Caplash v Rochester Oral & Maxillofacial Surgery = Assoc., LLC (2008 NY Slip Op 51216(U))

Caplash v Rochester Oral & Maxillofacial = Surgery=20 Assoc., LLC

2008 NY Slip Op 51216(U)

Decided on June 20, 2008

Supreme Court, Monroe County

Fisher, J.

Published by New York State = Law=20 Reporting Bureau pursuant to Judiciary Law =A7 = 431.

As corrected in part = through June 20,=20 2008; it will not be published in the printed Official=20 Reports.

At the conclusion of a hearing directed by the Appellate Division, = Fourth=20 Department to resolve "as an issue of fact" whether Jolly Caplash, one = of two=20 members of the company, retained standing to seek its dissolution by = motion made=20 returnable December 20, 2006, after tendering a letter of resignation = "as an=20 employee" on December 7, 2006, the court invited and has received = written=20 summations.=20

Termination of employment is governed by Caplash's employment = agreement.=20 Exhibit 6. As relevant here, the agreement provides that termination may = occur=20 upon mutual written agreement between the employee and ROMSA. The = employment=20 agreement is incorporated into Section 3.3(d) of ROMSA's operating = agreement.=20 Exhibit 3. The operating agreement makes employment a requirement of = membership.=20 In the words of the Appellate Division, the agreement "unequivocally = provides=20 for the termination of membership in the event of the termination of a = member's=20 employment."=20

Deciding the issue of Caplash's standing, then, involves a number of = related=20 questions. Since termination is "mutual" only if both parties agree, the = key=20 question is whether a party having ROMSA's authority to accept Caplash's = resignation did so. According to the Appellate Division, this question = becomes=20 whether Mr. Kristal had authority to accept Caplash's December 7th = resignation=20 as the company's attorney. For this reason, the Appellate Division = directed the=20 court to expand the record at an immediate trial to include the = circumstances=20 under which Mr. Kristal came to be retained, including whether = Salahuddin had=20 [*2]authority under the operating agreement = to hire a=20 separate attorney to represent the entity for any purpose other than = providing a=20 nominal defense to the declaratory judgment action.=20

A second question, not raised by the Appellate Division but by = Caplash, is=20 whether his December 7th letter was an unequivocal termination of = employment or=20 one conditioned upon a release of restrictions imposed upon him by the=20 employment agreement, including a covenant not to compete. If his = resignation is=20 held to be conditional, then he remained a member of ROMSA for purposes = of his=20 application for dissolution, since the company had not released him from = the=20 breach of contract claims alleged in its Answer and Counterclaim, = Defendant's=20 Exhibit C, nor had the company released him from the covenant not to = compete.=20

Some background about the professional relationship between Mr. = Kristal and=20 Salahuddin should be kept in mind. After representing Salahuddin in his = divorce=20 at a time when he was ROMSA's employee, Mr. Kristal regarded himself as=20 Salahuddin's personal attorney. In 1999, Salahuddin consulted with = Kristal when=20 he purchased a one-half membership interest from ROMSA's founder, Vernon = Loveless, DDS. Salahuddin was represented in the transaction by Mary G. = Ross,=20 Esq., of the Harter Secrest office. In 2005, Mr. Kristal was consulted = once=20 again when Loveless retired and sold the other half of his membership = interest=20 to Caplash. On this occasion, Ross represented Caplash and Salahuddin.=20

Documents signed in connection with Caplash's membership purchase = indicate=20 that Loveless held a substantial minority equity interest in ROMSA at = the time=20 of closing. Caplash paid $400,000 for Loveless's interest. Despite some=20 pleadings to the contrary, Salahuddin in his testimony fully accepted = Caplash's=20 status as a ROMSA member by virtue of the purchase. The operating = agreement,=20 however, does not provide for weighted voting. Upon his purchase, = therefore,=20 Caplash secured equal voting rights in company affairs.=20

Although Caplash testified that he never recognized Salahuddin as = president,=20 his Amended Complaint alleges that, prior to the June 14, 2006 election, = Salahuddin was indeed president of ROMSA.^[FN1] In any event, upon Loveless's = retirement,=20 Salahuddin assumed the duties, if not the title, of president without, = however,=20 a formal election or amendment of the operating agreement.=20

