Hardcore students of business divorce will remember Pappas v. Tzolis as a roller coaster ride through the trial and appellate courts in which, ultimately, New York’s highest court dismissed claims against a 40% LLC member who bought out his 60% co-members for $1.5 million, allegedly while concealing from them that he already had lined up a buyer for the LLC’s sole asset — a 49-year lease on a Manhattan commercial property — for $17.5 million. The court held that a provision in the buy-out agreement, stating that the buying member “has no fiduciary duty to the . . . sellers in connection with [the sales of their interests],” was a complete defense to the sellers’ claims that the buyer breached a duty to disclose the alleged $17.5 million offer. (Read here my post about the Court of Appeals’ November 2012 ruling.)
Pappas was decided on a pre-answer, pre-discovery motion to dismiss the complaint. The procedural posture required the court to assume the truthfulness of the complaint’s factual allegations. The defendant 40% member, Steve Tzolis, did not have to admit or deny that, in fact, he secretly had negotiated a $17.5 million sale of the LLC’s lease to a major real estate developer, Extell, before buying out his partners for $1.5 million. All we outside observers knew for certain was that the $17.5 million sale occurred about seven months after the buy-out of the member interests.
At least some of the mystery has now been revealed, courtesy of a subsequent lawsuit brought by one of the two disappointed sellers, Steve Pappas, against a law firm that, according to Pappas, represented him and/or the LLC in connection with the buy-out agreement while simultaneously assisting Tzolis’ secret negotiations to sell the lease to Extell. Our informational gain is of little comfort to Pappas, whose case against the law firm recently was thrown out as an impermissible end-run around the preclusive effective of the Court of Appeals’ ruling in the prior case. Pappas v Schatz, 2014 NY Slip Op 30946(U) [Sup Ct NY County Apr. 9, 2014].
Pappas’ New Allegations
Less than two months after Pappas lost his case against Tzolis in the Court of Appeals, he started an action against attorney Larry Schatz and his law firm, Grubman Indursky Shire & Meiselas, P.C., asserting claims for breach of fiduciary duty, fraudulent misrepresentation, and negligent misrepresentation (read complaint here). The complaint’s salient factual allegations, as supplemented by Pappas’ affidavit opposing the defendants’ dismissal motion (read here), included the following:
- In the Fall of 2006, i.e., months prior to the January 2007 buy-out by Tzolis of Pappas’ LLC membership interest, Tzolis initially met with Extell and outlined the parameters of a deal in principle. Defendant Schatz and his law firm participated in the negotiations.
- Extell told Tzolis that it wanted Pappas and the third LLC member, Constantine Infantopolous, removed from the LLC before it would agree to purchase the lease, and that it also wanted an additional 50-year extension on the lease from the building’s owner. Prior to Tzolis making overtures to acquire Pappas’ interest, Schatz initiated negotiations with the landlord for an extension.
- After Tzolis initiated buy-out discussions, and while continuing to work on the deal with Extell, Schatz solicited Pappas and told him that Tzolis wanted to purchase the interests in order to be able to fulfill his life long dream of creating the best catering hall in New York City, to be named “Talk of the Town.”
- Schatz held himself and his firm out as counsel for the LLC and provided advice to Pappas as he had on other unspecified occasions, while actually acting as counsel for Tzolis for the concealed transaction with Extell.
The Court’s Dismissal of the Action
Schatz and his law firm moved to dismiss the complaint on multiple grounds. Chiefly they relied on the res judicata impact of the Court of Appeals’ decision in the prior action; the Certificate signed by Pappas as part of the buy-out, in which he represented that he performed his own due diligence, engaged his own legal counsel, and was not relying on any other representation by Tzolis or his agents or representatives; and Pappas’ affidavit in the prior action in which he stated that Schatz was “the attorney for Tzolis” in connection with the buy-out. (Read here the defendants’ memorandum of law in support of their dismissal motion.)
The court’s decision, by Manhattan Commercial Division Justice Melvin L. Schweitzer, essentially found that Pappas’ affidavit in his prior action against Tzolis was fatal to his claims against Schatz and his law firm. Under “clear law in the State of New York,” Justice Schweitzer wrote, the doctrine of res judicata bars a plaintiff from “re-litigat[ing] against an agent the issues the parties already litigated and lost against the principal.” He continued:
Mr. Pappas is unquestionably barred from bringing claims against [defendants] acting as Mr. Tzolis’ agent. His attempts to avoid this prohibition by alleging that [Schatz] was acting as counsel for [the LLC] is contradicted by the characterization of [Schatz] as counsel for Mr. Tzolis in his own affidavit [in the prior action].
Justice Schweitzer refused to give weight to Pappas’ allegation that he understood Schatz was representing the LLC in connection with the buy-out agreement, writing as follows:
This simply does not pass muster. When [Schatz] told Mr. Pappas of Mr. Tzolis’ intent with respect to the use of the lease [to create a catering hall], Mr. Pappas certainly knew that [Schatz] was sharing Mr. Tzolis’ state of mind, which he had learned as counsel to Mr. Tzolis. It is inconceivable that when [Schatz] shared his knowledge of Mr. Tzolis’ state of mind, Mr. Pappas thought that he was acting on behalf of any party other than Mr. Tzolis. It is pure fantasy that Mr. Pappas thought [Schatz] was speaking on behalf of [the LLC] when he knew [Schatz] was Mr. Tzolis’ attorney. His assertion that he thought [Schatz] was speaking for [the LLC] is nothing but a transparent attempt to dodge the full impact of the decision of the Court of Appeals. Mr. Pappas’ claims are without merit.
I should point out that, in ascertaining what really happened leading up to Tzolis’ buy-out of his co-members, we’re reliant on the facts alleged by Pappas in his two lawsuits, in neither of which the defendants filed their own affidavits responding to Pappas’ allegations. To that extent, and assuming Pappas’ failed lawsuit against the attorneys is the last gasp, the mystery will live on.