DORA L. IRIZARRY, District Judge.
Plaintiffs filed this action against defendants asserting various claims arising from a failed business venture involving plaintiffs, defendants, and other non-parties. Defendants Manatt, Phelps & Phillips, LLP ("Manatt") and Seimans Industry, Inc. ("SII") moved for summary judgment (see Manatt Motion for Summary Judgment, Dkt. Entry No. 119; SII Motion for Summary Judgment, Dkt. Entry No. 118), which plaintiffs opposed (see Plaintiffs' Opposition, Dkt. Entry Nos. 143, 144). On July 11, 2012, the Court referred these motions to the Honorable Steven M. Gold, Chief United States Magistrate Judge for the Eastern District of New York, to prepare a Report and Recommendation. On June 21, 2013, Chief Magistrate Judge Gold issued his Report and Recommendation
When a party objects to a R & R, a district judge must make a de novo determination with respect to those portions of the R & R to which the party objects. See FED. R. CIV. P. 72(b); United States v. Male Juvenile, 121 F.3d 34, 38 (2d Cir. 1997). If, however, a party makes conclusory or general objections, or attempts to relitigate the party's original arguments, the court will review the R & R for clear error. Robinson v. Superintendent, Green Haven Correctional Facility, 2012 WL 123263, at *1 (E.D.N.Y. Jan. 17, 2012) (quoting Walker v. Vaughan, 216 F.Supp.2d 290, 292 (S.D.N.Y.2002)). The district court may then "accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions." Fed.R.Civ.P. 72(b); see also 28 U.S.C. § 636(b)(1).
As a preliminary matter, plaintiffs do not object to the portions of the R & R that recommend dismissal of the: (1) second, third, and fifth causes of action as time-barred (see R & R at 273-75); (2) eighth through eleventh causes of action, premised on Manatt's aiding and abetting SII (see R & R at 283-84); (3) twelfth and fourteenth causes of action seeking punitive damages and alleging a conspiracy among the defendants (see R & R at 283-84); and (4) thirteenth cause of action for intentional infliction of emotional distress (see R & R at 284-85). The Court has reviewed the submissions in connection with this motion and hereby adopts the unopposed recommendations of the R & R as to these claims. Accordingly, the second, third, fifth, eighth, ninth, tenth, eleventh, twelfth, thirteenth, and fourteenth causes of action are dismissed.
Plaintiffs object to the magistrate judge's recommendation that the first, fourth, sixth, and seventh causes of action which assert tax loss claims, be dismissed. (See R & R at 274-83; Pls.' Obj. at 3-28.) It is apparent that plaintiffs seek to relitigate many of the issues already briefed in their opposition to summary judgment. Nonetheless, the Court has carefully considered each of plaintiffs' objections. Upon review of the characteristically thorough, thoughtful, and wellreasoned R & R of Chief Magistrate Judge Gold, the Court hereby adopts the R & R in its entirety. Accordingly, the Court dismisses the first, fourth, sixth, and seventh causes of action.
Plaintiffs also challenge the magistrate judge's denial of their motion to unseal the documents exchanged during discovery and relied upon by the parties in connection with the briefing for the motion for summary judgment. (See Pls.' Obj. at 29-33.) As a preliminary matter, the objections to Magistrate Judge Gold's final order were untimely as they were not properly filed or served on defendants within the deadlines for such objections. See Fed.R.Civ.P. 72(a) ("A party may not assign as error a defect in the order not timely objected to."). Moreover, the objections
Upon due consideration, the R & R is adopted in its entirety. The complaint is dismissed as to all defendants. Furthermore, Magistrate Judge Gold's order denying plaintiffs' motion to unseal will remain in force notwithstanding the dismissal of this action.
SO ORDERED.
GOLD, STEVEN M., United States Magistrate Judge.
This litigation is one of several arising from the failure of the business relationship between plaintiffs and non-party Schlesinger Electrical Contractors, Inc. ("Schlesinger or SEC"). In this action, plaintiffs assert several claims against defendant Siemens Industry, Inc. ("SII" or "Siemens") arising out of Siemens' dealings with Schlesinger, and against Manatt, Phelps & Phillips, LLP ("Manatt"), a law firm that advised Siemens in connection with those dealings. Having completed discovery, the parties now bring crossmotions for summary judgment. Docket Entries 118, 119 and 143.
This case arises out of the overlapping relationships of plaintiffs and defendants with Schlesinger Electrical Contractors, Inc. More specifically, plaintiffs contend primarily that Siemens, by negotiating a revision to the terms of its relationship with Schlesinger, appropriated tax losses that should have flowed to FKC as a result of its relationship with Schlesinger.
The facts set forth below are drawn in large part from defendants' and plaintiffs' Local Civil Rule 56.1 Statements ("Defs. R. 56.1," Docket Entry 189 and "Pls. Resp. R. 56.1," Docket Entry 177, respectively). Plaintiffs also submitted a supplemental statement of undisputed facts ("Pls. Supp.
Because the parties refer to the various entities relevant to the pending motions by acronyms that can be difficult to recall and recognize, I set them out here, in one place, for the reader's convenience:
b. Formation of the SSE and SFD Entities
In 2004, Schlesinger Electrical Contractors, Inc. ("Schlesinger" or "SEC"), a nonparty, and defendant Siemens formed Schlesinger-Siemens, LLC ("SSE" or "the LLC"). Defs. R. 56.1 ¶ 16; Pls. Resp. R. 56.1 ¶ 6.
The following year, SSE's business was expanded to include bidding on other projects for the NYC-DEP. See 2005 Operating Agreement ("Operating Agreement" or "OA") ¶ 1.3, Peluso Ex. 7, Docket Entry 133-13. Most of the terms governing SSE's operations were set out in the 2005 agreement, which was then revised in 2007, 2008, and finally, in ways critical to the dispute in this case, in 2010. See generally OA; Pls. Ex. 22, Docket Entry
The 2005 Operating Agreement provided that the members of the LLC were SE & A (later Siemens) and Schlesinger. OA §§ 2.1-2.2. Siemens held a 51% and Schlesinger a 49% ownership interest in the LLC, but any "income, gain, revenue, or profit" realized by SSE was to be split equally between the two entities. Defs. R. 56.1 1112; Pls. Resp. R. 56.1 1112; see also OA §§ 3.2, 8.3(a)(iv); Volande Decl. 115.
