FILED: NEW YORK COUNTY CLERK 07/27/ :15 PM INDEX NO /2016 NYSCEF DOC. NO. 7 RECEIVED NYSCEF: 07/27/2016

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1 FILED: NEW YORK COUNTY CLERK 07/27/ :15 PM INDEX NO /2016 NYSCEF DOC. NO. 7 RECEIVED NYSCEF: 07/27/2016 SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY x YESHAYA AVERBUCH : Suing Individually and derivatively on behalf of NEW YORK BUDGET INN LLC, and : LAYINN HOSPITALITY GROUP, INC. : Index No /2016 Plaintiffs, - against - : NEW YORK BUDGET INN LLC, : JBJB ASSOCIATES LLC, 1850 ARON LLC, ISRAEL JERRY POLLAK, : JOSHUA KLAPPER, and ARON WALEWITSCH, : Defendants x MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS MOTION TO DISMISS COMPLAINT Roger J. Bernstein 535 Fifth Avenue, 35 th Floor New York, NY (212) rbernstein@rbjlaw.com Attorney for All Defendants 1 of 10

2 This Memorandum of Law is submitted on behalf of defendant New York Budget Inn LLC ( NYBI ) as well as all other defendants in support of their motion to dismiss. Since this case is related to the earlier-filed case of New York Budget Inn LLC v. Averbuch, N.Y. Cty. Index No (N.Y. Cty.), and since Averbuch has moved without opposition for consolidation of this case with the earlier-filed case, this Memorandum of Law will refer to the affidavits and exhibits filed in that case without re-filing them here. Statement of Facts The following facts are taken from plaintiff s complaint. New York Budget Inn, LLC ( New York Budget Inn or NYBI ) is a limited liability company. NYBI s three members are JBJB Associates LLC ( JBJB ), 1850 Aron LLC ( 1850 Aron ), and LayInn Hospitality Group, Inc. ( LayInn ). See plaintiff s complaint in this action (hereinafter Averbuch Complaint ) (Bernstein Affirmation dated July 27, 2016, Exhibit B), at 2. Plaintiff Yeshaya Averbuch ( Averbuch ) is not a member of NYBI. Instead, he owns a 52% interest in NYBI member LayInn, along with several other investors. Id. Averbuch purports to sue derivatively on behalf of New York Budget Inn in his First and Third Causes of Action. However, Averbuch has admitted in his complaint that he is not a member of NYBI. See Bernstein Aff., Exhibit B at 2 (identifying the three members of New York Budget Inn LLC as not including Averbuch). Instead, as Averbuch expressly admits, he is a manager of NYBI. Id. at 62 ( Plaintiff, one of the 1 2 of 10

3 managers of the LLC.... ) Indeed, in one of his causes of action Averbuch is suing for reimbursement of expenses allegedly incurred as a manager. Id. at Averbuch s complaint does not allege that Averbuch has made a demand on NYBI to file this action against these defendants. Nor does he allege that such a demand would be futile. Averbuch also seeks to sue derivatively on behalf of LayInn in his complaint s Second and Eighth Causes of Action against NYBI and other defendants alleging failure to distribute, conversion and improper income tax reporting. Again, he does not allege that he has ever made a demand on LayInn to file suit against NYBI or the other defendants. Nor does he allege that such a demand would be futile. Moreover, he does not allege any contractual or other legal relationship between LayInn and the individual investors in the other two members of NYBI whom he has named as defendants. See Bernstein Aff., Exhibit B. A full contemporaneous accounting has already been provided to Averbuch. See Affidavit of Alan Fruchter sworn to July 18, 2016 (filed in the related action in New York Budget Inn LLC v. Averbuch, N.Y. Cty. Index No ) ( Fruchter Aff. ), Exhibits A-E (NYBI financial statements for ), and Affidavit of Joshua Klapper sworn to July 18, 2016 (filed in the related action in New York Budget Inn LLC v. Averbuch, N.Y. Cty. Index No ) ( Klapper Affidavit ), Exhibits B and D (transmittal of financial statements and other reports to Averbuch). 1 1 Averbuch is seeking consolidation of this case with the case against him in New York Budget Inn, LLC v. Averbuch, Index No (N.Y. Cty.). NYBI does not oppose consolidation. It has also noted in the RJI for this case that this case is related to New York Budget Inn, LLC v. Averbuch. 2 3 of 10

