| Pokoik v Pokoik |
| 2014 NY Slip Op 01502 [115 AD3d 428] |
| March 6, 2014 |
| Appellate Division, First Department |
| Lee Pokoik, Also Known as Leon Pokoik,Respondent-Appellant, v Gary Pokoik, Appellant-Respondent, and JonathanPokoik, Respondent, et al., Defendant. |
—[*1] The Law Firm of Gary N. Weintraub, LLP, Huntington (Gary N. Weintraub ofcounsel), for respondent-appellant.
Order, Supreme Court, New York County (Joan M. Kenney, J.), entered January 25,2013, which, insofar as appealed from, granted defendants' motion for summaryjudgment dismissing the complaint as against defendant Jonathan Pokoik and denied themotion as against defendant Gary Pokoik, and denied plaintiff's cross motion forsummary judgment on his first cause of action alleging breach of fiduciary duty and fordismissal of defendants' affirmative defenses, unanimously modified, on the law, to grantdefendants' motion as to the fifth cause of action alleging breach of contract as againstGary, and to grant the cross motion to the extent of dismissing all of defendants'affirmative defenses and granting plaintiff summary judgment on his first cause of actionas against Gary, and otherwise affirmed, without costs.
As the proponent of the motion for summary judgment, Gary is required todemonstrate that there are no material issues of fact in dispute and that he is entitled tojudgment and dismissal as a matter of law (Winegrad v New York Univ. Med.Ctr., 64 NY2d 851, 853 [1985]; Ostrov v Rozbruch, 91 AD3d 147, 152 [1st Dept 2012]).Only when this burden is met, is the opposing party required to submit proof inadmissible form sufficient to create a question of fact requiring a trial (Kosson vAlgaze, 84 NY2d 1019 [1995]).
Gary contends that, based on Limited Liability Company Law § 409, he isentitled to summary judgment on the portion of the first cause of action that allegedbreach of fiduciary duty with respect to the properties located at 77th Street and 82ndStreet (the ones owned by the LLCs) because he reduced plaintiff's capital accounts ingood faith, relying on the advice of nonparty accounting firm Eisner & Lubin. As to theremaining portion of the first cause of action alleging breach of fiduciary duty withrespect to the 83rd Street property, which is owned by tenants-in-common, he claimsentitlement to [*2]summary judgment based on thebusiness judgment rule.
As the managing member of the LLCs, Gary owed plaintiff—a nonmanagingmember—a fiduciary duty (see Salm v Feldstein, 20 AD3d 469, 470 [2d Dept 2005];see also Tzolis v Wolff, 39AD3d 138, 146 [1st Dept 2007], affd 10 NY3d 100 [2008]). "[I]t iselemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whoseinterests the fiduciary is to protect. This is a sensitive and inflexible rule of fidelity,barring not only blatant self-dealing, but also requiring avoidance of situations in which afiduciary's personal interest possibly conflicts with the interest of those owed a fiduciaryduty" (Birnbaum v Birnbaum, 73 NY2d 461, 466 [1989] [internal quotationmarks and citations omitted]).
Reliance on outside professionals under Limited Liability Company Law §409 (b) (2) must be in good faith (see Limited Liability Company Law §409 [a]; Stephens v National Distillers & Chem. Corp., 1996 WL 271789, *6,1996 US Dist LEXIS 6915, *19 [SD NY, May 21, 1996, Nos. 91 Civ 2901 (JSM), 91Civ 2902 (JSM)]). As described here, Gary does not meet his initial burden of showingthat he acted in good faith and undivided loyalty to plaintiff so as to rely on LimitedLiability Company Law § 409 or the business judgment rule.
To establish a breach of fiduciary duty, the movant must prove the existence of afiduciary relationship, misconduct by the other party, and damages directly caused by thatparty's misconduct (seeKurtzman v Bergstol, 40 AD3d 588, 590 [2d Dept 2007]). In 2006, to settle adispute, Gary and plaintiff, both represented by counsel, agreed in writing that uponplaintiff's payment of more than $2.2 million and attorney's fees to four properties inwhich he and Gary, along with others, had a financial interest, any "discrepancy"between payments recorded in the properties' books and their bank statements would be"written off by the [four properties]." The parties knew that the amounts to be paid byplaintiff were less than the full amounts originally at issue. Plaintiff timely made allpayments. However Gary, the managing member, contends the accountant informed himthat under the Tax Law, the properties would have to account for the "written-off funds,"amounting to about $750,000. Gary followed the accountant's instructions to place theentire burden on plaintiff, reasoning that the "discrepancy" had likely been due toplaintiff's previous actions.
Neither the LLCs' operating agreements nor the 2006 settlement agreement provideany authority to unilaterally reduce plaintiff's accounts. Further, Gary makes no showingthat he informed plaintiff of the accountant's recommendation or notified him that hiscapital accounts, and no one else's, were depleted in order to address the tax situation.
At a later date, and without notice, Gary discontinued making distributions toplaintiff. Gary contends that plaintiff was not singled out for harmful treatment becausethe operating agreements for the LLCs require distributions to be made in proportion to amember's capital account, and all members' distributions were made that way. However,as the motion court noted, plaintiff was the only member who had his capital accountwritten down.
Gary had an interest in reducing plaintiff's capital accounts, as opposed to chargingcertain amounts to the LLCs, because the latter course of action would ultimately havehad a negative financial impact on Gary. These failures to make truthful and completedisclosures (Limited Liability Company Law § 409), and Gary's conflict inchoosing to burden only plaintiff and not all the LLCs members, including himself, doesnot show "undivided and undiluted loyalty" (Birnbaum v Birnbaum, 73 NY2d at466; see also Limited Liability Company Law § 409).
