Arfa v. Zamir, 2008 NY Slip Op 51908(U) (N.Y. Sup. Ct. 9/8/2008)
| Citation | 2008 NY Slip Op 51908 |
| Decision Date | 08 September 2008 |
| Docket Number | 603602/05 |
| Parties | RACHEL L. ARFA, ALEXANDER SHPIGEL, ARGELT LLC, on behalf of themselves and on behalf of HARLEM HOLDINGS, LCC, HARLEM MAINTENANCE SERVICES, INC. and AMELITE MANAGEMENT SERVICES, INC., Plaintiffs, v. GADI ZAMIR and ZAMIR PROPERTIES, INC., ELI MOR, JACOB PERRY, and ILAN CALIC, Defendants, 546-522 WEST 146TH Street LLC, 522-536 WEST 147TH STREET LLC, WEST 162ND STREET AND ACADEMY STREET LLC, 100-102 EAST 124TH STREET PACKAGE, LLC, HARLEM I LLC and HARLEM II LLC, and 2000 DAVIDSON AVE. LLC, Intervenors-Defendants/Counterclaim Plaintiffs/Cross-Claim Plaintiffs v. RACHEL L. ARFA, ALEXANDER SHPIGEL, Counterclaim-Defendants and GADI ZAMIR, WORLDWIDE MANAGEMENT GROUP, LLC, HARLEM HOLDINGS, LLC and AMELITE MANAGEMENT SERVICES, INC., Cross-Claim Defendants, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY & POPEO, P.C., Intervenor-Plaintiff v. 546-522 WEST 146TH STREET LLC, 522-536 WEST 147TH STREET LLC, WEST 162ND STREET AND ACADEMY STREET LLC, 100-102 EAST 124TH STREET PACKAGE, LLC, HARLEM I LLC and HARLEM II LLC Intervenor-Defendants, |
| Court | New York Supreme Court |
David J. Katz, Esq. (Schlam Stone & Dolan LLP) for Plaintiffs.
Mark G Cunha, Esq., Scott D. Laton, Esq. (Simpson Thacher & Bartlett, LLP.) for Intervener Plaintiffs Mintz Levin et al.
Eric B. Levine, Esq. (Wolf Haldenstein Adler Freeman & Herz, LLP) for Defendants.
John Van Der Tuin, Esq., Todd S. Pickard, Esq. (Balber Pickard Maldonado & Van Der Tuin P.C.) for Intervener Defendants 546-582 W. 146th Street, LLC et al.
Lawrence A. Mandelker, Esq. (Kantor, Davidoff, Wolfe, Mandelker & Kass, P.C.) for Receiver.
Motion sequence numbers 039, 040, 041 and 042 are consolidated for disposition.
In motion sequence 039, plaintiffs/counterclaim defendants Alexander Shpigel and Rachel L. Arfa move to dismiss the Intervenor-Defendants/Counterclaim Plaintiffs/Cross-Claimants'(Intervenors1) first, second, fifth, sixth, seventh and eighth amended counterclaims (CPLR 3211 [a] [1], [7]).
In motion sequence 040, cross-claim defendants Gadi Zamir and Worldwide Management Services, Inc. (Zamir Defendants) move to dismiss the Intervenors' amended cross-claims (CPLR 3211 [a] [1], [7]).
In motion sequence 041, plaintiffs/cross-claim defendants Harlem Holdings LLC (Harlem Holdings) and Amelite Management Services, Inc. (AMS) move to dismiss the Intervenor' first, second, fifth, sixth, seventh and eighth amended cross-claims.
In motion sequence 042, defendants Eli Mor, Jacob Perry, and Ilan Calic (together, Investor Defendants) move to dismiss the sixth and eighth causes of action of the second amended complaint (CPLR 3211 [a] [1], [3], [6], [7]).
The underlying action was commenced by Rachel Arfa and her husband, Alexander Shpigel (together, Arfa/Shpigel), against their former business partner, defendant Gadi Zamir.
Prior to the breakdown of their relationship, Arfa/Shpigel and Zamir, directly and through their wholly-owned companies Harlem Holdings, AmElite and Argelt LLC (Argelt), solicited a group of investors in Israel to purchase residential buildings. The parties planned to renovate and manage them, and thereafter, to sell or refinance them for profit. To this end, they organized seven New York limited liability companies (Property LLCs) to acquire seven separate properties (Properties) in and around upper Manhattan, New York.
