Ultrapak, LLC et al v. Laninver USA, Inc. et al
Filing
51
REPORT AND RECOMMENDATIONS RE: 33 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM filed by Laninver USA, Inc.Objections due per 28 U.S.C. § 636(b) and Fed. R. Civ. P. 6, 72.Signed by Hon. Hugh B. Scott on 1/9/2020. (GAI)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
Khalid M. Khan,
Plaintiff,
Report and Recommendation
18-CV-561V
v.
Laninver USA, Inc.,
Defendant.
I.
INTRODUCTION
Plaintiff Khalid M. Khan (“Khan”) owned a company that specialized in shrink sleeve
product packaging. Defendant Laninver USA, Inc., a holding company in a large corporate family
associated with product packaging, took an interest in Khan’s company. The parties struck a deal in
which defendant would buy out Khan’s company in two stages. Defendant first would buy a
majority stake in Khan’s company. Under the deal, if the net earnings by Khan’s company crossed a
certain threshold number then defendant was contractually obligated to finish buying out Khan for a
value set by formula in the contract. The formula potentially would net Khan a sale price into eight
figures. Critically, the deal between the parties was silent as to what would—or would not—happen
if Khan’s company did not cross that important threshold number. Khan believes that defendant
exploited that loophole in the deal by making intentionally bad management decisions as majority
owner that guaranteed that Khan’s company would not cross the threshold. A failure to cross the
threshold, according to Khan, would let defendant escape the contractual mandate and would give
defendant the option of pressuring Khan into selling his company cheap.
To pursue his accusations against defendant, Khan has an active amended complaint against
defendant that contains accusations of breach of fiduciary duty and failure to indemnify against
losses. (Dkt. No. 29.) The case currently comes before the Court on a motion by defendant to
dismiss the amended complaint altogether (Dkt. No. 33) under Rule 12(b)(6) of the Federal Rules of
Civil Procedure. Very briefly, defendant argues that Khan has not sufficiently pleaded a violation of
a specific provision of the deal between the parties, including any provision that would give rise to a
fiduciary duty. Defendant also believes that Khan’s claimed damages are too speculative. Khan
responds that he has cited explicit provisions of the deal between the parties that defendant has
breached and that lead to specific damages. Khan argues further that the breach of fiduciary duty
arises from defendant’s failure, as a majority owner, to look out for his interests as the minority owner.
District Judge Lawrence J. Vilardo has referred this case to this Court under 28 U.S.C.
§§ 636(b)(1)(A) and (B). (Dkt. No. 11.) The Court held oral argument on November 20, 2019. For
the reasons below, the Court respectfully recommends granting the motion to dismiss in part.
II.
BACKGROUND
A. Initial Events and the Purchase Agreement
This case concerns allegations1 that defendant intentionally damaged Khan’s contractual
business options to allow it to buy him out at an improper discount. Until 2012, Khan owned a
company called Shaant Industries, Inc. in Dunkirk, New York. Shaant Industries, Inc. was “a
producer of shrink sleeve product packaging in the North American shrink sleeve and flexible
packaging industry.” (Dkt. No. 29 at 1.) In 2012, defendant approached Khan to discuss acquiring
his company to expand its global shrink-sleeve operations into the United States and Canada. The
Court will use the name “Laninver” to refer collectively to defendant and to what appears to be a
complex network of holding companies:
1
For the sake of brevity, the Court will omit repeated use of the words “alleged” or “allegedly” when
describing the allegations in the amended complaint. Nothing in this background section constitutes a factual
finding unless otherwise noted.
2
At all relevant times, Laninver is a holding company with no business
operations of its own, wholly owned by Laninver S.H.C. S.L. based in Madrid, Spain,
which, in turn, is wholly owned by Grupo Lantero, an international company also
headquartered in Madrid, which is a prominent player in the global packaging
industry, including multiple European and North and South American markets, with
controlling ownership interests in multiple product line group companies.
As it is relevant to this action, one of Grupo Lantero’s holdings consists of
“Emsur,” itself a parent company and/or group of business entities with at least 10
production plants dedicated to the manufacture of flexible packaging primarily for
packaging food and dairy products in countries spanning the Americas, Europe,
Africa, the Middle East, and Asia.
Among other subsidiary companies and businesses, Emsur serves as the
parent entity for Emsur USA LLC (“Emsur USA”), a Delaware limited liability
company formed on December 16, 2013, and thereafter qualified to do business in
the State of Illinois where it maintains its principal place of business at 2800 Carl
Boulevard in Elk Grove Village, the same business location as defendant Laninver.
