| 21st Century Diamond, LLC v Allfield Trading, LLC |
| 2011 NY Slip Op 07364 [88 AD3d 558] |
| October 20, 2011 |
| Appellate Division, First Department |
| 21st Century Diamond, LLC, Respondent, v AllfieldTrading, LLC, et al., Appellants. Allfield Trading, LLC, Third-Party Plaintiff-Appellant, vExelco Group et al., Doing Business as Exelco North America, Inc., Third-PartyDefendants-Respondents. |
—[*1] Jones Day, New York (Stephen J. Pearson of counsel), for respondents.
Order, Supreme Court, New York County (James A. Yates, J.), entered May 24, 2010,which, to the extent appealed from as limited by the briefs, on a motion for reargument, adheredto a prior order, same court and Justice, entered January 22, 2010, granting plaintiff's andthird-party defendants' motions to dismiss, respectively, defendants' first, second and thirdcounterclaims and the third-party complaint, unanimously modified, on the law, to denythird-party defendants' motion as to the second, third and fourth causes of action of thethird-party complaint, and otherwise affirmed, without costs.
Plaintiff 21st Century Diamond, LLC (21st Century), a Delaware limited liability company,was organized to engage in the business of diamond wholesaling. 21st Century's members aredefendant and third-party plaintiff Allfield Trading, LLC (Allfield), which holds an 18% interest,and third-party defendant Exelco Group doing business as Exelco North America, Inc. (Exelco),which holds an 82% interest. Although Allfield is the minority member, its principals, defendantsJoshua Allen and Robert Cornfield, were formerly designated 21st Century's managers. After therelationship between Allfield and Exelco deteriorated, Exelco, as holder of the majority interest,removed Allen and Cornfield as managers and caused 21st Century to commence this actionagainst Allfield, Allen and Cornfield. In response, defendants asserted counterclaims against 21stCentury and Allfield, directly and derivatively on behalf of 21st Century, and brought athird-party action against Exelco and Exelco's owner and manager (respectively, third-partydefendants Jean-Paul Tolkowsky and Fazal Chaudhri) and a diamond brokerage firm and itsprincipal (third-party defendants Isidor Inc. and Ori Levy). At issue on this appeal is the motioncourt's dismissal of Allfield's first three counterclaims and of the third-[*2]party complaint in its entirety.[FN*]
The motion court erred in dismissing the third-party complaint's second, third and fourthcauses of action, which allege, respectively, breach of the implied covenant of good faith and fairdealing and breach of fiduciary duty (against Exelco) and aiding and abetting breach of fiduciaryduty (against Tolkowsky, Chaudhri, Isidor and Levy). Accepting the factual allegations of thethird-party complaint as true, and drawing all reasonable inferences in the pleader's favor,Allfield has made out a claim that Exelco breached its fiduciary duty as majority member of 21stCentury and the covenant of good faith and fair dealing implied in 21st Century's operatingagreement. Specifically, the third-party complaint alleges that Exelco usurped for itself aprospective supply deal with a major diamond retailer (Sterling Jewelers, Inc.) that Allen andCornfield were in the process of negotiating on 21st Century's behalf when they were removedfrom management. While 21st Century's operating agreement permits each member to engage inoutside activities "compet[ing] with the business of the Company," that provision did not entitleExelco to use 21st Century's proprietary information to appropriate for itself a businessopportunity that 21st Century had been pursuing (cf. Kahn v Icahn, 1998 WL 832629, *4,1998 Del Ch LEXIS 223, *15 [1998], affd 746 A2d 276 [Del 2000] [in dismissing ausurpation claim where the partnership agreement permitted competition with the entity, thecourt noted that the plaintiffs did not "plead specific facts by which [the court] might reasonablyinfer that there was misappropriation of information, unlawful redirection or personal use ofpartnership resources or some sort of misappropriation of proprietary investment research"]). Inaddition, the third-party complaint, construed liberally, states a cognizable claim against Exelco,as majority member of 21st Century, for oppression of Allfield, as minority member, by freezingthe latter out of the business and depriving it of the benefit of its interest. Determining whetherthese claims have merit must await the development of a factual record.
Defendants' first three counterclaims against 21st Century, as well as the third-partycomplaint's first cause of action against Exelco, were correctly dismissed. These claims are allbased on the contention that certain actions and resolutions that Exelco caused 21st Century totake in May and June of 2009 (principally, the commencement of this action and the removal ofAllen and Cornfield from management) were breaches of the operating agreement in that theywere taken without adherence to the usual procedures set forth in the operating agreement (suchas giving Allfield notice of a meeting of the members). This claim is unavailing because section5.8 of the operating agreement (entitled "Action Without Meeting") provides in pertinent part:"Any action required or permitted to be taken at any meeting of the Members may be takenwithout a meeting, without prior notice and without a vote, if Members holding voting interestssufficient to authorize such action at a meeting at which all of the Members entitled to votethereon were present and voted consent thereto in writing." This provision is enforceable underDelaware law (see Del Code Ann, tit 6, § 18-404 [d]). Accordingly, the operatingagreement permitted Exelco, as [*3]majority member, to cause21st Century to take the challenged actions (commencement of this action and removal of Allenand Cornfield from management) by voting for those actions in writing, which it did.
We reject defendants' argument that unanimity was required for the actions in question.While the operating agreement requires the members' unanimous approval for dissolution,commencing this lawsuit and removing certain managers did not amount to a "de factodissolution" of the company. Nor is a different result required by section 5.2 of the operatingagreement, which provides that the company's affairs "shall be managed by the Members" andthat "[t]he Members shall . . . vote on all . . . decisions of theCompany." Section 5.2 is a general provision prescribing how the company's business is to beconducted under ordinary circumstances. Section 5.8, on the other hand, permits action to betaken without a meeting of the members in the event their relationship has broken down, asoccurred in this case (cf. Crane, A.G. v206 W. 41st St. Hotel Assoc., L.P., 87 AD3d 174, 176 [2011]).
We have considered Allfield's arguments that the motion court erred in dismissing itsremaining third-party claims and find them unavailing. Concur—Mazzarelli, J.P.,Friedman, Catterson, DeGrasse and Manzanet-Daniels, JJ.
Footnote *: Although the order appealedfrom purportedly denied a motion to reargue, it is appealable because the court, in adhering to itsprior decision, addressed the parties' arguments on the merits (see Premier Capital v DamonRealty Corp., 299 AD2d 158 [2002]). We note that the fourth and fifth counterclaims, whichthe motion court sustained, are not at issue on this appeal.