Endico v. Endico

1

FELIX W. ENDICO, Individually and Derivatively on Behalf of Nominal Defendant UFS. Industries, Inc., Plaintiff, v. WILLIAM A. ENDICO and ACE ENDICO CORP., Defendants, And UFS INDUSTRIES, INC., Nominal Defendant.

No. 19 Civ. 7231 (JCM)

United States District Court, S.D. New York

August 23, 2022

OPINION AND ORDER

JUDITH C. MCCARTHY, UNITED STATES MAGISTRATE JUDGE

Plaintiff Felix W. Endico (“Plaintiff” or “Felix”) brings this action against Defendants William A. Endico (“William”) and ACE Endico Corp. (“ACE Endico”), (collectively “Defendants”), and nominal Defendant UFS Industries, Inc., d/b/a Sally Sherman (“Sally Sherman”), alleging the following: corporate waste aiding and abetting corporate waste, breach of fiduciary duty (individually and derivatively), aiding and abetting breach of fiduciary duty (individually and derivatively), unjust enrichment, aiding and abetting unjust enrichment conversion, aiding and abetting conversion, unfair competition, aiding and abetting unfair competition constructive trust, and accounting. (Docket No. 1-1). Plaintiff filed his complaint on July 18, 2019 (the “Complaint”), in the Supreme Court of the State of New York, County of Westchester. (Id.). On August 2, 2019, Defendants removed the action to this Court pursuant to 28 U.S.C. §§ 1332, 1441 and 1446. (Docket No. 1). Before the Court is Defendants' motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure (the “Motion”).^[1] (Docket No. 55). Plaintiff opposed the Motion, (Docket No. 68), and Defendants replied, (Docket No. 69). For the reasons set forth below, Defendants' Motion is granted in part and denied in part.

I. BACKGROUND

This action involves two brothers, Felix and William, who are each 50% shareholders in their family food manufacturing business, Sally Sherman.^[2] The following facts are gathered from Defendants' Rule 56.1 Statement of Material Facts, (Docket No. 58), Plaintiff's Opposition to Defendants' Motion for Summary Judgment, (Docket No. 65),^[3] the exhibits attached to the parties' submissions, and the declarations of William and Felix, (Docket Nos. 57 and 66).^[4] The facts are construed in the light most favorable to Plaintiff as the non-moving party. See Wandering Dago, Inc. v. Destito, 879 F.3d 20, 30 (2d Cir. 2018). The facts set forth herein are not in dispute, unless otherwise noted.

A. Endico Family Businesses and the Founding of ACE Endico

William and Felix's father, Michael Endico, Sr. (“Michael”), and their uncles, owned two family companies - Endico Potatoes and Sally Sherman. (Docket No. 67-2 at 13:14-19).^[5] Ultimately, the businesses split. (Id.). Thereafter, William and Felix's uncles ran Endico Potatoes, and Michael ran Sally Sherman until his death in 2010. (Id.; Docket No. 57 ¶ 2).

Sally Sherman, a Mount Vernon-based food manufacturer, has been an Endico family business since 1971. (Docket No. 66 ¶ 2; Docket No. 57 ¶ 2). It makes food such as potato salad and coleslaw. (Docket No. 57 ¶ 2). It does not sell food directly to end-users like supermarkets and delis, but rather relies on food service and master distributors to sell its products. (Id. ¶ 2).

From 1979 to 1984, Felix worked as an operations manager for Sally Sherman. (Docket No. 66 ¶ 5). In 1984, Felix left the company. (Id.). Thereafter, Felix continued to work in food manufacturing and assisted his father on Sally Sherman projects. (Id.).

From roughly 1960 to 1982, William worked in various roles in the Endico family businesses, ultimately serving as Vice President. (Docket No. 57 ¶ 3; Docket No. 66 ¶ 6). In 1982, William left the family businesses and founded ACE Endico. (Docket No. 57 ¶ 4; Docket No. 66 ¶ 7). William became, and remains today, a 61% shareholder of ACE Endico, with his partner owning the remaining 39%. (Docket No. 66 ¶¶ 2, 7).

ACE Endico is a food and food service distribution company based in Brewster, New York - it does not manufacture its own food. (Docket No. 57 ¶¶ 4, 6; Docket No. 58 ¶¶ 7-8; Docket No. 65 ¶¶ 7-8). ACE Endico distributes food and food service products to venues like restaurants, pizzerias, sports arenas and health care facilities, generating hundreds of millions of dollars in annual revenues. (Docket No. 57 ¶ 6).

B. ACE Endico's Business Relationship with Sally Sherman

Shortly after ACE Endico was founded, it began doing business with Sally Sherman, and in or about 1985, Michael made ACE Endico one of Sally Sherman's master distributors. (Docket No. 58 ¶ 12; Docket No. 65 ¶ 12). At the same time, Michael also instituted a 10% discount on the sales from Sally Sherman to ACE Endico, which was the discount Sally Sherman provided to master distributors. (Docket No. 58 ¶¶ 15-16; Docket No. 65 ¶¶ 15-16; Docket No. 66 ¶ 10). William testified that there was no written contract formalizing this arrangement and the discount was not reflected in purchase orders or invoices. (Docket Nos. 60-1 and 64-2 at 34:6-35:25). Instead, when ACE Endico received invoices showing the regular price, they discounted it by 10% before paying it. (Id.). This discount arrangement continued even after Michael's death when his estate's executor managed Sally Sherman. (Docket No. 58 ¶ 17; Docket No. 65 ¶ 17).

