| 546-552 W. 146th St. LLC v Arfa |
| 2008 NY Slip Op 06683 [54 AD3d 543] |
| September 2, 2008 |
| Appellate Division, First Department |
| 546-552 West 146th Street LLC et al., Appellants, et al.,Plaintiff, v Rachel L. Arfa et al., Respondents, et al.,Defendants. |
—[*1] Michael C. Marcus, Long Beach, for Rachel L. Arfa, Alexander Shpigel and American EliteProperties, Inc., respondents. Wolf Haldenstein Adler Freeman & Herz, LLP, New York (Eric B. Levine of counsel), forGadi Zamir, respondent. Kantor, Davidoff, Wolfe, Mandelker & Kass, P.C., New York (Lawrence A. Mandelker ofcounsel), for Harlem Holdings, LLC, respondent. Simpson Thacher & Bartlett LLP, New York (Mark G. Cunha of counsel), for Mintz LevinCohn Ferris Glovsky & Popeo, P.C., respondent. Petroff & Bellin, LLP, New York (Aytan Y. Bellin of counsel), for Edward Lukashok,Aubrey Realty Co. and 42nd Street Realty, LLC, respondents.
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered May 31, 2007,which denied plaintiffs' motion for leave to file and serve a second amended complaint andgranted defendants' motion and cross motions to dismiss the action with prejudice, unanimouslyaffirmed, with costs.
Plaintiffs are limited liability companies (LLCs) that purchased various properties betweenOctober 4, 2002 and February 25, 2005. The purchase agreements for the properties, withaccompanying brokerage agreements, were entered into prior to formation of the LLCs, which,after their formation, were assigned the purchasers' rights and obligations. This sequence ofevents is established by copies of the brokerage agreements and of Department of State [*2]records of the formation of the LLCs, and was not disputed at oralargument before the motion court. When the LLCs were formed, defendants Arfa, Shpigel andZamir were their sole members, with Shpigel, Zamir and defendant Harlem Holdings (owned byArfa, Shpigel and Zamir) acting as their sole managers. Outside investors were solicited topurchase interests in the LLCs, and the amounts the investors paid for their interests in the LLCswere used to fund the closings of the property acquisitions. The brokerage commissions werepaid at the closings. Defendants Mintz Levin and Lukashok represented the LLCs in thetransactions. Lukashok, either directly or through defendant Aubrey Realty, was also the brokerin the three transactions in which he was the attorney.
It is alleged that Arfa, Shpigel, Zamir and Harlem Holdings received commissions from thesellers in connection with the purchases, thereby inflating the total prices of the properties by atleast $6.5 million. It is further alleged that defendants failed to disclose the aforementionedcommissions to the LLCs or to the prospective investors at the time their investments weresolicited.
While these allegations may set forth a cognizable injury (see generally Caprer v Nussbaum, 36 AD3d 176, 183 [2006]), themotion court correctly found that plaintiffs lack standing to bring them. The alleged malefactorswere the only members and managers of the LLCs at the time the agreements for the payment ofthe undisclosed commissions were entered into, and, therefore, their acts and knowledge areimputed to the LLCs (see Center v Hampton Affiliates, 66 NY2d 782 [1985]). Notably,the individual investors in the LLCs have brought a parallel action, in which the question ofwhether such investors were wronged when their investments were solicited will be determined.
Contrary to plaintiffs' contention, there is no issue of fact as to whether the usualpresumption imputing the acts of agents to their principal is rebutted by the adverse interestexception. This exception arises if the principal's interests have been totally abandoned, andcannot be invoked merely because the agents have a conflict of interest or are not actingprimarily for their principal (id. at 784-785); the exception has been properly described as"narrow" (see Wight v BankAmerica Corp., 219 F3d 79, 87 [2000]; In re Mediators,Inc., 105 F3d 822, 827 [1997]).
Here, the issue is the content of the pleading. The proposed second amended complaint doesnot allege, nor may it be reasonably inferred therefrom, that the original owners and managers ofthe LLCs totally abandoned the interests of the LLCs (see Buechner v Avery, 38 AD3d 443, 444 [2007]); theyaccomplished the LLCs' main business purpose of acquiring the properties, and did not merelyprolong the existence of the entities (cf. Capital Wireless Corp. v Deloitte & Touche, 216AD2d 663, 666 [1995]).
The authorities plaintiffs rely upon are distinguishable. In Capital Wireless Corp. vDeloitte & Touche (supra), denial of a pre-answer dismissal motion was upheldwhere the corporate plaintiff had submitted affidavits, exhibits and excerpts from depositiontestimony tending to show that the fraud by its president sought its "obliteration," i.e., there wasevidence of a total abandonment of the corporation's interests. The similar result on summaryjudgment regarding third-party counterclaims in Dinerstein v Anchin, Block & Anchin, LLP (41 AD3d 167 [2007])was also based on an evidentiary showing.
Even if there were an issue of fact regarding the adverse interest exception, application of theexception would be barred here as a matter of law. We agree with the federal courts' articulationof the "sole actor" rule, that the adverse interest exception does not apply if the [*3]alleged wrongdoers were, at the time of their misconduct, either thesole managers or the sole owners of the plaintiff (see In re Mediators, 105 F3d at 827;In re Grumman Olson Indus., Inc., 329 BR 411, 425-426 [2005]). Here, they were both(cf. Morgado Family Partners, LP v Lipper, 6 Misc 3d 1014[A], 2004 NY Slip Op51791[U] [2004], affd 19 AD3d 262 [2005]).
Plaintiffs did not contend before the motion court that Arfa, Shpigel, Zamir and HarlemHoldings should be subject to liability as promoters, but the argument is one of law that may beraised for the first time at this juncture (see Chateau D' If Corp. v City of New York, 219AD2d 205, 209 [1996], lv denied 88 NY2d 811 [1996]). However, the argument lacksmerit. The instant circumstance, where the allegedly objectionable agreements were entered intobefore the formation of the LLCs so the promoters could not have then owed the nonexistententities any fiduciary obligations, differs from that in Northridge Coop. Section No. 1 v 32ndAve. Constr. Corp. (2 NY2d 514 [1957]), where it was stated, in dicta, that promoters, whohad allegedly engaged in self-dealing after the plaintiff cooperative corporation had been formed,must account to it.
In view of the foregoing, we need not address the parties' contentions regarding the viabilityof each cause of action.
We have considered plaintiffs' other contentions and find them unavailing.Concur—Tom, J.P., Saxe, Friedman, Gonzalez and McGuire, JJ.