Costello v. Molloy
| Decision Date | 23 September 2021 |
| Docket Number | 51797/21 |
| Citation | 73 Misc.3d 1206 (A),153 N.Y.S.3d 823 (Table) |
| Parties | William M. COSTELLO, individually and as a member of and suing in the right of Curis Partners, LLC, Plaintiff, v. Ronald M. MOLLOY and Curis Partners, LLC, Defendants. |
| Court | New York Supreme Court |
MITCHELLS LLP, By: Gilbert de Dios, Esq., Clyde Mitchel, Esq., Attorneys for Plaintiff, 84-58 151st Street, Briarwood, New York 11432
PARLATORE LAW GROUP, By: Scott D. Brenner, Esq., Attorneys for Plaintiff, One World Trade Center, Suite 8500, New York, New York 10007
HOGUET NEWMAN REGAL & KENNEDY, LLP, By: Frederic S. Newman, Esq., John P. Curley, Esq., Iricel E. Payano, Esq., Attorneys for Defendants, 60 East 42nd Street, 48th Floor, New York, New York 10165
The following e-filed documents, listed in NYSCEF by document numbers 6-11, 14-16, 22-29 were read on this motion by Plaintiff William M. Costello ("Plaintiff" or "Costello"), individually and as a member of and suing in the right of Curis Partners, LLC ("Curis") for an order granting Plaintiff a preliminary injunction:
Upon the foregoing papers and for the reasons set forth herein, Plaintiff's motion is granted in part to the extent set forth herein.
This action was initiated with Plaintiff's filing of a Summons and Complaint on February 17, 2021. It arises from Defendants’ attempt to divest him of his membership interest in Curis effective December 31, 2020. On February 18, 2021, Plaintiff filed this motion by Order to show Cause. The Court held a conference regarding the interim relief requested and granted a temporary restraining order enjoining Defendants from passing any amendment or other resolution that diminishes or otherwise adversely affects Plaintiff's rights or interest in Curis (NYSCEF Doc. No. 16).
The Court further ordered that the parties engage in mediation since the action is subject to the mandatory mediation rules of the Ninth Judicial District. However, the case did not settle. On April 20, 2021, the Court held a Preliminary Conference and issued a Preliminary Conference Order setting October 14, 2021 as the date for the completion of discovery and scheduling a trial readiness conference for October 20, 2021. The Court subsequently scheduled a hearing on the motion, which was held on June 29, 2021 and July 7, 2021. On July 29, 2021, the Court received the transcripts of the hearing and the Court was also advised by Plaintiff's and Defendants’ counsel that neither was requesting the right to file post-hearing briefs.
Based on the hearing held and the evidence presented, there are very few disputed facts. The parties agree that on May 15, 2015, Curis was formed when Costello, Molloy, George Stivala ("Stivala"), and Scott Petersen ("Petersen") entered into the Operating Agreement of Curis, a New York limited liability company (Plf's Ex. 1).2 The Operating Agreement was drafted by Molloy (Tr. at 174), and Costello, Stivala, and Petersen all had an opportunity to review it prior to signing it, although there is a dispute over whether the terms of Section 11.3 () were discussed prior to signing. Molloy, Stivala and Petersen testified that Section 11.3 was discussed and that all three understood it to mean that if one of them ceased being a working and contributing member of Curis, his membership could be terminated (Tr. at 112, 118-119, 120, 174, 218-219, 222-223, 236-37, 243-44). By contrast, Costello testified that Section 11.3 was not discussed (Tr. at 72). He further testified that the language is inapplicable to him since it is limited to employees and not Curis’ Members (Tr. at 69).3 The membership interests, at least with regard to Costello, Petersen, Molloy and Stivala, were given in exchange for their agreement to be working members of Curis (Tr. at 109, 218, 236).