4 Averbuch s remaining causes of action are personal claims that he asserts against NYBI for expense reimbursement as a manager, for advancement of and indemnification for legal fees, for alleged conversion of domain names, and for alleged breach of fiduciary duty. (Bernstein Aff., Exhibit B, at 74-90). His allegations have already been rebutted in the earlier-filed case against him filed by New York Budget Inn. See Klapper Affidavit, That is not to say that they are ripe for decision at this juncture; they should be dismissed along with the rest of this case and re-pleaded as counterclaims in the earlier-filed case against him. ARGUMENT I. Averbuch Has Failed to Meet Any of the Requirements for a Derivative Suit on Behalf of NYBI: A. Averbuch Is Not a Member of NYBI: The Court of Appeals has held that members of a limited liability company ( LLC ) have the right to bring a derivative case on behalf of their company. Tzolis v. Wolff, 10 N.Y.3d 100, 102 (2008) ( We hold that members of a limited liability company (LLC) may bring derivative suits on the LLC's behalf,... ). However, a plaintiff that is not an LLC member may not bring a derivative action on behalf of the LLC: the documentary evidence conclusively establishes that Avraham was not a member of 762 Park Place at the time he commenced this suit... [and] does not... have standing to bring the claim Park Place Realty, LLC v. Lehrer, 47 Misc. 3d 1217(A), 2015 WL at *4 (Sup. Ct. Kings Cty. 2015). 3 4 of 10

5 Counsel has not located any derivative case brought by a limited liability company manager. This is for good reason: managers of limited liability companies are not members and are not akin to shareholders or partners. Instead, like corporate managers, they work for the limited liability company. They owe fiduciary duties to the limited liability company with respect to the performance of their management duties. See, e.g., Palmetto Partners, L.P. v. AJW Qualified Partners, LLC, 83 A.D.3d 804, 808 (2d Dep t 2011). In this case Averbuch is one of four managers of New York Budget Inn. See Averbuch Complaint (Bernstein Aff., Exhibit B), at 62 & 81. He is not a member. At most, he is one of several shareholders in member LayInn. That does not make him a member of NYBI any more than it makes his fellow shareholders in LayInn members of NYBI. (Averbuch may claim that his share ownership in LayInn somehow makes him an indirect member of NYBI, but he cannot make such a claim without claiming that his co-shareholders in LayInn are also indirect members of NYBI. No court has, to counsel s knowledge, ever recognized a claim that ownership of some of the shares in a corporation that is member of a limited liability company transforms that shareholder into an LLC member.) B. Averbuch Has Failed to Make a Demand on NYBI and Has Failed to Allege Demand Futility Basic to any derivative action is an allegation that the plaintiff has made a 4 5 of 10

6 demand on an entity and that the entity has refused to act on a valid demand: [T]he requirement of a demand prior to the institution of derivative litigation is an necessary element of the claim. It is predicated on basic principles of business governance, i.e., that those entrusted with the management of a corporation who have the primary responsibility for acting in the name of the corporation are often in the best position to correct alleged abuses without resort to the courts. Evans v. Perl, 19 Misc.3d 1119(A), 2008 WL at *8 (Sup. Ct. N.Y. Cty. 2008). Averbuch s complaint is bereft of any such demand. Alternatively, a derivative action must allege that such a demand would be futile. Id. Again, there is no allegation in Averbuch s complaint that a demand would be futile. Averbuch s failure to plead either a demand or demand futility requires dismissal of his putative derivative causes of action on behalf of NYBI. Najjar Group, LLC v. W. 56th Hotel LLC, 110 A.D.3d 638, 639 (1st Dep t 2013) ( A pre-suit demand is similarly required in a derivative action involving a limited liability company ); Baker v. Andover Assoc. Mgt. Corp., 30 Misc.3d 1218(A), 2009 WL at *16 (Sup. Ct. Westchester Cty. 2009) ( [b]ecause Plaintiff has not alleged compliance with the requisites for a derivative action or sufficient facts to show that a pre-suit demand would have been futile, Plaintiff s claims must be dismissed ) (citations omitted). II. Averbuch Has Failed to Meet the Demand Requirement for a Derivative Suit on Behalf of LayInn: Averbuch also fails to allege the making of a demand upon LayInn that it institute the instant action. Nor does he allege that such a demand would be futile. Again, the failure to allege compliance with the demand requirement for a derivative 5 6 of 10