Schlesinger and the newly formed LLC also entered into a Support Services Agreement dated January 30, 2006. Defs. R. 56.1 ¶ 21; Pls. Resp. R. 56.1 1121; see also Support Services Agreement ("SSA"), Peluso Ex. 8, Docket Entry 133-14. The agreement provides that Schlesinger will supply certain services to the LLC, as set forth in an exhibit to the agreement, "in order to facilitate the operation" of the LLC's business. SSA § 2.1. One of the services listed in the Exhibit is business consulting, with an attendant estimated $156,000 per year cost, "[representing] a not to exceed consulting fee to be paid to First Keystone Consultants, Inc. for services in connection with management of SSE." SSA, Ex. A. § I. Plaintiff Robert Solomon asserts that, although he was not a party to the Support Services Agreement, this section of the agreement demonstrates that he was "responsible for the overall day-to-day management of the LLC" and that the money he was paid in this role indicates that "SEC was required to pass through to FKC what SEC received from SII pursuant to the SSA." R. Solomon Decl. ¶ 33. In essence, then, Mr. Solomon contends that FKC was entitled, pursuant to the Support Services Agreement, to a share of the amounts Schlesinger earned by virtue of being a member of the LLC.
After the formation of SSE, FKC and Schlesinger created a joint venture, SFD Associates.
Pursuant to SSE's Operating Agreement, its Board of Managers was comprised of three representatives appointed by Siemens and two by Schlesinger. Defs. R. 56.1 ¶ 15; OA 117.2(b). Once the agreement was executed, Schlesinger appointed Robert Solomon to the Board. Defs. R. 56.1 ¶ 18; Pls. Resp. R. 56.1 ¶ 18. According to Mr. Solomon, an initial investment he made in SFD, that was then contributed to SSE, was conditioned upon this appointment. Pls. Resp. R. 56.1 ¶ 18; R. Solomon Decl. ¶ 21.
In 2007, the relationship between Robert Solomon and Schlesinger began to break down, with the result that Mr. Solomon was removed from the board of Schlesinger-Siemens Electrical, LLC. In addition to citing complaints lodged by Schlesinger against Solomon, Defs. R. 56.1 ¶ 36; Pls. Resp. R. 56.1 ¶ 36, defendants argue that a 2007 audit of the LLC revealed deficiencies in its business practices that were attributable to Solomon, Defs. R. 56.1 ¶¶ 39-40; see also Peluso Ex. 11, Docket Entry 133-17 (copy of the audit report). In December of 2007, the SSE Board voted to restructure the company's management by appointing three company officers—two general managers (one appointed by Siemens and one by Schlesinger) and a controller—with Solomon alone in opposition to the proposal. Defs. R. 56.1 ¶ 43; Pls. Resp. R. 56.1 1143; see also Dec. 14, 2007 Board Minutes, Peluso Ex. 13, Docket Entry 133-19. The appointed officers did not include Solomon, and he contends that this change was designed "to vote [him] out. . . as SSE's Co-General Manager." Pls. Resp. R. 56.1 ¶ 42.
In March of 2008, Siemens conducted another audit of SSE focused on its practices during 2007. See Defs. R. 56.1 ¶ 80; Pls. Resp. R. 56.1 ¶ 80; see also Peluso Ex. 19, Docket Entry 134-7 (Siemens' final audit report, dated June 23, 2008). Siemens states that the report "criticized Robert Solomon's handling of material purchases, hiring and financial controls." Defs. R. 56.1 1182. Plaintiffs question the accuracy of many elements of the report, see, e.g., Pls. Resp. R. 56.1 ¶¶ 86-87, and label it defamatory, but also acknowledge that the report was "the only defamatory statement Defendants made against Mr. Solomon of which he is aware," Pls. Resp. R. 56.1 ¶ 81.
The parties agree that SSE sustained losses in the tax years ending in September 2008, 2009 and 2010. Defs. R. 56.1 ¶¶ 49-51, 53; Pls. Resp. R. 56.1 ¶¶ 49-51, 53; see also Baskinger Decl. ¶¶ 24, 26, 28.
Schlesinger-Siemens Electrical, LLC was initially financed by a $5100 contribution
SSE's 2005 and 2006 tax returns reflect that the LLC made a profit. Defs. R. 56.1 ¶ 47; Pls. Resp. R. 56.1 1147.
In July of 2009, Siemens and FKC signed an agreement pursuant to which
Following the dispute over Siemens' failure to complete its agreement to purchase FKC's interest in SFD, Siemens and FKC executed a General Release and Settlement Agreement. Peluso Ex. 34, Docket Entry 134-22; see also Defs. R. 56.1 ¶ 70; Pls. Resp. R. 56.1 170. This agreement provides that, in consideration for Siemens' payment of $750,000 to FKC, plaintiffs "fully and forever unconditionally release, remise, discharge and acquit [Siemens and its related entities] from any and all claims [arising] . . . from the beginning of time through the Execution Date of this Settlement Agreement." Settlement Agreement ¶¶ 1, 3. Siemens similarly released any claims it had against the Solomons and FKC. Pls. Resp. R. 56.1 173; Settlement Agreement ¶ 2.
The following month, though, FKC commenced a lawsuit (the "Bronx Action") against SSE and other parties seeking to recover for breach of contract and to foreclose on certain liens. Defs. R. 56.1 ¶ 109; Pls. Resp. R. 56.1 ¶ 109; see also Peluso Ex. 38, Docket Entry 135-3 (Complaint, First Keystone Consultants v. N.Y.C. Dep't Envtl. Prot. et al, No. 303366/2010, 2010 WL 1812840 (N.Y.Sup.Ct. Bronx Cnty. filed Apr. 26, 2010)). After learning of the suit, Siemens declined to make the final payment due to FKC under the Settlement Agreement, asserting that the filing of the Bronx Action breached that agreement. Defs. R. 56.1 ¶ 113; Pls. Resp. R. 56.1 ¶ 113; see also Friedman Decl. ¶ 29 (describing the decision to "suspend[ ] payment of the final $175,000 otherwise due under the Settlement Agreement" as "[b]ased on the filing of the Bronx Action, a clear breach of the Settlement Agreement").
