Opinion
2006/09758.
Decided June 20, 2008.
At the conclusion of a hearing directed by the Appellate Division, Fourth Department to resolve "as an issue of fact" whether Jolly Caplash, one of two members of the company, retained standing to seek its dissolution by motion made returnable December 20, 2006, after tendering a letter of resignation "as an employee" on December 7, 2006, the court invited and has received written summations.
Termination of employment is governed by Caplash's employment agreement. Exhibit 6. As relevant here, the agreement provides that termination may occur upon mutual written agreement between the employee and ROMSA. The employment agreement is incorporated into Section 3.3(d) of ROMSA's operating agreement. Exhibit 3. The operating agreement makes employment a requirement of membership. In the words of the Appellate Division, the agreement "unequivocally provides for the termination of membership in the event of the termination of a member's employment."
Deciding the issue of Caplash's standing, then, involves a number of related questions. Since termination is "mutual" only if both parties agree, the key question is whether a party having ROMSA's authority to accept Caplash's resignation did so. According to the Appellate Division, this question becomes whether Mr. Kristal had authority to accept Caplash's December 7th resignation as the company's attorney. For this reason, the Appellate Division directed the court to expand the record at an immediate trial to include the circumstances under which Mr. Kristal came to be retained, including whether Salahuddin had authority under the operating agreement to hire a separate attorney to represent the entity for any purpose other than providing a nominal defense to the declaratory judgment action.
A second question, not raised by the Appellate Division but by Caplash, is whether his December 7th letter was an unequivocal termination of employment or one conditioned upon a release of restrictions imposed upon him by the employment agreement, including a covenant not to compete. If his resignation is held to be conditional, then he remained a member of ROMSA for purposes of his application for dissolution, since the company had not released him from the breach of contract claims alleged in its Answer and Counterclaim, Defendant's Exhibit C, nor had the company released him from the covenant not to compete.
Some background about the professional relationship between Mr. Kristal and Salahuddin should be kept in mind. After representing Salahuddin in his divorce at a time when he was ROMSA's employee, Mr. Kristal regarded himself as Salahuddin's personal attorney. In 1999, Salahuddin consulted with Kristal when he purchased a one-half membership interest from ROMSA's founder, Vernon Loveless, DDS. Salahuddin was represented in the transaction by Mary G. Ross, Esq., of the Harter Secrest office. In 2005, Mr. Kristal was consulted once again when Loveless retired and sold the other half of his membership interest to Caplash. On this occasion, Ross represented Caplash and Salahuddin.
Documents signed in connection with Caplash's membership purchase indicate that Loveless held a substantial minority equity interest in ROMSA at the time of closing. Caplash paid $400,000 for Loveless's interest. Despite some pleadings to the contrary, Salahuddin in his testimony fully accepted Caplash's status as a ROMSA member by virtue of the purchase. The operating agreement, however, does not provide for weighted voting. Upon his purchase, therefore, Caplash secured equal voting rights in company affairs.
Although Caplash testified that he never recognized Salahuddin as president, his Amended Complaint alleges that, prior to the June 14, 2006 election, Salahuddin was indeed president of ROMSA. In any event, upon Loveless's retirement, Salahuddin assumed the duties, if not the title, of president without, however, a formal election or amendment of the operating agreement.
During the hearing, the court allowed Caplash to amend his Complaint further to deny that Salahuddin was president, although the court questioned whether such an amendment conformed to the proof.
There had been occasional friction between Loveless and Salahuddin, after Salahuddin joined ROMSA, but they managed to settle their differences through daily contacts, without resort to the protocol of the operating agreement. This harmony, such as it was, continued for some period of time after Loveless left the practice and Caplash joined the practice, that is until Caplash became dissatisfied with his share of company revenues. Not long after commencing his practice at ROMSA, and with Salahuddin's approval, Caplash had taken a position at ViaHealth, located at Rochester General Hospital, next to the company's Portland Avenue office. According to Salahuddin, this was intended to introduce Caplash to referral sources, and to gain admission privileges. Under the terms of the employment agreement, Caplash remitted his earnings at ViaHealth to ROMSA.
