Three weeks ago, I wrote about the Bak v Rostek case in Brooklyn Supreme Court addressing the duty to disclose third-party offers amidst buy-out negotiations between co-owners. In the classic scenario such as the one played out in Bak involving a single-asset realty holding company, co-owner #1 buys the shares of co-owner #2 at a negotiated price and soon afterward sells the company’s realty at a much higher price to an outside buyer who was waiting in the wings unknown to co-owner #2.

In my post, I commented on the dearth of such cases in the wake of the Centro-Arfa-Pappas trilogy of opinions in which the Court of Appeals rejected reliance on any categorical rule that the seller may “blindly trust” the buyer’s representations concerning value or that the buyer owes a non-releasable fiduciary duty to disclose to the seller all material information concerning the buy-out.

So much for dearth. Days after publishing my piece on Bak, I stumbled across another pending Brooklyn Supreme Court case involving a realty-holding LLC with a similar fact pattern, but with an interesting twist: instead of member #1 buying out member #2, member #1’s son, who helped his father manage the realty but was not himself a member, bought out member #2’s interest and, on the same day the buy-out was completed, the LLC sold the realty to an outside buyer at a much higher price.

The twist gets even twistier. Not only did member #2 sue member #1 and the son, he, or more precisely, his wife as executor of his estate, also brought a separate lawsuit with a claim for aiding and abetting breach of fiduciary duty against the lawyer who handled both the buy-out transaction as well as the LLC’s concurrent sale of the realty to the outside buyer.

Both cases feature decisions denying summary judgment motions. Absent settlement, the two cases are destined for separate trials. (A defense motion seeking a joint trial was denied.) Each case raises interesting issues surrounding fiduciary duties owed, or not, between the parties arising, or not, under the LLC’s operating agreement or common law.


Beginning in 2000, Hirsch Wolf (49%) and Sol Wahba (51%) were co-members of an LLC that owned as its sole asset a 5-story, mixed use building on Broadway in Manhattan’s NoMad (North of Madison Square Park) neighborhood.

The LLC agreement designated Sol as Managing Member with exclusive managerial authority except for certain enumerated acts effectively requiring unanimous member approval including any sale of the LLC’s realty. The agreement authorized Sol to appoint his son, Michael, to manage the property. The agreement also gave each member a right of first refusal for any transfer of his membership interest.

Wolf died in 2011, after which relations between the Wolf and Wahba families broke down. The Estate, acting by Wolf’s widow Raquel as executor, obtained an appraisal of the property at $6 million and procured a third-party offer to buy the building for $6.1 million. Sol rejected the offer. After it became clear that the parties could not agree on a purchaser for the property, they agreed to sell the Estate’s 49% interest to the son, Michael Wahba, for $2.75 million.

The Estate and Michael both asked lawyer Nathan Shapiro to prepare a Member Interest Purchase Agreement (MIPA). Years earlier, Shapiro had been employed by Hirsch and he also prepared the LLC’s 2000 operating agreement. Shapiro was not involved in the negotiation of the Estate’s sale to Michael. The MIPA, dated December 31, 2014, has a provision in which the signatories — Sol individually and as Managing Member of the LLC, Raquel as executor, and Michael on behalf of the entity he formed to acquire Sol’s 49% membership interest — acknowledge Shapiro’s prior representation of each of the parties and that “actual and potential conflicts of interest exist or may exist” among the parties “now or in the future”, and irrevocably waive any such conflict of interest. The provision further states that Shapiro “is ONLY representing the interest of the Purchaser” in regard to “the matters contemplated in this Agreement.”

The sale was completed in April 2015 upon Michael’s payment to the Estate of the balance of the $2.75 million purchase price.

Several months later, Raquel learned from public record that on the very same date Michael tendered the purchase price to the Estate, he signed a deed on the LLC’s behalf conveying the LLC’s realty to an outside buyer for $8.9 million pursuant to a contract of sale dated December 2014. She also learned that Shapiro represented the Wahbas in the transaction and had received in escrow the outside buyer’s 10% deposit in mid-December 2014.

The Suit Against the Wahbas

Raquel as executor filed suit in January 2016 against Wahba father and son, asserting claims for breach of fiduciary duty, aiding and abetting the same, fraudulent inducement, and unjust enrichment. The complaint seeks compensatory damages in the sum of $1.611 million equal to the difference between the $2.75 million received by the Estate and 49% of the $8.9 million paid to the Wahbas by the outside buyer.

