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McCagg v. Schulte Roth & Zabel LLP, 601566/04
Decided: August 1, 2008
Justice Bernard J. Fried

NEW YORK COUNTY
Supreme Court

Appearances:

For Plaintiff:

Paul H. Levinson, Esq.,

Bruce A. Langer, Esq.

McLaughlin & Stern, LLP

For Defendants:

Jonathan D. Siegfried, Esq.

LeBoeuf, Lamb, Greene & MacRae

Marc S. Weingarten, and Harry S. Davis

Attorneys for Schulte Roth & Zabel, LLP

Eugene Farber, Esq.

Farber, Pappalardo & Carbonari

Attorneys for Alan Clingman

Justice Fried
Click here to see Judicial Profile

Decision and Order

This decision and order determines the summary judgment motion (CPLR 3212) in
McCagg v. Schulte Roth & Zabel LLP (Index No. 601566/04)

(the Schulte action), and the crossmotion in the Schulte action, as well as the
motion to dismiss (CPLR 3211 [a]), in McCagg v. Marquis Jet Partners, Inc.
(Index No. 113026/07)(the Marquis action). The text is identical; however, the
decretal paragraphs differ in each action and on each Grey Sheet.

By decision and order dated September 23, 2005, I granted the motion of
defendant Alan Clingman (Clingman), to dismiss the verified complaint in the
Schulte action on statute of frauds grounds, only to the extent of dismissing
the first cause of action. The Appellate Division affirmed for the reasons
stated by this court (see McCagg v. Schulte Roth & Zabel LLP, 36 AD3d 424 [1st
Dept 2007]). Familiarity with that decision is assumed.

These related actions, brought by plaintiff Brin McCagg (McCagg), arise out of
an aborted venture incorporated under Delaware law as Clearjets, Inc.
(Clearjets), on December 17, 2002.

In the fall of 2002, McCagg and Clingman, a defendant in the Schulte action,
began preparations to launch Clearjets to compete with Marquis Jet Partners,
Inc. (Marquis), and Netjets, Inc. (Netjets, or, Marquis/Netjets), in the 25 hour
fractional jet airplane rental business. Clingman had been terminated as chief
executive officer of Marquis in August 2002, and still held approximately 12
percent of the stock of closely held Marquis.

According to the verified complaint in the Schulte action, on November 18, 2002,
McCagg and Clingman attended a meeting in Florida with representatives of
FlexJets, Inc. (Flexjets), to discuss the possibility of entering into a
contract with FlexJets to purchase fractional shares in jet aircraft
manufactured by Bombardier Aerospace, Inc. (Bombardier), and then develop a
rental program similar to that offered by Marquis and NetJets.

Schulte Roth & Zabel LLP (Schulte) handled the incorporation of Clearjets in
Delaware. In addition to preparing the certificate of incorporation, bylaws, and
minutes of board actions, Schulte prepared employment agreements for Clearjets
officers and employees, and reviewed a proposed master contract with
Bombardier/Flexjets. By a resolution of its board of directors dated December
20, 2002, Clearjets issued 60 percent of the stock to Clingman and 40 percent to
McCagg, and elected Clingman as Chairman, CEO and Treasurer, and McCagg as
President. Clearjets then rented office space, and hired a general counsel and
receptionist.

Thereafter, McCagg and Clingman entered a one-page "Letter of Agreement" (the
letter agreement), dated January 1, 2003, which was after Clearjets was
incorporated.

The letter agreement provides, in its entirety:

This document, dated January 1, 2003, will serve as an initial agreement (the
"Agreement") between Alan Clingman and Brin McCagg (the "Partners").

1. The Partners agree to contribute the fractional jet business into a mutually
owned LLC (the "LLC").

2. Both Partners will work full-time for the LLC and use their best efforts to
develop the contributed business.

3. Clingman will assume the title and role of Chairman and CEO, and McCagg will
assume the title and role of President. The Partners agree to confer on all
major decision [sic] regarding the operation of the businesses.

