LEWIS A. KAPLAN, District Judge.
This case arises out of the forced break up of the Yukos Group ("Yukos Oil"), which at one point was among the largest and wealthiest privately held corporate groups in the Russian Federation and that nation's largest exporter of crude oil. The matter is before the Court on the motion of defendant Daniel Feldman for summary judgment dismissing the amended complaint.
This case's full back story is long, complicated, and in some respects much disputed.
In 2006, Yukos Oil was forced into bankruptcy due to various taxes, fees, and penalties imposed by the Russian government — penalties which, in the view of Yukos Oil, were wrongful. A receiver was appointed for the assets of Yukos Oil. He sold many of these to a Russian company, OOO Promnefstroy ("Promnefstroy"),
The plaintiffs in this case are direct or indirect subsidiaries of Finance and CIS as well as two foundations and a trust established to protect assets of one or more of the corporate plaintiffs. They here sue Daniel Feldman who, from approximately 2007 to 2014, was a director of several of the plaintiff entities and previously had been employed by the now-defunct Yukos Oil. Plaintiffs claim that Feldman breached his fiduciary duties to them by, inter alia, misappropriating monies for personal gain and disclosing confidential information to plaintiffs' adversary, Promnefstroy.
The amended complaint details a series of alleged schemes whereby Feldman — in many cases while he occupied positions of trust as an officer or director of plaintiffs and in some instances after he ceased serving in those positions — is said to have breached his fiduciary and other duties to the plaintiffs by conveying plaintiffs' confidential information to its adversary Promnefstroy, helping or attempting to help himself to money and other property of the plaintiffs by a variety of means, diverting or attempting to divert corporate opportunities of the plaintiffs for his own benefit, overbilling for travel expense reimbursement, and other means.
One thread running through much of Feldman's position on this motion is that most if not all of the alleged inappropriate behavior resulted in no demonstrable damage to the plaintiffs.
Plaintiffs for the most part do not seek to recover damages proximately caused by the alleged misconduct. They instead rest principally on the faithless servant doctrine, which holds that an agent who betrays the agent's principal typically is entitled to no compensation, at least for the period of the agent's disloyalty. Thus, apart from seeking to recover alleged overcharges for travel expense reimbursement, the monetary relief they desire is principally disgorgement of Feldman's compensation for the relevant period.
Feldman argues that plaintiffs' failure to adduce evidence of "damages . . . allegedly suffered as a result of [his] conduct" "is fatal to [many of] Plaintiff's [sic] claims."
The law on this point is well settled. As the Second Circuit has written:
Accordingly, any failure by plaintiffs to adduce competent evidence of damages caused by the breaches of duty complained of would be entirely immaterial to their attempt to obtain disgorgement of compensation paid to Feldman during any periods in which he was in breach.
The amended complaint alleges that Feldman in 2008-09 was charged with acting as liaison on behalf the Yukos Group (a term that includes subsidiaries of Finance
Feldman argues that this claim should be dismissed because (1) there is no evidence that Feldman actually conveyed any confidential information and, in any case, (2) any claims for breach of contract or breach of fiduciary duty are time barred.
The first of these contentions is rejected on the basis of the faithless servant doctrine.
The second contention fails as well. The determination of the prescriptive period applicable in New York to claims of breach of fiduciary duty and of the time at which such a claim accrues can be complex undertakings, undertakings that none of the parties has even approached.
By the time this action was commenced on June 25, 2015, Feldman had left or been ousted from all of his positions with the plaintiffs and their affiliates.
Promnefstroy now seeks summary judgment dismissing plaintiffs' claims with respect to these events, essentially on the theory that Bailey & Glasser "did not even have time to review the materials it had collected from Feldman before turning them over to Feldman's new counsel" and, in any case, did not provide documents concerning Yukos to Promnefstroy.
In view of the fact that these events all post-dated the end of Feldman's employment by the plaintiffs, the legal position here is somewhat different. There is no evidence of the payment of any compensation to Feldman post-employment so the faithless servant doctrine has no bearing. Plaintiffs, in order to recover, therefore bear the burden of proving injury caused by a breach of duty. Moreover, as these are issues on which plaintiffs would bear the burden of proof at trial, plaintiffs must adduce admissible evidence sufficient to raise a genuine issue of fact for trial in order to withstand summary judgment.
