Source: https://casetext.com/case/abate-v-fifth-third-bank
Timestamp: 2019-04-19 04:45:31+00:00

Document:
JAMES ABATE, et al., Plaintiffs, v. FIFTH THIRD BANK, Defendant.
Counsel for Plaintiffs James S. O'Brien, Jr.
Plaintiffs James Abate, Andrew Bang, and D. Wayne Robinson (together, "Plaintiffs"), former holders of membership interests in Drexel Hamilton Investment Partners, LLC ("DHIP"), bring this action against Defendant Fifth Third Bank ("Fifth Third" or "Defendant") asserting claims for promissory estoppel, fraud, breach of contract, and breach of the implied covenant of good faith and fair dealing, all premised on Fifth Third's failure to provide a loan to DHIP. Before me is Defendant's motion for summary judgment on all of Plaintiffs' claims. (Doc. 85.) Because there is no genuine dispute of material fact relating to Plaintiffs' claims, and Plaintiffs are not entitled to bring these claims individually as a matter of law, Defendant's motion for summary judgment is GRANTED.
The facts stated in this section are undisputed unless otherwise indicated.
"Consol. 56.1" refers to the Consolidated Rule 56.1 Statement and Supplemental Statement of Undisputed Facts, dated April 27, 2017 ("Consolidated 56.1 Statement"). (Doc. 106.) In compliance with my Individual Rule, the Consolidated 56.1 Statement aggregates Defendant's statements and Plaintiffs' responses, and thus references in this Opinion and Order to individual paragraphs are to Defendant's statements and Plaintiffs' responses, or some combination thereof. While Plaintiffs also submitted a supplemental statement of undisputed facts, to which Defendant provided a response, my analysis does not depend on these statements and I therefore do not reference the supplemental statement in this Opinion and Order.
Defendant filed its motion for summary judgment on January 20, 2017, (Doc. 85), along with the declarations of Laura Russell and Philip Ottinger, (Docs. 86, 87), the declaration of James O'Brien with exhibits, (Doc. 88), Defendant's Local Civil Rule 56.1 Statement, (Doc. 89), and a memorandum of law in support of the motion, (Doc. 90). On March 27, 2017, Plaintiffs filed their memorandum of law in opposition to Defendant's motion, (Doc. 96), the declarations of James Abate, Andrew Bang, and D. Wayne Robinson, (Docs. 99, 100, 101), Plaintiffs' Local Civil Rule 56.1 Statement, (Doc. 102), and the declaration of Joshua Rievman with exhibits, (Doc. 72). On April 27, 2017, Defendant filed its reply memorandum of law in further support of its motion, (Doc. 107), the declaration of James O'Brien with exhibits, (Doc. 105), and consolidated Local Civil Rule 56.1 Statement, (Doc. 106), at which point the motion was fully submitted.
On September 11, 2017, Defendant submitted a letter providing notice of supplemental authority regarding Backus v. U3 Advisors, Inc., No. 1:16-cv-8990-GHW, 2017 WL 3600430 (S.D.N.Y. Aug. 18, 2017), (Doc. 108), and on September 19, 2017, Plaintiffs submitted a letter in response, (Doc. 109).
Summary judgment is appropriate when "the parties' submissions show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fay v. Oxford Health Plan, 287 F.3d 96, 103 (2d Cir. 2002); see also Fed. R. Civ. P. 56(a). "[T]he dispute about a material fact is 'genuine' . . . if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is "material" if it "might affect the outcome of the suit under the governing law," and "[f]actual disputes that are irrelevant or unnecessary will not be counted." Id.
On a motion for summary judgment, the moving party bears the initial burden of establishing that no genuine factual dispute exists; if satisfied, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial," id. at 256, and to present such evidence that would allow a jury to find in his favor, see Graham v. Long Island R.R., 230 F.3d 34, 38 (2d Cir. 2000). To defeat a summary judgment motion, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "A party asserting that a fact cannot be or is genuinely disputed must support the assertion by . . . citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials . . . ." Fed. R. Civ. P. 56(c)(1). In the event that "a party fails . . . to properly address another party's assertion of fact as required by Rule 56(c), the court may," among other things, "consider the fact undisputed for purposes of the motion" or "grant summary judgment if the motion and supporting materials—including the facts considered undisputed—show that the movant is entitled to it." Fed. R. Civ. P. 56(e)(2), (3).