Defendant Laninver is the manager of Emsur USA.
Emsur also serves as the parent entity of other related subsidiaries, including,
but not limited to, business entities commonly referred to within the Grupo Lantero
family of businesses as “Emsur Mexico,” “Emsur Spain,” and “Emsur Poland.” At
all relevant times, Emsur’s plants in the United States, Mexico, Spain, and Poland
produce printed flexible packaging.
(Id. at 3.) The discussions continued for about three years and culminated in two agreements. On
March 16, 2015, Khan and Laninver entered a Memorandum of Understanding. (Dkt. No. 34-1.)
Through the Memorandum of Understanding, the parties declared their intent to have Shaant
Industries, Inc. reorganize as Ultrapak LLC (“Ultrapak”). Laninver then intended to purchase a 51
percent stake in Ultrapak to become its majority owner; Khan would be the only other member of
the new LLC and would hold a 49 percent stake.
A few months later, on July 8, 2015, Khan and Laninver made their intentions formal when
they entered a Membership Interest and Note Purchase Agreement (the “Purchase Agreement”).
(Dkt. No. 34-2.) The Purchase Agreement contains many details about how the parties would set
up Ultrapak and take their ownership interests in it. Some of the details have particular relevance to
3
the pending motions. Section 2 of the Purchase Agreement is the core of the agreement and
describes how transfer of ownership would occur in two phases. Section 2.1 describes the first
phase, called an Initial Interest: Khan would sell Laninver a 51 percent interest in Ultrapak. (Id. at
5.) Section 2.2 describes a conditional second phase called the Additional Interest. The Court is
oversimplifying here, but in essence, if Ultrapak’s net revenues for the 12 months ending June 30,
2018 met or exceeded $4.5 million then Laninver was required (“shall purchase from Khan”) to buy
out Khan’s remaining 49 percent ownership stake. (Id.) The amount of the purchase under Section
2.2 would follow a formula described elsewhere in Section 2 and could run as high as several times
the net revenues in question. (Id. at 6.) Closing each phase of the ownership transfer would require
Laninver to make certain representations and warranties about documentation and financing. (Id. at
9, 10.) Under Sections 4.1(c)(ii) and 4.2(c)(iii), the parties were required to comply “in all material
respects [with] all agreements, obligations and conditions contained in this Agreement” for each
phase of the ownership transfer. (Id. at 9, 10.) Under Section 6, Laninver provided representations
and warranties to Khan pertaining to authority to enter the Purchase Agreement and the
representations that it made to Khan. (Id. at 15.) In Section 8.3, the parties agreed that the Purchase
Agreement with attached exhibits constituted “the full and entire understanding and agreement
between the parties.” (Id. at 16.) In Section 8.5, the parties agreed that New York law would govern
the Purchase Agreement.
For purposes of the pending motions, the most important section of the Purchase
Agreement is Section 7.2. Section 7.2 is titled “Indemnification by Purchaser [i.e., Laninver]” and
reads in its entirety as follows:
The Purchaser hereby agrees to indemnify and hold harmless Khan from and
against all Losses that he may incur as a result of (a) the breach of any representation
or warranty of the Purchaser in this Agreement or (b) the breach of any covenant of
the Purchaser in this Agreement or any Ancillary Agreement or (c) the fraud or
4
willful misconduct of the Purchaser in connection with the offer, sale or transfer of
the Note or Interests.
(Id. at 15.) The Purchase Agreement does not appear to contain any express warranties or covenants
from Laninver beyond what appears in Sections 4.1(c)(ii), 4.2(c)(iii), and 6. The reference to
representations could refer generally to the accuracy of financial and other statements that Laninver
had to provide as part of the transfer of ownership. The Purchase Agreement does not provide its
own definition of “fraud” or “willful misconduct.” Based on Section 1.39, the “Note” refers to
Section 3.1 and a loan that Laninver would provide Khan in the first phase of ownership transfer.
(Id. at 5, 7.) Based on Section 1.24, the “Interests” refer to the two phases of ownership transfer
described in Sections 2.1 and 2.2. (Id. at 5.)
