INDEX NO. 651880/2012
FILED: NEW YORK COUNTY CLERK 09/10/2012
NYSCEF DOC. NO. 15
RECEIVED NYSCEF: 09/10/2012
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
KNOX, LLC d/b/a KNOX, LLC OF NEW YORK
and DJW ADVISORS, LLC,
Plaintiffs,
v.
Index No. 651880/2012
CAPITAL L GROUP, LLC, JOHN R. LAKIAN,
DIANE W. LAMM, and JRL INVESTMENT
GROUP, INC.,
Defendants.
DEFENDANTS JOHN R. LAKIAN’S, DIANE W. LAMM’S AND JRL INVESTMENT
GROUP, INC.’S MEMORANDUM OF LAW IN SUPPORT OF THEIR
MOTION TO DISMISS
KOBRE & KIM LLP
800 Third Avenue
New York, New York 10022
Tel: +1 212 488 1200
Fax: +1 212 488 1220
Counsel for Defendants John R.
Lakian, Diane W. Lamm, and JRL
Investment Group, Inc.
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ......................................................................................................... iii PRELIMINARY STATEMENT .................................................................................................... 1 STATEMENT OF FACTS ............................................................................................................. 3 I. PLAINTIFFS AND THEIR INVESTMENTS IN THE COMPANY .................... 3 II. THE OPERATING AGREEMENT’S EXCULPATORY CLAUSE ..................... 4 III. LAKIAN’S AND LAMM’S DEPARTURE FROM THE COMPANY ................ 5 IV. THE PROPOSED DILUTIVE TRANSACTION .................................................. 5 ARGUMENT .................................................................................................................................. 6 I. PLAINTIFFS’ CLAIMS FOR FRAUDULENT INDUCEMENT AND
FRAUD AGAINST LAKIAN AND JRL MUST BE DISMISSED FOR
LACK OF PARTICULARITY. .............................................................................. 7 A. The Complaint Is Devoid of Any Facts from which Scienter Can
Reasonably Be Inferred............................................................................... 7 B. Plaintiffs Impermissibly Fail to Provide Notice to the Individual
Defendants as to Which Misrepresentations are Attributed to
Them. ........................................................................................................ 10 C. Plaintiffs’ Fraud Claim Fails for the Same Reason as Their
Fraudulent Inducement Claim and, In any Event, Is Nonsensical on
Its Face. ..................................................................................................... 12 II. PLAINTIFFS LACK STANDING TO ASSERT THE BREACH OF
FIDUCIARY DUTY AND CONVERSION CLAIMS BECAUSE THEY
ARE DERIVATIVE IN NATURE. ...................................................................... 13 III. THE PLAIN LANGUAGE OF THE OPERATING AGREEMENT
PRECLUDES ALL OF PLAINTIFFS’ CLAIMS PREDICATED ON
LAKIAN’S AND LAMM’S PERFORMANCE OF THEIR DUTIES. ............... 16 IV. PLAINTIFFS’ CONVERSION CLAIM MUST ALSO BE DISMISSED
FOR FAILURE TO PLEAD THE CLAIM’S BASIC ELEMENTS. ................... 19 A. Plaintiffs Cannot Assert a Conversion Claim Without Having
Demanded the Return of Any Property Purportedly Possessed by
the Moving Defendants. ............................................................................ 19 i
B. JRL Has Not Been Provided with Any Notice Whatsoever of the
Conversion Claim Asserted against It....................................................... 20 V. PLAINTIFFS’ CLAIMS FOR CONSTRUCTIVE TRUST MUST BE
DISMISSED BECAUSE IT IS A REMEDY AND NOT A CAUSE OF
ACTION. .............................................................................................................. 21 VI. PLAINTIFFS’ REQUEST FOR PUNITIVE DAMAGES MUST BE
DISMISSED. ........................................................................................................ 21 CONCLUSION ............................................................................................................................. 22 ii
TABLE OF AUTHORITIES
Cases
Page(s)
Aetna Cas. & Sur. Co. v Merchants Mut. Ins. Co., 84 A.D.2d 736 (1st Dep’t 1981)....................11
Agostino v. Hicks, 845 A.2d 1110 (Del. Ch. 2004) ................................................................. 14-15
Amusement Industry, Inc. v. Stern, 07 Civ. 11586, 2010 WL 2976199
(S.D.N.Y. July 26, 2010) .............................................................................................................13
Bazerman v. Edwards, 295 A.D.2d 115 (1st Dep’t 2002) .............................................................21
Benedict v. Whitman Breed Abbott & Morgan, 77 A.D.3d 867 (2d Dep’t 2010)..........................21
Benedict v. Whitman Breed Abbott & Morgan, 944 N.E.2d 1151 (N.Y. 2011) ............................21
Blackmore Partners, L.P. v. Link Energy LLC, 864 A.2d 80 (Del. Ch. Nov. 10, 2004) ...............18
Braddock v. Braddock, 60 A.D.3d 84 (1st Dep’t 2009) ..................................................................7
Cash v. Titan Fin. Servs., Inc. 58 A.D.3d 785 (2d Dep’t 2009) ....................................................20
Corso v. Bryan, 11 Misc.3d 1072(A) (Sup. Ct. Mar. 22, 2006) ....................................................14
Caniglia v. Chicago Tribune-New York News Syndicate, Inc., 612 N.Y.S.2d 146
(1st Dep’t 1994) ..............................................................................................................................6
Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985) .......................................7
Credit Alliance Corp. v. Arthur Andersen & Co., 66 N.Y.2d 812 (1985) .......................................7
DDJ Mgmt., LLC v. Rhone Group L.L.C., 78 A.D.3d 442 (1st Dep’t 2010) ...................................9
DiPace v. Figueroa, 128 A.D. 942 (3rd Dep’t 1987) .............................................................. 11-12
Edison Stone Corp. v. 42nd Street Dev. Corp., 145 A.D.2d 249 (1st Dep’t 1989) ..................... 6-7
El Entm’t U.S. LP v. Real Talk Entm’t, Inc., 85 A.D.3d 561 (1st Dep’t 2011) .............................11
Fink v. Citizens Mortg. Banking Ltd., 148 A.D.2d 578 (2d Dep’t 1989) .................................... 8-9
Finkelstein v. Warner Music Grp. Inc., 32 A.D.3d 344 (1st Dep't 2006) ......................................13
Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330 (N.Y. 1999) ...........................................7
Giant Group, Ltd. v. Arthur Andersen, LLP., 2 A.D.3d 189 (1st Dep’t 2003) ................................7
Green v. LocatePlus Holdings Corp., Civ. No. 4032-CC, 2009 WL 1478553 (Del. Ch. May 15,
2009) ...........................................................................................................................................15
In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009) ............................15
In re Dow Chemical Derivative Litig., Civ. No. 4349–CC, 2010 WL 66769 (Del. Ch. Jan. 11,
2010) ...........................................................................................................................................16
In re NYMEX S’holder Litig., Civ. Nos. 3621–VCN, 3835–VCN, 2009 WL 3206051 (Del. Ch.