Finally, in considering a summary judgment motion, a court must "view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor, and may grant summary judgment only when no reasonable trier of fact could find in favor of the nonmoving party." Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (internal quotation marks omitted); see also Matsushita, 475 U.S. at 587. "[I]f there is any evidence in the record that could reasonably support a jury's verdict for the non-moving party," summary judgment must be denied. Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002).
Plaintiffs claim that Fifth Third through its actions "destroyed" DHIP, thereby rendering DHIP, and thus the value of Plaintiffs' membership interests in DHIP, worthless. (Am. Compl. ¶¶ 25, 108-09.) Plaintiffs further contend that they have suffered in excess of $5 million in damages representing the "loss of [future] partner distributions" and forgone partners' compensation. (Id. ¶¶ 109-10, 118, 125, 136, 146.) Finally, Plaintiffs claim that the dissolution of DHIP caused harm to Plaintiffs' professional reputations. (Id. ¶¶ 111, 118, 125, 136, 146.) In response, Defendant asserts that Plaintiffs cannot personally recover for harm that Fifth Third allegedly caused to DHIP. Because I find that Plaintiffs' claims are derivative in nature and barred as a matter of law, I need not address the other bases for dismissal raised by Defendant. See, e.g., Lewin v. Lipper Convertibles, 756 F. Supp. 2d 432, 440 (S.D.N.Y. 2010), aff'd in part, vacated in part sub nom. CILP Assocs., L.P. v. PriceWaterhouse Coopers LLP, 735 F.3d 114 (2d Cir. 2013).
"[A] stockholder has no individual cause of action against a person or entity that has injured the corporation. This is true notwithstanding that the wrongful acts may have diminished the value of the shares of the corporation, or that the shareholder incurs personal liability in an effort to maintain the solvency of the corporation." Serino v. Lipper, 994 N.Y.S.2d 64, 68 (1st Dep't 2014); see also Abrams v. Donati, 489 N.E.2d 751, 751 (N.Y. 1985) ("For a wrong against a corporation a shareholder has no individual cause of action, though he loses the value of his investment or incurs personal liability in an effort to maintain the solvency of the corporation."). However, an exception to this principle exists where the wrongdoer has breached a duty owed directly to the shareholder that is independent of any duty owing to the corporation. Serino, 994 N.Y.S.2d at 69. "This is a narrow exception, and [a litigant's] claim must be factually supportable by more than complaints that conflate his derivative and individual rights." Id. In addition, a plaintiff may not obtain a recovery that otherwise duplicates or belongs to the corporation. Herbert H. Post & Co. v. Sidney Bitterman, Inc., 639 N.Y.S.2d 329, 337 (1st Dep't 1996).
These principles apply with equal force to limited liability companies. See, e.g., Tzolis v. Wolff, 829 N.Y.S.2d 488, 491 (1st Dep't 2007).
I apply New York law in light of the parties' consent to its application through their reliance on New York law in briefing this motion. See, e.g., Backus, 2017 WL 3600430, at *9.
When analyzing whether a claim is derivative or direct, courts consider "(1) who suffered the alleged harm (the corporation or the stockholders); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually)." Yudell v. Gilbert, 949 N.Y.S.2d 380, 384 (1st Dep't 2012) (quoting Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004)); see also Backus, 2017 WL 3600430, at *16 (applying Tooley and dismissing breach of contract claim because "it is apparent that the complaint alleges injury to Plaintiff only in terms of the alleged harm to [the company]" and "the benefit of any recovery on this claim must flow solely to [the company]"). If there is any harm caused to the individual, as opposed to the corporation, then the individual may proceed with a direct action. Gjuraj v. Uplift Elev. Corp., 973 N.Y.S.2d 172, 174 (1st Dep't 2013). "On the other hand, even where an individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot separately stand." Serino, 994 N.Y.S.2d at 69. In other words, "[t]he stockholder must demonstrate that . . . he or she can prevail without showing an injury to the corporation." Yudell, 949 N.Y.S.2d at 384 (citation omitted); see also Amusement Indus., Inc. v. Stern, No. 07 Civ. 11586(LAK)(GWG), 2010 WL 2976199, at *6 (S.D.N.Y. July 26, 2010) (noting that a claim is derivative if a plaintiff "cannot demonstrate any harm to himself for his causes of action without first demonstrating an injury to [the company]").