There had been occasional friction between Loveless and [*3]Salahuddin, after Salahuddin joined ROMSA, = but they=20 managed to settle their differences through daily contacts, without = resort to=20 the protocol of the operating agreement. This harmony, such as it was, = continued=20 for some period of time after Loveless left the practice and Caplash = joined the=20 practice, that is until Caplash became dissatisfied with his share of = company=20 revenues. Not long after commencing his practice at ROMSA, and with = Salahuddin's=20 approval, Caplash had taken a position at ViaHealth, located at = Rochester=20 General Hospital, next to the company's Portland Avenue office. = According to=20 Salahuddin, this was intended to introduce Caplash to referral sources, = and to=20 gain admission privileges. Under the terms of the employment agreement, = Caplash=20 remitted his earnings at ViaHealth to ROMSA.=20

In the Spring of 2006, Caplash consulted with R. Paul Hegner, a = dental=20 "practice consultant." On May 16, 2006, Caplash executed a power of = attorney,=20 Exhibit 11, allowing Hegner to undertake negotiations with respect to = his=20 membership interest in ROMSA. After a number of telephone calls in the=20 intervening two or three weeks, Kristal received a letter from Hegner, = Exhibit=20 10, dated June 6, 2006, confirming the scheduling of a special meeting = under=20 Section 7.5 of the operating agreement, requested by Caplash "in his = role as=20 secretary of the corporation." The meeting, attended by Kristal, = Caplash,=20 Salahuddin, Hegner and his assistant, Claire Nawrocki, took place as = scheduled=20 on June 14th at the ROMSA Portland Avenue office. Though a number of = items were=20 on the agenda, the most important topic discussed in retrospect was not = - the=20 ROMSA presidency. In summation, Mr. Kristal on behalf of ROMSA asserted = that,=20 though accounts differ, all witnesses agreed that an election took = place, that=20 Salahuddin voted in favor of Caplash assuming the presidency, and that = Caplash=20 did not immediately accept the position. In fact, Salahuddin denied that = an=20 election took place, and denied that he nominated Caplash. Instead, = Salahuddin=20 maintained that the meeting was not about the presidency, that the = question only=20 came up as an after-thought at the end of the meeting when Hegner = inquired=20 whether Caplash could become president, that he, Salahuddin, replied = that that=20 would be no problem if Caplash resigned all other positions he held and = devoted=20 100% of his time with ROMSA. Salahuddin insisted in his testimony that = he never=20 surrendered the office of presidency.=20

Salahuddin's testimony on this point is either mistaken or not = credible.=20 Kristal and Hegner testified in detail about the meeting in testimony = that the=20 court accepts (with one important exception). According to Kristal, = several=20 topics were discussed at the meeting, including the methodology of = compensation=20 for members, methodology of distribution of patients, the question of=20 appointment of corporate counsel, and the vote on the presidency. No = elaboration=20 of the meeting discussion was attempted by Kristal [*4]in his testimony except in regard to the = question of=20 corporate counsel and the vote on the presidency. Kristal testified that = he was=20 opposed to the appointment of counsel and that the members did not agree = to hire=20 counsel. The presidency was discussed next. According to Kristal, = Caplash was=20 nominated for the position by Salahuddin, and a unanimous vote was taken = electing Caplash to the post. Although Kristal expressed doubt that = Caplash=20 thereby became president, in deposition he conceded as much, albeit in = equivocal=20 terms.=20

Q.But if he subsequently assented to being president would he be = president=20 based upon that vote?=20

A.I expect so. I have no opinion on that subject.