Sept. 30, 2009) ............................................................................................................................18
In re Rausman, 50 A.D.3d 909 (2d Dep’t 2008) ...........................................................................19
J Squared Software, LLC v. Bernette Knitware Corp., 48 A.D.3d 351 (1st Dep’t 2008) .............20
iii
Kahn v. Portnoy, Civ. No. 3515-CC, 2008 WL 5197164 (Del. Ch. 2008)....................................18
Kelly v. Blum, Civ. No. 4516-VCP, 2010 WL 629850 (Del. Ch. Feb. 24, 2010) ..........................13
Lanzi v. Brooks, 54 A.D.2d 1057 (3rd Dep’t 1976) .........................................................................8
Lanzi v. Brooks, 43 N.Y.2d 778 (N.Y. 1977) ..................................................................................8
Laurie Marie M. v. Jeffrey T.M., 159 A.D.2d 52 (2nd Dep’t 1990) ..............................................22
Leon v. Martinez, 84 N.Y.2d 83 (1994) .....................................................................................6, 16
Mandarin Trading Ltd. v. Wildenstein, 65 A.D.3d 448 (1st Dep’t 2009) .....................................13
Mandarin Trading Ltd. v. Wildenstein, 944 N.E.2d 1104 (N.Y. 2011) .........................................13
Marvex Processing & Finishing v. Allendale Mut. Ins. Co., 91 Misc.2d 683
(N.Y. Sup. Ct. 1977) ...................................................................................................................21
Merrill Lynch Credit Corp. v. Smith, 930 N.Y.S.2d 126 (4th Dep’t 2011) .....................................7
M.J. & K. Co., Inc. v. Matthew Bender and Co., 631 N.Y.S.2d 938 (2d Dep’t 1995) ....................6
Miller v. Marchuska, 31 A.D.3d 949 (3d Dep’t 2006) ..................................................................19
Pludeman v. N. Leasing Systems, Inc., 890 N.E.2d 184 (N.Y. 2008)..............................................7
Protas v. Cavanagh, Civ. No. 6555–VCG, 2012 WL 1580969 (Del. Ch. May 4, 2012) ..............15
Rand Intern. Leisure Products, Inc. v. Bruno, 22 Misc. 3d 1111(A) (N.Y. Sup. Ct. 2009) .... 11-12
Samovar of Russia Jewelry Antique Corp. v. Generali the General Ins. Co. of Trieste, 102
A.D.2d 279 (1st Dep’t 1984) ................................................................................................ 21-22
Sirohi v. Lee, 222 A.D.2d 222 (1st Dep’t 1995) ........................................................................7, 21
Stanley Agency, Inc. v. Behind the Bench, Inc., 23 Misc. 3d 1107(A), 2009 N.Y. Slip Op.
50626(U) (N.Y. Sup. Ct. Apr. 23, 2009) ................................................................................. 11-12
Tache-Haddad Enterprises v. Melohn, 224 A.D.2d 213 (1st Dep’t 1996) ....................................20
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004)............................. 13-15
Thoreson v. Penthouse Intern., Ltd., 149 Misc. 2d 150 (N.Y. Sup. Ct. 1990) ..............................22
U.S. Underwriters Ins. Co. v. Greenwald, 31 Misc.3d 1206(A) (N.Y. Sup. 2010) .........................9
U.S. Underwriters Ins. Co. v. Greenwald, 82 A.D.3d 411 (N.Y. 2011) ..........................................9
Walker v. Sheldon, 10 N.Y.2d 401 (N.Y. 1961) ............................................................................21
Weir v. Holland & Knight, LLP, 34 Misc. 3d 1207(A) (N.Y. Sup. Ct. 2011) ......................... 19-20
Yudell v. Gilbert, 949 N.Y.S.2d 380 (1st Dep’t 2012)...................................................................13
Statutes and Rules
Page(s)
N.Y. C.P.L.R. § 3013 ................................................................................................................. 6, 11
N.Y. C.P.L.R. § 3016(b). ....................................................................................................... 6-8, 11
N.Y. C.P.L.R. § 3211(a) ............................................................................................................... 1, 6
iv
Other Authorities
Page(s)
2 Fletcher Cyc. Corp. § 275 ...........................................................................................................10
6 Del. § 18-1001 (2012) ...........................................................................................................16, 18
14 N.Y. Prac. § 212 ........................................................................................................................19
N.Y. Jur. Fraud and Deceit § 183 (2d ed. 2012) ............................................................................13
v
Defendants John R. Lakian (“Lakian”), Diane W. Lamm (“Lamm”), and JRL Investment
Group, Inc. (“JRL”) (collectively, the “Moving Defendants”), by and through their undersigned
counsel, respectfully submit this memorandum of law in support of their motion pursuant to
Section 3211(a) of the New York Civil Practice Law and Rules (“CPLR”). As set forth below,
each and every cause of action asserted against the Moving Defendants is legally insufficient on
its face and must be dismissed.
PRELIMINARY STATEMENT
Plaintiffs Knox, LLC (“Knox”) and DJW Advisors, LLC (“DJW”) (collectively,
“Plaintiffs”) come before the Court, apparently disappointed by an investment they made in a
Delaware limited liability company named the Capital L Group, LLC (the “Company”). They
principally allege that the Company, long after Lakian and Lamm had resigned their positions as
Company Officers, requested their consent to enter into a supposedly dilutive transaction. That
allegation and its attendant claims do not concern Lakian, Lamm or JRL.
Yet, in their buyers’ remorse, Plaintiffs have dragged the Moving Defendants into this
litigation by asserting various unsupported claims against them related to Plaintiffs’ initial
investment in the Company and Lakian’s and Lamm’s exercise of their duties during their
tenures as Company Officers. Plaintiffs allege that Lakian and JRL (along with the Company)
fraudulently induced them to invest in the Company and, once they had become Company
Members, Plaintiffs allege that Lakian and Lamm diverted their investment funds, supposedly
giving rise to claims of breach of fiduciary duty, fraud and conversion. All of Plaintiffs’ claims
against the Moving Defendants, however, must fail.
First, Plaintiffs’ claims sounding in fraud must be dismissed because their allegations
with respect to both the scienter and misrepresentation elements are not pled with particularity.
1
In fact, the only allegations in the Complaint that purport to support an inference of scienter are
made on “information and belief” and impermissibly do not provide any indication of the source
of the allegations, thereby rendering them insufficient to fulfill the statutory pleading
requirements. Further, although Plaintiffs made their investment just last year, they fail to
describe in the Complaint when, where or to whom the alleged fraudulent misrepresentations
were made by any of the Moving Defendants.
