665 F.Supp.3d 543
S.D.N.Y.2023Background
- Allen Eber's 1970 will placed controlling EB&C stock in a testamentary trust for equal benefit of his three children; trustees included his son Lester, attorney Elliott Gumaer, and a bank (later CNB). The trust terminated by Surrogate's Court order in 2017 and CNB attempted distributions.
- Lester ran the Eber corporate group (EB&C -> EBWLC -> Eber Metro -> Eber-CT/Slocum). From 2007 onward he entered a personal consulting/non‑compete agreement with Southern Wine & Spirits paying him millions while EBWLC sold assets to Southern. Lester was trustee and officer during these events.
- In 2012 Lester assigned purported loans to his wholly owned Alexbay and foreclosed: Alexbay accepted Eber Metro (and its 79% of Eber-CT) in satisfaction of the debt. Plaintiffs (Lester's nieces/nephews) were not informed and had not consented.
- Post-foreclosure transactions: transfers of Slocum Maine to Lester/Wendy, a Polebridge scheme that moved 6% of Eber-CT off the balance sheet, issuance in 2017 of EBWLC preferred voting shares to Lester, and other employment/severance arrangements for Lester and Wendy.
- Procedural posture: multi-year bench trial after partial summary judgment rulings for plaintiffs on trustee self-dealing; court found pervasive self-dealing, set aside numerous transactions, imposed constructive trusts, ordered disgorgement and prejudgment interest, removed Wendy from corporate offices for two years, appointed an interim director/receiver, and awarded punitive damages against Wendy.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Legality of Lester's Southern consulting/non‑compete payments | Lester (trustee/officer) diverted >$5.4M from corporate proceeds to himself; self‑dealing and usurpation of corporate opportunity | Payments were properly disclosed/authorized and were fair compensation; Southern insisted on paying Lester personally | Court: agreement was self‑dealing, void under New York "no further inquiry" rule; entire consulting proceeds (>$5.4M) awarded to EBWLC with prejudgment interest; corporate opportunity doctrine also applies |
| Validity of Alexbay foreclosure (2012) transferring Eber Metro/Eber‑CT to Alexbay | Foreclosure was a trustee self‑dealing transaction without beneficiary consent; voidable; reconveyance required | Foreclosure was commercially reasonable and judicially approved under UCC 9‑627; res judicata/Rooker‑Feldman defenses | Court: foreclosure void under "no further inquiry"; reconveyance ordered; held Alexbay (Lester) unjustly enriched (even if unjust enrichment not needed for rescission) |
| Surrogate accounting, trust stock distribution, and transfer‑restriction | Plaintiffs: Surrogate's distribution of EB&C shares to beneficiaries must be respected; Lester's attempt to invoke corporate transfer restriction to seize all shares for $0 is self‑dealing | Lester: EB&C bylaws permit transfer restriction exercise; he sought to acquire shares under bylaw procedure | Court: transfer restriction invoked by Lester to acquire trust shares for $0 violated fiduciary duties and BCL §720 standards; directed CNB to distribute EB&C shares per Surrogate's order (two‑thirds to plaintiffs, one‑third to estate) |
| Other post‑foreclosure / related transactions (Polebridge, Slocum Maine, Harris Beach settlement, 2012/2017 employment/stock issuances) | These transactions stripped value from trust/corporations to benefit Lester/Wendy and were not disinterested or fair | Defendants claimed business justifications, compensation, or reliance on counsel and prior approvals | Court: multiple transactions were sham/self‑dealing (Polebridge back‑stop, Slocum Maine split, Harris Beach $400k assignment, April 2012 severance, 2017 EBWLC preferred shares) and were voided; constructive trusts imposed and disgorgement ordered |
| Remedies: disgorgement, constructive trust, faithless‑servant forfeiture, punitive damages, equitable control | Plaintiffs sought full disgorgement, reconveyance, prejudgment interest, directors removal, receivership, and punitive damages | Defendants disputed amounts, asserted offsets (e.g., loans, Harris Beach payment), and urged limited relief | Court: awarded reconveyance, constructive trusts, disgorgement of compensation under faithless‑servant doctrine for Lester and Wendy for the relevant periods, prejudgment interest, denied set‑off for Harris Beach $400k, removed Wendy from corporate offices for two years, appointed temporary receiver, and awarded $650,000 punitive damages against Wendy |
Key Cases Cited
- Renz v. Beeman, 589 F.2d 735 (2d Cir. 1978) (trustee must avoid conflicts of interest; duty of loyalty is absolute)
- Meinhard v. Salmon, 249 N.Y. 458 (N.Y. 1928) (fiduciary duty of undivided loyalty for business partners; influential statement of loyalty principles)
- Pepper v. Litton, 308 U.S. 295 (1940) (standard for fiduciary breach and equitable remedies)
- City Bank Farmers Trust Co. v. Cannon, 291 N.Y. 125 (N.Y. 1943) (New York articulation of "no further inquiry" rule for trustee self‑dealing)
- Beatty v. Guggenheim Exploration Co., 225 N.Y. 380 (N.Y. 1919) (equitable conversion of legal title into constructive trust to prevent unjust enrichment)