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McCagg v. Schulte Roth Zabel LLP

Supreme Court of the State of New York, New York County
Aug 1, 2008
2008 N.Y. Slip Op. 51794 (N.Y. Sup. Ct. 2008)

Opinion

601566/04.

Decided August 1, 2008.

McLAUGHLIN STERN, LLP, New York, New York, (Paul H. Levinson, Esq., Bruce A. Langer, Esq.) for Plaintiff.

LeBOEUF, LAMB, GREENE MacRAE, New York, New York, (Jonathan D. Siegfried, Esq.) for Defendants.

Attorneys for Schulte Roth Zabel, LLP, Marc S. Weingarten, and Harry S. Davis, FARBER, PAPPALARDO CARBONARI, White Plains, NY, (Eugene Farber, Esq.), Attorneys for Alan Clingman.


This decision and order determines the summary judgment motion (CPLR 3212) in McCagg v Schulte Roth Zabel LLP (Index No. 601566/04) (the Schulte action), and the crossmotion in the Schulte action, as well as the motion to dismiss (CPLR 3211 [a]), in McCagg v Marquis Jet Partners, Inc. (Index No. 113026/07) (the Marquis action). The text is identical; however, the decretal paragraphs differ in each action and on each Grey Sheet.

By decision and order dated September 23, 2005, I granted the motion of defendant Alan Clingman (Clingman), to dismiss the verified complaint in the Schulte action on statute of frauds grounds, only to the extent of dismissing the first cause of action. The Appellate Division affirmed for the reasons stated by this court ( see McCagg v Schulte Roth Zabel LLP , 36 AD3d 424 [1st Dept 2007]). Familiarity with that decision is assumed.

These related actions, brought by plaintiff Brin McCagg (McCagg), arise out of an aborted venture incorporated under Delaware law as Clearjets, Inc. (Clearjets), on December 17, 2002.

In the fall of 2002, McCagg and Clingman, a defendant in the Schulte action, began preparations to launch Clearjets to compete with Marquis Jet Partners, Inc. (Marquis), and Netjets, Inc. (Netjets, or, Marquis/Netjets), in the 25 hour fractional jet airplane rental business. Clingman had been terminated as chief executive officer of Marquis in August 2002, and still held approximately 12% of the stock of closely held Marquis.

According to the verified complaint in the Schulte action, on November 18, 2002, McCagg and Clingman attended a meeting in Florida with representatives of FlexJets, Inc. (Flexjets), to discuss the possibility of entering into a contract with FlexJets to purchase fractional shares in jet aircraft manufactured by Bombardier Aerospace, Inc. (Bombardier), and then develop a rental program similar to that offered by Marquis and NetJets.

Schulte Roth Zabel LLP (Schulte) handled the incorporation of Clearjets in Delaware. In addition to preparing the certificate of incorporation, bylaws, and minutes of board actions, Schulte prepared employment agreements for Clearjets officers and employees, and reviewed a proposed master contract with Bombardier/Flexjets. By a resolution of its board of directors dated December 20, 2002, Clearjets issued 60% of the stock to Clingman and 40% to McCagg, and elected Clingman as Chairman, CEO and Treasurer, and McCagg as President. Clearjets then rented office space, and hired a general counsel and receptionist.

Thereafter, McCagg and Clingman entered a one-page "Letter of Agreement" (the letter agreement), dated January 1, 2003, which was after Clearjets was incorporated.

The letter agreement provides, in its entirety:

This document, dated January 1, 2003, will serve as an initial agreement (the "Agreement") between Alan Clingman and Brin McCagg (the "Partners").

1. The Partners agree to contribute the fractional jet business into a mutually owned LLC (the "LLC").

2. Both Partners will work full-time for the LLC and use their best efforts to develop the contributed business.

3. Clingman will assume the title and role of Chairman and CEO, and McCagg will assume the title and role of President. The Partners agree to confer on all major decision [sic] regarding the operation of the businesses.

4. LLC equity will be split 60% for Clingman and 40% for McCagg. Any shares issued for any purpose (e.g., raising capital, ESOPs, etc.) will dilute each Partner pro rata.

5. All legitimate and reasonable expenses, which are mutually agreed upon in advance, will be paid based on the Partners' 60-40 equity split.

6. Both Partners agree not to sell their stock without notifying the other Partner and allowing, but not requiring, the other Partner to participate in the sale event on a pro rata basis.

There is no allegation or evidence that such a limited liability corporation was ever created. No fractional jet business was ever established, and no agreement with Flexjets/Bombardier, or any other fractional jet ownership program was ever executed by Clearjets.

McCagg alleges that this letter agreement, which the verified complaint in the Marquis action characterizes as a "joint venture agreement," also constitutes an agreement that he and Clingman would own Clearjets as partners.