B. The Breakdown of the Relationship
The parties closed the first phase of the ownership transfer in 2016. By that time, according
to Khan, “Ultrapak worked to establish connections within the beverage industry, the fastest growth
segment of the shrink sleeve market, and formed key relationships pivotal to development of the
California beverage market, all in furtherance of the parties’ business plan, and in reliance upon the
promises and representations made by Laninver and Emsur that Emsur was dedicating sufficient
resources to Emsur USA in the form of printing presses, finishing equipment, and experienced
personnel and that Emsur USA would set aside sufficient capacity to capably produce quality
finished goods in its Chicago plant for Ultrapak’s domestic customers, within the customers’
shipment deadlines and at competitive delivered prices.” (Dkt. No. 29 at 8.) Once Ultrapak became
part of the Laninver family, however, Khan became alarmed at significant quality and other logistical
problems that arose. “At Laninver’s direction, Ultrapak’s first orders following the acquisition were
placed not with Emsur USA, but through Emsur Mexico which was designated as the initial
production plant to support Ultrapak while Emsur purportedly worked to bring its Emsur USA
5
plant online as Ultrapak’s prime supplier. However, as Ultrapak’s orders increased, Emsur
Mexico missed delivery deadlines and produced poor quality goods, resulting in numerous
customer and co-packer complaints and exhaustive efforts by Ultrapak to work to correct product
deficiencies.” (Id. at 9.) To correct Laninver’s deficiencies, “Ultrapak was forced to further ramp up
its finishing operation to compensate for Emsur USA’s refusals to divert proper resources and
inability to produce quality finished products, in an effort to save the customer accounts acquired by
Ultrapak in reliance upon the representations made by Emsur and Laninver and in an effort to
protect its business reputation which suffered as a result of Emsur’s recurring product and delivery
deficiencies.” (Id. at 10.) Khan came to believe that Laninver’s deficiencies had ethical implications
as well. “Laninver, despite its fiduciary obligations to Plaintiff as the minority interest holder and its
obligations during the earn-out period as a party to the Purchase Agreement, willfully usurped
opportunities from Ultrapak for Emsur’s benefit and constantly prioritized Emsur’s business
strategies over those of Ultrapak and to the detriment of Plaintiff.” (Id. at 9.) Some of Laninver’s
deficiencies led to overcharges for “wasted and unused product” that could not be sent to
customers; the overcharges ran into the hundreds of thousands of dollars. (Id. at 16.) Khan believes
that all of the harm that Ultrapak suffered did not result from mistakes but rather an intentional
business strategy:
On numerous occasions, when Plaintiff complained and voiced his concerns
about his earn-out rights and the promises by and obligations of Laninver, Emsur
would respond (including in writing). Indeed, even when minutes were being
circulated for review and edit after board meetings involving Ultrapak directors
(which involved Plaintiff and two Laninver representatives), a representative of
Emsur would respond and note “Emsur” next to the comments or suggested
changes. Laninver representatives ceded total control to and acted as one with
Emsur, despite any duties and obligations to Plaintiff.
As described above, Emsur and Laninver were wholly deficient in providing
everything that had been represented to Ultrapak at the time of acquisition, in that
Ultrapak was not provided the capacity necessary to meet its sales; production was
6
diverted to Emsur’s overseas plants rendering Ultrapak unmarketable to domestic
high-growth customers targeted in the parties’ business plan; Emsur’s finished
products were inferior in quality; and Emsur was too often unwilling to meet its own
delivery forecasts or prioritize representations made to Plaintiff, which knowingly
damaged Plaintiff’s earn-out rights in both lost sales and increased costs to Ultrapak,
thereby reducing the Net Turnover under the Purchase Agreement.
(Id. at 14.) “Thus, Defendant intentionally tanked the business of Ultrapak so that it could avoid its
payment obligations to Plaintiff, while also taking advantage of the business created through the
impacts on Ultrapak as a prior competitor.” (Id. at 18.) According to Khan, the problems that
Ultrapak had as part of the Laninver family worsened into a full-blown financial crisis. “In April
2018, with the knowledge and consent of Laninver, and under its direction, representatives of
Emsur met alone with Ultrapak’s sales agent and informed him that Ultrapak was in serious financial
crisis and there was a credit hold on all its orders, causing him to terminate his relationship with
Ultrapak and attempt to move the customer accounts which he serviced to Emsur directly.” (Id. at
20.) Khan found himself with no remedies short of litigation. “Despite Plaintiff’s and Ultrapak’s
repeated requests, Defendant and Emsur have since refused to engage in any effort to review the
illegitimate charges and over-billings which form the bulk of the monies Emsur ostensibly claimed it
was owed and has used as a stated basis for halting production and shipments.” (Id.)