In the Spring of 2006, Caplash consulted with R. Paul Hegner, a dental "practice consultant." On May 16, 2006, Caplash executed a power of attorney, Exhibit 11, allowing Hegner to undertake negotiations with respect to his membership interest in ROMSA. After a number of telephone calls in the intervening two or three weeks, Kristal received a letter from Hegner, Exhibit 10, dated June 6, 2006, confirming the scheduling of a special meeting under Section 7.5 of the operating agreement, requested by Caplash "in his role as secretary of the corporation." The meeting, attended by Kristal, Caplash, Salahuddin, Hegner and his assistant, Claire Nawrocki, took place as scheduled on June 14th at the ROMSA Portland Avenue office. Though a number of items were on the agenda, the most important topic discussed in retrospect was not — the ROMSA presidency. In summation, Mr. Kristal on behalf of ROMSA asserted that, though accounts differ, all witnesses agreed that an election took place, that Salahuddin voted in favor of Caplash assuming the presidency, and that Caplash did not immediately accept the position. In fact, Salahuddin denied that an election took place, and denied that he nominated Caplash. Instead, Salahuddin maintained that the meeting was not about the presidency, that the question only came up as an after-thought at the end of the meeting when Hegner inquired whether Caplash could become president, that he, Salahuddin, replied that that would be no problem if Caplash resigned all other positions he held and devoted 100% of his time with ROMSA. Salahuddin insisted in his testimony that he never surrendered the office of presidency.
Salahuddin's testimony on this point is either mistaken or not credible. Kristal and Hegner testified in detail about the meeting in testimony that the court accepts (with one important exception). According to Kristal, several topics were discussed at the meeting, including the methodology of compensation for members, methodology of distribution of patients, the question of appointment of corporate counsel, and the vote on the presidency. No elaboration of the meeting discussion was attempted by Kristal in his testimony except in regard to the question of corporate counsel and the vote on the presidency. Kristal testified that he was opposed to the appointment of counsel and that the members did not agree to hire counsel. The presidency was discussed next. According to Kristal, Caplash was nominated for the position by Salahuddin, and a unanimous vote was taken electing Caplash to the post. Although Kristal expressed doubt that Caplash thereby became president, in deposition he conceded as much, albeit in equivocal terms.
Q.But if he subsequently assented to being president would he be president based upon that vote?
A.I expect so. I have no opinion on that subject.
Kristal elaborated that "the meeting of June 14th was about two hours long and in the course of those two hours Mr. Hegner suggested that we elect a president, and in the course of that, in fact, Dr. Salahuddin nominated Dr. Caplash." He added, "there was a vote and the vote was two to nothing in favor of Dr. Caplash's election." Though acknowledging that the agenda for the meeting did not include the subject of the presidency, Kristal maintained that the election occurred.
Q.But did you have a vote on the presidency?
A.Yes.
On the subject of Caplash's continued employment at ViaHealth, Kristal's testimony also is accepted and Salahuddin's testimony is rejected. Salahuddin maintained a militant tone in his testimony on the subject which did not ring true. He insisted that he never "surrendered" the presidency of ROMSA at the June 14th meeting and fully conditioned his acceptance of Caplash as president on the latter's prior resignation from ViaHealth and other outside employment. Kristal, on the other hand, explained that the two issues were not linked at least initially, but later became the subject of an oral agreement between Caplash and Salahuddin that Caplash would not assume the presidency of ROMSA until he worked full-time there. Kristal testified:
. . . Dr. Caplash was employed at the time of the election and for some length of time prior to that at ViaHealth. He was not working at the ROMSA location full-time, and because he wasn't, Dr. Salahuddin and Dr. Caplash came by themselves to an agreement that Dr. Caplash would not assume the presidency of ROMSA until he was a full-time — — until he worked full-time there. That was expected to occur in October because he had a contract with ViaHealth that did not terminate until October and the time of the renewal of the contract, you know, the expectation was, barring the lawsuit, that he would not renew and that he would commence employment full-time at ROMSA.
Neither Caplash nor Salahuddin recalled such an agreement in their testimony, however. Caplash maintained that there were no conditions attached to the vote, other than that he would work those hours that Dr. Loveless had worked, and Salahuddin insisted that there was no vote and that the matter of his agreement to Caplash assuming the post of president was fully conditioned on a full-time commitment to ROMSA and resignation from ViaHealth. There was no reference in Salahuddin's testimony to an agreement of the kind Kristal described in his testimony.