Kristal = elaborated=20 that "the meeting of June 14th was about two hours long and in the = course of=20 those two hours Mr. Hegner suggested that we elect a president, and in = the=20 course of that, in fact, Dr. Salahuddin nominated Dr. Caplash." He = added, "there=20 was a vote and the vote was two to nothing in favor of Dr. Caplash's = election."=20 Though acknowledging that the agenda for the meeting did not include the = subject=20 of the presidency, Kristal maintained that the election occurred.=20

On the subject of Caplash's continued employment at ViaHealth, = Kristal's=20 testimony also is accepted and Salahuddin's testimony is rejected. = Salahuddin=20 maintained a militant tone in his testimony on the subject which did not = ring=20 true. He insisted that he never "surrendered" the presidency of ROMSA at = the=20 June 14th meeting and fully conditioned his acceptance of Caplash as = president=20 on the latter's prior resignation from ViaHealth and other outside = employment.=20 Kristal, on the other hand, explained that the two issues were not = linked at=20 least initially, but later became the subject of an oral agreement = between=20 Caplash and Salahuddin that Caplash would not assume the presidency of = ROMSA=20 until he worked full-time there. Kristal testified:=20

. . . Dr. Caplash was employed at the time of the election and for = some=20 length of time prior to that at ViaHealth. He was not working at the = ROMSA=20 location full-time, and because he wasn't, Dr. Salahuddin and Dr. = Caplash came=20 by themselves to an agreement that Dr. Caplash would not assume the = presidency=20 of ROMSA until he was a full-time - - until he worked full-time there. = That was=20 expected to occur in October because he had a contract with ViaHealth = that did=20 not terminate until October and the time of the renewal of the contract, = you=20 know, the [*5]expectation was, barring the = lawsuit,=20 that he would not renew and that he would commence employment full-time = at=20 ROMSA.

Neither Caplash nor Salahuddin recalled such an agreement = in=20 their testimony, however. Caplash maintained that there were no = conditions=20 attached to the vote, other than that he would work those hours that Dr. = Loveless had worked, and Salahuddin insisted that there was no vote and = that the=20 matter of his agreement to Caplash assuming the post of president was = fully=20 conditioned on a full-time commitment to ROMSA and resignation from=20 ViaHealth.^[FN2] There was no reference in = Salahuddin's=20 testimony to an agreement of the kind Kristal described in his = testimony.=20

I find that Hegner's testimony is entirely credible on the issue of a = contingency. According to Hegner, Salahuddin said at [*6]the June 14th meeting, "you may be surprised = but I am=20 agreeing to election of a President," and then nominated Caplash. = Shortly=20 thereafter, both members voted for Caplash, and that it was agreed that = Caplash=20 would have a short period of time to determine whether to accept the = post.=20 Hegner maintained, again in testimony I find credible and that I accept, = that no=20 conditions were attached to the election, or discussed. Rather, at the = end of=20 the meeting, some 20 minutes after the vote, Kristal told Hegner that = there was=20 a concern that Caplash was working at ViaHealth and that Salahuddin = wished that=20 to stop. Caplash agreed that he and Hegner would endeavor to extract = Caplash=20 from his ViaHealth contract, but to nothing more.=20

Caplash accepted the election results in a July 11, 2006, letter. = Later,=20 during the July 27th meeting, Kristal maintained that Caplash was not = suited for=20 the job of president and claimed that Caplash did not fulfill the = conditions for=20 assuming the post. When Hegner denied that there ever were any = conditions,=20 Salahuddin said that Caplash had to prove his loyalty to ROMSA. Hegner = also=20 raised at that meeting the question of dissolution by reason of deadlock = over=20 the presidency, and explained that, with dissolution, "there would be no = non-compete." I find that there was no contingency, that Caplash = accepted the=20 post in writing well prior to any mention of a contingency, and that the = contingency issue was interposed as surrogate and false post hoc = reasoning to=20 avoid a duly authorized unanimous action of the members at the June 14th = meeting.^[FN3]=20

Caplash filed an action for a declaratory judgment that he was indeed = elected=20 president on August 21, 2006. Salahuddin retained Kristal to defend = ROMSA in the=20 declaratory judgment action at the end of August 2006. On September 1, = 2006,=20 Kristal served ROMSA's Answer and Counterclaims. Defendant's Exhibit C. = Despite=20 ROMSA's status in the declaratory judgment action as a nominal = defendant,=20 see Amended Decision and Order, dated May 28, 2006, the = counterclaim was=20 for dissolution. But see, LLCL =A7 702 (only a member may seek=20 dissolution); Application of Clemente Bros., Inc, 19 AD2d 568 (3d = Dept.=20 1963)(statute "grants to the corporation as a separate entity no = authority to=20 determine whether a proceeding shall be initiated to dissolve itself"),=20 aff'd, 13 NY2d 963 (1963). In addition, there were other [*7]counterclaims against Caplash for breach of=20 contract.^[FN4] Salahuddin also appeared in the = action via=20 separate counsel, and filed an Answer and Counterclaim (denominated = affirmative=20 defense) for dissolution.^[FN5] Subsequently, Salahuddin moved for = summary=20 judgment declaring ROMSA dissolved. The motion was filed November 7, = 2006, and=20 was made returnable December 20th.=20