In Weisman v Awnair Corp. of America ( 3 NY2d 444), the Court of Appeals held that a partnership could not be operated in corporate form:

[t]he two forms of business are mutually exclusive, each governed by a separate body of law. When parties "adopt the corporate form, with the corporate shield extended over them to protect them against personal liability, they cease to be partners and have only the rights, duties and obligations of stockholders. They cannot be partners inter sese and a corporation as to the rest of the world" [citation omitted]

( id. at 449).

In Matter of Hochberg v Manhattan Pediatric Dental Group, P.C. ( 41 AD3d 202 [1st Dept 2007]), the Appellate Division, First Department, following a holding by the Appellate Division, Third Department, held that a partnership could operate in corporate form, stating "it is a question of fact whether the partnership was extinguished following the creation of a corporate entity to carry out the partnership business" ( id. at 203).

Here, any partnership created by the letter agreement was created after the incorporation of Clearjets, and is, therefore, not within the holding of Hochberg. McCagg alleges, however, that he and Clingman formed an oral joint venture in November 2002. Such a joint venture would be within the holding of Hochberg. Other than McCagg's assertion, there is no evidence of the formation of a joint venture.

I make no finding whether Clingman and McCagg made any oral joint venture or partnership agreement. I hold only that there is no evidence, other than McCagg's bare assertion, that the Schulte defendants had any knowledge of an oral joint venture or partnership agreement, or of the letter agreement.

As a matter of law, the letter agreement does not constitute a partnership agreement with respect to the ownership of Clearjets, Inc. While it requires the "partners" "to confer on all major decision [sic] regarding the operation of the businesses," it does not identify these "businesses," and does not even mention Clearjets. It is an ambiguous document which, at best, provides some evidence that Clingman and McCagg had agreed to become partners with respect to the fractional jet business, but apparently in the context of a to-be-formed mutually-owned LLC. At most, it evinces an intention to create a limited liability corporation in the future, into which the fractional jet business would be contributed.

Other than McCagg's assertion, and the letter agreement, there is no other evidence that McCagg and Clingman agreed to own Clearjets as partners. The letter agreement was initially drafted by plaintiff, and edited by Clingman. There is no evidence that any of the Schulte defendants advised either party with respect to the letter agreement. No partnership tax return has been submitted. No K-1 form has been submitted. Nowhere in the certificate of incorporation, by-laws, or the board resolutions dated January 26, 2003, of Clearjets, Inc., is there any indication that Clingman and McCagg owned Clearjets as partners.

The verified complaint in the Schulte action also names as defendants two Schulte partners, Marc S. Weingarten(Weingarten), and Harry S. Davis (Davis, or, collectively, the Schulte defendants). Plaintiff's cross motion in the Schulte action seeks leave to file an amended verified complaint, adding Schulte partner Robert R. Kiesel (Kiesel) as a defendant, and asserting derivative claims on behalf of Clearjets against the Schulte defendants.

While there is no written retainer agreement in the record between Schulte and Clearjets, or Schulte and Clingman, or Schulte and McCagg, it is undisputed that Schulte was Clingman's longtime counsel, and also represented Clearjets, Inc.

The e-mail correspondence shows that McCagg wanted to have an agreement in place with Bombardier by January 7, 2003. The communications from Schulte advising on Clearjets matters were addressed to both McCagg and Clingman.

In December 2002, immediately after the incorporation of Clearjets, both McCagg and Clingman consulted Schulte about how to respond to threatening communications emanating from Marguis and its principals, after word got back to Marquis that Clingman and plaintiff were planning a competing venture.

By e-mail dated December 18, 2002, Clingman informed Schulte, that he had heard that Marquis and Netjets were going to send Clingman a threat based on a clause in Netjets's trademark license agreement that gives Netjets the right to terminate the agreement if Clingman does business with a competitor.

By letter dated December 19, 2002, Kaye Scholer LLP (Kaye Scholer), counsel for Marquis, wrote to Clingman that it had come to their attention that Clingman was planning to compete with Marquis by forming a venture that would execute a contract with Bombardier/Flexjet. The letter threatens legal action if Clingman does not cease and desist. It alleges that Clingman had a duty not to compete with Marquis. Schulte researched the issue of whether Clingman was under any duty not to compete with Marquis, and was successful in rebuffing the challenge.

By letter dated December 20, 2002, Kaye Scholer informed McCagg that Marquis had learned that McCagg and Clingman were planning to launch a venture that would directly compete with Marquis. The letter states that Marquis took the threat very seriously because of McCagg's presence in Marquis's offices for the past two and one-half years, and that Marquis would take prompt legal action if it learns that McCagg had misappropriated any confidential proprietary information, or if McCagg assisted Clingman in the breach of his fiduciary duties to Marquis. McCagg had previously served as CEO of a corporation affiliated with the Marquis investors, and was involved in at least two other ventures with them in 2002.

A second letter of the same date, also from Kaye Scholer, accuses McCagg of refusing to return a laptop belonging to Superstar EXP. McCagg had served as CEO of Superstar EXP. The letter threatens legal action if McCagg does not return the laptop, or if McCagg removes proprietary information from the laptop. This letter indicates that a copy was sent to Kenneth Dichter (Dichter), who, according to McCagg, controlled Marquis.