Applying the above principles to the undisputed facts of this case, it is clear that Plaintiffs assert derivative claims and seek to recover individually for injuries that DHIP purportedly suffered in the first instance. Because Plaintiffs relinquished their membership interests in DHIP, they cannot pursue a derivative suit on behalf of DHIP.
It is fundamental that "loss of investment value  affects all shareholders and the corporation equally and may only be raised in a derivative suit." Baltus-Michaelson v. Credit Suisse First Boston, LLC, 116 F. App'x 308, 310 (2d Cir. 2004) (summary order). Courts routinely refuse to permit shareholders to recover for alleged diminution in the value of their corporate stock. See, e.g., Backus, 2017 WL 3600430, at *16 (finding that "[w]ere Plaintiff to recover directly for the alleged decrease in the value of [the company] as a result of the alleged [wrongdoing by defendant], the damages would be proportionate to [Plaintiff's] ownership interest, and the necessity of a pro rata recovery to remedy the alleged harm indicates that [Plaintiff's] claim is derivative") (internal quotation marks omitted); In re Scudder Mut. Funds Fee Litig., No. 04 Civ. 1921(DAB), 2007 WL 2325862, at *11 (S.D.N.Y. Aug. 14, 2007) ("[W]here a corporation suffers an injury and the shareholders suffer solely through a diminution in the value of their stock, the claim belongs to the corporation."); Serino, 994 N.Y.S.2d at 69-70 (affirming grant of summary judgment where individual asserted personal claims against accounting firm and sought to recover in his personal capacity for lost earnings, reputational harm, and the lost value of his shares in a company that he alleged had been destroyed by firm's wrongdoing); O'Neill v. Warburg, Pincus & Co., 833 N.Y.S.2d 461, 462 (1st Dep't 2007) ("Because the heart of the alleged injury is the diminution in the value of shares of [the] start-up company in which plaintiffs were minority shareholders, the argument that plaintiffs are entitled to bring a direct action . . . is unavailing under New York law."). Here, Plaintiffs' claims seeking to recover for the lost value of their membership interests are quintessential derivative claims. Because (1) the harm alleged by Plaintiffs has been suffered in the first instance by DHIP, not to them individually, and (2) Plaintiffs cannot demonstrate any injury to themselves independent of any injury to DHIP, Plaintiffs lack the ability to recover in their own right for the lost value of their membership interests.
Similarly, Plaintiffs cannot recover personally for injuries based on the loss of future partner distributions and foregone partner compensation because this claim is by its very nature embedded in the claim that Fifth Third "destroyed" DHIP. Courts consistently reject attempts by shareholders to personally recover for future distributions, lost earnings, and foregone compensation because such claims are necessarily confused and intertwined with the harm inflicted upon the company. See, e.g., Serino, 994 N.Y.S.2d at 68-70 (barring individual's attempt to recover lost earnings stemming from accounting firm's alleged wrongdoing that forced company to dissolve, finding individual's claims "inextricably embedded in the derivative claim" for injury to the company); Manson v. Stacescu, 11 F.3d 1127, 1130-33 (2d Cir. 1993) (rejecting claim of plaintiff, shareholder and director of corporation that filed for bankruptcy as result of defendants' alleged wrongdoing, attempting to recover in individual capacity for future lost earnings and profits, because "loss of income as president and director is an indirect result of the [alleged wrongdoing of the defendants] and subsequent bankruptcy of the [c]ompany"); see also Royal Crown Day Care LLC v. Dep't of Health and Mental Hygiene of the City of N.Y., No. 10-CV-5442 (MKB), 2012 WL 2992124, at *5 (E.D.N.Y. July 20, 2012) (finding that employees and LLC members lacked standing to recover for the loss of their jobs as a result of defendants' actions since "such a claim is derivative of [the LLC's] damages claim and [plaintiffs'] status as employees"). Plaintiffs contend that they would still be receiving compensation and distributions from DHIP but for Fifth Third's alleged destruction of DHIP. (Am. Compl. ¶¶ 109-10, 118, 125, 136, 146.) Accordingly, Plaintiffs' claims based on foregone future earnings derive directly from the alleged damage done to DHIP and fail as a matter of law.
