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Breach of Fiduciary Duty, Fraud and the Broken Friendship

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  • Posted on: Jul 15 2019

Working with friends can be both rewarding and challenging. The comfort that brings friends together often is replaced by the stress and rigors of running a business. Because friends have a history together, professional disagreements often become heated, especially when there are pent up issues or grudges that one holds about the other. Similarly, the character traits that created the friendship are often replaced by a professional (and, some would say, ugly) demeanor that was not seen until the partnership was formed. For this reason, many partnerships formed in friendship find that the relationship among the founders is too toxic for the partnership to continue as originally formed, if at all. Such was the case in Delibasic v. Manojlovic, 2019 N.Y. Slip Op. 05613 (3d Dept. July 11, 2019) (here).

Delibasic involved a dispute among friends who became business partners in connection with four (4) parcels of real estate located in Lake Placid, New York. The parties formed an oral partnership for the purpose of acquiring and improving real property and operating a vacation rental business through VRBO, Air B N B and the like. The plan was for the Delibasics to provide the initial money and for the Manojlovics to provide the knowledge and know-how and to later invest their funds.

According to plaintiffs, defendants mismanaged the rental properties, misrepresented the amount of money they contributed to the partnership and tried to steal one of the properties. Plaintiffs commenced the action alleging, inter alia, claims for breach of fiduciary duty and fraud. Following joinder of issue, plaintiffs moved for summary judgment on their claims for breach of fiduciary duty and fraud. In March 2018, the motion court denied the motion. Plaintiffs appealed.


[Ed. Note: the background discussion is taken from an earlier decision by the motion court (here), the facts of which, the motion court incorporated into its summary judgment decision.]

Plaintiffs Samir Delibasic and Snjezana Delibasic (“plaintiffs” or “Delibasic”) are married and reside in Mississauga, Ontario, Canada. Defendants Neven Manojlovic and Edvina Uzunovic (“defendants”) are married and reside in Stamford, Connecticut. In early 2010 – after plaintiffs visited defendants’ vacation home in Lake Placid – the parties decided to go into business together for the purpose of owning and renting properties in the Lake Placid area. An oral partnership was then formed whereby each of the four partners was to receive a 25% ownership interest in the business. The partners were to contribute equal amounts to the business and share equally in all profits and losses.

In May 2010, the partnership purchased certain unimproved property on Planty Way in Lake Placid. The property was later subdivided into two separate parcels – 8 Planty Way and 10 Planty Way, respectively – and a log home was built on each. In August 2010, the partnership purchased vacant property on Cascade Road in Lake Placid. The property – located adjacent to Planty Way – enabled the parties and renters to access the Planty Way properties without crossing an easement over neighboring property. The deeds to both the Planty Way and Cascade Road properties were placed in all four of the partners’ names. Later, in December 2011, the partnership purchased certain unimproved property on Seneca Trail in Lake Placid. In March 2012, the partnership created Srajevo Place LLC (the “LLC”) with the assistance of a law firm in Lake Placid. The firm also assisted the partnership in transferring both Planty Way properties to the LLC, with the Cascade Road and Seneca Trail properties remaining as partnership assets.

At the commencement of the partnership, plaintiffs contributed $410,000.00, which the parties used to purchase the properties on Planty Way and Cascade Road. A portion of the $410,000.00 was also used to build the home at 8 Planty Way, as well as the foundation at 10 Planty Way. Defendants, who did not contribute any capital at the commencement of the partnership, financed the remainder of the construction at 10 Planty Way. The former owner of the Seneca Road property agreed to hold the mortgage on that property. The note called for the partnership to make 36 monthly payments of $711.11, with payments to begin on January 9, 2012.

On January 1, 2012, plaintiffs took over management of rentals for the Planty Way properties. Plaintiffs apparently noticed some discrepancies in the amounts defendants claimed to pay for the construction of 10 Planty Way and the amounts actually charged by the builder. As a result, plaintiffs requested a full accounting from defendants and the LLC in early 2013.

The relationship between the parties subsequently deteriorated and, on December 31, 2013, defendants took over the management of 8 Planty Way without plaintiffs’ consent, changing the locks so as to prevent plaintiffs from entering the property. Plaintiffs contended that defendants refused to honor any of the rental contracts on 8 Planty Way, which resulted in lost revenue for the partnership. Plaintiffs further contended that defendants declined to pay their portion of the monthly mortgage on the Seneca Road property, as the result of which the partnership missed the February, March and April 2014 mortgage payments. Finally, plaintiffs contended that, unbeknownst to them, defendants paid off the mortgage on the Seneca Road property in April 2014 and assigned it to their company, defendant Lake Placid Properties, LLC (“Lake Placid Properties”).

