Favourite Ltd. v. Cico
| Decision Date | 21 June 2022 |
| Docket Number | Appeal No. 15157,Index No. 652857/16,Case No. 2021-02511 |
| Citation | 171 N.Y.S.3d 67 |
| Parties | FAVOURITE LIMITED, et al., Plaintiffs-Respondents, v. Benedetto CICO, et al., Defendants-Appellants, 151 East Houston Acquisition LLC, Defendant. |
| Court | New York Supreme Court — Appellate Division |
Marvin Kemp. PLLC, Rhinebeck (Sean M. Kemp of counsel), for Carla Cico appellant; Toptani Law Offices, New York (Edward Toptani of counsel), for Benedetto Cico, appellants.
Fein & Jakab, New York (Peter Jakab of counsel), and Valla Associates, Inc., PC., New York (Antonio Valla of counsel), for respondents.
Rolando T. Acosta, P.J., Dianne T. Renwick, Peter H. Moulton, Saliann Scarpulla, John R. Higgitt, JJ.
This appeal raises the interesting question of whether a trial court has the discretion to grant a plaintiff leave to amend a complaint, pursuant to CPLR 3025 (b)1 , after the Appellate Division has already ordered the complaint dismissed, with direction to enter judgment. We dismissed the complaint because plaintiffs, as non-managing members of a manager-managed Delaware limited liability company, lacked capacity2 or standing to act on behalf of the Company when they obtained a Certificate of Revival of the Company before filing a second amended complaint. After plaintiffs purportedly remedied this deficiency of proper standing, they sought to revive the dismissed action by seeking leave to file a third amended complaint. As aforementioned, after we had already ordered the complaint dismissed, the motion court granted plaintiffs leave to file the third amended complaint. At the time plaintiffs sought leave to amend, the time to commence a new action had expired, including the six-month grace period provided by CPLR 205(a).3 Under these circumstances, we find that the trial court lacked discretion to grant plaintiffs leave to amend a complaint that had already been dismissed by this Court.
A review of the long and entangled procedural history of this case is helpful to assess plaintiffs’ predicament. In 2007, the parties formed Upper East Side Suites, LLC (the Company), a Delaware limited liability company to be managed by two siblings, defendants Benedetto and Carla Cico (the Cicos or defendants), for the purpose of acquiring 44-46 East End Avenue and renting the apartments as short-term accommodations (like Airbnb). The parties invested over $4.5 million in the Company. This case involves alleged improprieties by the Cico defendants. While the Cicos are alleged to have caused some of the losses due to their acts of self-dealing and deficient management, a critical event also adversely affected the viability of the Company. It became illegal in New York, after the Company purchased the building, to operate the Company's short-term rental business. This eventually resulted in the building defaulting on its mortgage. Faced with foreclosure, the Cicos sold the building and used the net proceeds of $1.1 million as a down payment on a more expensive building, located at 151 Houston Street. Since the purchase price of the new building was nearly $19 million, substantial additional investment was required to close the sale. The investment, however, never materialized and the proceeds from the sale of the building were apparently forfeited.
On November 13, 2015, non-managing members holding more than 50% of the membership interests in the Company, as permitted by the operating agreement, voted to remove the Cicos as managers. In May 2016, the Company, and various members, Favourite Ltd., Claudio Gatelli, Graziano Sghedoni, Alberto Brentegani, Sirio SRL, and Oile SRL (plaintiff members) commenced this action against the Cicos, and others, to recover their investments in the Company. Without stating whether the claims were direct or derivative, the action asserted claims for breach of the Company's operating agreement, breach of fiduciary duty, unjust enrichment, an accounting, fraud, and conversion. Meanwhile, on November 16, 2016, the Delaware Secretary of State cancelled the Company's certificate of formation for failure to replace the registered agent who had resigned.
On February 21, 2018, the Company defaulted, and the motion court granted defendants’ motion without opposition and dismissed all the claims in the complaint. The court stated that the remaining plaintiffs "lack standing because the potentially viable claims in the complaint are derivative, and the complaint does not assert any derivative claims." The court explained that "[a]ll of the complaint's potentially viable causes of action belong to the Company because any recovery ... would go to the Company and be distributed pro rata to its members," and that the complaint failed to sufficiently allege fraud.
