Mosionzhnik v. Chowaiki

OPINION OF THE COURT

Motion sequence numbers 020 and 021 are consolidated for disposition.

Plaintiff Luba Mosionzhnik moves for partial summary judgment on the second and twelfth causes of action in the amended complaint (the AC) pursuant to CPLR 3212. (Sequence No. 020.) Defendants Ezra Chowaiki, David E. R. Dangoor, Todd Hutcheson, and Chowaiki & Co. Fine Art Ltd. (collectively, with defendant Chowaiki Mosionzhnik Gallery Ltd., the Gallery)^[1] move for partial summary judgment on the Gallery’s first and third counterclaims and on the second and seventh through eleventh causes of action in the AC. (Sequence No. 021.) The motions are granted in part and denied in part for reasons that follow.

I. Procedural History

On July 20, 2009, Mosionzhnik commenced this action against defendants alleging substantial wrongdoing in connection with an art gallery in which she was a shareholder and employee. Mosionzhnik’s operative pleading, the AC, was filed on May 14, 2010. The AC contains 13 causes of action: (1) oppressive conduct towards a minority shareholder; (2) a declaratory judgment regarding Mosionzhnik’s equity interests in the defendant companies; (3) Racketeer Influenced and Corrupt Organizations

The Gallery was formed on January 14, 2005, when the parties executed a shareholders’ agreement for Chowaiki Mosionzhnik Gallery Ltd. (the shareholders’ agreement) and virtually identical employment agreements for Mosionzhnik (the employment agreement) and Chowaiki. The shareholders’ agreement states that the Gallery’s three shareholders are Mosionzhnik and Chowaiki, who were each issued 250 shares, and Dangoor, who was issued 500 shares. All three are named directors. Chowaiki is designated the president, and Mosionzhnik is designated the vice-president and secretary. They each were paid an annual base salary of $120,000. Dangoor, who was not an employee of the Gallery, received 50% percent of the shares because he provided seed capital to the Gallery. Defendant Hutcheson now is an employee of the Gallery.

The shareholders’ agreement provides that upon the termination of Mosionzhnik’s (or any employee who owned stock, such as Chowaiki) employment, Mosionzhnik would have to sell her shares to the Gallery. Section 4.2 provides that “the price shall be the fair market value of the shares of stock to be sold determined by the accountants servicing the [Gallery] using generally accepted accounting principles, consistently applied.”

On July 23, 2008, Mosionzhnik was summoned to a meeting by Chowaiki and Dangoor at which Mosionzhnik was accused of myriad improprieties in connection with her employment with the Gallery and fired for cause.^[2] In a letter dated October 20, 2008, the Gallery notified Mosionzhnik that it had valued her shares at $170,000. The Gallery had retained an accounting firm, Holtz Rubenstein Reminick (Holtz), which issued a report

Mosionzhnik has admitted to committing the most egregious of the alleged improper acts. She secretly opened a Swiss bank account which she used to divert approximately $500,000 related to the Gallery’s art sales^[3] and used over $13 million of art consigned by the Gallery’s clients as collateral for loans without the clients’ knowledge or consent. Rather than deny or present evidence to refute these allegations, at her deposition, Mosionzhnik testified that her actions were not improper and noted that “plenty of advisors . . . take a kickback . . . That’s not ethical but it happens because it’s the art world.” With respect to illegally using client art as collateral, her defense is that Chowaiki also did so and told her that such a thing was accepted practice in the industry (despite the AC waxing poetic about Mosionzhnik being “an internationally acclaimed and renowned” art dealer, while Chowaiki supposedly was merely an “unsuccessful screenwriter” and ice cream salesman with “no formal education or expertise in art”). As discussed infra, these actions warrant summary judgment on liability. However, as discussed infra, Mosionzhnik’s bad acts^[4] do not destroy her right to receive the proper value of her shares pursuant to the terms of the shareholders’ agreement. Consequently, the central dispute on these motions is whether the Holtz report complied with section 4.2 of the shareholders’ agreement. Mosionzhnik’s main objection to the Holtz report is that it did not account for the Gallery’s interest in litigation it is funding in Europe (referred to by the parties and hereinafter as Project Gamma).

