Littman v. Magee

• Decision Date: 10 June 2008
• Docket Number: No. 602176/06,No. 3264,602176/06,3264
• Citation: 2008 NY Slip Op 5347,860 N.Y.S.2d 24,54 A.D.3d 14
• Parties: STEVEN LITTMAN, Appellant, v. JOHN W. MAGEE et al., Respondents, et al., Defendants.
• Court: New York Supreme Court — Appellate Division

54 A.D.3d 14

860 N.Y.S.2d 24

2008 NY Slip Op 5347

STEVEN LITTMAN, Appellant, v. JOHN W. MAGEE et al., Respondents, et al., Defendants.

No. 602176/06

No. 3264

Appellate Division of the Supreme Court of the State of New York, First Department.

June 10, 2008.

Kennedy Johnson Gallagher LLC, New York City (James W. Kennedy of counsel), and Shapiro Forman Allen Sava & McPherson LLP, New York City (Stuart L. Shapiro and Yoram Miller of counsel), for appellant.

Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York City (Sanford I. Weisburst, Michael B. Carlinsky, David L. Elsberg, Manny J. Caixeiro and William B. Adams of counsel), for respondents.

OPINION OF THE COURT

SAXE, J.P.

Plaintiff alleges that defendants wrongfully prevailed upon him to sell his minority interest in defendants' closely held corporation, and to execute in that context a broad release, by making assertions that he understood to mean that no material financial information was available beyond the limited materials already supplied to him. Since on a motion pursuant to CPLR 3211 the court must accept as true the allegations of the complaint, and give the plaintiff the benefit of any reasonable inference to be drawn from them (see Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 [2001]), and particularly since defendants owed plaintiff a fiduciary duty (see Global Mins. & Metals Corp. v Holme, 35 AD3d 93, 98 [2006], lv denied 8 NY3d 804 [2007]), the motion court erred in concluding that as a matter of law plaintiff's claims are barred by the terms of the release he signed.

The facts as alleged are as follows: Plaintiff was a founding member, with an 18.7% interest, in Rockwood Realty Associates LLC (Rockwood), a closely held New York real estate investment banking LLC formed in 1996 to provide transactional and advisory services to financial institutions and public and private owners. It is asserted that over the intervening years, the two owners with the majority interest in Rockwood increasingly arranged financial transactions for their benefit and to plaintiff's detriment. In this vein, in 2003 the company sold an interest in real estate and allocated $3.6 million to plaintiff in his K-1 for that year as his share of the earnings, creating a personal tax obligation for plaintiff of over $900,000, without paying him any cash distributions from the company to cover them, as had been the understanding of the members when the company was formed. So, in 2004, when plaintiff was approached about selling his interest back to the company, he responded positively, and negotiations began.

Plaintiff asserts that he repeatedly asked defendants to provide him with all the information he and his accountants believed necessary in order to determine the value of his interest. Initially, the information provided was limited to a Rockwood-generated balance sheet and income statement for the nine months ending in September 2004. Later, in response to plaintiff's request for further information regarding the value of Rockwood, its affiliates, and its projected value on a going forward basis, he was provided with tax returns and the combined financial statements for Rockwood and its affiliates for the years ended 2002 and 2003. The provided statements disclosed that Rockwood had eight affiliates of which it was the sole member and managing member; however, they were insufficient to analyze the value of the affiliates or their future prospects.

When plaintiff requested further information, including future financial projections, Rockwood's CFO allegedly instructed plaintiff that "no other information was or would be made available" and any further discussion was rebuffed. Further, Rockwood's CFO threatened that if plaintiff did not agree to the proposed sale, approximately $1 million in income would be allocated to him for the year 2004, while no distribution would be made to him to cover the taxes resulting from that allocation. Plaintiff emphasizes that defendants were actually in possession of financial projections but failed and refused to provide them, in order to induce and, essentially, compel him to agree to the proposed deal in the absence of the sought information.

On April 15, 2005, plaintiff entered into a membership interest transfer agreement with Rockwood, selling his interest back to the company for $2.125 million. As part of the agreement, plaintiff represented and warranted that he had "such knowledge and experience in financial and business matters such that [he] is capable of evaluating the terms and provisions of this Agreement and the other Transaction Documents." He also executed a broad omnibus general release of all claims between them.

In May 2006, Rockwood announced that DTZ Holdings, PLC had purchased a 50% interest in Rockwood for $45 million. Plaintiff commenced the instant action shortly thereafter, asserting that defendants had concealed information concerning the true value and prospects of Rockwood. Plaintiff asserted claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, constructive trust and an accounting, and sought a declaratory judgment declaring the general release void ab initio. Defendants moved to dismiss the complaint, asserting that it failed to state a cause of action and that it was barred by the release. The motion was granted, and this appeal ensued.

"[A] valid release constitutes a complete bar to an action on a claim which is the subject of the release" (Global Mins., 35 AD3d at 98). But, "a general release will not insulate a tortfeasor from allegations of breach of fiduciary duty, where he has not fully disclosed alleged wrongdoing" (H.W. Collections v Kolber, 256 AD2d 240, 241 [1998]). And, "a release may be set aside on the traditional bases of fraudulent inducement, fraudulent concealment, misrepresentation, mutual mistake or duress" (Global Mins., 35 AD3d at 98, citing Hack v United Capital Corp., 247 AD2d 300, 301 [1998]). Of course, even where there is a fiduciary relationship, a plaintiff with such a claim must establish justifiable reliance on the misrepresentations or omissions at issue (see Global Mins. at 98). So, if he was aware of information that rendered his reliance unreasonable, or if he had enough information to create a duty to investigate further, the requisite reliance cannot be established (id. at 98-101; see also Permasteelisa, S.p.A. v Lincolnshire Mgt., Inc., 16 AD3d 352 [2005]). However, in this instance, and at this juncture, it was erroneous to conclude as a matter of law that plaintiff could not establish the requisite justifiable reliance to set aside the release.

Initially, defendants, as shareholders, and particularly as active managing shareholders in a closely held corporation, owed a fiduciary duty to plaintiff, a minority shareholder (Global Mins. at 98). Plaintiff was therefore entitled to expect defendants to disclose any information in their possession that could reasonably bear on his consideration of defendants' offer, since "when a fiduciary, in furtherance of its individual interests, deals with the beneficiary of the duty in a matter relating to the fiduciary relationship, the fiduciary is strictly obligated to make full disclosure of all material facts" (Blue Chip Emerald v Allied Partners, 299 AD2d 278, 279 [2002], quoting Birnbaum v...