Caplash cross-moved for summary judgment declaring ROMSA dissolved, = and he=20 also cross-moved to amend the complaint. That motion was filed December = 12,=20 2006, the very day Kristal wrote the letter purportedly accepting = Caplash's=20 resignation. These motions also were made returnable December 20, 2006. = Kristal=20 filed no motion papers in connection with these cross-motions for [*8]dissolution, but of course had interposed the = counterclaim for dissolution described above. In summation, Caplash = points out,=20 quite correctly, that the proof at the hearing failed to address whether = Kristal's acceptance letter was received or even written prior to the = filing of=20 the cross-motion for dissolution. For this reason, Caplash argues, = Salahuddin=20 failed at the hearing to show that Caplash had been stripped of his = membership=20 status at the time he filed his cross-motion for dissolution. The court = agrees.=20

The issue of timing would not be important if Caplash had brought an = action=20 for dissolution prior to the filing of the motion, as usually occurs in=20 litigation of this sort. But the declaratory relief Caplash sought in = regard to=20 the presidency would have been incompatible with dissolution. = Nevertheless, the=20 failure to plead a cause of action for dissolution was not fatal to = Caplash's=20 cross-motion. "While the general rule is that a party may not obtain = summary=20 judgment on an unpleaded cause of action (Cohen v. City Co. of New = York,=20 283 NY 112), it is also true that summary judgment may be awarded on an=20 unpleaded cause of action if the proof supports such cause and if the = opposing=20 party has not been misled to its prejudice." Weinstock v. = Handler, 254=20 AD2d 165, 166 (1st Dept. 1998). See Cecos Inter., Inc. v. Advanced = Polymer=20 Sciences, Inc., 245 AD2d 1017 (4th Dept. 1997); Home Savings of = America,=20 FSB v. Coconut Island Properties, Ltd., 226 AD2d 1138, 1139 (4th = Dept.=20 1996); Deborah Inter. Beauty, Ltd. v. Quality King Distributors, = Inc.,=20 175 AD2d 791, 793 (2d Dept. 1991). The appellate division considered = plaintiff's=20 cross-motion for summary judgment decreeing a dissolution of ROMSA, and = found=20 the motion supported as a matter of law on its face, only finding an = issue of=20 fact on plaintiff's standing. Therefore it is the law of the case that = the proof=20 "supports such [unpleaded] cause," Weinstock v. Handler, 254 AD2d = at 166,=20 if standing is established. Even assuming that Kristal's letter was an = effective=20 acceptance of an unconditional tender of resignation, the court finds = that there=20 is no proof that it was written and received before Caplash filed his=20 cross-motion on December 12th, and that therefore he had standing as a = member of=20 ROMSA to seek dissolution. But for the reasons stated elsewhere in this = opinion,=20 the court finds additionally that the Kristal acceptance letter was = ineffective=20 to constitute the requisite written action of ROMSA accepting the = tendered=20 resignation that the operating agreement contemplates.=20

