| Roni LLC v Arfa |
| 2010 NY Slip Op 04700 [74 AD3d 442] |
| June 3, 2010 |
| Appellate Division, First Department |
| Roni LLC et al., Respondents, v Rachel L. Arfa et al.,Appellants, and Edward Lukashok, Respondent, et al., Defendants. |
—[*1] Balber Pickard Maldonado & Van Der Tuin, P.C., New York (John T. Van Der Tuin ofcounsel), for plaintiffs-respondents. Bellin & Associates LLC, White Plains (Aytan Y. Bellin of counsel), for Edward Lukashok,respondent.
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered April 17, 2009,which, insofar as appealed from as limited by the briefs, denied the motion of defendants RachelL. Arfa, Alexander Shpigel and American Elite Properties, Inc. (the promoter defendants) todismiss plaintiffs' accounting, breach of fiduciary duty, and constructive fraud causes of action,unanimously affirmed, with costs.
This action arises from a series of business transactions in which investors acquiredmembership interests in limited liability companies (LLCs) that purchased and managedmultifamily residential buildings in Harlem and the Bronx. The promoter defendants, directly orthrough their wholly owned companies, located the properties, arranged financing, organized theLLCs, solicited the investors, and managed the properties. Plaintiffs comprise the substantialmajority of the investors or the assignees of their claims.
Plaintiffs' central allegation in the amended complaint and in the affidavits and documentssubmitted in opposition to the motion to dismiss is that the promoter defendants made secretprofits at the expense of plaintiffs and the LLCs. Plaintiffs allege that the promoter defendantsdisclosed some of the profits they would make from the business venture but deliberatelyconcealed that property sellers and mortgage brokers directly or indirectly paid themcommissions of up to 15% of the purchase prices of the properties. These undisclosedcommissions, plaintiffs allege, inflated the prices that the LLCs paid for the properties bymillions of dollars.[*2]
In the amended complaint, plaintiffs asserted claims foran accounting, waste, breach of fiduciary duty, actual fraud, and constructive fraud. Thepromoter defendants moved to dismiss the complaint as against them for, among other things,failure to state a cause of action (CPLR 3211 [a] [7]) and failure to plead actual fraud and breachof fiduciary duty with specificity (CPLR 3016 [b]). The motion court granted the motion only tothe extent of dismissing the cause of action for waste and granting plaintiff leave to replead thecause of action for actual fraud.[FN1]
As a threshold matter, and contrary to the promoter defendants' assertion, the antifraudprovisions of the Martin Act (General Business Law art 23-A), which regulates the sale ofpublicly offered securities, do not preempt plaintiffs' claims for an accounting, breach offiduciary duty, and constructive fraud, because given the relatively small number of investorsand the absence of advertising, other than written promotional materials distributed to some ofthem, the offering was not "public" within the meaning of the act (see General BusinessLaw § 352-e [1] [a]; People v Glenn Realty Corp., 106 Misc 2d 46, 48 [1980]). Inview of the foregoing, we need not address the promoter defendants' other arguments withrespect to the act.
The promoter defendants also contend that the causes of action for breach of fiduciary duty,constructive fraud and an accounting should have been dismissed because plaintiffs failed toallege facts establishing that the promoter defendants were their fiduciaries (see Vitale vSteinberg, 307 AD2d 107, 110 [2003]). The motion court found that a fiduciary duty hadbeen sufficiently alleged based both on the parties' relationship and on the promoter defendants'status as the organizers of the business venture.
The parties' business or personal relationship is not sufficient to establish a fiduciaryrelationship. A conventional business relationship between parties dealing at arm's length doesnot give rise to fiduciary duties (see Schonfeld v Thompson, 243 AD2d 343, 343 [1997])unless the plaintiff shows that the defendant "had superior expertise or knowledge about somesubject and misled [the] plaintiff by false representations concerning thatsubject" (Stuart Silver Assoc. v Baco Dev. Corp., 245 AD2d 96, 99 [1997][emphasis supplied]; see also EBC I,Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19-20 [2005]). Although plaintiffs allege thatthe investors, who were Israelis, "had little or limited knowledge of New York real estate orUnited States laws, customs or business practices with respect to real estate or investments" andthat the promoter defendants held themselves out as experienced experts in these areas, plaintiffsdo not claim that the promoter defendants misled them about how particular real estate andinvesting practices in New York and the United States would affect the transactions in question.
