ENGELS v. REMS

Thursday, February 14, 2002

Supreme Court

Suffolk County

Justice Doyle

ENGELS v. REMS ” ORDERED that this motion by the defendant Stanley Ackert, individually, as an associate attorney and/or partner in defendant law firms, and the defendant law firms for an order pursuant to CPLR 3211 dismissing plaintiffs’ amended complaint, is granted in part and denied in part.

Plaintiffs commenced this action to recover monies alleged to have been lost as a result of the defendants’ waste of corporate assets, breach of fiduciary duties, conversion, unjust enrichment, breach of implied duty of good faith and fair dealing, and defamation. This lawsuit arises from the breakdown of a corporate relationship between the plaintiff, Steven Engels, and the defendants, Robert Rems and Stanley Ackert. Engels and Rems were equal shareholders in the Steven F. Engels Companies, Inc. (hereinafter referred to as the “Company”), which specialized in the construction of new homes. Engels was the president of the Company, Rems was the vice-president and treasurer, and Ackert was the secretary.

Plaintiffs allege, inter alia, that Rems, with Ackert’s acquiescence, continually raided corporate assets resulting in the claims for conversion, waste, breach of fiduciary duties, unjust enrichment and negligence. Plaintiffs also assert claims against the law firms where the defendant, Ackert, worked either as an associate or partner, during the period in question, sounding in legal malpractice. Plaintiffs allege seven independent causes of action against defendants Rems and Ackert, and two claims against Ackert and the law firms (hereinafter referred to as the “Ackert defendants,) where he was either an associate or partner.

The Ackert defendants now move to dismiss plaintiffs’ complaint pursuant to CPLR 3211, statute of limitations grounds, and lack of standing. In support of their motion the Ackert defendants submit, inter alia, a copy of plaintiffs’ amended complaint, a copy of the shareholders agreement for the Company and a series of legal bills issued by Ackert and defendant law firms to the Company. In opposition to the motion plaintiffs proffer, inter alia, alleged legal correspondences between Ackert and Engels and bank account information for the Company.

With respect to the issue of plaintiffs’ standing, it is well settled that in an action where one shareholder sues another shareholder for alleged conversion of corporate assets and profits, that action shall be derivative (see, Wolf v. Rand, 258 AD2d 401, 685 NYS2d 708 [1st Dept 1999]). In order to bring a derivative action a plaintiff must set forth, with particularity and specificity, either: (1) efforts to secure initiation of action by the corporation; or (2) the reasons for not making such an effort, setting forth sufficient details from which it may be inferred that making a demand on the corporation would be futile, where the corporation in which plaintiff was a shareholder was a New York corporation (see, Tong v. Hang Seng Bank Ltd. 210 AD2d 99, 620 NYS2d 42 (1st Dept 1994), N.Y. Bus. Corp, ?§626(c) [McKinney's 1986]).

Plaintiffs contend that defendants, Rems and Ackert, who are life partners, withdrew significant amounts of money for their own personal benefit and to the detriment of the Company. It would be unreasonable for the Court to ask Engels to secure initiation of the suit by the Company as it seems unlikely that defendant, Rems, would agree to, in effect, sue himself (see, Tong v. Hang Seng Bank, Ltd., 620 NYS2d 42, 44). Accordingly, motion to dismiss plaintiffs’ action based on Engels’ lack of standing is denied.

With respect to the first cause of action sounding in waste of corporate assets, plaintiffs maintain that Rems and Ackert converted Company assets to their own use by way of draw downs and payments of exaggerated legal bills submitted by the Ackert defendants. Plaintiffs allege that Ackert, as secretary and counsel to the Company, acquiesced to Rems’ transferring money from the Company to himself.

The Ackert defendants move to dismiss this cause of action pursuant to CPLR 3211 (a)(7). They maintain that the alleged payment of exaggerated legal fees does not constitute corporate waste and, therefore, this cause of action is meritless. Ackert contends that because he performed legal services for the company, to which the Company did not object, any monies paid to him do not represent corporate waste.

