Case Name: Howard Kagan, Appellant-Respondent, v. HMC-New York, Inc., et al., Respondents-Appellants
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 2012-02-28
Citations: 94 A.D.3d 67
Docket Number: 
Parties: Howard Kagan, Appellant-Respondent, v HMC-New York, Inc., et al., Respondents-Appellants.
Judges: 
Reporter: Appellate Division Reports
Volume: 94
Pages: 67–81

Head Matter:
[939 NYS2d 384]
Howard Kagan, Appellant-Respondent, v HMC-New York, Inc., et al., Respondents-Appellants.
First Department,
February 28, 2012
APPEARANCES OF COUNSEL
Lowenstein Sandler PC, New York City (David L. Harris, of the bars of the State of New Jersey and Commonwealth of Pennsylvania, admitted pro hac vice, and Steven M. Hecht of counsel), for appellant-respondent.
Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York City (Walter Rieman, Leslie Gordon Fagen and Nathaniel E. Marmon of counsel), for respondents-appellants.

Opinion:
OPINION OF THE COURT
Catterson, J.
In this action, we are asked to determine, inter alia, whether the plaintiffs claims for breach of contract can stand against defendant managers whose potential liability is circumscribed by the language of the contract, and whether his claims for breach of fiduciary duty should be reinstated under Delaware law. The plaintiff, Howard Kagan, seeks to recover amounts allegedly owed in connection with his work for an investment firm, HMC-NY, and his equity holding and membership interest in Harbinger Capital Partners GFJ LLC (hereinafter referred to as the Onshore Manager) and Harbinger Capital Partners Offshore Manager, LLC (hereinafter referred to as the Offshore Manager) (collectively hereinafter referred to as the Manager Entities or Company). He alleges that defendants, HMC Investors, LLC, HMC-New York, Inc., and Harbinger Holdings, LLC, as managers of the Manager Entities, violated the controlling agreements of both entities which are governed by Delaware Law.
Specifically, he alleges breach of sections 4.5 (d) and 8.7 of both agreements in that the defendant managers failed to properly calculate the amounts due to him in respect of 2007 withheld amounts, and to pay him such amounts within 30 days after his termination without cause, and that they failed to pay him his prorated share of the Manager Entities' performance compensation for 2008 by no later than March 31, 2009. Additionally, in respect of his equity holding and membership interest in the Offshore Manager, he alleges breach of section 4.6 of the Offshore agreement by defendants HMC Investors (and/or Harbinger Holdings) for making certain unauthorized deferrals of amounts owed to Offshore Manager.
The plaintiff also alleges breach of the implied covenant of good faith and fair dealing in that the defendant managers, inter alia, willfully refused to pay amounts that they allegedly acknowledged are due and owing to him under the terms of the agreements. Lastly, he alleges a breach of fiduciary duty.
As a threshold matter, it is undisputed that the managers, HMC-NY, HMC Investors, and Harbinger Holdings, are not contractually obligated to the plaintiff with respect to the provisions allegedly breached. In each instance, the provisions specify that the obligation rests with the Company, that is, the Manager Entity. However, the plaintiff asserts that, nevertheless, the defendants are not entitled to dismissal of the breach of contract claims. Instead, relying on Kuroda v SPJS Holdings, L.L.C. (971 A2d 872 [Del Ch Ct 2009]), the plaintiff argues that the "defendants have the authority to control the Manager Entities, and the [a]greements do not explicitly exempt them from liability under the circumstances alleged here."
We disagree. Whatever the extent of their authority and control, the defendants as managers are exempt from liability under the "circumstances alleged here," which are the factual allegations underlying the first and second causes of action in breach of contract.
Section 7.10 ("Limitation of Liability") of the agreements provides, inter alia:
"No Manager or Officer shall have any liability to the Company [the Manager Entities] or any Member or Holder for any loss suffered by the Company or any Member or Holder that arises out of any act or omission by the Manager or Officer, if such Manager or Officer performs its duty in compliance with the standard set forth in the immediately preceding sentence [to act in good faith, as set forth in § 7.9], except loss or damage resulting from intentional misconduct, knowing violation of law, gross negligence or a transaction from which the Manager or Officer received a personal benefit in violation or breach of the provisions of this Agreement" (emphasis added).
Section 7.9 of the agreements sets forth the "[d]uties of [m]anagers," requiring that they "act in good faith and in the best interest of the Company [the Manager Entities] and with such care as an ordinarily prudent person in a like position would use under similar circumstances."
Kuroda involved a similar type of action by an employee of an investment firm. One of the provisions of the operating agreement purporting to limit liability stated that managers/members will not be held liable for "mistakes, action or inaction [unless they] arise out of . . . gross negligence, willful misconduct or bad faith." (Kuroda, 971 A2d at 882.)
The Kuroda court simply found that the defendant managing members "have not argued that they are exculpated from liability under the terms of this section." (Kuroda, 971 A2d at 882.) This case presents the opposite scenario; the defendant managers argue strenuously that they are exempt from liability under the terms of the limitation of liability provisions of both operating agreements.
The language of the agreements' exculpatory clauses in both Kuroda and this case reflects that, as a matter of public policy and "longstanding general common-law principles" an LLC operating agreement may not limit liability for tortious conduct. (TIC Holdings v HR Software Acquisitions Group, 301 AD2d 414, 415 [1st Dept 2003]; see also e.g. Limited Liability Company Law § 417 [a] [1].) But, there is no tortious conduct alleged in this case.
