| Barbarito v Zahavi |
| 2013 NY Slip Op 03952 [107 AD3d 416] |
| June 4, 2013 |
| Appellate Division, First Department |
| Thomas Barbarito, Individually and on Behalf of AdmitOne, LLC, et al., Respondents-Appellants, v Leor Zahavi, et al., Defendants, andTLM Real Estate, LLC, et al., Appellants-Respondents. |
—[*1] Traub Lieberman Strauss & Shrewsberry LLP, Hawthorne (Daniel G. Ecker ofcounsel), for Mark J. Seelig and Meisler Seelig & Fein LLP, appellants-respondents. Hinckley & Heisenberg LLP, New York (Christoph Heisenberg of counsel), forrespondents-appellants.
Orders, Supreme Court, New York County (Anil C. Singh, J.), entered June 21,2012, which, insofar as appealed from as limited by the briefs, denied TLM's motion todismiss the eleventh and twelfth causes of action in the amended complaint as against itpursuant to CPLR 3211 (a) (1) and (7), and denied defendants Mark J. Seelig's andMeister Seelig & Fein, LLP's motion to dismiss the amended complaint as against thempursuant to CPLR 3211 (a) (7) and 3016 (b), unanimously reversed, on the law, withcosts, and the motions granted. The Clerk is directed to enter judgment dismissing theamended complaint as against defendants Mark J. Seelig; Meister Seelig & Fein, LLP;and TLM Real Estate, LLC. Appeals from order, same court and Justice, enteredDecember 22, 2011, which, inter alia, denied defendants TLM Real Estate, LLC's andMark J. Seelig's motions to dismiss the seventh, eleventh, and twelfth causes of action inthe original complaint as against them pursuant to CPLR 3211 (a) (1) and (7),unanimously dismissed, without costs, as academic.
For the purpose of determining whether the amended complaint states a cause ofaction under CPLR 3211 (a), we assume the truth of the following facts taken from thecomplaint (see Leon v Martinez, 84 NY2d 83, 88 [1994]). At some time beforeJanuary 2004, plaintiff Thomas Barbarito, defendant Leor Zahavi, and nonparties to thisappeal founded nominal defendant Admit One, LLC, a ticket brokerage firm. In August2005, Admit One obtained a revolving line of credit for approximately $6.5 million fromnonparty Bank of America.
From Admit One's inception, defendant Seelig and his law firm, defendant MeisterSeelig[*2]& Fein, LLP (MSF), served as counsel forAdmit One, and for Barbarito and Zahavi in their individual capacities. In addition,Seelig was the sole member of defendant TLM Real Estate, LLC (TLM). In July 2008,Zahavi, Barbarito, and certain nonparties to this appeal borrowed around $1.4 millionfrom TLM and executed a note for that loan (the July 2008 note).[FN*] Barbarito and Zahavi each executed confessions of judgment for the loan and placedmortgages on their homes.
Plaintiffs assert that through the fall and winter of 2008, Zahavi borrowed more than$4 million from Admit One to pay personal obligations arising from his brokerageaccount. According to plaintiffs, Zahavi received most of the money by drawing uponAdmit One's Bank of America line of credit, hiding the transaction's true nature fromBank of America by creating fictitious ticket purchases from Admit One.
Soon afterward, in April 2009, the July 2008 note was coming due. Zahavi andSeelig negotiated an amended and restated loan agreement by and among Zahavi,Barbarito, and TLM. In that amended loan agreement, the parties agreed to increase theprincipal amount of the obligation to $1.9 million, representing the original amountborrowed plus additional amounts that Zahavi had allegedly borrowed from TLM afterJuly 2008. The parties then recorded the new amount in an amended and restatedpromissory note dated as of April 23, 2009 and agreed to extend the July 2008 note's duedate until April 22, 2010. Additionally, Barbarito, Zahavi, and TLM entered into apledge agreement in which Barbarito and Zahavi pledged to TLM their membershipinterests in Admit One as partial security for the TLM loan.
Plaintiffs allege that in 2009, Bank of America declared Admit One to be in defaultof the line of credit in the amount of $6.3 million, largely because Zahavi had not paidback the money he borrowed to pay his personal obligations. Bank of America eventuallysold its rights in Admit One to defendant (and nonparty to this appeal) MetroEntertainment, Inc. Further, Seelig allegedly advised Barbarito to transfer to Zahavi32.52 shares of Admit One, thus diluting Barbarito's interest in Admit One and givingZahavi a majority interest in the company.
According to the amended complaint, on June 18, 2010, TLM and Zahavi enteredinto an assignment and assumption agreement in which TLM purported to assign toZahavi all of its rights and interests in the pledge agreement. By letter allegedly preparedby MSF and dated June 21, 2010, Zahavi exercised his rights under the assignment andassumption agreement, claiming to have obtained "all of Barbarito's right, title andinterest as a member" of Admit One. Plaintiffs allege that TLM then assigned to MetroEntertainment—a company run by a friend of Zahavi—all its rights andinterests in Barbarito's confession of judgment. Plaintiffs allege that Zahavi, with Seelig'sassistance, eventually acquired a controlling interest in Admit One.
TLM, Zahavi, and Metro Entertainment offered to release Barbarito from liabilityunder the outstanding TLM and Metro loans if Barbarito would give up his ownershiprights in Admit One. Barbarito, however, refused to do so. Plaintiffs allege thatthereafter, Zahavi and TLM, along with Metro and other nonparty defendants, seizedBarbarito's rights in Admit One and began foreclosure proceedings on his New York andFlorida properties.
In May 2011, Barbarito and his wife commenced this action, alleging that Zahavi and[*3]Seelig made false representations intended to induceBarbarito to enter into the various transactions surrounding the TLM loan. Thosetransactions, plaintiffs assert, ultimately deprived Barbarito of his membership interest inAdmit One. Plaintiffs also allege that Seelig made misrepresentations that violated his"confidential relationship" as counsel.