In opposition, the plaintiffs contend that Ackert, as corporate secretary and counsel to the Company, had a fiduciary duty to protect the assets of the Company. Plaintiffs maintain that Ackert allowed Rems to withdraw significant amounts of money from the corporate bank accounts all to the detriment of the Company.

It is well settled that on a motion to dismiss for failure to state a cause of action under CPLR 3211(a)(7), the complaint must be construed in a light most favorable to the plaintiff and all factual allegations must be accepted as true. The sole criteria is whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law, the motion must fail (see, Gruen v. County of Suffolk, 187 AD2d 560, 590 NYS2d 217 [1992]).

It is also well settled the Section 717 of the Business Corporation Law provides that directors and officers of a corporation shall discharge their duties diligently and in good faith. Directors and officers, in the performance of their duties, stand in a fiduciary relationship with the corporation (Schachter v. Kalik, 96 AD2d 1038, 466 NYS2d 444 (1983]). “A fiduciary is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior” (Meinhard v. Salmon, 249 NY 458,164 NE 545 [1928]). Accordingly, they owe the corporation their undivided loyalty and are not permitted to derive a personal profit at the expense of the corporation (see, Foley v. D’Agostino, 21 AD2d 60, 248 NYS2d 121 [1964]).

In the instant case, plaintiffs allege in their complaint that Reins, with the approval and acquiescence of Ackert, pilfered the accounts of the Company through the use of draw downs and payment of exaggerated legal fees. Acquiescence, as well as active participation in a scheme against a corporation by an officer or director, has imputed liability on that director or officer for the resulting losses to the corporation (see, Litwin v. Allen, __AD2d__, 25 NYS2d 667 [1940]). In addition, it has been stated that the essence of waste is the diversion of corporate assets for improper or unnecessary purposes (see, Aronoff v. Albanese, 85 AD2d 3,446 NYS2d 368 [1982]). Here, from the four corners of the complaint, plaintiffs have sufficiently alleged a cause of action sounding in waste of corporate assets against Ackert as secretary to the corporation. Plaintiff has alleged that Ackert had knowledge of Rems’ diversion of corporate assets and acquiesced thereto. Accordingly, Ackert’s motion to dismiss this cause of action, as well as the next cause of action, sounding in breach of fiduciary duty, for the identical reasons, is denied.

Next, with respect to the third cause of action, for an accounting, plaintiffs maintain in their complaint that Rems, with the knowledge of Ackert, regularly and continually, transferred funds from the operating account of the Company to either himself or third parties. Ackert contends that there is no basis for seeking an accounting from him as he does not have possession or control of the corporate books and records for such an accounting.

Section 720 of the Business Corporation Law provides that an action can be brought against one or more officers of a corporation to procure a judgment for the following relief, “(1) To compel the defendant to account for his official misconduct in the following cases: … (B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.” In addition, in order to effectively plead an equitable action for an accounting the plaintiff must allege a fiduciary relationship with the defendant and a concomitant wrongful action by that defendant (see, Kaminsky v. Kahn, 20 NY2d 573, 285 NYS2d 833 [1967]).

In the instant case, plaintiffs allege Ackert was the acting secretary of the Company at the time of the alleged pilfering of the corporate assets and there is no indication from the record before this Court that Ackert’s status changed prior thereto. As was noted earlier, an officer of a corporation stands in a fiduciary relationship with that corporation (see, Schachter v. Kulik, 96 AD2d 1038, 466 NYS2d 444 [1983]). Ackert’s corporate status, with the allegations contained in the complaint, are enough to sustain the equitable cause of action for an accounting. Accordingly, Ackert’s motion to dismiss this cause of action is denied.

Next, with respect to plaintiffs cause of action for conversion, plaintiffs allege that both defendants converted the assets of the Company and that both individual defendants were the beneficiaries of the conversion. In opposition, Ackert maintains that the complaint does not allege any facts that he had ownership, control or possession of the funds that were purportedly drawn down by Rems.

