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John KETTERER, Elizabeth Frank McGraw, Evelyn Ketterer, Melinda Waskow, Kristin Ketterer, Margaret Frank, Stephen Frank, Delores Meyn, Richard Maurer, Elizabeth Basirico, Derivatively on Behalf of Auerbach Grayson Holdings, Inc., Plaintiff, v. David Stuart GRAYSON, Auerbach Grayson & Company LLC, Berkshire Global Advisors LP f/k/a Berkshire Capital Securities LLC, New Frontier Securities LLC, Beltone Financial Holding SAE, Daniel Sigg, Auerbach Grayson Holdings Inc., Defendant.
The following e-filed documents, listed by NYSCEF document number (Motion 005) 79, 80, 81, 82, 83, 84, 85, 86, 87, 114, 115, 116, 117, 118, 149, 151 were read on this motion to/for DISMISSAL.
The following e-filed documents, listed by NYSCEF document number (Motion 006) 119, 120, 121, 122, 123, 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 150 were read on this motion to/for AMEND CAPTION/PLEADINGS.
The following e-filed documents, listed by NYSCEF document number (Motion 007) 90, 91, 92, 93, 94, 95, 96, 97, 98, 124, 125, 126, 127, 128, 129, 156 were read on this motion to/for DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 008) 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 152, 153, 154, 155, 157 were read on this motion to/for DISMISSAL.
The following e-filed documents, listed by NYSCEF document number (Motion 009) 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 184, 185, 212 were read on this motion to/for STAY.
The plaintiffs’ motion to file an amended complaint (Mtn. Seq. No. 005) must be granted because the Second Amended Complaint (the SAC; NYSCEF Doc. No. 120) is not patently devoid of merit and there is no prejudice to the Defendants (Davis v South Nassau Communities Hosp., 26 NY3d 563, 580 ; Eighth Ave. Garage Corp. v H.K.L. Realty Corp., 60 AD3d 404, 405 [1st Dept 2009]; CPLR 3025).
This action involves David Stuart Grayson and the other defendants’ alleged multi-step scheme involving fraud and breaches of fiduciary duties which divested the plaintiffs of their indirect investment in Auerbach Grayson & Company LLC (the Company) worth approximately $24 million for absolutely nothing.
The plaintiffs were minority shareholders of Auerbach Grayson Holdings Inc. (the Holding Company) and David Stuart Grayson was the majority shareholder, a Director, and the Chief Executive Officer (the SAC ¶ 2). The Holding Company's sole purpose was to hold both Class A and Class B membership interests in the Company. The members of the Company were (i) the Holding Company which held 2461 Class A Shares and 430 Class B Shares, (ii) Bellevue (USA) Inc. (i.e., Daniel Sigg's company) which held 275 Class A Shares and 53 Voting Convertible Preferred Shares, (iii) Strategic Investments I, Inc. which held 1,060 Non-Voting Convertible Preferred Shares 1 , (iv) Almaro Holding Inc. (i.e., also Mr. Sigg's company) which held 106 Voting Convertible Preferred Shares, (v) Frank & Company LLC (i.e., Stephen Frank's company) which held 53 Voting Convertible Preferred Shares and (vi) David S. Grayson who held 106 Profits Shares (NYSCEF Doc. No. 109 Schedule I). Mr. Grayson was also the CEO and one of two Directors of the Company. The other director of the Company was Mr. Sigg. To be clear, Mr. Grayson both by virtue of his ownership in the Holding Company and the Company and because he was management of both the Holding Company and the Company, controlled both entities.2
More specifically, the SAC alleges that step one of the scheme involved hiring Berkshire Global Advisors LP f/k/a Berkshire Capital Securities LLC's (Berkshire) to concoct a plan and find a buyer for the value of the plaintiffs’ minority interest without paying them — i.e., first by diluting their interest, converting their Class A ownership interests into Class B ownership interests and then by inappropriately depressing net operating income to effect a buyout of their interests for $0 — all without obtaining their consent (NYSCEF Doc. No. 121).3 This relationship ended in a lawsuit captioned Berkshire Capital Securities LLC v Auerbach Grayson & Co., LLC, and Beltone Financial Holdings SAE, Sup. Ct. NY Cty, Index. No. 655298/2016 (the Payoff Lawsuit) pursuant to which Berkshire sued for unpaid fees in connection with the very conduct alleged which forms the basis for the claims against them in this lawsuit.