7 action requires dismissal of his complaint. Baker v. Andover Assoc. Mgt. Corp., supra. It is immaterial that Averbuch is a 52% shareholder in LayInn. The demand requirement applies both to majority and minority shareholders in a limited liability company or corporation (LayInn is a corporation) if they wish to institute a derivative action on its behalf: [Plaintiff s] argument that the demand requirement was inapplicable because it had a majority equity interest in [the defendant entity], as opposed to a minority interest, is unavailing. BCL 626(c) does not differentiate between minority and majority shareholders for demand purposes. Ocelot Capital Mgt., LLC v. Hershkovitz, 90 A.D.3d 464, (1st Dep t 2011); accord, Barone v. Sowers, 128 A.D.3d 484, (1st Dep t 2015). III. Averbuch s Claim for an Accounting Is Barred by Documentary Evidence and by Lack of Standing: Claiming to suing individually and derivatively, Averbuch seeks an accounting by claiming that he has been denied access to NYBI s books and records. Averbuch Complaint, 58. Ample documentary evidence shows, however, that he received NYBI s financial statements for 2012, 2013 and 2014 when prepared, and that he has now received its financial statements for 2015 and the first five months of 2016 as well. See Fruchter Aff., 2 and Exhibits A-E; Klapper Aff., and Exhibits B, D and E. There is no right to an accounting as a matter of course. As a matter of law, a cause of action for an accounting will be dismissed when the necessity for an accounting is not established, and this is particularly so where a plaintiff has already had access to the company s financial records. See, e.g., Wyatt v. Fulrath, 38 Misc.2d 1012, 1014 (Sup. 6 7 of 10

8 Ct. N.Y. Cty. 1963), aff d, 22 A.D.2d 853 (1st Dept 1964), aff d, 16 N.Y.2d 169 (1965) (accounting denied where no necessity for such an accounting has been shown ); Rothbeind v. Levine, 261 A.D.2d 467, 467 (2d Dept 1999) (plaintiff collaterally estopped by prior decision denying an accounting where plaintiff had already had access to and copies of all partnership books and records); In re Kadel's Will, 35 Misc.2d 78, 79 (Sur. Ct. 1962), decree affd sub nom. Matter of Kadel's Estate, 19 A.D.2d 587 (2d Dept 1963) (accounting denied where, inter alia, deceased partnership member had receive[d] these accountant's reports during the partnership existence [and for] a subsequent period and had access to the firm's books and records while a partner.... ). Accordingly, based on the documentary evidence defendants have submitted, the cause of action for an accounting should be dismissed. In addition, plaintiff Averbuch, not being a member of NYBI, has no standing to seek an accounting. Cf. Doukas v. Ballard, 39 Misc 3d 1227(A), 2013 WL at *7 (Sup. Ct. Suffolk. Cty. 2013), aff d, 135 A.D.3d 896 (2d Dep t 2016) (non-shareholder of corporation lacked standing to seek accounting). IV. Averbuch Has Intermingled Individual and Derivative Claims: Averbuch s complaint, in addition to its other deficiencies, pleads individual and purported derivative claims together in the same cause of action. See, e.g., Averbuch Complaint, 57 ( Plaintiff, both in his individual capacity and derivatively on behalf of the LLC and LayInn,... ) and 87 ( defendants misappropriated LLC funds to the detriment of the LLC, plaintiff and LayInn. In addition to taking funds covertly for their personal use and without authorization, they are causing the LLC to distribute funds to 7 8 of 10

9 themselves to the exclusion of plaintiff and LayInn ) (emphasis supplied). Pleading individual and derivative damages in the same cause of action is impermissible because an individual s claims against an entity are altogether different from derivative claims on behalf of the entity: Although a complaint may contain both derivative claims, brought on behalf of a corporation, and individual claims, the two claims must not be intermingled within the same causes of action, but instead must be pleaded separately. In determining whether a claim is derivative or individual, the pertinent inquiry is whether the thrust of the plaintiff's action is to vindicate his personal rights as an individual and not as a stockholder on behalf of the corporation. Greenberg v. Falco Const. Corp., 29 Misc.3d 1202(A), 2010 WL , at *3 (Sup. Ct. Kings. Cty. 2010) (internal quotations and citations omitted); accord, Waxman Real Estate LLC v. Sacks, 32 Misc.3d 1241(A), 2011 WL at *5 (Sup. Ct. N.Y. Cty. 2011) (holding that intermingling of individual and derivative claims is not permitted in purported derivative case against LLC; derivative claims dismissed). Conclusion Averbuch s purported derivative complaint has been filed as a defensive tactic because of NYBI s pending lawsuit against him for misappropriating over $200,000 from NYBI. Having been filed only for that purpose, it fails to comply with the basic demand/demand futility requirement for instituting derivative litigation and fails to plead a valid claim for an accounting. It should be dismissed without leave to re-plead, 8 9 of 10

10 and Averbuch s personal grievances should be treated as counterclaims in the alreadypending case by NYBI against Averbuch. Dated: New York, New York July 27, 2016 /s/ Roger J. Bernstein Roger J. Bernstein 535 Fifth Avenue, 35th Fl. New York, NY (212) rbernstein@rjblaw.com Attorney for All Defendants 9 10 of 10