| Mizrahi v Cohen |
| 2013 NY Slip Op 02056 [104 AD3d 917] |
| March 27, 2013 |
| Appellate Division, Second Department |
| Ronald Mizrahi, Appellant-Respondent, v EzraCohen, Respondent-Appellant. |
—[*1] Solomon E. Antar, P.C., Brooklyn, N.Y. (Leopold Gross of counsel), forrespondent-appellant.
In an action, inter alia, to recover damages for breach of fiduciary duty and breach ofcontract, and for the judicial dissolution of the subject limited liability company, theplaintiff appeals from so much of an order of the Supreme Court, Kings County(Demarest, J.), dated January 12, 2012, as, after a nonjury trial, directed dismissal of thecauses of action to recover damages for breach of fiduciary duty and breach of contract,and denied, in effect, his application for an order authorizing him to purchase thedefendant's interest in the limited liability company upon its dissolution, and thedefendant cross-appeals, as limited by his brief, from so much of the same order asgranted, in effect, the plaintiff's application for judicial dissolution of the limited liabilitycompany and directed that, upon dissolution, certain contributions of the plaintiff to thelimited liability company are to be treated as loans to the limited liability company.
Ordered that on the Court's own motion, the notices of appeal and cross appeal aretreated as applications for leave to appeal and cross-appeal, and leave to appeal andcross-appeal is granted (see CPLR 5701 [c]); and it is further,
Ordered that the order is modified, on the law and the facts, by deleting the provisionthereof denying, in effect, the plaintiff's application for an order authorizing him topurchase the defendant's interest in the limited liability company upon its dissolution, andsubstituting therefor a provision directing that the plaintiff may purchase such interestwithin 60 days after a determination by the Supreme Court as to the value of suchinterest; as so modified, the order is affirmed insofar as appealed and cross-appealedfrom, without costs or disbursements, and the matter is remitted to the Supreme Court,Kings County, for further proceedings and for a determination thereafter as to the valueof the defendant's interest in the limited liability company.
The plaintiff and the defendant are the sole members of a limited liability company(hereinafter LLC). The plaintiff is a dentist and the defendant is an optometrist. The LLCwas formed for the purpose of the construction and operation of a mixed-usecommercial/residential building. The parties did not initially execute an LLC operatingagreement (hereinafter LLC agreement). In 2000, several months after the LLC wasformed, the parties purchased a parcel of real [*2]property, upon which they intended to construct thebuilding. At the closing of title, the property seller or lender required an LLC agreement.The attorney who represented both the plaintiff and defendant at the closing then draftedan LLC agreement.
The LLC agreement provided that the parties each own a 50% membership interestin the company. However, the LLC agreement did not set forth the amount of the parties'initial capital contributions. The LLC agreement also provided that, after the "initialcapital contributions" by the parties, no member would be required to contributeadditional capital unless required by a vote of all of the members of the company. TheLLC agreement provided that no member "shall have the right to receive any return ofany Capital Contribution," subject to certain exceptions that are not relevant here. TheLLC agreement provided that the LLC may be dissolved only upon the happening ofcertain specified events. Upon dissolution, the assets were to be distributed first tocreditors of the LLC, and then to the members, in proportion to their respectiveownership shares.
The parties contributed approximately equal funds toward the down payment on theparcel of real property. The construction of the building was largely financed by aconstruction loan. At some point, the parties refinanced that loan and obtained amortgage loan. In 2006, the construction was completed, and both parties moved theirprofessional offices into the building.
Through approximately 2003, the parties made approximately equal capitalcontributions to the LLC. After that, however, the contributions by the plaintiff greatlyexceeded those of the defendant. It is undisputed that, over time, the plaintiff contributedapproximately $1.4 million in capital to the company, while the defendant contributedapproximately $317,000 in capital to the company. At a hearing, an accountant for theLLC testified that the LLC experienced net operating losses in each year from 2006through 2010, and through the first half of 2011, when the hearing was held. Theaccountant testified, inter alia, that the LLC would have failed, if not for the use ofproceeds of the mortgage loan and capital infusions by the plaintiff, which were used tocover its operating expenses.
The plaintiff commenced this action, inter alia, to recover damages for breach offiduciary duty and breach of contract, and for the judicial dissolution of the LLC. Theplaintiff also sought an order authorizing him to purchase the defendant's interest in theLLC upon its dissolution.