The complaint alleges that Sol, as a member of the LLC, had a duty to disclose to the Estate the third-party offer and agreement to acquire the property for $8.9 million made before the Estate and Michael entered into the MIPA. It also alleges that Michael had the same duty of disclosure “as a de facto Manager of the LLC and its Real Property” and, alternatively, that he aided and abetted his father’s breach of fiduciary duty.

In 2017, both sides moved for summary judgment. Raquel argued that Sol breached the contractual prohibition in the LLC agreement on any sale of the LLC’s realty while the Estate held the deceased’s membership interest, without the Estate’s required consent. She also argued that both Sol and Michael breached their common-law fiduciary duty of disclosure.

The Wahbas countered that, as a non-member and non-manager of the LLC, Michael owed no fiduciary duty to the Estate. They also denied that Sol breached any duty, stressing that the pricing of the Estate’s buy-out was made in conjunction with a contemporaneous $6 million fair market value appraisal obtained by the Estate and consistent with the $6.1 million outside offer that the Estate had procured. They also argued that any duty to disclose or to obtain the Estate’s consent to a sale of the realty to the outside buyer “ceased upon an agreement to purchase [the Estate’s] membership interest in the Property.”

In November 2017, the court issued a one-sentence, handwritten order denying both sides’ summary judgment motions, writing only that “questions of fact including continuing relationship of parties after death of partner giving rise to continuing fiduciary relationship and issues concerning timing of agreements.”

As noted above, the case awaits trial. For those who want to dig deeper into the factual contentions and legal arguments raised in the parties’ pre-trial memoranda, you can read them here and here.

The Suit Against Shapiro

About a year after suing the Wahbas, the Estate filed a second lawsuit against lawyer Shapiro. The Estate’s complaint alleges that Shapiro, by virtue of his representation of the Wahbas in connection with the $8.9 million sale to the outside buyer, had full knowledge of that transaction before the MIPA was consummated and was duty-bound to disclose it to the Estate. The complaint asserts claims against Shapiro sounding in fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and violating rules of professional responsibility.

Shapiro’s initial motion to dismiss the entire complaint was granted by the court in June 2017, stating that Shapiro’s conduct as alleged did not constitute fraud or breach of fiduciary duty, that the Estate was represented by its own counsel during the transaction in question, and that “this court can ascertain no obligation on [Shapiro’s] part to disclose his then client’s negotiation with the third party purchaser.”

The Estate moved to reargue the court’s decision which the court granted in a February 2018 order but only to the extent of reinstating a single claim against Shapiro for aiding and abetting the Wahbas’ alleged breach of fiduciary duty, writing:

Sol, as the 51% owner of the LLC, and Michael, as the alleged de facto manager of the LLC, are alleged to have owed fiduciary duties to plaintiff as the 49% owner of the LLC. According the allegations of the complaint their most favorable intendment, the Court, upon reargument, finds that the complaint sufficiently pleads that to the extent [Shapiro] knowingly assisted Sol and Michael in consummating a series of interconnected transactions in a manner that was detrimental to plaintiffs interests, [Shapiro] may be held liable for aiding and abetting breaches of Sol’s and Michael’s fiduciary duties to plaintiff.

Following discovery both parties moved for summary judgment. Shapiro argued that his actions as Michael’s attorney were insufficient to establish that Shapiro provided “substantial assistance” to the alleged, primary breach of fiduciary duty by Sol and Michael, and that Shapiro had no obligation to inform the Estate of Michael’s “subsequent” deal with the outside buyer because the Estate was represented by its own counsel and contractually waived in the MIPA any conflict affecting Shapiro’s representation.

Echoing one of the takeaways of the Centro-Arfa-Pappas trilogy, Shapiro also argued that by the time of the transactions in question, the relationship between the Estate, Michael and Sol had deteriorated to such a point that it was not reasonable for the Estate to assume any fiduciary duty attached to the Michael’s buy-out of the Estate’s 49% interest.