There was a series of questions and answers, during Caplash's cross-examination by Salahuddin's counsel, that gave the court some pause. Caplash acknowledged that Salahuddin wanted him to quit ViaHealth and that he tried to extract himself from his contractual commitment to ViaHealth through Mr. Hegner's efforts. He also acknowledged that Hegner was not successful in that regard. When pressed whether release from the ViaHealth contract was a "condition for your presidency," Caplash at first denied that that was the case, next answered, "not that I recall," and when shown Hegner's June 20th letter reciting that ViaHealth would not release him, Caplash appeared to concede the point in this exchange:
Q.And your election as the president was contingent, is that correct?
A.If it's working out, yes.
Q.Thank you. . . .
But for the reasons detailed in the text below, I find that this is not the acknowledgment of a contingency Salahuddin's counsel's "Thank you" rejoinder would make of it, and even if it was on its face, did not state the true facts of the matter. The quoted exchange was equivocal at best on the existence of a contingency, and Caplash firmly denied on redirect that any contingency to his assuming the presidency came up at the June 14th meeting, or thereafter ("There was no condition being nominated as president.") Instead, Caplash knew Salahuddin preferred that he leave ViaHealth and he made efforts, unsuccessfully, to get out of his contract with ViaHealth. I find that there was nothing more to it than that.
I find that Hegner's testimony is entirely credible on the issue of a contingency. According to Hegner, Salahuddin said at the June 14th meeting, "you may be surprised but I am agreeing to election of a President," and then nominated Caplash. Shortly thereafter, both members voted for Caplash, and that it was agreed that Caplash would have a short period of time to determine whether to accept the post. Hegner maintained, again in testimony I find credible and that I accept, that no conditions were attached to the election, or discussed. Rather, at the end of the meeting, some 20 minutes after the vote, Kristal told Hegner that there was a concern that Caplash was working at ViaHealth and that Salahuddin wished that to stop. Caplash agreed that he and Hegner would endeavor to extract Caplash from his ViaHealth contract, but to nothing more.
Caplash accepted the election results in a July 11, 2006, letter. Later, during the July 27th meeting, Kristal maintained that Caplash was not suited for the job of president and claimed that Caplash did not fulfill the conditions for assuming the post. When Hegner denied that there ever were any conditions, Salahuddin said that Caplash had to prove his loyalty to ROMSA. Hegner also raised at that meeting the question of dissolution by reason of deadlock over the presidency, and explained that, with dissolution, "there would be no non-compete." I find that there was no contingency, that Caplash accepted the post in writing well prior to any mention of a contingency, and that the contingency issue was interposed as surrogate and false post hoc reasoning to avoid a duly authorized unanimous action of the members at the June 14th meeting.
On the issue of the handwritten note of the July meeting referred to in the Amended Decision and Order dated May 28th, Caplash testified that he signed the document before any titles were affixed under his name. Exh. G. This testimony, the only testimony on the subject offered by any witness, is credited. Accordingly, the document is not prohibitive.
Caplash filed an action for a declaratory judgment that he was indeed elected president on August 21, 2006. Salahuddin retained Kristal to defend ROMSA in the declaratory judgment action at the end of August 2006. On September 1, 2006, Kristal served ROMSA's Answer and Counterclaims. Defendant's Exhibit C. Despite ROMSA's status in the declaratory judgment action as a nominal defendant, see Amended Decision and Order, dated May 28, 2006, the counterclaim was for dissolution. But see, LLCL § 702 (only a member may seek dissolution); Application of Clemente Bros., Inc, 19 AD2d 568 (3d Dept. 1963) (statute "grants to the corporation as a separate entity no authority to determine whether a proceeding shall be initiated to dissolve itself"), aff'd, 13 NY2d 963 (1963). In addition, there were other counterclaims against Caplash for breach of contract. Salahuddin also appeared in the action via separate counsel, and filed an Answer and Counterclaim (denominated affirmative defense) for dissolution. Subsequently, Salahuddin moved for summary judgment declaring ROMSA dissolved. The motion was filed November 7, 2006, and was made returnable December 20th.
