Decided May 26, 2009.
Daniel Akselrod, Esq., Eric Wertheim, Esq., Val Mendel PC, New York, NY, Attorneys for Plaintiff.
Bernadette M. Crowley, Esq., Rossi Crowley LLP, Douglaston, New York, Attorneys for Defendant.
Neal M. Sher, Esq., New York, NY.
In this action by plaintiff Dmitriy Davydov (plaintiff) against Yuri Zhuk (defendant) alleging the breach of a shareholders' agreement, unjust enrichment, conversion of corporate assets, corporate business opportunities and good will, breach of fiduciary duty, fraud, and waste, and seeking damages, repayment of charges on a business joint credit card, and an accounting of business receipts, disbursements, profits, and losses, plaintiff moves for summary judgment in his favor and/or an order striking defendant's answer on the basis of spoliation, or, in the alternative, granting an adverse inference based upon the spoliated evidence.
In 1999, plaintiff worked for defendant at his company, U.S. Satellite Enterprises. Plaintiff and defendant then decided to go into business together. On March 22, 2000, plaintiff formed D Y Trade System Corp. (with the D Y standing for the first names of plaintiff and defendant, i.e., Dmitriy and Yuri), which sold doors and hardwood floors. D Y Trade System Corp. operated under the name "World of Doors." Shares of D Y Trade System Corp. were never issued and corporate formalities were never observed, but defendant concedes that he and plaintiff took money out of the corporation equally (Defendant's Dep. Transcript at 29). On March 15, 2003, D Y Trade System Corp., as a tenant, entered into a five-year lease for store premises and basement space located at 2338 Coney Island Avenue, in Brooklyn, New York.
It is undisputed that in 2003, "a third owner," Irina Klinova, was added to the corporation and a new corporate entity, ZDK Universal Trade, Inc. was created. On July 30, 2003, a certificate of assumed name for ZDK Universal Trade, Inc. to do business as "World of Doors" was filed. The letters ZDK in the name of ZDK Universal Trade, Inc. stood for the last names of defendant, plaintiff, and Klinova, and defendant admitted that he considered each of them to be equal owners of the business (Defendant's Dep. Transcript at 35). Defendant testified at deposition that D Y was closed "through the accountant" in or about June 2004 and ZDK took its place (Defendant's Dep. Transcript at 30-33). No shares of ZDK Universal Trade, Inc. were ever issued and no corporate formalities were followed, however, defendant admitted that he, plaintiff and Klinova were equal participants (Defendant's Dep. Transcript at 35). A letter from McLan Accounting Services dated August 5, 2003 states that Klinova and defendant were the sole directors, officers, and stockholders of ZDK Universal Trade, Inc., and that Klinova was the president/treasurer of ZDK Universal Trade, Inc., and defendant was its vice-president/secretary, however, such representation appears to conflict with defendant's own sworn testimony. With the permission of the landlord, ZDK Universal Trade, Inc. continued to use the store at 2338 Coney Island Avenue in Brooklyn, New York.
In September 2004, Klinova purportedly attempted to take over ZDK Universal Trade, Inc., which resulted in a lawsuit filed on December 27, 2004 by Klinova against plaintiff and defendant ( Klinova v Zhuk, Sup Ct, Kings County, Index No. 41753/04) and the closing of ZDK Universal Trade, Inc. That suit appears to have resulted in the dissolution of ZDK Universal Trade, Inc.
In mid-September 2004, ZDK Universal Trading, Inc. was formed and two different certificates of assumed name, i.e., one as ZDK Universal Trading and the other as the "International World of Doors," were filed. Although shares of ZDK Universal Trading, Inc. were never issued and again corporate formalities were not followed, in an affidavit previously submitted by defendant Zhuk in response to plaintiff's motion to appoint a receiver, dated June 11, 2007, Zhuk acknowledged that plaintiff was vice-president and treasurer of ZDK Universal Trading, Inc. Zhuk further acknowledges therein that he opened his own store in New Jersey between March and May of 2006. On September 16, 2004, the lease for the 2338 Coney Island Avenue store premises and basement space was assigned to ZDK Universal Trading, Inc., d/b/a International World of Doors. Plaintiff and defendant continued to operate the business of ZDK Universal Trading, Inc. together (without Klinova) at the same 2338 Coney Island Avenue location. Defendant admits that he and plaintiff took equal salaries from the business and were supposed to be equals in the business (Defendant's Dep. Transcript at 56, 68-69).