In its role as distributor for Sally Sherman, ACE Endico purchased potato salad and other foods and resold them to smaller customers along with other food service products.

(Docket No. 58 ¶¶ 13-14; Docket No. 65 ¶¶ 13-14). The distribution of Sally Sherman products constituted a fraction of ACE Endico's business, and the parties dispute whether ACE Endico's purchases from Sally Sherman totaled approximately one or two million dollars per year. (Docket No. 58 ¶ 18; Docket No. 65 ¶ 18; Docket No. 66 ¶ 21).

C. Michael Dies and His Estate Takes Over Control of Sally Sherman

In 2010, Michael died and his estate became the 100% owner of Sally Sherman, with the estate's executor, Kenneth Nohavicka, managing the company from 2010 through 2012. (Docket No. 57 ¶ 7). Nohavicka was ineffective as manager and made a “mess” of Sally Sherman's operations by requiring all decisions to be made through him, attending work inconsistently, and relying on costly consultant services. (Id. ¶ 8; Docket No. 58 ¶¶ 23, 25; Docket No. 65 ¶¶ 23, 25). Under Nohavicka's management, Sally Sherman had high expenses and a minimal sales force. (Docket No. 57 ¶ 8). At this time, big supermarket chains like A&P, Waldbaums, Pathmark, and Food Emporium also closed, causing Sally Sherman to lose those accounts. (Docket No. 57 ¶ 8; Docket No. 58 ¶ 24; Docket No. 65 ¶ 24). Sally Sherman also had limited cash flow and poor credit, and underwent an FDA inspection. (Docket No. 57 ¶ 8).

During Nohavicka's time as manager, he continued unchanged the prior business relationship between Sally Sherman and ACE Endico. (Docket No. 57 ¶ 8). However, he excluded William and Felix from Sally Sherman's management, removing them from Sally Sherman's five-person board of directors and even getting a restraining order against them. (Id. ¶¶ 7-8).

D. William Takes Over Management of Sally Sherman

In or about 2012, Nohavicka resigned from his role as estate executor and William stepped into the position. (Id. ¶ 9). Around the same time, William and Felix agreed that William would act as CEO of Sally Sherman, (Docket No. 57 ¶ 10; Docket No. 58 ¶ 32; Docket No. 65 ¶ 32), though Felix asserts the agreement was based on the understanding that both brothers had to approve strategic decisions for the company, (Docket No. 65 ¶ 32; Docket No. 66 ¶ 17). On or about August 1, 2013, William split Sally Sherman's stock, giving 50% to himself and 50% to Felix. (Docket No. 57 ¶ 9; Docket No. 66 ¶ 17).

As CEO of Sally Sherman, William does not receive a salary in the form of W-2 income, (Docket No. 57 ¶ 10), though Felix testified that he understands salary to include a “pecuniary award” like the financial benefits that William receives from Sally Sherman's transactions with ACE Endico, (Docket No. 65 ¶ 33; Docket No. 67-1 at 156:2-157:21). Not long after taking over, William successfully led Sally Sherman through an FDA inspection. (Docket No. 57 ¶ 10).

In 2017, William reduced the discount that ACE Endico was receiving from Sally Sherman from 10% to 6%, (Docket No. 58 ¶ 37; Docket No. 65 ¶ 36), testifying that he did so to help Sally Sherman at a time when it suffered a large financial loss. (Docket 60-1 at 160:5-23; Docket No. 60-2 at 191:15-20). Felix testified that he believes both 10% and 6% are excessive discounts for a master distributor based on his experience in the food industry, explaining that 2% is the standard discount in the industry for master distributors. (Docket No. 60-2 at 188:17194:5).

E. The Current Financial Status and Management of Sally Sherman

Currently, Sally Sherman has 70 employees, remains a going concern, and continues to be profitable. (Docket No. 58 ¶ 44; Docket No. 65 ¶ 44; Docket No. 57 ¶ 13). In 2013, the first year after William and Felix took over the company, Sally Sherman operated at a substantial loss but remained a going concern, and then was profitable in 2014, 2015, 2019, 2020, and was projected to be profitable in 2021. (Docket No. 58 ¶ 46; Docket No. 65 ¶ 46; Docket No. 57 ¶ 13).

The parties dispute whether Sally Sherman's value has increased or decreased since William began managing the company, with William alleging that it increased, (Docket No. 58 ¶ 45; Docket No. 57 ¶ 13), and Felix asserting that some years it increased and some years it decreased, (Docket No. 65 ¶ 45; Docket No. 66 ¶ 22). Felix contends that the overall book value decreased from $11,100,000 in 2012 to about $7,200,000 now, which Felix stated is reflected in the balance sheet of Sally Sherman's tax returns. (Id.).

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