A third letter to McCagg, by e-mail, from Bill Allard (Allard), the CEO of Marquis, states:

I hope the rumors I am hearing about you potentially competing with Marquis and or NetJets are not true. I don't believe the rumors are true because I can't believe someone would stoop so low or be so foolish to sit in our offices for a long time and whom we tried to help and then turn around and compete . . . I can't believe this is true and would like you to confirm this for me.

By e-mail dated December 24, 2002, McCagg wrote to Davis, saying that Weingarten had referred him to Davis. The e-mail asks Davis to advise McCagg on a proposed response to the Kaye Scholer letters, as well as the Allard letter, and includes a proposed response. The three letters were also sent to Davis. This e-mail also states that McCagg's lawyer was on vacation, but offers to put the two in touch if it would be helpful.

Davis made some editorial changes to McCagg's proposed response to Kaye Scholer, and advised McCagg to send the edited letter and not respond to the Allard letter.

Schulte billed Clearjets for its services in advising both McCagg and Clingman on how to respond to the threats from Marquis. Clearjets paid the bill, with McCagg contributing 40% of the bill, and Clingman, 60%. McCagg and Clingman agreed that the services included in Schulte's bill, including the advice to McCagg, were legitimate expenses of Clearjets.

In January 2003, Clingman met separately with Mr. Jacobs of Netjets, and Dichter of Marquis. Marquis proposed an agreement to buy back Clingman's Marquis stock. That proposal included a non-competition agreement. Clingman made a counter offer, which Marquis rejected. The counter-offer also contained an agreement by Clingman not to compete.

During the months of January through April 2003, negotiations between Clearjets and Bombardier/Flexjets continued. Clingman alleges that Delta Airlines, Inc., was also negotiating with Bombardier/Flexjets, to offer a similar product. Delta ultimately executed an agreement with Bombardier/Flexjets.

On April 9, 2003, Clingman executed a sale of his Marquis stock back to Marquis, and also agreed not to compete with Marquis for a two-year period.

In support of their motion for summary judgment, the Schulte defendants submit a portion of a billing statement from Schulte, addressed to Clingman, dated August 21, 2003, summarizing services rendered with respect to Marquis, for the period February 1, 2003 through July 31, 2003, as follows: "advice with respect to all aspects of Marquis relationship including disposition of shares . . . non-competition and release agreements" (see ex. J to Schulte moving aff.). This statement includes only the above-quoted summary. It does not include entries showing particular services by individual attorneys.

The statement does, however, list the attorneys who performed services during the period, and the hours worked for each attorney. Neither Davis nor Kiesel are listed as performing services during the period when the non-competition agreement was reviewed by Schulte.

In opposition to the Schulte defendants' motion for summary judgment, McCagg submitted redacted portions of a Schulte statement also dated August 21, 2003, that show some services related to the Marquis agreement ( see ex. 23 to McCagg moving aff.), but redact the entries for services during the two week period leading up to execution of the agreement.

According to the verified complaint in the Marquis action, "shortly thereafter," Clingman advised McCagg that Marquis had offered to buy his stock, and that Clingman was leaving Clearjets, and they had one week to vacate their offices.

On April 30, 2003, Clingman and McCagg met with Trevor Cornwell of Bombardier/Flexjets, at Cornwell's request, at the Four Seasons Hotel in New York. According to an April 29, 2003 e-mail from Clingman to McCagg, "Trevor asked if I would meet him to discuss 1 last time before making up my mind" [about withdrawing from negotiating a contract with Bombardier/Flexjets].

On May 5, 2003, Schulte filed a certificate of dissolution of Clearjets, with the Secretary of State of Delaware, at the direction of Clingman. The certificate is signed by Clingman as chairman. A copy of the certificate of dissolution, certified by the Delaware Secretary of State, has been submitted with this motion.

McCagg challenges the validity and efficacy of that certificate of dissolution, on the ground that it does not contain the acknowledgment allegedly required under Delaware law, and that it is false on its face because it states that all shareholders consent to the dissolution. McCagg alleges that he, as a 40% shareholder, never consented to the dissolution.

In both actions, defendants argue that the action is barred by 8 Del C § 278, captioned "[c]ontinuation of corporation after dissolution for purposes of suit and winding up affairs," which provides as pertinent:

All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years from such expiration or dissolution or for such longer period as the Court of Chancery shall in its discretion direct, bodies corporate for the purpose of prosecuting and defending suits. . . . With respect to any action, suit or proceeding begun by or against the corporation either prior to or within 3 years after the date of its expiration or dissolution, the action shall not abate by reason of the dissolution of the corporation; the corporation shall, solely for the purpose of such action, suit or proceeding, be continued as a body corporate beyond the 3-year period and until any judgments, orders or decrees therein shall be fully executed, without the necessity for any special direction to that effect by the Court of Chancery.

