In considering a motion to dismiss related to a real estate development joint-venture gone bad, a recent decision by Justice Andrea Masley in 3P-733, LLC v Davis (No. 650800/2018 [N.Y. Sup. Ct., N.Y. Cty., April 2, 2019]) highlights several issues that frequently arise at the motion to dismiss stage in the Commercial Division.

Plaintiff Piyush Bhardwaj, through his company 3P-733, LLC and defendant Tawan Davis, through CPG Invest (of which Davis is one of three members), formed a new company, non-party Carbyne Property Group, to invest in and develop real estate.  Plaintiffs allege that Carbyne began operating under the name “The Steinbridge Group” at some point under the same terms as Carbyne’s operating agreement. Steinbridge Group, LLC was eventually formed on March 31, 2016, but no operating agreement was ever prepared or signed. In 2016 or 2017, Steinbridge entered into four transactions, which incurred costs and expenses that were paid out of Carbyne’s bank account, but none of those deals closed. Capital contributions were allegedly made by both Bhardwaj and Davis to cover these Steinbridge-related expenses.

During the summer of 2017, while Steinbridge was still considering potential real estate investments, the relationship between Bhardwaj and Davis soured and Davis allegedly cut off Bhardwaj’s access to the company’s email account and shared drive before ultimately ejecting him from his 40% minority stake. In the complaint, Bhardwaj alleged that Davis falsely accused him of petty theft in a letter that Bhardwaj received from Davis’s attorney that August, and that Davis forwarded this letter to a company that was considering investing with Bhardwaj in order to undermine that deal.

Plaintiffs Bhardwaj and 3P-733 filed their second amended complaint in May 2018 and unsuccessfully moved for a preliminary injunction.  In this injunction decision, the court considered both defendants’ motion to dismiss the complaint in its entirety, except the breach of contract claim against CPG Invest, pursuant to CPLR 3211(a)(a) and (a)(7), as well as plaintiffs’ motion pursuant to CPLR 2221 to renew and reargue their preliminary injunction motion.

Justice Masley dismissed seven of the nine claims in plaintiffs’ second amended complaint, and dismissed one of the two remaining claims as against Davis as an individual.  Considering the court’s logic is instructive for plaintiffs seeking to avoid having claims stricken from their case at the start of litigation, and for defendants seeking to file motions to dismiss that attack these common weaknesses. As we previously noted, former Commercial Division Justices have stressed the importance of drafting compelling papers in briefing motions to dismiss to strategically frame the case early on.

Minority Shareholder Oppression and Breach of Fiduciary Duty

Defendants argued that plaintiffs’ breach of fiduciary duty claim was precluded by their breach of contract claim, which both parties agreed would proceed against CPG Invest under either the Carbyne contract or an alleged oral agreement between 3P-733 and CPG Invest regarding the formation of Steinbridge, and that plaintiffs’ minority shareholder oppression claim, to the extent it was even an independent claim under Delaware law, was duplicative of the fiduciary duty claim.  The court agreed as to the latter point, as there were no factual allegations distinguishing the breach of fiduciary duty claim from the minority oppression claim made in the complaint. Given that there was no allegation that Davis himself owed a fiduciary duty to Bhardwaj or 3P-733, as distinct from CPG Invest, the breach of fiduciary duty claim was dismissed against Davis individually. The breach of fiduciary claim against CPG Invest, however, was allowed to go forward because the Steinbridge members’ fiduciary obligations were not governed by the Carbyne operating agreement.

Fraud

At oral argument, plaintiffs conceded that their fraud claim was only directed at Davis in his individual capacity.  The court held that the fraud claim was duplicative of the breach of contract claim, as both were premised on identical facts and alleged the same injuries.[1] Plaintiffs asserted reputational and future business injuries, but those claimed harms did not arise from reliance on any allegedly fraudulent misrepresentations and were appropriately considered under plaintiffs’ defamation and tortious interference claims.

Defamation/Libel

Bhardwaj alleged that he was defamed by Davis’s false accusation in his attorney’s letter that Bhardwaj had committed petty theft and through statements in real estate publications that refer to the success of Steinbridge without mentioning Bhardwaj.  The Commercial Division held that the accusation of petty theft was protected by the litigation privilege, and that the average reader of the articles would not infer that statements wholly omitting Bhardwaj’s role in the venture had any defamatory connotations.

Conversion

The court further held that none of the lost or misappropriated interests that plaintiffs alleged to have been converted – i.e., Bhardwaj’s access to Carbyne/Steinbridge’s bank account, offices, email and database, and funds in the bank account and 3P-733’s equity interest in Steinbridge – were appropriate subjects for a conversion claim.

Breach of the Covenant of Good Faith and Fair Dealing

At oral argument, this claim was dismissed after plaintiffs conceded it was based on the same set of facts and alleged breaches as their contract claim.

Tortious Interference

The court held that plaintiffs had only alleged conclusory assertions and vague statements to support the tortious interference claim, and thus dismissed it without prejudice to plaintiffs repleading with additional, nonconclusory facts. 

Unjust Enrichment

The Commercial Division dismissed plaintiff’s unjust enrichment claim was dismissed to the extent it was premised on the Carbyne contract between 3P-733 and CPG Invest, and as to Davis as there were no allegations that he had individually benefited from the conduct at issue. The claim survived; however, as asserted by 3P-733 against CPG Invest to the extent it seeks redress for the oral agreement formed when transitioning from Carbyne to Steinbridge.

Motion to Renew and Reargue

The court denied plaintiffs’ motion for leave to reargue as they failed to identify any specific issues of law or fact that the court had misapprehended or overlooked.  Justice Masley also denied plaintiffs’ renewed request for a preliminary injunction given the failure to meet the necessary elements for an injunction and their motion for a pre-judgment attachment of Davis’s assets based on Davis’s Pennsylvania residence given his strong New York contacts and a new York address.

Conclusion

Plaintiffs’ complaint included nine claims against defendants.  After the motion to dismiss, only plaintiffs’ breach of contract claim remained against one corporate defendant, as well as plaintiffs’ breach of fiduciary duty claim as against a single individual defendant. Plaintiffs were given five days to replead their tortious interference claim against the same individual defendant. Plaintiffs also lost two motions for a preliminary injunction. While plaintiffs may very well be victorious on these remaining claims, their failure to adequately allege several of their claims allowed defendants to claim several successes at this early stage in the litigation.