In addition to the reasons stated in the court's Amended Decision and = Order=20 denying Salahuddin's mid-hearing motion for summary judgment (at 19-32), = part of=20 which rejected Salahuddin's contention that ROMSA was set up as = member-managed,=20 it must be observed that the chancellor of the Delaware Court of = Chancery has=20 since held that, even in a member-managed LLC, where two co-[*9]equal owners (in terms of voting rights) = "disagree, the=20 LLC is deadlocked[,] [and] [a] deadlocked LLC cannot validly retain = counsel and=20 file an answer." Maitland v. Int'l Registries, LLC, 2008 WL = 2440521, *1-2=20 (Civ. Action No. 3669-CC) (Del. Ch. June 6, 2008)(William B. Chandler, = III, J.)=20 (http://courts.delaware.gov/opinions/(w50hlq45lvjdlae00mzftg45)/download.= aspx?ID=3D107380)(striking=20 the LLC's answer and disqualifying the entity's counsel), citing = Engstrum v.=20 Paul Engstrum Associates, 124 A.2d 722 (Del. Ch. 1956). In that = case, it was=20 held that the hiring of counsel on behalf of the LLC by a fifty percent = member=20 was not authorized under the operating agreement "which requires action = by=20 majority." Id. (at p.1). Accordingly, Salahuddin's = member-management=20 argument, even on its own terms, fails to achieve the result he seeks. = He had no=20 authority to hire counsel for ROMSA for any purpose, and certainly not = for the=20 purpose of appearing in the action in a militant capacity on one side of = a 50-50=20 split of the kind present here, or to accept a tendered resignation of = another=20 employee on behalf of the entity.=20

Separately, Caplash was duly elected president and accepted the post = in=20 writing. Nothing by way of "action" under =A77.10 of the operating = agreement=20 (majority vote) occurred subsequently to undo the results of the June = 14th=20 election. Inasmuch as Caplash was president at the relevant times in=20 August-December, Salahuddin had no authority to act on behalf of ROMSA=20 notwithstanding that he still performed the day-to-day management of the = business. Of course, where the members acquiesce in such management = powers by a=20 member, implied authority may be present. Cf., New York Metro Corp. = v. Chase=20 Manhattan Bank, N.A., 52 NY2d 732, 734 (1980)("other evidence, ..., = from=20 which the jury could have concluded ... [corporate president] had = authority ...=20 unrelated to any specific corporate resolution" required submission of = that=20 discrete issue to the jury); Weber v. Loft Candy Corp., 277 App. = Div.=20 1005 (2d Dept. 1950)("Proof is material with respect to the custom of = the=20 corporation and authority of the sales manager and president"); = Gamacho v.=20 Hamilton Bank-Note & Engraving Co., 2 App. Div. 369, 371 (1st = Dept.=20 1896). See also, Sun Printing & Publishing Ass'n v. = Moore, 183=20 U.S. 642, 650-51, 22 S.Ct. 240, 244, 46 L.Ed. 366 (1902)(inasmuch as = "the=20 trustees of the Sun Association must be presumed to have exercised a = supervision=20 over the business of the corporation, they are to be charged with = knowledge of=20 the extent of the power usually exerted by its managing editor, and must = be held=20 to have acquiesced in the possession by him of such authority, even = though they=20 had not expressly delegated it to him"); White, New York Business=20 Entities =B6 B715.06[2], at p. 7-158 ("one of the facts that may = demonstrate=20 implied authority is a continued course of dealing in which an agent has = been=20 [*10]permitted to perform the act in = question"). But=20 where no such acquiescence is present, and none was after Caplash's July = 11th=20 written acceptance of the election result and the filing of his = declaratory=20 judgment action on August 21st, none may be inferred. Accordingly, = Salahuddin=20 had no implied actual authority to hire Kristal to represent ROMSA. The = question=20 identified for trial by the appellate division must be answered in = Caplash's=20 favor.Because the appellate division held that the motion was otherwise=20 supported by evidence of deadlock, Caplash's motion for summary judgment = dissolving ROMSA is granted.=20

Any other result would lead to manifest unfairness. The crux of this=20 controversy is the enforceability of Caplash's covenant not to compete = by reason=20 of his taking up a trial practice in the office of Dr. Rennie who had in = late=20 November 2006 recently passed away, an office within the territorial = restriction=20 of the restrictive covenant. It appeared from the proof that Caplash was = looking=20 into four locations for alternate work during the period after both = Salahuddin=20 and Mr. Kristal interposed counterclaims for dissolution and Salahuddin = moved on=20 November 7th for summary judgment declaring ROMSA dissolved. As Hegner=20 testified, Caplash came to him with the thought that the writing was on = the=20 wall, that ROMSA was hopelessly deadlocked, and that his opponents in = the=20 litigation were seeking an accelerated judgment of dissolution in = motions that=20 were returnable in mid-December. Hegner testified that he only contacted = the=20 attorneys for the Rennie estate "in the November, December time = element."=20 Despite the effort by defendants' counsel to portray the approach to the = Rennie=20 estate as sinister, the effort can only be seen as an understandable = reaction to=20 the fact that the two defendants in the action had counterclaimed for=20 dissolution and the individual defendant had moved for a summary = determination=20 of the same on undisputed proof of a deadlock. Caplash's first day of = work at=20 the Rennie practice was on December 11th, the day before he filed his=20 cross-motion for summary judgment declaring ROMSA dissolved. With both = motions=20 for dissolution filed, dissolution appeared foreordained. It was only = the last=20 minute maneuvering on December 15th that changed this.=20

