1:19-cv-04735
S.D.N.Y.Aug 27, 2020Background
- Plaintiff Jay Schiff, former Co-President/President of 10th Lane Finance (a Delaware LLC), signed a 2009 Employment Agreement with ZM Equity that promised him 20% of incentive compensation received by 10th Lane Partners after a five-year vesting schedule; Schiff’s incentive vested when he left in Feb 2015.
- Schiff alleges defendants (ZM Equity, Centre Lane Partners (CLP), Morgan, 10th Lane Partners) mismanaged 10th Lane Finance after the Investment Period ended (June 2015), made post-period investments, delayed sales/distributions, engaged in self-dealing, and charged excessive fees, reducing the incentive pool.
- After an offered settlement conditioned on a release, Schiff sued for breach of the Employment Agreement, breach of the LLC Agreement, breach of implied covenants, tortious interference, and sought declaratory relief (including release from a Confidentiality Agreement and alter-ego relief against CLP); he also moved to amend.
- Procedural/threshold facts: ZM Equity was formally dissolved and its certificate of cancellation filed in Delaware in 2016; 10th Lane Partners is alleged successor; jurisdiction is federal diversity.
- The court analyzed capacity/alter-ego under Delaware and New York law, contract interpretation (ambiguity vs. employer discretion), derivative-versus-direct claims under Delaware Tooley analysis, and Rule 19 joinder concerns for 10th Lane Finance.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Capacity / Alter‑ego (ZM Equity and CLP) | ZM Equity was wound up improperly; CLP is ZM’s alter ego and liable | ZM Equity was dissolved and cannot be sued; CLP not alter ego absent fraud/abuse | ZM Equity claims dismissed (dissolved under Delaware law); CLP alter‑ego claim dismissed for failure to plead abuse/fraud |
| Breach of Employment Agreement (20% incentive; release condition) | Schiff entitled to 20% of managing member’s incentive; payment was improperly reduced and conditioned on signing a release | Employment Agreement gives ZM “sole discretion” over computations/determinations | Ambiguity exists as to scope of “sole discretion” and whether a release may be required; breach claim survives against 10th Lane Partners |
| Implied covenant of good faith and fair dealing | Defendants’ post‑period acts (new investments, delays, self‑dealing, fee allocations) breached implied covenant under the Employment Agreement | These claims duplicate express contract or arise under LLC Agreement; cannot be used to create new substantive rights | Dismissed: duplicative/improperly used to enlarge contract rights; survives only where distinct from breach claims (not here) |
| Derivative vs Direct / Demand futility and Joinder (LLC Agreement claims) | Schiff says he has a direct right because of his contractual entitlement to incentive compensation | Defendants say harms are to the LLC (10th Lane Finance) and thus derivative requiring demand/demand futility pleading and joinder | Court finds many LLC claims are derivative; dismissal for failure to plead demand/demand futility; court orders supplemental briefing on joinder of 10th Lane Finance (Rule 19/diversity) |
| Tortious interference | Morgan acted for personal profit and interfered with Schiff’s contractual rights | Morgan and 10th Lane Partners are parties/insiders (not strangers); corporate officer immunity applies | Dismissed: Morgan not a stranger and plaintiff failed to plead the heightened facts (malice/outside scope) required to hold an officer individually liable |
| Confidentiality Agreement (declaratory relief) | Schiff seeks declaration freeing him to disclose track record to prospective employers | Defendants say no actual controversy; confidentiality provisions enforceable; nonsolicit expired | Nonsolicitation clause expired; other confidentiality provisions are broad/ambiguous — declaratory claim allowed to proceed to clarify scope/enforceability |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (establishes plausibility standard for complaints)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must allege facts raising claims above speculative level)
- Metro Commc'n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121 (Del. Ch. 2004) (Delaware rule on capacity of dissolved LLC and exception for improper winding up)
- Morris v. N.Y. State Dept. of Taxation & Fin., 623 N.E.2d 1157 (N.Y. 1993) (alter‑ego/veil piercing requires abuse of corporate form beyond mere breach)
- NetJets Aviation, Inc. v. LHC Commc'ns, LLC, 537 F.3d 168 (2d Cir. 2008) (breach of contract alone insufficient to pierce corporate veil)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (direct v. derivative inquiry—who suffered harm and who would benefit from recovery)
- El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016) (contract claims are not direct by default; Tooley governs analysis)
- Namad v. Salomon Inc., 543 N.E.2d 722 (N.Y. 1989) (bonus language that vests absolute discretion bars enforceable bonus claim)
- W.W.W. Assocs., Inc. v. Giancontieri, 566 N.E.2d 639 (N.Y. 1990) (contract ambiguity must be determined from the contract’s face)