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ZACKIVA COMMUNS. CORP. v. HOROWITZ

June 28, 1993

ZACKIVA COMMUNICATIONS CORP.,
v.
COREY M. HOROWITZ and KENNETH HOROWITZ, Defendants.



The opinion of the court was delivered by: KENNETH CONBOY

 KENNETH CONBOY, DISTRICT JUDGE:

 Plaintiff Zackiva Communications Corporation ("Zackiva") brought this action against defendants Corey M. Horowitz ("Corey") and Kenneth Horowitz ("Kenneth") alleging three separate claims: breach of fiduciary duty, fraudulent concealment, and constructive fraud. Upon this motion, the defendants have moved for summary judgment, or, in the alternative, for a dismissal of the complaint on various grounds. For the reasons set forth below, the defendants' motion is granted in part and denied in part.

 Background

 Plaintiff and defendant Kenneth Horowitz were two of nine minority shareholders of Cellular Systems, Inc. (CSI), owning approximately seventeen percent of the stock (hereinafter the "minority shareholders"). See Second Amended Complaint (hereinafter the "Complaint"), para. 7 (Defendants' "Notice of Motion," Exhibit C). The minority shareholders of CSI eventually sold one half of their collective seventeen percent interest in CSI for $ 150,000,000 to Metromedia Company ("Metromedia") on or about August 9, 1990 ("CSI transaction"). Plaintiff's 3(G) Statement, March 4, 1993, at para. 1 (attached to Affidavit of Kenneth Iscol).

 According to the Complaint, during the negotiations leading up to the CSI transaction, the minority shareholders (including plaintiff and Kenneth Horowitz) entered into an agreement to share confidential information, discuss the value of CSI stock, implement a common negotiating strategy to sell the minority shareholders' CSI stock, preserve the minority shareholders' confidences in dealing with Metromedia, and not use the information obtained to improperly further personal interests with Metromedia. See Id. at paras. 16-17. The Complaint alleges that the agreement was "implied in law and fact," and that all nine minority shareholders and their respective financial advisors became part of the agreement. See Id. at para. 17.

 According to the Complaint, Kenneth Horowitz introduced his cousin Corey Horowitz to the other minority shareholders as his financial advisor in the CSI transaction. See Id. at para. 21. The Complaint asserts that, thereafter, Corey Horowitz became financial advisor to other unidentified minority shareholders, and that in this capacity, Corey Horowitz attended meetings and had access to the confidential strategies and positions of plaintiff and the other minority shareholders in connection with the negotiations that led up to the CSI transaction. See Id. at paras. 23-26.

 The Complaint alleges that while the minority shareholders were negotiating the CSI transaction with Metromedia, Kenneth Horowitz was negotiating with Metromedia with respect to compensation for Kenneth and Corey arising out of a different transaction (the "Ponderosa transaction"). See Id. at para. 28. It is this alleged "conflict of interest" which is the subject of the lawsuit. Plaintiff claims that the defendants had a duty to disclose fully and completely their alleged conflict of interest with Metromedia, that the defendants did not fulfill this duty, and that defendants used their confidential relationship with the minority shareholders, including the plaintiff, to exact a financial gain in their dealings with Metromedia on the Ponderosa transaction.

 Plaintiff does not claim that it was damaged by the alleged wrongful conduct, but that the defendants' were unjustly enriched by the exploitation of the alleged confidential relationship between plaintiff and defendants. In this action, plaintiff seeks to disgorge the profit made by the defendants and claims that defendants' alleged wrongful conduct constitutes a breach of fiduciary duty, fraudulent concealment, and constructive fraud.

 Discussion

 A. Sufficiency of Claim for Breach of Fiduciary Duty:

 Defendants maintain that the plaintiff fails to state a claim for breach of fiduciary duty, because plaintiff does not allege that it suffered any damages as a result of defendants' alleged wrongful acts. We disagree. It is well established that to state a claim for breach of fiduciary duty, a plaintiff need not allege damages to itself. Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969) (". . . a corporate fiduciary, who is entrusted with potentially valuable information, may not appropriate that asset for his own use even though, in so doing, he causes no injury to the corporation." 301 N.Y.S.2d at 81). See also ABKCO Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988 (2d Cir. 1983) ("Appellant urges, in essence, that a finding of breach of fiduciary duty by an agent, to be actionable, must be found to have been the proximate cause of injury to the principal. We do not accept appellant's proffered causation standard. An action for breach of fiduciary duty is a prophylactic rule intended to remove all incentive to breach -- not simply to compensate for damages in the event of a breach." Id. at 995). Accordingly, we reject defendants' argument that the claim for breach of fiduciary is deficient because it doesn't allege damages.

 B. Sufficiency of Fraud Claims:

 Defendants maintain that the plaintiff fails to state a claim for fraudulent concealment and constructive fraud because: (1) defendants' alleged failure to disclose Ponderosa was not a "material" omission; (2) there was no reliance on defendants' purported failure to disclose Ponderosa to plaintiff's detriment or injury; (3) plaintiff's reliance was neither ...


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