Second, Plaintiffs lack standing to bring their breach of fiduciary duty and conversion
claims because those claims are derivative in nature and can be pursued, if at all, only by the
Company. Plaintiffs cannot cure this defect by re-casting their claims as derivative because they
have failed to make a demand on the Company to pursue them or to even try to allege that such a
demand would be futile.
Third, the plain language of the Company’s Operating Agreement, which Plaintiffs cite to
in their own Complaint, precludes all of their claims against Lakian and Lamm that post-date
their investment in the Company.
Fourth, Plaintiffs’ claims for a constructive trust should be dismissed because a
constructive trust is a remedy, not an independent cause of action, and Plaintiffs have not stated
any claims that could warrant such a remedy.
Fifth, Plaintiffs’ claims for a punitive damages remedy also must be dismissed because
Plaintiffs have not stated any viable claims against the Moving Defendants. Moreover, the
Complaint does not allege the type of harm to the public or widespread wrongdoing necessary to
sustain a punitive damages award.
Accordingly, the Moving Defendants respectfully submit that Plaintiffs’ claims against
them should be dismissed in their entirety.
2
STATEMENT OF FACTS1
The Complaint purports to provide a narrative of Plaintiffs’ membership in the Company,
within which a limited set of transactions are alleged between Plaintiffs and the Moving
Defendants.2
I.
PLAINTIFFS AND THEIR INVESTMENTS IN THE COMPANY
Plaintiff Knox is a Nevada limited liability company authorized to do business in the
State of New York as Knox, LLC of New York. Compl. ¶ 1. Plaintiff DJW is a Connecticut
limited liability company authorized to do business in the State of New York. Id. ¶ 2. Both
Knox and DJW, on or about February 4, 2011, entered into subscription agreements (the
“Subscription Agreements”) with the Company whereby they acquired certain membership units
and rights in the Company in exchange for their capital contributions. Id. ¶ 9. Lakian, who
served as CEO and Manager of the Company until December 1, 2011, executed the Subscription
Agreements on behalf of the Company. Id. ¶ 13, Exs. A and B (“Subscription Agreements”).
Lamm, who served as COO and Manager of the Company until December 1, 2011, was not a
party to the Subscription Agreements. Id.
In the Subscription Agreements, Plaintiffs agreed to wire their capital contributions to an
account at Carolina First Bank in the name of JRL, a South Carolina corporation allegedly
controlled by Lakian. Compl. ¶¶ 6, 16; see also Subscription Agreements. The document
attached to the Complaint as Exhibit D indicates that JRL was retained by the Company to
1
For the purposes of this motion, the Court must accept the allegations as true and, accordingly,
they are presented as such herein. The Moving Defendants, however, reserve their right to
contest the veracity of any and all of the allegations should the litigation proceed beyond the
instant motion practice.
2
The Complaint and the exhibits attached thereto have been included as Exhibit A to the
Affirmation of Jonathan D. Cogan filed contemporaneously with this memorandum.
3
provide management and strategic oversight, and the services of Lakian and Lamm were made
available to the Company through JRL. See Id. Ex. D (“Master Transaction Agreement”).
Plaintiffs allege that the Company, Lakian and JRL represented to them before they
entered into the Subscription Agreements that their contributions would be used for operational
purposes.
Compl. ¶¶ 10-11.
The Company, Lakian and JRL allegedly repeated this
representation after Plaintiffs made their investments. Id. ¶ 66.
Plaintiffs allege that Lakian and Lamm, as members of the Company’s Board of
Managers and its CEO and COO, respectively, diverted their capital contributions for personal
purposes, which included a restaurant business. Compl. ¶¶ 12-15.
II.
THE OPERATING AGREEMENT’S EXCULPATORY CLAUSE
In making their capital contributions to the Company, Plaintiffs agreed to the provisions
of the Company’s Amended and Restated Limited Liability Agreement.
See Subscription
Agreements at 1(a), 2-5. The Company and its members subsequently executed the Third
Amended and Restated Limited Liability Company Agreement, dated August 9, 2010
(“Operating Agreement”), upon which Plaintiffs predicate their breach of contract claims against
the Company. Compl. ¶¶ 12, 31, Ex. C (“Operating Agreement”). The Operating Agreement
contains an exculpatory clause that provides in relevant part that:
Each Manager and Officer shall be liable solely to the Company
and, derivatively, to its Members for the Manager’s and Officer’s,
as applicable, gross negligence or willful misconduct. The
Manager’s or Officer’s taking of any action or failure to take any
action, or a Manager’s or Officer’s errors in judgment, the effect of
which may cause or result in loss or damage to the Company, if
done pursuant to the provisions of the Act, the Certificate of
Formation and this Agreement, shall be presumed not to constitute
gross negligence or willful misconduct on the part of the Manager
or Officer. Id. Operating Agreement ¶ 6.6(a)(i).
4
The Operating Agreement also provides that it shall be binding on all parties and it shall be
governed by Delaware law. Operating Agreement ¶¶ 13.4, 13.6.
III.
LAKIAN’S AND LAMM’S DEPARTURE FROM THE COMPANY
On or about December 1, 2011, less than a year after Plaintiffs invested in the Company,
Lakian, Lamm, the Company and JRL entered into the Master Transaction Agreement (“MTA”),
whereby Lakian and Lamm resigned from the Company. Compl. ¶ 17; see Master Transaction
Agreement. The MTA included general releases for “any and all claims and liabilities of any
nature” between the Company and the Moving Defendants. Compl. ¶ 17; see Master Transaction
Agreement ¶ 3.2.
Lakian and Lamm signed the MTA individually and on behalf of the
Company. Id.
There are no further allegations of relevant conduct by the Moving Defendants.
IV.
THE PROPOSED DILUTIVE TRANSACTION
The Complaint further alleges that in or about January, 2012, Knox and DJW were
requested by the Company—from which Lakian and Lamm had already resigned—to enter into a
Consent and Agreement whereby Plaintiffs would consent to the acquisition of Capital Guardian
Holding, LLC (“CG Holding”), a wholly owned subsidiary of the Company, by National Patent
Development Corporation (the “Consent Agreement”). Compl. ¶¶ 17-19. Should the Consent
Agreement have closed, Plaintiffs contend that they would have been required to surrender their
shares in the Company in exchange for cash and shares of CG Holding, thereby significantly
depreciating the value of their initial investments. Id. ¶¶ 19-20. Plaintiffs allege that the Consent
Agreement was a concerted effort made by the Company to cover up the bad acts of the Moving
Defendants which were detrimental to the Company’s Members. Id. ¶ 21.
