Opinion
Index No. 653527/2022 Motion Seq. No. 001
08-17-2023
HASSAN RAGAB, Plaintiff, v. SHR CAPITAL PARTNERS LLC, URI COHEN, JIM EDMUNDS, RENE LAJOUS, and DAVID LAZIER Defendants.
Unpublished Opinion
MOTION DATE 06/20/2023.
PRESENT: HON. MARGARET A. CHAN, Justice.
DECISION + ORDER ON MOTION
MARGARET A. CHAN, J.S.C.
The following e-filed documents, listed by NYSCEF document number (Motion 001) 12, 13, 14, 15, 16, 18, 19, 20, 21 were read on this motion to/for LEAVE TO FILE.
In this action brought by plaintiff Hassan Ragab (Ragab) against his former employer, SHR Capital Partners LLC (SHR), and SHR's board of managers, Uri Cohen, Jim Edmunds, Rene Lajous, and David Lazier (the Board, and together with SHR, defendants), Ragab moves pursuant to CPLR 3025 (b) for leave to amend the complaint to include two additional plaintiffs, the Hassan Ragab 2018 Family Trust (HR Trust) and the Sara Ragab 2018 Family Trust (SR Trust, together with HR Trust, the Trusts). Defendants oppose the motion. For reasons set forth below, the motion is granted.
Background
SHR is a search fund-an investment vehicle used by individual entrepreneurs with privately raised capital to search, acquire, and grow businesses (NYSCEF #2 - Compl., ¶¶ 21, 27). Ragab is the founder of SHR and acted as its Chief Executive Officer (CEO) from 2011 to 2021 (Compl., ¶¶ 1, 21, 24). As CEO, Ragab was compensated by guaranteed payments and additional equity interests (Compl., ¶ 30).
In 2014, Ragab and SHR entered into a restated LLC agreement (the Agreement) (Compl., ¶¶ 95, 131). Upon execution of the Agreement, SHR issued to Ragab certain performance units, which were unvested equity interests in SHR (Compl., ¶¶ 3, 30, 68, 133). Pursuant to Schedule B of the Agreement, whether Ragab's performance units would vest depended on the fair market value of SHR as of Ragab's termination date, if Ragab was terminated as CEO (Compl., ¶¶ 38'40, 133). As part of this process, the Agreement required the Board to engage a certified valuation analyst from an independent accounting firm to determine the fair market value of SHR in good faith (Compl., ¶¶ 39, 40).
In 2018, the Trusts were created and Ragab transferred his vested and unvested equity interests in SHR to the Trusts in a fifty fifty split (NYSCEF # 13 - Nolan Aff, ¶¶ 9'13). Sara Ragab (Sara) is the trustee of the HR Trust and Ragab is the trustee of the SR Trust (together, the Trustees) (NYSCEF # 19 - Nolan Reply Aff, ¶ 9). Since this transfer of Ragab's interests, the Trusts have been holding the right to Ragab's performance units (NYSCEF # 13, ¶14).
On January 14, 2021, Ragab was terminated as SHR's CEO (Compl., ¶ 25). Following Ragab's termination, the Board hired Eide Bailly, LLC (Eide Bailly) to determine the fair market value of SHR as of Ragab's termination date (see Compl., ¶¶ 38-41, 48). In October 2021, Eide Bailly issued its valuation report (Compl., ¶ 53). Based on the report, SHR determined that Ragab's performance units did not vest (Compl., ¶ 68). Ragab alleges that this valuation report "materially undervalued SHR" due to Eide Bailly's mistakes and the Board's undue influence (Compl., ¶¶ 54-65). Ragab also alleges that the Board, in breach of the Agreement and its fiduciary duties, accepted the results from Eide Bailly's report to purposefully understate SHR's value and prevent Ragab's performance units from vesting (Compl., ¶¶ 67, 71, 102, 138).