The causes of action in the Marquis action were pleaded as pendant claims in the federal antitrust action, McCagg v Marquis Jet Partners, Inc., et al. (05 CV 10607) (US Dist Ct, SD NY 2007). The amended complaint in that action, which contains the pendant derivative claims, is dated March 13, 2006, which is within the three-year period of 8 Del C § 278. United States District Judge Paul A. Crotty dismissed the federal action by order dated March 29, 2007. The Marquis action was commenced within six months of that date. Therefore, the tolling provision of CPLR 205 (a) applies, and the Marquis action is not barred by 8 Del C § 278.

Similarly, the derivative claims that are the subject of the cross-motion in the Schulte action are timely because they relate back to the initial complaint (CPLR 203 [f]), which was not barred by the three-year rule. That complaint gives adequate "notice of the transactions, occurrences, or series of transactions or occurrences, to be proved pursuant to the amended pleading" ( id.).

Therefore, it is immaterial whether the certificate of dissolution was effective, because either way the derivative causes of action are not barred by 8 Del C § 278.

The Schulte Action

In the Schulte action, of the seven remaining causes of action in the verified complaint, only the sixth through eighth causes of action are against the Schulte defendants.

The Cross Motion in the Schulte Action

The proposed amended verified complaint seeks to assert a derivative malpractice claim on behalf of Clearjets against the Schulte defendants, and include Kiesel as an additional defendant. The cross motion is granted to the extent of granting leave to file the proposed amended verified complaint, but is denied with respect to adding Kiesel as a defendant.

Based upon the pleadings, affidavits, documentary evidence and deposition testimony, the Schulte defendants have established their prima facie entitlement to judgment as a matter of law, with respect to the sixth and eighth causes of action only, and plaintiff has failed to demonstrate the existence of a triable issue of fact on those causes of action ( see Alvarez v Prospect Hosp., 68 NY2d 320, 324; Zuckerman v City of New York, 49 NY2d 557). The Schulte defendants have not established their entitlement to judgment as a matter of law with respect to the seventh cause of action in the amended verified complaint.

The Sixth Cause of Action

The sixth cause of action in the amended verified complaint alleges that Schulte and the Schulte defendants represented plaintiff, individually, in addition to representing Clingman, Clearjets, and a partnership and joint venture between McCagg and Clingman. It charges that the Schulte defendants breached the fiduciary duty allegedly owed to both the alleged Clearjets partnership and to McCagg individually, by failing to make full disclosure to McCagg, or seek his consent or waiver, with respect to the disclosure by Schulte to McCagg of "all material facts affecting the venture and representation of Clearjets," including the allegedly secret negotiations between Clingman and Marquis, in which the Schulte defendants allegedly represented both sides. Schulte's February 13, 2002 bill to Clearjets includes an entry for "advice with respect to continuing investment in Marquis and disposition of same."

The sixth cause of action also charges that the Schulte defendants' representation of Clingman in negotiating to sell his stock back to Marquis and enter a non-competition agreement was adverse to the duties that the Schulte defendants allegedly owed to McCagg and the alleged partnership, and constituted an "irreconcilable conflict."

Despite the unexplained absence of any written retainer agreement between Schulte and Clearjets, Clingman, or McCagg, the evidence fails to raise a factual issue whether an attorney-client relation was formed between the Schulte defendants and McCagg individually. Nor is there sufficient evidence to raise a factual issue whether Schulte represented any joint venture or partnership comprising Clingman and McCagg. Rather, the advice rendered by Davis to McCagg was incidental to Schulte's representation of Clearjets, and was treated by Schulte, Clingman, and McCagg as a corporate matter of Clearjets.

McCagg's unilateral belief does not confer upon him the status of client ( see Jane St. Co. v Rosenberg Estis, P.C., 192 AD2d 451 [1st Dept 1993]). There was no privity or "near privity" relationship between the Schulte defendants and McCagg ( see Allianz Underwriters Ins. Co. v Landmark Ins. Co. , 13 AD3d 172 , 175 (1st Dept 2004)(attorney-client relationship may be based on "near privity"relation) . The privity was between Clearjets and Schulte, and Clingman and Schulte. No documentary evidence suggests privity between Schulte and McCagg, individually ( see Griffin v Anslow , 17 AD3d 889 , 892 [3d Dept 2005]).

The advice sought by McCagg from Davis was in connection with a challenge apparently intended by Marquis to deter McCagg from launching Clearjets with Clingman. Schulte advised McCagg on how to extricate himself from his relations with the principals of Marquis, in order to serve as president of Clearjets.

There is no merit to McCagg's argument that, because the Schulte defendants did not assert lack of capacity as an affirmative defense in their answer, they cannot assert the defense that the advice they gave to McCagg was on behalf of Clearjets. The issue is not in what capacity McCagg was acting when he consulted Davis. Rather, it is whether an attorney-client relation was formed.

