It’s simply in the nature of things that business divorce litigants tend to accuse one another of all manner of heinous, dastardly misdeeds. Phrases like “oppression,” “fraud,” “deceit,” “theft,” “siphoning” of assets, “diversion” of opportunities, etc., are the norm. As a litigant, if you make those kinds of allegations, and they turn out to be unsuccessful, or you withdraw them, can you be sued for defamation? Staten Island Supreme Court Justice Wayne M. Ozzi considered that question in Seneca v Cangro, 2018 NY Slip Op 33404(U) [Sup Ct Richmond County Nov. 27, 2018], a lawsuit pitting an uncle against his nephews over claims they defamed him while suing to dissolve three family-owned entities.
The Family Businesses
In 1962, ancestors of the current antagonists formed C. Seneca Construction, Inc. (the “Corporation”), a real property holding, management, and construction company. In 2004, the family expanded its business with the formation of two additional real property companies organized as LLCs (the “LLCs”). Pursuant to written operating agreements, one of which you can read here, Anthony Seneca was a 25% member of the LLCs, and his nephews, Emil and Carlo Cangro, collectively owned 25%. Anthony, Emil, and Carlo allegedly owned shares of stock in the Corporation in the same percentages.
The Dissolution Petitions
In 2016, Emil and Carlo filed three, separate, mirror-image lawsuits seeking judicial dissolution of the LLCs under Section 702 of the LLC Law and the Corporation under Section 1104-a of the Business Corporation Law. In the amended petitions, one of which you can read here, Emil and Carlo alleged the following misdeeds by their uncle:
- he “exerted sole control . . . and is diverting assets . . . for his own use” (par. 27)
- he “enrich[ed] himself from assets and income . . . at the expense of the minority . . . by his oppressive conduct” (par. 28)
- he has “manipulated and shown losses” for the business (par. 29)
- he has “taken loans . . . without consent of the Members” (par. 30)
- he “wasted and diverted the assets” of the business “for his own personal use (par. 35)
- he “manipulated the books . . . [so that] there is no profit only losses for many years” (par. 36)
Fairly generic allegations, as far as business divorce pleadings go.
Withdrawal of the Dissolution Lawsuits
In 2017, after fighting it out with Anthony for more than a year, Emil and Carlo voluntarily withdrew their dissolution petitions and discontinued their lawsuits “without prejudice,” meaning the claims were not resolved, one way or the other, on the merits.
The Defamation Complaint
In 2017, a month after Emil and Carlo withdrew their dissolution lawsuits, Anthony sued them in a separate lawsuit. In Anthony’s amended complaint, he alleged that Emil and Carlo’s dissolution petitions were “needlessly defamatory, containing statements not pertinent to the dissolution actions,” and “which themselves, were lacking in merit, and were expressly malicious resulting in damages” to Anthony’s reputation. According to Anthony:
[Emil and Carol] defamed and slandered [Anthony] by publicly calling him a ‘thief’ claiming he took money for his own personal use from the Corporations; that he ‘manipulated the books’ of the Corporations; diverted assets for his own use; enriched himself at the expense of defendants herein; has taken improper loans from the Corporations; looted the Corporations; has misappropriated monies from the Corporations; has engaged in ‘illegal and fraudulent actions’ and has filed false tax returns.
Anthony alleged that because of Emil and Carlo’s accusations, he “has been subjected to humiliation, scorn, degradation, mental anguish and suffering, has sustained damage to his reputation and suffered personal injuries, pecuniary special damages and suffered defamation per se.” Anthony asserted a bevy of intentional tort claims against his nephews: (i) libel, (ii) libel per se, (iii) defamation, (iv) defamation per se, (v) intentional infliction of emotional distress, (vi) negligent infliction of emotional distress, (vii) filing of a so-called “sham” litigation, and (viii) malicious prosecution.
The Motion to Dismiss
Emil and Carlo filed a pre-answer motion to dismiss Anthony’s complaint. You can read the papers in support of, and in opposition to dismissal, here and here.
