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Elements of Conversion, Moneys Had and Received and Breach of Fiduciary Duty Causes of Action Described/Equitable Estoppel Did Not Apply to Toll Applicable Statutes of Limitations

The Third Department explained the elements of causes of action for conversion, aiding and abetting conversion, moneys had and received, breach of fiduciary duty, and aiding and abetting breach of a fiduciary duty.  The Third Department further held that the doctrine equitable estoppel did not toll the applicable statutes of limitations and delineates what the applicable statutes of limitations are.  With respect to conversion, moneys had and received and equitable estoppel, the court wrote:

“Conversion is an unauthorized exercise of dominion and control over” someone else’s property that “interferes with and is in defiance of the superior possessory right of the owner or another person” … . A claim can exist for aiding and abetting conversion if the aider-abettor has actual knowledge that the person who directly converted the plaintiff’s property did not own that property … . Here, the complaint alleges that defendant knew of and acquiesced in Jaques’ unauthorized personal purchases from plaintiff’s accounts, that the purchased items were delivered to and used to improve defendants’ home, and that defendant accepted the benefits of these converted items. These allegations stated a cause of action against defendant for aiding and abetting conversion. * * *

Plaintiff properly stated a cause of action against defendant for moneys had and received. The elements of such a cause of action are that the defendant received money belonging to the plaintiff and benefitted from that money, and that equity and good conscience will not permit the defendant to keep the money … . The complaint alleges that money stolen from plaintiff by Jaques was used to improve and maintain defendants’ home, and that defendant consented to these actions. Accepting the allegations as true, and reasonably inferring that the use of this money provided a benefit to defendant, the third cause of action was sufficient. * * *

Supreme Court erred in concluding that the doctrine of equitable estoppel tolled the statutes of limitations as raised by defendant. Although the doctrine precludes a defendant from relying on a “statute of limitations defense when the plaintiff was prevented from commencing a timely action by reasonable reliance on the defendant’s fraud, misrepresentation or other affirmative misconduct . . ., equitable estoppel does not apply where the misrepresentation or act of concealment underlying the estoppel claim is the same act which forms the basis of [the] plaintiff’s underlying substantive cause[s] of action” … . Torrance Constr., Inc. v Jaques, 2015 NY Slip Op 02813, 3rd Dept 4-2-15

 

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Delaware Pleading Requirements Not Met in Shareholders’ Derivative Action

The Second Department determined the shareholders’ derivative action alleging breach of a fiduciary duty was properly dismissed for failure to meet the pleading requirements of the controlling Delaware law:

As the parties agree, the laws of Delaware, the State of incorporation, govern the issues raised on this appeal … . Delaware Chancery Court Rule 23.1(a) provides that every shareholders’ derivative complaint shall “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” A plaintiff’s demand on the directors pursuant to Rule 23.1(a) will be excused “if the derivative complaint pleads particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment” … . Demand may also be excused in certain circumstances “where particularized factual allegations create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand” … . Here, the allegations of the amended complaint were insufficient to satisfy the pleading requirements of Rule 23.1(a). Walter v FalconStor Software, Inc., 2015 NY Slip Op 02112, 2nd Dept 3-18-15

 

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Statutes of Limitations for Actions Stemming from the Alleged Fraudulent Transfer of Real Property Explained

The Second Department determined plaintiff’s actions, which stemmed from the allegation defendant had acquired a deed to his property by fraud, were timely. The court explained the statutes of limitations for actual and constructive fraud, breach of fiduciary duty, actions to quiet title, conversion by fraud, money had and received, and constructive trust. In essence, actions which have an equitable component are governed by a six-year statute of limitations:

The statute of limitations for a cause of action alleging a breach of fiduciary duty does not begin to run until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated … . * * *

The statute of limitations for a cause of action sounding in breach of fiduciary duty is dependent on the relief sought. The Court of Appeals ruled in IDT Corp. v Morgan Stanley Deal Witter & Co. (12 NY3d at 139):

“New York law does not provide a single statute of limitations for breach of fiduciary duty claims. Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Where the remedy sought is purely monetary in nature, courts construe the suit as alleging injury to property’ within the meaning of CPLR 214(4), which has a three-year limitations period. Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213(1) applies. Moreover, where an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213(8)” (citations omitted).

Since the plaintiff’s right to the subject property is in issue, awarding damages would not be adequate. Therefore, the six-year statute of limitations for causes of action sounding in equity should be applied … . Since the second and third causes of action accrued in 2006, when the defendants allegedly acted contrary to their fiduciary obligations, to the plaintiff’s detriment, those causes of action, interposed four years later in 2010, are not time-barred.