C. This Litigation
Khan commenced this case by filing his original complaint on May 17, 2018. The original
complaint included Ultrapak itself as a plaintiff; this inclusion raised some issues concerning an
attorney conflict of interest and how Ultrapak would be represented. (See generally Dkt. Nos. 17, 27,
28.) With the help of new counsel (the present counsel), Khan filed an amended complaint naming
himself the sole plaintiff. (Dkt. No. 29.) The amended complaint contains three claims. In the first
claim, Khan accuses Laninver of violating Section 7.2 of the Purchase Agreement. According to
Khan, “Laninver worked to minimize Ultrapak’s new and existing business and to increase its
7
expenses so that it did not ‘have to pay too much for [Plaintiff’s] buyout’ and could instead ‘buy
[Plaintiff] on the cheap,’ and engaged in other willful misconduct.” (Id. at 21.) Khan’s theory of
liability is that “Laninver has at the very least engaged in ‘willful misconduct’ in connection with
the sale and transfer of Plaintiff’s membership interests in Ultrapak and therefore is required to
indemnify Plaintiff, individually, pursuant to Section 7.2 of the Purchase Agreement for Losses
suffered by Plaintiff as a result of such conduct.” (Id. at 22.) In the second claim, Khan accuses
Laninver of breach of fiduciary duty. Simply put, Khan asserts that Laninver owed him, as minority
member, fiduciary duties. “In accordance with its fiduciary duties, Laninver must treat Plaintiff with
the utmost fairness, may not take any actions solely for its personal gain or that usurp (for itself or
Emsur) opportunities and benefits from Plaintiff, at the expense of Plaintiff, and may not deal
with Plaintiff in an unfair or inequitable manner. Laninver breached its fiduciary duties to Plaintiff
by, among other things, placing its own interests above those of Plaintiff, neglecting Plaintiff’s rights
and concerns, ceding control of decisions and priorities and otherwise acting as one with Emsur,
and advancing Emsur’s interests at the direct expense of Plaintiff, including by prioritizing Emsur’s
customers, usurping opportunities and employees that would have benefitted Plaintiff’s interests,
and secretively working to stunt Ultrapak’s earnings so as to reduce or eliminate its earn-out
obligations to Plaintiff.” (Id. at 23.) In the third claim, Khan invokes Section 7.2 of the Purchase
Agreement to assert that Laninver has a contractual obligation to indemnify him for all of the losses
that he incurred “as a result of Laninver’s willful misconduct and contractual breaches.” (Id. at 24.)
D. The Pending Motion
Laninver filed the pending motion to dismiss on September 16, 2019. Laninver seeks
dismissal of the amended complaint on several grounds. Laninver notes that the amended
complaint contains numerous references to the Memorandum of Understanding and argues that the
8
Purchase Agreement superseded it and any associated oral promises. Laninver next argues that the
claims in the complaint invoking Section 7.2 of the Purchase Agreement are “fatally vague” because
Section 7.2 is only a general indemnification provision. According to Laninver, Khan never specifies
in the amended complaint the specific actions that would constitute a breach of Section 7.2.
“Indeed, Ultrapak’s LLC Agreement gave Laninver approval over new business, since it required
Ultrapak to obtain the consent of Laninver prior to marketing Ultrapak’s products to a specific list
of customers.” (Dkt. No. 33-1 at 13.) Khan similarly cannot plead “willful misconduct” because the
phrase comes from tort law and would be inappropriate in a contract setting. Laninver argues
further that Khan lacks standing to bring his claim of breach of fiduciary duty. According to
Laninver, all of the harm alleged in the amended complaint fell directly on Ultrapak and not on
Khan personally. Any claim for injury, under this reasoning, thus would belong to Ultrapak and
could not be asserted by Khan. Finally, Laninver argues that the only damages that Khan has
asserted are conditional profits to himself that might have come during the second phase of the
ownership transfer. “But, these conditional damages were not reasonably contemplated by the
parties when they negotiated the MINPA [i.e., the Purchase Agreement]. On the contrary, the
MINPA was structured to allow for the possibility that Ultrapak might not even achieve the sales
goals required to earn any earn out payment. In other words, the parties contemplated that Ultrapak
might not achieve the sales necessary to obtain any further investment from Laninver, let alone the
‘millions’ in damages plaintiff claims.” (Id. at 18.)
Khan opposes the motion to dismiss in all respects. Khan acknowledges that the amended
complaint contains references to the Memorandum of Understanding but asserts that his claims rely
exclusively on the Purchase Agreement:
Laninver engaged in conduct to avoid its contractual payment obligations to Mr.
Kahn. That conduct breached Section 7.2 in two independent ways. First, Laninver
9
breached Section 7.2(c) by engaging in willful misconduct in connection with Mr.
Khan’s Ultrapak membership interest (including by intentionally tanking Mr. Khan’s
earn-out rights). Second, Laninver breached Section 7.2(b) by acting in bad faith and
failing to indemnify Mr. Khan for its “breach of any covenant of [Laninver] in [the
Purchase Agreement].”