Approximately a year later, on September 21, 2010, Schlesinger and Siemens entered into an agreement restructuring the responsibilities of each party under the SSE Operating Agreement. Defs. R. 56.1 ¶ 114; Pls. Resp. R. 56.1 ¶ 114; see also Restructuring Agreement, Peluso Ex. 42, Docket Entry 135-7. As will be discussed below, this Restructuring Agreement purported to reallocate responsibility for the losses of the LLC, and is thus at the heart of plaintiffs' claims. Plaintiffs, citing a number of emails from Manatt attorneys, allege that Manatt drafted the Restructuring Agreement and advised Siemens to sign it. Pls. Supp. R. 56.1 ¶ 31. Siemens declines to respond to this statement of fact on the basis of attorney-client privilege. Defs. Resp. Supp. R. 56.1 ¶ 31. I assume the allegation to be true for purposes of this Report.
Among other things, the Restructuring Agreement removed the responsibility Schlesinger had under the Operating Agreement for cost overruns and losses and provided that it would not be subject to calls for capital contributions or to fund LLC expenses. Restructuring Agreement ¶ 1.01(a). At the same time, the Restructuring Agreement reallocated the right to claim all tax losses from October 1, 2009 forward to Siemens, but did not alter the allocation of profits outlined in the Operating Agreement. Id. ¶ 1.01(c). Finally, the Restructuring Agreement terminated the Support Services Agreement (SSA) between Schlesinger and the LLC. Id. ¶ 1.03. Siemens maintains that the provision of the Restructuring Agreement that reallocates all tax losses to it merely recognizes "Siemens' absorption of the SSE losses." Defs. R. 56.1 ¶ 116.
In July 2011, SSE amended its tax returns for the years ending September 30, 2008 and 2009 to reallocate certain losses from SEC to Siemens. Defs. R. 56.1 ¶ 117; Pls. Resp. R. 56.1 ¶ 117; see also Baskinger Decl. ¶¶ 39-40, 44. According to Siemens Corporation's Tax Director, Ms. Baskinger, she and other tax professionals at Siemens Corporation consulted with Deanna Harris of the accounting firm KPMG before the returns were amended. Baskinger Decl. ¶ 34; see also Harris Decl. HH 5-6, 15-18 (detailing the information she was given about the SSE members' respective contributions and capital accounts and her advice to amend the tax returns and partnership agreement).
The amendments to the LLC's returns appear to be consistent with the advice Baskinger and Harris describe having rendered. The amended returns did not alter the total amount of losses claimed by SSE, but rather revised the allocation of the claimed losses between Siemens and Schlesinger. Defs. R. 56.1 ¶¶ 117-18; Pls. Resp. R. 56.1 ¶¶ 117-18; see also Baskinger
Siemens maintains that these amendments were warranted not simply based upon the reallocation of responsibility for the LLC's losses set forth in the Restructuring Agreement, but also and more fundamentally because Siemens, regardless of the Restructuring Agreement, in actual fact bore the losses incurred by the LLC and was therefore entitled to claim those losses pursuant to the applicable tax laws and regulations. Defs. R. 56.1 ¶¶ 117, 119. Plaintiffs protest this contention and stress that the tax returns were revised only after the execution of the Restructuring Agreement. Plaintiffs also point to an email in which Ms. Baskinger apparently stated that the original LLC agreement was revised "to allow" for the reallocation of the tax losses. Pls. Resp. R. 56.1 ¶¶ 117, 119.
In February of 2011, the Solomons filed the instant suit.
Defendants argue that a number of plaintiffs' claims are time-barred, and plaintiffs acknowledge as much. More specifically, both sides agree that plaintiffs' claims for tortious interference with contract and aiding and abetting a breach of fiduciary duty, based on the ouster of Robert Solomon from the SSE board, are time-barred. Plaintiffs' claim for defamation was likewise brought after the statute of limitations had expired. Accordingly, as discussed below, I recommend that summary judgment be granted to the defendants on these claims.
Plaintiffs' second and third causes of action are based upon a vote to remove Robert Solomon from the LLC's Board of Managers and assert claims for tortious interference with contract and aiding and abetting a breach of fiduciary duty. See Am. Compl. ¶¶ 16-18, 65, 66.
As defendants correctly point out, tortious interference and breach of fiduciary duty claims are subject to a three-year statute of limitations, and plaintiffs' claims are thus time-barred. See Defs. Mem. 17, Docket Entry 132. It is well-settled that New York's three-year statute of limitations for claims of injury to property, N.Y. C.P.L.R. 214(4), applies to tortious interference with contract and breach of fiduciary duty claims. See, e.g., Chevron Corp. v. Donziger, 871 F.Supp.2d 229, 257 (S.D.N.Y.2012) ("The statute of limitations for tortious interference claims is three years, and it `begins to run when the defendant performs . . . the alleged interference'" (quoting Thome v. Alexander & Louisa Calder Found., 70 A.D.3d 88, 890 N.Y.S.2d 16, 30 (1st Dep't 2009))); Kaufman v. Cohen, 307 A.D.2d 113, 118, 760 N.Y.S.2d 157 (1st Dep't 2003) ("[W]here suits alleging a breach of fiduciary duty seek only money damages, courts have viewed such actions as alleging `injury to property,' to which a three-year statute of limitations applies" (internal citations omitted)); St. John's Univ., N.Y. v. Bolton, 757 F.Supp.2d 144, 172 (E.D.N.Y. 2010) ("[A] claim that the defendant aided and abetted another's breach of fiduciary duties is subject to the same limitations period applicable to the underlying breach of fiduciary duty" (internal citation omitted)).
Similarly, defendants correctly posit, and plaintiffs do not dispute, that plaintiffs' defamation claim is time-barred. Plaintiffs' defamation claim, their fifth cause of action, is based on allegations that Krutemeier, a Siemens executive, published "statements . . . accusing Solomon of being a criminal and made other false defamatory statements" in a 2008 audit report and that Siemens "instructed Krutemeier to obtain and publish these false statements." Am. Compl. ¶ 68. It is undisputed that the sole publication of the audit report occurred in November 2009. See Pls. Resp. R. 56.1 ¶¶ 103-05. The statute of limitations for defamation claims in New York is one year and begins to run upon publication. Lehman v. Discovery Commc'ns, Inc., 332 F.Supp.2d 534, 537 (E.D.N.Y.2004). Plaintiffs do not contest that more than one year elapsed after the publication of the allegedly defamatory statement and before the filing of this case.