As relevant, the Payoff Lawsuit was resolved pursuant to a certain Settlement Agreement (the Settlement Agreement; NYSCEF Doc. No. 105), dated as of October 23, 2017, by and among Berkshire, the Company, and Beltone Financial Holdings SAE (Beltone). Pursuant to Section 3 of the Settlement Agreement, the alleged wrongdoers released each other and their principals, parents, partners and their successors and assigns. This release offers no protection as to the claims asserted in this lawsuit because the plaintiffs did not sign the release and a tortfeasor can not release an alleged aider and abettor on behalf of the injured party of the very tort which is said to have caused the injury. Indeed, it sounds like the punchline of a bad joke — Did you hear the one about the tortfeasor and the aider and abettor? Answer: No. “Punchline:” Well, they decided to release each other and their affiliates so I guess it's all good and the injured party is out of luck. In a word: Ridiculous!
Step two involved the transaction itself. In June 2016, pursuant to a certain Investment Agreement (the Original Investment Agreement; NYSCEF Doc. No. 139), dated as of June 1, 2016, by and among Beltone, the Company, the Holding Company and Mr. Grayson, Beltone agreed to purchase 51% of the Company for $25 million. The Original Investment Agreement provided that the members of the Company would execute a Second Amended and Restated Operating Agreement providing for the conversion of all equity interests into 4,203.928 class A shares and 4,039.068 class B shares. Simultaneously, Beltone was to purchase the 4,203.928 Class A shares which represented 51% of the Company.
The Original Investment Agreement was amended three months later in September 2016 pursuant to a certain Amendment No. 1 to Investment Agreement (the First Amendment; the Original Investment Agreement, together with the First Amendment, hereinafter, collectively, the Investment Agreement; NYSCEF Doc. No. 140), dated September 29, 2016, by and among Beltone, the Company, the Holding Company, and Mr. Grayson. Significantly, none of the plaintiffs executed the Investment Agreement.
Pursuant to the terms of the First Amendment, all of the existing equity interests of the Company pursuant to a Second Amended and Restated Operating Agreement would be converted into 6,161.777 class A shares and 4107.852 class B shares. Simultaneously, Beltone through its wholly owned subsidiary defendant New Frontier Securities LLC (New Frontier), agreed to purchase nine percent more of the Company for $1 million less (i.e., 60% of the Company for $24 million; the Beltone Investment).
Pursuant to the terms of the Investment Agreement that none of the plaintiffs executed, New Frontier had an option to purchase all or part of the Class B shares (id., ¶ 12.15 [b]). Indeed, according to the SAC, the plaintiffs were not even made aware of the option and other material terms of the Beltone Investment (NYSCEF Doc. No. 120, ¶ 50).4
Step three of the alleged scheme involved squeezing out the plaintiffs for nothing. To wit, after the Beltone Investment, the Company was managed by a Board of Directors entirely controlled by Beltone, Mr. Grayson, and Mr. Sigg (NYSCEF Doc. No. 120, ¶ 12). According to the SAC, Beltone, Mr. Grayson, and Mr. Sigg intentionally or negligently mismanaged the Company causing approximately $6 million losses per year for the next three years (id., ¶¶ 12, 54) to put Beltone's option in the money so they could acquire all of the outstanding Class B shares in the Company, including the shares held by the Holding Company for $0 (id., ¶¶ 12, 55-56).
Step Four involved Beltone's sale of its interest in the Company to HDH Global LLC (HGH Global), a company jointly owned by Mr. Grayson and PT MNC Kapital Indonesia (id., ¶¶ 14, 58-59), whereby Mr. Grayson recaptured a 25% interest in the Company (id., ¶ 58).