Plaintiffs allege four causes of action against the Moving Defendants: (1) breach of
fiduciary duty with respect to Lakian’s and Lamm’s performance as Managers of the Company
5
(Count IV); (2) conversion of their capital contributions by Lakian, Lamm and JRL (Count VII);
(3) fraud in the inducement with respect to the Subscription Agreements (Count VIII); and (4)
fraud committed upon and after the execution of the Subscription Agreements (Count IX). See
Compl. ¶¶ 39-43, 53-70. Plaintiffs further assert a claim for a constructive trust for the capital
contributions they committed to the Company (Count X). Id. ¶¶ 71-76.
ARGUMENT
The Moving Defendants seek dismissal of all claims asserted against them for failure to
state a cause of action. N.Y. C.P.L.R. § 3211(a)(7). For the purposes of adjudicating the motion,
the court must accept the facts as alleged in the Complaint as true, accord Plaintiffs the benefit of
every possible favorable inference, and determine only whether the facts as alleged fit within any
cognizable legal theory. N.Y. C.P.L.R. § 3013; Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994).
“[A]llegations consisting of bare legal conclusions,” however, “are not entitled to such
consideration,” Caniglia v. Chicago Tribune-New York News Syndicate, Inc., 612 N.Y.S.2d 146,
146-47 (1st Dep’t 1994), as “conclusory allegations without factual support are insufficient to
state a cause of action.” M.J. & K. Co., Inc. v. Matthew Bender and Co., 631 N.Y.S.2d 938, 940
(2d Dep’t 1995).
Plaintiffs’ claims sounding in fraud additionally are subject to the heightened pleading
standard set forth in CPLR § 3016(b), which provides that “[w]here a cause of action or defense
is based upon misrepresentation, fraud, mistake, wilful default, breach of trust or undue
influence, the circumstances constituting the wrong shall be stated in detail.” N.Y. C.P.L.R. §
3016(b). “CPLR 3016(b) imposes a more stringent standard of pleading than the generally
applicable ‘notice of the transaction’ rule of CPLR 3013, and complaints based on fraud which
fail in whole or in part to meet this special test of factual pleading have consistently been
6
dismissed.” Edison Stone Corp. v. 42nd Street Dev. Corp., 145 A.D.2d 249, 254 (1st Dep’t
1989).
I.
PLAINTIFFS’ CLAIMS FOR FRAUDULENT INDUCEMENT AND FRAUD
AGAINST LAKIAN AND JRL MUST BE DISMISSED FOR LACK OF
PARTICULARITY.
The elements of a fraudulent inducement claim are clearly defined: “a plaintiff must
assert [i] the misrepresentation of a material fact, [ii] which was known by the defendant to be
false and [iii] intended to be relied on when made, and that [iv] there was justifiable reliance and
[v] resulting injury.” Braddock v. Braddock, 60 A.D.3d 84, 86 (1st Dep’t 2009) (citing Gaidon
v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 348 (N.Y. 1999)). Each of these elements must
be alleged with particularity. See Sirohi v. Lee, 222 A.D.2d 222, 222 (1st Dep’t 1995). Plaintiffs
have failed to carry that burden with respect to at least the first two elements. The Court’s
analysis need not continue further.
A.
The Complaint Is Devoid of Any Facts from which Scienter Can Reasonably
Be Inferred.
Plaintiffs’ allegations do not adequately plead scienter. A complaint must plead with
specificity facts from which scienter can be reasonably inferred.
Pludeman v. N. Leasing
Systems, Inc., 890 N.E.2d 184, 187 (N.Y. 2008); see also Giant Group, Ltd. v. Arthur Andersen,
LLP., 2 A.D.3d 189, 190 (1st Dep’t 2003) (upholding dismissal of fraud claim where the plaintiff
only alleged, in conclusory fashion, that “defendants knew or recklessly failed to discover certain
improprieties in the financial statements”). New York courts have consistently held that a
“single allegation of scienter, without additional detail concerning the facts constituting the
alleged fraud, is insufficient under the special pleading standards required under CPLR 3016(b).”
Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 554 amended by 66 N.Y.2d 812
(1985); Merrill Lynch Credit Corp. v. Smith, 930 N.Y.S.2d 126, 128 (4th Dep’t 2011).
7
Here, Plaintiffs allege in conclusory fashion that “Lakian, JRL and Capital L knew that
their representations to Knox and DJW were false and fraudulent and made such representations
to induce Knox and DJW to enter into their Subscription Agreements.” Compl. ¶ 60. Plaintiffs’
sole support in the Complaint for this inference of fraudulent intent is their allegation that (1)
Lakian, JRL and the Company allegedly told them that their money would be used for a
corporate purpose; and (2) at some later time, the money allegedly was used by Lakian and
Lamm for personal purposes instead.3 Thus, Plaintiffs’ factual allegations of fraudulent intent
require the Court to infer that Lakian, JRL and the Company must have known that their
representation that the money would be used for corporate purposes was false at the time they
made it simply because the money ultimately was used for other purposes.
The Court may not sustain the claim on the basis of such an inference. Under New York
law, “any inference drawn from the fact that [an] expectation did not occur is not sufficient to
sustain the plaintiff's burden” under CPLR § 3016(b). Lanzi v. Brooks, 54 A.D.2d 1057, 1058
(3rd Dep’t 1976) aff’d, 43 N.Y.2d 778 (N.Y. 1977). An illustration of this principle is provided
by Fink v. Citizens Mortg. Banking Ltd.: there, the plaintiff asserted a fraud claim based on the
allegation that the defendant never intended to fulfill its promise to close a mortgage transaction
by an agreed upon date. 148 A.D.2d 578 (2d Dep’t 1989). Plaintiff supported the fraud
allegation merely by pleading the fact that the transaction did not close at the time that
defendants had originally represented it would close. Id. The Fink court, recognizing that a
plaintiff must allege “facts sufficient to establish that the defendant, at the time the alleged
representation was made, never intended to honor its promise,” dismissed the fraud assertion as
3
As will be made clear in discovery—if this litigation proceeds beyond this dismissal motion—
Lakian and Lamm did not improperly “divert” Plaintiffs’ money for their own use. Rather, they
faithfully exercised their duties as Officers of the Company. Further, none of the Moving
Defendants made false representations to Plaintiffs regarding their investments in the Company.
8
“unsupported by any factual allegations and [] conclusory in nature.” Id. (emphasis added).
Here, as in Fink, Plaintiffs have not alleged any facts to establish that the Moving Defendants
never intended to honor their alleged promise and, as such, their fraudulent inducement claim
must be dismissed.