As I recounted on the record at the hearing, on December 12th, = counsel for=20 Salahuddin faxed a letter to the court requesting an adjournment of the = motions=20 by reason of the extensive relief Caplash demanded in his cross-motions. = There=20 was no hint that Salahuddin's motion for dissolution would be withdrawn. = On=20 December 15th, counsel for Caplash faxed a letter to the court objecting = to the=20 requested adjournment on the ground that "deteriorating circumstances at = ROMSA"=20 made it necessary to make career plans before the holidays and that it = was=20 necessary to have some direction from the court on dissolution before = then.=20 [*11]December 15th was a Friday. The court = attempted=20 an accommodation by granting an adjournment of the bulk of the = cross-motions to=20 January 24, 2007, but deciding the cross-motions for dissolution by = granting=20 them. This determination was made in a handwritten endorsement of the = December=20 15th letter objection to the adjournment request, which noted that "both = parties=20 agree that an order of dissolution should be entered." Court Exh. = No.3.^[FN6] Whether I wrote this determination = (and=20 request to submit order) on the 15th or 18th, the fax of it to counsel = did not=20 go out from my chambers until the next Monday, the 18th. Although = Salahuddin=20 served his adversary with an affidavit withdrawing his motion for = dissolution on=20 the 15th, and my chambers has a record of receiving it that day, Court = Exh. #4,=20 I have no way of determining whether it was received in chambers prior = to my=20 inscription on the December 15th letter, and I am certain that I did not = read it=20 before then. Of course, ultimately, dissolution was ordered and Caplash = remained=20 at the Rennie practice location. On a subsequent motion to reargue, the = court=20 permitted withdrawal of Salahuddin's motion, and the appellate division = reversed=20 the determination of the cross-motion in favor of an immediate trial of = the=20 standing issue, otherwise finding the cross-motion properly supported.=20

The point, however, is that the juxtaposition of the pleadings and = motion=20 practice directed at dissolution extant on December 7th, the = circumstances of=20 the parties' deteriorating relationship, which included a fool-hardy = attempt by=20 Caplash at firing Salahuddin, the existence of claims against Caplash in = the=20 defendants' answers, and the potential invocation of the restrictive = covenant by=20 reason of Caplash's exploration of the Rennie practice, all inevitably = point in=20 the direction of a finding that the December 7th resignation letter was = a=20 conditional one, particularly in regard to the question of the [*12]restrictive covenant. Hegner testified that = the letter=20 was "designed" to be conditional. Although I agree that there are words = used=20 that might be interpreted as Mr. Kristal's summation would urge the = court=20 ("references to the non-compete are not mandatory but precatory"), the = document=20 is, at best for defendants, ambiguous. I accept the view that the letter = of=20 resignation was intended, and actually was, conditional on ROMSA = releasing=20 Caplash from his employment agreement, a release that never occurred, = and that=20 therefore his resignation did not become effective when accepted by = Kristal's=20 December 11th letter even if Kristal had authority to act on behalf of = ROMSA.=20

For all of the foregoing reasons, the standing issue is resolved in = Caplash's=20 favor, and the cross-motion for summary judgment declaring ROMSA = dissolved is=20 granted. Amended Decision and Order dated May 28, 2008, hereby made a = part=20 hereof. The parties shall confer for the purpose of agreeing on a = receiver, and=20 report back to the court within a week. Mr. Rose has, understandably, = declined=20 to serve further.=20