.). As part of its formation, UniLoeb invested more than $2 million into the Company (id.).
As relevant, the well pled complaint alleges that when the Company was formed, the parties agreed to build a comic-based business building on in-person Comic Con events and expanding to include digital celebrity content, e-commerce, and original superhero programing (id., ¶ 28).
Each of the Individual Defendants signed their own employment agreement and co-signed each other's employment agreement on behalf of the Company. In the Gareb Employment Agreement, Gareb Shamus listed his address under his signature as 100 Jane Street, New York, NY (NYSCEF Doc. No. 36, at 7). The Employment Agreements each contained a non-solicitation provision and a non-compete provision. Pursuant to the non-solicitation provision, the Individual Defendants agreed:
During my employment with the Company and its affiliates and for a period of two (2) years thereafter, I will not request or otherwise attempt to induce or influence, directly or indirectly, any present customer, licensor or supplier, or prospective customer, licensor or supplier, of the Company or other persons sharing a business relationship with the Company to cancel, to limit, divert, reduce or postpone their business with the Company, or otherwise take any action which might be to the disadvantage of the Company (NYSCEF Doc. No. 36-37, ¶ 6).
Pursuant to the non-compete provision, the Individual Defendants agreed:
During my employment with the Company and its affiliates and for a period of two (2) years thereafter, I will not directly or indirectly, for myself, or on behalf of any other person, firm, corporation or other entity (except Ace), whether as principal, agent, debtor, executive, consultant, joint venturer, investor, employee, stockholder, partner, officer, member, manager, director, sole proprietor or in any other capacity, engage in, manage, own, operate, control, participate in the ownership, management, operation or control of or assist in any person or entity, that: (i) offers or produces products or engages in a business that is substantially similar to those products or the Business, or any Future Business; or (ii) offers or produces products or engages in a business that is otherwise directly competitive with the Business or Future Business (id., ¶ 7).
However, notwithstanding this agreement, in 2021, Gareb Shamus formed and began operating Heromaker, a company that UniLoeb alleges (i) operates in the same business as the Company, (ii) has the same business model as the Company, and (iii) leverages the same celebrity relationships as the Company (id., ¶¶ 3, 46).
Gareb Shamus did this while continuing to serve as the CEO and a full-time employee of the Company (id.). He never notified UniLoeb or any of the minority investors in the Company about Heromaker which was set up to explore and realize the very benefits of the business that belonged to UniLoeb - let alone offered it to them and/or obtained their consent to explore this opportunity without them (id.). UniLoeb also alleges that while Gareb Shamus was unlawfully competing with the Company, the Individual Defendants transferred assets from the Company, caused the Company to incur substantial debts, and have refused to provide financial disclosures required by statute and by the Operating Agreement (id., ¶ 4). Put another way, UniLoeb argues that the Individual Defendants and their company Ace Universe set up the Company to raise money and then transferred the Company's business to Heromaker and shut out the investors from the very business that they owned.
For completeness, UniLoeb did not make a demand on the Company to bring the derivative claims against the Individual Defendants or Heromaker because it alleges that such demand would be futile given the Individual Defendants' control of the Company's Board of Managers and given Gareb Shamus's investment in and control of Heromaker. Because the Company is a Delaware limited liability company (NYSCEF Doc. No. 35, § 2.1) and because the Operating Company and the Employment Agreements all contain Delaware choice of law provisions (NYSCEF Doc. No. 35, § 14.11; NYSCEF Doc. Nos. 36 and 37, § 15), Delaware law applies to claims arising from these agreements.
UniLoeb sued by summons and complaint dated March 10, 2022, alleging derivative causes of action on behalf of the Company for (i) breach of fiduciary duty against the Individual Defendants (first cause of action), (ii) aiding and abetting breach of fiduciary duty against Heromaker (second cause of action), (iii) breach of contract against Gareb Shamus for breach of the Gareb Employment Agreement (third cause of action), (iv) usurpation of corporate opportunity against Gareb Shamus (fourth cause of action) (v) unfair competition against Gareb Shamus and Heromaker (fifth cause of action), (vi) breach of contract for breach of the Operating Agreement against the Individual Defendants (seventh cause of action), (vii) unjust enrichment against Gareb Shamus and Heromaker (eighth cause of action), (viii) the faithless servant doctrine against the Individual Defendants (ninth cause of action), (ix) an equitable accounting against Ace Universe and Ace Universe LLC (tenth cause of action), and a direct causes of action for breach of contract against the Company for breach of the Operating Agreement (sixth cause of action).
