The lion’s share of cases we write about on New York Business Divorce involve consummated business relationships where the warring parties have clearly chosen the particular entity form governing their relations, whether it be partnership, corporation, or limited liability company.

But a sizable minority of cases on our blog are less about consummated business relationships, and more about whether the parties actually formed an enforceable business relationship to begin with, and if so, in what form.

In Kefalas v Pappas (___ AD3d ___, 2024 NY Slip Op 01912 [2d Dept Apr. 10, 2024]), the Court considered both of these questions, including the intriguing question of whether one can form an enforceable joint venture even though the alleged venture’s affairs are handled in separate entities acting as alleged “mere conduits.”

The Alleged Joint Venture

In his complaint, Vassilios Kefalas (“Kefalas”) alleged that he and Petros Alexandros Pappas (“Pappas”) had a “long-standing but failed business relationship” involving “international shipping” and “New York real estate.” Kefalas characterized the relationship as a “widespread and confidential business and profit-sharing arrangement.”

The Shipping Part

The shipping side of the venture involved two corporations, Octagon Maritime Holdings Corp. (“Octagon”) and Royce Research Limited (“Royce”), the latter of which allegedly sold the former a shipping business called Oceanbulk Shipping & Trading (“OBST”). Kefalas alleged that OBST was an asset of a joint venture between he and Pappas “notwithstanding Octagon’s 100% record ownership of OBST,” and that Pappas “failed to account” to Kefalas for “substantial profits and distributions” from OBST. Kefalas alleged that he contributed $1 million in exchange for “40% of the profits.”

In addition, Kefalas alleged that Royce entered into a joint venture with a publicly-traded company, StarBulk Carriers Corp., and that Pappas agreed that Kefalas would receive a “one-third profit sharing interest in Royce” as a “member” of Royce in consideration for Kefalas providing “settlement and collection” services for certain claims Royce had against a third-party. According to the complaint, Pappas “failed to properly or fully account” to Kefalas, who “never received any profits, distributions, or monies from Royce.”

The Real Estate Part

The real estate side of the venture involved the “acquisition of a property identified and located by Kefalas in Manhattan for purposes of redevelopment or sale.”

Kefalas alleged that he was “vested with the vast majority of the managerial and supervisory duties” for this part of the venture, in exchange for which he would receive a “12.5% share of the profits” from sale or redevelopment of a building on Maiden Lane. The property was apparently owned and managed through several separate entities, including Maiden Lane Holding LLC, Maiden Lane Capital LLC, and Maiden Lane Development LLC.

Kefalas alleged that the building was sold “for approximately $64 million,” the proceeds of which Pappas allegedly diminished by improperly paying expenses including unauthorized broker commissions and personal and family tax planning fees.

Kefalas alleged five causes of action, but we’ll focus only on his first: breach of joint venture.

The Dismissal Motion

Pappas moved to dismiss the claim under CPLR 3211 (a) (7), submitting a lengthy affidavit arguing that there was “no such thing” as the joint venture Kefalas alleged, and that Kefalas has “merely taken the sum of a series of separate business ventures, for many of which Kefalas was not even a contracting party, and attempted to now combine them together as if they constituted a single, intertwined joint venture between us, which is demonstrably false.” Unfortunately for Pappas, in paragraph 16, he described the Manhattan real estate project with Kefalas as a “joint venture,” a phrase that would come back to haunt him.

In a lengthy decision, Nassau County Commercial Division Justice Timothy S. Driscoll denied Pappas’s motion, with both sides appealing. You can read Pappas’s briefs here and here.

The Appellate Decision

The appeals court provided a thorough primer on the law of joint ventures, writing that “[a] joint venture is an association of two or more persons to carry out a single business enterprise for profit, for which purpose they combine their property, money, effects, skill and knowledge” and is “in a sense a partnership for a limited purpose,” whose “legal consequences” are “equivalent to those of a partnership” (quotations omitted).

The “essential elements of a joint venture,” the Court explained, are:

• “an agreement manifesting the intent of the parties to be associated as joint venturers”;

• “a contribution by the coventurers to the joint undertaking (i.e., a combination of property, financial resources, effort, skill or knowledge)”;

• some degree of joint proprietorship and control over the enterprise”; and

• “a provision for the sharing of profits and losses.”

