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Grgurev v. Licul

United States District Court, S.D. New York

January 26, 2017

FERDO GRGUREV and OMER GRGUREV, individually and derivatively, Plaintiffs,


          GREGORY H. WOODS United States District Judge.

         Plaintiffs Omer and Ferdo Grgurev and Defendants Milan Licul and Branko Turcinovic are experienced restaurateurs who have owned and operated restaurants together for many years. Unfortunately, the relationship between them has now gone to pot, devolving into this acrid stew which, after long simmering, has now come to a boil. The amended complaint asserts a smorgasbord of fourteen derivative and direct claims ranging from trademark infringement to tortious interference. Defendants have asserted five counterclaims, including a petition for dissolution of one of the corporations that they co-own with Plaintiffs. In addition, all parties have informed the Court of their intention to bring cross-motions for sanctions, and Plaintiffs have recently moved for a preliminary injunction barring Defendants from making any repairs, renovations, or improvements to one of their jointly owned restaurants while this action is pending. Now before the Court, however, is Defendants' motion to realign the parties and to dismiss twelve of Plaintiffs' claims. For the reasons that follow, Defendants' motion to dismiss is GRANTED IN PART and DENIED IN PART.

         I. BACKGROUND[1]

         A. The Relationship Between the Parties

         Plaintiffs Omer and Ferdo Grgurev and Defendants Milan Licul and Branko Turcinovic (the “Co-Owner Defendants, ” and collectively with Plaintiffs, the “Co-Owner Parties”) are equal co-owners of Nominal Defendants Ocinomled Ltd. (“Ocinomled”) and 50/50 Restaurant Corporation (“50/50”). ECF No. 26, Am. Compl. (“AC”), ¶¶ 16-19. Because they each hold a 25% ownership stake, the Plaintiffs together and the Co-Owner Defendants together each represent half of the voting power of each these entities.

         The Co-Owner Parties formed Ocinomled “in or around 1998” for the purpose of purchasing Delmonico's, a restaurant located at 56 Beaver Street in Manhattan.[2] AC ¶ 16. Ocinomled is a closely held corporation and does not have a governing operating agreement or shareholders' agreement. AC ¶ 18, 97.

         Prior to forming Ocinomled, the Co-Owner Parties had partnered together for many years in the operation of other restaurants, including Scaletta. AC ¶ 19. Scaletta is located at 50 West 77th Street in Manhattan and is operated through Nominal Defendant 50/50. Id. The Co-Owner Defendants have owned other restaurants separate and apart from those that they own with Plaintiffs, including Murano and Arno, the latter of which they own and operate through Balarini Restaurant Corporation. AC ¶ 20.

         According to the amended complaint, Defendant Milan Licul was, “at all relevant times, ” responsible for maintaining the financial books and records of both Delmonico's (through Ocinomled) and Scaletta (through 50/50). AC ¶ 21, 122. Licul engaged the same accountant to maintain the books for both restaurants. AC ¶ 123. Licul was also the president of 50/50. AC ¶ 193.

         B. Delmonico's and the DELMONICO'S Marks

         Delmonico's has been described by the New York Times as “possibly the most famous name in American restaurant history.” AC ¶ 27, Ex. A. “In operating and promoting its restaurant, Ocinomled maintains the classic and upscale ambience for which Delmonico's is famous, and its menu includes classic Delmonico's dishes, such as Lobster Newburg, Oysters Rockefeller, Baked Alaska, Eggs Benedict, Chicken a la Keene and, of course, Delmonico's Steak.” AC ¶ 23. According to Plaintiffs, the “high-end reputation of the restaurant is inextricably tied to the DELMONICO'S name.” Id. Plaintiffs allege that Delmonico's “has been extremely profitable for the last fifteen years” and has averaged annual net revenues of at least $5 million for the past several years. AC ¶¶ 29-30.

         In acquiring the Delmonico's restaurant, Ocinomled also acquired the right to use the “Delmonico's” name, as well as “all other rights” to that name held by the seller, CIBE Beaver LLC. AC ¶ 17. In 2004, Ocinomled filed an application with the U.S. Patent and Trademark Office (the “USPTO”) for registration of the DELMONICO'S service mark in Class 43 for Restaurant Services (the “Restaurant Mark”). AC ¶ 24. That application is assigned U.S. Serial Number 76577253. Id. In 2007, Ocinomled filed an application with the USPTO for registration of the DELMONICO'S trademark and service marks for various products and services covered by Classes 8, 16, 18, 21, 25, 29, 30, 34, and 41, including cutlery, cookbooks, bags and briefcases, dinnerware, clothing, prepared foods, salad dressings and sauces, cigars and cigar accessories, and entertainment services (the “Product Mark, ” and collectively with the Restaurant Mark, the “Marks”). AC ¶ 25. That application is assigned U.S. Serial Number 77301695. Id.

