Talking Capital LLC v Omanoff

[Pages:32]Talking Capital LLC v Omanoff 2018 NY Slip Op 30332(U)

February 23, 2018 Supreme Court, New York County

Docket Number: 650973/2017

Judge: Shirley Werner Kornreich 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.

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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: PART 54

----------------------------------------------------------------------)(

TALKING CAPITAL LLC, together with its subsidiaries TALKING CAPITAL PARTNERS 11, LLC, TALKING CAPITAL PARTNERS Ill, LLC, and FOREFRONT PARTNERS LLC,

Index No.: 650973/2017 DECISION & ORDER

Plaintiffs,

-against-

RODNEY OMANOFF, OMANOFF AMERICA TELECOM, LLC, BRENDAN ROSS, MARK PROTO, MUDMONTH, LLC, JOSEPH RAHMAN a/k/a YOUSSEF RAHMAN, CHRISTOPHER LARA, INTOUCH TELECOM, INC., DLI TC, LLC, VOiP GUARDIAN PARTNERS I LLC, VOiP GUARDIAN LLC, DIRECT LENDING INVESTMENTS LLC, and DIRECT LENDING INCOME FUND, L.P.,

Defendants.

----------------------------------------------------------------------)( SHIRLEY WERNER KORNREICH, J.:

Motion sequence numbers 004 and 005 are consolidated for disposition.

At heart, this is an action brought by Talking Capital LLC (the Company), its

subsidiaries, and one of its members against former managing m~mbers and others for forming a

competing entity. Defendants DLI TC, LLC (DLI TC), Direct Lending Investments, LLC,

Direct Lending Income Fund, L.P. (collectively, the DLI Companies), and Brendan Ross

(collectively, the DLI Defendants) ?move to dismiss the amended complaint (the AC). Seq. 004.

Defendants Rodney Omanoff, Mark Proto, Joseph Rahman (collectively, the Manager

Defendants), Omanoff America Telecom, LLC (OAT), Mudmonth, LLC (Mudmonth),

Christopher Lara, InTouch Telecom, Inc. (InTouch), VoIP Guardian Partners I LLC, and VoIP

Guardian LLC (together, the VoIP Companies) (collectively, the Omanoff Defendants)

separately move to dismiss the AC. Seq. 005. Plaintiffs, the Company, Talking Capital Partners

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II, LLC (TCP II), Talking Capital Partners III, LLC (TCP III; and together with TCP II, the

Subsidiaries), and Forefront Partners, LLC (Forefront), oppose both motions. For the reasons

that follow, defendants' motions are granted in part and denied in part.

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Factual Background & Procedural History

As this is a motion to dismiss, the facts recited are taken from the AC (Dkt. 62) 1 and the

documentary evidence submitted by the parties.2

In 2014, non-party Bradley Reifler, acting on behalf of Forefront,3 negotiated and agreed

with Omanoff, Proto, and Rahman to create the Company, a Delaware LLC based in New York.

The Company provides financing to telecommunications firms that route international calls. The

Company was in the factoring business; it would lend money to telecoms in exchange for a

percentage of their accounts receivable.

The Company is governed by an operating agreement dated September 8, 2014~ See Dkt.

63 (the Operating Agreement).4 Its three Members - Forefront, OAT, and Mudmonth - are

1 References to "Dkt." followed by a number refer to documents filed in this action on the New York State Courts Electronic Filing system (NYSCEF).

2 The court, however, will not consider factual averments in defendants' affidavits (such as Ross' claim that DLI TC was not given a certain contractually require notice) because they are inadmissible on a motion to dismiss. See Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., 115 AD3d 128, 134 n.4 (1st Dept 2014), accord Rovella v Orofino Realty Co., 40 NY2d 633, 634 (1976); see also Amsterdam Hospitality Group, LLC v Marshall-Alan Assocs., Inc., 120 AD3d 431, 432 (lst Dept 2014)("We have held that affidavits that 'do no more than assert the inaccuracy of plaintiffs' allegations [ ] may not be considered, in the context of a motion to dismiss, for the purpose of determining whether there is evidentiary support for the complaint ... and do not otherwise conclusively establish a defense to the asserted claims as a matter of law."), quoting Tsimerman v Janoff, 40 AD3d 242 (lst Dept 2007).

3 Reitler claims to be a manager of Forefront. See Dkt. I02 at I.

4 Plaintiffs' allegations concerning so~e of the defendants' representations about their experience and the state of the factoring market are of no moment, notjust?because of a lack of any alleged due diligence, but also because each member warranted in section 11.1 of the

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LLCs controlled by Reifler, Omanoff, and Proto, respectively, and each had a one-third interest. See id. at 63-64. Sections 5.1 and 5.4 of the Operating Agreement provide that the Company is to be controlled by a Board of Managers (the Board), consisting of three Managers --' Reifler, Omanoff, and Proto. See id. at 8-9, 64. Rahman worked for the Company and was named in section 5.11 as a "Tax Matter Partner" along with Omanoff and Riefler. See id. at 14-15.