The first cause of action, to quiet title pursuant to RPAPL article 15, is not time-barred, since the plaintiff was seized or possessed of the premises within 10 years before the commencement of the action and is in essence seeking a determination that the quitclaim deed which he executed in 2003 was part of a mortgage transaction, and not a conveyance of title (see CPLR 212[a]; Real Property Law § 320…).

The fourth cause of action, alleging conversion based upon fraud, is not time-barred, since it is governed by the statute of limitations set forth in CPLR 213(8) … .

The fifth cause of action, seeking damages for money had and received …, is equitable in nature and, therefore, the applicable statute of limitations is six years … . Since the defendants’ receipt of money occurred in 2006, and the action was commenced in 2010, the cause of action is not time-barred. Similarly, the sixth cause of action, sounding in unjust enrichment, is equitable in nature, and is not time-barred … .

The seventh cause of action alleging a constructive trust is equitable in nature and governed by a six-year statute of limitations … . The elements of a cause of action to impose a constructive trust are (1) a confidential or fiduciary relationship, (2) a promise, (3) a transfer in reliance thereon, and (4) unjust enrichment … . The cause of action accrued on the date of the “wrongful transfer” of the subject property … . Loeuis v Grushin. 2015 NY Slip Op 01926, 2nd Dept 3-11-15

 

 

 

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Re: Breach of Fiduciary Duty and Fraud Causes of Action—Application of the “Repudiation Rule” and the “Discovery Rule” to the Statute of Limitations Explained

Plaintiff (a governmental agency charged with administering the workers’ compensation system) brought this action against workers’ compensation trusts alleging the trusts became insolvent because of defendants’ misconduct. Plaintiff alleged breach of fiduciary duty, fraud, breach of contract and sought common law indemnification. The bulk of the decision is devoted to determining the timeliness of the actions. The decision addressed the “repudiation rule” and the “discovery rule” in fraud actions, as well as many other issues not summarized here:

…[T]he repudiation rule, which provides that “the applicable statutory period . . . does not begin to run until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated” … . The Court of Appeals has instructed that, under the repudiation rule, “the time starts running when a successor [fiduciary] is put in place” … . After the fiduciary “has yielded . . . to a successor, . . . [t]he running of the statute [of limitations] then begins, and only actual or intentional fraud will be effective to suspend it” … . * * * … [T]he repudiation rule acts as a toll of the limitations period for all misconduct committed by the fiduciary prior to repudiation of its obligation or termination of the relationship. In other words, all of the alleged misconduct prior to the severance date is included in the actionable portion of the claim. * * *

…[A] portion of plaintiff’s breach of fiduciary duty claim is grounded in its allegations that the … defendants breached their fiduciary duties to the trusts by fraudulently concealing or misrepresenting the financial condition of the trusts, the danger of operating deficits and issues associated with underwriting deficiencies, and that [defendants] did so as part of a scheme to increase membership and thereby increase its own commissions. These are fraud allegations, and they are essential to this portion of the fiduciary duty claim. That is, the relevant portion of the claim is “based on fraud” and “there would be no injury but for the fraud” … . As such, that portion of the fiduciary duty claim is subject to a six-year limitations period … . * * *

The “discovery rule” is found in CPLR 213 (8), which provides that claims based on fraud “must be commenced [within] the greater of six years from the date the cause of action accrued or two years from the time [a] plaintiff . . . discovered the fraud, or could with reasonable diligence have discovered it.” It is settled that “[t]he inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was possessed of knowledge of facts from which [the fraud] could be reasonably inferred” … . New York State Workers’ Compensation Bd v Consolidated Risk Servs Inc, 2015 NY Slip Op 01699, 3rd Dept 2-26-15

 

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Petitioners, Who Did Not Represent a Majority of the Elected Board of Directors, Did Not Have Standing the Seek Dissolution of the Corporation Under Business Corporation Law 1102/Criteria for Common-Law Dissolution Not Met

The Second Department determined Supreme Court correctly found that the petitioners did not have standing to seek dissolution of the corporation pursuant to Business Corporation Law 1102.  However, the Second Department found Supreme Court erred when it granted the petition under a common-law dissolution theory, a ground not raised by the parties and not applicable under the facts:

…[T]he Supreme Court properly determined that [petitioners] lacked standing to seek dissolution of Candlewood pursuant to Business Law § 1102, since they do not represent a majority of the corporation’s duly elected board of directors … . However, as the appellants correctly contend, the court should have dismissed the petition rather than grant the petition for dissolution on a ground that was not raised by the petitioners and was inapplicable to the circumstances. “[T]he remedy of common-law dissolution is available only to minority shareholders who accuse the majority shareholders and/or the corporate officers or directors of looting the corporation and violating their fiduciary duty” … . The petitioners did not allege that a majority of shareholders, the directors, or the officers looted the corporation or breached a fiduciary duty to … a minority shareholder. Matter of Candlewood Holdings Inc …, 2015 NY Slip Op 00533, 2nd Dept 1-21-15