It is in relation to this latter independent breach that allegations referencing
the terms of the MOU are particularly relevant, even though a breach of the MOU is
not the basis of the claim. This is because the implied covenant of good faith and
fair dealing falls within the scope of covenants made by Laninver, and thus a breach
of the covenant of good faith and fair dealing constitutes a breach of Section 7.2(b).
(Dkt. No. 39 at 4.) Khan responds to any arguments about vagueness by citing events alleged in the
amended complaint that give considerable detail about how Laninver gave Ultrapak short shrift to
lower its value. Finally, Khan notes that Laninver conceded the existence of fiduciary duty owed to
him as minority member of Ultrapak:
Laninver correctly acknowledges that, as a majority member of Ultrapak, it
owes Mr. Khan, individually, a fiduciary duty. Docket No. 33-1 at 12. See also Berman
v. Sugo LLC, 580 F. Supp. 2d 191, 204 (S.D.N.Y. 2008) (“Federal and state courts
have recognized that members of a limited liability company, like partners in a
partnership, owe a fiduciary duty of loyalty to fellow members.”). Laninver also does
not contest the fact that, if proven, certain wrongful conduct alleged by Mr. Khan
could rise to the level of a fiduciary breach. Instead, Laninver’s sole challenge to Mr.
Khan’s fiduciary duty claim is based upon its belief that Mr. Khan does not seek
redress for any personal harm. Specifically, Laninver argues that Mr. Khan “seeks
redress for harm that Laninver purportedly caused to Ultrapak—not plaintiff
himself.” Docket No. 33-1 at 11. That contention is conclusory and objectively
false. The only two interest holders in the company are Laninver and Mr. Khan.
Had Laninver acted in good faith and not otherwise breached its duties to Mr. Khan,
it would have paid money to Mr. Khan for his interests, not Ultrapak. And damage
to Mr. Khan’s membership interests constitute damages to him, individually. Mr.
Khan’s claims against Laninver are righteous.
(Id. at 13.)
III.
DISCUSSION
A. Motions to Dismiss Generally
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted
as true, to state a claim to relief that is plausible on its face. A claim has facial plausibility when the
10
plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability
requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where
a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line
between possibility and plausibility of entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(internal quotation marks and citations omitted). Courts assess Rule 12(b)(6) motions “accepting all
factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff’s
favor.” Peter F. Gaito Architecture, LLC v. Simone Dev. Corp., 602 F.3d 57, 61 (2d Cir. 2010) (internal
quotation marks and citation omitted). “On a motion to dismiss, the court may consider any written
instrument attached to the complaint as an exhibit or any statements or documents incorporated in it
by reference.” Yak v. Bank Brussels Lambert, 252 F.3d 127, 130 (2d Cir. 2001) (editorial and internal
quotation marks and citation omitted). “Simply stated, the question under Rule 12(b)(6) is whether the
facts supporting the claims, if established, create legally cognizable theories of recovery.” Cole-Hoover v.
Shinseki, No. 10-CV-669, 2011 WL 1793256, at *3 (W.D.N.Y. May 9, 2011) (internal quotation marks
and citation omitted).
As a preliminary matter, the Court must decide whether to consider certain documents that
have become part of the record but lie outside of the amended complaint. “Because a Rule 12(b)(6)
motion challenges the complaint as presented by the plaintiff, taking no account of its basis in
evidence, a court adjudicating such a motion may review only a narrow universe of materials.
Generally, we do not look beyond facts stated on the face of the complaint, documents appended to
the complaint or incorporated in the complaint by reference, and matters of which judicial notice
may be taken.” Goel v. Bunge, Ltd., 820 F.3d 554, 559 (2d Cir. 2016) (internal quotation and editorial
marks and citation omitted). “Where a document is not incorporated by reference, the court may
11
neverless consider it where the complaint relies heavily upon its terms and effect, thereby rendering
the document integral to the complaint. However, even if a document is integral to the complaint, it
must be clear on the record that no dispute exists regarding the authenticity or accuracy of the
document. It must also be clear that there exist no material disputed issues of fact regarding the
relevance of the document.” DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010)
(internal quotation marks and citations omitted). “A document is integral to the complaint where
the complaint relies heavily upon its terms and effect. Merely mentioning a document in the
complaint will not satisfy this standard; indeed, even offering limited quotations from the document
is not enough. In most instances where this exception is recognized, the incorporated material is a
contract or other legal document containing obligations upon which the plaintiff’s complaint stands
or falls, but which for some reason—usually because the document, read in its entirety, would
undermine the legitimacy of the plaintiff’s claim—was not attached to the complaint.” Goel, 820
F.3d at 559 (internal quotation and editorial marks and citations omitted).