These counterclaims, of course, exceeded Kristal's authorization in the retainer agreement and made participation of the LLC in the litigation well beyond appearing as a "proper jural party for the limited and passive purpose of rendering it amenable to the orders of the court'" by "assum[ing] a militant alignment on the side of one of the two equal, discordant stockholders.'" Matter of Levitt (Public Relations Aids, Inc.), 109 AD2d 502, 510-11 (1st Dept. 1985) (quoting Matter of Clemente Bros, supra).
Salahuddin's original Answer was the one extant at the time of Caplash's purported resignation and Kristal's alleged acceptance, and contained a demand that the LLC be dissolved. Answer ¶ 5 ("the individual defendant demands dissolution pursuant to § 701(b) of the Limited Liability Company Law of New York, and this defense represents the individual defendant's written request, as the only remaining member of ROMSA, for dissolution within 180 days following the plaintiff's resignation"); Answer WHEREFOR Clause ("and that the individual defendant or ROMSA have judgment for dissolution"). Salahuddin's Answer denominated the matter as an affirmative defense, but the "defense" (and wherefor clause) clearly seek the affirmative relief of dissolution, and thus was "improperly denominated an affirmative defense." Ell-Dorer Contracting Co. v. P.T. L. Const. Co., 85 AD2d 866 (3d Dept. 1981). See Bates v. Rosekrans, 10 Tiffany 409, 87 NY 409 (1867)("No particular form of words is necessary to make a pleading a counter-claim; . . . ordinary and most satisfactory form of giving that intimation is by a statement that the pleading is a counter-claim, or by a prayer for relief") (emphasis supplied); McKinny's Cons. Laws of NY, CPLR 3019, Practice Commentaries C3019:7 (failure to "denominate" counter-claim "as such," CPLR § 3011, does not alter its character as an affirmatively pleaded counter-claim although it may relieve the plaintiff of serving a reply).
Caplash cross-moved for summary judgment declaring ROMSA dissolved, and he also cross-moved to amend the complaint. That motion was filed December 12, 2006, the very day Kristal wrote the letter purportedly accepting Caplash's resignation. These motions also were made returnable December 20, 2006. Kristal filed no motion papers in connection with these cross-motions for dissolution, but of course had interposed the counterclaim for dissolution described above. In summation, Caplash points out, quite correctly, that the proof at the hearing failed to address whether Kristal's acceptance letter was received or even written prior to the filing of the cross-motion for dissolution. For this reason, Caplash argues, Salahuddin failed at the hearing to show that Caplash had been stripped of his membership status at the time he filed his cross-motion for dissolution. The court agrees.
The issue of timing would not be important if Caplash had brought an action for dissolution prior to the filing of the motion, as usually occurs in litigation of this sort. But the declaratory relief Caplash sought in regard to the presidency would have been incompatible with dissolution. Nevertheless, the failure to plead a cause of action for dissolution was not fatal to Caplash's cross-motion. "While the general rule is that a party may not obtain summary judgment on an unpleaded cause of action ( Cohen v. City Co. of New York, 283 NY 112), it is also true that summary judgment may be awarded on an unpleaded cause of action if the proof supports such cause and if the opposing party has not been misled to its prejudice." Weinstock v. Handler, 254 AD2d 165, 166 (1st Dept. 1998). See Cecos Inter., Inc. v. Advanced Polymer Sciences, Inc., 245 AD2d 1017 (4th Dept. 1997); Home Savings of America, FSB v. Coconut Island Properties, Ltd., 226 AD2d 1138, 1139 (4th Dept. 1996); Deborah Inter. Beauty, Ltd. v. Quality King Distributors, Inc., 175 AD2d 791, 793 (2d Dept. 1991). The appellate division considered plaintiff's cross-motion for summary judgment decreeing a dissolution of ROMSA, and found the motion supported as a matter of law on its face, only finding an issue of fact on plaintiff's standing. Therefore it is the law of the case that the proof "supports such [unpleaded] cause," Weinstock v. Handler, 254 AD2d at 166, if standing is established. Even assuming that Kristal's letter was an effective acceptance of an unconditional tender of resignation, the court finds that there is no proof that it was written and received before Caplash filed his cross-motion on December 12th, and that therefore he had standing as a member of ROMSA to seek dissolution. But for the reasons stated elsewhere in this opinion, the court finds additionally that the Kristal acceptance letter was ineffective to constitute the requisite written action of ROMSA accepting the tendered resignation that the operating agreement contemplates.
