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Renewal Contracts, Breach of Fiduciary Duty and the Continuing Wrong Doctrine

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  • Posted on: May 8 2020

Statutes of limitations limit the time within which a defendant can be held liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitations period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run is an important issue for a lawyer and client to discuss.

This Blog often examines the statute of limitations in the context of fraud and contract actions. In today’s article, we look at the statute of limitations in the context of a breach of fiduciary duty action.  

New York law does not provide a single statute of limitations for breach of fiduciary duty claims. IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 139 (2009). Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Loengard v. Santa Fe Indus., 70 N.Y.2d 262, 266 (1987). Where the remedy sought is purely monetary in nature, courts construe the suit as alleging “injury to property” within the meaning of CPLR § 214 (4), which has a three-year limitations period. See, e.g., Yatter v. Morris Agency, 256 A.D.2d 260, 261 (1st Dept. 1998). Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR § 213 (1) applies. Loengard, 70 N.Y.2d at 266-267. Moreover, where an allegation of fraud is essential to a breach of fiduciary duty claim, courts apply a six-year statute of limitations under CPLR § 213 (8). Kaufman v. Cohen, 307 A.D.2d 113, 119 (1st Dept. 2003).

A breach of fiduciary duty is a tort. A tort claim accrues when “the claim becomes enforceable, i.e., when all elements of the tort can be truthfully alleged in a complaint.” Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 94 (1993). As with other torts in which damage is an essential element, the claim “is not enforceable until damages are sustained.” Id. at 94. To determine timeliness, the courts consider whether the plaintiff’s complaint alleges, as a matter of law, “damages suffered so early as to render the claim time-barred.” Id. at 94-97.

The statute of limitations “on claims against a fiduciary for breach of its duty is tolled until such time as the fiduciary openly repudiates the role.” AccessPoint Med. LLC v. Mandell, 106 A.D.3d 40, 45 (1st Dept. 2013). This rule exists “to protect beneficiaries in the event of breaches of duty by fiduciaries such as … corporate officers … in circumstances in which the beneficiaries would otherwise have no reason to know that the fiduciary was no longer acting in that capacity.” Id. (emphasis added); Knobel v. Shaw, 90 A.D.3d 493, 496 (1st Dept. 2011); Golden Pac. Bancorp v. FDIC, 273 F.3d 509, 518-19 (2d Cir. 2001). This rule has been repeatedly applied to toll the limitations period on claims against corporate officers and directors. See, e.g., Westchester Religious Inst. v. Kamerman, 262 A.D.2d 131, 132 (1st Dept. 1999) (tolling limitations period on breach of fiduciary duty claim against corporate officers until officers left their positions of trust); Steele v. Anderson, No. 03-CV-1251, 2004 WL 45527, at *1 (N.D.N.Y. Jan. 8, 2004) (tolling limitations period on claims against corporate directors and officers for breach of fiduciary duty, corporate waste, and accounting until termination of fiduciary relationship). 

Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am., 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id. (internal quotation marks and citation omitted).

The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id. It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id. (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc., 22 N.Y.3d 1024, 1032 (2013).

In Ganzi v. Ganzi, 2020 N.Y. Slip Op. 02740 (1st Dept. May 7, 2020) (here), the Appellate Division, First Department, affirmed the denial of a post-trial motion to dismiss breach of fiduciary duty claims on statute of limitations grounds, holding that the plaintiffs timely brought their claims.

Ganzi involved allegedly improper transactions and practices by the majority shareholders of closely-held family businesses: Just One More Restaurant Corp. (“JOMR”), which owned the now-shuttered, renowned New York City establishment, the original Palm Restaurant (“Palm”); and Just One More Holding Corp. (“JOMH”), which owned real property at which the Palm was located. The actions challenged by plaintiffs Gary Ganzi (“Gary”), Claire Breen (“Claire”), and the Estate of Charles Cook (“Cook’s Estate”) occurred decades after the ownership and management of the businesses had been passed down the family trees to the defendants, Bruce Bozzi Sr. (“Bruce”) and Walter Ganzi, Jr. (“Wally”), plaintiffs’ cousin.

Plaintiffs asserted derivative claims for breach of fiduciary against defendants, as the majority shareholders of JOMR. The claims fell into two general categories relating to undervaluation of JOMR’s intellectual property assets, and challenge: (1) JOMR’s issuance of below market rate license agreements to restaurants and related entities owned in whole or in part by defendants; and (2) JOMR’s issuance of a below market rate agreement granting exclusive licensing/sublicensing rights to its valuable intellectual property assets to defendants’ wholly-owned management company, the Palm Management Corporation (“PMC”), and the transactions that occurred thereunder. Plaintiffs also asserted a derivative claim that defendants, as the majority shareholders of JOMH, breached their fiduciary duties by leasing JOMH’s real property to JOMR for below market rates.

[Ed. Note: JOMR’s asset is its intellectual property (“Palm IP”). The Palm IP includes a series of trademarks and service marks, design elements of the Palm — such as its menu, food quality choices and methods of preparation — and the Palm’s decor, display of certain photographs, artistic caricatures, sketches, cartoons, and other elements.]