Like their other claimed damages, Plaintiffs cannot recover for alleged reputational harm because that injury is incidental to the harm that Fifth Third purportedly inflicted upon DHIP. See, e.g., Serino, 994 N.Y.S.2d at 70 (rejecting shareholder's damages claim for alleged reputational harm suffered as a result of the destruction of the company); Hahn v. Stewart, 5 A.D.3d 285, 286 (1st Dep't 2004) (rejecting former shareholder and CEO's personal claim for reputational harm arising as a result of insider trading scandal since such a claim pled "a wrong to the corporation only, for which a shareholder can only sue derivatively"). Moreover, the alleged reputational damage asserted by Plaintiffs is typically not compensable under claims for breach of contract, fraud, or promissory estoppel. See, e.g., Karetsos v. Cheung, 670 F. Supp. 111, 115 (S.D.N.Y. 1987) (noting that damages to reputation "are generally not recoverable for breach of contract in New York State"); In re Optimal U.S. Litig., 837 F. Supp. 2d 244, 266 (S.D.N.Y. 2011) (stating that damage to reputation is not compensable under a fraud claim); Darby Trading Inc. v. Shell Int'l Trading & Shipping Co., 568 F. Supp. 2d 329, 341 (S.D.N.Y. 2008) ("[I]n the absence of egregious circumstances, courts have consistently rejected promissory estoppel claims when the alleged injuries consisted of lost profits, lost fees, forgone business opportunities or damage to business reputation.") (internal quotation marks omitted).
In support of their claims, Plaintiffs principally rely on Henneberry v. Sumitomo Corp. of America, 415 F. Supp. 2d 423 (S.D.N.Y. 2006). Plaintiffs' reliance on Henneberry is entirely misplaced. In Henneberry, defendant-investor Sumitomo Corporation of America ("SCOA") repeatedly promised Henneberry, a majority shareholder of Smartix International Corporation ("Smartix"), that it would procure future investments for Smartix and "not let [Smartix] fail," but that, in the interim, Henneberry would need to make personal bridge loans to Smartix, which Henneberry made in reliance on SCOA's promises. Henneberry, 415 F. Supp. 2d at 431. After SCOA reneged on its promises, Smartix became "worthless" and Henneberry, through a proposed amended complaint, sought leave to assert a claim of detrimental reliance. Id. at 432-34. In his proposed amended claim, Henneberry sought only reimbursement for the money he personally loaned to Smartix rather than damages for the lost value of his interest in the company. (O'Brien Decl. Ex. 124, ¶¶ 124-45.) The Court granted leave to amend because Henneberry's alleged acts of personal reliance—his provision of bridge loans to Smartix—plausibly caused him injury in his personal capacity independent of any harms experienced by the company. Henneberry, 415 F. Supp. 2d at 441-43. Unlike Plaintiffs in this case, Henneberry sought to recover for harm that he personally suffered separate and apart from Smartix, and harm for which Smartix could not have claimed. Here, in contrast, Plaintiffs' alleged acts of personal reliance—the pledge of their membership interests as set forth in the Sanlam Agreement—were not the cause of the loss of their membership interests or any other damage. The option in the Sanlam Agreement—as Plaintiffs concede—never came into being and Sanlam had no ability to force Plaintiffs to transfer their membership interests. (Consol. 56.1 ¶¶ 105-09 (acknowledging as undisputed that the option in the Sanlam Agreement was never triggered and Sanlam did not have the right to force Plaintiffs to sell their membership interests).) That is why Plaintiffs and DHIP's other former members were presented with three options during their conference call on August 21, 2013, rather than being subject to Sanlam's ability to exercise its option under the Sanlam Agreement. Plaintiffs chose to enter into the August 2013 Agreement and to "voluntarily Jointly Transfer their Membership Interests to Centre."
As set forth in detail above, the injuries for which Plaintiffs seek redress—the lost value of their interests in DHIP, their loss of future compensation and distributions from DHIP, and reputational harm—derive entirely from the harm allegedly inflicted by Fifth Third on DHIP. Accordingly, Plaintiffs cannot bring the asserted claims on their own behalf, and summary judgment for Fifth Third is appropriate.

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