Farro v. Schochet

190 A.D.3d 689

140 N.Y.S.3d 524

Menachem FARRO, etc., appellant-respondent,

v.Zalman SCHOCHET, etc., et al., respondents-appellants.

2017–10401

Index No. 518007/16

Supreme Court, Appellate Division, Second Department, New York.

Argued—September 11, 2020

January 13, 2021

Barton, LLP, New York, N.Y. (Sheldon Eisenberger and T. Bryce Jones of counsel), for appellant-respondent.

Farrell Fritz, P.C., New York, N.Y. (Peter A. Mahler and Franklin C. McRoberts of counsel), for respondents-appellants.

WILLIAM F. MASTRO, A.P.J., CHERYL E. CHAMBERS, VALERIE BRATHWAITE NELSON, LINDA CHRISTOPHER, JJ.

DECISION & ORDER

In an action, inter alia, to recover damages for breach of fiduciary duty and breach of contract, the plaintiff appeals, and the defendants cross-appeal, from an order of the Supreme Court, Kings County (Sylvia G. Ash, J.), dated August 18, 2017. The order, insofar as appealed from, upon reargument, (1) adhered to a determination in an order of the same court dated May 19, 2017, denying that branch of the plaintiff's prior motion for injunctive relief which was to enjoin the sale or merger of the subject businesses pending determination of the action, (2), in effect, vacated a determination in the order dated May 19, 2017, denying that branch of the defendants' prior motion pursuant to CPLR 3211(a) which was to dismiss the seventh cause of action and thereupon granted that branch of the defendants' prior motion, and (3), in effect, vacated a determination in the order dated May 19, 2017, granting that branch of the plaintiff's prior cross motion pursuant to CPLR 3025 for leave to file a second amended complaint which was to add an eleventh cause of action, alleging violation of Limited Liability Company Law § 1002, and thereupon denied that branch of the plaintiff's prior cross motion. The order, insofar as cross-appealed from, upon reargument, (1) adhered to a determination in the order dated May 19, 2017, denying those branches of the defendants' prior motion pursuant to CPLR 3211(a) which were to dismiss the first through sixth and eighth through tenth causes of action, (2) adhered to a determination in the order dated May 19, 2017, granting that branch of the plaintiff's prior cross motion pursuant to CPLR 3025 for leave to file a second amended complaint which was to add a twelfth cause of action, alleging breach of fiduciary duty, and (3), in effect, vacated a determination in the order dated May 19, 2017, denying that branch of the plaintiff's prior motion for injunctive relief which was to enjoin a proceeding pursuant to Limited Liability Company Law § 1005 to appraise the plaintiff's interest in the subject businesses and thereupon granted that branch of the plaintiff's prior motion.

ORDERED that the order dated August 18, 2017, is affirmed insofar as appealed from; and it is further,

ORDERED that the order dated August 18, 2017, is reversed insofar as cross-appealed from, on the law and the facts, upon reargument, (1) the determination in the order dated May 19, 2017, denying those branches of the defendants' motion pursuant to CPLR 3211(a) which were to dismiss the first through sixth and eighth through tenth causes of action is vacated, and thereupon those branches of the defendants' prior motion are granted, (2) the determination in the order dated May 19, 2017, granting that branch of the plaintiff's cross motion pursuant to CPLR 3025 for leave to file a second amended complaint which was to add a twelfth cause of action, alleging breach of fiduciary duty, is vacated, and thereupon that branch of the plaintiff's prior cross motion is denied, and (3) the determination in the order dated May 19, 2017, denying that branch of the plaintiff's motion for injunctive relief which was to enjoin a proceeding pursuant to Limited Liability Company Law § 1005 to appraise the plaintiff's interest in the subject businesses is adhered to; and it is further,

ORDERED that one bill of costs is awarded to the defendants.

In 2003, Menachem Farro and Levi Wilhelm, as equal members, formed LMEG Wireless, LLC (hereinafter LMEG Wireless), for the purpose of manufacturing, distributing, and selling aftermarket accessories for cellular telephones. In 2008, LMEG Wireless obtained a series of loans from Zalman Schochet in amounts ranging from $300,000 to more than $1 million to fund its ongoing operating expenses. By September 2010, LMEG Wireless, Farro, and Wilhelm owed Schochet $6 million. Between 2009 and 2011, LMEG Wireless also borrowed funds from Farro's friends and family (hereinafter the friends and family loans).