On March 24, 2006, ZDK Universal Trading, Inc. entered into a two-year lease with an option to renew for three additional years for warehouse space located at 1617 East Elizabeth Avenue, in Linden, New Jersey. Plaintiff and defendant each personally guaranteed the warehouse lease. In May 2006, defendant, without informing plaintiff, opened his own store, located at 200 Main Street, in Fort Lee, New Jersey. Defendant called the New Jersey business, "World of Doors" and used the same warehouse as used by ZDK Universal Trading, Inc. (Defendant's Dep. Transcript at 79). Defendant admitted that he operated this New Jersey business while also engaged in the business of ZDK Universal Trading, Inc. with plaintiff (Defendant's Dep. Transcript at 73). In January 2007, defendant changed the website for "World of Doors" to list the 200 Main Street, Fort Lee, New Jersey, address as one of the addresses for "World Doors," along with the 2338 Coney Island Avenue location in Brooklyn and the 1617 East Elizabeth Avenue location of the warehouse in Linden, New Jersey.
Plaintiff claims that when he later found out about defendant's New Jersey business, he entered into negotiations with defendant to have defendant buy him out, but never reached an agreement. On January 25, 2007, when plaintiff returned from a trip abroad, he found that defendant had changed the locks at the warehouse, thereby denying him access. On January 30, 2007, plaintiff also found out that defendant had removed him as a signatory on ZDK Universal Trading, Inc.'s bank account. It is undisputed that defendant unilaterally took complete control of the receipts and all finances of ZDK Universal Trading, Inc. The World of Doors in Fort Lee, New Jersey, is still in business, and defendant plans to open a new location in Paramus, New Jersey. Defendant also has a new Brooklyn store, Solo Porte, which sells doors and door accessories just like Brooklyn World of Doors had sold.
On April 17, 2007, plaintiff filed this action against defendant. Plaintiff's complaint alleges that defendant breached the shareholders' agreement between them for ZDK Universal Trading, Inc., which was incorporated in September 2004, and that defendant also breached his fiduciary duty to him by diverting corporate business opportunities of ZDK Universal Trading, Inc. to defendant's New Jersey business. Specifically, plaintiff alleges that defendant used the warehouse and inventory in the warehouse for defendant's New Jersey store, and offered ZDK Universal Trading, Inc.'s potential customers better prices at the New Jersey store, thus diverting business from the 2338 Coney Island Avenue Store.
Plaintiff further alleges that defendant has siphoned off income from ZDK Universal Trading, Inc. for his own personal New Jersey business, and has used business inventory and real estate from ZDK Universal Trading, Inc. for his New Jersey business. Plaintiff also alleges that defendant has denied him access to the corporate bank account, and has refused to account for the business. In addition, plaintiff alleges that defendant has not been paying the credit card bills for a joint business credit card, for which he was a guarantor, and that the credit card company is taking steps to collect the balance from him. Plaintiff's complaint seeks damages and an accounting, and alleges claims, for among other things, breach of contract, unjust enrichment, conversion, breach of fiduciary duty, fraud, and waste.
Defendant interposed an answer on June 2007, denying plaintiff's allegations. Plaintiff's attorney served defendant with a first demand for production of documents on June 22, 2007. This demand sought production of ZDK Universal Trading, Inc.'s financial records and its corporate documents, including its certificate of incorporation, shareholders' agreements, partnership agreements, resolutions, and minutes of meetings. It also sought documents concerning payments or contributions of any kind made by defendant or plaintiff to ZDK Universal Trading, Inc.; all bank records; all documents concerning or reflecting all sales by ZDK Universal Trading, Inc.; all receipts, bills, invoices, work orders, and contracts concerning sales and installations at the 2338 Coney Island Avenue store; documents reflecting payments by any person to ZDK Universal Trading, Inc.; contracts or agreements between defendant or ZDK Universal Trading, Inc. and any other party concerning the sale and/or installation of doors, door accessories, and parquet and laminated floors; and all receipts, invoices, bills, and bills of lading from suppliers of the 2338 Coney Island Avenue store.
