Obtaining investments and operating a business with partners can be an exciting venture, but it can also can pave the way for challenging scenarios.
When things are not going as expected, the temptation to “leave” the Company one starts with partners and initiate a competing entity may sound appealing, but it could also have very significant and detrimental ramifications if such activity is not pre-approved by your business partners, even if they are only silent investors.
The case below serves as a reminder that operating agreements, employment agreements, and corporate statutes protecting aggrieved business partners will often ensure that owners simply cannot “walk away” from one another and initiate competing ventures, without their being significant legal ramifications.
In the case of Uniloeb Holdings LLC v. Shamus, the Plaintiff, Uniloeb Holdings LLC, filed suit in the New York County Commercial Division against several defendants, including Gareb Shamus, Stephen Shamus, and their associated companies, Ace Universe, Inc., Heromaker Studios, Inc., and Heromaker Studios, LLC.
Uniloeb Holdings LLC made a multi-million dollar investment into Ace Universe and became a minority owner thereof. The Individual Defendants operated Ace, which was a joint venture (“Joint Venture”) with Uniloeb Holdings, with the premise that the Joint Venture would build a comic-based business revolving around Comic Con events and expanding to include digital celebrity content, e-commerce, and original superhero programming.
As part of their loyalty to the venture, each of the Individual Defendants signed employment agreements containing non-compete and non-solicitation provisions to ensure that their focus and energies were devoted to the JV.
The crux of the lawsuit revolved around allegations that the Individual Defendants breached their employment agreements and their fiduciary duties by secretly misappropriating corporate opportunities and company assets to separate companies they created, namely Defendants Heromaker Studios, Inc. and Heromaker Studios, LLC, without proper explanation or consent from the Plaintiff.
The Plaintiffs further alleged that Defendant Heromaker (i) operated in the same business as the JV; (ii) utilized the same business model as the JV; and (iii) leveraged the same celebrity relationships as the JV.
It was also alleged that the Individual Defendants transferred assets from the JV and/or caused the Company to incur substantial debts, and thereafter refused to provide financial disclosures despite demands being made. The Plaintiff’s complaint concludes that they, as investors, were shut out from the very business that they owned.
Plaintiff filed suit alleging a litany of causes of action, including claims arising out of breach of contract, breach of fiduciary duty, usurpation of corporate opportunity, unfair competition, violations of the faithless servant doctrine, unjust enrichment and aiding and abetting breach of fiduciary duty.
Defendants moved to dismiss the Complaint for failing to adequately set forth facts, which, even taken as true, would be adequate to satisfy the elements of the causes of action set forth in the Complaint.
The key legal issues addressed in the court’s decision were as follows:
- Did the Plaintiff adequately set forth a cause of action for breach of fiduciary duty against the individual defendants?
The Court found that the Plaintiff did adequately set forth a cause of action for breach of fiduciary duty, as the Individual Defendants owed a duty of loyalty and care to the JV.
- Should the breach of contract cause of action against the Individual Defendants, as related to their breach of the Operating Agreement, be dismissed?
The court dismissed claims for breach of contract related to the JV’s Operating Agreement against the Individual Defendants as they were apparently not parties to that agreement (i.e. the Individual Defendants did not sign the Operating Agreement).
However, the breach of contract cause of action related to Gareb Shamus’s employment agreement was allowed to continue since it was adequately plead that he had violated the terms of his employment agreement.
- Would the court allow the cause of action for usurpation of corporate opportunity to proceed?
Yes, the court allowed the cause of action for usurpation of corporate opportunity to proceed. The complaint alleged that the defendants diverted business opportunities that rightfully belonged to the Company, to their own Companies, and these allegations was enough to satisfy the requisite elements for a usurpation of corporate opportunity cause of action.
- Would the court allow the cause of action for unfair competition to proceed?
Yes, the court allowed the cause of action for unfair competition to proceed. The complaint alleged that the defendants wrongfully diverted the Plaintiff’s business to themselves, thus establishing an unfair competition claim.
- Should the Court dismiss the cause of action labeled as a breach of the faithless servant doctrine?
Yes, the court dismissed the cause of action specifically labeled as a breach of the faithless servant doctrine. Delaware law, which governed the case, did not recognize it as a separate cause of action. However, the court indicated that disgorgement could still be a potential remedy for other claims related to fiduciary duties and breaches of employment agreements.
- Should the court allow the cause of action for unjust enrichment to proceed?
Yes, the court allowed the cause of action for unjust enrichment to continue, as, if proven true, the Defendants would have enriched themselves as the expense of the JV and the Plaintiff
- Should the court allow the cause of action against Heromaker for aiding and abetting breach of fiduciary duty (i.e. aiding and abetting Gareb Shamu’s actions) to proceed?
The court ruled that the cause of action for aiding and abetting breach of fiduciary duty was valid and should proceed. The complaint alleged that Heromaker was formed to assist Gareb Shamus in breaching his fiduciary duties, and the court found this claim against Heromaker to be legitimate.
The moral of the story is that a business partner who takes a corporate opportunity away from the business to which he or she is a fiduciary will likely wind up as a defendant in lawsuit, unless the matter can be resolved amicably via pre-litigation settlement terms.
Ross E. Pitcoff, Esq. is the Founder of Pitcoff Law Group, a New York Commercial Litigation boutique with a focus on Business Divorce.
You can contact Ross at email@example.com or call the office at (646) 386-0990.