Instead, the defendant managers correctly assert that the plaintiffs allegations in the first and second causes of action are for breach of certain specific contractual provisions dealing with the deferral, withholding and calculation of the plaintiffs payments, and the obligation to make those payments within 30 days of termination. The plaintiffs allegations of a breach of the implied covenant of good faith and fair dealing arise from the same contractual provisions. The plaintiff's allegation is that, based on those contractual provisions, certain of the defendants allegedly acknowledged that they owe the plaintiff a part of the monies he seeks. Therefore, he claims there exists an implied obligation to pay at least that amount by a certain date as well as an implied obligation to ensure a sufficiency of funds to make the payments.
The plaintiff does not allege any breach by the defendants of their duty to "act in good faith and in the best interest of the [c]ompany" pursuant to section 7.9. Absent such an allegation, the defendant managers' liability is limited only to specific tortious acts — intentional misconduct, a knowing violation of the law, gross negligence and self-dealing; none of which the plaintiff alleges against them.
As much as we are obligated to accept all allegations as true on a CPLR 3211 motion to dismiss (Salles v Chase Manhattan Bank, 300 AD2d 226, 228 [1st Dept 2002]), in this case the plaintiff simply does not make any allegations at all that fall within the exclusions of the liability limitation provision. As the defendants correctly assert, under Delaware law, a breach of contract claim is not an allegation of intentional misconduct, knowing violation of law, gross negligence or self-dealing. (See Nolu Plastics, Inc. v Ledingham, 2005 WL 5654418, *2 [Del Ch Ct 2005] [intentional misconduct refers to acts of wrongdoing such as fraud and conversion and is distinguished from breach of contract].) As such, neither the willful conduct or the bad faith alleged in the first and second breach of contract causes of action constitutes the act of intentional misconduct that is referred to in the "limitation of liability" provision.
The plaintiffs breach of fiduciary duty causes of action were correctly dismissed. As the motion court, relying correctly on Delaware law, noted, when "[t]he same facts that underlie [a plaintiffs] contract claim also form the basis of [plaintiffs] fiduciary claim," the fiduciary claim is precluded. (See Gale v Bershad, 1998 WL 118022, *5, 1998 Del Ch LEXIS 37, *19 [1998]; HB Korenvaes Invs., L.P. v Marriott Corp., 1993 WL 205040, 1993 Del Ch LEXIS 90 [1993]; accord William Kaufman Org. v Graham & James, 269 AD2d 171, 173 [1st Dept 2000].) As the motion court further correctly observed, the defendant managers' obligation to properly calculate and distribute monies owed to the plaintiff arises out of the LLC agreements. Thus, in this case, the plaintiff's complaint asserts contractual and fiduciary claims that arise from the same alleged facts and underlying conduct. Since the fiduciary claims are substantially identical to the breach of contract claims they were properly dismissed. (See Nemec v Shrader, 991 A2d 1120, 1129 [Del 2010].) Moreover, resurrecting them, as the dissent urges, would simply and impermissibly allow the plaintiff to plead his breach of contract claims under a different guise.
In any event, the dissent's view that Delaware law requires explicit elimination or restriction of fiduciary duties otherwise such duties apply by default, appears to be based on the belief that "explicit" requires such elimination or restriction to be written into an agreement in haec verba. However, section 7.9 of the agreement sets forth, in relevant part, the duties of the managers as: "The [m]anagers shall act in good faith and in the best interest of the Company." Section 7.10 in turn expressly limits the liability of the managers who act in accordance with that standard set forth in section 7.9. As the defendants correctly assert, with these provisions the agreement imposes only specific limited contractual obligations on the managers, thus eliminating the traditional fiduciary duties imposed under Delaware law; expressio unius est exclusio alteráis.
The dissent's reliance on Kelly v Blum (2010 WL 629850, 2010 Del Ch LEXIS 31 [2010]), is misplaced. Kelly does not stand for the proposition that, without specific elimination, such contractual provisions cannot eliminate fiduciary duties that would exist under common law. Section 7.9 of the agreement at issue in Kelly, clearly refers to liability arising, inter alia, out of a "willful breach of [the Managers'] contractual or fiduciary duties" (2010 WL 629850, *11, 2010 Del Ch LEXIS 31, *46 [additional emphasis added]). It makes sense then that the Kelly court found that "the parties intended traditional fiduciary duties to apply." (Id.) No such reference to the fiduciary duties of managers appears in the applicable section 7.10 in this case. On the contrary, it is explicitly omitted. Finally, in the absence of a viable claim for breach of fiduciary duty, the related claims of aiding and abetting such a breach were also properly dismissed. It should be noted that, of course, notwithstanding the foregoing, and to the extent that the issue is not raised on appeal, the plaintiffs breach of contract claims against the Manager Entities have survived.
Accordingly, the order of the Supreme Court, New York County (Richard B. Lowe, III, J.), entered June 7, 2010, which, insofar as appealed from as limited by the briefs, granted defendants' motion to dismiss plaintiff's claims for breach of fiduciary duty, and aiding and abetting breach of fiduciary duty and denied the motion seeking dismissal of plaintiffs breach of contract claims against HMC Investors, LLC, HMC-New York, Inc. and Harbinger Holdings, LLC, should be modified, on the law, to the extent of granting the motion to dismiss plaintiffs breach of contract claims as against the foregoing defendants, and otherwise affirmed, with costs. The Clerk is directed to enter judgment dismissing the complaint as against HMC Investors, LLC, HMC-New York, Inc. and Harbinger Holdings, LLC. The order of the same court and Justice, entered September 22, 2010, which, insofar as appealed from, denied plaintiffs motion for leave to renew defendants' motion to dismiss, should be affirmed, with costs.