4. LLC equity will be split 60 percent for Clingman and 40 percent for McCagg.
Any shares issued for any purpose (e.g., raising capital, ESOPs, etc.) will
dilute each Partner pro rata.

5. All legitimate and reasonable expenses, which are mutually agreed upon in
advance, will be paid based on the Partners' 60-40 equity split.

6. Both Partners agree not to sell their stock without notifying the other
Partner and allowing, but not requiring, the other Partner to participate in the
sale event on a pro rata basis.

There is no allegation or evidence that such a limited liability corporation was
ever created. No fractional jet business was ever established, and no agreement
with Flexjets/Bombardier, or any other fractional jet ownership program was ever
executed by Clearjets.

McCagg alleges that this letter agreement, which the verified complaint in the
Marquis action characterizes as a "joint venture agreement," also constitutes an
agreement that he and Clingman would own Clearjets as partners.

In Weisman v. Awnair Corp. of America (3 NY2d 444 [1957]), the Court of Appeals
held that a partnership could not be operated in corporate form:

[t]he two forms of business are mutually exclusive, each governed by a separate
body of law. When parties "adopt the corporate form, with the corporate shield
extended over them to protect them against personal liability, they cease to be
partners and have only the rights, duties and obligations of stockholders. They
cannot be partners inter sese and a corporation as to the rest of the world"
[citation omitted]

(id. at 449).

In Matter of Hochberg v. Manhattan Pediatric Dental Group, P.C. (41 AD3d 202
[1st Dept 2007]), the Appellate Division, First Department, following a holding
by the Appellate Division, Third Department, held that a partnership could
operate in corporate form, stating "it is a question of fact whether the
partnership was extinguished following the creation of a corporate entity to
carry out the partnership business" (id. at 203).

Here, any partnership created by the letter agreement was created after the
incorporation of Clearjets, and is, therefore, not within the holding of
Hochberg. McCagg alleges, however, that he and Clingman formed an oral joint
venture in November 2002. Such a joint venture would be within the holding of
Hochberg. Other than McCagg's assertion, there is no evidence of the formation
of a joint venture.

I make no finding whether Clingman and McCagg made any oral joint venture or
partnership agreement. I hold only that there is no evidence, other than
McCagg's bare assertion, that the Schulte defendants had any knowledge of an
oral joint venture or partnership agreement, or of the letter agreement.

As a matter of law, the letter agreement does not constitute a partnership
agreement with respect to the ownership of Clearjets, Inc. While it requires the
"partners" "to confer on all major decision [sic] regarding the operation of the
businesses," it does not identify these "businesses," and does not even mention
Clearjets. It is an ambiguous document which, at best, provides some evidence
that Clingman and McCagg had agreed to become partners with respect to the
fractional jet business, but apparently in the context of a to-be-formed
mutually-owned LLC. At most, it evinces an intention to create a limited
liability corporation in the future, into which the fractional jet business
would be contributed.

Other than McCagg's assertion, and the letter agreement, there is no other
evidence that McCagg and Clingman agreed to own Clearjets as partners. The
letter agreement was initially drafted by plaintiff, and edited by Clingman.
There is no evidence that any of the Schulte defendants advised either party
with respect to the letter agreement. No partnership tax return has been
submitted. No K-1 form has been submitted. Nowhere in the certificate of
incorporation, by-laws, or the board resolutions dated January 26, 2003, of
Clearjets, Inc., is there any indication that Clingman and McCagg owned
Clearjets as partners.

The verified complaint in the Schulte action also names as defendants two
Schulte partners, Marc S. Weingarten (Weingarten), and Harry S. Davis (Davis,
or, collectively, the Schulte defendants). Plaintiff's cross motion in the
Schulte action seeks leave to file an amended verified complaint, adding Schulte
partner Robert R. Kiesel (Kiesel) as a defendant, and asserting derivative
claims on behalf of Clearjets against the Schulte defendants.

While there is no written retainer agreement in the record between Schulte and
Clearjets, or Schulte and Clingman, or Schulte and McCagg, it is undisputed that
Schulte was Clingman's longtime counsel, and also represented Clearjets, Inc.

