IN RE: the Application of Ronald LEHAN (2025)

Centuries ago, before the merchants of the Hanseatic League (in the 12th Century) braved the seas in search of riches, it was understood that those who sought their fortunes in the realm of commerce stood the risk of loss, even ruin, in their quest for profit. Over the years, the perils that aspiring captains of industry have faced are many - the vagaries of weather, the avarice of princes and other possibilities. As pointed out by respondent's counsel, the Covid Pandemic, in addition to the tragic loss of life, severely disrupted the business community. The negative factors have changed and evolved but the threat remains the same, a miscalculation of the market or some other misstep could mean the difference between a flourishing concern creating services, products and jobs, uplifting and sustaining the society which, hopefully, has encouraged its formation or a shuttered business which stands as mute witness to failure.

Amid all of the uncertainties of engaging in venture capitalism, however, there is an absolute which gives comfort. The Court speaks of the solemn and unquestioned devotion that the entrepreneur has a right to expect from the partner of their labors. We dare to say that along with the inviolability of contract and the sacred right of property, fiduciary duty is one of the pillars of commercial law, indeed of society itself. We laud its application and condemn those who disregard its principles for immediate gain. As discussed below, Mr. Montgomery falls into the latter category and has earned the law's rebuke.

This is a petition for the dissolution of Dix Hills Car Wash (“DHCW”), a closely held domestic corporation which operated a retail car wash in Huntington, NY. What could have become a thriving business ended in acrimony and mutual recrimination. Mr. Lehan alleges that Mr. Montgomery engaged in illegal, oppressive, and fraudulent conduct in the operation of DHCW causing the former significant financial loss. Respondent counters that the petitioner breached the agreement between them and further asserts that the inexperience of Mr. Lehan was the ultimate cause of his business disappointment. In addition to dissolution of the company, the complaint asserts causes of action for breach of contract, unjust enrichment, and breach of fiduciary duty.

A non-jury trial was conducted to resolve the differing averments of the parties. The Court would be remiss if it did not thank Mr. Amadio, petitioner's counsel and Mr. Frank, respondent's counsel, for their exemplary representation of their respective clients.

The Petitioner, Mr. Lehan, took the stand. He stated, inter alia, that he had known the respondent Mr. Montgomery for many years. Trusting in Mr. Montgomery's integrity and business acumen, he discussed investing in DHCW as a means of learning the car wash business. In September of 2015 this discussion eventually ripened into a contract whereby Mr. Lehan invested $220,000 with the respondent's company in return for a 22% share of DHCW. Mr. Montgomery held the remaining 78% interest in the company. It was Mr. Lehan's understanding that his investment was to be used for improvements to the car wash. Pursuant to the agreement, petitioner was to receive a $500 per week draw as shareholder of DHCW. Mr. Lehan received this draw until late November 2015 after which he received no remuneration for approximately two years. The reason he continued to work under these circumstances was based on respondent's continued promise of pay and claim that the business was not profitable. When it became abundantly clear to him that income would never be forthcoming, Mr. Lehan left the business in December of 2017 and commenced this action.

The respondent, Mr. Montgomery, testified that he accepted Mr. Lehan's capital contribution of $220,000 for 22% of the business. Respondent detailed that between September of 2015 and 2017, he contributed $195,240 to DHCW's operations while Mr. Lehan contributed nothing. Mr. Montgomery also averred that his wife Dorothy provided significant loans in order to keep DHCW operating. Between April 2019 through February 2021, Mrs. Montgomery advanced $154,105 to DHCW (See Resp. Ex. R). These transactions are witnessed by notations on a series of checks (See Resp. Ex. R, pp. Lehan v. Montgomery — Resp. Post EBT 000181, 000197, 000200, 000201, 000203, 000211, 000218, 000223, 000234, 000235, 000238, 000240, 000243, 000247, 000251, 000263, 000271, 000287, 000295, 000307, 000324, and 00328).

