Summary
applying the "well settled [law] . . . that a partner in an organization owes a fiduciary duty of loyalty to fellow partners in that organization" to members of a limited liability company
Summary of this case from Berman v. Sugo LLCOpinion
02 Civ. 7865 (GBD).
June 9, 2003.
MEMORANDUM OPINION ORDER
Plaintiff brought this diversity action against defendants alleging breach of contract, tortious interference with contractual relations, breach of fiduciary duty, and tortious interference with a fiduciary duty in connection with plaintiff's partnership agreement with defendants. Defendants now move for partial judgment on the pleadings with respect to Counts II, III, and IV. Plaintiff opposes that motion. For the foregoing reasons, defendants' motion is granted in part, and denied in part.
Count I alleges that defendant FrontPoint Partners, LLC ("FFP") breached the contract. Defendants do not move for partial judgment on the pleadings with respect to that count, however.
Discussion
Federal Rule of Civil Procedure 12(c) allows a party to move for judgment on the pleadings. See FED. R. Civ. P. 12(c). This Court will accept the allegations in the complaint as true and construe them in the light most favorable to the non-movant, in this case, the plaintiff. See King v. Am. Airlines, Inc., 284 F.3d 352, 355 (2d Cir. 2002). All reasonable inferences will be drawn in favor of the plaintiff. See Patel v. Searles, 305 F.3d 130, 134-35 (2d Cir. 2002). "A complaint will only be dismissed if it appears beyond [a] doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. at 135 (internal quotation marks omitted), quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
There are three controlling partnership documents in this case, that together form plaintiff's partnership agreement with defendant FrontPoint Partners, LLC ("FFP"). The first is the Services and Collaboration Agreement ("Services Agreement"), whereby plaintiff agreed to manage an investment fund for FFP. The second is the Second Amended and Restated Limited Liability Company Agreement ("LLC Agreement"), whereby plaintiff became a partner of FFP. The third is the Equity Reallocation Agreement ("Equity Agreement") whereby the parties agreed to the various equity interests plaintiff and the other members would hold in FFP (collectively, the "partnership agreement").
Two of the three documents have choice of law clauses. The Services Agreement provides that New York law will govern the contract. See Complaint at Ex A, § 9(e). The LLC Agreement, however, provides that Delaware law will govern that contract.See id. at Ex. B, § 11.05. The Equity Agreement, on the other hand, does not have a choice of law clause. It is immaterial, however, whether Delaware or New York law is the applicable choice of law because there is no conflict between the two with respect to the issues raised in defendants' motion.
A. Tortious Interference with Contractual Relations
Count II alleges that the individual defendants tortiously interfered with plaintiff's partnership agreement with FFP, causing FFP to breach the contract. Defendants argue, however, that a claim for tortious interference of contractual relations may only be maintained against a third party to the contract, and not against the contracting party itself. Defendants argue that all three individual defendants are parties to the contract because they are original members of FFP, and are signatories to the LLC and Equity Agreements.
In a claim for tortious interference with contractual relations, a plaintiff must allege the existence of "1) a contract, 2) about which defendant knew and 3) an intentional act that is a significant factor in causing the breach of such contract 4) without justification 5) which causes injury."Irwin Leighton., Inc. v. W.M. Anderson Co., 532 A.2d 983, 992 (Del.Ch. 1987); LaBarte v. Seneca Resources Corp., 285 N.Y.S.2d 618 (App.Div. 2001). However, "only a stranger to a contract, such as a third party, can be liable for tortious interference with a contract. . . . Plaintiffs cannot state a claim for tortious interference against one of the contracting parties." Winicki v. City of Olean, 611 N.Y.S.2d 379, 380 (App.Div. 1994) (citations omitted); Shearin v. E.F. Hutton Group. Inc., 652 A.2d 578, 590 (Del.Ch. 1994).
In this case, the individual defendants are all signatories to both the LLC Agreement and the Equity Agreement. See Compl. at Ex. B and C. However, with respect to the Services Agreement, only defendant Duff, and not defendants Caffray or Ghaffari are signatories. See id. at Ex. A. Since defendants Caffray and Ghaffari are not signatories to the Services Agreement, a question of fact remains as to whether they are parties to that document, and consequently parties to plaintiff's partnership agreement as a whole. Defendant Duff, however, is a signatory to all three documents, and consequently a party to plaintiff's partnership agreement. Therefore, this Court grants the motion for judgment on the pleadings as to defendant Duff on Count II, since as a matter of law, plaintiff can not state a claim against Duff for tortious interference with contractual relations.
Defendants next argue that, in any event, the motion for judgment on the pleadings should be granted as to Count II because officers and directors of a corporation can not be held personally liable for inducing a breach of contract by their corporations when they act within the scope of their employment. Under both Delaware and New York law, officers and directors are only liable for interfering with their own company's contracts if they exceeded the scope of their authority. See Wallace v. Wood, 752 A.2d 1175, 1182 (Del.Ch. 1999); Albert v. Loksen, 239 F.3d 256, 275 (2d. Cir. 2001) (applying New York law and finding that "a plaintiff may maintain an action for tortious interference against a co-employee by showing that the co-employee acted outside the scope of [his or her] authority.") (citations omitted).
