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Alshuaibi v. Kelly

02-6069 (U.S. Dist. Ct. D. N.J. 2003)

LIMITED LIABILITY COMPANIES; FIDUCIARY DUTIES—A court sorts through myriad allegations made by one member of a limited liability company against the other, primarily concerning a possible breach of fiduciary duties.

Two men had a longstanding relationship in the marketing, promotion, and distribution of television and radio programming to foreign countries. The first man negotiated with certain foreign language programming providers, while the other acted as a liaison to American markets and managed the formalization of the first partner’s negotiations into written contracts. The two eventually formed a company in which each owned a fifty percent interest. The second man, and the company that he owned, drew up a Memorandum of Understanding (MOU) that would govern the operation of the new company until an operating agreement was finalized. Pursuant to the MOU, the parties agreed to assign all of the licensing agreements to the new company. The MOU also stated that neither could transfer his interest without the other’s consent, and no additional members could be admitted to the company. Furthermore, the MOU stated that the second man’s company would prepare the financial statements and tax returns for the new company.

Within a year of forming the new company, the second man began a relationship with another communications company. Three years later, while still negotiating the operating agreement for the newly created company, the second man sold his entire interest in his own company to the other communications company. The first man then alleged that following this sale, the second man had neglected his duties to the new company and had obstructed its business. Another allegation was that the second man had allowed the communications company to use space on the new company’s programming for free. The first man also claimed that the second man was involved in a scheme to steal the new company’s business by using the first man’s connections with programming providers to take over those relationships. Specifically, he claimed that the second man used mirror companies in place of the new company when executing the company’s contracts and doing other business.

The second member moved to dismiss the complaints for failure to state a claim upon which relief can be granted. The Court held that the first man had sufficiently pleaded all of the elements of a cause of action for his breach of contract claim. He alleged the existence of a contract; a breach of the contract; damages; and that he had performed his own contractual duties. Thus, the Court denied the motion to dismiss the breach of contract claim.

The first member next alleged a breach of fiduciary duty against the second member and the company he owned individually. The Court pointed out that a fiduciary relationship may arise when one party places trust and confidence in another who is in a dominant or superior position. Such a relationship arises between two persons when one is under a duty to act for, or give advice to, another on matters within the scope of their relationship. Thus, if the second man and his company were managing members of the new company, as the first man claimed, the Court held that the second man and his company may in fact have had a fiduciary duty to the first man due to his reliance on them and their dominant position over him. The Court held that the first man had properly pleaded a breach of fiduciary duty against both the second man and his company.

The first man also alleged a breach of fiduciary duty against an employee hired by the second man to prepare the new company’s financial statements. He claimed that the second member’s company had a contractual duty to the new company to prepare the new company’s financial statements. He further claimed that since the second man hired this employee for that purpose, the employee owed a fiduciary duty to him and the new company. The Court disagreed, holding that although the first member alleged that the second member’s company had a contractual duty to prepare financial statements for the new company, he failed to plead sufficient facts to show that the employee owed a fiduciary duty to him personally. Additionally, the first man did not plead facts sufficient to pierce the corporate veil. Thus, the Court granted the motion to dismiss this claim.

The first man next alleged an aiding and abetting of a breach of fiduciary duty against the employee and the communications company. The Court stated that, to make someone liable, one must show that the person knew that the other’s conduct constituted a breach of fiduciary duty and gave substantial assistance to the other in committing that breach. The Court allowed this claim to go forward because the first man adequately pleaded that the two parties knew of the second man and his company’s fiduciary duty to him and aided in breaching that duty. However, the Court granted a motion to dismiss the claim of breach of fiduciary duty against the communications company, holding that the first man failed to allege any facts to support his conclusion that the other man’s company’s fiduciary duties were transferred to the communications company.

The Court also held that the first man properly pleaded a fraud claim against the second. He alleged a material misrepresentation of a presently existing or past fact; that the second man knew that the fact was false; that he relied on this fact, and that he incurred damage as a result. In addition, the Court held that the first man properly pleaded all of the elements of his negligence claim when he alleged that a duty of care existed; that there was a breach of that duty; there was proximate cause; and damages flowed from the breach

The Court next dismissed the first man’s claim of conversion against the communications company. Such a claim is established if a party proves that the offender assumed the right of ownership over the party’s goods without permission, and excluded the rightful owner from exercising dominion over them. The first man argued that the company converted the new company’s property by placing its sticker on the new company’s equipment. The first requirement of a conversion claim is ownership. The first man did not claim that he owned the property, but rather that the new company owned the property. He then argued that because he owned fifty percent of the new company, he had an ownership interest in the property. However, New Jersey’s Limited Liability Act states that a limited liability company interest is personal property, and a member does not have an interest in specific limited liability company property. Therefore, the Court held the man did not have standing to bring a conversion claim.

The first man also alleged tortuous interference with contract against the communications company. The Court rejected a motion to dismiss, holding that the first man claimed that there was an existing contractual relationship; that there was intentional and malicious interference; that there was a loss or breach of a contract resulting from the interference; and as a result, damages resulted.

The Court also denied a motion to dismiss the claim of unjust enrichment against the second man, his company, and the communications company. The Court held that the first man adequately alleged that the other parties received a benefit and that an injustice would result if they retained the benefits without paying for them.

Finally, the Court dismissed the first man’s claim that the second man, his company, and the employee he hired had violated New Jersey’s RICO statute. To state a claim under RICO, one must establish the existence of an enterprise affecting trade or commerce; that the other parties were associated with the enterprise; that they participated in the conduct of the enterprise; and that they participated through a pattern of racketeering activity that included at least two predicate acts. Furthermore, one must prove that some degree of continuity or threat of continuity as an element of the activity. The first man argued that the threat was continuing and he sought a preliminary injunction. The Court disagreed, holding that this conclusory assertion was insufficient to allege a violation of the RICO statute. Furthermore, the Court believed that the essence of the case was a breach of contract action and was not satisfied that the man’s alleged damages provided a basis for continuing injury. Therefore, the Court would not issue a requested injunction


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