In 2021, respondent entered into a contract to sell the car wash business for $800,000. On the closing date Mr. Montgomery reduced the purchase price to $400,000 (Exhibit F).

Between the date Mr. Lehan bought into the business and the subsequent sale of DHCW, petitioner did not answer a call for capital that was demanded by the respondent.

Although some documentary proof was tendered by the parties, particularly bank records indicating deposits and withdrawals, the interpretation of this evidence turns on the veracity of the respective witnesses. This requires the Court to make an initial finding on the credibility of Messrs. Lehan and Montgomery as they testified before the Court. In assessing the credibility of the witnesses, the Court is obliged to apply the same criteria as a lay person jury of six. This includes the physical demeanor of the witness on the stand (People v. Ya-ko Chi, 72 AD3d 709, 710, 898 NYS2d 619, 621 [2nd Dept 2010]; see People v. Mateo, 2 NY3d 383, 410, 779 NYS2d 399, 811 NE2d 1053, cert. denied 542 US 946, 124 S Ct 2929, 159 LEd2d 828; People v. Bleakley, 69 NY2d 490, 495, 515 NYS2d 761, 508 NE2d 672]).

Applying these criteria the Court finds the testimony of Mr. Lehan to have been presented in a forthright, consistent and hence credible manner. His candid demeanor impressed the Court as truthful, and believable.

By contrast, Mr. Montgomery's testimony was troublesome. He exhibited a poor demeanor and was inconsistent in his averments which leads the Court to find him a less than credible witness.

Moreover, Mr. Montgomery invoked his 5th Amendment right against self-incrimination when asked questions about his tax returns, DHCW tax returns, or payroll records. It was averred that this action was taken in light of Mr. Montgomery's fear of criminal prosecution. Although the assertion of the right was within the bounds of propriety, it significantly prejudiced the plaintiff's ability to cross-examine him. Under these circumstances, the Court imposes a negative inference on Mr. Montgomery's testimony (Andrew Carothers, M.D., P.C. v. Progressive Ins. Co., 33 NY3d 389, 407, 128 NE3d 153, 164—65 (2019) citing Baxter v. Palmigiano, 425 U.S. 308, 316, 96 S Ct 1551, 47 LEd2d 810 [1976]); Marine Midland Bank v. Russo Produce Co., 50 NY2d 31, 42, 427 NYS2d 961, 405 NE2d 205 [1980]; Prince, Richardson on Evidence § 5—710).

In light of the above analysis, the thoughtful argument of Mr. Frank is revealed to be chimerical because it rests upon the statements of a dissembler.

The bank records in evidence reveal that Mr. Montgomery's assertions were categorically false. He never used Lehan's $220,000 investment to renovate the car wash and admitted during cross examination that he kept the funds for himself. This self-serving behavior continued throughout the time period that Mr. Lehan was associated with DHCW.

Mr. Lehan was obliged to leave the business, because the respondent failed to pay his salary. In 2021 respondent's actions regarding the contract to sell the car wash business are inexplicable. Mr. Montgomery did not notify his fellow owner, Mr. Lehan, of his decision to sell the business. The contract price was for $800,000. On the closing date, however, Mr. Montgomery reduced the purchase price to $400,000 (Exhibit F). He admitted that he never revealed to the purchasers that Mr. Lehan was a co-owner, nor did respondent provide Mr. Lehan with 22% of the net sale proceeds. Instead, he paid his personal criminal fines and sales tax arrears for Bob 1232 Corp., a company not associated with Mr. Lehan, totaling $36,726 (Exhibit K). Mr. Montgomery then diverted the remaining sum of $248,713 to his own use (Exhibit H).

It was also undisputed that just a year and a half after Mr. Montgomery sold the business, the purchaser in turn transferred ownership for the sum of $2,400,000.

Based on the above testimony and documentary exhibits, the Court will analyze the applicable law and whether the plaintiff has proven his causes of action by a fair preponderance of the credible evidence.