On this record, the advice that McCagg sought and received from Davis regarding the Marquis threats does not create a conflict. There were no client confidences involved. The interests of McCagg and Clearjets, in responding to the Marquis challenges, were fully aligned. Therefore, at the time that Davis advised McCagg on how to respond to the Marquis threats, Davis and Schulte were not required by Disciplinary Rule 5-109 (Code of Professional Responsibility DR 5-109 [ 22 NYCRR 1200.28]) to explain to McCagg that they represented Clearjets and not McCagg. That disciplinary rule, captioned "[o]rganization as client," provides:

(a) When a lawyer employed or retained by an organization is dealing with the organization's directors, officers, employees, members, shareholders or other constituents, and it appears that the organization's interests may differ from those of the constituents with whom the lawyer is dealing, the lawyer shall explain that the lawyer is the lawyer for the organization and not for any of the constituents.

Davis's accession to plaintiff's request for advice in responding to the Marquis threat would not lead a reasonable person in McCagg's position to conclude that Schulte and Davis thereby became McCagg's personal attorney rather than counsel to Clearjets ( see Polovy v Duncan, 269 AD2d 111, 112 (1st Dept 2000). "Unless the parties have expressly agreed otherwise in the circumstances of a particular matter, a lawyer for a corporation represents the corporation, not its employees [citation omitted]" ( id.; see Talvy v. American Red Cross in Greater New York ( 205 AD2d 143, 149 [1st Dept 1994], affd for reasons stated, 87 NY2d 826).

By reason of the foregoing, the sixth cause of action in the Schulte action is dismissed because the evidence fails to raise a factual issue whether the Schulte defendants owed any fiduciary duty to either McCagg or any alleged partnership or joint venture.

The Seventh Cause of Action

The seventh cause of action in the amended verified complaint charges the Schulte defendants with aiding and abetting Clingman in the breach of his fiduciary duties to McCagg, Clearjets and the alleged Clearjets partnership or joint venture. It is brought by McCagg both individually, and derivatively on behalf of Clearjets.

A claim for aiding and abetting breach of fiduciary duty requires allegations of a breach of fiduciary obligations to another, that the defendant knowingly induced or participated in the breach, and that the plaintiff suffered damage as a result of the breach ( see Kaufman v Cohen, 307 AD2d 113, 125 [1st Dept 2003]). And "[a] person knowingly participates in a breach of fiduciary duty only when he or she provides substantial assistance' to the primary violator [citations omitted]" ( id. at 126)

The actions that allegedly constitute a breach of fiduciary duty by Clingman are twofold. First, McCagg argues that Clingman's execution of a non-competition clause with Marquis is a breach of fiduciary duty. The verified complaint charges that the Schulte defendants negotiated the non-competition agreement and concealed their own role. Next, it alleges that the Schulte defendants aided and abetted Clingman "in his plan to reap a windfall from Marquis by pretending he would build and launch Clearjets with McCagg as a competitive threat."

McCagg also alleges that the Schulte defendants aided and abetted Clingman in the commission of fraud. This charge of fraud apparently refers to Clingman's allegedly fraudulent inducement of McCagg to join Clearjets, which Clingman allegedly had no intention of building into a business, but merely intended to set up Clearjets as an apparent competitive threat to induce Marquis to buy back Clingman's shares. There is simply no evidence that the Schulte defendants had knowledge of this alleged scheme.

There are three possible bases for a fiduciary duty owed by Clingman that the Schulte defendants could be charged with aiding and abetting. First is the fiduciary duty owed by a majority shareholder in a closely held corporation to a minority shareholder, not to engage in oppressive actions toward minority shareholders. Next is the fiduciary duty that Clingman owed to Clearjets as chairman and CEO. The third possible basis is the fiduciary duty owed by Clingman to McCagg as an alleged partner or joint venturer.

Because the evidence fails to raise a factual issue whether the Schulte defendants knew about the alleged partnership or joint venture, they cannot be charged with knowingly aiding and abetting the breach of the fiduciary duty that Clingman would owe to McCagg as a partner or joint venturer. "Although a plaintiff is not required to allege that the aider and abettor had an intent to harm, there must be an allegation that such defendant had actual knowledge of the breach of duty" ( Kaufman v Cohen, 307 AD2d at 125).

With respect to the fiduciary duty of a majority shareholder to a minority shareholder, the Schulte defendants are charged with knowledge that Clingman was the majority shareholder because they prepared the board of directors minutes for Clearjets, in which the equity issuance was approved.

"Oppressive actions . . . refer to conduct that substantially defeats the reasonable expectations' held by minority shareholders in committing their capital to the particular enterprise [citations omitted]" ( Matter of Kemp Beatley, Inc., 64 NY2d 63, 72-73).

This fiduciary duty is rooted in Business Corporation Law § 1104-a, captioned "[p]etition for judicial dissolution under special circumstances," which provides, as pertinent:

(a) The holders of shares representing twenty percent or more . . . may present a petition of dissolution on one or more of the following grounds:

(1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders.