For these reasons, I respectfully recommend that defendants be granted summary
Plaintiffs assert four claims against Siemens (plaintiffs' first, fourth, sixth and seventh causes of action) based upon their contention that Siemens improperly allocated for its own benefit tax losses belonging to Schlesinger, and hence indirectly belonging to FKC. More specifically, plaintiffs claim that Siemens tortiously interfered with FKC's contract with Schlesinger; that Siemens aided and abetted Schlesinger's breach of fiduciary duty to plaintiffs; that Siemens converted the tax losses; and that Siemens was unjustly enriched by its wrongful acquisition of the tax losses.
Defendants first assert that a settlement agreement entered into by FKC and Siemens in 2009 released the tax loss claims because the losses arose before the agreement was signed and because the agreement bars any future as well as all existing claims. Defs. Mem. 11; see also Defs. Ex. 34, Docket Entry 134-22 (redacted copy of the settlement agreement).
Although the settlement agreement is not dated, the parties agree that it was signed on September 23, 2009. Defs. R. 56.1 ¶ 70; Pls. Resp. R. 56.1 ¶ 70. While some of the disputed tax losses had been incurred by that date, the restructuring agreement that allocated all responsibility for the LLC's losses to Siemens was not executed until September 21, 2010. Defs. R. 56.1 ¶ 114. Moreover, Siemens did not file amended tax returns claiming the LLC's losses for itself until July of 2011. Baskinger Decl. ¶ 44, Docket Entry 190.
The relevant clause of the settlement agreement said by defendants to bar plaintiffs' claims based on Siemens' reallocation of tax losses provides that
Settlement Agreement 111 (emphasis added). By its plain language, then, the agreement is confined to claims based on matters that had already occurred when the Agreement was executed. At the time the settlement agreement was signed, the Restructuring Agreement had not yet been executed and the amended tax returns had not yet been filed. I therefore conclude that the settlement agreement does not bar plaintiffs from asserting claims based upon the disputed allocation of the LLC's tax losses.
Defendants argue in the alternative that plaintiffs' tax loss claims should be dismissed because the reallocation of the tax losses was proper under the Restructuring Agreement, and would have been consistent with, if not required by, the Internal Revenue Code regardless of whether the Restructuring Agreement had been executed. See Defs. Mem. 18-19. Defendants further assert that plaintiffs may not challenge the reallocation of the LLC's losses because they suffered no resulting injury. Id. at 21-23. Plaintiffs argue in response that the reallocation of tax losses was improper, required their consent which was neither sought nor obtained, and deprived them of a valuable asset. Pls. Mem. 13-16, Docket Entry 150.
Plaintiffs' claim that it was improper for Siemens and Schlesinger to enter into a Restructuring Agreement that reallocated the LLC's losses to Siemens. Plaintiffs' contention is completely without merit.
First, it is clear that responsibility for LLC's losses is attributed to Siemens under the Restructuring Agreement. Section 1.01(a) of the agreement is captioned "Elimination of SEC's Liability for Losses of the Company," and provides that
Restructuring Agreement, Peluso Ex. 42, Docket Entry 135-7. The agreement goes on to state explicitly in Section 1.01(c) that the allocation of tax losses made in the original operating agreement "shall be adjusted" to provide that Siemens "shall be entitled to all deductions for losses incurred" by the LLC. Id. Thus, the Restructuring Agreement indisputably entitled Siemens to file tax returns claiming the losses of the LLC.
Plaintiffs challenge the validity of the Restructuring Agreement, arguing that it could not properly have been entered into without First Keystone's consent. It is undisputed, however, that plaintiffs were not members of the LLC and had no direct rights with respect to agreements made by those who were. It is thus unclear on what basis plaintiffs contend that FKC had any right to object to the execution of the Restructuring Agreement except, perhaps, as a third party beneficiary of the LLC's Operating Agreement. Plaintiffs, though, have explicitly acknowledged that FKC was not a third party beneficiary. Pls. Mem. 25 n. 28, Docket Entry 150. Instead, they argue that the allocation of losses in Restructuring Agreement was
Even if plaintiffs had asserted that FKC had rights as a third party beneficiary, though, the claim would fail. In support of their position that FKC had a right to object to the Restructuring Agreement, plaintiffs emphasize that First Keystone contributed start-up capital to the LLC (albeit indirectly by contributing capital to SFD) and that First Keystone was entitled to share in Schlesinger's LLC profits (again, indirectly through its interest in SFD). Pls. Mem. 2, 4-6, Docket Entry 150. However, "[t]o succeed on a third-party beneficiary theory under New York law, a non-party must be the intended beneficiary of the contract, not the incidental beneficiary to whom no duty is owed." Noveck v. PV Holdings Corp., 742 F.Supp.2d 284, 295 (E.D.N.Y.2010) (citing Madeira v. Affordable Hons. Found., Inc., 469 F.3d 219, 252 (2d Cir.2006)). The burden of demonstrating that a non-contracting party was intended to be a third party beneficiary lies with the party asserting third party beneficiary status. See, e.g., Westport Marina v. Boulay, 783 F.Supp.2d 344, 350 (E.D.N.Y.2010) (citing Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, 786, 811 N.Y.S.2d 294, 844 N.E .2d 748 (2006)). In this case, not only have plaintiffs not offered any evidence that FKC was the intended beneficiary of the Operating Agreement, but the agreement itself specifically disavows such an intention. The LLC's Operating Agreement includes a section captioned "No Third Party Beneficiaries" that provides, with exceptions not relevant here, that "the parties do not intend to confer any benefit under this Agreement on anyone other than the parties, and nothing contained in this Agreement will be deemed to confer any such benefit on any other person." OA § 18.4, Docket Entry 133-13. Such clauses are dispositive evidence of the intent of Schlesinger and Siemens, the LLC's members. See India.com, Inc. v. Dalai, 412 F.3d 315, 321 (2d Cir.2005) (noting that "where a provision exists in an agreement expressly negating an intent to permit enforcement by third parties, . . . that provision is decisive" (internal citation omitted) and finding that defendant was not a third-party beneficiary, even though other contractual provisions regarding his rights were in tension with the negating clause); see also 4 Hour Wireless v. Smith, 2002 WL 31654963, at *1 (S.D.N.Y.