 

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Doctrine of Res Judicata Did Not Preclude Lawsuit Against Defendant Building Inspector In His Individual Capacity After Summary Judgment (In Defendant’s Favor) In an Action Against Defendant In His Official Capacity—Transactional Approach to Res Judicata Explained

The Second Department determined that summary judgment in favor of the defendant (Maikisch) in an action brought against a town and defendant in his capacity as building inspector did not, pursuant to the doctrine of res judicata, preclude a lawsuit against the defendant in his individual capacity. The court explained the analytical criteria:

This State has adopted the transactional analysis approach in deciding the application of the doctrine of res judicata. Under this analysis, “once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy” … . “It is not always clear whether particular claims are part of the same transaction for res judicata purposes. A pragmatic' test has been applied to make this determination–—analyzing whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding or usage'” … . “One linchpin of res judicata is an identity of parties actually litigating successive actions against each other: the doctrine applies only when a claim between the parties has been previously brought to a final conclusion'”

…[I]n the prior action, the plaintiff made no claim against Maikisch in his capacity as an individual. Rather, the plaintiff sought relief, in the form of a declaratory judgment, against the Town and Maikisch in his capacity as Building Inspector of the Town. “It has been repeatedly held that persons suing or being sued in their official or representative capacity are, in contemplation of law, distinct persons, and strangers to any right or liability as an individual, and consequently a former judgment concludes a party only in the character in which he was sued” … .

In any event, the differences which exist between the issues raised in the prior litigation and those raised now, namely, the differences in the kind of relief sought, in the kind of facts to be proved, and in the kind of law to be applied, outweigh the similarities to such an extent as to render the doctrine of res judicata inapplicable … . In the prior action, the plaintiff sought a judgment declaring that the subject property was exempt from certain land-use and building code regulations. There, the plaintiff alleged that, for reasons stated, the relevant regulations were inapplicable the subject property. In this action, the plaintiff seeks to recover money damages from Maikisch individually, based on contract and tort theories. In this action, the plaintiff alleges, inter alia, that Maikisch breached an oral contract between the parties, breached a fiduciary duty owed to the plaintiff, and tortiously interfered with the plaintiff's business relations. Specialized Realty Servs LLC v Maickisch, 2014 NY Slip Op 08627, 2nd Dept 12-10-14

 

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Operating Agreements Created a Limited Liability Company In Which Members Did Not Share Control of the Development Project or Responsibility for Losses/No Fiduciary Duty Arises from a Limited-Liability-Company Relationship, As It Does from a Partnership or Joint Venture

The Second Department noted that a fiduciary duty did not arise among members of a limited liability company, as it would have in a partnership or joint venture.  Here, the operating agreements created a limited liability company in which (unlike a partnership or joint venture) the members did not share control of the project or responsibility for losses:

“Generally, where parties have entered into a contract, courts look to that agreement to discover . . . the nexus of [the parties'] relationship and the particular contractual expression establishing the parties' interdependency. If the parties . . . do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them'” … . Here, the written operating agreements submitted in support of the motions demonstrated an intent to form a limited liability company, not a partnership or joint venture that would have given rise to a fiduciary relationship. Moreover, the members of the limited liability company did not share control of the subject development project or responsibility for the losses, which are elements of both a joint venture and a partnership … . Grand Pac Fin Corp v 97-111 Hale LLC, 2014 NY Slip Op 08604, 2nd Dept 12-10-14

 

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Re: Breach of Fiduciary Duty Claims Against the Directors of a Corporation, the Plaintiffs Failed to Rebut the Presumptions of Loyalty, Prudence and Good Faith Under the Business Judgment Rule

In finding that the breach of fiduciary duty claims against the directors of a corporation were properly dismissed, the First Department explained the relevant analysis:

The court, after citing and applying the correct standard of review …, properly dismissed the breach of fiduciary duty claims against [defendant-directors of the corporation] …, due to plaintiffs’ failure to rebut the presumptions of loyalty, prudence and good faith under the business judgment rule … . In particular, plaintiffs failed to allege facts that support a finding of interest or lack of independence by a majority of the board members … . Giuliano v Gawrylewski, 2014 NY Slip Op 07941, 1st Dept 11-18-14

 

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Relationship Between the “Open Repudiation [of Fiduciary Obligations] Rule” and the Laches Defense Explained/Allegations that Investments Made by the Fiduciary Underperformed Does Not State a Cause of Action for Breach of the Fiduciary Duty