To begin, the motion court should have granted TLM's motion to dismiss theeleventh cause of action seeking surplus under UCC 9-610 and 9-616. UniformCommercial Code § 9-610 (a) states, "[a]fter default, a secured party maysell . . . or otherwise dispose of any or all of the collateral" (emphasisadded). Moreover, the pledge agreement specifically states, "Pledgee [i.e., TLM] shallnot be obligated to make any sale of the Collateral if it shall determine not to do so. . . ." TLM was therefore not obliged to sell the collateral—that is,Barbarito's membership interest in Admit One—after Barbarito defaulted on theloan.
Further, a secured party is "not obligated to act in a commercially reasonable mannerbefore taking possession of the collateral" (Chase Equip. Leasing Inc. v Architectural Air, L.L.C., 84AD3d 439, 439 [1st Dept 2011]; see Bank Leumi USA v Agati, 5 AD3d 292, 293 [1st Dept2004]). Here, the record does not indicate that TLM took possession of the collateral.
As to the June 18, 2010 assignment of the pledge agreement, the pledge agreementwas merely an incident to the note it was intended to secure. However, the recordcontains no indication that TLM assigned the underlying note to Zahavi, and the transferof the pledge agreement without the note is a legal nullity, leaving the transferee withoutstanding to enforce the pledge (see U.S. Bank, N.A. v Collymore, 68 AD3d 752, 754 [2dDept 2009]; see also Merritt v Bartholick, 36 NY 44, 45 [1867] [security cannotbe separated from debt and exist independently of debt]). The eleventh cause of actiontherefore fails to state a claim as against TLM.
The twelfth cause of action for an accounting under the UCC also should bedismissed as against TLM. UCC 9-608 (a) (4) is inapplicable because, as we havealready concluded, TLM was not obliged to dispose of the collateral. Likewise, UCC 9-616 is inapplicable because a membership interest in a limited liability company is not aconsumer good (see UCC 9-102 [23]). UCC 9-607, another section that plaintiffscite in their amended complaint, does not address accountings at all.
The seventh cause of action fails to state a claim for fraud as against Seelig, as itdoes not allege that he made a material misrepresentation of fact (see e.g. Eurycleia Partners, LP vSeward & Kissel, LLP, 12 NY3d 553, 559 [2009]). In fact, plaintiffs attributeonly one statement to Seelig—namely, that TLM would refrain from collecting onthe July 2008 note until Admit One had sufficient assets. However, plaintiffs do notallege Seelig made the statement with an intent to deceive, or even that the statement wasfalse (see CPLR 3016 [b]). Nor do plaintiffs claim that they relied on specialknowledge that Seelig may have had, or that Seelig made a misleading partial disclosure(cf. Williams v Sidley AustinBrown & Wood, L.L.P., 38 AD3d 219, 220 [1st Dept 2007]).
Similarly, even if we were to view the seventh cause of action as a claim for ascheme or conspiracy to wrongfully take Barbarito's membership interest in Admit One,it would still fail to state a cause of action as against Seelig. The amended complaintalleges, "TLM's Seelig and Zahavi agreed that . . . the first step of thescheme would be for TLM to take Barbarito's Admit One membership interests andprovide those to Zahavi, without TLM complying with its UCC obligations to offer themembership interests to the highest bidders." However, as we have already noted, TLM'spurported assignment to Zahavi of its rights under the pledge agreement [*4]without a concomitant transfer of the underlying note was alegal nullity. As we have also noted, TLM was not obliged to sell Barbarito'smembership interest in Admit One.
The seventh cause of action should also be dismissed insofar as it alleges that MSFaided and abetted the alleged fraud or the scheme, because even assuming for the sake ofargument that a fraudulent scheme existed, MSF did not provide "substantial assistance"to any such alleged scheme (seeStanfield Offshore Leveraged Assets, Ltd. v Metropolitan Life Ins. Co., 64 AD3d472, 476 [1st Dept 2009], lv denied 13 NY3d 709 [2009]). On the contrary,documenting and negotiating the April 23, 2009 loan transaction from TLM to plaintiffs"fall[s] completely within the scope of defendant's duties as an attorney" (Art Capital Group, LLC vNeuhaus, 70 AD3d 605, 606 [1st Dept 2010]).
To the extent the seventh cause of action alleges that Seelig aided and abetted a fraudagainst nonparty Bank of America, it should be dismissed because plaintiffs were notinjured when Bank of America, after making a loan to Admit One, sold the loan at asteep discount to Metro Entertainment.
Finally, the "single motion rule" (CPLR 3211 [e]) does not bar Seelig and MSF frommoving to dismiss the amended complaint, as the fraud cause of action in the amendedcomplaint is not the same as the corresponding cause of action in the original complaint.Indeed, plaintiffs did not assert the fraud claim against MSF in the original complaint, soMSF could not have moved to dismiss that claim. Although the malpractice cause ofaction is the same in the original complaint as in the amended complaint, the motioncourt dismissed that cause of action in the original complaint. Therefore, because Seeligand MSF did not have the opportunity to address the merits of the original cause ofaction, the single motion rule does not apply (Rivera v Board of Educ. of the City of N.Y., 82 AD3d 614[1st Dept 2011]; cf. B.S.L. One Owners Corp. v Key Intl. Mfg., 225 AD2d 643,644 [2d Dept 1996]). Concur—Friedman, J.P., Saxe, Moskowitz and DeGrasse, JJ.
Footnote *: Although Barbarito andZahavi originally owned Admit One with other parties, they eventually bought out theother owners so that by December 2001, Barbarito and Zahavi owned the entirecompany.