Since 1972, defendants have opened new Palm restaurants around the world (“New Palms”) and have an ownership interest in numerous New Palms and their associated business entities. All of the New Palms entered license agreements with JOMR, from the 1970s to 2011, which identified JOMR as the licensor and owner of “long established, famous and valuable service marks used in connection with the operation of distinctive, high quality restaurants,” and that JOMR had “devised and developed certain confidential know-how relating to the management and operation of restaurants, including business practices, unique recipes, and formulae”; under those agreements, the New Palms agreed to pay JOMR an annual licensing fee of $6,000 “for the use of [JOMR’s] Licensed Trademark and . . . know-how.” The $6,000 annual fee was imposed for all New Palms in which defendants had an ownership interest, regardless of when those restaurants first opened. At issue were 54 license agreements, all of which included the $6,000 fee, entered between JOMR and the New Palms owned by defendants: 26 licenses in 2007, backdated to January 1, 2004 (“2007 Licenses”); and 28 licenses in 2011, backdated to January 1, 2010 (“2011 Licenses”). The parties stipulated to the validity and enforceability of the 2007 and 2011 Licenses. 

In 2007, PMC and JOMR entered into a Master License Agreement (“MLA”) through which PMC acquired the “exclusive, worldwide, royalty bearing, sub-licensable license” to the Palm IP for an annual flat payment of $12,000. Under the MLA, PMC entered into sublicense agreements for the use of Palm IP with third parties for at or near market rate value, as opposed to the $6,000 flat fee paid by the New Palms.

Plaintiffs alleged that defendants engaged in a decades-long pattern of exploiting the Palm IP to benefit defendants’ own businesses (i.e., by licensing Palm IP to the New Palms for below market rates), and by improperly entering the MLA between JOMR and PMC and using the MLA to divert substantial revenue from JOMR to PMC. Plaintiffs further alleged that defendants breached their fiduciary duties to JOMH, which owned the real estate in New York City at which the Palm and its offices were located, by leasing the space at below market level rates to JOMH’s detriment. Defendants asserted a statute of limitations defense, among others. 

Following a bench trial, the Court held that plaintiffs’ breach of fiduciary duty claims were not time barred. Defendants appealed. The First Department affirmed.

Defendants argued that the breach of fiduciary duty claims were time-barred because JOMR had previously executed license agreements that included the same $6,000 annual license fee provision for the use of its intellectual property. Defendants contended that the execution of the 2007 and 2011 Licenses merely renewed, updated, and reaffirmed preexisting allegedly tortious licensing arrangements, and did not constitute new, discrete acts causing new injury that restarted the applicable six-year statute of limitations. The First Department rejected the argument, holding that “[t]he trial court correctly rejected defendants’ statute of limitations defense to the derivative claims.” Slip Op. at *1.

The Court explained that “the 2007 and 2011 licenses, even if they stated the same terms, were not mere ‘renewals’ of prior, written agreements. Rather, they were new and fully enforceable contracts entered into between JOMR and defendants’ wholly-owned restaurants within the limitations period, as they included a recital providing that ‘Licensor and Licensee have previously entered into a certain License Agreement and desire to enter into a new License Agreement under the terms and conditions as herein set forth,’ as well as a merger clause providing that ‘this Agreement contains all of the terms and conditions agreed upon by the parties hereto and no promises or representations have been made other than as herein set shall be valid unless made in writing executed by an authorized officer of the Licensee or Licensor.’” Id. at *2. The Court concluded that “[t]hese are formal, complete agreements that have legal effect, and any associated breach of fiduciary duty occurred upon the execution of those agreements, regardless of identical breaches that occurred in connection with prior license agreements that were in place for unspecified terms and that were superseded by the new agreements.” Thus, “[w]hile defendants argue that the old licenses, including the $6,000 fee term, would have remained in place indefinitely even if the agreements had not been re-papered in 2007 and 2011, such that there was no injury in 2007 and 2011, the formalizing of the licenses in 2007 and 2011 was a new, overt act that constituted an injurious breach of fiduciary duty.” Id.

In reaching the decision, the Court distinguished the facts in Ganzi with Madison Squ. Garden, L.P. v National Hockey League, 2008 WL 4547518, 2008 US Dist. LEXIS 80475 (S.D.N.Y. 2008). In the latter case, the agreements at issue were not new and independent contracts that could be enforced in their own right. As the court observed: “The allegations in the Complaint … do not plausibly allege any ‘new and independent acts’ that inflicted ‘new and accumulating injury’ on MSG.” 2008 WL 4547518, at *10. 

Takeaway

In the post-trial memoranda, plaintiffs argued that the statute of limitations was tolled under the continuing wrong doctrine. Plaintiffs maintained that defendants repeatedly breached their fiduciary obligations every time defendants failed to distribute profits to JOMR in a fair and reasonable manner. In other words, every underpayment made within six years prior to the commencement of the action was a new self-dealing transaction that could have been remedied, altered or corrected, or reviewed.

In addition, plaintiffs argued (and prevailed) on the argument that defendants committed new breaches of fiduciary duty by causing JOMR to enter into new license agreements within the limitations period. 

Though mentioning the continuing wrong doctrine, the First Department focused its decision on the enforceability of the 2007 and 2011 License Agreements. And, it is that focus that makes Ganzi notable. As the Court explained, although those agreement were essentially carbon copies of existing license agreements, they were different in that they specifically provided they were new, independent agreements. That finding was reinforced by the merger clause in each of the agreements. Thus, according to the Court, whether JOMR would have continued to license the Palm IP for $6,000 per year pursuant to the preexisting licenses regardless of whether the 2004 and 2010 agreements had ever been prepared was of no moment. For statute of limitations purposes, the claims accrued when the 2007 and 2011 license agreements were entered – i.e., “the formalizing of the licenses in 2007 and 2011”, each of which “was a new, overt act that constituted an injurious breach of fiduciary duty.” 

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