Gary also fails to show that he is entitled to summary judgment dismissing so muchof the [*3]first cause of action alleging breach offiduciary duty with respect to the 83rd Street property, which is owned bytenants-in-common, based on the business judgment rule. He cites no cases applying thatrule to a tenancy-in-common. Even if, arguendo, the business judgment rule could beapplied to a tenancy-in-common, it "does not protect . . . corporatefiduciaries when they make decisions affected by inherent conflict of interest" (Wolfv Rand, 258 AD2d 401, 404 [1st Dept 1999]). In addition, "[t]he business judgmentrule . . . permits review of improper decisions, as when the challengerdemonstrates that the board's action . . . deliberately singles out individualsfor harmful treatment" (Barbour v Knecht, 296 AD2d 218, 224 [1st Dept 2002][internal quotation marks omitted]). In sum, Gary's motion was properly denied as to thefirst cause of action.
However, Gary should have been granted summary judgment dismissing the fifthcause of action, which alleged breach of contract with respect to the 83rd Street property,because plaintiff failed to prove that there was a contract for that property (see AlliedSheet Metal Works v Kerby Saunders, Inc., 206 AD2d 166, 172-173 [1st Dept1994]). We note that plaintiff can still seek his distributions for the 83rd Street propertyunder the first cause of action.
Turning to plaintiff's cross motion, the motion court should have granted summaryjudgment dismissing the seven affirmative defenses. The first defense relies on theprovision in the LLC operating agreements governing distributions. However, plaintiffestablishes that he continued to receive distributions for about three years after hisaccounts were emptied. Gary's lack of good faith is revealed when he does not explainwhy the terms of the operating agreement were disregarded for three years and thensuddenly enforced. Additionally, the first defense has no application to thetenancy-in-common.
The second defense should be dismissed because the evidence submitted onplaintiff's cross motion refuted defendants' allegations that the 2006 settlement agreementrequired a general reconciliation of the books and records relating to the properties atissue on appeal, that Eisner & Lubin performed such a reconciliation, that Eisner &Lubin discovered that plaintiff had fraudulently entered expenses, and that, as a result,his capital accounts were reduced.
The third defense of the business judgment rule is dismissed for the reasons statedabove; plaintiff establishes prima facie that Gary's actions toward him were not carriedout in good faith, and Gary fails to raise a triable question of fact. The business judgmentrule is not applicable in the absence of good faith which includes "deliberately singl[ing]out an individual for harmful treatment" (Owen v Hamilton, 44 AD3d 452, 456 [1st Dept 2007],lv dismissed 10 NY3d 757 [2008]).
Plaintiff should also have been granted summary judgment dismissing the fourthdefense. The basis for defendants' allegation that plaintiff has unclean hands is hispre-April 2006 disbursements from the properties, which defendants characterize asmisappropriation. However, Gary released those claims in the July 2006 settlementagreement.
The fifth defense of waiver is based on plaintiff's annual receipt of K-1s from theLLCs which, beginning for the tax year 2006, show that his accounts were running anegative balance, therefore, according to Gary, providing plaintiff with notice severalyears before he instituted this action. However, plaintiff was never alerted by hisaccountant (the same firm as undertook the forensic review providing the basis for the2006 settlement), of the change to his account. There was no contemplation in the 2006settlement that plaintiff's accounts would ever be invaded. In any event, the tax forms didnot alert plaintiff that his accounts were treated differently from those of the othermembers. In addition, this defense is inapplicable to the tenancy-in-common.[*4]
Plaintiff should have been granted summaryjudgment dismissing the sixth defense, as the release in the 2006 settlement agreementdoes not bar his claims. Plaintiff should also have been granted summary judgmentdismissing the seventh defense, failure to join indispensable and necessary parties,namely, the LLCs. The breach of fiduciary duty claim can proceed against Gary in theabsence of the LLCs.
Plaintiff was also entitled to summary judgment in his favor on his first cause ofaction for breach of fiduciary duty as against Gary. As already discussed, all of theaffirmative defenses should have been dismissed (see Brandy B. v Eden Cent. School Dist., 15 NY3d 297,302 [2010] ["(s)ummary judgment must be granted if the proponent makes a prima facieshowing of entitlement to judgment as a matter of law, tendering sufficient evidence todemonstrate the absence of any material issues of fact, and the opponent fails to rebutthat showing" (internal quotation marks omitted)]). Although judicial inquiry into theactions of corporate directors is normally prohibited, plaintiff has made a showing ofself-dealing and misconduct on Gary's part, and we are thus permitted to examine themanagement of the LLCs' finances, as well as those of the tenancy-in-common (seeJones v Surrey Coop. Apts., 263 AD2d 33, 36 [1st Dept 1999]). While it may be thatGary relied on his accountant's opinion when he drained plaintiff's capital account, hisand the accountant's failure to inform plaintiff of this decision or of the subsequentelimination of distributions, clearly establishes plaintiff's claim that Gary was not actingin his best interest and that Gary breached his fiduciary duty of care (compare Schultzv 400 Coop. Corp., 292 AD2d 16, 22 [1st Dept 2002]).
We have considered the parties' remaining arguments, including Gary's argument thatplaintiff is estopped from complaining about distributions, and plaintiff's argument thatJonathan's motion should have been denied, and find them unavailing.Concur—Tom, J.P., Friedman, Renwick, Feinman and Clark, JJ. [Prior CaseHistory: 2013 NY Slip Op 30132(U).]