Even if plaintiffs could successfully attack the validity of the Restructuring Agreement, their challenge to the reallocation of the LLC's tax losses would still fail. This is so because, as is shown below, a review of the applicable Internal Revenue Code provisions, as well as the regulations and case law applying them, demonstrates that Siemens would have been entitled to claim the disputed tax losses even if the Restructuring Agreement had never been adopted.
Although SSE is a limited liability corporation, its profits and losses are properly allocated among its members as if it were a partnership. Pursuant to regulations promulgated under the Internal Revenue Code, "[a] business entity that is not classified as a corporation under" certain provisions of the Code not relevant here "can elect its classification for federal tax purposes. . . . An eligible entity with at least two members can elect to be classified as either an association [that is, a corporation]. . . or a partnership." 26 C.F.R. § 301.7701-3(a); see also Baskinger Decl. ¶ 7 (noting that "a multi-member LLC can elect to be treated as a partnership for income tax purposes"). Baskinger's declaration suggests that this election was made; even if it had not been, a domestic eligible entity with two or more members is automatically treated as a partnership unless the entity elects otherwise. 26 C.F.R. § 301.7701-3(b)(i). In line with the regulations, SSE's tax returns reflect that it is an LLC whose assets and liabilities are to be treated as those of a partnership. Baskinger Decl., Exs. 3-5 (2007 and 2008 amended tax returns, 2009 tax return).
Determining the appropriate distribution of a partnership's tax losses involves an examination of each partner's rights and responsibilities, because "[a] partnership is not subject to Federal income tax. . . . Rather, the partners are liable for tax in their separate and individual capacities. . . . Each partner is [thus] required to take into account his distributive share of the partnership's income, gain, loss, deductions, and credits." Renkemeyer, Campbell & Weaver, LLP v. Comm'r, 136 T.C. 137, 142-3 (2011). The Internal Revenue Code mandates, in essence, that where the terms of a partnership agreement and the economic reality of how losses and profits are in fact distributed among the partners differ significantly, the allocation of profits and losses for tax purposes is governed by the economic reality rather than the terms of the partnership agreement. Specifically, the relevant Code provision states:
I.R.C. § 704(b).
The term "substantial economic effect" in Section 704(b) "is a term of art and is meant to preclude partnerships from using agreements for gain allocation
Courts generally merge the two prongs of the analysis and look to the partners' respective capital accounts to determine their actual interest in the partnership and thus whether the allocations in the partnership agreement reflect financial reality. The U.S. Tax Court has summarized its approach as follows: "if the partnership agreement provides for an allocation that does not have substantial effect, then a partner's distributive share is determined by the partner's interest in the partnership. Determinations of substantial economic effect, as well as determinations of a partner's interest in the partnership, are dependent upon an analysis of the partners' capital accounts." Estate of Ballantyne v. Comm'r, 2002 WL 1359741, at *7 (U.S.Tax Ct. June 24, 2002); see also Ballantyne v. Comm'r, 341 F.3d at 805 n. 3 (noting that "[t]he test of whether an allocation has substantial economic effect has been called a capital account analysis. . . . Under the capital account analysis, the partners must maintain capital accounts, and upon liquidation, distributions must be made according to the positive or negative balances in those capital accounts" (internal citation and quotation marks omitted)).
By 2008, the LLC capital accounts of Schlesinger and Siemens no longer reflected the equal sharing of profits and losses contemplated by the original Operating Agreement, and the allocation under the Operating Agreement therefore ceased to have "substantial economic effect." Janet Baskinger, Siemens' Director of Tax, reports in her declaration that the LLC was originally capitalized with $10,000 in cash, and that Siemens and Schlesinger each contributed another $300,000 during 2006. Baskinger Decl. ¶ 14, Docket Entry 190. By 2008, however, these capital contributions had been depleted. Id. ¶ 23. The LLC reported a loss for the tax year ending September 30, 2008, and all of its capital needs during that year were funded by Siemens. Id. ¶ 24. The same held true
Harris Decl. ¶¶ 16-17.
Plaintiffs have not presented any evidence calling into question defendants' contention that Siemens "made the economic outlays to keep the SSE enterprise afloat." Nor have plaintiffs submitted any expert declarations suggesting that the allocation of losses to Siemens or the filing of amended tax returns by Siemens claiming those losses was in any way improper.
Plaintiffs seem to argue that the terms of the original Operating Agreement, which imposed financial responsibility for half of the LLC's losses on Schlesinger, themselves had a "substantial economic effect" that should be considered when allocating losses for tax purposes. This argument turns the proper analysis on its head. By relying on the responsibilities imposed by the terms of the agreement rather than the true economic facts—that is, by relying on what the agreement says rather than what Siemens and Schlesinger actually did—plaintiffs ignore the Code's aim to look beyond the language of an agreement to whether its terms "actually affect the dollar amount of the partners' shares of the total partnership income or loss." Estate ofCarberry v. Comm'r, 933 F.2d 1124, 1130 (2d Cir.1991) (quoting 26 C.F.R. § 1.704-1(b)(2)) (emphasis added). In any event, the original Operating Agreement explicitly provides that its general provisions calling for the allocation of profits and losses "among the Members equally" are subject to "the adjustments required by the IRC § 704(b) regulations." OA § 5.4(b), Docket Entry 133-13. The terms of the Operating Agreement are therefore not an obstacle to the reallocation of the LLC's losses to Siemens.