While the analysis below does not necessarily rely on every document that the Court
reviewed, the Court has been willing to consider several documents that appear in the record. The
amended complaint contains references to the Memorandum of Understanding, both as a historical
event between the parties and as examples of what “good faith” between the parties would have
been. The amended complaint also relies heavily on the Purchase Agreement, and violations of it, to
form the basis of Laninver’s alleged liability. The Purchase Agreement, in turn, contains Exhibits A
through I, which comprise the Ultrapak LLC Agreement and various documents related to the
transfer of ownership. Subject to the actual consideration given below, the Court has decided that
all of these documents are integral to the amended complaint. The Court has reviewed the
documents accordingly.
12
B. Section 7.2 of the Purchase Agreement
The Court now turns to the parties’ arguments about Section 7.2 of the Purchase
Agreement. Khan’s claims under Section 7.2, and the parties’ arguments about them, are admittedly
confusing. On its face, Section 7.2 serves to protect Khan from damages that he would incur if
Laninver breached the Purchase Agreement or committed some “fraud or willful misconduct” apart
from breaching the agreement. This protective function of Section 7.2 appears superfluous. If
Laninver had breached express provisions of the Purchase Agreement or had committed fraud then
it would owe Khan damages whether Section 7.2 existed or not:
A so-called “indemnification” clause which agrees to “indemnify” or “hold
harmless” a contracting party only when the other party is solely at fault is legally a
contribution clause based upon the degree of fault, not a contractual indemnification
clause under New York law. In order to constitute a true indemnification clause, the
contractual obligation must be to assume the cost of liability irrespective of fault.
Under the contract at issue, neither party agreed to bear a loss it did not incur by its
own acts. There was no shifting of liability, without regard to a degree of fault, by
agreement or operation of law. As a matter of law, the parties’ agreement to hold
the other harmless from claims resulting from its sole negligence creates no greater
obligation by contract than that which is already legally required by the law of
contribution.
Anderson v. Greyhound Lines, Inc., No. 06 CIV. 13371 GBD, 2011 WL 3480945, at *4 (S.D.N.Y. Aug.
3, 2011) (citations omitted). The New York Court of Appeals once elaborated, in the tort context,
on how true indemnification puts a blameless party or non-party in the position of someone who is
fully liable:
To place the issue before us in focus, it is useful to restate the important
substantive distinctions between contribution and indemnity. Basically, in
contribution the loss is distributed among tort-feasors, by requiring joint tort-feasors
to pay a proportionate share of the loss to one who has discharged their joint
liability, while in indemnity the party held legally liable shifts the entire loss to
another. Contribution arises automatically when certain factors are present and does
not require any kind of agreement between or among the wrongdoers. Indemnity,
on the other hand, arises out of a contract which may be express or may be implied
in law to prevent a result which is regarded as unjust or unsatisfactory.
13
Rosado v. Proctor & Schwartz, Inc., 484 N.E.2d 1354, 1356 (N.Y. 1985) (citations omitted). The
distinct aspect of indemnification as a loss-shifting event after determination of liability leads to
another confusing aspect of Khan’s claims. Counts One and Three of the amended complaint, on
the surface, do not allege an underlying or independent contractual breach or other liabilitygenerating event. Counts One and Three allege only a breach of the contribution / indemnification
provision in Section 7.2. The New York Court of Appeals, however, has held that “the indemnity
claim is a separate substantive cause of action, independent of the underlying wrong.” McDermott v.
City of New York, 406 N.E.2d 460, 462–63 (N.Y. 1980); accord City of New York v. Lead Indus. Ass’n,
Inc., 644 N.Y.S.2d 919, 922–23 (N.Y. App. Div. 1996) (“The classic situation giving rise to a claim
for indemnity is where one, without fault on its own part, is held liable to a third party by operation of
law (frequently statutory) due to the fault of another.”). Khan thus has left the Court to ponder two
claims that Laninver has failed to reimburse him under Section 7.2 for unspecified wrongdoing that, if
proven, would require reimbursement with or without Section 7.2. Put another way, the Court could
view Counts One and Three as a request for declaratory judgment—a declaration that Laninver would
owe Khan damages to be determined if it breached some other provision in the Purchase Agreement.