Moreover, Plaintiffs’ two factual allegations describing Lakian’s and Lamm’s purported
use of Company funds for personal purposes—which, as explained above, are integral to the
scienter element of their claim—are both made on information and belief. Compl. ¶ 15 (“Lakian
and Lamm, during their tenure at Capital L, diverted Knox’s and DJW’s capital contributions for
their personal use which included, upon information and belief, a restaurant business”), Id. ¶ 16
(“upon information and belief, [Plaintiffs’] funds were never delivered by Lakian and JRL to
Capital L, but instead were delivered to Lakian, Lamm, and other individuals and/or entities
affiliated with Lakian and/or Lamm”) (emphasis added). Yet “[f]actual allegations of fraud
based entirely upon ‘information and belief,’ without any indication of the sources of the
allegations, are insufficient to fulfill the statutory pleading requirements.” U.S. Underwriters
Ins. Co. v. Greenwald, 31 Misc.3d 1206(A), *4 (N.Y. Sup. 2010), aff'd, 82 A.D.3d 411 (N.Y.
2011); see also DDJ Mgmt., LLC v. Rhone Group L.L.C., 78 A.D.3d 442 (1st Dep’t 2010). As
Plaintiffs here have not provided any indication of the source of these allegations, their
fraudulent inducement claim must be dismissed as insufficient.
Finally, Plaintiffs’ allegation that Lakian and Lamm diverted their capital contributions
by having Plaintiffs wire their funds through a JRL account controlled by Lakian (presumably, as
opposed to having the funds wired directly to the Company) does not give rise to an inference of
scienter. This is not a situation in which JRL and Lakian are accused of going behind the
Company’s back to divert an investor’s money for Lakian’s own personal use. Indeed, the
9
Company is alleged to have acted together with Lakian and JRL to fraudulently induce
Plaintiffs’ investment. Thus, it makes no sense to say that the fact that the money was wired to
JRL instead of the Company is indicative of fraud. This is particularly the case given that
documents attached to the Complaint indicate that JRL was retained by the Company to provide
management and strategic oversight. See Master Transaction Agreement. It is perfectly logical
and in no way indicative of fraud that an entity that was hired by the Company to provide
services to it would receive Company money.
B.
Plaintiffs Impermissibly Fail to Provide Notice to the Individual Defendants
as to Which Misrepresentations are Attributed to Them.
Plaintiffs point to only two allegedly false statements that they say were made to them in
advance of their investment in the Company: “Lakian, JRL and Capital L falsely and
fraudulently told Knox and DJW on or before February 4, 2011 and prior to Knox and DJW
entering into their Subscription Agreements, [1] that Knox’s and DJW’s capital contributions
would be used by Capital L in furtherance of their operation of Capital L’s business and [2] that
the monies paid by Knox and DJW were to be paid into JRL for ‘regulatory reasons.’” Compl. at
¶ 59.
Both of these allegations suffer from the same defect: namely, they lump multiple
defendants together and fail to provide any detail as to who specifically among them made the
allegedly false representations to Knox and DJW; to whom at Knox and DJW (which are entities,
not people) those representations were allegedly made; or when or where they were made.
Moreover, although a corporation only acts through its agents, see 2 Fletcher Cyc. Corp. § 275,
Plaintiffs have not identified any particular agent at JRL that purportedly made the false
representations.
10
These allegations thus fall short of meeting the particularly requirement of CPLR §
3016(b). Compare Stanley Agency, Inc. v. Behind the Bench, Inc., 23 Misc. 3d 1107(A), 2009
N.Y. Slip Op. 50626(U), *12-13 (N.Y. Sup. Ct. Apr. 23, 2009) (dismissing fraud claim in which
the “plaintiff does not provide any details with regard to the alleged misrepresentation made to it
[and] does not identify the party making the alleged misrepresentation or the circumstances
under which the statement was made”) with El Entm’t U.S. LP v. Real Talk Entm’t, Inc., 85
A.D.3d 561, 561 (1st Dep’t 2011) (holding that the plaintiff’s complaint pleaded fraud with
adequate particularity when it stated “who made the misrepresentation to whom, the date the
misrepresentation was made, and its content”).
New York courts consistently reject precisely the type of group pleading alleged by
Plaintiffs here with respect to the two purported misrepresentations of a material fact. In DiPace
v. Figueroa, the plaintiff’s complaint alleged that the defendants “mismanaged, wasted, and
[took] corporate assets,” but “[n]o specific factual averments [were] provided as to when and
what wrongful acts were attributed to each defendant.”
128 A.D. 942 (3rd Dep’t 1987)
(emphasis added). The appellate court concluded that the pleading failed to satisfy the minimum
requirements of CPLR 3013 and 3016(b). DiPace at 943. Similarly, in Aetna Cas. & Sur. Co. v
Merchants Mut. Ins. Co., “the first four causes of action [were] pleaded against all defendants
collectively without any specification as to the precise tortious conduct charged to a particular
defendant.” 84 A.D.2d 736, 736 (1st Dep’t 1981). Because “[a] defendant is entitled to notice of
the material elements of each cause of action,” the court held that the “[d]efendants cannot
reasonably be required to frame a response to the complaint,” and it granted the motion to
dismiss. Id. at 736; see also Rand Intern. Leisure Products, Inc. v. Bruno, 22 Misc. 3d 1111(A),
*3 (N.Y. Sup. Ct. 2009) (dismissing complaint against defendant Hyper Bicycle, Inc. when
11
plaintiff “fail[ed] to identify, with adequate specificity, the wrongful conduct supposedly
perpetrated by Hyper” but rather “lumped Hyper together” with another defendant) (emphasis
added).
C.
Plaintiffs’ Fraud Claim Fails for the Same Reason as Their Fraudulent
Inducement Claim and, In any Event, Is Nonsensical on Its Face.
Plaintiffs’ fraud claim is virtually identical to their fraudulent inducement claim. Indeed,
the alleged fraudulent misrepresentations upon which the fraud claim is predicated are
substantively the same as those alleged in the fraudulent inducement claim. The only difference
between these two causes of action is that the alleged misstatements that form the basis of the
fraud claim were allegedly made subsequent to the time Plaintiffs entered into their Subscription
Agreements. Thus, for the same reasons that Plaintiffs fraudulent inducement claim fails, so too
does their fraud claim. See, e.g., Stanley at *12 (“[A] plaintiff must [] set forth his or her claim
in sufficient detail to clearly inform a defendant with respect to the incidents complained of in
the fraud action”).
Plaintiffs’ fraud claim fails for the additional reason that it is illogical on its face in light
of their fraudulent inducement claim.