In this case, the complaint alleges that around November 2001, Caffray asked plaintiff to share his investment methodology with Newt Glassman, a close friend of Caffray's, and a friend of Caffray's sister. See Complaint at ¶ 23. Plaintiff refused, believing that Glassman was unethical. Plaintiff alleges that his feelings about Glassman led to a breakdown in the relationship between him and Caffray. See id. The complaint further alleges that three months later, Caffray, Duff and Ghaffari unilaterally decided over dinner to replace plaintiff with Glassman. See id. at ¶ 25. Plaintiff alleges that his termination from the company was in violation of the provisions of the Services Agreement, as that agreement requires termination only for cause and by a vote of the Board of Directors. See id.
Viewing the facts in the light most favorable to the plaintiff, as this Court must, plaintiff may very well be able to show that Caffray and Ghaffari's actions were outside the scope of employment in that Caffray's favoritism towards Glassman was the reason for the termination, and the termination was in bad faith. At this stage of the litigation, defendants have not shown as a matter of law that under no set of circumstances could plaintiff state a claim upon which relief could be granted. Therefore, defendants' motion for judgment on the pleadings as to Count II is denied with respect to defendants Caffray and Ghaffari.
B. Breach of Fiduciary Duty and Tortious Interference with a Fiduciary Duty
Defendants contend that Counts III and IV should be dismissed because corporate executives do not owe each other a fiduciary duty. Defendants argue that the individual defendants here owed only a duty to FFP, and not to each other or to plaintiff.
It is well settled, however, that a partner in an organization owes a fiduciary duty of loyalty to fellow partners in that organization. See Walker v. Resource Dev. Co. Ltd., 791 A.2d 799, 817 (Del.Ch. 2000) (assuming a cause of action for breach of duty of loyalty and granting a constructive trust in favor of former member of a limited liability company who was removed from the company by the remaining members); VGS, Inc. v. Castiel, No. C.A. 17995, 2000 WL 1277372 (Del.Ch. Aug. 31, 2000), at *4 (finding a breach of duty of loyalty when two managers of a limited liability company executed a written consent to merge with another company without the knowledge of the third member); Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 973-74 (2d Cir. 1989) (applying New York law and finding that general partner's business transactions were self-interested and breached fiduciary duty owed to limited partners); Birnbaum v. Birnbaum, 539 N.E.2d 574, 575-76 (N.Y. 1989) (finding that a partner not only owes a fiduciary duty of loyalty to other partners but also owes a duty to avoid self-dealing and conflicts of interest). Defendants' motion for judgment on the pleadings as to Counts III and IV on the grounds that a fiduciary duty does not lie between partners in a limited liability company is, therefore, denied.
Lastly, defendants argue that Counts III and IV should be dismissed because they are redundant of plaintiff's breach of contract claim under Count I, in that the breach of fiduciary duty is based upon the same set of facts as those that support the contract claim.
The Delaware Court of Chancery addressed the issue of whether a breach of fiduciary duty claim is redundant of a contract claim in RJ Associates Inc. v. Health Payors' Org. Ltd. Partnership, No. 16873, 1999 WL 550350, at *10 (Del.Ch. July 16, 1999). RJ Associates involved a limited partnership composed of a general partner and two limited partners. The plaintiff, one of the limited partners, brought suit against the general partner and the remaining limited partner alleging both breach of contract and fiduciary duties in connection with the partnership's deductions of certain expenses from the plaintiff's partnership distributions. The defendants moved to dismiss the fiduciary duty claims on the grounds that they were merely duplicative of plaintiff's breach of contract claims. The Delaware Court of Chancery, however, denied defendants' motion to dismiss, finding that "[c]onduct by an entity that occupies a fiduciary position . . . may form the basis of both a contract and a breach of fiduciary duty claim." RJ Associates, 1999 WL 550350, at *10; see also Mevers v. Waverly Fabrics, 479 N.E.2d 236, 239 n. 2 (N.Y. 1985) (finding that "a contracting party may be charged with a separate tort liability arising from a breach of duty distinct from, or in addition to, the breach of contract[.]")
In this case, plaintiff brought both breach of contract and breach of fiduciary duty claims against defendants. As noted earlier, the partners of FFP owe each other a fiduciary duty. Defendants' conduct, therefore, may form the basis of both a breach of fiduciary duty and a contract claim. In any event, the contract claim is directed solely at FFP, while the fiduciary duty claims are directed at the individual defendants. As the claims are directed at different defendants, on this basis as well there is no redundancy between the claims. Therefore, as a matter of law, the breach of fiduciary duty claim is not duplicative or redundant of the contract claim and defendants' motion for judgment on the pleadings as to Counts III and IV is denied.
Conclusion
For the foregoing reasons, defendants' motion for partial judgment on the pleadings is granted in part as to defendant Duff on Count II, and denied in all other respects.
SO ORDERED.