Without a firm accusation apart from a conditional requirement for indemnification, Khan
has failed to state a cognizable cause of action. In reaching that conclusion, the Court wants to
make clear that Khan has provided considerable factual detail for something that he believes that
Laninver has been doing. Khan essentially has claimed that Laninver is exploiting a loophole in the
Purchase Agreement. The Purchase Agreement specifies what would have happened if Ultrapak
had hit a target number for net earnings during a certain 12-month period. The Purchase
Agreement does not specify what would have happened if Ultrapak had missed the target number.
Khan, in effect, is alleging that Laninver deduced that one or both of the following would occur if
14
Ultrapak missed the target number: 1) Laninver would be able to pressure Khan into selling his
remaining ownership interest for much less than would have been required if the target number had
been hit; and 2) an Ultrapak that missed the target number would be in such financial distress for
other reasons that it would be desperate to find a buyer to rescue it. Several potentially cognizable
causes of action suggest themselves, including a breach of the implied warranty of good faith and
fair dealing. Khan has not, however, chosen a specific and substantive cause of action to pursue,
and the Court should not guess how Khan might want to fit his factual narrative into a legal theory
of liability. Khan has not identified a specific representation, warranty, or covenant in the Purchase
Agreement that Laninver breached and that would give rise to indemnification under Sections 7.2(a)
or (b). Any specific allegation of fraud to invoke Section 7.2(c) would require satisfying Rule 9(b);
Khan has not done so through an amended complaint that does not specify fraud in the
inducement, fraudulent reliance on a specific promise, or some other fraudulent event. Not even a
request for declaratory judgment would work under the circumstances, since Khan has not properly
pleaded a specific conflict of rights that could be settled through a declaratory judgment. See, e.g.,
Beacon Const. Co. v. Matco Elec. Co., 521 F.2d 392, 397 (2d Cir. 1975) (declaratory judgment helps “to
settle legal rights and remove uncertainty and insecurity from legal relationships without awaiting a
violation of the rights or a disturbance of the relationships”) (internal quotation marks and citation
omitted). Under these circumstances, dismissal of Counts One and Three is appropriate. The Court
accordingly recommends granting Laninver’s motion with respect to Counts One and Three of the
amended complaint.
15
C. Fiduciary Duty to a Minority Member of an LLC
The Court next turns its attention to Count Two of the amended complaint and Khan’s
allegation of a breach of fiduciary duty. Under New York law,2 “[t]he elements of a cause of action
to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2)
misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct.” Rut
v. Young Adult Inst., Inc., 901 N.Y.S.2d 715, 717 (N.Y. App. Div. 2010) (citation omitted). Here, a
fiduciary relationship between Khan and Laninver existed. Schedule A of the Ultrapak LLC
Agreement lists both Khan and Laninver as the two members of Ultrapak (Dkt. No. 34-4 at 40), and
“members of a limited liability company, like partners in a partnership, owe a fiduciary duty of
loyalty to fellow members.” Berman v. Sugo LLC, 580 F. Supp. 2d 191, 204 (S.D.N.Y. 2008)
(citations omitted). Khan has pleaded misconduct by way of asserting Laninver’s efforts to damage
his interest in Ultrapak to avoid having to buy him out under the contractual formula in the
Purchase Agreement. The alleged misconduct is analogous to a misrepresentation of Ultrapak’s
value and of efforts to maintain that value; and to self-dealing. See Meisel v. Grunberg, 651 F. Supp. 2d
98, 120 (S.D.N.Y. 2009) (citations omitted); cf. Estrada v. Dugow, No. 15 CIV. 3189 (ER), 2016 WL
1298993, at *5 (S.D.N.Y. Mar. 31, 2016) (“Self-dealing also constitutes a breach under the wellestablished law of fiduciaries.) (citations omitted); Piller v. Princeton Realty Assocs. LLC, 104 N.Y.S.3d
344, 350 (N.Y. App. Div. 2019) (claim for breach of fiduciary duty survive dismissal where
defendant allegedly caused “plaintiff to be divested of the value of his interest”); Salm v. Feldstein, 799
2
New York law applies to Count Two. Under Section 8.5 of the Purchase Agreement, the parties agreed to
New York law “for the purposes of any action arising out of or relating to this Agreement.” The phrase
“arising out of or relating to” is broad enough here to cover an allegation about the transfer of ownership that
lies at the heart of the Purchase Agreement. See Rosehoff Ltd. v. Cataclean Americas LLC, No. 12-CV-1143A,
2013 WL 2389725, at *8 (W.D.N.Y. May 30, 2013) (interpreting “arising out of” and “in relation to”) (citing
Coregis Ins. Co. v. Am. Health Found., Inc., 241 F.3d 123, 128 (2d Cir. 2001) (citation omitted)).
