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Howard Kagan v. Hmc-New York

February 28, 2012


The opinion of the court was delivered by: Catterson, J.

Kagan v HMC-New York, Inc.

Decided on February 28, 2012

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.


Peter Tom, J.P. David B. Saxe James M. Catterson Karla Moskowitz Sallie Manzanet-Daniels, JJ.

Cross appeals from an order of the Supreme Court, New York County (Richard B. Lowe III, J.), entered June 7, 2010, which, insofar as appealed from as limited by the briefs, granted defendants' motion to dismiss plaintiff's claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty and denied the motion seeking dismissal of plaintiff's breach of contract claims against HMC Investors, LLC, HMC-New York, Inc. and Harbinger Holdings, LLC., and an order, same court and Justice, entered September 22, 2010, which, insofar as appealed from, denied plaintiff's motion for leave to renew defendants' motion to dismiss. Lowenstein Sandler PC, New York (David L. Harris of the bar of the State of New Jersey and Commonwealth of Pennsylvania admitted pro hac vice, and Steven M. Hecht of counsel), for appellant-respondent/appellant. Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York (Walter Rieman, Leslie Gordon Fagen and Nathaniel E. Marmon of counsel), for respondents- appellants/respondents. CATTERSON, J.

In this action, we are asked to determine, inter alia, whether the plaintiff's claims for breach of contract can stand against defendant managers whose potential liability is circumscribed by the language of the contract, and whether his claims for breach of fiduciary duty should be reinstated under Delaware law. The plaintiff, Howard Kagan, seeks to recover amounts allegedly owed in connection with his work for an investment firm, HMC-NY, and his equity holding and membership interest in Harbinger Capital Partners GP, LLC (hereinafter referred to as the "Onshore Manager") and Harbinger Capital Partners Offshore Manager, LLC (hereinafter referred to as the "Offshore Manager") (collectively hereinafter referred to as the "Manager Entities" or "Company"). He alleges that defendants, HMC Investors LLC, HMC-New York Inc., and Harbinger Holdings, LLC., as managers of the Manager Entities, violated the controlling agreements of both entities which are governed by Delaware Law.

Specifically, he alleges breach of sections 4.5(d) and 8.7 of both agreements in that the defendant managers failed to properly calculate the amounts due to him in respect of 2007 withheld amounts, and to pay him such amounts within 30 days after his termination without cause, and that they failed to pay him his pro-rated share of the Manager Entities' performance compensation for 2008 by no later than March 31, 2009. Additionally, in respect of his equity holding and membership interest in the Offshore Manager, he alleges breach of section 4.6 of the Offshore agreement by defendants HMC Investors (and/or Harbinger Holdings) for making certain unauthorized deferrals of amounts owed to Offshore Manager.

The plaintiff also alleges breach of the implied covenant of good faith and fair dealing in that the defendant managers, inter alia, willfully refused to pay amounts that they allegedly acknowledged are due and owing to him under the terms of the agreements. Lastly, he alleges a breach of fiduciary duty.

As a threshold matter, it is undisputed that the managers, HMC-NY, HMC Investors, and Harbinger Holdings, are not contractually obligated to the plaintiff with respect to the provisions allegedly breached. In each instance, the provisions specify that the obligation rests with the Company, that is, the Manager Entity. However, the plaintiff asserts that, nevertheless, the defendants are not entitled to dismissal of the breach of contract claims. Instead, relying on Kuroda v. SPJS Holdings L.L.C. (971 A.2d 872 (Del. Ch. 2009)), the plaintiff argues that the "defendants have the authority to control the Manager Entities, and the [a]greements do not explicitly exempt them from liability under the circumstances alleged here."

We disagree. Whatever the extent of their authority and control, the defendants as managers are exempt from liability under the "circumstances alleged here," which are the factual allegations underlying the first and second causes of action in breach of contract.

Section 7.10 ("Limitation of Liability") of the Agreements provides, inter alia: "No Manager or Officer shall have any liability to the Company [the Manager Entities] or any Member or Holder for any loss suffered by the Company or any Member or Holder that arises out of any act or omission by the Manager or Officer, if such Manager or Officer performs its duty in compliance with the standard set forth in the immediately preceding sentence [to act in good faith, as set forth in § 7.9], except loss or damage resulting from intentional misconduct, knowing violation of law, gross negligence or a transaction from which the Manager or Officer received a personal benefit in violation or breach of the provisions of this Agreement" (emphasis added).

Section 7.9 of the Agreements sets forth the "[d]uties of [m]anagers," requiring that they "act in good faith and in the best interest of the Company [the Manager Entities] and with such care as an ordinarily prudent person in a like position would use under similar circumstances."

Kuroda involved a similar type of action by an employee of an investment firm. One of the provisions of the operating agreement purporting to limit liability stated that managers/members will not be held liable for "mistakes, action or inaction [unless they] arise out of . . . gross negligence, willful misconduct or bad faith." Kuroda, 971 A.2d at 882.

The Kuroda court simply found that the defendant managing members "have not argued that they are exculpated from liability under the terms of this section." Kuroda 971 A.2d at 882. This case presents the opposite scenario; the defendant managers argue strenuously that they are exempt from liability under ...

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