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Seretis v. Fashion Vault Corp.

Supreme Court of New York, First Department

October 22, 2013

Pano Seretis, etc., Plaintiff-Appellant,
Fashion Vault Corp. et al., Defendants-Respondents.

James W. Hyde, IV, Wells, for appellant.

Wachtel Missry LLP, New York (David Yeger of counsel), for respondents.

Gonzalez, P.J., Tom, Saxe, Manzanet-Daniels, Gische, JJ.

Order and judgment (one paper), Supreme Court, New York County (Sue Ann Hoahng, Special Referee), entered August 21, 2012 (as an order) and October 9, 2012 (as a judgment), dismissing plaintiff's claims, unanimously affirmed, without costs.

By the time of trial, the only remaining causes of action were the first, for an accounting; the second, alleging that defendant Frederick Margulies had converted and misappropriated nominal defendant Fashion Vault Corp.'s assets; the third, alleging that Margulies had breached his fiduciary duty to Fashion Vault; and the eighth, alleging that Margulies had breached the shareholders' agreement among plaintiff, Margulies, and Fashion Vault. The order of reference did not specify what the referee was to hear and determine; however, the parties agreed that it was the valuation of Fashion Vault's inventory and shares.

The complaint pleads the second and third causes of action as derivative claims. Furthermore, "allegations of... diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually" (Abrams v Donati, 66 N.Y.2d 951, 953 [1985]).

The first cause of action seeks an accounting on behalf of both Fashion Vault and plaintiff individually. As a shareholder in a close corporation, plaintiff had the right to an accounting (see United Telecard Distrib. Corp. v Nunez, 90 A.D.3d 568, 569 [1st Dept 2011]). At trial Margulies produced the financial records of Fashion Vault and testified under oath regarding the disposition of the corporate assets, which fulfills defendants' obligation to account (see Malone v Sts Peter and Paul's Church Brooklyn, 64 NE 961 [1902]; Schreier v Mascola, 81 A.D.2d 909 [2nd Dept 1981]). Plaintiff's objections to the adequacy of the information provided were considered and rejected by the trial court, finding instead that the corporation's liabilities exceed its assets and that there was nothing to distribute to the shareholders (see e.g. Bartlett v Drew, 57 NY 587, 589 [1874]).

It is also true that plaintiff's eighth cause of action is an individual claim. However, contrary to the allegation of the complaint, Margulies' breach of the shareholders' agreement did not cause Fashion Vault's demise; rather, the corporation had financial problems from the beginning, when plaintiff was still involved in running it. Therefore, the court's error in implicitly classifying this cause of action as derivative is harmless.

We are not persuaded by plaintiff's contention that Margulies failed to meet his burden to come forward with evidence with respect to his disposition of Fashion Vault's assets. In response to plaintiff's evidence that Fashion Vault's inventory had a value of $1, 911, 788.33 at cost as of February 28, 2005, Margulies testified that inventory reports such as the one introduced by plaintiff did not reflect shrinkage, i.e., theft by employees and/or customers. Second, Margulies testified that he returned some inventory to Fashion Vault's vendors after February 28, 2005; his testimony was partially corroborated by a vendor and by documents. Third, Margulies testified that he caused some of Fashion Vault's inventory to be sold and that he used the proceeds from those sales to pay down Fashion Vault's debt to nonparty Valley National Bank; again, his testimony was partially corroborated by documentary evidence.

"[T]he decision of the fact-finding court should not be disturbed upon appeal unless it is obvious that the court's conclusions could not be reached under any fair interpretation of the evidence, especially when the findings of fact rest in large measure on considerations relating to the credibility of witnesses" (Thoreson v Penthouse Intl., 80 N.Y.2d 490, 495 [1992] [internal quotation marks omitted]).

Contrary to plaintiff's claim, the Special Referee's decision satisfies CPLR 4213(b) (see e.g. Marks v Macchiarola, 250 A.D.2d 499 [1st Dept 1998]).

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