| Lemle v Lemle |
| 2012 NY Slip Op 01106 [92 AD3d 494] |
| February 14, 2012 |
| Appellate Division, First Department |
| Michael Lemle, Individually and as a Shareholder of 132 West 31stStreet Realty Corp., Suing in the Name of 132 West 31st Street Realty Corp.,Appellant, v Florence Lemle et al., Respondents. Michael Lemle, Individually and as aShareholder of 132 West 31st Street Realty Corp., Suing in the Name of 132 West 31st StreetRealty Corp., Respondent-Appellant, v Florence Lemle et al., Appellants-Respondents, et al.,Defendant. |
—[*1] Levine Lee LLP, New York (Seth L. Levine of counsel), for Florence Lemle,appellant-respondent/respondent. Friedman Law Group, LLP, New York (Tracey Kitzman of counsel), for Douglas Lemle,appellant-respondent/respondent. Law Offices of Roger J. Bernstein, New York (Roger J. Bernstein of counsel), for DeanneLemle Bosnak, appellant-respondent/respondent. Cohen & Gresser LLP, New York (Brett D. Jaffe of counsel), for 132 West 31st Street RealtyCorp., respondent.
Order, Supreme Court, New York County (Barbara R. Kapnick, J.), entered January 20,2009, which, to the extent appealed from as limited by the briefs, granted the individualdefendants' motion to dismiss the first amended complaint and the corporate defendant's motionto dismiss the causes of action for common-law dissolution and appointment of a temporaryreceiver, denied plaintiff's motion for a preliminary injunction prohibiting the individualdefendants from using corporate funds to pay their litigation expenses, and granted the individualdefendants' cross motion seeking advancement of such expenses, unanimously modified, on the[*2]law, to deny defendants' motions to dismiss the causes ofaction for conversion, breach of fiduciary duty and dissolution, and otherwise affirmed, withoutcosts. Order, same court and Justice, entered July 13, 2010, which, to the extent appealed from aslimited by the briefs, granted the individual defendants' motion to dismiss the permanentinjunction cause of action in the second amended complaint and denied their motion to dismissthe fraud cause of action, and, upon granting only so much of plaintiff's motion for reargumentand renewal as sought reargument of the individual defendants' motion to dismiss the accountingclaims in the first amended complaint, denied the individual defendants' motion to dismiss thoseclaims, unanimously affirmed, without costs.
Defendant 132 West 31st Street Realty Corp. is a corporation owned and managed by theLemle family. Plaintiff Michael Lemle and his three siblings, defendants Florence Lemle,Douglas Lemle and Deanne Lemle Bosnak, are shareholders, directors and officers of thecorporation. Plaintiff and his siblings each owns approximately 4.6% of the corporation'soutstanding shares. Nonparty Edna Lemle, the deceased mother of plaintiff and his siblings, alsoserved as a director and was the majority shareholder, holding beneficial ownership ofapproximately 80% of the corporation's stock.
According to plaintiff, the corporation's principal asset is an underlease for an office buildinglocated in Manhattan. Plaintiff contends that although the corporation once actively managed thebuilding, the building is now managed by an independent company, and the corporation isessentially a holding company that receives passive income from the underlease. Thecorporation's only other assets are securities, gold, and real property, and, according to plaintiff,the income derived from these assets is passive.
Plaintiff and his siblings each receives an annual director's fee of $40,000 and an annualofficer's salary of $50,000. Florence Lemle, the corporation's chief financial officer and actingchief executive officer, receives an additional salary of $125,000. In addition, the corporation hasextended loans to plaintiff and his siblings, in various amounts and subject to various terms.
Over time, controversies arose between plaintiff and his siblings with respect to the loanbalances, interest rates, due dates and other terms. In June 2004, plaintiff and his siblings eachentered into a loan modification agreement with the corporation. In those agreements, the partiesagreed that each of the loan balances, "as they will ultimately be determined," will be payable "onthe later of" the death of Edna Lemle and distribution of her estate or December 30,2012.[FN1]
In 2007, plaintiff brought this action, individually and derivatively as a shareholder, allegingthat his siblings have converted millions of dollars from the corporation in breach of theirfiduciary duties. Plaintiff alleges, among other things, that they have falsified their corporate loanaccounts and other corporate records to eliminate millions of dollars of principal and interestowed by them to the corporation. In addition, plaintiff claims that his siblings have wrongfullytransferred corporate assets to themselves and others by way of excessive compensation andbenefits, reimbursement for inappropriate personal expenses, and salaries or bonuses paid toindividuals who performed no work for the corporation.
In the first amended complaint, plaintiff asserted derivative claims against his siblings forbreach of fiduciary duty, conversion, fraud, and an accounting. In his individual capacity,plaintiff asserted claims against the corporation for common-law dissolution and the appointmentof a temporary receiver, and sought injunctive relief against his siblings. The siblings and the[*3]corporation each moved to dismiss pursuant to CPLR 3211(a). In addition, plaintiff sought a preliminary injunction prohibiting the individual defendantsfrom using corporate funds to pay their litigation expenses, and the individual defendantscross-moved pursuant to Business Corporation Law § 724 (c) for advancement of thoseexpenses. In a decision and order entered January 20, 2009, the motion court dismissed thecomplaint in its entirety, but granted leave to replead the fraud and injunction causes of action.The court denied plaintiff's request for a preliminary injunction and granted the individualdefendants' cross motion for advancement of their litigation expenses.