The e-mail correspondence shows that McCagg wanted to have an agreement in place
with Bombardier by January 7, 2003. The communications from Schulte advising on
Clearjets matters were addressed to both McCagg and Clingman.

In December 2002, immediately after the incorporation of Clearjets, both McCagg
and Clingman consulted Schulte about how to respond to threatening
communications emanating from Marguis and its principals, after word got back to
Marquis that Clingman and plaintiff were planning a competing venture.

By e-mail dated December 18, 2002, Clingman informed Schulte, that he had heard
that Marquis and Netjets were going to send Clingman a threat based on a clause
in Netjets's trademark license agreement that gives Netjets the right to
terminate the agreement if Clingman does business with a competitor.

By letter dated December 19, 2002, Kaye Scholer LLP (Kaye Scholer), counsel for
Marquis, wrote to Clingman that it had come to their attention that Clingman was
planning to compete with Marquis by forming a venture that would execute a
contract with Bombardier/Flexjet. The letter threatens legal action if Clingman
does not cease and desist. It alleges that Clingman had a duty not to compete
with Marquis. Schulte researched the issue of whether Clingman was under any
duty not to compete with Marquis, and was successful in rebuffing the challenge.

By letter dated December 20, 2002, Kaye Scholer informed McCagg that Marquis had
learned that McCagg and Clingman were planning to launch a venture that would
directly compete with Marquis. The letter states that Marquis took the threat
very seriously because of McCagg's presence in Marquis's offices for the past
two and one-half years, and that Marquis would take prompt legal action if it
learns that McCagg had misappropriated any confidential proprietary information,
or if McCagg assisted Clingman in the breach of his fiduciary duties to Marquis.
McCagg had previously served as CEO of a corporation affiliated with the Marquis
investors, and was involved in at least two other ventures with them in 2002.

A second letter of the same date, also from Kaye Scholer, accuses McCagg of
refusing to return a laptop belonging to Superstar EXP. McCagg had served as CEO
of Superstar EXP. The letter threatens legal action if McCagg does not return
the laptop, or if McCagg removes proprietary information from the laptop. This
letter indicates that a copy was sent to Kenneth Dichter (Dichter), who,
according to McCagg, controlled Marquis.

A third letter to McCagg, by e-mail, from Bill Allard (Allard), the CEO of
Marquis, states:

I hope the rumors I am hearing about you potentially competing with Marquis and
or NetJets are not true. I don't believe the rumors are true because I can't
believe someone would stoop so low or be so foolish to sit in our offices for a
long time and whom we tried to help and then turn around and compete . . . I
can't believe this is true and would like you to confirm this for me.

By e-mail dated December 24, 2002, McCagg wrote to Davis, saying that Weingarten
had referred him to Davis. The e-mail asks Davis to advise McCagg on a proposed
response to the Kaye Scholer letters, as well as the Allard letter, and includes
a proposed response. The three letters were also sent to Davis. This e-mail also
states that McCagg's lawyer was on vacation, but offers to put the two in touch
if it would be helpful.

Davis made some editorial changes to McCagg's proposed response to Kaye Scholer,
and advised McCagg to send the edited letter and not respond to the Allard
letter.

Schulte billed Clearjets for its services in advising both McCagg and Clingman
on how to respond to the threats from Marquis. Clearjets paid the bill, with
McCagg contributing 40 percent of the bill, and Clingman, 60 percent. McCagg and
Clingman agreed that the services included in Schulte's bill, including the
advice to McCagg, were legitimate expenses of Clearjets.

In January 2003, Clingman met separately with Mr. Jacobs of Netjets, and Dichter
of Marquis. Marquis proposed an agreement to buy back Clingman's Marquis stock.
That proposal included a non-competition agreement. Clingman made a counter
offer, which Marquis rejected. The counter-offer also contained an agreement by
Clingman not to compete.

During the months of January through April 2003, negotiations between Clearjets
and Bombardier/Flexjets continued. Clingman alleges that Delta Airlines, Inc.,
was also negotiating with Bombardier/Flexjets, to offer a similar product. Delta
ultimately executed an agreement with Bombardier/Flexjets.