Plaintiffs also contend that, despite the fact that Siemens may have covered the expenses and losses of the LLC, certain financial responsibilities were imposed on Schlesinger pursuant to the Operating Agreement that made the reallocation of losses to Siemens—at least in the absence of the Restructuring Agreement—improper. In this regard, plaintiffs invoke 26 C.F.R. § 1.704-1(b)(2)(ii)(c). Pls. Supp. R. 56.1 ¶¶ 75-78; Pls. Mem. 15-16. Section 1.704-1(b)(2)(ii)(c) states as follows:
Plaintiffs contend that Section 8.2(e) of the LLC's Operating Agreement imposes an "unconditional obligation" within the scope of Section 1.704-1(b)(2)(ii)(c)(2). Pls. Mem. 17-19. Section 8.2(e) of the Operating Agreement provides that "unanticipated cost overruns" within a member's scope of work will be paid by that member. OA § 8.2(e). Responsibility for an "unanticipated cost overrun," though, is not an "unconditional obligation;" it arises only under the condition that cost overruns occur. Moreover, the regulation by its terms applies only to obligations that must be satisfied no later than the end of the tax year in which a partner's interest is liquidated. There is no indication in the Operating Agreement of any time by which unanticipated cost overruns must be paid. Indeed, Section 5.3(c) of the Operating Agreement, captioned "No Liability for Negative Capital Account," provides that "No Member shall be liable, either before or upon distribution or other termination of the Company, to the Company for its negative Capital Account Balance, if any." OA. Accordingly, the terms of the Operating Agreement, even when considered in light of 26 C.F.R. § 1.704-1(b)(2)(ii)(c)(2), did not impose financial responsibilities on Schlesinger that had a substantial economic effect inconsistent with the reallocation of the LLC's losses to Siemens.
In short, plaintiffs are unable to challenge the validity of the Restructuring Agreement, which plainly allocates responsibility for the LLC's losses to Siemens. Moreover, plaintiffs have failed to identify any evidence raising a material question of fact with respect to the source of the LLC's financing after the original capital contributions made by Siemens and Schlesinger were depleted. Thus, even if the Restructuring Agreement were somehow set aside, the undisputed evidence would establish that Siemens provided all of the LLC's financial support and absorbed all of its losses during the tax years in question. It was therefore proper for the LLC to file amended returns attributing all of its losses to Siemens.
In their first cause of action, plaintiffs allege that defendant Siemens tortiously interfered with the contract between Schlesinger and FKC by "purchasing FKC's "$67,500,000 share of the Tax Losses from Schlesinger." " Am. Compl. ¶ 64. To succeed on a claim for tortious interference with contractual relations, a plaintiff must show: "(a) that a valid contract exists; (b) that a `third party' had knowledge of the contract; (c) that the third party intentionally and improperly procured the breach of the contract; and (d) that the breach resulted in damage to the plaintiff." Albert v. Loksen, 239 F.3d 256, 274 (2d Cir.2001) (quoting Finley v. Giacobbe, 79 F.3d 1285, 1294 (2d Cir. 1996)). "[T]o be actionable, the interference must be intentional and not incidental to some other lawful purpose." Dell's Maraschino Cherries Co., Inc. v. Shoreline Fruit Growers, Inc., 887 F.Supp.2d 459, 482 (E.D.N.Y.2012) (quoting Health-Chem Corp. v. Baker, 915 F.2d 805, 809 (2d Cir.1990)); see also Discover Grp., Inc. v. Lexmark Int'l, Inc., 333 F.Supp.2d 78, 83 (E.D.N.Y.2004) (noting that "[i]n order to state a claim for tortious interference with contract under New York law, plaintiffs must demonstrate ... [inter alia] defendant's intentional procurement of the third-party's breach of the contract without justification" (internal citation omitted) (emphasis added)). Plaintiffs have
In their fourth cause of action, plaintiffs allege that Siemens aided and abetted Schlesinger's breach of its fiduciary duty to FKC by entering into an agreement with Schlesinger to reallocate the tax losses. A claim for breach of fiduciary duty is stated under New York law when a fiduciary duty exists between the plaintiff and another entity, that entity breaches the duty, and the plaintiff sustains damages. See Sheehy v. New Cent. Mortg., 690 F.Supp.2d 51, 62 (E.D.N.Y.2010) (citing Meisel v. Grunberg, 651 F.Supp.2d 98, 114 (S.D.N.Y.2009)). If a breach of fiduciary duty has in fact taken place, a defendant may be held liable for aiding and abetting that breach if it "knowingly induced or participated in the breach, and... [the] plaintiff suffered damage as a result of the breach." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 294 (2d Cir. 2006) (quoting Kaufman v. Cohen, 307 A.D.2d 113, 125, 760 N.Y.S.2d 157 (1st Dep't 2003)). The undisputed evidence here indicates that the tax losses at issue were reallocated to Siemens because Schlesinger lacked the funds to keep the LLC running. Plaintiffs never explain or demonstrate what duty Schlesinger had that it breached when it reached the apparently reasonable agreement that Siemens would take responsibility for funding the LLC's operations, but would thereby acquire the right to claim its losses for tax purposes. Moreover, as discussed below, even if plaintiffs could establish the breach of a fiduciary duty, they could not establish that they suffered any damages as a result of the reallocation of the LLC's losses.
Plaintiffs' sixth cause of action asserts a claim for conversion. Under New York law, conversion is "the exercise of unauthorized dominion over the property of another in interference with a plaintiffs legal title or superior right of possession." Citadel Mgmt. v. Telesis Trust, Inc., 123 F.Supp.2d 133, 147 (S.D.N.Y. 2000) (quoting LoPresti v. Terwilliger, 126 F.3d 34, 41 (2d Cir.1997)). Plaintiffs never held legal title to the tax losses of the LLC. Moreover, because Siemens legitimately acquired the right to claim those losses, plaintiffs did not have a "superior right of possession" to them.
Plaintiffs' seventh cause of action asserts a claim of unjust enrichment. A claim of unjust enrichment under New York law requires a demonstration "1) that the defendant benefitted; 2) at the plaintiffs expense; and 3) that equity and good conscience require restitution." Barbagallo v. Marcum LLP, 820 F.Supp.2d 429, 443 (E.D.N.Y.2011) (quoting Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir.2000)). Here, as explained below, the LLC's tax losses would have had no value to plaintiffs, and their reallocation therefore may not be said to have occurred at "plaintiffs expense." Moreover, because the reallocation of the losses was proper, "equity and good conscience" do not "require restitution." Finally, "the existence of a valid written contract generally precludes proceeding on grounds of unjust enrichment." Id. (internal citation omitted). Here, the rights and obligations at issue are set forth in the SFD Agreement, Peluso Ex. 5, Docket Entry 133-9, as well as the LLC's Operating Agreement and Restructuring Agreement. The existence of these contracts precludes any unjust enrichment claim.