Petitioner's first and second causes of action seek dissolution of DHCW under BCL §§ 1104-a (a) (1) and (2), respectively (see Dkt 1, ¶¶15—41).

Under BCL § 1104-a (a) (1), any shareholder must establish that they own twenty percent or more of all outstanding shares, and that the directors in control of the corporation have been guilty of illegal, fraudulent or oppressive actions towards the complaining shareholders.

BCL § 1104-a (a) (2), allows a shareholder to seek dissolution if the assets of the corporation are being looted, wasted, or diverted for non-corporate purposes.

In light of the February 2022 sale of the car wash (DHCW's sole asset) the respondent contends that these causes of action are academic. We disagree. Notwithstanding the sale of assets, the Court possesses the power “․ provide relief from dissolution and direct restitution ․” Kassab v. Kasab, 195 AD3d 832, 151 NYS3d 94, 99 (2d Dept 2021).

The Court finds that Mr. Lehan has established these two claims under the aforementioned statute. Mr. Montgomery asserts that Mr. Lehan has failed to prove “oppressive actions” under the rule in In re Kemp & Beatley, Inc., 64 NY2d 63, 73, 473 NE2d 1173 [1984]. Contrary, to respondent's expectations, the holding in Kemp eloquently argues his rival's cause.

As set forth by the Court, “oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture.” (id. at 73)

In the operation of DHCW, the respondent took Mr. Lehan's investment, signed a shareholder agreement and proceeded to treat Mr. Lehan's money as personal funds. Additionally, Mr. Lehan - mistakenly relying on Mr. Montgomery's word concerning DHCW's financial distress - was excluded from examining the books and denied his salary. During the same period of time, Mr. Montgomery doesn't appear to have observed a single corporate formality. Instead, a reasonable observer would conclude that Mr. Montgomery's treatment of Mr. Lehan's $220,000 investment was as if the petitioner had made him a personal gift of the funds.

Respondent's reliance on the holding in Matter of Brach, 135 AD2d 711, 522 NYS2d 612 (2d Dept 1987) also fails to provide succor. The Brach Court held that “․ the petition merely [set] forth the petitioner's dissatisfaction with the management of the corporation” (Id. at 712). This Court finds that Mr. Lehan has proven the criteria set forth in Brach, namely: that DHCW's capital was “․ wasted or looted by the other shareholders for their own enrichment.” (Id. at 712)

Since Mr. Lehan had a reasonable expectation of participation in the management of the business and that his money would be used for business purposes, the petitioner has shown both oppression and diversion of funds on the part of the respondent. Therefore, the Court will grant judgment to petitioner on the first two causes of action.

The Court turns to petitioner's cause of action for breach of contract.

“The essential elements of a cause of action to recover damages for breach of contract are the existence of a contract, the plaintiff's performance pursuant to the contract, the defendant's breach of its contractual obligations, and damages resulting from the breach” Avery v. WJM Dev. Corp., 216 AD3d 887, 888—89, 189 NYS3d 621, 623 (2 d Dept 2023) citing R. Vig Props., LLC v. Rahimzada, 213 AD3d 871, 873, 184 NYS3d 782 [internal quotation marks omitted]; see Fairlane Fin. Corp. v. Longspaugh, 144 AD3d 858, 859, 41 NYS3d 284).

The respondent contends that the petitioner cannot maintain this claim because Mr. Lehan failed to answer calls for capital to fund the expenses of DHCW between the years 2015 and 2022 (see Pet. Ex. 7, pp 112—114) while, at the same time, Mr. Montgomery and his family contributed $349,345 to the business.

This argument is less than persuasive.

It is beyond cavil that when one party commits an initial material breach of a contract, the other party to the agreement is excused from their duty of further performance (Markham Gardens L.P. v. 511 9th LLC, 38 Misc 3d 325, 331, 954 NYS2d 811, 815 [Sup Ct Nassau County 2012] citing Grace v. Nappa, 46 NY2d 560, 567, 389 NE2d 107, 110 [1979]).