On April 9, 2003, Clingman executed a sale of his Marquis stock back to Marquis,
and also agreed not to compete with Marquis for a two-year period.

In support of their motion for summary judgment, the Schulte defendants submit a
portion of a billing statement from Schulte, addressed to Clingman, dated August
21, 2003, summarizing services rendered with respect to Marquis, for the period
February 1, 2003 through July 31, 2003, as follows: "advice with respect to all
aspects of Marquis relationship including disposition of shares . . .
non-competition and release agreements" (see ex. J to Schulte moving aff.). This
statement includes only the above-quoted summary. It does not include entries
showing particular services by individual attorneys.

The statement does, however, list the attorneys who performed services during
the period, and the hours worked for each attorney. Neither Davis nor Kiesel are
listed as performing services during the period when the non-competition
agreement was reviewed by Schulte.

In opposition to the Schulte defendants' motion for summary judgment, McCagg
submitted redacted portions of a Schulte statement also dated August 21, 2003,
that show some services related to the Marquis agreement (see ex. 23 to McCagg
moving aff.), but redact the entries for services during the two week period
leading up to execution of the agreement.

According to the verified complaint in the Marquis action, "shortly thereafter,"
Clingman advised McCagg that Marquis had offered to buy his stock, and that
Clingman was leaving Clearjets, and they had one week to vacate their offices.

On April 30, 2003, Clingman and McCagg met with Trevor Cornwell of
Bombardier/Flexjets, at Cornwell's request, at the Four Seasons Hotel in New
York. According to an April 29, 2003 e-mail from Clingman to McCagg, "Trevor
asked if I would meet him to discuss 1 last time before making up my mind"
[about withdrawing from negotiating a contract with Bombardier/Flexjets].

On May 5, 2003, Schulte filed a certificate of dissolution of Clearjets, with
the Secretary of State of Delaware, at the direction of Clingman. The
certificate is signed by Clingman as chairman. A copy of the certificate of
dissolution, certified by the Delaware Secretary of State, has been submitted
with this motion.

McCagg challenges the validity and efficacy of that certificate of dissolution,
on the ground that it does not contain the acknowledgment allegedly required
under Delaware law, and that it is false on its face because it states that all
shareholders consent to the dissolution. McCagg alleges that he, as a 40 percent
shareholder, never consented to the dissolution.

In both actions, defendants argue that the action is barred by 8 Del C §278,
captioned "[c]ontinuation of corporation after dissolution for purposes of suit
and winding up affairs," which provides as pertinent:

All corporations, whether they expire by their own limitation or are otherwise
dissolved, shall nevertheless be continued, for the term of 3 years from such
expiration or dissolution or for such longer period as the Court of Chancery
shall in its discretion direct, bodies corporate for the purpose of prosecuting
and defending suits . . . . With respect to any action, suit or proceeding begun
by or against the corporation either prior to or within 3 years after the date
of its expiration or dissolution, the action shall not abate by reason of the
dissolution of the corporation; the corporation shall, solely for the purpose of
such action, suit or proceeding, be continued as a body corporate beyond the
3-year period and until any judgments, orders or decrees therein shall be fully
executed, without the necessity for any special direction to that effect by the
Court of Chancery.

The causes of action in the Marquis action were pleaded as pendant claims in the
federal antitrust action, McCagg v. Marquis Jet Partners, Inc., et al. (05 CV
10607)(US Dist Ct, SD NY 2007). The amended complaint in that action, which
contains the pendant derivative claims, is dated March 13, 2006, which is within
the three-year period of 8 Del C §278. United States District Judge Paul A.
Crotty dismissed the federal action by order dated March 29, 2007. The Marquis
action was commenced within six months of that date. Therefore, the tolling
provision of CPLR 205 (a) applies, and the Marquis action is not barred by 8 Del
C §278.

Similarly, the derivative claims that are the subject of the cross-motion in the
Schulte action are timely because they relate back to the initial complaint
(CPLR 203 [f]), which was not barred by the three-year rule. That complaint
gives adequate "notice of the transactions, occurrences, or series of
transactions or occurrences, to be proved pursuant to the amended pleading"
(id.).