The motion court should not have dismissed the conversion and breach of fiduciary dutyclaims. Conversion is the unauthorized assumption and exercise of the right of ownership overanother's property to the exclusion of the owner's rights (Thyroff v Nationwide Mut. Ins. Co., 8 NY3d 283, 288-289 [2007])."Where the property [alleged to have been converted] is money, it must be specificallyidentifiable and be subject to an obligation to be returned or to be otherwise treated in a particularmanner" (Republic of Haiti v Duvalier, 211 AD2d 379, 384 [1995]). Thus, conversionoccurs when funds designated for a particular purpose are used for an unauthorized purpose(see Meese v Miller, 79 AD2d 237, 243 [1981]).
Here, reading the complaint in a light most favorable to plaintiff, the conversion claim issufficiently stated by, inter alia, allegations that plaintiff's siblings (1) falsified loan documents soas to eliminate millions of dollars in principal and interest they owed to the corporation; (2) usedcorporate funds to pay for personal vacation, shopping and other non-business-related expenses;and (3) used corporate funds to pay excessive compensation and benefits to themselves and otherindividuals who did little or no work for the corporation. Likewise, these allegations ofself-dealing are sufficient to state a cause of action that plaintiff's siblings breached theirfiduciary duties to the corporation.
At this early stage of the litigation, it cannot be said that those parts of the complaint allegingexcessive compensation are barred as a matter of law by the business judgment rule. Thebusiness judgment rule prevents courts from inquiring into "actions of corporate directors takenin good faith and in the exercise of honest judgment in the lawful and legitimate furtherance ofcorporate purposes" (Auerbach v Bennett, 47 NY2d 619, 629 [1979]). However,"pre-discovery dismissal of pleadings in the name of the business judgment rule is inappropriatewhere those pleadings suggest that the directors did not act in good faith" (534 E. 11th St. Hous. Dev. Fund Corp. vHendrick, 90 AD3d 541, 542 [2011]).
The complaint alleges that (1) the individual defendants made statements suggesting thatthere was no legitimate basis for the inflated compensation; (2) when plaintiff proposed anoutside auditor, his siblings objected, saying that they would be unable to answer questions aboutwhat they did for the company to earn their compensation; and (3) salary and benefits were paidto individuals who did no work at all for the corporation. Given the totality of the allegations ofcorporate theft and misconduct by the individual defendants, the complaint sufficiently states forpleading purposes that the individual defendants acted in bad faith in setting the challengedcompensation (see Marx v Akers, 88 NY2d 189, 203-204 [1996]).
The individual defendants contend that the loan modification agreements render plaintiff'sclaims about the false loan accounts nonjusticiable. Specifically, they argue that because theagreements defer payment of the loans to a future date, the claims are not ripe. We disagree.Although it is true that courts are not empowered to determine hypothetical or remote [*4]questions (Ashley Bldrs. Corp. v Town of Brookhaven, 39 AD3d 442 [2007]),here, as explicitly recognized in the modification agreements, a present controversy exists.Plaintiff's claims that his siblings altered corporate records to reduce their indebtedness to thecorporation do not become nonjusticiable merely because the parties agreed to defer repayment.
Notably, the parties deferred only the date of repayment, not the resolution of all disputesconcerning the proper amounts of the loans. The agreements place no restrictions on plaintiff'sright to bring an action based on his siblings' alleged wrongful conduct. Although the agreementscontemplate repayment of the loan balances "as they will ultimately be determined," nothing inthat language, or any other part of the agreements, precludes the determination of the correctbalances in a court action such as this one.
The cause of action seeking the appointment of a temporary receiver was correctly dismissed."The appointment of a receiver is not a form of ultimate relief that can be awarded in a plenaryaction, but rather, is limited as a provisional remedy (see CPLR 6401 [a]) or as an aid inpost-judgment enforcement (see CPLR 5228)" (Old Republic Natl. Tit. Ins. Co. v Cardinal Abstract Corp., 14 AD3d678, 680-681 [2005]).
