Kagan v. HMC-New York, Inc.

94 A.D.3d 67, 939 N.Y.S.2d 384
CourtAppellate Division of the Supreme Court of the State of New York
DecidedFebruary 28, 2012
StatusPublished
Cited by5 cases

This text of 94 A.D.3d 67 (Kagan v. HMC-New York, Inc.) is published on Counsel Stack Legal Research, covering Appellate Division of the Supreme Court of the State of New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Kagan v. HMC-New York, Inc., 94 A.D.3d 67, 939 N.Y.S.2d 384 (N.Y. Ct. App. 2012).

Opinions

[69]*69OPINION OF THE COURT

Catterson, J.

In this action, we are asked to determine, inter alia, whether the plaintiffs claims for breach of contract can stand against defendant managers whose potential liability is circumscribed by the language of the contract, and whether his claims for breach of fiduciary duty should be reinstated under Delaware law. The plaintiff, Howard Kagan, seeks to recover amounts allegedly owed in connection with his work for an investment firm, HMC-NY, and his equity holding and membership interest in Harbinger Capital Partners GFJ LLC (hereinafter referred to as the Onshore Manager) and Harbinger Capital Partners Offshore Manager, LLC (hereinafter referred to as the Offshore Manager) (collectively hereinafter referred to as the Manager Entities or Company). He alleges that defendants, HMC Investors, LLC, HMC-New York, Inc., and Harbinger Holdings, LLC, as managers of the Manager Entities, violated the controlling agreements of both entities which are governed by Delaware Law.

Specifically, he alleges breach of sections 4.5 (d) and 8.7 of both agreements in that the defendant managers failed to properly calculate the amounts due to him in respect of 2007 withheld amounts, and to pay him such amounts within 30 days after his termination without cause, and that they failed to pay him his prorated share of the Manager Entities’ performance compensation for 2008 by no later than March 31, 2009. Additionally, in respect of his equity holding and membership interest in the Offshore Manager, he alleges breach of section 4.6 of the Offshore agreement by defendants HMC Investors (and/or Harbinger Holdings) for making certain unauthorized deferrals of amounts owed to Offshore Manager.

The plaintiff also alleges breach of the implied covenant of good faith and fair dealing in that the defendant managers, inter alia, willfully refused to pay amounts that they allegedly acknowledged are due and owing to him under the terms of the agreements. Lastly, he alleges a breach of fiduciary duty.

As a threshold matter, it is undisputed that the managers, HMC-NY, HMC Investors, and Harbinger Holdings, are not contractually obligated to the plaintiff with respect to the provisions allegedly breached. In each instance, the provisions specify that the obligation rests with the Company, that is, the Manager Entity. However, the plaintiff asserts that, nevertheless, the defendants are not entitled to dismissal of the breach of contract [70]*70claims. Instead, relying on Kuroda v SPJS Holdings, L.L.C. (971 A2d 872 [Del Ch Ct 2009]), the plaintiff argues that the “defendants have the authority to control the Manager Entities, and the [a]greements do not explicitly exempt them from liability under the circumstances alleged here.”

We disagree. Whatever the extent of their authority and control, the defendants as managers are exempt from liability under the “circumstances alleged here,” which are the factual allegations underlying the first and second causes of action in breach of contract.

Section 7.10 (“Limitation of Liability”) of the agreements provides, inter alia:

“No Manager or Officer shall have any liability to the Company [the Manager Entities] or any Member or Holder for any loss suffered by the Company or any Member or Holder that arises out of any act or omission by the Manager or Officer, if such Manager or Officer performs its duty in compliance with the standard set forth in the immediately preceding sentence [to act in good faith, as set forth in § 7.9], except loss or damage resulting from intentional misconduct, knowing violation of law, gross negligence or a transaction from which the Manager or Officer received a personal benefit in violation or breach of the provisions of this Agreement” (emphasis added).

Section 7.9 of the agreements sets forth the “[d]uties of [m]anagers,” requiring that they “act in good faith and in the best interest of the Company [the Manager Entities] and with such care as an ordinarily prudent person in a like position would use under similar circumstances.”

Kuroda involved a similar type of action by an employee of an investment firm. One of the provisions of the operating agreement purporting to limit liability stated that managers/members will not be held liable for “mistakes, action or inaction [unless they] arise out of . . . gross negligence, willful misconduct or bad faith.” (Kuroda, 971 A2d at 882.)

The Kuroda court simply found that the defendant managing members “have not argued that they are exculpated from liability under the terms of this section.” (Kuroda, 971 A2d at 882.) This case presents the opposite scenario; the defendant managers argue strenuously that they are exempt from liability under the terms of the limitation of liability provisions of both operating agreements.

[71]*71The language of the agreements’ exculpatory clauses in both Kuroda and this case reflects that, as a matter of public policy and “longstanding general common-law principles” an LLC operating agreement may not limit liability for tortious conduct. (TIC Holdings v HR Software Acquisitions Group, 301 AD2d 414, 415 [1st Dept 2003]; see also e.g. Limited Liability Company Law § 417 [a] [1].) But, there is no tortious conduct alleged in this case.

Instead, the defendant managers correctly assert that the plaintiffs allegations in the first and second causes of action are for breach of certain specific contractual provisions dealing with the deferral, withholding and calculation of the plaintiffs payments, and the obligation to make those payments within 30 days of termination. The plaintiffs allegations of a breach of the implied covenant of good faith and fair dealing arise from the same contractual provisions. The plaintiff’s allegation is that, based on those contractual provisions, certain of the defendants allegedly acknowledged that they owe the plaintiff a part of the monies he seeks. Therefore, he claims there exists an implied obligation to pay at least that amount by a certain date as well as an implied obligation to ensure a sufficiency of funds to make the payments.

The plaintiff does not allege any breach by the defendants of their duty to “act in good faith and in the best interest of the [c]ompany” pursuant to section 7.9. Absent such an allegation, the defendant managers’ liability is limited only to specific tortious acts — intentional misconduct, a knowing violation of the law, gross negligence and self-dealing; none of which the plaintiff alleges against them.

As much as we are obligated to accept all allegations as true on a CPLR 3211 motion to dismiss (Salles v Chase Manhattan Bank, 300 AD2d 226, 228 [1st Dept 2002]), in this case the plaintiff simply does not make any allegations at all that fall within the exclusions of the liability limitation provision. As the defendants correctly assert, under Delaware law, a breach of contract claim is not an allegation of intentional misconduct, knowing violation of law, gross negligence or self-dealing. (See Nolu Plastics, Inc. v Ledingham,

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Cite This Page — Counsel Stack

Bluebook (online)
94 A.D.3d 67, 939 N.Y.S.2d 384, Counsel Stack Legal Research, https://law.counselstack.com/opinion/kagan-v-hmc-new-york-inc-nyappdiv-2012.