Section 1.5 states, in bold, that "Notwithstanding anything to the contrary set forth herein, it is agreed and understood that the affirmative vote, consent or approval of all the Managers is required for every act or decision done or made by the [Board]." See id. at 2 (bold and underline in original; italics added for emphasis). 5 The Company's purpose is set forth in section 2.6, which provides that the Company's factoring clients would include small and medium sized telecoms (Tier 3 Carriers) that were awarded contracts by "major" telecoms (Tier 1 Carriers), such as Verizon and AT&T. See id. at 4. Section 2.6 further provides that the Board

Operating Agreement that: "By reason of his ... business or financial experience, or by reason of the business or financial experience of his ... financial advisor ... he ... is capable of evaluating the risks and merits of ... this investment." See Dkt. 63 at 21. Likewise, section 11.4 provides that the members are "financially able to bear the economic risk of' losing their entire investment. See id. at 22. Regardless, plaintiffs do not assert a claim for fraudulent inducement.

5 A provision to this effect can be found 'in multiple sections of the Operating Agreement". For instance, section 4.7, which addresses how voting interests are to be commensurate with the members' percentage interests, concludes, again in bold, that "Notwithstanding anything to the contrary set forth herein, it is agreed and understood that the affirmative vote, consent or approval of all the Members holding all Interests is required for every act or decision done or made by the Members." See Dkt. 63 at 8 (bold and underline in original; italics added for emphasis); see also id. at 9 (Notwithstanding anything to the contrary set forth herein, it is agreed and understood that the affirmative vote, consent or approval of all the Managers is required for every act or decision done or made by the [Board] unless a majority of those present of three members present authorize one member to take action in a specific matter.") (bold and underline in original). Likewise, section 4.9(a) requires "all" members to call meetings, and requires written consents in lieu of a meeting to be signed by "all" members. See id. at 8.

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is authorized to form subsidiaries to purchase accounts receivable of Tier 1 Carriers fro.m Tier 3 Carriers. See id. at 4-5.

Sections 2.8 and 5.5 contain exculpatory clauses that restrict the liability of Members and Managers to acts such as gross negligence and fraud. See id. at 5, 13. Section 2.1 O(b) states that the Operating Agreement is only intended to benefit the Company's Members, that it "is expressly not intended for the benefit of any creditor of the Company or any other Person," and

that no other party shall have any rights under the Operating Agreement. See id. at 5. The Operating Agreement contains partial disclaimers of the duty ofloyalty. 6 Section 5.6 states that the Managers need not devote all their time to the Company, but may "devote whatever time, effort, and skill as they deem appropriate." See id. at 14. Section 5.7, which governs conflicted

transactions, permits the Managers and their Affiliates to "engage in any transaction ... with the

Company so long as: (i) such transaction is not expressly prohibited by this Agreement and the terms and conditions of such transaction, on an overall basis, are fair and reasonable to the Company and are at least as favorable to the Company as those that are generally available from Persons capable of similarly performing them and in similar transactions between parties operating at arm' length and (ii) such transaction has been consented to in writing by the Members holding all interests.

Id. (emphasis added). However, the Operating Agreement does not permit Members or Mangers

to appropriate corporate opportunities without the consent of the other Members. In section 5.5, the Members agreed they would otherwise be subject to the fiduciary

duties applicable under Delaware law to directors of a corporation,7 and not those duties

6 See Auriga Capital Corp. v Gatz Props., 40 A3d 839, 851 (Del Ch 2012), aff'd 59 A3d 1206 (Del 2012) (Delaware law imparts default fiduciary duties on managing members of an LLC).

7 Absent a fiduciary duty waiver in an operating agreement, Delaware corporate law mandates application of entire fairness scrutiny to conflicted transactions. See Miller v HCP & Co., 2018 WL 656378, at *2 (Del Ch 2018).

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applicable to partners. See id. at 13. In other words, aside from the Operating Agreement's fiduciary duty waivers and exculpatory clauses, the Company is governed like a corporation.

In practice, "Omanoff was principally in charge of managing all day-to-day operations, including procuring financing opportunities relating to overseas telecom providers and supervising [the Company's] New York offices," while Forefront "concentrated its efforts on

raising capital for [the Company] and its affiliates." See AC ifif 25-26. In that regard, Reifler

introduced the other Managers to Ross, whose DLI Companies could finance the Company's factoring business. Allegedly, "Ross came to New York on at least three occasions to meet with the representatives of [the Company] and entered into negotiations to provide loans to [the

Company] and its affiliates." AC if 28. "The negotiations in New York proved successful and led to a series ofloans made by Ross' s affiliated companies in 2014 to early 2016." if 30. The ?

loans were made to wholly owned subsidiaries of the Company, TCP II and TCP III, which were formed pursuant to section 2.6 of the Operating Agreement. 8 "The total amount ofloans issued by Ross' s affiliated companies amounted to approximately $180 million (including renewals and

rollovers of prior financings)." if 31. "Given this magnitude, Ross' s affiliated companies became the leading lending source for [the Company and Subsidiaries]." if 32.