In a response dated July 10, 2007, defendant's attorney responded to each of the above demands that "[n]o such records are in the possession of defendant." As defendant explained during his deposition, all of the business records for ZDK Universal Trading, Inc. were stored in the basement of the building at the 2338 Coney Island Avenue (Defendant's Dep. Transcript at 49). By a Lease Surrender Agreement dated July 2007, defendant terminated the lease for the store premises and basement space at 2338 Coney Island Avenue, and the store and basement space were rented to defendant's friend for use as a restaurant. When defendant vacated the store in July 2007, while this action was pending and after being served with plaintiff's June 2007 discovery demands, he left all of ZDK Universal Trading, Inc.'s business records in the basement because they "were of no interest to [him]," and all of these records were thrown in the garbage (Defendant's Dep. Transcript at 49).
Plaintiff contends that he was an equitable shareholder of ZDK Universal Trading, Inc. and relies upon defendant's deposition testimony that he and plaintiff were in business together, that defendant considered the parties to be equals in the business, and that defendant and plaintiff would take equal amounts out of the company (Defendant's Dep. Transcript at 55-56). Plaintiff argues that these admissions by defendant show that the parties were equal de facto shareholders.
It is well established that shareholders in a closely held corporation share a fiduciary duty among themselves ( see Littman v Magee , 54 AD3d 14 , 17; Global Mins. Metals Corp. v Holme , 35 AD3d 93 , 98; Brunetti v Musallam , 11 AD3d 280 , 281; Sager Spuck Statewide Supply Co. v Meyer, 273 AD2d 745, 748; Matter of Cassata v Brewster-Allen-Wichert, Inc., 248 AD2d 710, 711). Thus, defendant's status as a shareholder and officer of the corporation, ZDK Universal Trading, Inc., imposed a fiduciary responsibility upon him to plaintiff, a fellow officer and owner ( see Littman, 54 AD3d at 17; Global Mins. Metals Corp., 35 AD3d at 98; Brunetti, 11 AD3d at 281; Blank v Blank, 256 AD2d 688, 695). The operation of a competing business by one shareholder, without the knowledge and consent of the other shareholder, would constitute a breach of this fiduciary duty as a matter of law ( see Yu Han Young v Chiu , 49 AD3d 535 , 536; Adirondack Capital Mgt., Inc. v Ruberti, Girvin Ferlazzo, P.C. , 43 AD3d 1211 , 1215).
Here, defendant admitted, at his deposition, that, without plaintiff's knowledge, he opened a similar business, using the same "World of Doors" name, at the same time as he was operating the Brooklyn World of Doors business, i.e., ZDK Universal Trading, Inc., with plaintiff (Defendant's Dep. Transcript at 73). Plaintiff argues that such admission entitles him to summary judgment in his favor. Plaintiff seeks his share of the assets allegedly misappropriated by defendant from the Brooklyn World of Doors and the disgorgement of defendant's profits from the New Jersey World of Doors which, he alleges, were from business diverted from the Brooklyn World of Doors store at 2338 Coney Island Avenue.
Plaintiff has sustained his burden to demonstrate entitlement to summary judgment based upon the admissions of defendant contained in his deposition testimony acknowledging that he and plaintiff were equal owners of the various corporate entities which succeeded each other and his acknowledgment that, without consulting plaintiff, he had opened and maintained a competing business using assets of ZDK Universal Trading, Inc.
In opposition to plaintiff's motion, defendant has failed to submit his own affidavit, but has submitted only the affirmation of his attorney and has annexed a prior affidavit by defendant, in which he states that he formed ZDK Universal Trading, Inc. Significantly, defendant, in his prior affidavit, does not deny that plaintiff had an interest in ZDK Universal Trading, Inc., but only states that shares of ZDK Universal Trading, Inc. were never issued. Defendant also acknowledges, in that affidavit, that plaintiff was the vice-president/secretary of ZDK Universal Trading, Inc.
It is well-settled that an attorney's affirmation by one having no personal knowledge of the facts is of no evidentiary value, is insufficient to defeat competent evidence submitted in support of plaintiff's claims and fails to raise a triable issue of fact ( Zuckerman v City of New York, 49 NY2d 557, 563; Prince v. Accardo , 54 AD3d 837 [2d Dept 2008]; Matter of Ziomek , 40 AD3d 774 [2d Dept 2007]). In her affirmation, defendant's attorney asserts that while plaintiff and defendant worked together from 1999 until 2006, plaintiff was only an employee of defendant, relying upon plaintiff's inability to produce a written shareholders' agreement between the parties. Such contention is not only incompetent, but is also irrelevant.
