Kleeberg v. Eber

665 F.Supp.3d 543

Daniel KLEEBERG, et al., Plaintiffs, v. Wendy EBER, in her individual capacity and as Executrix u/w/o Lester Eber, et al., Defendants, and Eber Bros. & Co., Inc., et al., Nominal Defendants, and Canandaigua National Bank & Trust Company, Intervenor Defendant.

16-cv-9517 (LAK)

United States District Court, S.D. New York

Signed March 30, 2023

Brian C. Brook, Attorney for Plaintiff.

Kevin P. Mulry, Frank T. Santoro, Farrell Fritz, P.C., Paul Francis Keneally, Colin D. Ramsey, Jillian K. Farrar, Underberg & Kessler LLP, John S. Herbert, Herbert Law, Attorneys for Defendants Wendy Eber in her individual capacity and as Executrix of the Estate of Lester Eber and for Defendant Alexbay, LLC.

Donald W. O'Brien, Jr., Woods Oviatt Gilman LLP, Attorneys for Intervenor Defendant.

OPINION

Lewis A. Kaplan, District Judge.

Table of Contents

Facts — The Cross-Motions for Summary Judgment 555

A. The Facts and the Parties' Positions on the Partial Summary Judgment Motions 555

I. Allen Eber's Will and the Testamentary Trust 555

II. The Corporate Structure of the Eber Entities 556

a. EB&C 556

b. EBWLC 556

c. Eber Metro 557

d. Eber-CT 557

III. Lester Eber's, Gumaer's, and Wendy Eber's Roles Within the Eber Entities 558 IV. Lester's Non-Competition and Consulting Agreement with Southern Wine and Spirits of America, Inc. 558

V. Lester's Loans and Demand for Payment by the New York State Teamsters Conference Pension and Retirement Fund 560

VI. Alexbay's Foreclosure Action Against EBWLC and Eber Metro 561

VII. Continuing Liability to the Teamsters Fund, Subsequent Transactions, and Wendy's Promotions Within the Eber Entities 562

VIII. The EBWLC Retirement Plan and Pension Benefit Guaranty Corporation Law Suit and the Commencement of the Instant Action 563

IX. The 2017 Issuance of EBWLC Voting Preferred Shares of Stock to Lester Eber 564

X. The Surrogate's Court Order and the Termination of the Trust 564

XI. CNB's Proposed Distributions and the Transfer Restriction on the EB&C Stock 565

XII. Plaintiffs Dismiss CNB from the Instant Action with Prejudice, Lester Seeks to Acquire All Remaining Shares of EB&C Voting Stock by Invoking EB&C's Transfer Restriction, and Plaintiffs Supplement Their Second Amended Complaint 566

B. The Partial Summary Judgment Decision 567

C. The Trial 568

D. The Belated Jurisdictional and Res Judicata Defenses 568

Analysis and Additional Findings 569

A. Jurisdiction 569

B. General Legal Standards 569

1. Breach of Trust Claims 569

2. Derivative Claims 571

3. Aiding and Abetting 572

4. The Corporate Opportunity Doctrine 573

5. The Faithless Servant Doctrine 574

C. Self-Dealing Transactions Void Under the No Further Inquiry Rule 575

1. Plaintiffs Own Two-Thirds of EB&C 575

2. Lester's Diversion to His Own Benefit of Over $5 Million from Southern 577

a. The Background — Lester's Expansion of the Business 577

b. The Initial Southern Approach 578

c. The Southern Asset Purchase and Lester's 2007 "Consulting" Agreement and Non-Compete 578

d. Lester's "Consulting" Agreement Is Void Under "No Further Inquiry"...580

e. The Southern "Consulting" Arrangement and Non-Compete Was a Corporate Opportunity Usurped by Lester 582

3. Lester's Fraudulent Acquisition of Eber Metro — the June 2012 Alexbay Foreclosure 583

a. Lester Was Enriched Unjustly by the Alexbay Foreclosure 584

i. The Purported 2006 Notes 585

ii. The LOC Note Was Not a Valid Debt of the Eber Companies 588

iii. Valuation of Eber Metro as of June 5, 2012 590

4. The $400,000 Harris Beach Assignment Is Not a Valid Debt of EBWLC 591

a. The Harris Beach Litigation and Assignment of Claims 591

b. Litigation with PBGC 592

c. The Harris Beach Settlement Constituted Self-Dealing by Lester 593 5. Lester's April 2012 Employment Contract Is Set Aside 594

6. The 2017 Issuance of EBWLC Voting Preferred Shares to Lester Is Void 595

D. Other Transactions Set Aside 597

1. The Polebridge Transaction 597

2. Post-Foreclosure Transactions 601

a. Slocum Maine Transfer to Wendy and Lester 601

b. Wendy's Employment Agreement and Receipt of Eber Metro Shares 602

E. The Faithless Servant Doctrine Requires Disgorgement of Defendants' Compensation 603

F. Punitive Damages 604

G. Equitable Relief Pending Entry of Final Judgment 606 Conclusion 607

Sadly, disputes concerning family businesses can poison relationships, sometimes for generations, and dissipate family assets. This case exemplifies the point.