In addition to the reasons stated in the court's Amended Decision and Order denying Salahuddin's mid-hearing motion for summary judgment (at 19-32), part of which rejected Salahuddin's contention that ROMSA was set up as member-managed, it must be observed that the chancellor of the Delaware Court of Chancery has since held that, even in a member-managed LLC, where two co-equal owners (in terms of voting rights) "disagree, the LLC is deadlocked[,] [and] [a] deadlocked LLC cannot validly retain counsel and file an answer." Maitland v. Int'l Registries, LLC, letter decision, at p. 3 (Civ. Action No. 3669-CC) (Del.Ch. June 6, 2008) (William B. Chandler, III, J.) (http://courts.delaware.gov/opinions/(w50hlq45lvjdlae00mzftg45)/download. aspx?ID=107380) (striking the LLC's answer and disqualifying the entity's counsel), citing Engstrum v. Paul Engstrum Associates, 124 A.2d 722 (Del.Ch. 1956). In that case, it was held that the hiring of counsel on behalf of the LLC by a fifty percent member was not authorized under the operating agreement "which requires action by majority." Id. (at p. 1). Accordingly, Salahuddin's member-management argument, even on its own terms, fails to achieve the result he seeks. He had no authority to hire counsel for ROMSA for any purpose, and certainly not for the purpose of appearing in the action in a militant capacity on one side of a 50-50 split of the kind present here, or to accept a tendered resignation of another employee on behalf of the entity.
Separately, Caplash was duly elected president and accepted the post in writing. Nothing by way of "action" under § 7.10 of the operating agreement (majority vote) occurred subsequently to undo the results of the June 14th election. Inasmuch as Caplash was president at the relevant times in August-December, Salahuddin had no authority to act on behalf of ROMSA notwithstanding that he still performed the day-to-day management of the business. Of course, where the members acquiesce in such management powers by a member, implied authority may be present. Cf., New York Metro Corp. v. Chase Manhattan Bank, N.A., 52 NY2d 732, 734 (1980)("other evidence, . . ., from which the jury could have concluded . . . [corporate president] had authority . . . unrelated to any specific corporate resolution" required submission of that discrete issue to the jury); Weber v. Loft Candy Corp., 277 App. Div. 1005 (2d Dept. 1950)("Proof is material with respect to the custom of the corporation and authority of the sales manager and president"); Gamacho v. Hamilton Bank-Note Engraving Co., 2 App. Div. 369, 371 (1st Dept. 1896). See also, Sun Printing Publishing Ass'n v. Moore, 183 U.S. 642, 650-51, 22 S.Ct. 240, 244, 46 L.Ed. 366 (1902) (inasmuch as "the trustees of the Sun Association must be presumed to have exercised a supervision over the business of the corporation, they are to be charged with knowledge of the extent of the power usually exerted by its managing editor, and must be held to have acquiesced in the possession by him of such authority, even though they had not expressly delegated it to him"); White, New York Business Entities ¶ B715.06[2], at p. 7-158 ("one of the facts that may demonstrate implied authority is a continued course of dealing in which an agent has been permitted to perform the act in question"). But where no such acquiescence is present, and none was after Caplash's July 11th written acceptance of the election result and the filing of his declaratory judgment action on August 21st, none may be inferred. Accordingly, Salahuddin had no implied actual authority to hire Kristal to represent ROMSA. The question identified for trial by the appellate division must be answered in Caplash's favor. Because the appellate division held that the motion was otherwise supported by evidence of deadlock, Caplash's motion for summary judgment dissolving ROMSA is granted.
Any other result would lead to manifest unfairness. The crux of this controversy is the enforceability of Caplash's covenant not to compete by reason of his taking up a trial practice in the office of Dr. Rennie who had in late November 2006 recently passed away, an office within the territorial restriction of the restrictive covenant. It appeared from the proof that Caplash was looking into four locations for alternate work during the period after both Salahuddin and Mr. Kristal interposed counterclaims for dissolution and Salahuddin moved on November 7th for summary judgment declaring ROMSA dissolved. As Hegner testified, Caplash came to him with the thought that the writing was on the wall, that ROMSA was hopelessly deadlocked, and that his opponents in the litigation were seeking an accelerated judgment of dissolution in motions that were returnable in mid-December. Hegner testified that he only contacted the attorneys for the Rennie estate "in the November, December time element." Despite the effort by defendants' counsel to portray the approach to the Rennie estate as sinister, the effort can only be seen as an understandable reaction to the fact that the two defendants in the action had counterclaimed for dissolution and the individual defendant had moved for a summary determination of the same on undisputed proof of a deadlock. Caplash's first day of work at the Rennie practice was on December 11th, the day before he filed his cross-motion for summary judgment declaring ROMSA dissolved. With both motions for dissolution filed, dissolution appeared foreordained. It was only the last minute maneuvering on December 15th that changed this.