In December 2004, shortly before the formation of the Gallery, Mosionzhnik and Chowaiki decided to invest in a pending

It is

well established that summary judgment may be granted only when it is clear that no triable issue of fact exists. (Alvarez v Prospect Hosp., 68 NY2d 320 , 325 [1986].) The burden is upon the moving party to make a prima facie showing of entitlement to summary judgment as a matter of law. (Zuckerman v City of New York, 49 NY2d 557 , 562 [1980]; Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065 , 1067 [1979].) A failure to make such a prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers. (Ayotte v Gervasio, 81 NY2d 1062 , 1063 [1993].) If a prima facie showing has been made, the burden shifts to the opposing party to produce evidentiary proof sufficient to establish the existence of material issues of fact. (Alvarez, 68 NY2d at 324 ; Zuckerman, 49 NY2d at 562 .) The papers submitted in support of and in opposition to a summary judgment motion are examined in the light most favorable to the party opposing the motion. (Martin v Briggs, 235 AD2d 192 , 196 [1st Dept 1997].) Mere conclusions,

Recovery on the remaining improprieties of which Mosionzhnik and Chowaiki accuse each other is barred by the doctrine of in pari delicto. This doctrine “mandates that the courts will not intercede to resolve a dispute between two wrongdoers.” (Kirschner v KPMGLLP, 15 NY3d 446 , 464 [2010].) That Chowaiki’s allegations are pleaded as counterclaims by the Gallery against Mosionzhnik is irrelevant because both of their actions are imputed to the Gallery.

“Agency law presumes imputation even where the agent acts less than admirably, exhibits poor business judgment, or commits fraud.” (Kirschner, 15 NY3d at 465 .) Imputation “is a legal presumption that governs in every case, except where the corporation is actually the agent’s intended victim.” (Id. at 466.) This exception is called the “adverse interest exception,” and applies only where the agent has “totally abandoned his principal’s interests and [is] acting entirely for his own or another’s purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.” (Id. [citation and internal quotation marks omitted].)

[2] Here, the record unequivocally establishes that the legality of the Gallery’s business practices ranged from the questionable (the champertous funding of European litigation) to the impermissible (using client property as loan collateral). The Gallery cannot recover against Mosionzhnik for her bad acts because the Gallery benefitted from them.^[6] *8 Indeed, much of the Gallery’s Russian business during Mosionzhnik’s tenure was predicated on all sorts of shady practices. Mosionzhnik, however, cannot be said to have “totally abandoned [the Gallery’s] interests” and was not “acting entirely for [her own purposes].” (Id.) Instead, Mosionzhnik’s business decisions, regardless of their wisdom, were made both for her benefit (as she was skimming commissions) and for the benefit of the Gallery (because

Likewise, the questions of fact about whether Chowaiki’s alleged wrongdoing rose to the level of severity of Mosionzhnik’s actions are irrelevant. Mosionzhnik lacks standing to sue Chowaiki for breaching his fiduciary duties to the Gallery because such a claim is derivative and belongs to the Gallery. (See Yudell v Gilbert, 99 AD3d 108 , 113-114 [1st Dept 2012]; accord Tooley v Donaldson, Lufkin & Jenrette, Inc., 845 A2d 1031 , 1033 [Del 2004].)^[7] However, even if Mosionzhnik could maintain such a claim, it, nonetheless, would be barred by the in pari delicto doctrine for the same reasons that the Gallery’s claims are precluded.

3. Breach of the Employment Agreement

[3] Even though there can be no recovery for the abovementioned bad acts because of the in pari delicto doctrine, the undisputed fact that Mosionzhnik committed them (along with her stealing $500,000 from the Gallery, for which she is liable) precludes her from claiming any further compensation from the Gallery.^[8] It is well established that an employee who “act[s] in any manner inconsistent with his agency or trust” and fails “to exercise the utmost good faith and loyalty in the performance of his duties” is deemed a “faithless servant” and “must ... account to his principal for secret profits [and] forfeit[ ] his right to compensation.” (Lamdin v Broadway Surface Adv. Corp., 272 NY 133 , 138 [1936]; Visual Arts Found., Inc. v Egnasko, 91 AD3d 578 , 579 [1st Dept 2012].) Therefore, Mosionzhnik’s claim