For all these reasons, I respectfully recommend that summary judgment be granted in favor of the defendants on each of plaintiffs' claims related to the LLC's tax losses, or the first, fourth, sixth and seventh causes of action in plaintiffs' amended complaint.
Plaintiffs have brought a number of claims against Manatt, counsel to defendant Siemens. Specifically, in their eighth, ninth, tenth and eleventh causes of action, plaintiffs allege that Manatt aided and abetted the tortious interference with contract, breach of fiduciary duty, and conversion they attribute to Siemens, and were unjustly enriched as a result. See Am. Compl. ¶¶ 71-74. Plaintiffs' primary factual allegations against Manatt involve the firm's role in drafting the Restructuring Agreement with the alleged knowledge that it was assisting Siemens in commandeering FKC's property by reallocating the LLC's tax losses. See id. ¶¶ 46-48, 59-60.
In order "[t]o establish an aiding and abetting claim, a plaintiff must adequately plead `(1) the existence of a violation by the primary wrongdoer; (2) knowledge of this violation on the part of the aider and abettor; and (3) proof that the aider and abettor substantially assisted the primary wrongdoer.'" In re Refco Sec. Litig., 759 F.Supp.2d 301, 333 (S.D.N.Y. 2010) (quoting Chemtex, LLC v. St. Anthony Enters., Inc., 490 F.Supp.2d 536, 546 (S.D.N.Y.2007)) (emphasis added). Because I recommend that summary judgment be entered against plaintiffs on their claims of tortious interference with contract, breach of fiduciary duty, conversion, and unjust enrichment against Siemens, I recommend that plaintiffs' aiding and abetting claims against the law firm be dismissed as well. See id. at 332 (ruling that because plaintiff "failed to plead the primary wrong of conversion ... any claim against the [defendants] for aiding and abetting conversion should be dismissed"); WIT Holding Corp. v. Klein, 282 A.D.2d 527, 529, 724 N.Y.S.2d 66 (2d Dep't 2001) (finding that "[a]s there [was] no cause of action to recover damages for breach of fiduciary duty, the plaintiffs cause of action... for aiding and abetting a breach of a fiduciary duty should also have been dismissed" by the lower court).
Plaintiffs' twelfth and fourteenth causes of action purport to state claims against all defendants for conspiracy and punitive damages, respectively. Am. Compl. ¶¶ 75, 77. As defendants note, however, New York common law does not recognize an independent cause of action for either punitive damages or conspiracy. See Excelsior Capital LLC v. Allen, 2012 WL 4471262, at *7 (S.D.N.Y. Sept. 26, 2012) (observing that "[p]unitive damages
Plaintiffs' thirteenth cause of action asserts a claim against all defendants for intentional infliction of emotional distress. Am. Compl. ¶ 76. A party asserting a claim for intentional infliction of emotional distress must establish: "(i) extreme and outrageous conduct; (ii) intent to cause, or disregard of a substantial probability of causing, severe emotional distress; (iii) a causal connection between the conduct and injury; and (iv) severe emotional distress." Vumbaca v. Terminal One Grp. Ass'n, L.P., 859 F.Supp.2d 343, 377 (E.D.N.Y.2012). The claim "is an extremely disfavored cause of action. To prevail, plaintiff must prove extreme and outrageous conduct that transcends all bounds of decency, and that is regarded by civilized society as atrocious and utterly intolerable." Durant v. A.C.S. State & Local Solns., Inc., 460 F.Supp.2d 492, 499 (S.D.N.Y.2006) (internal citation omitted); see also Elmowitz v. Exec. Towers at Lido, LLC, 571 F.Supp.2d 370, 378 (E.D.N.Y. 2008) (noting that, as of the date of the opinion, not a single intentional infliction of emotional distress claim had survived scrutiny by the New York Court of Appeals); cf. Koulkina v. City of New York, 559 F.Supp.2d 300, 324 (S.D.N.Y.2008) (discussing several cases in which lower New York courts found that the conduct at issue was sufficiently outrageous to sustain a claim for intentional infliction of emotional distress, including one "where, during a live radio broadcast, defendant allegedly handled and made disrespectful comments about the cremated remains of plaintiffs sister" (internal citations omitted)).
It is abundantly clear that, even if plaintiffs' claims could otherwise withstand defendants' motion, the conduct of defendants alleged by plaintiffs would not meet the level of egregiousness contemplated by a claim of intentional infliction of emotional distress. The evidence demonstrates that plaintiffs' claims involve, in essence, a commercial
Moreover, the limitations period applicable to claims for intentional infliction of emotional distress is one year. Cabrera v. Quik Park Columbia Garage Corp., 2000 WL 1897348, at *1 (E.D.N.Y. Dec. 18, 2000) (noting that "[i]t is wellestablished under New York law that a claim of intentional infliction of emotional distress has a one-year statute of limitations") (collecting cases); accord Patterson v. Balsamico, 440 F.3d 104, 112 n. 4 (2d Cir.2006) (noting that "New York courts have held that a claim for damages for intentional infliction of emotional distress is subject to the one-year statute of limitations in C.P.L.R. Section 215(3)" (internal citations omitted)). Plaintiffs' thirteenth cause of action does not specify which of the alleged wrongs perpetrated by defendants form the basis for their intentional infliction of emotional distress claim. However, their claim is, for reasons discussed above, time barred to the extent it is based upon the ouster of Robert Solomon from the LLC board or upon the alleged defamation of Solomon by Krutemeier. To the extent plaintiffs' claim is based on the reallocation of the LLC's tax losses from Schlesinger to Siemens, I have already explained my reasons for concluding that the reallocation was proper. Accordingly, for all these reasons, defendants' motion for summary judgment on plaintiffs' claim for intentional infliction of emotional distress should be granted.
Plaintiffs have also moved to unseal each of the documents submitted in connection with defendants' motions for summary judgment. Docket Entry 180. For the reasons stated below, plaintiffs' motion is denied.