         Both of Ocinomled's registration applications are “suspended in accordance with USPTO procedure pending resolution of a concurrent use registration application made by an unrelated party in connection with its operation of an unrelated restaurant using the Delmonico's name in or around Albany, New York.” AC ¶ 26.

         Plaintiffs alleges that the Marks “are famous and are an iconic symbol of a fine dining steakhouse.” AC ¶ 27. They also allege that the Marks “invoke the goodwill associated with the historical roots of the Delmonico's restaurant.” Id.

         C. The Operation of Delmonico's and Scaletta

         After the Co-Owner Parties purchased Delmonico's through Ocinomled, they closed the restaurant for refurbishment and reopened it in mid-May 1998.[3] AC ¶ 22. They “jointly decided that none of them would be directly involved in the day-to-day operations of the restaurant.” AC ¶ 31. The Co-Owner Defendants devoted their time to managing their other restaurants, Murano and Arno, while Plaintiffs continued managing the day-to-day operations of Scaletta. Id.

         The Co-Owner Defendants appointed Defendant Dennis Turcinovic―Defendant Branko Turcinovic's son―as one of two co-managers of Delmonico's. AC ¶ 32. As co-manager, he had regular access to the cash received during the course of Delmonico's daily operations. AC ¶ 103.

         Defendant Milan Licul “conducts the bookkeeping” for Delmonico's and “maintains the financial books and records of Delmonico's at the offices of Arno, ” the restaurant jointly owned by the Co-Owner Defendants. AC ¶ 33. Plaintiffs allege that Defendants Milan Licul and Dennis Turcinovic “were and are responsible for collecting all cash receipts from Delmonico's restaurant.” AC ¶ 34.

         Defendant Milan Licul also is responsible for maintaining the books and records for the other restaurants jointly owned by the Co-Owner Parties, including Scaletta. AC ¶ 96.

         The Co-Owner parties received regular salaries from Ocinomled, which “were determined by Defendant Milan [Licul] and paid out through the company's payroll.” AC ¶ 35. Initially, Plaintiffs were paid $500 per week, but their salaries were subsequently raised to $1, 500 per week. AC ¶ 36. Defendant Branko Turcinovic was also paid $1, 500 per week, while Defendant Milan Licul paid himself $2, 000 per week. Id.

         D. Defendants' Alleged Unauthorized Exploitation of the Marks

         Plaintiffs allege that, based on the success of Delmonico's restaurant, the Co-Owner Defendants “saw an opportunity to capitalize on the DELMONICO'S marks.” AC ¶ 39. “[R]ather than expanding the brand for the benefit of Ocinomled, ” however, the Co-Owner Defendants “elected to pursue opportunities for their own benefit, to the detriment of Ocinomled” by using the Marks in connection with various sauces and other restaurants. AC ¶ 40; id. ¶¶ 40-90.

         1. The Sauces and Delmonico's Distribution LLC

         According to the amended complaint, the Co-Owner Defendants “undertook to manufacture, distribute and sell products under the DELMONICO'S Product Mark, including Delmonico's steak sauce . . . as well as other sauces, salad dressings and marinades.” AC ¶ 41. The Co-Owner Defendants presented Plaintiffs with the idea of developing and marketing a steak sauce under the DELMONICO'S Product Mark. AC ¶ 42. Based upon a representation that royalties would be paid to Ocinomled for that use of the Product Mark, Plaintiffs did not object to the idea. AC ¶¶ 43-44. Thereafter, the Co-Owner Defendants began manufacturing, distributing, and selling steak sauce under the DELMONICO'S Product Mark, but Ocinomled has not received any royalties or other compensation. AC ¶ 44-45.

         In addition to the use of the Product Mark in connection with the steak sauce, Plaintiffs allege that the Co-Owner Defendants “unilaterally decided to use the DELMONICO'S Product Mark for pasta sauces, salad dressings and marinades.” AC ¶ 47. They did not inform Plaintiffs of their plan to do so, nor did they obtain a license or consent from Ocinomled for the use of the Product Mark in connection with those products. AC ¶ 48-49.