The circumstances here persuade the Court that plaintiffs have raised a genuine issue of material fact. Plaintiffs and Promnefstroy long have been engaged in a struggle over control of former overseas (i.e., non-Russian) assets of Yukos Oil. They have been at sword's point. Upon Feldman's being terminated and sued by plaintiffs, Promnefstroy came to his rescue by agreeing to pay for his legal defense in exchange for information and, indeed, by designating its own lawyers, Bailey & Glasser, to represent Feldman. The legal defense obviously was something of value to Feldman, giving rise to the inference that Feldman delivered, or promised to deliver, something of value to Promnefstroy in return. The evidence, given Feldman's history as an insider with the plaintiffs, permits the inference that the value that Feldman had to transfer to Promnefstroy was inside information of the plaintiffs. Thus, it is reasonable to infer that transmission of whatever he knew and any interesting documents he possessed was at least part of the consideration for Promnefstroy's agreement to provide him with a defense. Promnefstroy's designation of Bailey & Glasser as Feldman's counsel makes that inference even more persuasive than otherwise would have been so. And while a trier of fact might credit the denials of Bailey & Glasser and Promnefstroy, it would not be obliged to do so. Accordingly, summary judgment with respect to this claim will be denied.
Feldman mounts a series of often fact-specific attacks on the other schemes plaintiffs allege. Some fail for reasons to which the Court already has alluded. But there is another problem with at least some of those attacks, and it is illustrated by Feldman's position with respect to what plaintiffs call the Bonus Scheme.
The starting point for the plaintiffs' so-called bonus scheme allegations are the facts that one of the foundation plaintiffs is the sole shareholder of YHIL and Feldman was one of YHIL's directors from 2006 until September 2012.
Feldman, in breach of his obligations to the foundations, allegedly disclosed the foundations' action with respect to English and the substance of the GML letter concerning bonuses to fellow YHIL directors including Martin Parr, as well as others (together, the "Non Foundation Group"), and promoted the idea that the Non Foundation Group, like English, might well be treated unfairly by the Foundations. Accordingly, he proposed to the Non Foundation Group that it set up a bonus pool for itself. Among other things, he retained New York counsel and, through the New York lawyers and on an anonymous basis, British Virgin Islands ("BVI") counsel to advise with respect to the possible establishment of a trust into which the Non Foundation Group could divert $50 to $75 million from YHIL and its subsidiaries without the foundations' knowledge or approval and then cause the trust to distribute money to themselves. He initially paid over $30,000 in legal fees out of his own pocket.
In the end, some of those whom Feldman approached declined to go along with the scheme, which therefore failed. Feldman then billed and obtained reimbursement from YHIL for the legal fees, allegedly under false pretenses.
Feldman now seeks dismissal of the claim relating to these events essentially on three grounds. First, no bonuses of the sort that Feldman proposed ever were paid and the proposed trust never was created. Second, the retention of the law firms Feldman hired for the purpose of obtaining advice concerning the use of a trust was approved by the entire YHIL board.
As an initial matter, the arguments ignore the fact that plaintiffs' claim rests principally on the faithless servant doctrine. The facts that the trust ultimately was not created and that the proposed bonuses were not paid are entirely beside the point given that Feldman's activities were undertaken for the purpose of diverting funds from YHIL for the personal benefit of Feldman and the Non Foundation Group. If plaintiffs prove their case, they may prove entitled to recover whatever compensation was paid to Feldman during the period of his disloyalty.
Second, Feldman's attempt to invoke the alleged approvals by the YHIL directors — in substance, an invocation of the business judgment rule — is wide of the mark. It is true of course that the management of corporations is entrusted to their boards of directors and that directors enjoy both broad discretion in the management of the businesses and material protection against liability for the proper exercise of their responsibilities. But the business judgment rule is not entirely without limits. Directors owe their corporations duties of due care and, pivotal for present purposes, loyalty. "[T]he business judgment doctrine is misapplied when it is extended to provide protection to corporate board members where there is an abundance of evidence strongly suggesting breach of fiduciary duty," including self dealing.