Allen Eber — who died more than 50 years ago — founded a successful business. He and his wife had one son, Lester, and two daughters. Eventually, the ownership of the business wound up in a testamentary trust created under Allen's will for the equal benefit of Lester, Lester's sisters, and their respective heirs. Lester, the family lawyer Elliott Gumaer, and a bank were the trustees, and Lester ran the business.

Allen, his wife, and all three of their children now are deceased. This lawsuit is a battle between Lester's sole heir, daughter Wendy, both in her own right and as Lester's executrix, and Wendy's cousins. The cousins, who are the plaintiffs, claim that their uncle Lester and, in time, their cousin Wendy engaged in extensive self-dealing and other misconduct in breach of their duties as officers and directors of the family company and its subsidiaries and, in the case of Lester, his duties as a trustee of the testamentary trust.¹ Indeed, they already have prevailed on a motion for partial summary judgment as to liability with respect to what perhaps is their most important self-dealing claim concerning Lester's actions. They here seek extensive legal and equitable relief against the estate as well as Wendy.

Unfortunately, the span of years covered by this decision is long² and some of the transactions challenged and the contexts in which they occurred are complex. But there is a common thread — Lester, and then Lester's daughter Wendy, repeatedly took, or tried to take, whatever economic value they thought they could get out of the family business to the detriment of the beneficial owners of two-thirds of that business whose interests they were bound to protect.

The parties have been battling in this Court for years now. This is the Court's decision after trial.

Facts — The Cross-Motions for Summary Judgment

Despite the duration and complexity, and the fact that the parties' cross-motions for partial summary judgment were denied in many respects, there is a great deal that is not at issue. That is so because Magistrate Judge Katharine H. Parker, who decided those motions,³ rendered careful and detailed rulings which largely set out the context and many of the transactions in question. Accordingly, the Court begins by quoting a substantial portion of the exposition of the facts that is contained in her first decision as a means of setting the stage for what will follow.⁴ Next, it summarizes the magistrate judge's rulings on the summary judgment motions to the extent they remain material.

With that background, this Court then proceeds to its own analysis of the issues that were tried. That section of this opinion contains this Court's additional findings of fact on the material questions presented. To whatever extent, if any, those findings differ from factual statements in Judge Parker's decisions, as distinguished for example from her description of the parties' claims, this Court's own findings of course control. It is this Court's findings that are based on its view of the trial evidence, including its view of the credibility of the witnesses and of the appropriate inferences to be drawn on the trial record, which is not identical to the record that was before Judge Parker on the motions.

A. The Facts and the Parties' Positions on the Partial Summary Judgment Motions⁵

I. Allen Eber's Will and the Testamentary Trust

Allen Eber founded EB&C, including its wine and liquor distribution business. (Dkt. No. 265 ("Pls.' Rule 56 Statement") ¶ 1.) He died in 1970 and his last will and testament (the "Allen Eber Will" or "Will") provided for the creation of a testamentary trust to hold his residuary estate, including all of the controlling stock for EB&C (the "Trust"). (Id.; Dkt. No. 266-8 ("Brook Decl. in Supp.") Ex. 132 (the "Will").) The Will stated that it was Allen Eber's "wish that [his] voting control of [EB&C] can be retained and, subject to that primary wish, ... that [his] interests in certain other close corporations can also be retained and that [his] son, Lester [Eber], may have an opportunity to participate in the management thereof." (Will § 11.)

The Allen Eber Will nominated three trustees to manage the Trust: Lester Eber; Allen Eber's attorney, Elliott W. Gumaer, Jr. ("Gumaer"); and Marine Midland Trust Company, a bank. (Id. § 12.) M&T Bank subsequently replaced Marine Midland Trust Company as co-trustee, and CNB replaced M&T Bank in July of 2007. (Pls.' Rule 56 Statement ¶ 4.) The Will provided that the Trust assets would transfer to the Trust beneficiaries per stirpes, that is, "[p]roportionately ... according to their deceased ancestor's share." Black's Law Dictionary (11th ed. 2019); (see also Will § 9.) Allen Eber's three children, Mildred Eber Boslov, Sally Eber Kleeberg, and Lester Eber, were the original beneficiaries of the Trust and each held a one-third "equal" interest in the Trust. (Will § 9.) When Mildred Eber Boslov died in 1973, her only child, Plaintiff Audrey Hays, became a one-third beneficiary of the Trust. (Pls.' Rule 56 Statement ¶ 2.) When Sally Kleeberg passed away in 2014, her two children, Plaintiffs Daniel Kleeberg and Lisa Stein, each became a beneficiary of the Trust, each holding a one-sixth interest in the Trust. (Id.)

Under the terms of the Will, the Trust could be terminated in one of two ways. The Trust would automatically terminate upon the death of the last of Allen Eber's three children. In the alternative, the Will provided that the Trust could be terminated if "all, or substantially all, [the] stock of [EB&C] ... [w

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