In reversing Surrogate’s Court’s dismissal of objections to the fiduciary’s final accounting based on the laches defense, the Fourth Department explained the “open repudiation rule” and its relationship to laches.  To take advantage of the laches defense, the fiduciary must have openly repudiated his or her obligation or there must have been a judicial settlement of the fiduciary’s account, niether of which took place here.  The Fourth Department reached the same result as did Surrogate’s Court by concluding, pursuant to CPLR 3211(a)(7), that the numerous specific objections failed to state any cause of action against the fiduciary.  With respect to the “open repudiation rule” and the “underperforming investments” allegations, the court wrote:

… [T]he open repudiation rule applies to the defense of laches … . As the Court of Appeals stated in Barabash, “[a] fiduciary is not entitled to rely upon the laches of his beneficiary as a defense, unless he repudiates the relation to the knowledge of the beneficiary” … . Moreover, the open repudiation rule “requires proof of a repudiation by the fiduciary which is clear and made known to the beneficiaries” … . * * * Inasmuch as petitioner’s repudiation of its role of fiduciary was a prerequisite to its assertion of the defense of laches, and because no such repudiation occurred, we conclude that the Surrogate erred in permitting petitioner to assert that defense and in dismissing the objections on the ground that the objections were barred thereby. * * *

The elements of a cause of action for breach of fiduciary duty are ” the existence of a fiduciary duty, misconduct by the [fiduciary] and damages that were directly caused by the [fiduciary’s] misconduct’ ” … . * * *

We reject objectants’ contention that they stated a cause of action for breach of fiduciary duty by filing an objection to petitioner’s refusal to consider investment in nonproprietary funds. Objectants correctly concede that the Prudent Investor Act permits petitioner to invest trust assets in proprietary funds (see EPTL 11-2.3 [d]). The Prudent Investor Act also requires a trustee such as petitioner with “special investment skills” to “exercise such diligence in investing and managing assets as would customarily be exercised by prudent investors of discretion and intelligence having special investment skills” (EPTL 11-2.3 [b] [6]). Even under this standard, however, ” it is not sufficient that hindsight might suggest that another course would have been more beneficial; nor does a mere error of investment judgment mandate a surcharge’ ” … . Thus, it is well settled that ” a fiduciary’s conduct is not judged strictly by the success or failure of the investment . . . In short, the test is prudence, not performance, and therefore evidence of losses following the investment decision does not, by itself, establish imprudence’ ” … . Here, objectants merely alleged that the proprietary funds were underperforming, which is insufficient to state a cause of action for breach of fiduciary duty … . Matter of JPMorgan Chase Bank NA, 2014 NY Slip Op 07799, 4th Dept 11-14-14

 

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Shareholders’ Requests for Documents for Investigation of Possible Wrongdoing by Corporation Were Facially Legitimate Under the Business Corporation Law (BCL) and Common Law–No Need for Shareholders to Bring a Shareholders’ Derivative Action to Procure the Documents

The First Department determined shareholders’ (petitioners’) requests for documents from the respondent corporation were facially legitimate pursuant to the Business Corporation Law (BCL) and common law and disputes about the propriety of the requests should be resolved in a hearing.  Supreme Court’s ruling that the petitioners were required to institute a shareholders’ derivative action was reversed.  The shareholders were investigating whether respondent’s board of directors failed to oversee wrongdoing by S & P, a credit rating agency wholly owned by respondent:

Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose … . The statutory right supplemented, but did not replace, the common-law right … .

Here, petitioners sufficiently showed that they were acting in good faith and for a proper purpose in seeking to enforce their common-law right to inspect respondent’s books and records. Specifically, the petition alleges that petitioners seek to investigate alleged mismanagement and breaches of fiduciary duty by respondent’s board of directors in failing to oversee purported wrongdoing by S & P; this alleged wrongdoing, petitioners assert, exposed respondent to substantial potential liability in multiple civil actions and investigations. These allegations form a proper basis for petitioners’ request … .

Contrary to respondent’s contentions, investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are, in fact, proper purposes for a BCL § 624 request, even if the inspection ultimately establishes that the board had engaged in no wrongdoing … . Indeed, petitioners identified several reasons for making their demand, including assessment of policies that the board had implemented when issuing credit ratings and investigation of possible wrongdoing by the respondent’s board of directors. Each of these purposes adequately justifies petitioners’ access to certain board documents. Moreover, because the common-law right of inspection is broader than the statutory right, petitioners are entitled to inspect books and records beyond the specific materials delineated in BCL § 624(b) and (e) … . Retirement Plan for Gen Empls of City of N Miami Beach vs McGraw-Hill Cos Inc, 2014 NY Slip Op 06154, 1st Dept 9-11-14

 

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