In this case, the respondent failed to pay Mr. Lehan his $500 per week salary. Additionally, in what can only be viewed as a considered decision, Mr. Montgomery elected to bar petitioner from the latter's rightful access to the books and records of the company. In short, Mr. Montgomery's actions constituted a “positive and unequivocal” repudiation of the respondent's obligation. Thus, Mr. Lehan was not under an obligation to provide additional capital. In light of the respondent's behavior up until that time, the petitioner could only have expected Mr. Montgomery to treat any such contribution as a personal gift. Under the circumstances presented, the plaintiff has established, by the requisite quantum of proof, that the defendant committed a material breach of the contract.

Turning to the petitioner's claim sounding in unjust enrichment, the Court concludes that it is untenable. As stated in the oft cited Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 NY2d 382, 388, 516 NE2d 190, 193 (1987) “The existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter.”

Petitioner's counsel argues that Mr. Lehan should be allowed to proceed on both quasi contract and breach of contract theories, citing to Plumitallo v. Hudson Atl. Land Co., LLC, 74 AD3d 1038, 1039, 903 NYS2d 127, 128 (2d Dept 2010); Goldman v. Simon Prop. Grp., Inc., 58 AD3d 208, 220, 869 NYS2d 125, 135 (2d Dept 2008); and Schwartz v. Pierce, 57 AD3d 1348, 870 NYS2d 161 (3d Dept 2008). Such reliance is problematic. Plumitallo and Goldman were decisions accompanying motions to dismiss and held that unjust enrichment and breach of contract could be pled in the alternative.

Schwartz v. Pierce, 57 AD3d 1348, 870 NYS2d 161 (3d Dept 2008) is instructive since it involved review of a jury instruction. The learned Court held that it was permissible for a jury to allow a plaintiff recovery for quantum meruit “․ if he or she fails to establish the right to recover under the disputed contract.” (Id. at 1353)

As discussed above, the petitioner has proven the existence and breach of a “․ valid written agreement, the existence of which is undisputed, and the scope of which clearly covers the dispute between the parties” Schwartz, supra quoting (Clark—Fitzpatrick, Inc. v. Long Is. R.R. Co., supra at 389; M & A Constr. Corp. v. McTague, 21 AD3d 610, 611, 800 NYS2d 235 [2005]).

The facts presented in this matter do not justify allowing an equitable cause of action since Mr. Lehan has an adequate remedy at law for breach of contract upon which he has prevailed. The claim for unjust enrichment will be dismissed.

We now turn to a discussion of petitioner's cause of action sounding in breach of fiduciary duty.

“A fiduciary relationship ‘exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the ‘relation’ ” Marmelstein v. Kehillat New Hempstead, 11 NY3d 15, 21, 892 NE2d 375, 378 (2008) citing EBC I, Inc. v. Goldman, Sachs & Co., 5 NY3d 11, 19, 799 NYS2d 170, 832 NE2d 26 [2005], quoting Restatement [Second] of Torts § 874, Comment [a]). The Marmelstein Court held that a fact specific inquiry was required to prove the existence of this relationship (Id. at 21).

“In order to succeed on a cause of action to recover damages for breach of fiduciary duty, a plaintiff must do more than make allegations of unscrupulous acts [citation omitted]” (Robert I. Gluck, M.D., LLC v. Kenneth M. Kamler, M.D., LLC, 74 AD3d 1167, 1167, 904 NYS2d 151, 152 [2d Dept 2010]). A plaintiff must prove three elements (1) The existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct (Id. at 1167). It is incumbent upon Mr. Lehan to prove specific facts which demonstrate these criteria because “Mere speculation cannot support a cause of action for breach of fiduciary duty” (cites omitted) [In re Kenneth Cole Prods., Inc., 27 NY3d 268, 278, 52 NE3d 214, 221 (2016)].