Here, the amended complaint alleges in substance that Feldman and the Non Foundation Group were engaged in collusive action for the purpose of diverting YHIL assets to their personal benefit and, moreover, to do so without the knowledge of YHIL's sole shareholder, one of the foundations. Their self interest, assuming the truth of the allegations of the complaint, is patent. Certainly the amended complaint does not allege facts, and Feldman has offered no evidence, that would demonstrate that the scheme was fair to YHIL and would have served the best interests of that company and its shareholder. Nor has Feldman demonstrated that his actions were approved by a disinterested majority of the YHIL board. And the fact that some of the group ultimately backed away, resulting in the abandonment of the scheme, does not save Feldman from potential liability, at least at the summary judgment stage.
Feldman's motion with respect to this aspect of the amended complaint is an example of his setting up of a straw man by mischaracterizing plaintiffs' claim and they attempting to tear it down.
Yukos International U.K. B.V. ("UKBV"), a subsidiary of the foundations, owned about 15 percent of the shares of Intelligent Energy ("IE"). Feldman served as the foundations' representative on the IE board. And Feldman characterizes plaintiffs' claim with respect to IE as being merely that Feldman disclosed confidential information concerning IE to potential purchaser.
In the briefest scope, plaintiffs assert that they had decided to sell UKBV's IE shares and retained an investment firm named Turquoise Associates to find potential buyers. Unbeknownst to plaintiffs, Feldman made a side deal with Turquoise pursuant to which Turquoise in certain circumstances would split with him a success fee it stood to earn in the event of a favorable sale. As time went by, Feldman, rather than simply seeking to find a buyer for the IE share block, secretly attempted to put together a special purpose vehicle and raise money from investors to enable him to buy UKBV's interest in IE. Eventually he disclosed his plan to plaintiffs and suggested that his proposed special purpose vehicle would pay them £0.80 per IE share. But he did not reveal that IE just the day before had set a value on its shares of £1.00 per share — 25 percent more than the price Feldman offered.
In the final analysis, Feldman's machinations came to plaintiffs' attention and Feldman was removed from the IE board, so plaintiffs arguably did not suffer economic damage as a proximate consequence of Feldman's alleged breaches of fiduciary duty. Nevertheless, Feldman in this instance too fails to come to grips with the plaintiffs' faithless servant theory of recovery and thus is not entitled to summary judgment on this series of events either. Moreover, as the foregoing demonstrates, the true nature of plaintiffs' claim bears only faint resemblance to Feldman's inaccurate and incomplete characterization.
Feldman served for a period as the trustee of plaintiff 2004 Security Trust, which was created under a trust agreement dated March 13, 2004 (the "Security Trust").
Feldman challenges the first of these claims, essentially on the ground that David Godfrey, the protector of the trust, had access to books and records that would have revealed the actual compensation of the preceding trustee and therefore either knew or should have known that the compensation that Feldman received exceeded that which had been agreed upon. He points to the facts that Godfrey apparently knew the amount of Feldman's compensation and that Feldman's successor knowingly was paid just what Feldman had taken. He describes this claim as "highly dubious,"
The same is true with respect to the second of these claims. It is undisputed that Feldman used $500,000 of trust money to purchase in his own name an interest in a private equity fund. Feldman seeks to defend this by asserting that he disclosed the investment to Godfrey at the outset, that the investment ultimately was turned over to the Security Trust, and that the Security Trust eventually made a good deal of money on it. But Godfrey denies that Feldman disclosed the investment contemporaneously, let alone that it was made in Feldman's name rather than the Security Trust's.
Plaintiffs claim that Feldman breached his fiduciary duties to YHIL in connection with transfers and/or improper concealment of transfers of YHIL funds to Cleanthis Georgiadis: (1) $99,000 for use in a Georgiadis political campaign in Cyprus, and (2) $1 million to secure payment of funds to which Georgiadis might have become entitled pursuant to an indemnity agreement between Georgiadis and YHIL, $400,000 of which was not returned.
