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No Damages, No Claim, Problem

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  • Posted on: Aug 3 2022

By: Jeffrey M. Haber

It is axiomatic that a plaintiff cannot succeed on his or her cause of action if there are no provable damages. It is, therefore, important that the plaintiff plead and prove each element of the claim, including the damages element. After all, damages are “an essential element”1 of any tort cause of action.2 

This basic tenant of law was at the heart of Mohinani v. Charney,3 a case in which plaintiff failed to prove damages resulting from defendants’ alleged breach of fiduciary. 

Mohinani involved a commercial real estate project in which plaintiffs invested $4.5 million. 

Plaintiffs asserted, among other claims, breach of fiduciary duty against the estate of Leon H. Charney, based on Charney’s alleged conduct with respect to the real estate venture that he organized and managed. Plaintiffs and Charney were the sole members of defendant LHC Club LLC (“LHC”), in which Charney held the majority interest and of which he was manager. LHC, in turn, held a 30% interest in two limited liability companies (the “LLCs”) that owned and managed two adjoining real estate properties that were to be redeveloped. Plaintiffs claimed at trial and in their pre- and post-trial submissions that at the March 2007 closing of the LLCs’ acquisition of the properties, Charney breached his fiduciary duty to plaintiffs, as minority investors, by taking for himself $1.5 million in “special distributions” from the LLCs and a $1 million “acquisition fee” that should have been received by LHC. Plaintiffs further contended that Charney breached his fiduciary duty to them by obtaining payment from the LLCs to his management company of approximately $850,000 in management fees during the life of the project. The project ultimately failed, resulting in the loss of plaintiffs’ $4.5 million capital investment.

After a bench trial, the motion court held that, among other things, plaintiffs did not prove that Charney breached any duty to them. “The only possible fiduciary violation,” said the motion court, was “the taking of fees that are not entirely fair to LHC or the LLCs that own the Properties.” Those fees, said the motion court, “were expressly authorized by contract with the other investors, who paid the bulk of them since they had a much bigger equity stake than the Mohinanis.”

In other words, the motion court found that plaintiffs did not prove any direct damages to themselves.

The Mohinanis’ contention that Charney had a direct fiduciary duty to buy them out on the same terms as the other investors is rejected. They cite no authority actually supporting this unpersuasive proposition; instead, they rely on cases involving operation, management or disposition of an entity’s property in a manner unfair to the entity and damaging the entity.

The motion court directed that judgment be entered in defendants’ favor. 

Plaintiffs appealed. The Appellate Division, First Department affirmed.

The Court held that the motion court “properly concluded that plaintiffs failed to establish a valid claim for breach of fiduciary duty against Charney at trial.”4 The reason, said the Court, was because plaintiffs were not damaged by the alleged breach of fiduciary duty:

In this case, all of the damages plaintiffs sought to prove and to recover upon a theory of breach of fiduciary duty — the $1.5 million in special distributions and the $1 million acquisition fee that Charney (rather than LHC) allegedly received at the closing, and the $850,000 in management fees that his company allegedly thereafter received from the LLCs — would have been losses directly suffered by LHC (the special distributions and the acquisition fee) or by the LLCs (the management fees). Therefore, plaintiffs cannot validly assert a claim to recover such damages in their own names.5 

“[S]uch claims”, noted the Court, “must be asserted as derivative claims on behalf of LHC, or as double derivative claims on behalf of the LLCs.”6 The Court explained that “[t]he fact that plaintiffs were the only other members of LHC does not obviate the requirement that a claim of misappropriation of funds owed to LHC be brought derivatively. Any injury is to LHC, and any damages must be recovered by LHC.”7 

The Court went on to say that “[f]or the same reasons”, “plaintiffs lack[ed] standing to bring a direct claim for any breach of fiduciary duty” in connection with the $850,000 in fees paid by the LLCs in which LHC had a partial stake.8 Any action regarding those fees, said the Court, should have been brought as a double derivative claim.9

The Court rejected plaintiffs’ argument that defendants waived their standing defense because they did not raise it in their answer or in a pre-answer motion to dismiss.10 The Court noted that “plaintiffs consistently asserted these causes of action as direct claims on their own behalf, not as derivative or double-derivative claims.”11 “It is only now, upon appeal,” said the Court, “after the trial court ha[d] dismissed the claims for lack of the element of an injury directly suffered by plaintiffs, that plaintiffs argue[d] that they should be permitted to pursue the claims as derivative or double-derivative claims, and to amend their complaint accordingly.”12 Indeed, explained the Court, “when the [motion] court and defense counsel sought clarification of the nature of plaintiffs’ claims in the months preceding trial, plaintiffs never moved to amend the complaint to plead derivative claims and argued only that Charney’s duties to plaintiffs, rather than to LHC, were breached. Plaintiffs never sought leave to replead their claims as derivative claims and thus waived their argument that they should be able to do so now.”13 

Takeaway

A tort claim is actionable when all elements of the tort can be truthfully alleged in a complaint.14 As with other torts in which damage is an essential element, a breach of fiduciary duty claim “is not enforceable until damages are sustained.”15 Mohinani highlights this point.


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.


Footnotes

  1. IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 140 (2009).
  2. Besen v. Farhadian, 195 A.D.3d 548, 549-550 (1st Dept. 2021) (“To state a claim for breach of fiduciary duty, plaintiffs must allege that … they suffered damages caused by (the) misconduct”) (internal quotation marks omitted), quoting Burry v. Madison Park Owner LLC, 84 A.D.3d 699, 699-700 (1st Dept. 2011).
  3. Mohinani v. Charney, 2022 N.Y. Slip Op. 04782 (1st Dept. Aug. 2, 2022) (here).
  4. Slip Op. at *1.
  5. Id. at *1-*2.
  6. Id. at *2 (citations omitted).
  7. Id. (citation omitted).
  8. Id.
  9. Id.
  10. Id.
  11. Id.
  12. Id.
  13. Id. (citing, OFSI Fund II, LLC v. Canadian Imperial Bank of Commerce, 82 A.D.3d 537, 540 (1st Dept. 2011), lv. denied, 17 N.Y.3d 702 (2011)).
  14. Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 94 (1993).
  15. Id.
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