On September 27, 2022, Ragab commenced this action against SHR and the Board to dispute, in part, the non-vesting of Ragab's performance units (Compl. at 2, 21, 22). Ragab asserted several causes of action, including breach of contract and breach of fiduciary duties, seeking damages over one million dollars and other declaratory judgments (id). On June 2, 2023, Ragab moved for leave to amend the complaint to add the Trusts as plaintiffs and to clarify that the Trusts, not Ragab, have been owning equity interests in SHR since the 2018 transfer of Ragab's equity interests (NYSCEF #14 - Proposed Amended Complaint). Ragab's Proposed Amended Complaint (PAC) also revises the prayer for relief section to emphasize that one of the remedies that Ragab seeks is to require SHR to "complete a good faith [vlaluation of SHR" (id., ¶¶ 3 [b], 4 [b]). Defendants oppose Ragab's motion, arguing that the PAC includes substantive revisions other than adding the Trusts as plaintiffs (NYSCEF # 15). Defendants contend that the PAC would cause substantial prejudice to defendants as well as being insufficient as a matter of law (NYSCEF # 18 - Opp. at 5-6).
Discussion
A party may amend its pleading "at any time" by leave of court (CPLR 3025 [b]; see Kimso Apartments, LLC v Gandhi, 24 N.Y.3d 403, 411 [2014] ["absent prejudice, courts are free to permit amendment even after trial"]). Absent "prejudice or unfair surprise resulting directly from the delay," leave to amend "shall be freely given" unless the proposed amendment is "palpably improper or insufficient as a matter of law" (CPLR 3025 [b]; McGhee v Odell, 96 A.D.3d 449, 450 [1st Dept 2012] [internal citation omitted]). For this purpose, a proposed pleading is insufficient if it "fails to state a cause of action" or is "patently lacking in merit" (Davis v South Nassau Communities Hospital, 26 N.Y.3d 563, 580 [2015]; Thompson v Cooper, 24 A.D.3d 203, 205 [1st Dept 2005]).
Prejudice to Defendants
Defendants argue that significant prejudice would flow from the PAC because amending the complaint to add new plaintiffs and a "new theory of recovery," after the parties have "already spent months" on discovery, would open up "potentially extensive discovery" (Opp. at 1, 7'8). Specifically, defendants claim that the PAC includes a "new theory of recovery," under which Ragab "need no longer prove any damages" (id. at 1, 7'8, 11'13). This "new theory" appears to be an added sentence in the PAC's prayer for relief that demands defendants to "complete a good faith [v]aluation of SHR" (NYSCEF# 14, ¶¶ 3 [b], 4 [b]). Defendants assert that the PAC's revised request for relief essentially compels defendants to prove damages suffered by Ragab as a result of Eide Bailly's valuation of SHR or the lack thereof (Opp. at 1, 7'8, 11'13). Moreover, defendants claim that Ragab's "extended delay" in seeking leave and failure to explain the delay requires denial of leave, given that the transfer of Ragab's interest to the Trusts occurred in 2018 and is probably a fact known to Ragab before he commenced this action (id. at 6'7).
Ragab counters that he has not added any new requests for relief in the PAC; the only proposed change is the addition of the Trusts as plaintiffs (NYSCEF # 21 at 5'6; NYSCEF #13, ¶18). Ragab also explains that the discovery is still in its early stages (NYSCEF # 19, ¶¶ 4'7). As to the delay, Ragab argues that (1) the ninemonth period between the filing of this motion and the original complaint does not constitute an extended delay,' (2) delay alone is insufficient to deny leave; and (3) absent a showing of prejudice, any purported failure to offer an excuse for delay is not fatal to a motion for leave (NYSCEF # 21 at 2-4). The court agrees.
Leave to amend pleadings may be denied when there is "prejudice or surprise resulting directly from the delay" (McGhee, 96 A.D.3d at 450 [internal citation omitted]). "The burden of establishing prejudice is on the party opposing the amendment" (Kimso Apartments, LLC, 24 N.Y.3d at 411; McGhee, 96 A.D.3d at 450 ["[a] party opposing leave to amend must overcome a heavy presumption of validity in favor of [permitting amendment]"] [internal citation omitted]). Where significant discovery remains outstanding, "the need for additional discovery does not constitute prejudice sufficient to justify denial of an amendment" (322 W. 47th St. HDFC v Tibaldeo, 196 A.D.3d 411, 412 [1st Dept 2021]).
Generally, delay in seeking leave to amend is not unreasonable if leave is sought before the note of issue is filed and before the action is certified as trialready (see Johnson v Montefiore Med. Ctr., 203 A.D.3d 462, 463 [1st Dept 2022]).