“The majority shareholders in a close corporation are in a fiduciary relationship with the minority shareholders” (Celauro v. 4C Foods Corp., 187 AD3d 836, 132 NYS3d 159, 162 [2d Dept 2020] citing see World Ambulette Transp., Inc. v. Lee, 161 AD3d 1028, 1033, 78 NYS3d 137 [2d Dept 2018], citing Richbell Info. Servs. v. Jupiter Partners, 309 AD2d 288, 300, 765 NYS2d 575 [1st Dept 2003]). Since his position as the majority owner of DHCW placed Mr. Montgomery in a position of trust, he was under a duty to safeguard the assets of the corporation and provide an open and honest account of the business operations to Mr. Lehan. “Under New York law, directors of a corporation owe fiduciary duties to the body of shareholders to protect their ownership interests and to act in good faith, “treat[ing] all shareholders, majority and minority, fairly [cites omitted]” Eccles v. Shamrock Cap. Advisors, LLC, 42 NY3d 321, 333, 245 NE3d 1110, 1119 & n 8 (2024). A fair review of the proof shows that respondent failed to honor this obligation.

The evidence adduced at trial clearly demonstrated that respondent breached his fiduciary duty to both petitioners. The proof overwhelmingly establishes that Mr. Montgomery paid his personal expenses from company funds and diverted cash in excess of $1,064,625 out of the corporate checking account. That money was a corporate asset of DHCW. This failure to deposit cash receipts on respondent's part constitutes a clear breach of his duty of the good faith and loyalty to Lehan and DHCW. Mr. Montgomery's claims of financial distress and outstanding loans to his spouse were self-serving and belied by an admittedly affluent lifestyle. As further proof of the casual manner in which the respondent treated the petitioner's initial capital outlay, the Court notes that the respondent gave his wife a check (drawn on the DHCW account) in the amount of $150,000 one week after the final deposit of Mr. Lehan's $220,000 investment. Accordingly, the Court will grant judgment in favor of petitioner on the cause of action for breach of fiduciary duty.

In his defense of Mr. Montgomery's actions, counsel states “It is understood amongst entrepreneurs that investment in closely held corporations is perilous”. As noted above, however, the “peril” should not be found in the person of a co-venturer who is held to “the punctilio of an honor the most sensitive” as their standard of behavior (Meinhard v. Salmon, 249 NY 458, 464, 164 N.E. 545, 546 (1928 Cardozo J.)

The egregious nature of Mr. Mongomery's actions are exemplified in the sale of DHCW in February of 2022. “A corporate fiduciary is permitted to engage in other business ventures absent his corporate colleagues' consent and does not breach a fiduciary duty by virtue of such outside involvement” Licensing Dev. Grp., Inc. v. Freedman, 184 AD2d 682, 683, 585 NYS2d 456, 457 (2d Dept 1992). In the case before us, however, Mr. Montgomery alienated the business itself, acquired profit for himself and treated his business partner as a non-entity. If, in respondent's opinion, a sale of DHCW's assets were economically advantageous for the company, such conduct would have been entirely proper. Under such circumstances, the respondent could have discharged his fiduciary obligation to the minority shareholder by rendering an accounting and allocating his share of the sale price. Admittedly, none of these actions were performed by Mr. Montgomery.

The Court has considered the remaining arguments of respondent's counsel and although they have been expressed with great eloquence by Mr. Frank, they fail to find purchase with this Court.

Accordingly, the Court will grant judgment in favor of the petitioner and against respondent on the causes of action indicated above in the sum of $501,516, with interest from the date of the filing of the petition. This sum represents 22% share of the February 2022 sale proceeds, Mr. Lehan's $500 per week salary for two years and the funds improperly paid by respondent from the DHCW bank account for personal expenses and moneys paid to Mr. Montgomery's spouse as well as the business entity known as “Bob 1232”. Petitioner's request that the Court infer an additional amount of money from the sale of DHCW is denied. Such an award would be speculative.

Settle judgment within thirty days from service of a copy of this decision with notice of entry.

This memorandum also constitutes the order of the Court.

James Hudson, J.