On April 11, 2014, Lake Placid Properties sent correspondence to all four of the partners declaring “the full amount of the debt to be due and owing” and further advising that the “[f]ailure to remit [this]
sum by May 12, 2013 may cause the commencement of foreclosure proceedings.” According to plaintiffs, they did not discover that Lake Placid Properties was owned by defendants until after receiving the correspondence.

Plaintiffs commenced the action on May 27, 2014, seeking, inter alia, dissolution of the partnership and the LLC and damages for breach of fiduciary duty and fraud.

Plaintiffs moved for summary judgment on, inter alia, their breach of fiduciary duty and fraud claims. The motion court denied the motion.

In denying the motion, the motion court held that there were:

material issues of fact … with respect to: the terms of the partnership agreement between the parties, including the management of the partnership, whether the parties contributed to the partnership account, the commingling of personal and partnership funds and whether the parties agreed or consented to the same, whether defendants refused to honor rental agreements plaintiffs had in place; the mortgage related to the Seneca Trail property, including the circumstances surrounding the assignment of the same and why payments on the same were not timely made by plaintiffs; preparation of the Kenny invoices for work related to the construction of 8 Planty Way and 10 Planty Way; whether defendants made any material misrepresentations of fact with respect to the amount of utility bills defendants claim to have paid and the creation and/or amount of a number of construction related invoices defendants claim to have paid and/or with respect defendant’s investment in, and capital contribution to, the partnership, and defendants’ intent.

The motion court also held that “material issues of fact exist[ed] with respect to whether defendants engaged in misconduct and whether plaintiffs sustained damages that were directly caused by defendants’ misconduct.”

Finally, addressing plaintiff’s fraud claim, the motion court concluded that material issues of fact existed concerning each element of plaintiffs’ fraud claim – that is, there were issues of fact concerning “whether defendants made any material misrepresentation, with knowledge of its falsity, for the purpose of inducing plaintiffs to rely upon it, and, if so, whether plaintiffs justifiably relied on the misrepresentation and sustained injury as a result.”

As noted, plaintiffs appealed.

The Appellate Division, Third Department, affirmed.

The Third Department’s Decision

To succeed on a claim for breach of fiduciary duty, a plaintiff must establish the existence of a fiduciary relationship, misconduct by the defendant and damages directly caused by the defendant’s misconduct. Loch Sheldrake Beach & Tennis Inc. v. Akulich, 141 A.D.3d 809, 811 (2016), lv. dismissed, 28 N.Y.3d 1104 (2016); Rut v. Young Adult Inst., Inc., 74 A.D.3d 776, 777 (2010).

In New York, “[p]artners … and particularly managing partners, owe a fiduciary duty to the other partners.” Birnbaum v. Birnbaum, 73 N.Y.2d 461, 465 (1989) (citations omitted). Among the duties owed is the duty of loyalty – that is, a duty that not only bars “blatant self-dealing, but also [the] avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.” Id. at 466 (citations omitted).

The Court found that the motion court correctly found issues of fact regarding whether defendants engaged in misconduct that caused plaintiffs’ damages:

As part of this cause of action, plaintiffs submitted documentary proof establishing that partnership funds were used by defendants to pay off expenses on their personal credit cards. The record, however, also reflects that some of the charges on defendants’ personal credit cards were partnership expenses and that, in order to refinance one of the properties owned by the partnership, the bank required that the credit cards be fully paid off. To the extent that plaintiffs contend that defendants improperly commingled personal and partnership funds or used their personal bank account to hold partnership funds, the record discloses a triable issue of fact as to whether plaintiffs acquiesced to such practice.

Slip Op. at **1-2.

The Court also concurred with the motion court in finding issues of fact concerning plaintiffs’ claims that defendants mismanaged the rental properties. Id. at *2 (“In addition, to the extent that plaintiffs argue that defendants breached a fiduciary duty by mismanaging the rental properties, the parties offer conflicting testimony on this issue.”)

Finally, the Court held that the motion court did not err in finding issues of fact surrounding plaintiffs’ claim “that defendants surreptitiously tried to usurp the Seneca Trail property.” Id. at *2.  The Court rejected plaintiffs’ contention that assignment of the mortgage for the Seneca Trail property to the LLC was improper and entitled them to summary judgment on the fiduciary duty claim.

The record, however, indicates that mortgage payments for the Seneca Trail property had not been paid and that the original mortgagee had threatened legal action with respect to this property. Manojlovic testified in his deposition that he consulted with an attorney to determine what action should be taken with respect to the Seneca Trail property and was advised to have a third party assume the mortgage. Upon this advice, the mortgage for the Seneca Trail property was ultimately assigned to the limited liability company. Furthermore, according to Manojlovic, neither he nor Uzunovic had any ownership interest in this limited liability company and that he merely managed it.


