Maldonado v. Dibre

• Decision Date: 23 June 2016
• Citation: Maldonado v. Dibre, 2016 NY Slip Op 4999, 140 A.D.3d 1501, 35 N.Y.S.3d 731 (N.Y. App. Div. 2016)
• Parties: Teodoro MALDONADO et al., Appellants–Respondents, v. Alain DiBRE et al., Respondents–Appellants.
• Court: New York Supreme Court — Appellate Division

140 A.D.3d 1501

35 N.Y.S.3d 731

2016 N.Y. Slip Op. 04999

Teodoro MALDONADO et al., Appellants–Respondents,

v.Alain DiBRE et al., Respondents–Appellants.

Supreme Court, Appellate Division, Third Department, New York.

June 23, 2016.

Tabner, Ryan & Keniry, LLP, Albany (Thomas R. Fallati of counsel), for appellants-respondents.

Deily & Glastetter, LLP, Albany (John D. Rodgers of counsel), for respondents-appellants.

Before: LAHTINEN, J.P., ROSE, LYNCH, CLARK and AARONS, JJ.

LYNCH, J.

Cross appeal from an order of the Supreme Court (Nolan, Jr., J.), entered April 27, 2015 in Saratoga County, which granted defendants' motion to dismiss plaintiffs' second amended complaint.

Plaintiffs Teodoro Maldonado and Steven Maldonado (and a third person not a party to this action) owned and operated Nissan of Saratoga, LLC, an automobile dealership located in the Town of Malta, Saratoga County. In 2009, when the dealership began to experience significant financial difficulties, the Maldonados sought assistance from defendants Alain DiBre and Patrick DiBre, who owned and operated several other Nissan dealerships. Although an agreement was not reached directly after this initial contact, in May 2010, immediately prior to the entry of an order of seizure by the dealership's secured lender, the DiBres and Maldonados negotiated a complex transaction wherein the DiBres paid them $2,000,000 for the assets and real estate of the dealership and transferred the acquisitions to two newly formed business entities, defendants Saratoga Springs Nissan LLC and 2906 Rt 9 Realty LLC (hereinafter collectively referred to as the LLCs). As part of this transaction, the DiBres and Maldonados executed a membership agreement and an operating agreement wherein it was agreed that the DiBres would own 80% and the Maldonados would own 20% of the LLCs. Further, the DiBres loaned the Maldonados the money necessary to purchase their interests in the LLCs, and the Maldonados both signed promissory notes as part of the transaction wherein they agreed to repay $226,200 in quarterly installments to defendant AP Management Group, Inc., an entity owned by the DiBres. Pursuant to a hypothecation agreement, the Maldonados each granted to AP a security interest in their 10% ownership rights in the LLCs—referred to as units—and agreed that, upon any default in payments under the promissory notes, AP would receive all dividends and distributions that the Maldonados would otherwise be entitled to as members and could also sell their respective units at either a public or private arm's-length sale.

The membership agreement called for Saratoga Springs Nissan LLC to make a monthly guaranteed payment in the amount of $25,000 to a management company operated by the Maldonados. This guaranteed payment was distinct from the cash distributions provided for in the operating agreement. As to the latter, it was agreed that the DiBres would serve as the dealership's operating managers with the authority—“from time to time in such manner as [they] determined”—to distribute cash flow in proportion to each member's interest in the LLCs. Following the creation of the LLCs, Teodoro Maldonado continued to work at the dealership as the general manager and Steven Maldonado ran the pre-owned division of the dealership. It is not disputed that, in January 2011, the DiBres terminated the Maldonados and forced them off the dealership property, that no monthly guaranteed payment has been made since January 2011 and that the Maldonados stopped making the quarterly loan payments beginning with the payment due in February 2011.

In March 2011, plaintiffs commenced this action seeking to recover their monthly management fees and share of profits, asserting causes of action for, among other things, breach of the operating and membership agreements, fraudulent inducement, breach of fiduciary duty and for an accounting. Defendants answered and interposed several counterclaims and affirmative defenses. In October 2011, defendants moved to dismiss five of the 11 causes of action in the amended complaint—namely, the first (fraudulent inducement), second (breach of contract), fourth (unjust enrichment), fifth (prima facie tort) and seventh (Labor Law) claims—based on allegations that the Maldonados were entitled to continued employment and were fraudulently induced to sell their business to the DiBres. In March 2012, Supreme Court granted the motion, holding, among other things, that the sale of the Maldonados' dealership was “the alternative to simply going out of business” and that the Maldonados' employment at the dealership was an at-will arrangement.