Plaintiffs also allege that the promoter defendants "play[ed] upon the cultural identities andfriendship" of the Israeli investors, but personal connections of that sort alone between parties tobusiness transactions do not establish a fiduciary relationship (see Johnston v DeHaan,37 AD2d 1028, 1029 [1971]).
However, plaintiffs' allegations that the promoter defendants planned the business venture,organized the LLCs, and solicited plaintiffs to invest in them are sufficient to establish afiduciary relationship (see Dickerman v Northern Trust Co., 176 US 181, 203-204[1900]). It is well settled that both before and after a corporation comes into existence, itspromoter acts as the fiduciary of that corporation and its present and anticipated shareholders(see Brewster v Hatch, [*3]122 NY 349, 359 [1890];Gates v Megargel, 266 F 811, 816-817 [2d Cir 1920], cert denied 254 US 639[1920]; see also 1A Fletcher, Cyclopedia of Corporations § 192.10, at 340-350[Perm ed]). By extension, the organizer of a limited liability company is a fiduciary of theinvestors it solicits to become members (see generally Limited Liability Company Law§ 203 [a] [iii]). The fiduciary duty includes the obligation to disclose fully any interests ofthe promoter that might affect the company and its members, including profits that the promotermakes from organizing the company (see Brewster, 122 NY at 361-362; see also1A Fletcher, Cyclopedia of Corporations § 193.10, at 353-357 [Perm ed]).Accordingly, plaintiffs stated a cause of action for breach of fiduciary duty by alleging that thepromoter defendants failed to reveal that they would receive commissions from sellers andmortgage brokers in addition to their other, disclosed, profit from the venture.
The promoter defendants' argument that the constructive fraud cause of action should havebeen dismissed for failure to plead the materiality, justifiable reliance, and damages elements ofthe claim (see Del Vecchio v Nassau County, 118 AD2d 615, 617-618 [1986]) is withoutmerit.[FN2]As for materiality, plaintiffs allege that they never would have invested in the LLCs had theyknown about the undisclosed commissions, and it cannot be said as a matter of law thatknowledge of these commissions would not have influenced their decision (see Swersky vDreyer & Traub, 219 AD2d 321, 328 [1996]).
As for justifiable reliance, the promoter defendants claim that plaintiffs received constructivenotice of brokerage commissions, and point to a provision in some of the LLCs' operatingagreements that permits the promoter defendants to provide services to the real estate properties'sellers, and to drafts of letter agreements that some plaintiffs allegedly received and thatpurportedly refer to the commissions. The import of these documents and the question whetherthey put plaintiffs on constructive notice cannot be resolved on a pre-answer motion to dismiss(see Braddock v Braddock, 60AD3d 84, 88 [2009]).
Finally, plaintiffs sufficiently alleged damages by asserting that they suffered actualpecuniary loss in the amount of the secret commissions that inflated the purchase prices of theproperties that the LLCs acquired (see Kuo Feng Corp. v Ma, 248 AD2d 168, 169[1998], appeal [*4]dismissed 92 NY2d 845 [1998], lvdenied 92 NY2d 809 [1998]). Concur—Friedman, J.P., Sweeny, Freedman andAbdus-Salaam, JJ.
Footnote 1: The record indicates thatplaintiffs repleaded the fraud cause of action by serving and filing a second amended complaint,which is not a subject of this appeal.
Footnote 2: In their brief, the promoterdefendants also contend that the actual fraud claim should be dismissed for failure to allegemateriality, justifiable reliance, and damages, but the issue whether the fraud claim wasadequately pleaded is not properly before this Court, since the motion court granted the promoterdefendants' motion to dismiss the claim with leave to replead, and that ruling has not beenappealed.