The Supreme Court did not err in directing dismissal of the cause of action to recoverdamages for breach of fiduciary duty. Contrary to the plaintiff's contention, that cause ofaction was not properly brought in the plaintiff's individual capacity (see Abrams vDonati, 66 NY2d 951, 952 [1985]; Yudell v Gilbert, 99 AD3d 108, 113-114 [2012]; Hahn v Stewart, 5 AD3d285, 286 [2004]; see alsoTzolis v Wolff, 10 NY3d 100 [2008]).
Contrary to the defendant's contention, the LLC agreement is ambiguous and,therefore, parol evidence of the parties' course of dealing is admissible to supplement andinterpret the terms of that agreement (see Goldman Sachs Group, Inc. v Almah LLC, 85 AD3d424, 426-427 [2011]; White Plains Equities Assoc., Inc. v Vista Devs. Corp., 82AD3d 569 [2011]; FootLocker, Inc. v Omni Funding Corp. of Am., 78 AD3d 513, 515 [2010]).Further, the evidence of the parties' conduct with respect to capital contributions did notconstitute a prior oral agreement or an impermissible oral modification of the contract.
Nevertheless, the Supreme Court did not err in directing dismissal of the cause ofaction to recover damages for breach of contract. Even considering the evidence of theparties' conduct regarding capital contributions, the plaintiff failed to establish theexistence of a binding agreement as to the parties' responsibility for such contributions.Therefore, the plaintiff failed to show a breach of any such agreement (see Schaffe v SimmsParris, 82AD3d 867, 867-868 [2011]; Mode Contempo, Inc. v Raymours Furniture Co., Inc., 80AD3d 464 [2011]; Wild vHayes, 68 AD3d 1412, 1414 [2009]).
The Supreme Court did not err in granting, in effect, the plaintiff's application forjudicial dissolution of the LLC. Under the circumstances presented, it is not reasonablypracticable for the LLC to continue to operate, as continuing the LLC is financiallyunfeasible (see Limited Liability Company Law § 702; see also Matter of 1545 OceanAve., LLC, 72 AD3d 121, 131 [2010]).[*3]
Contrary to the defendant's contention, theSupreme Court did not err in determining that if the assets of the company are to beliquidated, then the capital contributions of the plaintiff are to be treated as loans to theLLC to the extent that those contributions exceeded those made by the defendant.Although the LLC agreement provided that a member does not have the right to receiveany return of capital contributions, the LLC agreement also provided for the repaymentof debts of the LLC upon dissolution. The record, including an affidavit submitted by thedefendant, establishes that the parties intended that the capital contributions by theplaintiff were to be treated as loans to the LLC to the extent that those contributionsexceeded those made by the defendant. In addition, the LLC agreement is silent as to theissue of equalization of capital contributions. Under these circumstances, the SupremeCourt did not err in directing that such contributions are to be treated as loans to the LLC(see Limited Liability Company Law §§ 702, 704 [c]; Matter ofKSI Rockville v Eichengrun, 305 AD2d 681 [2003]).
The Supreme Court should have granted, in effect, the plaintiff's application for anorder authorizing him to purchase the defendant's interest in the LLC upon itsdissolution. The Limited Liability Company Law "does not expressly authorize a buyoutin a dissolution proceeding" (Matter of Superior Vending, LLC [Tal—Plotkin], 71AD3d 1153, 1154 [2010]). Nonetheless, in certain circumstances, a buyout may bean appropriate equitable remedy upon the dissolution of an LLC (see id.). Underthe facts of this case, the remedy of a buyout by the plaintiff is appropriate (seeid.). Contrary to the defendant's contention, the provisions of the LLC agreementregarding dissolution of the LLC do not preclude an order authorizing a buyout upon thejudicial dissolution of the LLC pursuant to Limited Liability Company Law § 702(see Limited Liability Company Law § 702; see also Matter ofSuperior Vending, LLC [Tal—Plotkin], 71 AD3d at 1154). Accordingly, thematter must be remitted to the Supreme Court, Kings County, for further proceedings andfor a determination thereafter as to the value of the defendant's interest in the LLC. Eng,P.J., Rivera, Lott and Miller, JJ., concur. [Prior Case History: 34 Misc 3d 1210(A),2012 NY Slip Op 50030(U).]