As discussed above, the thrust of the fraudulent
inducement claim is that Plaintiffs were told alleged lies and were induced by those lies to make
their investment. Plaintiffs’ fraud claim is premised on substantively identical alleged lies
repeated after the time of their investment. In other words, Plaintiffs’ Complaint, read in its
entirety, claims that defendants (1) told them lies; (2) induced them to invest based on those lies;
and (3) after they invested, told them the same exact lies again. Just how they again relied on the
alleged lies uttered to them after they invested, and how those post-investment lies could have
12
caused them damage, is left to the imagination.4 Such an ill-defined claim cannot stand. See
Mandarin Trading Ltd. v. Wildenstein, 65 A.D.3d 448 (1st Dep’t 2009) aff’d 944 N.E.2d 1104
(N.Y. 2011) (dismissing claim for fraudulent misrepresentation when plaintiff failed to allege
reliance); N.Y. Jur. Fraud and Deceit § 183 (2d ed. 2012)( “It is fundamental that in order to
secure relief . . . for fraud, the person seeking redress must have been damaged, injured, or
harmed as a result of the asserted fraud.”).
II.
PLAINTIFFS LACK STANDING TO ASSERT THE BREACH OF FIDUCIARY
DUTY AND CONVERSION CLAIMS BECAUSE THEY ARE DERIVATIVE IN
NATURE.
In Tooley v. Donaldson, Lufkin & Jenrette, Inc., the Supreme Court of Delaware5
established the test for distinguishing derivative claims from direct claims, holding “that issue
must turn solely on the following questions: (1) who suffered the alleged harm (the corporation
or the suing stockholders individually), and (2) who would receive the benefit of any recovery or
other remedy (the corporation or the stockholders, individually).” 845 A.2d 1031, 1032 (Del.
2004). 6 The Tooley court further stated that in the context of a breach of fiduciary duty claim,
4
To the extent that this claim can be construed to allege that the Moving Defendants defrauded
Plaintiffs through acts or omissions that impacted Plaintiffs through their Membership interests
in the Company, the claim is a derivative claim that cannot be asserted directly. See Section II,
infra.
5
Delaware law applies to the instant analysis because New York courts “look to the law of the
state of incorporation in adjudicating a corporation’s ‘internal affairs,’ including the question of
whether a claim is direct or derivative.” Amusement Industry, Inc. v. Stern, 07 Civ. 11586, 2010
WL 2976199, *4 (S.D.N.Y. July 26, 2010) (citing Finkelstein v. Warner Music Grp. Inc., 32
A.D.3d 344, 345 (1st Dep't 2006)). In any event, New York courts have adopted the Tooley test
for distinguishing between direct and derivative claims under New York law, Yudell v. Gilbert,
949 N.Y.S.2d 380, 381(1st Dep’t 2012), and accordingly the analysis would be the same if the
Court were to apply New York law.
6
Although the question presented in Tooley was whether claims asserted by stockholders of a
corporation were direct or derivative claims, under Delaware law “case law governing corporate
derivative suits is equally applicable to suits on behalf of an LLC.” Kelly v. Blum, Civ. No.
4516-VCP, 2010 WL 629850, *9 (Del. Ch. Feb. 24, 2010).
13
the inquiry must be “has the plaintiff demonstrated that [it] can prevail without showing an
injury to the corporation?” Id. at 1036.
Under the Tooley test, Plaintiffs’ claims are clearly derivative, not direct. Plaintiffs
predicate their conversion claim on their allegation that Lakian, Lamm and JRL wrongfully
diverted funds invested in the Company. Compl. ¶ 54. In particular, Plaintiffs allege that first,
they invested their monies in the Company, and then Lakian, Lamm and JRL purportedly
diverted corporate monies. Id. ¶¶ 9, 15, 16. Thus, the harm that flowed from the diversion
(assuming, arguendo¸ that such a diversion occurred) was a harm that befell the Company
directly and Plaintiffs only indirectly.
Courts have frequently dismissed conversion claims brought directly when the alleged
harm was suffered by all shareholders and any remedy would accrue to the corporation. See,
e.g., Corso v. Bryan, 11 Misc.3d 1072(A) (Sup. Ct. Mar. 22, 2006) (dismissing plaintiff’s fraud
and conversion claims because “the claims to recover for the conversion of corporate assets
belong to the corporation not the individual, and damages will be awarded by the Court to the
corporation rather than directly to the derivative plaintiff”). Plaintiffs have attempted to artfully
plead around this result by alleging that “Lakian, Lamm, and JRL . . . converted Knox’s and
DJW’s cash capital contributions to Capital L.” Compl. ¶ 54. This allegation disregards the
essential fact that, at the time of the purported conversion, Plaintiffs’ capital contributions had
become the Company’s assets rather than their personal assets. See Subscription Agreements
(“the Member desires to acquire membership interests of the LLC in exchange for a Capital
Contribution”) (emphasis added). As such, all of the Company’s members would have been
ratably effected by the alleged misuse of Company funds. See Agostino v. Hicks, 845 A.2d 1110,
1123 (Del. Ch. 2004) (holding that a claim of corporate mismanagement predicated on harm
14
suffered equally by all shareholders is a derivative claim). Plaintiffs do not—because they
cannot—allege any specific facts to indicate that their investments in the Company were
impacted any differently from those of their fellow Company members. Under Tooley, a “mere
conclusory allegation of direct injury” unsupported by any “specific facts” of Plaintiffs’ direct
harm must be dismissed. Green v. LocatePlus Holdings Corp., Civ. No. 4032-CC, 2009 WL
1478553, *1 (Del. Ch. May 15, 2009); see also Protas v. Cavanagh, Civ. No. 6555–VCG, 2012
WL 1580969, *6 (Del. Ch. May 4, 2012) (claim “artfully presented” as a direct claim
nonetheless dismissed because plaintiff’s damages were “entirely dependent on the harm caused”
to the company as a whole).
Plaintiffs’ breach of fiduciary duty claim fares no better. It depends on two allegations of
misconduct: one, the diversion of Company monies and two, the execution of the release.
Compl. ¶ 40. The diversion of Company monies, as discussed above, is derivative in nature.
The challenged release is a release of a right held by the Company that could only have been
exercised by the Company for the benefit of the Company: the MTA clearly provides that
“Capital L [and two parties unrelated to this action] hereby releases and forever
discharges…each of Lakian, Lamm, JRL Investments…”. Master Transaction Agreement ¶
3.2(a) (emphasis added); see also In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106,
137-38 (Del. Ch. 2009) (holding that shareholders’ claim challenging the corporation’s execution
of a release agreement with former CEO could proceed as a derivative claim). Plaintiffs thus
cannot “prevail without showing an injury to the [Company]” with respect to either allegation
and, accordingly, the breach of fiduciary duty claim must be dismissed. Tooley at 1036; see
Agostino at 1123 (determining that plaintiff’s breach of fiduciary duty claims were derivative in
nature).
15
Plaintiffs cannot now save these claims by re-casting them as derivative claims. In order
for Plaintiffs to assert derivative claims on behalf of the Company, they must either first make a
demand on the Company or, alternatively, plead that making such a demand would be futile. 6
Del. § 18-1001 (2012). Plaintiffs have done neither. Their claims therefore must be dismissed.