4. Breach of the Shareholders’ Agreement

That being said, Mosionzhnik is still entitled to be paid the fair market value of her shares pursuant to section 4.2 of the shareholders’ agreement. The right to be paid for her equity is not impaired by her bad acts because her equity is not compensation for her services and not dependent on her job performance. Indeed, her right to receive cash for her shares is only triggered upon her termination. Neither the shareholders’ agreement nor the employment agreement distinguishes between termination for or without cause. This is unsurprising because Mosionzhnik’s employment was at-will.^[9] Ergo, the basis for her termination has no impact on her right to receive money for her shares.

As a result, the court must reach the essential inquiry in this case of whether the value of Mosionzhnik’s shares exceeds her liability to the Gallery. Based on the discussion above, it would appear that the question is simple: are her shares worth more than $500,000? The relevant inquiries are: (1) whether the Holtz report is a reflection of the fair market value of the shares based on generally accepted accounting principles; and (2) should Project Gamma be accounted for in the valuation of the Gallery?

As discussed supra, part II, the Gallery retained Holtz to value Mosionzhnik’s shares. The Holtz report, which was issued on October 20, 2008, used a calculation engagement methodology to determine that her shares were worth $170,000 as of July 23, 2008. Mosionzhnik objected to this valuation and hired her own expert, Gettry Marcus Stern & Lehrer, CPA, PC. (GMSL), which issued a report on August 19, 2011, using a valuation engagement methodology to conclude that her shares were worth $4,317,200 as of July 23, 2008.

Mosionzhnik’s only other basis to disregard the Holtz report is her contention that it improperly utilized a calculation engagement instead of a valuation engagement. This objection is inapposite because both are generally accepted accounting principles. If, however, Mosionzhnik had pointed out real error in the valuation, such as misstating amounts in the Gallery’s financial statements, the inquiry might be different. She did not. The shareholders’ agreement does not provide her the right to procure her own report if she disagrees with the Gallery’s valuation. In light of the evidence of how the Gallery does business, it is unsurprising (aside from the usual expectation that the experts of adverse parties will disagree) that Holtz and GMSL came to drastically different conclusions about the value of the Gallery. Regardless, the court must accept the Holtz report because it was prepared in accordance with the terms of the shareholders’ agreement. If the parties, who constitute all of the involved individuals that formed the Gallery and drafted the shareholders’ agreement, wished to grant a terminated employee a more substantive right to participate in or challenge the valuation of her shares, they could have drafted the shareholders’ agreement differently. As they did not, they are bound by the express term of the shareholders’ agreement they all agreed to. Defendants followed the protocol set forth in sec

D. Issues for Trial

In searching the record, the court sua sponte grants summary judgment and dismisses Mosionzhnik’s oppressive conduct towards a minority shareholder, RICO,^[12] accounting, and unjust enrichment claims, and also dismisses the Gallery’s unjust enrichment claim. Defendants’ conduct complied with the governing written agreements and there is no question of fact that these claims are refuted by the evidence or are otherwise duplicative of the parties’ breach of contract claims. These claims are dismissed.

However, questions of fact preclude summary judgment on Mosionzhnik’s claims for defamation and tortious interference and the Gallery’s remaining breach of contract claims (which essentially allege similar allegations, such as wrongfully competing with the Gallery’s clients). It should be noted that truth is “a complete defense” to a defamation claim. (Panghat v New York Downtown Hosp., 85 AD3d 473 , 473 [1st Dept 2011].) So, even though many of the parties’ fraud allegations are barred by the in pari delicto doctrine, the facts about such alleged fraud might still be addressed at trial because the truth of those allegations are at the heart of how each side allegedly defames the other and seeks to destroy the other’s reputation in the art industry. These types of allegations, made in a public trial, often have the potential for significant reputational harm for all participants, regardless of who obtains a favorable verdict. Given the net judgment before trial ($330,000 in favor of the Gallery), the limited potential for further recovery for either