However, leave will be denied if the proposed amendment would serve no purpose other than to "needlessly complicate and/or delay discovery and trial" (Cafe Lughnasa Inc. v A &R Kalimian LLC, 176 A.D.3d 523, 523 [1st Dept 2019] [internal citation omitted]).
Applying these standards, the court concludes that defendants have not established prejudice. First, as Ragab notes, only initial discovery has taken place in this action which was filed on September 27, 2022. Indeed, neither document production nor depositions have started (NYSCEF # 19, ¶ 4). And to the extent that defendants need to conduct additional discovery, the deadline in the preliminary conference order had been extended for 90 days (NYSCEF # 17 - Conference order dated June 8, 2023). According to the schedule in the June 8 conference order, the parties have until September 28, 2023, to have their deposition notices ready. Hence, because discovery is still in its early stages, the possibility of additional discovery does not result in significant prejudice to defendants (St. Nicholas W. 126 L.P. v Republic Inv. Co., LLC, 193 A.D.3d 488, 489 [1st Dept 2021] ["additional discovery, extended litigation, and increased liability exposure does not result in prejudice warranting denial of plaintiffs motion, where significant discovery is outstanding"]).
Defendants' contention that the PAC would "re-cast this lawsuit by adding multiple plaintiffs and an entirely new theory of recovery" is similarly unavailing (Opp. at 1). Adding the Trusts-which hold Ragab's equity interests in SHR and act through Ragab and Sara-as plaintiffs neither changes the claims asserted against defendants nor disrupts the parties' discovery needlessly (see Verizon New York, Inc. v Consol. Edison, Inc., 38 A.D.3d 391 [1st Dept 2007] [granting leave upon finding that the proposed amendment would not "needlessly complicate and/or delay discovery"]). In any event, the request for a good faith valuation of SHR is a relief Ragab already sought in the original complaint, not a "new theory of recovery" (CompL, ¶¶ 111, 128, 129, 145, 146, prayer for relief ¶¶ 2 [b], 3 [b], 4 [b]). Considering that the complaint sought "a declaration that the Eide Bailly Report did not determine the Fair Market Value of SHR in good faith" (NYSCEF # 2 ¶ 109); defendants fail to explain why, by carrying over this sought relief from the original complaint to the PAC re-casts this lawsuit or shifts the burden of proof to defendants.
Finally, even assuming that Ragab was late in filing this motion, mere lateness cannot justify denial of leave, particularly in the absence of any prejudice (Edenwald Contr. Co., Inc. v City of New York, 60 N.Y.2d 957, 959 [1983] ["[m]ere lateness is not a barrier to the amendment. It must be lateness coupled with significant prejudice to the other side"]). This remains true even if Ragab knew or should have been aware of the relevant facts "long before" seeking leave to amend (see Greenburgh Eleven Union Free School Dist. v Natl. Union Fire Ins. Co., 298 A.D.2d 180, 180 [1st Dept 2002] ["while plaintiff was or should have been aware of facts and theories asserted in amended complaint long before amendment was actually sought, delay alone is not sufficient ground for denying leave to amend"]).
In any event, the court concludes that Ragab did not unreasonably delay this motion by seeking leave after nine months. At the time of Ragab's motion, the parties had not yet produced documents and were nowhere close to filing a note of issue (NYSCEF # 19, ¶ 4). By contrast, in the cases cited by defendants, leave was sought years after the action commenced or after an action was trial-ready (see Pecora v Pecora, 204 A.D.3d 611, 612 [1st Dept 2022] [plaintiff moved for leave to amend almost seven years after commencing the action]; Morand v Farmers New Century Ins. Co., 171 A.D.3d 1167, 1168 [2d Dept 2019] [moving for leave after the case had been certified trial-ready]). Absent any extended delay, Ragab need not proffer an excuse for not moving for leave earlier (Johnson v Montefiore Med. Ctr., 203 A.D.3d 462, 463 [1st Dept 2022] [a reasonable excuse for delay is required only if there is an extended delay]).
In light of the above, defendants have failed to show prejudice or delay that warrants denial of leave.