See In re Dow Chemical Derivative Litig., Civ. No. 4349–CC, 2010 WL 66769, *15 (Del. Ch.
Jan. 11, 2010) (dismissing all claims for failure to adequately plead demand futility).
III.
THE PLAIN LANGUAGE OF THE OPERATING AGREEMENT PRECLUDES
ALL OF PLAINTIFFS’ CLAIMS PREDICATED ON LAKIAN’S AND LAMM’S
PERFORMANCE OF THEIR DUTIES.
Plaintiffs apparently recognize that any fiduciary duty that Lakian or Lamm may have
owed them only arose once Plaintiffs became members of the Company. See Compl. ¶ 40
(“Lakian and Lamm, as Managers of Capital L, owed a fiduciary duty of loyalty and care to
Members Knox and DJW…”) (emphasis added). And once Plaintiffs became Members, they
became bound by the Operating Agreement.7 Operating Agreement ¶ 13.6. The plain language
of that agreement bars their breach of fiduciary duty and conversion claims against Lakian and
Lamm.
In pertinent part, the Company’s Operating Agreement provides:
Each Manager and Officer shall be liable solely to the Company
[Capital L] and, derivatively, to its Members for the Manager’s or
Officer’s, as applicable, gross negligence or willful misconduct.
The Manager’s or Officer’s taking of any action or failure to take
any action, or a Manager or Officer’s errors in judgment, the effect
of which may cause or result in loss or damage to the Company, if
done pursuant to the provisions of the Act, the Certificate of
Formation and this Agreement, shall be presumed not to constitute
7
Plaintiffs have attached to the pleading the Third Amended and Restated Limited Liability
Company Agreement of Capital L Group, dated August 9, 2010. Compl. Ex. C, Operating
Agreement. Plaintiffs’ breach of contract claim alleges that they are bound by that agreement
(Id. ¶ 29), and the Court must take that allegation as true for the purpose of this motion practice.
See Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994).
16
gross negligence or willful misconduct on the part of the Manager
or Officer. Operating Agreement ¶ 6.6(a)(i) (emphasis added).
The Company’s Operating Agreement thus limits the liability of Directors and Officers to
certain conduct and, more importantly, grants the Company with the sole authority to bring any
action against those Officers and Directors. In so doing, the Operating Agreement provides an
additional basis (independent of the law regarding derivative actions described above) for the
preclusion of any of the Members—including Plaintiffs—from suing Lakian and Lamm for
claims predicated on their actions as Company Officers, including the breach of fiduciary duty
claim asserted in the fourth cause of action.
The second sub-paragraph of the Operating Agreement’s Liability provision further
makes clear that the intent of the provision in its entirety is to limit the liability of the Managers
and Officers to the Members. That sub-paragraph provides: “The Members shall look solely to
the Company’s property for the return of their Capital Contribution, and if the Company property
remaining after payment or discharge of the Company’s debts and liabilities is insufficient to
return such Capital Contributions, no Member shall have recourse against any Manager or any
Officer, except as provided in Section 6.6(a)(i) above, or any other Member.”
Agreement ¶ 6.6(a)(ii).
Operating
Thus the combined effect of the two provisions is to protect the
Managers and Officers from litigation initiated by any Member, either on account of their
alleged misconduct or on account of a Member’s inadequate capital return, and to assign the
Company sole responsibility for (i) bringing actions against Managers or Officers for their
putative misconduct and (ii) providing the members with their capital return.
17
This limitation of liability is consistent with the governing Delaware Limited Liability
Company Act,8 which allows limited liability companies to limit the scope of their managers’
fiduciary duties. 6 Del. § 18-1101(c) (“the member’s or manager’s or other person’s duties may
be expanded or restricted or eliminated by provisions in the limited liability company
agreement”); see Kahn v. Portnoy, Civ. No. 3515-CC, 2008 WL 5197164, *3 (Del. Ch. 2008)
(stating that “LLC agreements are contracts that are enforced according to their terms”).
Delaware law thus permits the Operating Agreement’s exculpatory clause and Plaintiffs, who are
bound by the Operating Agreement’s terms, accordingly have no right to assert the breach of
fiduciary duty claim they have alleged here. That claim must therefore be dismissed. See
Blackmore Partners, L.P. v. Link Energy LLC, 864 A.2d 80, 84 (Del. Ch. Nov. 10, 2004)
(recognizing the validity of an exculpatory clause in the Operating Agreement of a Delaware
limited liability company); cf. In re NYMEX S’holder Litig., Civ. Nos. 3621–VCN, 3835–VCN,
2009 WL 3206051, *6 (Del. Ch. Sept. 30, 2009) (dismissing shareholder claims against
corporate executives due to exculpatory clause in the certificate of incorporation precluding
liability for breaches of the duty of care).
Plaintiffs’ conversion claims against Lakian and Lamm are similarly founded on their
alleged conduct after Plaintiffs became Members of the Company and were bound by the
Operating Agreement.
Although Plaintiffs’ pleading declines to provide any temporal
parameters for the misconduct alleged, it must be inferred that Lakian and Lamm could only
have “converted Knox’s and DJW’s cash capital contributions to Capital L,” Compl. ¶ 54, once
Plaintiffs had executed the Subscription Agreements, contributed their capital and become
8
The Operating Agreement provides that it shall be construed and enforced in accordance with
the laws of the State of Delaware. Operating Agreement ¶ 13.4.
18
Members.9
The conversion claims against Lakian and Lamm are thus precluded by the
Operating Agreement’s exculpation clause as well and must be dismissed.
IV.
PLAINTIFFS’ CONVERSION CLAIM MUST ALSO BE DISMISSED FOR
FAILURE TO PLEAD THE CLAIM’S BASIC ELEMENTS.
A.
Plaintiffs Cannot Assert a Conversion Claim Without Having Demanded the
Return of Any Property Purportedly Possessed by the Moving Defendants.
Plaintiffs’ conversion claim additionally fails as to all the Moving Defendants because
Plaintiffs have failed to allege all of the basic elements of the claim. “The elements of a cause of
action in conversion are the plaintiff’s right to possession, intent of the defendant, and
defendant’s interference with plaintiff's property rights to the exclusion of plaintiff’s rights.” 14
N.Y. Prac. § 212. An action for conversion does not lie absent any allegation by the plaintiff that
it has attempted to exercise its property rights and been interfered with by the defendant: “Where
possession is originally lawful, a conversion does not occur until the owner makes a demand for
the return of the property and the person in possession of the property refuses to return it.” In re
Rausman, 50 A.D.3d 909, 910 (2d Dep’t 2008); see also Miller v. Marchuska, 31 A.D.3d 949,
950 (3d Dep’t 2006) (holding that plaintiff established a prima facie claim for conversion by
pleading that he was the owner of the subject property, the defendants had possession of the
subject property, and defendants had refused to return the property to him upon his demand).
