Southern Advanced Materials, LLC v Abrams 2019 NY Slip Op 30041(U) January 4, 2019 Supreme Court, New York County Docket Number: /2015 Judge:

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1 Southern Advanced Materials, LLC v Abrams 2019 NY Slip Op 30041(U) January 4, 2019 Supreme Court, New York County Docket Number: /2015 Judge: Saliann Scarpulla Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's ecourts Service. This opinion is uncorrected and not selected for official publication.

2 [*[FILED: 1] NEW YORK COUNTY CLERK 01/04/ :43 P~ SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY PRESENT: HON. SALIANN SCARPULLA Justice x SOUTHERN ADVANCED MATERIALS, LLC, - v - Plaintiff, ROBERT ABRAMS, ROBERTS. ABRAMS LIVING TRUST, JOHN DOES, Defendant. PART IAS MOTION 39EFM MOTION DATE 08/06/2018 MOTION SEQ. NO. 007 DECISION AND ORDER x The following e-filed documents, listed by NYSCEF document number (Motion 007) 235, 236, 237, 238, 239,240,241,242,243,244,245,246,247,248,249,250,251,252,253,254,255,256,257,258,259, 260,261,262,263,264,265,267,268,269,270,271,272,273,274,275,276,277,278,279,280,281, 282,283 were read on this motion to/for LEAVE TO FILE This action arises from the sale of nonparty CV Holdings, LLC ("CVH"), in which plaintiff Southern Advanced Materials, LLC ("SAM") was an investor. SAM commenced this action in March 2015, alleging that CVH's manager and majority member, defendants Robert Abrams and Robert S. Abrams Living Trust (together, "Abrams"), improperly structured the sale of CVH to deprive SAM of its proper payout. In April 2015 Abrams moved to dismiss the original complaint. The parties fully briefed the motion, but SAM then filed an amended complaint. The parties then stipulated to accept the amended complaint as the operative pleading, and Abrams moved again to dismiss. The second motion to dismiss was fully briefed, but Sam again determined to amend its complaint. SAM filed its second amended complaint in October Abrams, for the third time, moved to dismiss. Page 1of6 1 of 6

3 [*[FILED: 2] NEW YORK COUNTY CLERK 01/04/ :43 P~ In a decision dated September 29, 2016, I dismissed the second, third, fourth, and sixth causes of action for breach of contract in SAM' s second amended complaint, and I also dismissed SAM' s first and second counterclaims for fraud in a related action. See S. Advanced Materials LLC v Abrams, 2016 N.Y. Slip Op (U) (N.Y. County Sept. 29, 2016), affd as mod, 151A.D.3d451 (1st Dept 2017). The parties appealed my September 2016 decision and order, and the First Department affirmed the dismissal of these causes of action but modified as to one of my legal findings. See S. Advanced Materials LLC v Abrams,151 A.D.3d at The following two causes of action now remain in the second amended complaint: (1) SAM's claim that Abrams breached CVH's operating agreement, on the ground that the sale of CVH was a dissolution rather than equity sale, thereby entitling SAM to a preferred return under the operating agreement's terms; and (2) a direct claim for Abrams' breach of fiduciary duty for misrepresenting and concealing material facts that, inter alia, deprived SAM of its proper payout and CVH' s option interest in another company, Si02 Medical Products, Inc. ("Si02" or "Si02 Option"). Now, three years after the litigation was commenced, after resolution of the appeal on its second amended complaint and at a time when discovery is supposed to be wrapping up, 1 SAM moves for leave to amend the complaint a third time to (1) add a claim for rescissory damages as a remedy for the breach of fiduciary duty claim; and (2) 1 As shown in their last compliance order, the parties have completed document discovery, depositions are scheduled for the next couple of months, and expert discovery has also been scheduled. Page 2 of 6 2 of 6

4 [*[FILED: 3] NEW YORK COUNTY CLERK 01/04/ :43 P~ add a claim for breach of an agreement, in which SAM approved the sale of CVH in exchange for certain option rights after the sale was consummated ("Retained Claims Agreement"). Discussion Leave to amend a complaint is freely granted "upon such terms as may be just[.]" CPLR 3025 (b). "In determining whether to grant a motion to amend [the complaint], the court should consider the merit of the proposed [cause of action] and whether the plaintiff will be prejudiced by the delay in raising it" Lanpont v Savvas Cab Corp., Inc., 244 A.D.2d 208, (1st Dep't 1997); see also MBIA Ins. Corp. v Greystone & Co., Inc., 74 A.D.3d 499, 500 (1st Dep't 2010) ("On a motion for leave to amend, plaintiff... [must] show that the proffered amendment is not palpably insufficient or clearly devoid of merit") (citation omitted). Since this action was commenced, SAM has alleged that the shareholder consent Abrams received to cancel the Si02 Option (as part of the CVH transaction) was defective because Abrams undervalued Si02 to investors to advance his interests. These allegations were previously the basis for SAM's claim for breach of the "Members Agreement," an agreement between shareholders, and I dismissed that cause of action as derivative on Abrams' motion to dismiss. This dismissal was subsequently affirmed by the First Department. Now, for the first time, SAM seeks to recast the same allegations as a basis for an award of rescissory damages on its direct claim for breach of fiduciary duty. Page 3 of 6 3 of 6