Feldman first claims that the $99,000 payment was not a campaign contribution, but a compensation advance to Georgiadis of a sort allegedly common between YHIL and its directors and approved by the YHIL board. He relies principally on a declaration of Sergei Ketcha. As the evidence cited in plaintiffs' Rule 56.1 statement demonstrates, however, there is a genuine issue of material fact with respect to this claim.
As for the $1 million indemnity fund, Feldman argues that the indemnity was proper, that the transfer of money to Georgiadis was approved by the YHIL board, and that he had nothing to do with whatever happened in this regard. In fact, however, Feldman has produced no evidence that the $1 million transfer was approved by the board,
Plaintiffs claim that YHIL mistakenly overpaid Feldman for the year 2011 to the extent of approximately $110,000 and that his retention of the allegedly excess payment breached fiduciary and contractual duties. Feldman acknowledges the receipt of the funds in question but asserts that the amounts received were entirely correct. The record shows the following.
The amended complaint alleges, and Feldman admits, that the YHIL board on May 27, 2010, fixed Feldman's compensation for serving as a YHIL director for the period June 20, 2010 through June 19, 2011 at $240,000.
On January 17, 2011, the YHIL board increased Feldman's compensation for the year 2011 to $500,000.
Feldman's unsworn memorandum claims that the $110,465.75 actually reflected a raise — that his compensation for 2011 was increased to $610,465.75 by the January 17, 2011 board resolution. Perhaps. But there is no evidence to support the notion that the YHIL board in January 2011 increased Feldman's 2011 compensation not merely to the $500,000 that appears in its resolution (and for that matter in Feldman's director's agreement) but to a substantially higher figure. And there is a perfectly sensible alternative explanation — that the board increased Feldman's compensation for 2011 from $240,000 to $500,000 and that it, and quite possibly Feldman, simply overlooked the fact that Feldman already had been paid $110,465.75 in respect to 2011 and so the monthly payments for 2011 should have been reduced to account for that earlier payment.
Of course, it is not for this Court to resolve this matter on a motion for summary judgment. Suffice it to say that a trier of fact reasonably could conclude that the director's agreement imperfectly reflected the parties' agreement in consequence either of mutual mistake or of unilateral mistake by YHIL of which Feldman was aware but which he fraudulently or inequitably failed to call to YHIL's attention in breach of his fiduciary duty as a YHIL director.
The amended complaint alleges that Feldman submitted claims, and obtained reimbursement, for over $1 million in business trip airfare and other purported business expenses.
Feldman's statute of limitations argument is entirely without merit for reasons discussed above.
Feldman conceded during discovery that he submitted in support of at least some of his airfare reimbursement claims screen shots for business class fare quotes he generated during the booking process but then actually flew in other fare classes at considerably lower costs and that he made money in these instances.
Feldman contends that the amended complaint does not particularize any claim for which either Yukos Capital or Luxtona could obtain any relief. He argues that the case, insofar as it is brought on behalf of these plaintiffs, should be dismissed. Plaintiffs have not responded to the this contention in any respect.
Accordingly, Feldman is entitled to summary judgment dismissing the claims of these two plaintiffs.
For the foregoing reasons, Feldman's motion for summary judgment dismissing the amended complaint [DI 199] is granted to the extent that the action, insofar as it is brought on behalf of plaintiffs Yukos Capital S.A.R.L. and Luxtona Limited, is dismissed. The motion is denied in all other respects.
This case is set for trial June 6, 2017 at 9:30 a.m.
SO ORDERED.
We have disposed above of his further contention that plaintiffs have failed to prove any damages.
Plaintiffs concede that Feldman some years later owned up to what he had done. They assert, however, that his disclosure was motivated by the facts that he faced personal tax liability for income on the investment, asked the hedge fund to change the Form K-1 to indicate that the gain was taxable to the Security Trust, and was met with a demand by the hedge fund to provide the passport and proof of residence of the trust protector, Godfrey. In other words, plaintiffs contend that Feldman admitted what he had done when he eventually was faced with a Hobson's choice of paying substantial tax personally or making the admission in order to shift the tax to the Security Trust.
It is not clear whether the director's agreement was approved by the YHIL board. Mr. Parr, then a YHIL director, testified that it was not. Parr Dep. [DI 209-8] at 228:23-229:14.