In light of the elements set forth above, a conversion claim must be dismissed if the
plaintiff “fails to make any showing that he demanded the return of the [allegedly converted
property],” Weir v. Holland & Knight, LLP, 34 Misc. 3d 1207(A), *10 (N.Y. Sup. Ct. 2011),
because “[p]roof of a demand for the return of the subject property is an essential ingredient in a
9
The Subscription Agreements by which Plaintiffs made their investments make clear that
Plaintiffs had already become bound by the Operating Agreement at the time that they were
executed. See Subscription Agreements (“Whereas, the LLC and the Member have entered into
that certain Amended and Restated Limited Liability Company Agreement….”).
19
conversion action.” Cash v. Titan Fin. Servs., Inc. 58 A.D.3d 785, 789 (2d Dep’t 2009) quoting
Tache-Haddad Enterprises v. Melohn, 224 A.D.2d 213, (1st Dep’t 1996). Plaintiffs’ Complaint,
however, does not allege that Plaintiffs have tried to recover their capital contributions from any
of the Moving Defendants; it lacks even a hint that Plaintiffs have attempted to communicate
with the Moving Defendants following their initial investment.
The conversion claims,
therefore, must be dismissed. See J Squared Software, LLC v. Bernette Knitware Corp., 48
A.D.3d 351, 351 (1st Dep’t 2008) (holding that “[p]laintiff does not have a cause of action for
conversion where it alleges that the program was obtained by defendant licensee pursuant to a
valid contract and does not claim that it ever demanded the program’s return”).
B.
JRL Has Not Been Provided with Any Notice Whatsoever of the Conversion
Claim Asserted against It.
The allegations in support of Plaintiffs’ conversion claim, which are inadequate with
respect to all of the Moving Defendants, are even more deficient with respect to JRL. Nowhere
in the Complaint do Plaintiffs identify the manner in which JRL interfered with Plaintiffs’
property rights, as is necessary to sustain a conversion cause of action. See J Squared Software
at 351. Rather, the entire claim against JRL is premised upon the conclusory allegation that
“Lakian, Lamm, and JRL, by their willful misconduct, converted Knox’s and DJW’s cash capital
contributions to Capital L.” Compl. ¶ 54. Plaintiffs may argue that the claim against JRL is
supported by the allegation that Lakian and Lamm had Plaintiffs wire their contributions into an
account in JRL’s name, Id. ¶ 16, yet that allegation provides no information whatsoever
regarding any action taken by JRL to interfere with Plaintiffs’ property rights to the exclusion of
Plaintiffs’ rights. Nor does it provide any information from which the court may infer any intent
on the part of JRL. For any and all of the aforementioned shortcomings, the conversion claim
against JRL must be dismissed.
20
V.
PLAINTIFFS’ CLAIMS FOR CONSTRUCTIVE TRUST MUST BE DISMISSED
BECAUSE IT IS A REMEDY AND NOT A CAUSE OF ACTION.
A constructive trust is an equitable remedy that is not available absent a showing that the
plaintiff has a valid underlying claim. See Benedict v. Whitman Breed Abbott & Morgan, 77
A.D.3d 867, 869 (2d Dep’t 2010) leave to appeal denied, 944 N.E.2d 1151 (N.Y. 2011) (holding
that “an equitable remedy, such as the imposition of a constructive trust . . . is not available to
enforce a legal right that is itself barred by the statute of limitations”).
In particular, a
constructive trust is a fraud rectifying remedy that must be dismissed here based on the
insufficiency of the Plaintiffs’ fraud claims, as set forth in section I, supra. See Bazerman v.
Edwards, 295 A.D.2d 115 (1st Dep’t 2002) (holding that “In view of the dismissal of the third
counterclaim for fraud, there was no predicate for defendant's request for imposition of a
constructive trust, that remedy being ‘fraud rectifying’ rather than ‘intent-enforcing.’”).
VI.
PLAINTIFFS’ REQUEST FOR PUNITIVE DAMAGES MUST BE DISMISSED.
Plaintiffs’ claim for punitive damages must be dismissed because the complaint does not
allege the type of harm to the public or widespread wrongdoing necessary to sustain an award of
punitive damages. In Marvex Processing & Finishing v. Allendale Mut. Ins. Co., a New York
County Supreme Court dismissed a claim for punitive damages, explaining that “it must be
alleged and shown that there was a gross and wanton fraud upon the public involving a high
degree of moral culpability. . .” 91 Misc.2d 683, 685 (N.Y. Sup. Ct. 1977) (citing Walker v.
Sheldon, 10 N.Y.2d 401 (N.Y. 1961)) (emphasis added). The First Department has followed that
rule consistently. See Sirohi at 223 (holding that “punitive damages would not be recoverable
for the conduct alleged . . . since no wrongdoing of a continuous and systematic nature aimed at
the public generally is involved and since any underlying private wrong would be adequately
compensated by monetary damages.”); Samovar of Russia Jewelry Antique Corp. v. Generali the
21
General Ins. Co. of Trieste, 102 A.D.2d 279 (1st Dep’t 1984) (holding that fraudulent, criminal
or dishonest acts concerning or affecting the general public are necessary to permit recovery of
exemplary damages).
Plaintiffs’ allegations involve nothing more than two investors’
dissatisfaction with their investments in a limited liability company; they have not alleged any
misconduct directed at the general public whatsoever. Moreover, even when, for the purposes of
this motion, all of Plaintiffs’ conclusory and unsupported allegations are accepted as true, it is
plain that the Moving Defendants’ purported actions fall far short of the “extreme misconduct,”
Thoreson v. Penthouse Intern., Ltd., 149 Misc. 2d 150, 160 (N.Y. Sup. Ct. 1990) or “aggravated
circumstances which effect a public interest,” Laurie Marie M. v. Jeffrey T.M., 159 A.D.2d 52,
58 (2nd Dep’t 1990), that warrant punitive damages.
CONCLUSION
For the foregoing reasons, the Moving Defendants respectfully request that the Court
dismiss the Complaint as against them.
Dated: New York, New York
September 10, 2012
KOBRE & KIM LLP
s/Jonathan D. Cogan .
Steven G. Kobre
Steve.Kobre@kobrekim.com
Jonathan D. Cogan
Jonathan.Cogan@kobrekim.com
Jason Manning
Jason.Manning@kobrekim.com
800 Third Avenue
New York, New York 10022
Tel: +1 212 488 1200
Fax: +1 212 488 1220
Counsel for Defendants Lakian, Lamm, and JRL
22