Person Assuming Management of Family Business Does Not Assume Liability for Predecessor’s Business Torts, According to New York Court

file531278556409.jpgA New York court recently addressed the fiduciary duties owed among managers of businesses involved in a venture together. A group of real estate investors sought to hold an individual liable for multiple business torts, all of which were allegedly committed by his son. Halpern, et al v. Kuskin, 2013 NY Slip Op. 32005(U) (N.Y. Sup. Ct., Aug. 26, 2013). The father took over the operation of several business entities from his son, and the plaintiffs argued that the father was liable either for the allegedly tortious acts themselves, for aiding and abetting said acts, or for attempting to shield his son from liability. The court held that the plaintiffs failed to plead any facts directly alleging the father’s liability. It also addressed the question of the father’s fiduciary duty to his son, as part of a family business, versus any fiduciary duty he might have owed to the plaintiffs.

Two plaintiffs signed an operating agreement with Brad Kuskin, according to the court, in March 2008 for a limited liability company (LLC) intended to purchase investment property in Crested Butte, Colorado. The two plaintiffs, along with a third plaintiff, signed another operating agreement with Kuskin for an LLC whose purpose was to purchase property in Crystal Springs, New Jersey. The plaintiffs invested substantial funds, including about $1.1 million by the lead plaintiff, in the two LLCs. The plaintiffs alleged that Kuskin used the invested funds to purchase the Colorado property in another company’s name, and otherwise mismanaged the funds.

Gary Kuskin, Brad Kuskin’s father, took over operations of various businesses from his son, including the company or companies involved in the deals with the plaintiffs. In their lawsuit, the plaintiffs alleged that Brad Kuskin fraudulently induced them to invest money with him. They further claimed that Gary Kuskin “attempted to make Brad Kuskin judgment proof.” Id. at 3. The suit, which only named Gary Kuskin as a defendant, included causes of action for tortious interference with a contract, aiding and abetting fraud, and breach of fiduciary duties. It essentially sought to hold Gary Kuskin liable for intentional torts committed by his son through their business.

The court dismissed the plaintiff’s claims, finding that they had not sufficiently pleaded a case against Gary Kuskin. The tortious interference claims required proof of intentional conduct by the defendant, which the court found lacking. Id. at 4. The “aiding and abetting” claims required proof of intent to defraud, “plaintiff’s justifiable reliance, and damages.” Id. at 5. The court found no evidence of intent or reliance.

The plaintiffs’ breach of fiduciary duty claims were apparently based on the defendant’s alleged attempt to protect his son from liability by taking over the business from him. This breached the defendant’s fiduciary duty to the plaintiffs, they argued. The court disagreed, again noting the required elements of the claim, including proof of “misconduct” by the defendant. Id. It further noted that, by the time Gary Kuskin took over the family business, the alleged misconduct had already occurred, so the plaintiffs had not demonstrated that a fiduciary relationship necessarily existed.

Business attorney Samuel C. Berger represents New York and New Jersey businesses and entrepreneurs. We offer fixed-fee packages of legal services, covering a wide range of issues, to help businesses understand their duties and rights, and to allow them to grow and run smoothly. Contact us today online or at (212) 380-8117 to schedule a confidential consultation to discuss your legal matter.

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