The Court of Appeals described the standard for assessing what constitutes "oppressive actions":

A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.

Given the nature of close corporations and the remedial purpose of the statute, this court holds that utilizing a complaining shareholder's "reasonable expectations" as a means of identifying and measuring conduct alleged to be oppressive is appropriate. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner's expectations in entering the particular enterprise. Majority conduct should not be deemed oppressive simply because the petitioner's subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not necessarily be equated with oppression.

Rather, oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture ( Matter of Kemp Beatley, Inc., 64 NY2d at 72-73).

Neither of the two alleged breaches of fiduciary duty involves oppressive actions as a result of the abuse of Clingman's status as majority shareholder. Neither entering the April 9, 2003 covenant not to compete, nor allegedly executing the scheme to set up Clearjets as a ruse to induce Marquis to buy out his 12% interest, involves oppressive conduct that flows from any hegemonic abuse of Clingman's status as majority shareholder. Neither Clingman's allegedly fraudulent inducement of McCagg to join Clearjets, nor his entry into a non-competition agreement with Marquis, involves exercise of Clingman's corporate control by virtue of his status as the majority shareholder.

Therefore, all that remains of the seventh cause of action is the derivative claim that the Schulte defendants aided and abetted Clingman in the breach of his fiduciary duty to Clearjets, as chairman and CEO. Again, the alleged breaches are twofold: first, entering the non-compete, and second, carrying out the alleged ruse.

Other than McCagg's bare assertion, there is no evidence that the Schulte defendants had knowledge of this ruse or secret intention or knowingly rendered substantial assistance to effectuating it.

Therefore, the only viable claim is whether the Schulte defendants rendered substantial assistance to Clingman in effectuating the April 9, 2003 agreement not to compete.

Under the particular circumstances presented, where the primary purpose for the creation of Clearjets was to compete with Marquis, I cannot say as a matter of law that Clingman's negotiation and execution of a non-competition agreement with Marquis, while still chairman and CEO of Clearjets, was not a breach of his fiduciary duty owed to Clearjets. Nor can I say as a matter of law, based on the parties' submissions including redacted and incomplete billing statements that Schulte and Weingarten did not aid and abet Clingman in this alleged breach. As noted above, the statements show that Schulte advised Clingman on "all aspects of Marquis relationship including . . . non-competition and release agreements."

Because there are material issues of fact whether the Schulte defendants knowingly rendered substantial assistance to Clingman in negotiating and executing the non-competition agreement, while he was chairman and CEO of Clearjets, the seventh cause of action is not dismissed ( see State 0f New York v Grecco, 43 AD3d 397 [2nd Dept 2007]).

The Eighth Cause of Action

The eighth cause of action charges the Schulte defendants with legal malpractice by engaging in an impermissible conflict by "adversely representing the interests of Clingman over [McCagg] and the joint venture, which was completely outside of the realm of the attorney-client relationship established with Clearjets." The eighth cause of action is brought by McCagg individually, as well as derivatively on behalf of Clearjets. It alleges that the Schulte defendants knew or should have known that Clingman's execution of a non-competition agreement would "ring the death knell" for Clearjets.

The malpractice claim in the verified amended complaint involves the same allegations in the original complaint, except it includes Kiesel and is asserted derivatively. It is predicated on the theory that Schulte represented both McCagg and an alleged Clearjets joint venture, two allegations for which I have held that there is insufficient evidence to raise a factual issue. It alleges that the Shulte defendants "engaged in an unpermitted conflict of interest in adversely representing the interests of Clingman over McCagg and the joint venture" (Proposed Verified Amended Complaint, ¶ 147, Ex. S to Langer Aff. in Support of Cross-Motion).

The second alleged basis for malpractice is that the Schulte defendants did not disclose to McCagg the alleged fact that "it was materially advising and assisting Clingman how to benefit and prosper from his negotiations with Marquis to the detriment of the venture" ( id. at ¶ 148).

Absent an independent duty to McCagg, the Schulte defendants were not under any duty to disclose Clingman's negotiations with Marquis to McCagg ( National Westminster Bank USA v Weksel, 124 AD2d 144 [1st Dept 1987]; Jebran v LaSalle Bus. Credit, LLC , 33 AD3d 424 , [1st Dept 2006]). Nonetheless, the negotiations were disclosed on the February 2003 Schulte statement, and billed to Clearjets.

To sustain a legal malpractice claim, a plaintiff must present "proof of the attorney's negligence, a showing that the negligence was the proximate cause of the plaintiff's loss or injury, and evidence of actual damages" ( Pellegrino v File, 291 AD2d 60, 63 [1st Dept 2002]).