5 [*[FILED: 4] NEW YORK COUNTY CLERK 01/04/ :43 P~ Under Delaware law, 2 rescissory damages may be available for breach of a fiduciary duty in appropriate circumstances. See In re Orchard Enterprises, Inc. Stockholder Litig., 88 A.3d 1, 38 (Del. Ch. 2014) (Rescissory damages are "available for an adjudicated breach of the duty of loyalty, such as cases involving self-dealing or where a fiduciary puts personal interests ahead of the interests of its beneficiary."). According to SAM' s proposed amendments, because rescission is impractical, SAM is "entitled to the monetary equivalent of[] being restored to... its 8.25% ownership interest in Si02" for Abrams' alleged material misrepresentations and self-dealing. Contrary to SAM's allegations, SAM never owned an 8.25% interest in Si02 to which to restore it. Instead, SAM owned an 8.25% interest in CVH that entitled SAM to certain voting rights vis-a-vis the Si02 Option. CVH eventually cancelled that option with shareholder approval. To the extent SAM continues to dispute the propriety of CVH's decision to cancel the Si02 Option, I previously determined that such allegations set forth an injury to CVH, not SAM individually. Therefore, consistent with my prior decision, the rescissory damages SAM seeks related to the Si02 Option flows to the same party, i.e., CVH. See Lenois v Lawal, 2017 WL at 20 (Del. Ch. Nov. 7, 2017) (dismissing plaintiffs direct claim for breach of the duty of disclosure because the rescissory damages plaintiff sought would flow to the company rather than the shareholder class). 2 It is undisputed that Delaware law applies. Page 4 of 6 4 of 6

6 [*[FILED: 5] NEW YORK COUNTY CLERK 01/04/ :43 P~ Moreover, although SAM claims that it has obtained much more detailed information in discovery as to Abrams' alleged breach of fiduciary duty, SAM does not offer any new evidence concerning the Si02 Option. SAM' s motion to amend is really a back-door effort to resurrect the same derivative claim that I previously dismissed. Therefore, I deny SAM' s request to amend to add a claim for rescissory damages. SAM also seeks to add a breach of contract claim based on the Retained Claims Agreement. Under the Retained Claims Agreement, SAM approved the sale of CVH, subject to the right to receive the same terms as any other shareholder that received more favorable terms than SAM ("True-Up Option"). As an alternative, SAM also had the right to either (1) enter into a warrant agreement to purchase a specified amount of Si02 stock ("Warrant Option"), or (2) litigate specified claims ("Claims Option"). According to SAM, Abrams breach the Retained Claims Agreement by failing to promptly provide Abrams with information, and SAM now seeks to exercise the Warrant Option or recover its monetary equivalent. 3 However, even assuming Abrams failed promptly to provide SAM with information, the time to enforce that provision was prior to exercising any option. Instead, SAM elected to litigate claims at the exclusion of any other right under the Retained Claims Agreement. Having made its election, SAM may not now attempt to state a claim for breach of contract to exercise the Warrant Option. 3 Under the terms of the Retained Claims Agreement, Abrams had to disclose certain information. Neither party disputes that SAM commenced this litigation prior to Abrams' end date to provide that information. Page 5 of 6 5 of 6

7 [*!FILED: 6] NEW YORK COUNTY CLERK 01/04/ : 43 PMI Consequently, I deny SAM's request to add a cause of action for breach of the Retained Claims Agreement. In accordance with the foregoing, it is ORDERED that the motion of Southern Advanced, LLC for leave to file a third amended complaint is denied. This constitutes the decision and order of the Court. CHECK ONE: APPLICATION: 1/4/2019 DATE CHECK IF APPROPRIATE: ~ CASE DISPOSED GRANTED 0 DENIED SETTLE ORDER INCLUDES TRANSFER/REASSIGN NON-FINAL DISPOSITION GRANTED IN PART SUBMIT ORDER FIDUCIARY APPOINTMENT -~.c. D OTHER D REFERENCE Page 6 of 6 6 of 6