Therefore, it is immaterial whether the certificate of dissolution was
effective, because either way the derivative causes of action are not barred by
8 Del C §278.

The Schulte Action

In the Schulte action, of the seven remaining causes of action in the verified
complaint, only the sixth through eighth causes of action are against the
Schulte defendants.

The Cross Motion in the Schulte Action

The proposed amended verified complaint seeks to assert a derivative malpractice
claim on behalf of Clearjets against the Schulte defendants, and include Kiesel
as an additional defendant. The cross motion is granted to the extent of
granting leave to file the proposed amended verified complaint, but is denied
with respect to adding Kiesel as a defendant.

Based upon the pleadings, affidavits, documentary evidence and deposition
testimony, the Schulte defendants have established their prima facie entitlement
to judgment as a matter of law, with respect to the sixth and eighth causes of
action only, and plaintiff has failed to demonstrate the existence of a triable
issue of fact on those causes of action (see Alvarez v. Prospect Hosp., 68 NY2d
320, 324 [1986]; Zuckerman v. City of New York, 49 NY2d 557 [1980]). The Schulte
defendants have not established their entitlement to judgment as a matter of law
with respect to the seventh cause of action in the amended verified complaint.

The Sixth Cause of Action

The sixth cause of action in the amended verified complaint alleges that Schulte
and the Schulte defendants represented plaintiff, individually, in addition to
representing Clingman, Clearjets, and a partnership and joint venture between
McCagg and Clingman. It charges that the Schulte defendants breached the
fiduciary duty allegedly owed to both the alleged Clearjets partnership and to
McCagg individually, by failing to make full disclosure to McCagg, or seek his
consent or waiver, with respect to the disclosure by Schulte to McCagg of "all
material facts affecting the venture and representation of Clearjets," including
the allegedly secret negotiations between Clingman and Marquis, in which the
Schulte defendants allegedly represented both sides. Schulte's February 13, 2002
bill to Clearjets includes an entry for "advice with respect to continuing
investment in Marquis and disposition of same."

The sixth cause of action also charges that the Schulte defendants'
representation of Clingman in negotiating to sell his stock back to Marquis and
enter a non-competition agreement was adverse to the duties that the Schulte
defendants allegedly owed to McCagg and the alleged partnership, and constituted
an "irreconcilable conflict."

Despite the unexplained absence of any written retainer agreement between
Schulte and Clearjets, Clingman, or McCagg, the evidence fails to raise a
factual issue whether an attorney-client relation was formed between the Schulte
defendants and McCagg individually. Nor is there sufficient evidence to raise a
factual issue whether Schulte represented any joint venture or partnership
comprising Clingman and McCagg. Rather, the advice rendered by Davis to McCagg
was incidental to Schulte's representation of Clearjets, and was treated by
Schulte, Clingman, and McCagg as a corporate matter of Clearjets.

McCagg's unilateral belief does not confer upon him the status of client (see
Jane St. Co. v. Rosenberg & Estis, P.C., 192 AD2d 451 [1st Dept 1993]). There
was no privity or "near privity" relationship between the Schulte defendants and
McCagg (see Allianz Underwriters Ins. Co. v. Landmark Ins. Co., 13 AD3d 172, 175
(1st Dept 2004)(attorney-client relationship may be based on "near
privity"relation). The privity was between Clearjets and Schulte, and Clingman
and Schulte. No documentary evidence suggests privity between Schulte and
McCagg, individually (see Griffin v. Anslow, 17 AD3d 889, 892 [3d Dept 2005]).

The advice sought by McCagg from Davis was in connection with a challenge
apparently intended by Marquis to deter McCagg from launching Clearjets with
Clingman. Schulte advised McCagg on how to extricate himself from his relations
with the principals of Marquis, in order to serve as president of Clearjets.

There is no merit to McCagg's argument that, because the Schulte defendants did
not assert lack of capacity as an affirmative defense in their answer, they
cannot assert the defense that the advice they gave to McCagg was on behalf of
Clearjets. The issue is not in what capacity McCagg was acting when he consulted
Davis. Rather, it is whether an attorney-client relation was formed.