In early 2011, LMEG Wireless became insolvent and, in October 2011, Farro and Wilhelm began to negotiate with Schochet for additional loans. Schochet agreed to loan LMEG Wireless additional funds for the purpose of paying off the friends and family loans. Schochet negotiated with some of the friends and family lenders to lower interest rates and retired other debts. As of December 7, 2011, LMEG Wireless owed Schochet $11.14 million. In exchange for Schochet's additional loans, the interest rate reduction on the friends and family loans, and the retirement of other loans, Farro and Wilhelm agreed to convey a one-third interest in LMEG Wireless to Schochet.

In or about 2015, Farro, Wilhelm, and Schochet entered into a series of negotiations to sell LMEG Wireless and its associated business entities (hereinafter collectively the subject businesses). According to Schochet and Wilhelm, Farro either undermined the ongoing negotiations or actively opposed the proposed sale, and ultimately, no sale occurred.

In 2016, Farro commenced this action, individually and derivatively, against LMEG Wireless, Schochet, and Wilhelm (hereinafter collectively the Schochet group), among others, to recover damages, inter alia, for breach of fiduciary duty and breach of contract.

Farro initially moved, inter alia, to preliminarily enjoin the Schochet group from holding any corporate meetings for the purpose of selling or transferring the assets of the subject businesses to third parties. While that motion was pending, Schochet and Wilhelm notified Farro that on November 16, 2016, as holders of two-thirds of LMEG Wireless and pursuant to Limited Liability Company Law §§ 407 and 1002, they had approved the merger of LMEG Wireless with LMEG Acquisition, LLC. Pursuant to those statutes, Schochet and Wilhelm offered Farro, as a dissenting member, compensation for his interest in the subject businesses.

In December 2016, all of the defendants moved pursuant to CPLR 3211(a) to dismiss the amended complaint. Farro cross-moved pursuant to CPLR 3025 for leave to file a second amended complaint to assert additional causes of action, alleging a violation of Limited Liability Company Law § 1002 and breach of fiduciary duty. In an order dated May 19, 2017, the Supreme Court denied the defendants' motion to dismiss, granted Farro's cross motion for leave to file a second amended complaint, and denied, as academic, Farro's initial motion for injunctive relief in light of the November 2016 merger transaction.

Thereafter, by written notice dated May 25, 2017, Farro advised LMEG Wireless, Schochet, and Wilhelm that he was dissenting from the November 16, 2016 merger. However, in that same notice, Farro further advised that he was exercising his rights to receive an appraisal of, and compensation for, his interest in the subject businesses under Limited Liability Company Law § 1005, stating, "I hereby further demand appraisal and payment of the fair value of my [i]nterest."

The defendants then moved for leave to reargue their prior motion to dismiss and their opposition to Farro's prior cross motion. Farro cross-moved for leave to reargue his prior motion for injunctive relief. In an order dated August 18, 2017, the Supreme Court granted reargument, and, upon reargument, (1), in effect, vacated the determination in the May 19, 2017 order denying that branch of the defendants' prior motion pursuant to CPLR 3211(a) which was to dismiss the seventh cause of action, alleging breach of contract, and thereupon granted that branch of the defendants' prior motion, (2), in effect, vacated the determination in the May 19, 2017 order granting that branch of Farro's prior cross motion for leave to file a second amended complaint which was to add an eleventh cause of action, alleging a violation of Limited Liability Company Law § 1002, and thereupon denied that branch of Farro's prior cross motion, and (3), in effect, vacated the determination in the May 19, 2017 order denying that branch of Farro's prior motion for injunctive relief which was to enjoin a proceeding pursuant to Limited Liability Company Law § 1005 to appraise the value of Farro's interest in the subject businesses, and thereupon granted that branch of Farro's prior motion. The court otherwise adhered to its original determination in the order dated May 19, 2017.

Farro appeals, contending that the Supreme Court erred in adhering to the determination in the May 19, 2017 order denying that branch of his motion which was to enjoin the sale or merger of the subject businesses, in directing dismissal of the seventh cause of action, and in denying him leave to add an eleventh cause of action, alleging a violation of Limited Liability Company Law § 1002. The defendants cross-appeal, contending that the court erred in adhering to the determinations in the May 19, 2017 order denying those branches of their motion pursuant to CPLR 3211(a) which were to dismiss the first through sixth and eighth through tenth causes of action and granting Farro leave to add a twelfth cause of action, alleging breach of fiduciary duty, and in granting that branch of Farro's motion for injunctive relief which was to enjoin the Limited Liability Company Law § 1005 appraisal proceeding. We affirm insofar as Farro appeals, and reverse insofar as the defendants cross-appeal.

Injunctive relief may properly be denied where the issue has become...