To establish a cause of action in conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question (Independence Discount Corp. v. Bressner, 47 AD2d 756, 365 NYS2d 44 [1975]). Here, plaintiff has failed to adequately allege the requisite elements of conversion as against defendant Ackert. The amended complaint and affirmation in opposition to Ackert’s motion to dismiss merely recite the alleged fact that Rems and Ackert are life partners and own homes together, and allege that both parties were beneficiaries to the alleged conversion. While it is axiomatic that a court must assume the truth in the complainants allegations, such an assumption must fail where there are conclusive allegations lacking factual support (see, Elsky v. KM Insurance Brokers, 139 AD2d 691, 527 NYS2d 446 [1988]). Accordingly, Ackert’s motion to dismiss this cause of action is granted.

With respect to plaintiffs cause of action for unjust enrichment plaintiffs allege that, by virtue of the transfer of funds from the Company to their private use, the individual defendants have been unjustly enriched. In opposition, Ackert maintains that plaintiffs’ complaint fails to plead the requisite elements for a claim for unjust enrichment.

In order to prevail on a claim for unjust enrichment in New York, a plaintiff must establish; (1) that the defendant benefitted; (2) at the plaintiffs expense; and (3) that “equity and good conscience” require restitution (see, Kaye v. Grossman, 202 F3d 611, 2000 USApp LEXIS 1197 [2000]). The essence of such a claim “is that one party has received money or a benefit at the expense of another” (City of Syracuse v. R.A.C. Holding, Inc., 258 AD2d 905, 685 NYS2d 381 [1999]).

Here, plaintiffs merely allege that by virtue of Rems’s transfer of funds from the Company, Ackert was unjustly enriched. As was noted earlier, while it is axiomatic that a court must assume the truth in the complainant’s allegations, such an assumption must fail where there are conclusive allegations lacking factual support (see, Elsky v. KM Ins. Brokers, 139 AD2d 691, supra). Plaintiffs’ complaint merely states that defendants’ transfer of funds from the Company to their private use constituted unjust enrichment. It does not allege that Ackert received funds from the Company for his personal use, nor does it allege how Ackert benefitted from any transfer. Mere allegations that the defendants share homes in various locales are insufficient. Accordingly, Ackert’s motion to dismiss this cause of action is granted.

With respect to plaintiffs cause of action sounding in breach of an implied duty of good faith and fair dealing, plaintiffs allege that Ackert, as secretary and counsel to the corporation, had an implied duty of good faith and fair dealing with the Company and its shareholders. Plaintiffs allege Ackert breached this duty. Ackert’s submissions do not address this cause of action.

Plaintiffs claims do not arise from any contractual obligation between the parties in this action, and, therefore, no duty can be implied (see, Marcella & Co., Inc. v. Avon Products, Inc., 282 AD2d 718, 724 NYS2d 192 [2001]). Moreover, this claim is duplicative of the previous cause of action sounding in breach of fiduciary duty (see, New York Univ. v. Continental Ins. Co., 87 NY2d 308, 639 NYS2d 283 [1995]). An improper attempt to advance an “alternative theory” to recover what is essentially the same relief arising out of the same or related facts requires dismissal of that cause of action (see, Sterngass v. County of Rockland, 208 AD2d 916, 617 NYS2d 876 [1994]). Accordingly, Ackert’s motion to dismiss this cause of action is granted.

With respect to plaintiffs cause of action for defamation, plaintiffs allege that defendants, Rems and Ackert, defamed and slandered plaintiff, Engels, to third parties by accusing Engels of being a liar and a cheat. Plaintiffs contend that these comments were made to an attorney-real estate developer who subsequently discharged Engels from consulting jobs he was performing for that developer. In opposition to the motion Ackert maintains that plaintiffs have failed to set forth with particularity the speaker and setting for the allegedly defamatory comments, pursuant to CPLR 3016(a).

CPLR 3016(a) states, “In an action for libel or slander, the particular words complained of shall be set forth in the complaint, but their application to the plaintiff may be stated generally.” The complaint must set forth the time, manner, and place of the alleged defamatory comments (see, Sirlanni v. Rafaloff, 284 AD2d 447, 727 NYS2d 452 [2001]).