Sufficiency as a Matter of Law
Next, defendants argue that, in seeking to add the Trusts in their own names as plaintiffs, the PAC is insufficient as a matter of law because trusts do not have standing to sue or be sued in their own names and must act through the trustees (Opp. at 9-11). Defendants emphasize that the PAC fails to identify the Trustees or provide for the Trustees' consent to commence the action (id). Ragab replies that he is the trustee of the SR Trust and Sara is the trustee of the HR Trust and both Trustees have consented to this action (NYSCEF # 19, ¶¶ 9, 10). In addition, Ragab, through his counsel, proposes to further amend the caption of the PAC to add Ragab and Sara, in their capacities as the Trustees, as plaintiffs (id., ¶10).
It is true that a trust cannot maintain an action in its own name and must act through the trustees because a trust is "a legal fiction" (see Natixis Real Estate Capital Tr. 2007-HE2 v Natixis Real Estate Holdings, LLC, 149 A.D.3d 127, 132 [1st Dept 2017]). However, a movant may also address omissions from its original moving papers on reply (see Feliciano v New York City Health and Hosps. Corp., 62 A.D.3d 537, 538 [1st Dept 2009] [allowing introduction of a new argument in a reply affirmation]; see also Home Ins. Co. v Leprino Foods Co., 7 A.D.3d 471 [1st Dept 2004] ["[t]he inadvertent omission of [certain document] from the original moving papers was adequately explained in the reply affidavit"]). Indeed, courts have discretion to consider arguments raised on reply if they are "in direct response" to the other party's opposition (L. Y.E. Diamonds, Ltd. v Gemological Inst, of Am., Inc., 169 A.D.3d 589, 590 [1st Dept 2019] [considering counsel's affidavit and exhibits offered on reply "in direct response to" the opposition papers]; Home Ins. Co., 7 A.D.3d at 471 [1st Dept 2004] [considering plaintiffs argument raised for the first time on reply because it was "directly responsive" to defendant's opposition]). This is especially true if new arguments raised on reply do not prejudice the opposing party (Burlington Ins. Co. v Guma Const. Corp., 66 A.D.3d 622, 624-625 [2d Dept 2009] [finding that a court may consider a new argument raised for the first time in a reply affirmation where the opposing party did not suffer any prejudice]).
Applying the above principles, the court concludes that the PAC, as revised on reply, is not palpably insufficient as a matter of law. Although the initial PAC failed to add the Trustees as plaintiffs, defendants have not shown that such defects, cured through Ragab's reply, would prejudice a substantial right of defendants. In fact, Ragab's counsel has adequately identified the Trustees, provided for their consent, and added the Trustees as plaintiffs, in direct response to defendants' opposition that the Trusts lack standing (NYSCEF # 19, ¶¶ 9, 10). Given these revisions, the PAC is sufficient for granting leave to amend (see Maestracci v Helly Nahmad Gallery, Inc., 155 A.D.3d 401, 404 [1st Dept 2017] [granting leave to add a co-plaintiff]).
Even assuming that the initial PAC did not meet the requirement under CPLR 3025(b) that a proposed amended pleading must "clearly show the changes or additions to be made" as it did not include the caption as further amended on reply (NYSCEF #'s 14, 19), the Court of Appeals has suggested that this omission is not a sufficient independent ground to deny leave (see Greene v Esplanade Venture Partnership, 36 N.Y.3d 513, 526 n.3 [2021]).
Conclusion
In view of the above, it is hereby
ORDERED that plaintiff Hassan Ragab's motion under CPLR 3025 (b) seeking leave to amend the complaint is granted,' and it is further
ORDERED that the caption be amended to include as plaintiffs Hassan Ragab, in his personal capacity and as trustee of the Sara Ragab 2018 Family Trust, and Sara Ragab, as trustee of the Hassan Ragab 2018 Family Trust, such that the new caption will read as follows:
HASSAN RAGAB in his personal capacity and as trustee of the SARA RAGAB 2018 FAMILY TRUST, and SARA RAGAB, as trustee of the HASSAN RAGAB 2018 FAMILY TRUST Plaintiffs, v.
SHR CAPITAL PARTNERS LLC, URI COHEN, JIM EDMUNDS, RENE LAJOUS, and DAVID LAZIER Defendants.
INDEX NO. 653527/2022
And it is further
ORDERED that within ten (10) days of the e-filing of this order, plaintiff shall (i) e-file an amended complaint, which takes the caption described above and is consistent with the proposed amended complaint (NYSCEF # 14); and (ii) serve a copy of the amended complaint on all parties; and it is further
ORDERED that defendants shall answer or otherwise move within thirty (30) days from the date of service.