To plead a fraud claim, plaintiffs must demonstrate that “defendants knowingly misrepresented a material fact with the intent to deceive [them] and, after having justifiably relied upon such misrepresentation, [they] experienced pecuniary loss.” State of New York v. Industrial Site Servs., Inc., 52 A.D.3d 1153, 1157 (2008); see also Pasternack v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817, 827 (2016).

Plaintiffs alleged that defendants: (1) attempted to steal the Seneca Trail property by failing to contribute to the mortgage payments for the property, then surreptitiously procuring an assignment of the mortgage by one of their other companies, and threatening to foreclose on the property; with the net effect being that plaintiffs would lose their investment in the property and defendants would hold it free and clear; (2) misrepresented and overstated the amounts allegedly paid for utilities on the properties in an effort to artificially increase the amount of their partnership contribution; and (3) created false invoices concerning expenses to be paid to the contractor on the Planty Way properties that inflated the amount contributed by defendants as capital contributions.

The Court agreed with the motion court that there were triable issues of fact that prevented the grant of summary judgment on the fraud claim.

Plaintiffs point to defendants’ actions regarding the Seneca Trail property as one basis for the fraud claim but, as discussed, a question of fact exists concerning the propriety of those actions. Plaintiffs also claim that defendants overstated the amount they had paid for utility expenses in connection with some of the subject properties. In his affidavit, Manojlovic did not dispute that there was an overstatement, but further stated that any overstatement was an accounting error and that any errors were fixed prior to the commencement of this action. Plaintiffs also claim that defendants created false invoices concerning expenses to be paid to a contractor that inflated the amount contributed by defendants as capital contributions. Other than speculation, however, plaintiffs failed to substantiate their claim of forgery. Furthermore, Manojlovic explained that he created invoices because the contractor’s record keeping was inadequate and that such invoices reflected what had already been paid to the contractor. The contractor also testified at his deposition that he assisted Manojlovic in typing the invoices and creating their format. Finally, the record discloses a triable issue of fact as to what defendants contributed to the partnership as capital contributions.

Id. at *2.

“In view of the foregoing,” the Court found “that plaintiffs were not entitled to summary judgment on their fraud cause of action.” Id. (citation omitted).


It has been said that “[a] business partnership is like a marriage.” (Here.) Like any marriage, “trust, communication, honesty, respect and the ability to compromise” are key traits in a successful relationship. Id. Just as good marriages grow over time, so too do business relationships. Having said that, however, “not all friendships can evolve into business partnerships, so carefully choosing who you work with is essential.” Id. As Delibasic shows, the relationship between the parties devolved, not evolved, with one set of friends accusing the other of misconduct and fraud.  

From a legal perspective, Delibasic shows the difficulties a party encounters trying to obtain summary judgment. Because “[s]ummary judgment is a drastic remedy,” courts grant it “only where the moving party has ‘tender[ed] sufficient evidence to demonstrate the absence of any material issues of fact.’” Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 324 (1986). Thus, if the moving party fails to make the requisite showing, “it is not entitled to summary judgment.” Maines Paper & Food Serv., Inc. v. Restaurant Mgmt. by D.C. Corp., 229 A.D.2d 748, 750 (3d Dept. 1996).

Mere conclusions, speculation, unsubstantiated allegations or expressions of hope are insufficient to defeat a summary judgment motion. Zuckerman v. City of N.Y., 49 N.Y.2d 557, 562 (1980). As the Third Department noted, some of Delibasic’s allegations fell into that category. Slip Op. at *2 (“Other than speculation, however, plaintiffs failed to substantiate their claim of forgery”). Other allegations were simply disputed – that is, Delibasic could not “demonstrate the absence of any material issues of fact.” Alvarez, 68 N.Y.2d at 324.

As noted, Delibasic highlights the challenges the proponent of a summary judgment motion must overcome to obtain such relief. These challenges can be considerable. Indeed, a study of cases in three federal district courts (here) found that only about 10% of contract and tort cases succeeded in obtaining summary disposition. (“Contract and tort cases have reasonably uniform low summary judgment rates, with results across our districts and time periods that are all consistent with rates being less than 10%.”) No doubt, the reason for such a low percentage of success has to do with the fact that it is easier to find material issues of disputed fact when trying to resolve issues of scienter (or state of mind), causation, or breach of a duty (such as negligence). As the Third Department noted in Delibasic, “the record disclose[d] … triable issue[s] of fact” with regard to many of the elements of Delibasic’s breach of fiduciary duty and fraud claims.

Does this mean that parties should not move for summary judgment? Delibasic (as well as the studies) show that the answer is dependent upon the facts and evidence of the case. To be sure, questions of law, issues that can be proven through documentary evidence, and the inability to support a claim or an element of a claim with evidence may militate in favor of making a motion for summary judgment. But, as Delibasic illustrates, obtaining summary judgment on issues that are inherently factual (e.g., scienter, breach of duty and causation) may prove to be too challenging.

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