Pursuant to the Operating Agreement, Costello and Molloy were each vested with a 25.1% membership interest, and Petersen and Stivala were each vested with a 24.9% membership interest (Plf's Ex. 1 at § 3.1.1 and Schedule A). On November 10, 2015, a new member, John Foster, was admitted and Molloy gave Foster 10% of his 25.1% membership interest in exchange for Foster's payment of $50,000 leaving Molloy with a 15.1% membership interest (Plf's Ex. 2; Tr. at 206-08). Foster has never worked for Curis (Tr. at 127); instead, Molloy determined that he should be given a 10% membership interest based on Foster's substantial wealth that could be tapped into if Curis ever needed working capital (Tr. at 128). However, Molloy admitted that Foster had no commitment to provide further funding to Curis (Tr. at 161). Further, since Foster is not a working member, the provision under which Molloy purportedly terminated Costello and forfeited Costello's membership interest based on Costello's alleged failure or inability to work is inapplicable to Foster's membership.
Since its formation, Molloy has been Curis’ Chief Executive Office and Manager. As reflected in the Operating Agreement, the Manager has numerous powers assigned to him (Def's Ex. C).4 Costello, prior to his termination in December 2020 was Curis’ Chief Operating Officer, Stivala is Curis’ Chief Medical Officer (id.; see also Tr. at 216; Plf's Ex. 8 at ¶¶ 4-5) and Petersen is its Chief Information (Technology) Officer (Def's Ex. C; Tr. at 231-232). At some point after the parties entered into the Operating Agreement (August 2015), Costello contributed $40,000 in capital, but this amount was subsequently reimbursed to him by Curis in early 2016 (Tr. at 34, 122, 162). Curis is in the business of providing home health care services to health plan members (Tr. at 107). Costello and Molloy have been friends and business associates for some 30 years prior to the dispute giving rise to this action (Tr. at 13-14, 112-14), and the company that they both worked at prior to forming Curis was Medical House Calls (Tr. at 13), a company that was in the same business as Curis (Tr. at 107). Indeed, Curis’ only client is Health First, which was Medical House Calls’ client prior to it leaving Medical House Calls for Curis (Tr. at 16, 21-22, 170). It is undisputed that the COVID-19 pandemic caused Curis to shutdown in March 2020 since it could not have the doctors perform house calls (Tr. at 130), and the last time any member received a distribution was in July 2020 (Tr. at 127, 204). Despite Curis being shutdown, according to Molloy, Curis spent this time developing another line of business (Tr. at 131-32). In addition, during the shutdown, Curis obtained $430,000 in PPP loans (Tr. at 155). Beginning in September 2020, Curis was able to resume its house call business (Tr. at 155).
The evidence at the hearing makes clear that Costello was not an employee of Curis; instead, he was providing services as a working member of Curis (Tr. at 8, 64-65, 67-69, 73, 167, 177 [K-1s not W-2s], 179-181, 183, 214, 218). It is Costello's position that he could continue to be a member even if he was not working for Curis (Tr. at 69).
Although it took a while for Curis to get off the ground, Curis turned into a very profitable company and Costello, Molloy and Petersen5 each earned distributions totaling approximately $240,000 in 2018 and $305,000 in 2019 (Tr. at 76; Plf's Ex. 8 at ¶¶ 10-14).
This action was initiated based on the Termination Letter Costello received in December 2020. The Termination Letter dated December 8, 2020 and authored by Molloy states:
A review of the Termination Letter, as well as Section 11.3 of the Operating Agreement, makes clear that the Termination Letter and attached proposed release was more akin to a settlement proposal since rather than simply offering Costello what Defendants contend he was entitled under Section 11.3 (), Defendants also offered Costello a right to receive 10% of the proceeds from any sale of Curis occurring within 12 months of December 31, 2020. Further evidence of its settlement proposal characteristics is the fact that Molloy was requesting that Costello sign not only the Termination Letter, but also the attached proposed general release, which was not required pursuant to Section 11.3. It is undisputed that Costello did not receive any payout because, according to Molloy, Costello's Capital Account had a negative balance. Molloy explained that...
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