         The Co-Owner Defendants formed Defendant Delmonico's Distribution LLC (“Delmonico's Distribution”) for the purpose of manufacturing, distributing, and selling these sauces, and Plaintiffs allege that Delmonico's Distribution “is currently selling these products nationwide online and in stores” at the direction of the Co-Owner Defendants. AC ¶¶ 51-52. Neither Delmonico's Distribution nor the Co-Owner Defendants have reported their earnings from the manufacture, distribution, and sale of these products to Ocinomled or to Plaintiffs. AC ¶ 53. They also have not paid any license fees or royalties. AC ¶ 54.

         2. The Unauthorized Restaurants: Delmonico's Kitchen and Delmonico's of Southampton

         According to the amended complaint, the Co-Owner Defendants also used the DELMONICO'S name on other restaurants, including Delmonico's Kitchen and Delmonico's of Southampton, which are owned by corporations that the Co-Owner Defendants alone own and control. AC ¶ 59-90. Neither Plaintiffs nor Nominal Defendants Ocinomled and 50/50 have any ownership stake in or affiliation with either of these restaurants. AC ¶¶ 62, 77.

         Through Defendant Five “M” Corporation (“Five M”), an entity which they own and control, the Co-Owner Defendants converted Murano into Delmonico's Kitchen, which is located at 207 West 36th Street in Manhattan. AC ¶¶ 60-61. The website of Delmonico's Kitchen states that “Delmonico's, the country's first fine dining restaurant, has expanded its premier location at 56 Beaver Street to Midtown Manhattan” and references 1837―the year in which the original Delmonico's restaurant is believed to have opened. AC ¶ 69 & Ex. B. Neither the Co-Owner Defendants nor Five M obtained permission from Plaintiffs to use the DELMONICO'S name in connection with that restaurant, nor did they obtain a license or other form of consent from Ocinomled. AC ¶ 64. As with the Product Mark, Plaintiffs allege that neither the Co-Owner Defendants nor Five M have reported the revenues earned from Delmonico's Kitchen to Ocinomled, and they have not paid any licensing fees or royalties to Ocinomled for their use of the Restaurant Mark. AC ¶ 65-66.

         Plaintiffs allege that the use of the Restaurant Mark in connection with Delmonico's Kitchen has caused customers to confuse that restaurant with Ocinomled's restaurant, as evidenced by “several consumer reviews on public websites such as Yelp” that “reflect that consumers believe that Delmonico's Kitchen is affiliated with Ocinomled's famous Delmonico's restaurant.” AC ¶ 71.

         Through 268 SH Restaurant Corporation (“SH”), another entity that they own and control, the Co-Owner Defendants opened a restaurant by the name of Delmonico's of Southampton in 2013. AC ¶ 75. As with Delmonico's Kitchen, the amended complaint alleges that neither the Co-Owner Defendants nor SH received permission from Plaintiffs or Ocinomled to use the DELMONICO'S name in connection with Delmonico's of Southampton, nor did they obtain a license or other form of consent for that use of the Restaurant Mark. AC ¶ 79. Neither Plaintiffs nor Ocinomled have received any report of the revenues earned from Delmonico's of Southampton, and no license fees or royalties have been paid to Ocinomled for the use of the Restaurant Mark in connection with Delmonico's of Southampton. AC ¶ 80-81.

         According to the amended complaint, the Co-Owner Defendants and SH “encouraged customer confusion by mischaracterizing Delmonico's of Southampton as an ‘offshoot' of the Delmonico's flagship New York City location, promoting the false assumption of a connection between Ocinomled's restaurant and [Delmonico's of Southampton].”[4] AC ¶ 83. Several customers have “confused Delmonico's of Southampton as being affiliated with Ocinomled's restaurant.” AC ¶ 85. For example, “several publicly available reviews reflect that consumers believed that Delmonico's of Southampton was another location of Ocinomled's famous Delmonico's restaurant.” Id.

         3. The Cease-and-Desist Letter and the Co-Owner Defendants' Response

         On November 12, 2013, Plaintiffs, through counsel, served a cease-and-desist letter upon the Co-Owner Defendants. AC ¶ 91 & Ex. C. The letter advised the Co-Owner Defendants that their use of the DELMONICO'S Restaurant Mark in connection with Delmonico's Kitchen and Delmonico's of Southampton was improper and unauthorized and, because it was a usurpation of the name for their own benefit, it was a breach of their “fiduciary obligation as shareholders of Ocinomled Ltd.” AC ¶ 91 & Ex. C, at 1. The letter also demanded that the Co-Owner Defendants immediately cease their use of the name in connection with the “unaffiliated restaurants.” AC, ¶ 92 & Ex. C, at 2.[5]

         Despite receiving this letter, the Co-Owner Defendants and Defendants Five M and SH “continued to willfully use the DELMONICO'S name without authorization in connection with their unaffiliated restaurants.” AC ¶ 93. Plaintiffs allege that Defendants' continued “misuse of the Restaurant Mark caused substantial damage to Ocinomled.” AC ¶ 94.