"For a defendant in a legal malpractice case to succeed on a motion for summary judgment, evidence must be presented in admissible form establishing that the plaintiff is unable to prove at least one of the essential elements" of legal malpractice ( Crawford v McBride, 303 AD2d 442, 442 [2d Dept. 2003]). The three elements are "that the attorneys were negligent, that their negligence was the proximate cause of the plaintiff's damages, and that the plaintiff suffered actual damages as a direct result of the attorneys' actions" ( Franklin v Winard, 199 AD2d 220, 220 [1st Dept 1993]).

As counsel to Clearjets, Schulte was under no duty to make efforts to prevent the departure of a key employee, or, absent an independent duty, to disclose the impending departure to other corporate officers. Next, the proposed verified amended complaint alleges that the Schulte defendants "knew or should have known that Clingman's entry into a non-competition agreement . . . with Marquis . . . would ring the death knell for the venture and cause McCagg to lose the entire value of his investment" (id. at ¶ 149). It alleges that the Schulte defendant committed malpractice by their silence. As set forth above, the Schulte defendants owed no duty to inform McCagg of Clingman's intention. Also, the Schulte defendants owed no duty to Clearjets to prevent its CEO from negotiating his separation from the corporation.

The Marquis Action

The verified complaint contains two causes of action. The first cause of action alleges that Marquis and Netjets tortiously interfered with McCagg and Clearjet's existing business relationship with Clingman. The second cause of action charges that Marquis and Netjets tortiously interfered with both an existing and a prospective business relationship between Clearjets and Bomabardier/Flexjets.

The First Cause of Action

In the first cause of action, the verified complaint alleges that Marquis and Netjets both knew that McCagg and Clingman were partners in Clearjets; that Marquis improperly sent a letter to Clingman alleging that he was under a duty not to compete; that Marquis made implied threats to McCagg; that Marquis threatened and misled potential investors, employees and prospective employees of Clearjets; that Marquis wrongfully induced Clingman to sign a non-competition agreement; and that Marquis and Netjets provided the funding for the repurchase of Clingman's Marquis shares and thus procured the agreement not to compete. It also alleges that defendants used "other wrongful means" to injure McCagg and deprive McCagg and Clearjets of their advantageous business relation with Clingman.

The first cause of action further alleges that Marquis and Netjets induced Clingman to breach his fiduciary duty to McCagg. The alleged inducement was the payment, allegedly by both defendants, for Clingman's Marquis stock and his agreement not to compete.

It also alleges that Marquis and Netjets induced Clingman to breach his fiduciary duty to Clearjets and to McCagg by "secretly turning the Schulte law firm against both McCagg and Clearjets" (Verified Complaint at ¶ 14).

The Second Cause of Action

The second cause of action charges that defendants tortiously interfered with an "existing and prospective business relationship" between Clearjets, Inc. and Bombardier/Flexjets " . . . with respect to becoming Flexjet's exclusive reseller of 25 hour jet cards." It alleges that defendants knew of the relationship with Bombardier/Flexjets, and intentionally interfered by "improperly communicating with and disseminating palpably false information to Bombardier/Flexjets in an attempt to derail the incipient Clearjets/Bombardier/Flexjets contract" (Verified Complaint at ¶ 18).

It further alleges that defendants determined that Bombardier/Flexjets would not proceed with the Clearjets contract if Clingman were not involved, and also determined that the non-competition agreement would "scuttle" Clearjets and cause McCagg and Clearjets to lose the Bombardier/Flexjets business relationship.

The verified complaint alleges, without specificity, that defendants used "dishonest, unfair and improper" means to interfere with the negotiations and business relationship between Clearjets and Bombardier/Flexjets. Tortious Interference

Because the first cause of action does not allege that Clingman was induced to breach any existing contract, and because the submissions establish that no binding contract existed between Bombardier/Flexjets and Clearjets at the time of the alleged interference, both causes of action must be considered to be for tortious interference with a prospective business relationship.

The distinction thus made between the possible liability of a competitor for interference with performance of an existing contract and the more demanding requirements to establish liability for interference with prospective contractual relations reflects a recognition of the difference in the two situations in the relationship of the parties and in the substance and quality of their resulting interests; greater protection is accorded an interest in an existing contract (as to which respect for individual contract rights outweighs the public benefit to be derived from unfettered competition) than to the less substantive, more speculative interest in a prospective relationship (as to which liability will be imposed only on proof of more culpable conduct on the part of the interferer)

( Guard-Life Corp. v S. Parker Hardware Mfg. Corp., 50 NY2d 183, 191).

"Tortious interference with contract requires the existence of a valid contract between the plaintiff and a third party, defendant's knowledge of that contract, defendant's intentional procurement of the third party's breach of contract without justification, actual breach and damages [citation omitted]"( Vigoda v DCA Productions Plus Inc., 293 AD2d 265, 266 [1st Dept 2002).

Defendants' status as prospective competitors

may excuse [them] from the consequences of interference with prospective contractual relationships, where the interference is intended at least in part to advance the competing interest of the interferer, no unlawful restraint of trade is effected, and the means employed are not wrongful. Wrongful means' include physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degrees of economic pressure; they do not, however, include persuasion alone although it is knowingly directed at interference with the contract.

