• Motion to Dismiss Aggrieved LLC Partner’s Claims for Fraud and Breach of Fiduciary Duty Denied: C&B Enters. USA v Koegel
  • January 31, 2013 | Author: Adam M. Rafsky
  • Law Firm: Farrell Fritz, P.C. - Uniondale Office
  • In a January 14, 2013 decision by Justice Demarest, the court denied in part and granted in part the third-party defendant Rosenberg’s motion to dismiss each of the causes of action asserted against him by the defendant/third-party plaintiff Koegel, who sued individually and derivatively on behalf of the plaintiff C&B. Koegel and Rosenberg formed C&B, a New York LLC, in order to purchase and build an apartment in Brooklyn. The third-party complaint alleged a series of abuses by Rosenberg, allegedly perpetuated in order to satisfy his business and personal debts, some of which required Rosenberg’s fraudulent representations that he and a third party were the sole members of C & B, and that he was the managing member and had the authority to the bind the LLC.

    Although the court held that all of the events that could have triggered Koegel’s claim for a judgment declaring her ownership interest in the LLC occurred within the six-year statute of limitations, the court dismissed the cause of action. The court explained that CPLR 3104 requires that “[s]eparate causes of action . . . be separately stated and numbered,” but Koegel asserted a single derivative cause of action seeking: 1) the declaratory judgment; 2) an accounting; 3) access to the LLC’s books and records; and 4) a permanent injunction. Noting that the first three claims should have been brought individually, not derivatively, the court dismissed the cause of action without prejudice, granting Koegel leave to replead the claims.

    The court denied the motion as to the causes of action sounding in breach of fiduciary duty and fraud. First, the court held that the breach of fiduciary duty claims were timely, as all of underlying events occurred within the six-year period that applied in lieu of a three-year period since the allegations of Rosenberg’s fraud were essential to the breach of fiduciary duty causes of action. The court further held that fraud causes of action sufficiently pled justifiable reliance and satisfied the stringent pleading requirement for fraud under CPLR 3016 (b). Specifically, the fourth cause of action sufficiently alleged a cause of action for fraudulent concealment based on the fiduciary duty between Rosenberg and Koegel and Rosenberg’s concealment of information regarding transactions that affected Koegel’s membership interest. And the fifth cause of action, which the court held was also sufficiently pled, was properly brought as a derivative fraud claim against C&B because the allegations of Rosenberg’s mismanagement that resulted in his personal benefit plead a wrong to the corporation.

    Finally, the court denied out of hand Rosenberg’s argument that he could not be held personally liable for breach of fiduciary duty and fraud because the alleged wrongdoing was on behalf of the LLC, explaining that “it is axiomatic that a member is liable for his own torts, despite the shield of the LLC form.”

    C&B Enters. USA LLC v Koegel, Sup Ct, Kings County, January 14, 2013, Demerest, J. Index No. 50089/12