The Estate countered that Shapiro provided substantial assistance to the Wahbas’ alleged breaches of fiduciary duty by using his position and expertise as legal counsel “to structure and coordinate the execution and closing of the two inter-related transactions and agreements, with full knowledge that he was enabling the breach of fiduciary duty to occur.” The Estate further argued,

Nathaniel Shapiro knew that plaintiff would not have signed the December 31, 2014 MIPA if she were aware of the $8.9 million Contract to sell the Property that was signed on or before December 18, 2014. In addition, based upon his knowledge of the agreements between the parties, Nathaniel Shapiro, as an experienced attorney, also knew that, as the actual, and/or de facto managers of the LLC, the Wahbas owed fiduciary duties to plaintiff to disclose the $8.9 million contract, even up to the date of closing on the buy-out of her shares; and he also knew that those fiduciary duties were being breached. Nevertheless, he prepared and negotiated the legal documents and facilitated and coordinated the closing of both transactions, all to the substantial detriment of plaintiff.

For those interested in reading more of the parties’ arguments, click here and here.

In a Decision and Order issued December 11, 2020, the court denied both motions, concluding that “Questions of fact exist as to whether Shapiro ‘knowingly participated’ in Michael Wahba’s alleged breach of fiduciary duty.” In reaching its conclusion, the court made the following observations which reflect, as the court put it, the “convoluted background of this case”:

  • Michael “was never a member of the business at the same time as plaintiff” and “there is no evidence that he was a fiduciary of the business” prior to entering into the MIPA. “At best, he was an employee or de facto member of the business.”
  • “Given the fact that Shapiro never had a business relationship with plaintiff, the fact that the parties waived any potential conflict in the MIPA, and plaintiff retained separate counsel for the transaction, there is no evidence that Shapiro owed plaintiff a direct duty. Therefore, the question remains whether Shapiro ‘knowingly participated’ in Wahba’s alleged breach.”
  • While Shapiro’s affidavit avers that he believed all parties were aware of Wahba’s intention to sell the property, “[n]otably, his affidavit does not state that he believed plaintiff knew that Wahba had lined up a buyer or that the purchase offer was significantly higher than the previous appraisal. Rather, it states that no one asked him Michael’s intentions, whether plaintiff agreed to a good price, or whether Michael received any subsequent offers.”
  • Shapiro “was clearly involved in the sale [of the property] as his signature appears on the contract of sale.”

Closing Comments

When the Estate entered into the MIPA, agreeing to sell its 49% interest to Michael for $2.75 million, presumably it believed it was getting a fair price based on a $6 million appraisal and the $6.1 million third-party offer that Sol rejected. When Michael entered into the MIPA, he and his father apparently had in their pocket a deal to sell the LLC’s property for $8.9 million.

So who is the opportunist?

Is it a classic case of seller’s remorse, with the Estate realizing too late that it undervalued the property and using litigation as a tool to renegotiate an arm’s-length purchase and sale agreement?

Or is it the Wahbas, keeping the $8.9 million deal with the outside buyer a secret even before the MIPA was signed while at the same time using the MIPA to justify their silence and vitiate one or the other’s otherwise controlling contractual and fiduciary duties?

And what of Shapiro’s conduct? Transactions of the sort almost always involve the assistance of lawyers. Assuming Shapiro was not acting on behalf of the Estate, should he be held secondarily liable for the Wahbas’ alleged breaches because he prepared the legal documents and shepherded the two transactions? Would he have breached a duty of confidentiality owed to the Wahbas as his clients if, without their approval, he had disclosed to the Estate the $8.9 million deal before the deals closed?

These difficult questions ultimately will have to be answered by the juries in the two cases. For the rest of us, though, the lessons remain the same:

  • If you’re the seller, demand the buyer’s representation in the buy-out agreement that it has no other offers or indications of interest in acquiring the company or its assets and/or demand a price protection provision (a/k/a jerk insurance) should the buyer sell the company or its assets within a defined period after the buy-out.
  • If you’re a buyer, get a release, disclaimer of buyer’s fiduciary duty, disclaimer of seller’s reliance on any buyer representations or omissions except as set forth in the buy-out agreement, and seller’s express representation that it has exercised due diligence to its own satisfaction with the assistance of counsel.
  • If you’re the lawyer, avoid entanglements of the sort seen in the Wolf case involving past and present clients on both sides of the transaction. Even if you don’t cross any line of legal liability, you’re bound to make one side or the other angry enough to sue you, and who needs that?