"The first set of loans were made in the fall of 2014 totaling $7 million, pursuant to two promissory notes each in the sum of $3.5 million (the "Initial Loans"). The Initial Loans were

8 The Subsidiaries, also Delaware LLCs, do not have separate operating agreements. Plaintiffs conclusorily allege they operated under the Company's Operating Agreement. This allegation is not supported by any documentation. Since the Operating Agreement requires unanimous consent, the Company's subsidiaries could not have "adopted" the Operating Agreement without unanimous consent of the Members. Forefront does not allegefthat the other Members unanimously agreed. In any event, as noted herein, Forefront is not aggrieved by the holding that the Subsidiaries are not governed by the Operating Agreement because that fact actually may result in the Omanoff Defendants having broader liability (e.g., due to no fiduciary duty

waivers and exculpatory clauses). 5

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personally guaranteed by [Reifler]." ~ 33. "The Initial Loans were timely repaid with interest

and led to a number of subsequent loans in 2015 pursuant to a certain Master Receivable[s]

Purchase and Servicing Agreement dated as of December 1, 2014." ~ 35; see Dkt. 70 (the PSA).

The PSA is an agreement between TCP II (defined as Originator) and DLI TC (defined as Buyer). See id. at 1.9 Section 25 of the PSA provides that the PSA, and all matters related to it,

are governed by New York law. See id. at 22. In section 27(a), the parties to the PSA submitted

to the jurisdiction of New York courts in any action relating to the PSA, 10 subject to the

following caveat:

provided, each party agrees that it will not commence any such action, other than regarding claims specified in the first sentence of Section 1O(b) [i.e., concerning a breach of warranty], without first entering into good faith discussions with the other party for a period of not less than thirty (30) days, in an effort to amicably resolve any such differences.

9 The PSA's whereas clauses explain that "the Originator enters into Factoring Agreements with Merchants, under which the Originator agrees to purchase from the Merchant Receivables from Customers for service provided under a Carrier Agreement"; that "pursuant to this Agreement, Originator will provide a Credit Package (as hereinafter defined) relating to a Merchant and each Carrier Agreement relating to Receivables that the Originator proposes to sell to Buyer"; that "Originator has agreed to provide Buyer with an exclusive Purchase Option on the terms and conditions set forth below"; and that "if Buyer exercises the Purchase Option, Buyer will purchase the Receivables generated under the subject Factoring Agreement, on the terms and conditions set forth herein." See Dkt. 70 at 1. While the PSA is an extensive agreement, the court limits its discussion to the portions of the PSA that are relevant to the instant motions. It should be noted that section 23 of the PSA provides that:

The relationship between Originator and Buyer shall be that of independent contractors. Neither is a trustee or agent for the other, nor does either have any fiduciary obligations to the other. This Agreement shall not be construed to create a partnership or joint venture between the Parties....

Dkt. 70 at 22.

10 It should be noted that, unlike the PSA, the Operating Agreement does not contain a forum selection clause.

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Id (emphasis added). In other words, this meet and confer obligation is a procedural condition precedent to DLI TC's consent to jurisdiction in this court.

Section 2 of the PSA provides DLI TC with a right of first refusal to finance the Company's telecom factoring. See id at 5-7. Section 2(a) sets forth the information that must be provided to DLI TC and requires that this information be sent by email and. made available on a Credit Website. See id. at 5. DLI TC could exercise its right of first refusal "by indicating its approval to purchase the Receivables covered by the Credit Notice in a reply email ... within four (4) Business Days after the Effective Offer Date." See id. at 6.

The PSA had a five-year term, subject to early termination under certain conditions set forth in section 16. See id. at 18. Section 18(d) contains a restrictive covenant that prohibits DLI TC, its principals, and affiliates from engaging "in any business providing trade finance or factoring services to telecommunications carriers in connection with voice over internet protocol (VoIP) services outside of the PSA while the PSA is in effect and for two years thereafter." See id. at 20-21. Further, section 18(e) prohibits DLI TC, its principals, and affiliates from soliciting customers and employees of the Company and its affiliates during this restriction period. See id. at 21. Section 18(f) states that "[t]he restrictions set forth in this Section 18 are considered by the Parties to be reasonable for the purposes of protecting the value of their respective businesses and goodwill and respecting applicable legal and contractual requirements"; contains a "blue penciling" provision that provides that "[i]f any provision of this Section 18 relating to the time period, scope of activities or geographic area of restrictions is declared by a court of competent jurisdiction to exceed the maximum permissible time period, scope of activities or geographic area, each such provision shall be reduced to the maximum which such court deems

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