The plaintiffs sued by summons and complaint dated May 28, 2021 (NYSCEF Doc. No. 1), asserting derivative claims on behalf of the Holding Company. Subsequently, the plaintiffs filed an amended complaint (NYSCEF Doc. No. 55), dated October 22, 2021, asserting causes of action for breach of fiduciary duty against the Company, Mr. Grayson, Mr. Sigg, Beltone, and New Frontier (first cause of action), aiding and abetting breach of fiduciary duty against Beltone and Berkshire (second cause of action), and unjust enrichment against Beltone and New Frontier (third cause of action).
Recognizing that the claims are direct and not derivative claims, the plaintiffs now move (Mtn. Seq. No. 006) to file the SAC (i) adding additional factual allegations relating to the already plead claims, (ii) removing certain causes of action, and (iii) clarifying that the remaining causes of action are brought directly, and not derivatively, including removing the Holding Company as a nominal defendant and the Company as a defendant.
Discovery is in its neonatal state. A preliminary conference had not even been held in the case when this motion was filed. There simply is no prejudice to the filing of the SAC and there has been no delay. It does not matter that previously the defendants may have filed motions to dismiss that this Court never heard. Nor are the defendants entitled to the Court ordering that this is the final amendment to the complaint that could be filed or for costs to be assessed. Should discovery (which has not taken place) disclose additional facts or information and the plaintiffs seek to further amend the complaint, this Court will review any such proposed amendment at that time. Nothing suggests that the plaintiffs’ conduct has been inappropriate in any manner much less willful and contumacious warranting any type of sanction.
Denial of the motion is also inappropriate based on the defendants’ argument that the SAC fails because these are derivative claims (which they can not assert because they lack standing — i.e., having been bought out for $0 pursuant to an agreement that they never saw or signed to facilitate the defendants’ ruse, they are not owners so they can not satisfy the dual requirements of contemporaneous and continuous ownership (Independent Inv. Protective League v Time, Inc., 50 NY2d 259, 263 ). Simply put, the defendants are wrong.
Under Delaware law, whether a claim is direct or derivative is determined under the Tooley test. The issues are (i) who suffered the alleged harm, the company or the shareholders, and (ii) who would receive the benefit of any recovery, the company or the shareholders (Tooley v Donaldson, Lufkin & Jenrette, Inc., 845 A2d 1031 [Del 2004]). The well pled SAC alleges prima facie evidence of breaches of both the duties of care and loyalty by Mr. Grayson and Mr. Sigg and aiding and abetting over those breaches by Berkshire, Beltone and New Frontier. No independent committee or valuation appears to have been done to determine if the transaction is fair and no independent approval was sought of the plaintiffs (shareholder approval of the Company which was controlled by Mr. Grayson and Mr. Sigg would have been without consequence). Given Mr. Grayson and Mr. Sigg's interests disclosed in the documents, the recovery here would not flow to the Company or the Holding Company and in fact the injury was not to those entities. The injury as alleged was tactical and precise and occasioned by these plaintiffs and the recovery, if successful in this lawsuit, would necessarily flow to them. Thus, it can not be said that the SAC is utterly devoid of merit.
The defendants’ reliance on Serino v Lipper, 123 AD3d 34 (1st Dept 2014) is misplaced. In Serino, Mr. Lipper, the founder of a group of hedge funds, asserted counterclaims against PricewaterhouseCoopers, who had audited the funds and provided personal tax services to Mr. Lipper, alleging, among other things, that PricewaterhouseCoopers was aware that the funds were overvaluing their assets but failed to include that information in their audit. Mr. Lipper alleged that he could bring direct claims against PricewaterhouseCoopers because they had performed tax services for him and because he relied on the audit of the funds in making personal financial decisions. The Appellate Division applied the Tooley test and found that, where harm was caused to the individual, rather than the corporation, direct claims may proceed, but where individual harm is claimed but is confused with or embedded in the harm to the corporation, it cannot stand separately (id., at 40). The Appellate Division held that Mr. Lipper's claim for damages based on the lost value of his holdings was derivative and that his claim for lost earning capacity was inextricably embedded in that derivative claim (id., at 41). As discussed above, the claims in this case are not derivative in nature. The conduct alleged in this case was designed to strip these plaintiffs of their holdings without paying them. That is a direct claim under Tooley and Serino.