As I recounted on the record at the hearing, on December 12th, counsel for Salahuddin faxed a letter to the court requesting an adjournment of the motions by reason of the extensive relief Caplash demanded in his cross-motions. There was no hint that Salahuddin's motion for dissolution would be withdrawn. On December 15th, counsel for Caplash faxed a letter to the court objecting to the requested adjournment on the ground that "deteriorating circumstances at ROMSA" made it necessary to make career plans before the holidays and that it was necessary to have some direction from the court on dissolution before then. December 15th was a Friday. The court attempted an accommodation by granting an adjournment of the bulk of the cross-motions to January 24, 2007, but deciding the cross-motions for dissolution by granting them. This determination was made in a handwritten endorsement of the December 15th letter objection to the adjournment request, which noted that "both parties agree that an order of dissolution should be entered." Court Exh. No. 3. Whether I wrote this determination (and request to submit order) on the 15th or 18th, the fax of it to counsel did not go out from my chambers until the next Monday, the 18th. Although Salahuddin served his adversary with an affidavit withdrawing his motion for dissolution on the 15th, and my chambers has a record of receiving it that day, Court Exh. #4, I have no way of determining whether it was received in chambers prior to my inscription on the December 15th letter, and I am certain that I did not read it before then. Of course, ultimately, dissolution was ordered and Caplash remained at the Rennie practice location. On a subsequent motion to reargue, the court permitted withdrawal of Salahuddin's motion, and the appellate division reversed the determination of the cross-motion in favor of an immediate trial of the standing issue, otherwise finding the cross-motion properly supported.
This is in keeping with the policy of the courts to expedite resolution of dissolution proceedings. The "stability of the . . . [LLC], the financial security of its . . . [members] and the ends of justice require that the action or proceeding be disposed of with utmost dispatch, as expeditiously as reasonably practicable." Matter of T.J. Ronan Paint Corp, 98 AD2d 413, 420 (1st Dept. 1984) (corporate dissolution) (observing that "pendency of this proceeding for more than three years is far in excess of the time reasonably required to effect a final dissolution, even allowing for the animosity and hostility which have plagued this proceeding"). See also, Grammas v. Charla, 45 AD2d at 756 ("trial should proceed as expeditiously as reasonably possible); Gandi v. Filler, 15 Misc 3d 1123(A), 2007 WL 1175486 (Sup.Ct. Nassau Co. April 11, 2007)(same).
The point, however, is that the juxtaposition of the pleadings and motion practice directed at dissolution extant on December 7th, the circumstances of the parties' deteriorating relationship, which included a fool-hardy attempt by Caplash at firing Salahuddin, the existence of claims against Caplash in the defendants' answers, and the potential invocation of the restrictive covenant by reason of Caplash's exploration of the Rennie practice, all inevitably point in the direction of a finding that the December 7th resignation letter was a conditional one, particularly in regard to the question of the restrictive covenant. Hegner testified that the letter was "designed" to be conditional. Although I agree that there are words used that might be interpreted as Mr. Kristal's summation would urge the court ("references to the non-compete are not mandatory but precatory"), the document is, at best for defendants, ambiguous. I accept the view that the letter of resignation was intended, and actually was, conditional on ROMSA releasing Caplash from his employment agreement, a release that never occurred, and that therefore his resignation did not become effective when accepted by Kristal's December 11th letter even if Kristal had authority to act on behalf of ROMSA.
For all of the foregoing reasons, the standing issue is resolved in Caplash's favor, and the cross-motion for summary judgment declaring ROMSA dissolved is granted. Amended Decision and Order dated May 28, 2008, hereby made a part hereof. The parties shall confer for the purpose of agreeing on a receiver, and report back to the court within a week. Mr. Rose has, understandably, declined to serve further.
SO ORDERED.