Plaintiff's complaint alleges that a written shareholders' agreement was executed in September 2004, and plaintiff testified, at his deposition, that such a shareholders' agreement was prepared by the law firm of Forster Iannacone, who defended both plaintiff and defendant in the suit brought by Klinova, (Plaintiff's Dep. Transcript at 76-78). In seeking to defeat plaintiff's claims, defendant has annexed affidavits from Frank Iannacone and Jeanne Ellen Forster from the law firm of Forster Iannacone wherein they each state that they did not prepare a shareholders' agreement involving plaintiff or defendant. While defendant's counsel relies upon these affidavits to impeach plaintiff, it is clear that plaintiff was uncertain as to the identity of the attorneys that handled the incorporation. Moreover, such issue is of no moment since it is well established that the mere fact that an alleged shareholder is not formally issued stock certificates, or does not physically possess stock certificates or a shareholders' agreement is not dispositive, without more, of whether he or she is a shareholder ( see French v French, 288 AD2d 256, 256; Blank, 256 AD2d at 693; Matter of Steward, 229 AD2d 500, 500-501; Matter of M. Kraus, Inc., 229 AD2d 347, 348; Purnell v LH Radiologist, P.C., 228 AD2d 360, 361, affd 90 NY2d 524; Matter of Benincasa v Garrubbo, 141 AD2d 636, 638; Lubov v Wilikson, 2008 NY Slip Op 30234[U] [Sup Ct, NY County 2008]; Marciano v Champion Motor Group, Inc., 2007 NY Slip Op 33021[U] [Sup Ct, NY County 2007]). Where no certificates of stock are issued by a corporation, the court may consider other evidence to determine the validity of a plaintiff's claim that he or she was a shareholder of the corporation, such as corporate and personal tax returns, financial statements, the names on corporate bank accounts, bank records, the parties' testimony, the monies contributed by the parties to the corporation, the work performed by the parties for the corporation, and the payments made by the parties for corporate obligations ( see Blank, 256 AD2d at 693; Hunt v Hunt, 222 AD2d 759, 760). Because defendant failed to preserve the business records of ZDK Universal Trading, Inc., much of this proof is no longer available to plaintiff. However, in this case, defendant's own deposition testimony, together with leases executed by both parties, and the absence of any competent evidence to dispute plaintiff's claims unequivocally establish that plaintiff was and is a fifty percent owner of the various corporations known as "World of Doors" and that he was owed a fiduciary duty from defendant Zhuk who, by his own admission, breached such duty in unilaterally diverting business assets belonging to the joint enterprise he had with plaintiff, to his own purposes. Accordingly, summary judgment on the issue of liability is granted to plaintiff.
Plaintiff further argues, in his motion, that defendant's answer should be stricken for spoliation of evidence. As discussed above, defendant admitted at his deposition that he was in control of the business records demanded by plaintiff but threw away, or permitted to be thrown away, the business records of ZDK Universal Trading, Inc. that had been stored in the basement of the leased Brooklyn store premises (Defendant's Dep. Transcript at 49). The Lease Surrender Agreement dated July 2007 and executed by defendant, evidences that this occurred after this action was filed on April 17, 2007 and after defendant had been served with plaintiff's June 22, 2007 discovery demands.
"[U]nder the common-law doctrine of spoliation, when a party negligently loses or intentionally destroys key evidence, thereby depriving the non-responsible party from being able to prove its claim or defense, the responsible party may be sanctioned by the striking of its pleading'" ( Denoyelles v Gallagher , 40 AD3d 1027 , 1027, quoting Baglio v St. John's Queens Hosp., 303 AD2d 341, 342-343; see also Utica Mut. Ins. Co. v Berkoski Oil Co. , 58 AD3d 717 , 718; Barnes v Paulin , 52 AD3d 754 , 755; Madison Ave. Caviarteria v Hartford Steam Boiler Inspection Ins. Co. , 2 AD3d 793 , 796). "[W]here the lost item is the key' evidence in the case, the proper sanction is to strike the pleading of the responsible party" ( Marro v St. Vincent's Hosp. Med. Ctr. of NY, 294 AD2d 341, 341; see also DiDomenico v C S Aeromatik Supplies, 252 AD2d 41, 53; Squitieri v City of New York, 248 AD2d 201, 202; Kirkland v New York City Hous. Auth., 236 AD2d 170, 173). Here, it is clear that defendant had a duty to preserve the evidence demanded and willfully failed in such duty, thus depriving plaintiff of necessary evidence. Under such circumstances, his answer would be properly stricken ( Baglio v St. John's Queens Hospital, 303 AD2d 341, 342 [2d Dept 2003]; New York Central Mutual Fire Ins. Co. v Turnerson's Electric, Inc., 280 AD2d 652 [2d Dept 2001]). However, in light of this Court's determination as to liability based upon the undisputed evidence, the striking of the pleading is no longer necessary. The only issue remaining to be litigated is the measure of damages suffered by plaintiff as a result of defendant's breach.