Most of Kefalas’s joint venture claim foundered on the final element, the Court explaining that:

An agreement to distribute the proceeds of an enterprise upon a percentage basis does not give rise to a joint venture if the enterprise does not represent a joinder of property, skills and risks, and it is not enough that two parties have agreed together to act in concert to achieve some stated economic objective (citation and quotations omitted).

The Court held:

[T]he plaintiff failed to state a cause of action to recover damages for breach of a joint venture agreement with regard to the OBST, Royce, and Supramax vessels transactions. The pleadings and other evidentiary material submitted failed to describe those transactions as anything other than profit-sharing agreements. As the plaintiff failed to allege a mutual promise or undertaking to share the burden of the losses of the alleged enterprises, he failed to state a cause of action based on a joint venture agreement with regard to the OBST, Royce, and Supramax vessels transactions (citations and quotations omitted).

Contrarily, the Court ruled that Kefalas stated a viable claim for breach of joint venture for the real estate portion of the relationship because “Pappas, in an affidavit that he submitted in support of the defendants’ motion, admitted that he and the plaintiff entered into a joint venture agreement to acquire and redevelop the Maiden Lane property.”

Finally, the Court ruled that ownership and management of the Maiden Lane property through multiple separate entities was not fatal to Kefalas’s joint venture claim, writing:

As the plaintiff stated a cause of action based on a joint venture agreement with regard to the Maiden Lane property transaction, the plaintiff has standing to bring this action in his individual capacity, as he alleged that the corporations were mere conduits (see Rinaldi v Casale, 13 AD3d 603 [2d Dept 2004]).

Easy to Allege, Hard to Disprove

Many folks, Pappas certainly among them, would argue that it is far too easy for plaintiffs to successfully allege an oral joint venture agreement. Defendants often must defend against such claims even though they never consciously considered their arrangement to be a joint venture, a partnership, or anything like it. As Peter Mahler once wrote, people can become joint venturers or partners without any conscious intention to do so because the existence of an oral partnership turns on one’s actions and conduct, not one’s subjective thoughts or beliefs.

Other times, defendants may be forced to defend against such claims even though they clearly chose some other entity form, like a corporation, to run their business. We encountered this problem in our article about Eikenberry v Lamson, in which Kings County Commercial Division Justice Leon Ruchelsman wrote that it is “well settled in New York that a partnership or a joint venture may not operate through a corporate form and that any fiduciary obligations that the partners owe one another cease to exist once they agree to conduct business as a corporation,” but that there is an “exception” to this rule “where the corporation is a mere adjunct of the joint venture or the rights retained in the partnership are independent of and extrinsic to the corporate entity.”

In Eikenberry, the Court held that an alleged oral joint venture was inconsistent with the parties’ operation in a corporate form, ruling that all “allegations that are based upon any corporate activity are hereby dismissed.” In Kefalas, the Court reached the opposite outcome. How is one to reconcile these two seemingly diverged outcomes? Hard to say. Perhaps it just comes down to the skill of the lawyer and the sensibilities of the judge while navigating seemingly inconsistent rules of law.

Kefalas is also a reminder that oral joint ventures and partnerships require, as an essential element, an agreement to share losses. In the real world, when people go into business, they rarely envision losing money, and they often fail to even address the subject at all. But when putting together a complaint, lawyers should know better. Failure to allege the essential element of an agreement to share in losses is a well-known landmine for alleged oral joint venture and partnership agreements.

A case I handled for the defendant a couple of years ago involving an alleged joint venture to redevelop Oheka Castle disposed of the plaintiff’s claims on this very basis (U.S. Bank N.A. v Kahn Prop. Owner, LLC, 206 AD3d 851 [2d Dept 2022] [plaintiff failed to set forth a “legally cognizable cause of action” for an alleged “joint venture agreement because it does not allege a mutual promise or undertaking to share the burden of the losses”]).

In the end, “the issue of the existence of a joint venture presents a question of fact for the trier of fact to determine” (RCR Builders, Inc. v Batex Contr. Corp., 230 AD2d 897 [2d Dept 1996]).

Easy for plaintiffs to allege. Hard for defendants to disprove. Potentially viable even if one or more separate entities exist governing the exact same subject matter. All reasons why oral joint ventures are truly the wild west of business associations.

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