         E. Other Alleged Wrongful Conduct

         1. Alleged Misappropriation of Funds

         Plaintiffs also allege that Defendants “misappropriated funds and resources that rightfully belonged to Ocinomled and the Plaintiffs.” AC ¶ 95. Specifically, they allege that the Co-Owner Defendants and Defendant SH have “used funds received at Delmonico's―which belonged to Ocinomled―to purchase the building that housed Delmonico's of Southampton, through another entity controlled by Defendant Milan [Licul], Defendant [268] SH Realty [Corporation (“SH Realty”)], and to establish that restaurant.” AC ¶ 99. They also allege that the Co-Owner Defendants and SH “may have” put up Ocinomled's Delmonico's restaurant as collateral, without authorization, for the loan they took to develop Delmonico's of Southampton. AC ¶ 100.

         Similarly, Plaintiffs allege that the Co-Owner Defendants and Defendant Five M used Delmonico's funds to “refurbish and reinvent Murano restaurant into Delmonico's Kitchen.” AC ¶ 101. This project cost “approximately $600, 000, at least a portion of which was paid for with Ocinomled's funds.” Id. The Co-Owner Defendants also “repeatedly used Delmonico's chefs and waiters at Delmonico's of Southampton and Delmonico's Kitchen but, upon information and belief, paid these employees from Ocinomled's payroll, despite Ocinomled having no interest in these other two restaurants.” AC ¶ 108.

         Plaintiffs further allege that the Co-Owner Defendants and Defendant Delmonico's Distribution used Ocinomled's funds to finance the creation, marketing, and distribution of the various sauces, salad dressings, and marinades described above. AC ¶ 102.

         According to the amended complaint, Defendant Milan Licul manipulated Ocinomled's general ledger to conceal Delmonico's actual cash receipts “in order to aid the transfer of cash receipts to Five M, SH Realty, SH Restaurant, Delmonico's Distribution, and Balarini Restaurant Corp., all to be applied to infringing products and restaurants.” AC ¶ 105.

         Defendant Dennis Turcinovic “provided a portion of that cash to Defendant Milan [Licul] to be used for these improper purposes, ” and Defendant Branko Turcinovic “was aware of this regular ‘siphoning' of cash to Defendant Milan [Licul], and assisted in those improper transactions.” AC ¶ 103-104.

         2. 2015 Salary Changes

         In April 2015―the same time period during which the Co-Owner Defendants were allegedly siphoning funds from Ocinomled to benefit their other ventures―they also “unilaterally elected to cut off Plaintiffs['] . . . compensation, without explanation.” AC ¶ 37, 106. At the same time, Plaintiffs allege, Defendant Milan Licul doubled Defendant Branko Turcinovic's compensation to $3, 000 per week and increased his own compensation to $3, 500 per week. AC ¶ 38.

         3. Alleged Misuse of FEMA Funds

         Ocinomled's Delmonico's restaurant sustained approximately $3 million of flooding damage from Hurricane Sandy in 2012. AC ¶ 112-113. The Co-Owner parties jointly decided to file a claim with the Federal Emergency Management Agency (“FEMA”) for those losses. AC ¶ 114. Approximately two years later, Plaintiffs requested information concerning the status of the FEMA claim, and Defendant Milan Licul informed them that no money had ever been paid on the claim. AC ¶ 115. “Upon further inquiry, however, Plaintiffs learned from Ocinomled's accountant that this statement by Defendant Milan [Licul] was false, and that FEMA had in fact paid some funds” to Ocinomled. AC ¶ 116. Accordingly, Plaintiffs allege that Defendant Milan Licul “misappropriated the FEMA funds that had been paid to Ocinomled and used them for his own benefit and for the benefit of Defendants SH Restaurant, SH Realty and Five M.” AC ¶ 117.

