Rosenberg & Estis, PC, New York (Norman Flitt of counsel), for appellant-respondent and respondent.
The Law Firm of Gary N. Weintraub, LLP, Huntington (Gary N. Weintraub of counsel), for respondent-appellant.
Tom, J.P., Friedman, Renwick, Feinman, Clark, JJ.
Order, Supreme Court, New York County (Joan M. Kenney, J.), entered January 25, 2013, which, insofar as appealed from, granted defendants' motion for summary judgment dismissing the complaint as against defendant Jonathan Pokoik and denied the motion as against defendant Gary Pokoik, and denied plaintiff's cross motion for summary judgment on his first cause of action alleging breach of fiduciary duty and for dismissal of defendants' affirmative defenses, unanimously modified, on the law, to grant defendants' motion as to the fifth cause of action alleging breach of contract as against Gary, and to grant the cross motion to the extent of dismissing all of defendants' affirmative defenses and granting plaintiff summary judgment on his first cause of action as against Gary, and otherwise affirmed, without costs.
As the proponent of the motion for summary judgment, Gary is required to demonstrate that there are no material issues of fact in dispute and that he is entitled to judgment and dismissal as a matter of law (Winegrad v New York Univ. Med. Ctr., 64 N.Y.2d 851, 853 ; Ostrov v Rozbruch, 91 A.D.3d 147, 152 [1st Dept 2012]). Only when this burden is met, is the opposing party required to submit proof in admissible form sufficient to create a question of fact requiring a trial (Kosson v Algaze, 84 N.Y.2d 1019 ). Gary contends that, based on Limited Liability Company Law 409, he is entitled to summary judgment on the portion of the first cause of action that alleged breach of fiduciary duty with respect to the properties located at 77th Street and 82nd Street (the ones owned by the LLCs) because he reduced plaintiff's capital accounts in good faith, relying on the advice of non party accounting firm Eisner & Lubin. As to the remaining portion of the first cause of action alleging breach of fiduciary duty with respect to the 83rd Street property, which is owned by tenants-in-common, he claims entitlement to summary judgment based on the business judgment rule.
As the managing member of the LLCs, Gary owed plaintiff - a non managing member - a fiduciary duty (see Salm v Feldstein, 20 A.D.3d 469, 470 [2d Dept 2005]; see also Tzolis v Wolff, 39 A.D.3d 138, 146 [1st Dept 2007], affd 10 N.Y.3d 100 ). "[I]t is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and inflexible rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty" (Birnbaum v Birnbaum, 73 N.Y.2d 461, 466  [internal quotation marks and citations omitted]).
Reliance on outside professionals under Limited Liability Company Law § 409(b)(2) must be in good faith (see Limited Liability Company Law § 409[a]; Stephens v National Distillers & Chem. Corp., 1996 WL 271789, *6, 1996 U.S. Dist LEXIS 6915, *19 [SD NY 1996]). As described here, Gary does not meet his initial burden of showing that he acted in good faith and undivided loyalty to plaintiff so as to rely on Limited Liability Company Law § 409 or the business judgment rule.
To establish a breach of fiduciary duty, the movant must prove the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party's misconduct (see Kurtzman v Bergstol, 40 A.D.3d 588, 590 [2d Dept 2007]). In 2006, to settle a dispute, Gary and plaintiff, both represented by counsel, agreed in writing that upon plaintiff's payment of more than $2.2 million and attorney's fees to four properties in which he and Gary, along with others, had a financial interest, any "discrepancy" between payments recorded in the properties' books and their bank statements would be "written off by the [four properties]." The parties knew that the amounts to be paid by plaintiff were less than the full amounts originally at issue. Plaintiff timely made all payments. However Gary, the managing member, contends the accountant informed him that under the tax law, the properties would have to account for the "written-off funds, " amounting to about $750, 000. Gary followed the accountant's instructions to place the entire burden on plaintiff, reasoning that the "discrepancy" had likely been due to plaintiff's previous actions.
Neither the LLCs' operating agreements nor the 2006 settlement agreement provide any authority to unilaterally reduce plaintiff's accounts. Further, Gary makes no showing that he informed plaintiff of the accountant's recommendation or notified him that his capital accounts, and no one else's, were depleted in order to address the tax situation.
At a later date, and without notice, Gary discontinued making distributions to plaintiff. Gary contends that plaintiff was not singled out for harmful treatment because the operating agreements for the LLCs require distributions to be made in proportion to a member's capital account, and all members' distributions were made that way. However, as the motion court noted, plaintiff was the only member who had his capital account written down.
Gary had an interest in reducing plaintiff's capital accounts, as opposed to charging certain amounts to the LLCs, because the latter course of action would ultimately have had a negative financial impact on Gary. These failures to make truthful and complete disclosures (Limited Liability Company Law § 409), and Gary's conflict in choosing to burden only plaintiff and not all the LLCs members, including himself, does not show "undivided and undiluted loyalty" (Birnbaum v Birnbaum, 73 N.Y.2d at 466; see also Limited Liability Company Law § 409).
Gary also fails to show that he is entitled to summary judgment dismissing so much of the first cause of action alleging breach of fiduciary duty with respect to the 83rd Street property, which is owned by tenants-in-common, based on the business judgment rule. He cites no cases applying that rule to a tenancy-in-common. Even if, arguendo, the business judgment rule could be applied to a tenancy-in-common, it "does not protect... corporate fiduciaries when they make decisions affected by inherent conflict of interest" (Wolf v Rand, 258 A.D.2d 401, 404 [1st Dept 1999]). In addition, "[t]he business judgment rule... permits review of improper decisions, as when the challenger demonstrates that the board's action * * * deliberately singles out individuals for harmful treatment" (Barbour v Knecht, 296 A.D.2d 218, 224 [1st Dept 2002] [internal quotation marks omitted]). In sum, Gary's motion was properly denied as to the first cause of action.
However, Gary should have been granted summary judgment dismissing the fifth cause of action, which alleged breach of contract with respect to the 83rd Street property, because plaintiff failed to prove that there was a contract for that property (see Allied Sheet Metal Works v Kerby Saunders, Inc., 206 A.D.2d 166, 172-173 [1st Dept 1994]). We note that plaintiff can still seek his distributions for the 83rd Street property under the first cause of action.
Turning to plaintiff's cross motion, the motion court should have granted summary judgment dismissing the seven affirmative defenses. The first defense relies on the provision in the LLC operating agreements governing distributions. However, plaintiff establishes that he continued to receive distributions for about three years after his accounts were emptied. Gary's lack of good faith is revealed when he does not explain why the terms of the operating agreement were ...