A large number of documents have been filed under seal or with redactions both in support of and opposition to defendants' motion for summary judgment. I have previously examined the scope of defendants' filings made under seal in the case. See Order dated Aug. 31, 2012, at 2 n. 2, Docket Entry 186 (ordering that, "[t]o the extent ... there remains non-confidential information submitted in support of the summary judgment motion that is not publicly available, defendants shall publicly file such documents, redacted where necessary"); Order dated Dec. 19, 2012, at 2, Docket Entry 188 (ordering that defendants resubmit certain documents relevant to the disposition of the summary judgment motion with more limited redactions or provide briefing on why they should not be ordered to do so). Responding to these orders, defendants have publicly filed redacted versions of documents originally submitted under seal and, in some instances, have submitted second versions of previously filed documents with fewer redactions. Docket Entries 187, 189-92.
As a result, the overwhelming majority of documents submitted by defendants that remain completely under seal are tax returns or summaries of the Solomons' taxable income that were provided by plaintiffs in response to defendants' interrogatories. Tax returns are generally afforded special protection from public disclosure. See, e.g., Carmody v. Village of Rockville Ctr., 2007 WL 2042807, at *2 (E.D.N.Y. July 13, 2007) (citing United States v. Bonanno Organized Crime Family of La Cosa Nostra, 119 F.R.D. 625, 627
Similarly, the documents plaintiffs have filed to oppose summary judgment that remain under seal are either tax returns, internal communications regarding the Restructuring Agreement or the tax return amendments (none of which contradict the expert declarations publicly filed), or wholly irrelevant to the disposition of the summary judgment motion. As with the documents submitted by defendants, I have previously had occasion to examine the filing of multiple documents subject to a stipulation of confidentiality by plaintiffs. See Order dated Aug. 31, 2012, Docket Entry 186. As I noted at that time, consideration of whether the seal in this case should be lifted is complicated by the fact that "plaintiffs have employed litigation tactics in this and a related case before this Court that have already been found not to have been entirely proper." Id. at 3 (citing related case First Keystone Consultants, Inc. v. Schlesinger Elec. Contractors, Inc., 862 F.Supp.2d 170, 195 (E.D.N.Y.2012)). The concern I expressed then is heightened now that I have reviewed the parties' motions, and it has become clear that many of the documents filed by plaintiffs with the Court have no apparent relevance to the arguments made by the parties in connection with the pending motions. For example, plaintiffs have filed information about SSE's implemented or planned construction projects. These documents arguably illustrate how the LLC came to be losing money, or the roles Schlesinger and Solomon were expected to play in SSE's work. As this Report makes clear, however, these details have no bearing on the current economic reality of the LLC and resulting tax loss reallocations or any other issue raised by the pending motions. I am thus left with serious concerns about plaintiffs' motive for filing large numbers of apparently irrelevant confidential documents with the Court.
Plaintiffs' most compelling argument for unsealing these documents is the Second Circuit's holding in Lugosch v. Pyramid Company of Onondaga, 435 F.3d 110 (2d Cir.2006). The Court there stated that "documents submitted to a court in support of or in opposition to a motion for summary judgment are judicial documents to which a presumption of immediate public access attaches." Id. at 126. Nevertheless, I do not read the Second Circuit's opinion in Lugosch, which was written in response to long-pending requests of media outlets for documents of potential public importance, as an invitation to litigants to file an adversary's irrelevant confidential documents as a way of avoiding a confidentiality stipulation into which they entered. The documents in this case all appear to have been produced pursuant to such a stipulation, Docket Entry 49-1, and plaintiffs should not lightly be freed of the commitments they made when the stipulation was entered. This is particularly so when plaintiffs have previously transgressed the bounds of that stipulation by attempting to use documents produced in this case under a stipulation of confidentiality in another litigation. See First Keystone Consultants, Inc. v. Schlesinger Elec. Contractors, Inc., No. 10-CV-696, Docket Entry 164, at 5-8, 2013 WL 950573 (E.D.N.Y. Mar. 12, 2013) (Matsumoto, J.).
Even if the presumption described in Lugosch applied with full force under these facts, this Court would still be required to balance "the role of the material at issue in the exercise of Article III judicial power and the resultant value of such information to those monitoring the federal courts." 435 F.3d at 119 (quoting United States v. Amodeo ("Amodeo II"), 71 F.3d 1044,
For the reasons stated above, plaintiffs' motion to unseal is denied. Moreover, I respectfully recommend that defendants' motions for summary judgment be granted in their entirety and that all claims against the defendants be dismissed, and that plaintiffs' cross-motion for summary judgment be denied.
Any objections to the recommendations made in this Report must be made within fourteen days after service of the Report and, in any event, no later than July 8, 2013. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. Proc. 72(b)(2). Failure to file timely objections may waive the right to appeal the District Court's order. See Small v. Sec'y of Health & Human Servs., 892 F.2d 15, 16 (2d Cir.1989) (discussing waiver under the former ten-day limit).
Signed June 21, 2013.
Many of the documents in this case have been filed both under seal in their entirety and publicly with redactions. The docket entry numbers cited in this Report are those of the redacted versions. In addition, defendants resubmitted their Rule 56.1 statement and certain supporting affidavits with previously redacted material disclosed on December 28, 2012, pursuant to an Order issued December 19, 2012. Docket Entries 188-190. This Order and the redaction of documents in this case will be further discussed below in connection with plaintiffs' motion to unseal.
As further discussed below, SSE's 2007 and 2008 tax returns were amended in 2011, and plaintiffs dispute the propriety of these amendments. See Pls. Supp. R. 56.1 ¶¶ 76-78; Defs. Resp. Supp. R. 56.1 ¶¶ 76-78; see also Baskinger Decl. 111134, 39-40. The amendments do not relate to the amount of the company's overall losses.
The Amended Complaint also includes allegations against Frank Krutemeier, a citizen of Germany, who has not appeared in this case. When plaintiffs sought to remand the case to state court in 2011, Krutemeier filed a declaration stating that he had not been personally served and that he resided in Georgia from 2004 to 2010 and thereafter in Germany. See Krutemeier Decl. in Opposition to Motion for Remand, Docket Entry 10. FKC's counsel has certified that he served the amended complaint, discussed further in the text below, on Krutemeier in 2011, but that he did so by sending it to a Siemens address in Georgia. Docket Entry 45-1. In any event, plaintiffs have not sought entry of Krutemeier's default.