The Legal Landscape
Before we get to the Seneca decision itself, though – a quick summary of the law of defamation for statements made in connection with pending litigation.
It is an ancient legal principle – originating in England’s medieval common-law courts – that statements made by parties or their lawyers in connection with ongoing litigation are, under most circumstances, protected by an “absolute privilege” against, or “absolute immunity” from, claims for defamation, libel, slander, and the like. Noted the U.S. Supreme Court in Randall v Brigham, 74 US 523  – “This doctrine is as old as the law” itself.
Under modern law, the standard for determining a statement’s eligibility for protection by the absolute privilege is often referred to as the “pertinence” standard:
It is well established that a statement made in the course of legal proceedings is absolutely privileged if it is at all pertinent to the litigation. . . The proper inquiry is whether the statements sustained as defamatory by the motion court may possibly be pertinent to the [facts or issues of the] litigation. . . As this Court has noted, the privilege embraces anything that may possibly be pertinent or which has enough appearance of connection with the case.
(Lacher v Engel, 33 AD3d 10 [1st Dept 2006]). Under this extremely liberal standard, “any doubts are to be resolved in favor of pertinence” (Flomenhaft v Finkelstein, 127 AD3d 634 [1st Dept 2015]).
Though the absolute privilege is broad, there is a narrow exception, sometimes referred to as the “sham” litigation exception – for “initiating a sham complaint . . . for the sole purpose of later disseminating the false allegations to defame” the defendant (WA Rte. 9, LLC v PAF Capital LLC, 136 AD3d 522 [1st Dept 2016]).
The Seneca Decision
So how did Emil and Carlo fare? In a series of four holdings, the court awarded them a clean sweep, dismissing Anthony’s complaint in full.
First, applying the extremely liberal “pertinence” standard, the court held:
[T]he subject statements contained in the second Amended Verified Petition were pertinent to Cangro’s litigation for an accounting or to dissolve the companies owned by the parties. Accordingly, plaintiff’s causes of action for libel, libel per se, defamation, defamation per se, and intentional infliction of emotional distress are dismissed.
Second, with respect to Anthony’s claims for “malicious prosecution,” the court held that Anthony “has not asserted facts sufficient to allege” the necessary legal element to prove such a claim of “absence of probable cause or actual malice” by Emil and Carlo when they filed the dissolution proceedings.
Third, with respect to Anthony’s claims for intentional and negligent infliction of emotional distress, the court held that “the allegations against Mr. Seneca in the underlying actions fail to meet the criteria of extreme in degree and outrageous in character as to go beyond all possible bounds of decency” required of such claims.
Fourth, with respect to Anthony’s claim for a “sham” litigation – which is not a claim at all, but rather, a narrow exception to the doctrine of absolute privilege – the court held that “plaintiff has failed to submit evidentiary facts establishing that Cangro instituted a sham action for dissolution.”
The line of demarcation between non-defamatory, protected speech and potential defamatory, non-protected speech is whether the allegations are “at all pertinent to the litigation.” In Seneca, the court reached the undoubtedly correct result of dismissing Anthony’s complaint. If allegations in business divorce cases akin to those Emil and Carlo made about their uncle were defamatory, it would have a profound negative impact on the ability of closely-held business owners to effectively pursue claims for dissolution, breach of fiduciary duty, and wrongdoing against co-owners, officers, directors, and managers.
The trend in the law is towards even broader protections for adversaries against claims for defamation. In Front, Inc. v Khalil, 24 NY3d 713 , New York’s highest court extended the privilege against defamation to pre-litigation statements, like demand or cease-and-desist letters. “[W]e hold,” the Court ruled, “that statements made prior to the commencement of an anticipated litigation are privileged, and that the privilege is lost where a defendant proves that the statements were not pertinent to a good faith anticipated litigation.”
The bottom line: If you are a person, entity, or lawyer contemplating a business divorce lawsuit, consider whether your allegations of wrongdoing have some articulable connection to the facts or issues in the case. If they are “pertinent,” they are protected, and you should not fear a claim of defamation.