Here, plaintiffs have failed to set forth with any degree of Particularity the words defendants allegedly used to defame or slander the plaintiffs (see, Lexow & Jenkins, P.C. v. Hertz Commercial Leasing Corp., 122 AD2d 25, 504 NYS2d 192 [1986]), nor have plaintiffs set forth the time, manner, and place of the alleged defamatory comments. Plaintiffs have simply alleged that defendants referred to plaintiff, Engels, as a liar and a thief to a developer and “other people.” Accordingly, plaintiffs cause of action, for defamation, is dismissed.

Plaintiffs remaining causes of action, sounding in legal malpractice are directed against Ackert individually and against the law firms where Ackert was employed. Plaintiffs allege that defendants breached their fiduciary responsibilities to plaintiffs by failing to warn Engels of the one-sided nature of a shareholders agreement, prepared by Ackert, and the potential conflict of interest between Ackert as secretary to the Company, life partner of Rems, and as counsel for the Company. In opposition, Ackert maintains that any action against the Ackert defendants, with respect to the preparation of the shareholders agreement is time barred by the applicable statute of limitations, and that Engels was represented by other counsel when he signed the document. Additionally, Ackert contends that he was not general counsel to the Company, but rather, performed discrete legal tasks.

To establish a claim of legal malpractice under New York law, a plaintiff must demonstrate that: (1) an attorney-client relationship existed; (2) the attorney failed to exercise the degree of care commonly exercised by an ordinary member of the legal community; (3) the attorney’s negligence proximately caused plaintiffs injury, and; (4) plaintiff incurred damages as a direct result of the attorney’s alleged malpractice acts (Steinfeld v. Marks, 1997 US Dist Lexis 13569 [1997]). In a legal malpractice action based on conflict of interest, plaintiff must show that a conflict existed and that he was damaged thereby (see, Marquez v. J. Ross Dep., 162 AD2d 1011, 557 NYS2d 802 [1990]).

First, with respect to the preparation of the shareholders agreement, the proof before this Court shows that plaintiff, Engels, was represented by independent counsel for that particular matter. Therefore, any claim for legal malpractice based on the preparation of the shareholders agreement is barred as there did not exist an attorney-client relationship between Engels and the Ackert defendants. However, Ackert’s representation of Engels, personally, and the Company in various matters continued at least until July 29, 1999. Ackert’s suggestion that any representation of the company he undertook was only for specific discrete tasks is disingenuous. Copies of legal bills, submitted by the Ackert defendants to the Company, reflect in depth representation from 1996 until 1999 with total fees in excess of $20,000.00. Additionally, plaintiffs have adequately pled that an attorney-client relationship existed between plaintiffs and the Ackert defendants, the Ackert defendants breached a duty of care, this breach caused the plaintiffs’ injury, and the injury resulted in plaintiffs’ damages. Therefore, the sole remaining issue with respect to the eighth and ninth causes of action is whether a conflict of interest existed.

Plaintiffs claim a conflict of interest on several grounds. First, plaintiffs maintain that a conflict existed because Ackert and Rems were life partners and, therefore, Ackert was not looking out for the best interests of the Company. Second, plaintiffs contend that Ackert enabled Rems to engage in acts to the detriment of the Company, namely withdraw large sums of money from the Company bank accounts. Third, plaintiffs allege that Ackert represented Rems in an individual capacity when the relationship between Engels and Rems began to deteriorate.

It has been stated that when a party is under a duty to speak, or when his failure to speak is inconsistent with honest dealings and misleads another, then his silence may be deemed to be acquiescence (see, LeCorre v. Bijesse Belford Dolewski & DeMicco, 269 AD2d 569, 703 NYS2d 279 [2000]; Matter of Aetna Cos. & Sur. Co. v. Crown, 181 AD2d 883, 581 NYS2d 418 [1992]), Plaintiffs have sufficiently pled that Ackert, as counsel to the Company, breached a duty to Engels and the Company by allowing Rems to pilfer the Company’s assets. This created a conflict of interest between Engels, the Company, and Ackert. Accordingly, Ackert’s motion to dismiss these causes of action is denied.

Plaintiffs’ fourth, fifth, sixth, and seventh causes of action are hereby dismissed. The motion to dismiss the remaining causes of action is denied.