In the complaint, the cause of action for breach of contract for breach of the Operating Agreement and the cause of action for unjust enrichment were both labelled as the seventh cause of action. This appears to have been a typographical error and the Court refers to the unjust enrichment claim as the eighth cause of action in this Decision and Order.
Discussion
On a motion to dismiss, the Court must afford the pleading a liberal construction and accept the facts as alleged as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory (Leon v Martinez, 84 N.Y.2d 83, 87-88 [1994]).
As an initial matter, the defendants argue that the lawsuit must be dismissed because UniLoeb failed to make a demand on the Board of Managers of the Company. The argument fails. Under Delaware law, demand is excused where it is futile (United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v Zuckerberg, 262 A.3d 1034, 1058 [Del 2021]). The premise being demand must be excused where the Board is not independent either by virtue of its financial interest, or because it is controlled by an interested party or because it would otherwise be called upon to sue itself. In analyzing whether demand is futile, courts consider the following factors on a director-by-director basis to determine: (i) whether the director received a material personal benefit from the alleged misconduct, (ii) whether the director would face a substantial likelihood of liability on any of the claims, and (iii) whether the director lacks independence from someone who received a material personal benefit or would face a substantial likelihood of liability (id.). As discussed above, the Individual Defendants control the Board of Managers and are alleged to have engaged in wrongdoing. As such, demand must be excused.
1. The Cause of Action for Breach of Fiduciary Duty (first cause of action) is not dismissed
To plead a cause of action for breach of fiduciary duty, a plaintiff must allege (i) that a fiduciary duty existed, and (ii) that the defendant breached that duty (McKenna v Singer, 2017 WL 3500241, * 15 [Del Ch Ct 2017]). The Individual Defendants owed fiduciary duties of loyalty and care to the Company as its CEO, President, and as members of its board. As discussed above, the complaint alleges breaches of the duty of loyalty and care based on, among other things, the Individual Defendants' misappropriation of a corporate opportunity. They are simply not entitled to dismissal based on their argument that the scope of the opportunity that belonged to the Company was different and did not include the opportunity that Heromaker is exploiting. This inquiry is simply not resolved at this stage of the proceeding. In addition, even if there is not complete overlap between the two opportunities, given the similarity in business, at a bare minimum, the Individual Defendants had an obligation to present this opportunity to a disinterested board given the obligations set forth in the Employment Agreements. This, as alleged, they did not do. Thus, the claim sounding in breach of duty can not be dismissed.
2. The Cause of Action for Breach of the Contract for Breach of the Operating Agreement (seventh cause of action) is dismissed but the Cause of Action for Breach of Contract for Breach of the Gareb Employment Agreement (third cause of action) is not dismissed
Breach of contract requires (i) a contractual obligation, (ii) a breach of that obligation, and (iii) resulting damage (Humanigen, Inc. v Savant Neglected Diseases, LLC, 238 A.3d 194, 202 [Del Sup Ct 2020]). The Individual Defendants are not parties to the Operating Agreement and have no contractual responsibilities pursuant to the Operating Agreement. As such, the breach of contract claim based on the Operating Agreement (seventh cause of action) must be dismissed.
As to the Gareb Employment Agreement, however, Gareb Shamus is not entitled to dismissal. Pursuant to the terms of the Gareb Employment Agreement, Gareb Shamus agreed not to solicit customers, licensors, or suppliers of the Company to limit, cancel, or divert their business with the Company (NYSCEF Doc. No. 36, ¶ 6). He also agreed not to engage in any business that offers products or engages in business substantially similar to the Company or that otherwise competes with the Company (id., ¶ 7). This is exactly what UniLoeb alleges Gareb Shamus did. To wit, as alleged, Gareb Shamus founded and operated Heromaker to conduct the same business as the Company in direct competition and to take relationships that had been formed with the Company, including with celebrities, and move them to Heromaker. For the avoidance of doubt, Gareb Shamus's argument that the restrictions in his Employment Agreement are overbroad fails. These restrictions are narrowly tailored to address the very situation alleged. Thus, the cause of action for breach of the Employment Agreement (third cause of action) is not dismissed.