Until October of 2005, Harlem Holdings served as the co-manager, alongside Shpigel and Zamir (together, the Managers), of each of the Property LLCs. Harlem Holdings was 60% beneficially owned by Arfa/Shpigel through Argelt, while the remaining 40% interest in Harlem Holdings was beneficially owned by Zamir, through another entity.
Bitter infighting erupted between Arfa/Shpigel and Zamir, causing a management deadlock in the Property LLCs. To break the deadlock, a proxy contest was held, and the members of the Property LLCs voted pursuant to operating agreements (Operating Agreements) in late October of 2005 to transfer management to Zamir. At this time, Zamir and his entity, WMS, assumed management responsibilities for the Property LLCs.
After less than a year at the helm, the Property LLCs removed Zamir amidst allegations of wrongdoing and the deterioration of the Properties. Thereafter, this Court appointed Lawrence Mandelker, Esq. (Receiver), as temporary receiver of Harlem Holdings, in February of 2006.
In November of 2006, Arfa/Shpigel commenced an action against Zamir, alleging a variety of misconduct, including fraud, breach of fiduciary duty and contract, both before and after the proxy contest. Additionally, Arfa/Shpigel allege that the Investor Defendants made defamatory statements to members of the Property LLCs, and another investor, Eldan-Tech. Ltd. (Eldan) during the period of the proxy contest, and lobbied the investors to remove Shpigel as manager, and otherwise, convinced them not to conduct business with Arfa/Shpigel.
The Intervenors were given leave to intervene in this action as defendants, for the purpose of filing counterclaims against Arfa/Shpigel and Harlem Holdings, and cross-claims against Zamir, arising out of the alleged mismanagement of the Properties occurring before and after the proxy contest. They seek an accounting, and assert causes of action for violation of Real Property Law (RPL) § 440-a, waste and mismanagement, breach of contract, and declaratory judgment.
Arfa and the Managers2 move to dismiss the Intervenors' first, second, fifth, sixth, seventh and eighth amended counterclaims and cross-claims (CPLR 3211 [a] [1], [7]).
The first amended counterclaim seeks an accounting against Arfa/Shpigel, Harlem Holdings and Zamir, from the time period before the Managers were removed in November of 2005, on the ground that they breached their fiduciary duties to the Intervenors in their capacities as promoters, organizers and managers of the Property LLCs.
The fifth and sixth counterclaim allege waste and mismanagement of the Properties by Arfa and the Managers, insofar as they caused the Property LLCs to make commercially unreasonable payments on self interested agreements with their affiliates, made preferential payments to companies affiliated with Arfa and the Managers, commingled funds of the Property LLCs, and engaged counsel to represent the Property LLCs that were conflicted, by virtue of the prior and continuing representation of Arfa and the Managers.
I. First, Fifth, and Six Counterclaim
Arfa and the Managers move to dismiss the counterclaims and cross-claims for an accounting, and for waste and mismanagement, on the ground that an exculpatory clause contained in the Operating Agreements precludes the assertion of any claims that are founded upon a breach of fiduciary duty.
Undoubtedly, where a member of an LLC takes on the role of manager, his conduct is held to a stricter standard of behavior (LLCL § 409 [a]; Tzolis v Wolff, 10 NY3d 100, 104-105 [2008]; see also Meinhard v Salmon, 249 NY 458, 463-64 [1928]). Consistent with this principle, this Court has already determined that Shpigel, Zamir and Harlem Holdings are fiduciaries of the Property LLCs in their capacity as managers.
The LLC's operating agreement is the basic document that sets forth the rights and duties of the members and managers among themselves, including setting forth any limitation of liability for acts performed in good faith. Nonetheless, the operating agreement cannot limit or eliminate acts or omissions that constitute bad faith (Limited Liability Corporation Law [LLCL] § 417 [a] [1]; § 420; TIC Holdings, LLC v HR Software Acquisitions Group, Inc., 301 AD2d 414, 415 [1st Dept 2003]).
The clause at issue here3 expressly limits the Managers' liability for acts undertaken in good faith, and in this vein, is consistent with New York's LLC law. Nonetheless, the clause does not limit liability for acts of "gross negligence or willful misconduct" (Operating Agreements, § 6.6). In any event, the duty of good faith does not necessarily embody all fiduciary responsibilities, including the duty of loyalty, that precludes self-interested conduct.
The Intervenors allege in sufficient detail that the Managers acted grossly negligent, and/or willfully and in bad faith, by inter alia, entering into self-interested agreements and transactions with their affiliated companies, that caused the...
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