( Guard-Life Corp., 50 NY2d at 191).

"In order to recover damages for interference with existing economic relations in a nonbinding relationship, a defendant's conduct must amount to a crime or an independent tort [citation omitted].' A sole exception to this general rule has been recognized where a defendant has engaged in conduct for the sole purpose of inflicting intentional harm on plaintiff'" ( Lawrence v Union of Orthodox Jewish Congregations of Am. , 32 AD3d 304 [1st Dept 2006]).

The record does not support the characterization that either defendant's conduct in the second cause of action amounted to a crime or independent tort, or was engaged in for the sole purpose of inflicting harm on either McCagg or Clearjets.

Aiding and Abetting Breach of Fiduciary Duty

In an apparent effort to demonstrate that defendants' conduct constituted an independent tort, the first cause of action pleads that defendants aided and abetted Clingman's breach of fiduciary duty to both Clearjets and McCagg.

A claim for aiding and abetting breach of fiduciary duty requires allegations of a breach of fiduciary obligations to another, "that the defendant knowingly induced or participated in the breach," and, "that the plaintiff suffered damage as a result of the breach," ( see Kaufman v Cohen, 307 AD2d at 125. "A person knowingly participates in a breach of fiduciary duty only when he or she provides substantial assistance' to the primary violator [citations omitted]" ( id. at 126).

A cause of action for aiding and abetting breach of fiduciary duty must be pleaded with sufficient particularity (CPLR 3016 [b]), "to apprise defendants of the conduct on which this claim was predicated" ( Wiener v Lazard Freres Co., 241 AD2d 114, 123 [1st Dept 1998]).

The verified complaint alleges two separate breaches by Clingman of his alleged fiduciary duty to McCagg that defendants allegedly aided and abetted.

The first claimed breach of fiduciary duty by Clingman that defendants allegedly aided and abetted is secretly turning the law firm of Schulte Roth Zabel LLP against McCagg. The verified complaint does not contain any allegations of conduct by either defendant that would constitute participation in this alleged breach.

The second alleged breach by Clingman that defendants allegedly aided and abetted is Marquis's execution of the non-competition agreement with Clingman. The pleadings and affidavits contain numerous allegations that both Marquis and Netjets induced Clingman to enter the non-competition provision.

While on a motion pursuant to CPLR 3211 (a) (7), I must assume the truth of the allegations in the pleadings, I need not assume the truth of allegations that are "inherently incredible" ( Ullmann v Norma Kamali, Inc., 207 AD2d 691, 692 [1st Dept 1994]; Roberts v Pollack, 92 AD2d 440, 444 [1st Dept 1983]).

On this record I decline to assume the truth of the allegation that either Marquis or Netjets knew that McCagg and Clingman owned Clearjets, Inc., as partners. This allegation is necessary to sustain the cause of action, because a defendant charged with aiding and abetting breach of fiduciary duty must do so knowingly with actual knowledge of the existence of the fiduciary duty ( see Eurycleia Partners, LP v Seward Kissel, LLP , 46 AD3d 400 , 402 [1st Dept 2007]). Absent knowledge on the part of defendants that Clingman owed a fiduciary to Mccagg as a partner, defendants cannot be held to have aided and abetted breach of that duty.

Nor is there any basis for me to assume the truth of the allegation that Marquis or Netjets knew that Clingman owed McCagg a fiduciary duty as a minority shareholder in a closely held corporation.

Because none of the actions allegedly taken by Marquis or Netjets would constitute improper means or a crime or independent tort under the circumstances, the first and second causes of action are dismissed for failure to state a cause of action (CPLR 3211 [a] [7]).

Accordingly, it is

ORDERED, that defendants motion for summary judgment (CPLR 3212) dismissing the complaint is granted, to the extent of dismissing the sixth and eighth causes of action, and otherwise denied; and it is

ORDERED, that the motion for summary judgment is granted to the extent of dismissing the verified complaint as against Davis; and it is

ORDERED, that the cross-motion is granted to the extent of granting leave to file the proposed verified amended complaint, except leave is denied to add Kiesel as a defendant, and the cross-motion is otherwise denied.


Summaries of

McCagg v. Schulte Roth Zabel LLP

Supreme Court of the State of New York, New York County
Aug 1, 2008
2008 N.Y. Slip Op. 51794 (N.Y. Sup. Ct. 2008)
Case details for

McCagg v. Schulte Roth Zabel LLP

Case Details

Full title:BRIN McCAGG, Plaintiff, v. SCHULTE ROTH ZABEL LLP, MARC WEINGARTEN, HARRY…

Court:Supreme Court of the State of New York, New York County

Date published: Aug 1, 2008

Citations

2008 N.Y. Slip Op. 51794 (N.Y. Sup. Ct. 2008)

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