After the court granted leave to replead, plaintiff filed a second amended complaintreasserting a fraud cause of action on behalf of the corporation, and seeking on his own behalf apermanent injunction. The individual defendants again moved to dismiss the complaint, andplaintiff sought reargument and renewal of the earlier motions to dismiss with respect to his othercauses of action. In a decision and order entered July 13, 2010, the court dismissed the injunctionclaim, but denied the motion to dismiss the fraud cause of action as premature.[FN2]
Plaintiff asserts a derivative claim on behalf of the corporation alleging that the individualdefendants committed a fraud against the corporation. To establish fraud, a plaintiff must show amaterial misrepresentation of an existing fact, made with knowledge of its falsity, an intent toinduce reliance thereon, justifiable reliance upon the misrepresentation, and damages (Eurycleia Partners, LP v Seward & Kissel,LLP, 12 NY3d 553, 559 [2009]). The allegations that the individual defendants falsifiedtheir corporate loan accounts are sufficient to establish a knowing misrepresentation made to thecorporation. However, an essential element of fraud is justifiable reliance upon therepresentations made (Ross vGidwani, 47 AD3d 912 [2008]). The second amended complaint fails to set forthspecific facts alleging that the corporation acted, or failed to act, in reliance on themisrepresentations. Thus, as presently pleaded, the fraud cause of action is not sufficiently stated.
Nevertheless, we agree with the motion court that dismissal of the fraud claim at this stagewould be inappropriate. CPLR 3211 (d) provides a court with discretion to deny a motion todismiss if it appears that "facts essential to justify opposition may exist but cannot then be stated"(CPLR 3211 [d]; see Peterson v Spartan Indus., 33 NY2d 463, 467 [1974]). Here,plaintiff has set forth a reasonable basis to believe that with additional discovery, especiallyaccess to backup documents concerning adjustments made to the loan accounts, he would be ableto develop sufficient facts to establish the reliance element of this fraud claim assertedderivatively on behalf of the corporation.[*5]
In the second amended complaint, plaintiff alleges that hehas not been provided with full access to corporate books and records, including records of thecorporate accountant, documents supporting various adjustments to the loan accounts, andbackup documentation for the general ledgers. Plaintiff maintains that he has made unsuccessfulrequests for these documents which, according to plaintiff, are in the exclusive possession andcontrol of the individual defendants. Plaintiff also submitted a report of an accountant stating thathe is unable to conduct an audit of the corporate books in the absence of such documentation. Inhis report, plaintiff's accountant states that, based on the available records, it appears that thecorporation "simply removed" $2.2 million of indebtedness owed by Douglas Lemle alone. Theaccountant points to numerous other discrepancies in the loan accounts and other corporaterecords. In light of these specific facts, which are supported by the report of plaintiff'saccountant, dismissal of the fraud claim was not warranted (see Marcus Dairy v Jacene RealtyCorp., 245 AD2d 493 [1997]; Pappas v Pilevsky, 225 AD2d 394 [1996]).
Likewise, plaintiff's cause of action for common-law dissolution, asserted in the firstamended complaint, should not have been dismissed. There is a reasonable basis to believe thatfurther discovery may reveal evidence of egregious conduct necessary to sustain the claim(see Fedele v Seybert, 250 AD2d 519, 521-522 [1998]; see generally Leibert vClapp, 13 NY2d 313 [1963]). Denial of the motion to dismiss the fraud and dissolutionclaims, however, is without prejudice to renewal upon the completion of discovery (seeHalmar Corp. v Hudson Founds., 212 AD2d 505, 506 [1995]; Cerchia v V.A. Mesa,Inc., 191 AD2d 377 [1993]).
Plaintiff's cause of action seeking a permanent injunction was properly dismissed. To plead acause of action for a permanent injunction, a plaintiff must allege, inter alia, "[a] violation of aright presently occurring, or threatened and imminent" (Elow v Svenningsen, 58 AD3d 674, 675 [2009] [internal quotationmarks omitted]). The complaint fails to allege any specific actions taken by the individualdefendants to remove plaintiff as an officer or director or otherwise dilute his interest in thecorporation. Furthermore, there is no showing that plaintiff does not have an adequate remedy atlaw (see Mini Mint Inc. v Citigroup,Inc., 83 AD3d 596 [2011]).
On October 6, 2010, after the entry of both orders on appeal, the motion court directed anaccounting of the corporation. The individual defendants argue that the court-ordered accountingmoots all of plaintiff's claims relating to the loan balances. Because neither the accounting order,nor the facts and circumstances upon which it was issued, are part of the record on appeal, wecannot consider it (see Ramirez v NewYork City Hous. Auth., 57 AD3d 231 [2008]). In any event, plaintiff is entitled to pleadin the alternative (see CPLR 3014, 3017 [a]; Volt Sys. Dev. Corp. v RaytheonCo., 155 AD2d 309 [1989]) and pursue his accounting claims and his tort claimssimultaneously.
The motion court properly granted the individual defendants' motion for advancement oftheir reasonable litigation expenses. The individual defendants have "raised genuine issues of[*6]fact or law" (Business Corporation Law § 724 [c])sufficient to be entitled to advancement of their expenses (see 136 E. 56th St. Owners vDarnet Realty Assoc., 248 AD2d 327 [1998]). Concur—Saxe, J.P., Friedman,Moskowitz, Freedman and Richter, JJ.
Footnote 1: After the agreements weresigned, Edna Lemle died.
Footnote 2: The court also grantedreargument with respect to the accounting causes of action, and upon reargument, denied themotion to dismiss those claims. The individual defendants do not challenge that ruling.