In October 2012, Supreme Court granted plaintiffs' application to enjoin AP's sale of the Maldonados' units in the LLCs and directed plaintiffs to post an undertaking in the amount of $50,000. Plaintiffs were unable to obtain a bond, even after Supreme Court granted an extension, and, in March 2014, the court vacated the preliminary injunction. This Court denied plaintiffs' subsequent application for a stay and, in May 2014, AP sold the Maldonados' units to the DiBres.¹ Thereafter, we denied defendants' motion to dismiss the appeal as moot and conditionally dismissed the appeal for failure to prosecute unless plaintiffs timely perfected the appeal. Plaintiffs failed to do so and we dismissed the appeal.² In the meantime, Supreme Court permitted plaintiffs to serve a second amended complaint, and, in April 2015, the court granted defendants' motion to dismiss the remaining causes of action set forth therein, finding that these claims were derivative and that, upon the sale of the Maldonados' ownership interests in the LLCs, they lost standing to continue the action. Plaintiffs now appeal, bringing up for review Supreme Court's prior order of dismissal (see CPLR 5501[a][1] ; 5701 [a][1] ).³

A derivative suit may be commenced by a member of a limited liability company on behalf of such limited liability company when recovery is sought for damages to the entity (see Tzolis v. Wolff, 10 N.Y.3d 100, 103, 855 N.Y.S.2d 6, 884 N.E.2d 1005 [2008] ). A direct or individual claim may exist, however, if the “plaintiff suffered the alleged harm individually, and he [or she] would receive the benefit of any recovery” (Scott v. Pro Mgt. Servs. Group, LLC, 124 A.D.3d 454, 454, 2 N.Y.S.3d 90 [2015] ; see Gjuraj v. Uplift El. Corp., 110 A.D.3d 540, 540, 973 N.Y.S.2d 172 [2013] ). When considering the sufficiency of a complaint, “[t]he pertinent inquiry is whether the thrust of the plaintiff's action is to vindicate his [or her] personal rights as an individual and not as a stockholder on behalf of the corporation” (Albany–Plattsburgh United Corp. v. Bell, 307 A.D.2d 416, 419, 763 N.Y.S.2d 119 [2003] [internal quotation marks and citation omitted], lv. dismissed and denied 1 N.Y.3d 620, 777 N.Y.S.2d 14, 808 N.E.2d 1273 [2004] ; see Craven v. Rigas, 85 A.D.3d 1524, 1527, 926 N.Y.S.2d 693 [2011], lv. dismissed 17 N.Y.3d 932, 935 N.Y.S.2d 574, 959 N.E.2d 511 [2011] ). If the individual claim is “confused” or “embedded” within the derivative claim, then it must be dismissed (Serino v. Lipper, 123 A.D.3d 34, 40, 994 N.Y.S.2d 64 [2014] ; see Abrams v. Donati, 66 N.Y.2d 951, 953–954, 498 N.Y.S.2d 782, 489 N.E.2d 751 [1985] ; Yudell v. Gilbert, 99 A.D.3d 108, 115, 949 N.Y.S.2d 380 [2012] ).

In support of the breach of fiduciary duty cause of action, plaintiffs allege that defendants withheld profit distributions and diverted profits, withheld management fees, used corporate property for personal use, mismanaged the dealership, caused a reduction in the value of plaintiffs' units, sold the dealership without sharing profits with plaintiffs and failed to disclose profits belonging to the dealership. By their eighth and ninth causes of action, plaintiffs allege that the LLCs have not accounted for property held in trust for plaintiffs.

We agree with Supreme Court's determination that the breach of fiduciary duty cause of action, based primarily on corporate mismanagement, misuse of corporate property and diversion of corporate funds, is a derivative one (see Jobson v. Progno, 100 A.D.3d 1407, 1407–1408, 953 N.Y.S.2d 523 [2012] ; Craven v. Rigas, 85 A.D.3d at 1527, 926 N.Y.S.2d 693 ; Albany–Plattsburgh United Corp. v. Bell, 307 A.D.2d at 419, 763 N.Y.S.2d 119.⁴ Similarly, because any right that plaintiffs have to an accounting of monies due to and diverted from the LLCs is derived from their membership in the LLCs, we agree with Supreme Court's determination that the eighth and ninth causes of action are derivative and not direct (see Yudell v. Gilbert, 99 A.D.3d at 114, 949 N.Y.S.2d 380 ). Accordingly, because plaintiffs' units were sold, Supreme Court properly determined that they did not have standing to proceed on the derivative third, eighth, ninth, tenth and eleventh causes of action (see Herman v. Herman,

122 A.D.3d 506, 507, 998 N.Y.S.2d 319 [2014] ; Ciullo v. Orange & Rockland Utils.,

271 A.D.2d 369, 369, 706 N.Y.S.2d 428 [2000], lv. denied 95 N.Y.2d 760, 714 N.Y.S.2d 710, 737 N.E.2d 952 [2000] ; Rubinstein v. Catacosinos, 91 A.D.2d 445, 446–447, 459 N.Y.S.2d 286 [1983], affd. 60 N.Y.2d 890, 470 N.Y.S.2d 570, 458 N.E.2d 1247 [1983] ). Here, the LLCs were not dissolved but sold in accordance with the operating agreement and, if there was any remedy for the derivative claims, it would belong to the purchaser of the units, not plaintiffs (see

Hanna v. Lyon, 179 N.Y. 107, 110–111, 71 N.E. 778 [1904] ; compare

Independent Inv. Protective League v. Time, Inc., 50 N.Y.2d 259, 264, 428 N.Y.S.2d 671, 406 N.E.2d 486 [1980] ). Accordingly, under the circumstances, we agree with Supreme Court that even if, as plaintiffs claim, the loss of the units was not voluntary, they still would not have standing to pursue derivative claims.

We turn next to plaintiffs' causes of action for breach of contract and the duplicative claim for a declaratory judgment.⁵ These causes of action are...