Finally, leave to amend can not be denied because the Court can not determine at this stage whether the statute of limitations limits or precludes these fraud-based claims. As pled, the plaintiffs were unaware of the harm done to them (because they did not sign the Investment Agreement) until the conversion/buyout took place. Their claims may well be entitled to the benefit of equitable tolling or the discovery rule (Zumpano v Quinn, 6 NY3d 666, 674 ).
The Court has considered the defendants’ remaining arguments and finds them unavailing.
At oral argument the defendants indicated that their motions to dismiss (Mtn. Seq. Nos. 005, 007-008) should be marked as withdrawn without prejudice and Berkshire's motion for a stay (Mtn. Seq. No. 009) pending resolution of Berkshire's motion to dismiss is denied.
It is hereby ORDERED that the motion for leave to file the Second Amended Complaint is granted; and it is further
ORDERED that the Second Amended Complaint in the proposed form annexed to the moving papers (NYSCEF Doc. No. 120) shall be deemed served upon service of a copy of this order with notice of entry thereof; and it is further
ORDERED that the Defendants shall serve an answer to the amended complaint or otherwise respond thereto within 20 days from the date of said service; and it is further
ORDERED that the motion to dismiss are withdrawn without prejudice; and it is further
ORDERED that the motion to stay is denied.
1. Strategic's investment was to be purchased as part of the transaction described below.
2. Mr. Sigg was Bellevue's director designee in the Company. He was also Bellevue's President and Almaro's President. Given this and the fact that the Company owed him $200,000 of subordinated debt (NYSCEF Doc. No. 139) scheduled to mature in April 2017, Mr. Sigg can not be said to be independent as it relates to the transaction described below.
3. Mr. Frank did not sign the Investment Agreement (hereinafter defined) either based on his individual holdings in the Holding Company or on behalf of his company Frank & Company LLC, which was a member in the Company. He did however execute the Second Amended Operating Agreement (hereinafter defined) on behalf of his company, Frank & Company LLC. Pursuant to the Second Amended Operating Agreement, Frank & Company LLC's 53 Voting Convertible Shares were converted into 64.130 Class B Shares. Notwithstanding anything discussed on the record (7.13.22) to the contrary, and upon further reflection, this Court holds at this time only that Mr. Frank's ability to bring these claims on behalf of Frank & Company LLC based on the recapitalization set forth in the Second Amended Operating Agreement and the purchase option itself may well be limited based on what he agreed to on behalf of Frank & Company LLC in the Second Amended Operating Agreement. From Mr. Frank's perspective, based on the documents he actually saw (i.e., the Second Amended Operating Agreement) he may however only have understood that Frank & Company's convertible shares were being converted to Class B shares. He simply may not have understood that the dilution and the subsequent post-investment conduct was being accomplished. Whatever it is that he did agree to, to be clear, he did not agree that Mr. Grayson could sell the plaintiffs’ investment to a third party, benefit from that transaction personally and then artificially decrease the net operating income of the Company so that the obligation to pay him would be for $0. Additionally, and for completeness, the other plaintiffs’ consent was never obtained to recapitalization which transformed their interests from Class A to Class B or to the dilution of their equity.
4. As discussed above, Mr. Frank on behalf of Frank & Company LLC executed the Second Amended Operating Agreement and his ability to bring this suit may well be limited as discussed above.
Andrew Borrok, J.
Response sent, thank you
Docket No: Index No. 653510/2021
Decided: July 25, 2022
Court: Supreme Court, New York County, New York.
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