Seller Alleges Buyers’ Breach of Fiduciary Duty Induced Contract

This was originally published on the SGR Blog.

Court Determines if Seller Has Legally Cognizable Claims

Our Courts usually do not permit a breach of contract claim to be escalated to the business tort of breach of fiduciary duty. But, as a recent case illustrates, unique circumstances, collateral factors, and allegations of fraud and concealment may justify the claim.

Tiny 1, Ltd. and others alleged that Georges Berberi and Matt Auerbach, both of whom were affiliated with Samfet Marble Inc., sought to purchase Tiny 1, formerly known as Port Morris Tile & Marble Corp., and schemed to control Port Morris’s financial operations while its sole owner, Vincent DeLazzero, was ill. The complaint further alleged that Berberi and Auerbach fraudulently concealed wire transfers from Port Morris to Samfet, increased Port Morris’s debt, denied DeLazzero timely access to Port Morris’s books and records, which had been falsified by James Coyle and Michael Giambra, and ultimately forced DeLazzero to sell Port Morris for far less than it was originally worth.

Berbrri, Auerbach, Samfet, Coyle, and Giamba moved to dismiss the complaint. The motions were denied. An appeal followed.

The Supreme Court properly denied Berberi and Auerbach’s motion to dismiss, on statute of limitations grounds, the causes of action for breach of fiduciary duty, and aiding and abetting breach of fiduciary duty. Fraud was sufficiently pleaded and was essential to those causes of action, and therefore, a six-year limitations period applied.

Tiny 1 properly stated breach of fiduciary duty claims against Berberi and Auerbach. A fiduciary relationship does not exist in an arms-length business transaction, but the pleadings in this action alleged unique circumstances that, when accepted as true, did not constitute an ordinary arms-length transaction.

According to the complaint, DeLazzero was ill when the parties contemplated the sale; as a result, Auerbach and Berberi took over certain financial operations of Old Port Morris to complete due diligence before they bought the company. Thus, the complaint stated, while they were acting as buyers, Auerbach and Berberi also became acting corporate officers of the selling company, creating a higher position of trust than ordinarily existed between buyers and sellers. Similarly, even assuming the more stringent standard of “but for” causation applied to the fiduciary duty claims, breach of fiduciary duty was sufficiently pleaded as Coyle and Giambra because the complaint sufficiently alleged that the damages were caused by their conduct in misstating or falsifying Old Port Morris’s financial records.

As to the claim of aiding and abetting breach of fiduciary duty, the complaint alleged that Michael Breslin substantially assisted in breaches of fiduciary duty by, among other things, attending a meeting at which DeLazzero was shown a false balance sheet, prepared by one of Breslin’s subordinates at Breslin’s behest, that artificially reduced the company’s value by $9 million. The complaint therefore stated a claim that, by his conduct, Breslin substantially assisted the primary violators in, at a minimum, devaluing Old Port Morris so it could be bought at an artificially reduced price.

The complaint properly stated jurisdiction over Samfet, a Canadian company, since it asserted that Samfet was directly involved in the conduct at issue over a period of years and committed a tortious act within the state through its agent, Berberi. The complaint properly asserted jurisdiction over defendant Port Morris Tile & Marble Boston LP, as the successor in interest to Port Morris Tile & Marble LP, the buyer of Old Port Morris. The complaint also properly alleged jurisdiction over NYC Marble Acquisitions LP and the purchaser/Port Morris by alleging that they aided and abetted the primary violators through the acts of their agents, including Berberi and Breslin

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