Plaintiff's motion to strike defendant's answer is premised primarily upon his inability to prove damages. Defendant has failed to turn over nearly all financial records upon which plaintiff might assess defendant's misappropriation of the shared assets of the parties' joint Brooklyn business, and defendant's profits from the competing store in New Jersey allegedly obtained as a result of defendant's diversion of corporate opportunities and business from the 2338 Coney Island Avenue store in Brooklyn. Plaintiff asserts that these records would include invoices, complete sets of bank statements, and complete import records created by custom brokers. Plaintiff contends that he cannot determine the extent to which defendant misappropriated the assets of the Brooklyn store without these business records. Specifically, plaintiff asserts that he needs evidence of the sales defendant made that show defendant's profits in the New Jersey store after he was frozen out of the business.
Plaintiff's demand for an accounting, to which he is unquestionably entitled, has also been frustrated by defendant's destruction of the corporate records.
However, eleven sales invoices, which defendant has produced from the New Jersey World of Doors, listing the cost of sold merchandise, as reflected in records obtained from the customs brokers who imported the doors, show an average mark-up of 250%. Plaintiff, in projecting that mark-up onto all of the custom broker records independently obtained, covering the period April 2006 to June 2007, calculates a total profit by defendant of between $1,100,000 and $1,400,000. Plaintiff suggests that an appropriate sanction to impose upon defendant for the spoilation of necessary evidence would be for the court to assume this profit range as the total profits on the sales which defendant has not produced, and award him half of these profits, i.e., between $550,000 and $700,000.
The court finds from the undisputed evidence that, at the time defendant disposed of the relevant business records, he was aware that the issue in this case related to those business records. Indeed, defendant was on notice of plaintiff's claims and document demands and should have maintained the business records, which were relevant to these claims and within the scope of these document demands ( see Anesthesia Assoc. of Mount Kisco, LLP v Northern Westchester Hosp. Ctr. , 44 AD3d 975, 976). Defendant cannot be permitted to frustrate plaintiff's proof that he had diverted resources from the parties' shared business to a competing business. Thus, a sanction must be imposed against defendant for his spoliation of evidence ( see Denoyelles, 40 AD3d at 1027; DiDomenico, 252 AD2d at 53).
When the missing evidence does not completely deprive the plaintiff of the ability to establish his or her case, a negative or adverse inference against the defendant at the trial of the action is an appropriate sanction ( see Barnes, 52 AD3d at 755; Yechieli v Glissen Chem. Co. , 40 AD3d 988 , 989; E.W. Howell Co., Inc., v S.A.F. La Sala Corp. , 36 AD3d 653 , 655; Marro, 294 AD2d at 341-342). It appears that plaintiff is not totally bereft of the means to establish his claims, and may still be able to establish his damages based upon bank records, tax returns, custom broker records, and other independently available evidence. ( see Barnes, 52 AD3d at 755). Accordingly, the court agrees that the sanction of an adverse inference is appropriate here as to the mark-up and profit margin of defendant's business and will determine damages based upon the 250% mark-up shown by the records that have been produced.
Plaintiff's motion, insofar as it seeks summary judgment in his favor, is granted on the issue of liability. Plaintiff's motion, insofar as it seeks an order striking defendant's answer on the basis of spoliation, is rendered moot, but is granted to the extent that an adverse inference is appropriate and will be made on the issue of damages.
The parties shall appear in Commercial Part I, Room 756 of the Kings County Supreme Court, for a conference on July 30, 2009 at 10 am.
This constitutes the decision and order of the court.