16
N.Y.S.2d 104, 106 (N.Y. App. Div. 2005) (noting that “the alacrity with which the dealership was
sold after the plaintiff conveyed his interest in the company to the defendant” sufficed to show
misrepresentation of value for summary-judgment purposes). Finally, Khan successfully has pleaded
damages caused by the alleged breach of fiduciary duty. “The measure of damages for breach of
fiduciary duty is the amount of loss sustained, including lost opportunities for profit on the
properties by reason of the faithless fiduciary’s conduct.” 105 E. Second St. Assocs. v. Bobrow, 573
N.Y.S.2d 503, 504 (N.Y. App. Div. 1991) (citation omitted). “[T]he calculation of damages in
breach of fiduciary duty cases is predicated upon the type of misconduct in which the fiduciary
engaged.” Fed. Ins. Co. v. Mertz, No. 12-CV-1597-NSR-JCM, 2016 WL 164618, at *7 (S.D.N.Y. Jan.
12, 2016) (internal quotation marks and citations omitted). The measure of damages most
appropriate for this case can be determined after discovery and after a specific finding of liability at
trial. At a minimum, though, Khan has pleaded explicitly that Laninver’s faithless conduct cost
Ultrapak about $1 million in extra charges, which would have a ripple effect on the value of Khan’s
ownership interest. (Dkt. No. 29 at 16.) Khan additionally has pleaded in Count Two that Laninver
intentionally damaged Ultrapak’s value to dodge the mandatory buyout of Khan specified in Section
2.2 of the Purchase Agreement. Laninver is right to point out that Count Two only implies that
Section 2.2 would have taken effect absent the alleged faithless conduct. At this very early stage of
the litigation, however, the implication is strong enough that Khan should have an opportunity to
document his assertions more carefully during discovery.
Under the circumstances, Khan successfully has pleaded Laninver’s breach of a fiduciary
duty to him that directly caused him damages. Accordingly, the Court recommends denying
Laninver’s motion with respect to Count Two of the amended complaint.
17
IV.
CONCLUSION
Khan successfully has pleaded a violation of trust that, subject to discovery and trial,
plausibly could constitute a breach of fiduciary duty. For all of the foregoing reasons, the Court
respectfully recommends granting Laninver’s motion to dismiss (Dkt. No. 33) in part to dismiss
Counts One and Three of the amended complaint. The Court recommends denying Laninver’s
motion with respect to Count Two of the amended complaint.
V.
OBJECTIONS
A copy of this Report and Recommendation will be sent to counsel for the parties by
electronic filing on the date below. “Within 14 days after being served with a copy of the
recommended disposition, a party may serve and file specific written objections to the proposed
findings and recommendations.” Fed. R. Civ. P. 72(b)(2); see also 28 U.S.C. § 636(b)(1). Any
objections must be filed electronically with the Clerk of the Court through the CM/ECF system.
“As a rule, a party’s failure to object to any purported error or omission in a magistrate
judge’s report waives further judicial review of the point.” Cephas v. Nash, 328 F.3d 98, 107 (2d Cir.
2003) (citations omitted); see also Mario v. P & C Food Markets, Inc., 313 F.3d 758, 766 (2d Cir. 2002)
(“Where parties receive clear notice of the consequences, failure timely to object to a magistrate’s
report and recommendation operates as a waiver of further judicial review of the magistrate’s
decision.”) (citation omitted). “We have adopted the rule that failure to object timely to a magistrate
judge’s report may operate as a waiver of any further judicial review of the decision, as long as the
parties receive clear notice of the consequences of their failure to object. The rule is
18
enforced under our supervisory powers and is a nonjurisdictional waiver provision whose violation
we may excuse in the interest of justice.” United States v. Male Juvenile (95-CR-1074), 121 F.3d 34,
38–39 (2d Cir. 1997) (internal quotation marks and citations omitted).
“Where a party only raises general objections, a district court need only satisfy itself there is
no clear error on the face of the record. Indeed, objections that are merely perfunctory responses
argued in an attempt to engage the district court in a rehashing of the same arguments set forth in
the original papers will not suffice to invoke de novo review. Such objections would reduce the
magistrate’s work to something akin to a meaningless dress rehearsal.” Owusu v. N.Y. State Ins., 655
F. Supp. 2d 308, 312–13 (S.D.N.Y. 2009) (internal quotation and editorial marks and citations
omitted).
SO ORDERED.
__/s Hugh B. Scott________
DATED: January 9, 2020
Hon. Hugh B. Scott
United States Magistrate Judge
19
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?