The court instructed the remaining plaintiffs to "decide whether they will seek leave to file an amended complaint in which they will replead their claims derivatively" and "that if an amended derivative complaint is filed, the proper causes of action should be for breach of the Operating Agreement and breach of fiduciary duty."
On March 29, 2018, plaintiff members filed its first amended complaint, asserting a first cause of action, individually and derivatively, for breach of the operating agreement, a second cause of action, derivatively, for breach of fiduciary duty, and a third cause of action, individually and derivatively, for fraud. The Company was dropped as a plaintiff in the first amended complaint after losing its legal representation.
On April 19, 2018, after the first amended complaint was filed, Sirio, as a member of the Company, obtained a Delaware Certificate of Revival of the Company. On May 31, 2018, plaintiff members asked the Company's other members to vote to approve a second amended complaint Resolution (the Resolution), which would authorize the Company to file a second amended complaint in the action. Fifty-one percent of the Company's members approved the Resolution by June 30, 2018.
On June 21, 2018, defendants moved to dismiss the first amended complaint, and on July 23, 2018, plaintiff members cross-moved for leave to file a second amended complaint to include the Company as a direct plaintiff, citing the certificate of revival and the members’ consent to prosecute this action. The second amended complaint contains four causes of action: (1) derivative claim for breach of the operating agreement, asserted by the Company against the Cicos; (2) derivative claim for breach of fiduciary duty, asserted by the Company against the Cicos; (3) direct claim of fraud, asserted by plaintiff members against the Cicos; and (4) direct claim for inspection of the Company's books and records, asserted by plaintiff members against the Cicos.
In October 2018, the motion court largely granted the motion to amend. The court summarily rejected defendants’ argument based on the certificate of revival, holding that the Company was no longer "inactive" and had standing to assert direct claims. The motion court also rejected defendants’ jurisdictional argument, noting that, except for judicial dissolution claims, New York courts "routinely" adjudicate disputes involving the internal affairs of Delaware entities. The motion court, however, found the direct claim of fraud, asserted by plaintiff members against the Cicos, was not sufficiently pleaded with particularity. Thus, the motion court allowed plaintiff members to file a second amended complaint, but only as to the proposed derivative claims.
In November 2018, plaintiff members filed the second amended complaint, and defendants again moved to dismiss it. Defendants urged that dismissal was mandated because: (1) the Company's claims are being prosecuted without actual authority as the Company is acting at the direction of a majority of its members instead of its managers; (2) even if the Company can be duly directed to act at the direction of a majority of its members, the aggregate equity held by the directing members is less than 50%; (3) the claims are timed-barred; and (4) the second amended complaint fails to sufficiently plead a claim for breach of fiduciary duty.
On June 17, 2019, the motion court found that all but a portion of the third argument lacked merit; it partially granted the motion to dismiss the second amended complaint on the grounds that the Company's breach of contract and breach of fiduciary duty claims were time-barred. The motion court noted that the parties agreed that the applicable statute of limitations for both claims under Delaware law is three years (see 10 Del C § 8106 ; Wal-Mart Stores, Inc. v. AIG Life Ins. Co. , 860 A.2d 312, 319 [Del. 2004] ). Moreover, the court noted, defendants conceded in the complaint that most of the claims accrued on May 29, 2013, less than three years before the action was commenced. Thus, the motion court found that the action was mostly not time-barred; it was only timed-barred with respect to allegations of wrongdoing prior to May 27, 2013. Otherwise, the court denied the motion to dismiss the second amended complaint, rejecting defendants’ argument that the Company's claims were being prosecuted without actual authority.
Defendants did not appeal from the June 17, 2019, order. Instead, they appealed from the October 2018 order. Defendants argued that, in the absence of a choice-of-forum provision in the Company's LLC agreement, the agreement's Delaware choice-of-law provision, together with Section 18-1001 of the Delaware Limited Liability Company Act (LLC Act), gave Delaware Chancery Court exclusive jurisdiction to adjudicate plaintiffs’ derivative claims. Alternatively, defendants argued, the Company lacked standing to sue in its own name, first, because Section 18-803(b) of the Delaware LLC Act requires...
To continue reading
Request your trial