3. The Cause of Action for Usurpation or Misappropriation of a Corporate Opportunity (fourth cause of action) is not dismissed
The elements of usurpation or misappropriation of corporate opportunity are (i) an opportunity within the company's line of business, (ii) the company has an interest or expectancy in the opportunity, (iii) the company is able to exploit the opportunity, and (iv) by taking the opportunity for his own, the fiduciary is placed in a position inimical to his duties to the company (McGowan v Ferro, 859 A.2d 1012, 1038 [Del Ch Ct 2004]). As discussed above, UniLoeb alleges that (i) Gareb Shamus intentionally formed and operated Heromaker to divert opportunities away from the Company which belonged to the Company, (ii) Heromaker and the Company have the same business model, and (iii) the opportunities diverted to Heromaker could have been exploited by the Company. This is sufficient.
4. The Cause of Action for Unfair Competition (fifth cause of action) is not dismissed
The Individual Defendants argue that the Court should apply California law and not New York law in analyzing this cause of action because according to the Gareb Shamus, he is domiciled in California and not New York. On the record before the court, the assertion is simply not true. As discussed above, in the Gareb Employment Agreement (which he executed and Stephen Shamus executed on behalf of the Company), Gareb Shamus indicated under his name in the signature line that his address is "100 Jane St 9R, New York, NY 10014" (NYSCEF Doc. No. 36, at 7).
A cause of action for unfair competition requires the plaintiff to demonstrate that the defendant wrongfully diverted the plaintiff's business to itself (McKinnon Doxsee Agency, Inc. v Gallina, 187 A.D.3d 733, 737 [2d Dept 2020]) and that there be either a confidential relationship between the parties or a valid agreement to refrain from unfair competition (V Ponte and Sons, Inc. v American Fibers Intern., 222 A.D.2d 271, 271 [1st Dept 1995]). For the reasons discussed above, dismissal is not appropriate.
5. The Cause of Action Styled as a Breach of the Faithless Servant Doctrine (ninth cause of action) is dismissed as a separate cause of action
Delaware does not recognize a separate cause of action brought under the faithless servant doctrine (Enzo Life Sciences, Inc. v Adipogen Corp., 82 F.Supp.3d 568, 606 [D Del 2015]). However, to the extent the claims sound in breach of fiduciary duty and breach of the employment agreement, dismissal is not appropriate (United Food, 250 A.3d at 891; see Yukos Capital S.A.R.L. v Feldman, 977 F.3d 216, 229 [2d Cir 2020]). For the avoidance of doubt, disgorgement may well be an appropriate remedy.
6. The Cause of Action for Unjust Enrichment (eighth cause of action) may be pled in the alternative at this stage of the litigation
The Individual Defendants' argument that the cause of action for unjust enrichment must be dismissed as duplicative is unavailing. Given the fact that the Individual Defendants dispute the scope of opportunity that belonged to the Company, under Delaware law, unjust enrichment may be pled in the alternative (Breakaway Solution, Inc. v Morgan Stanley & Co. Inc., 2004 WL 1949300, * 14 [Del Ch Ct 2004]).
7. The Cause of Action for Aiding and Abetting Breach of Fiduciary Duty (second cause of action) is not properly dismissed
The elements of aiding and abetting breach of fiduciary duty are (i) an underlying breach of fiduciary duty, (ii) that the defendant knowingly induced or participated in the breach, and (iii) that the plaintiff suffered damages (Schroeder v Pinterest Inc., 133 A.D.3d 12, 25 [1st Dept 2015]). As discussed above, UniLoeb alleges that Heromaker was formed for the purpose of assisting Gareb Shamus in breaching his fiduciary duties to the Company by using the Company's celebrity relationships, intellectual property, and business model to compete with the Company and divert its resources and opportunities. Thus, dismissal is simply not appropriate.
It is hereby ORDERED that the Individual Defendants' motion to dismiss is granted solely to the extent of dismissing (i) the faithless servant cause of action (ninth cause of action) and (ii) the breach of the Operating Agreement against the Individual Defendants cause of action (seventh cause of action); and it is further
ORDERED that Heromaker's motion to dismiss is denied in its entirety.