         4. Alleged Interference with the Renewal of Scaletta's Lease

         According to the amended complaint, Defendant Milan Licul's “misconduct was not just limited to Delmonico's.” AC ¶ 119. Since 50/50 opened Scaletta in 1988, it has operated in a leased space on the Upper West Side of Manhattan. AC ¶ 124. As of the time the amended complaint was filed on February 22, 2016, the Scaletta lease was set to expire at the end of March 2016. AC ¶ 125. Plaintiffs allege that Defendant Milan Licul, on behalf of 50/50, “unilaterally took control of negotiations with the landlord to renew the current lease” and “notified Plaintiffs . . . that he . . . was the only person with authority to negotiate a new lease for the restaurant.” AC ¶ 126. As of the date the amended complaint was filed, 50/50 had been unable to reach terms on a renewal of the lease with the landlord. AC ¶ 127.

         Plaintiffs allege that Mr. Licul is “acting solely out of malice” by “intentionally stalling negotiations and purposely refusing to reach terms on 50/50's lease renewal” “in order to punish [Plaintiffs] for disputing [his] misconduct with respect to Ocinomled, and to pressure [Plaintiffs] not to assert claims with regard to his other wrongdoing.” AC ¶¶ 128-130. This conduct, Plaintiffs allege, is “risking the future of Scaletta restaurant.” AC ¶ 131.

         F. Demand Futility Allegations[6]

         Plaintiffs have made no demand on Ocinomled aside from the letter demanding that the Co-Owner Defendants cease and desist from using the DELMONICO'S Marks in connection with their unaffiliated restaurants. AC ¶ 132-134. Instead, Plaintiffs allege that a litigation demand would be futile for several reasons: First, the Co-Owner Defendants “were and are the primary actors behind all of the wrongful conduct” alleged in the amended complaint “and face a substantial likelihood of being held liable for . . . breaching their fiduciary duties . ., and are therefore incapable of disinterestedly considering a demand to vigorously prosecute this action against themselves.” AC ¶ 134(a). Second, as 50% shareholders in the Nominal Defendants, the Co-Owner Defendants could “prevent any action taken on behalf of the Nominal Defendants to remedy the actions taken against it.” AC ¶ 134(b). Third, “[t]he actions taken by Defendants are so egregious on their face that they could not have been the product of sound business judgment.” AC ¶ 134(d).

         G. Procedural History

         Plaintiffs initiated this lawsuit on December 16, 2015. In the original complaint, the Grgurevs joined Ocinomled and 50/50 as plaintiffs. ECF No. 1, Compl., at 1. They brought federal trademark claims as well as various state law claims. Compl. ¶¶ 132-191. On February 5, 2016, Defendants answered the complaint and asserted counterclaims for breach of the duties of care and loyalty owed to 50/50, conversion, and unjust enrichment. ECF No. 18. Defendants also petitioned for dissolution of 50/50. Id.

         On February 29, 2016, Plaintiffs amended their complaint to replead certain of their claims as derivative and to rename Ocinomled and 50/50 as nominal defendants. ECF No. 26, AC. The amended complaint asserts ten derivative claims and four direct claims, including claims for federal trademark infringement and dilution, as well as state law claims for breach of fiduciary duty, breach of the duty of loyalty, conversion, unjust enrichment, deceptive trade practices, and tortious interference with business relationship. AC ¶¶ 137-220. Plaintiffs also assert an equitable claim for an accounting. AC ¶¶ 170-174. As relief, Plaintiffs seek a permanent injunction barring Defendants from using the Marks in connection with the unauthorized restaurants and products, as well as compensatory and punitive damages. AC at 33-34.[7]

         On March 29, 2016, Defendants moved to dismiss twelve of the fourteen claims asserted in the amended complaint. ECF No. 38, Mot. to Dismiss; ECF No. 40, Mem. of Law in Supp. of Mot. to Dismiss (“Defs.' Mem.); ECF No. 39, Decl. of Alan C. Trachtman (“Trachtman Decl.”). The only claims they do not move to dismiss are the federal claims for false designation of origin pursuant to 15 U.S.C. § 1125(a) and trademark dilution pursuant to 15 U.S.C. § 1125(c). See Defs.' Mem. In addition, Defendants request in their motion that the Court re-align the parties to recast the Nominal Defendants as plaintiffs. Defs.' Mem. at 2-3. Plaintiffs filed an opposition brief on April 22, 2016. ECF No. 45, Mem. of Law in Opp'n to Mot. to Dismiss (“Pls.' Mem.”); ECF No. 46, Decl. of Jamie M. Brickell (“Brickell Decl.”). ...

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