On this record, the advice that McCagg sought and received from Davis regarding
the Marquis threats does not create a conflict. There were no client confidences
involved. The interests of McCagg and Clearjets, in responding to the Marquis
challenges, were fully aligned. Therefore, at the time that Davis advised McCagg
on how to respond to the Marquis threats, Davis and Schulte were not required by
Disciplinary Rule 5-109 (Code of Professional Responsibility DR 5-109 [22 NYCRR
1200.28]) to explain to McCagg that they represented Clearjets and not McCagg.
That disciplinary rule, captioned "[o]rganization as client," provides:

(a) When a lawyer employed or retained by an organization is dealing with the
organization's directors, officers, employees, members, shareholders or other
constituents, and it appears that the organization's interests may differ from
those of the constituents with whom the lawyer is dealing, the lawyer shall
explain that the lawyer is the lawyer for the organization and not for any of
the constituents.

Davis's accession to plaintiff's request for advice in responding to the Marquis
threat would not lead a reasonable person in McCagg's position to conclude that
Schulte and Davis thereby became McCagg's personal attorney rather than counsel
to Clearjets (see Polovy v. Duncan, 269 AD2d 111, 112 (1st Dept 2000). "Unless
the parties have expressly agreed otherwise in the circumstances of a particular
matter, a lawyer for a corporation represents the corporation, not its employees
[citation omitted]" ( id.; see Talvy v. American Red Cross in Greater New York
(205 AD2d 143, 149 [1st Dept 1994], affd for reasons stated, 87 NY2d 826
[1995]).

By reason of the foregoing, the sixth cause of action in the Schulte action is
dismissed because the evidence fails to raise a factual issue whether the
Schulte defendants owed any fiduciary duty to either McCagg or any alleged
partnership or joint venture.

The Seventh Cause of Action

The seventh cause of action in the amended verified complaint charges the
Schulte defendants with aiding and abetting Clingman in the breach of his
fiduciary duties to McCagg, Clearjets and the alleged Clearjets partnership or
joint venture. It is brought by McCagg both individually, and derivatively on
behalf of Clearjets.

A claim for aiding and abetting breach of fiduciary duty requires allegations of
a breach of fiduciary obligations to another, that the defendant knowingly
induced or participated in the breach, and that the plaintiff suffered damage as
a result of the breach (see Kaufman v. Cohen, 307 AD2d 113, 125 [1st Dept
2003]). And "[a] person knowingly participates in a breach of fiduciary duty
only when he or she provides 'substantial assistance' to the primary violator
[citations omitted]" (id. at 126)

The actions that allegedly constitute a breach of fiduciary duty by Clingman are
twofold. First, McCagg argues that Clingman's execution of a non-competition
clause with Marquis is a breach of fiduciary duty. The verified complaint
charges that the Schulte defendants negotiated the non-competition agreement and
concealed their own role. Next, it alleges that the Schulte defendants aided and
abetted Clingman "in his plan to reap a windfall from Marquis by pretending he
would build and launch Clearjets with McCagg as a competitive threat."

McCagg also alleges that the Schulte defendants aided and abetted Clingman in
the commission of fraud. This charge of fraud apparently refers to Clingman's
allegedly fraudulent inducement of McCagg to join Clearjets, which Clingman
allegedly had no intention of building into a business, but merely intended to
set up Clearjets as an apparent competitive threat to induce Marquis to buy back
Clingman's shares. There is simply no evidence that the Schulte defendants had
knowledge of this alleged scheme.

There are three possible bases for a fiduciary duty owed by Clingman that the
Schulte defendants could be charged with aiding and abetting. First is the
fiduciary duty owed by a majority shareholder in a closely held corporation to a
minority shareholder, not to engage in oppressive actions toward minority
shareholders. Next is the fiduciary duty that Clingman owed to Clearjets as
chairman and CEO. The third possible basis is the fiduciary duty owed by
Clingman to McCagg as an alleged partner or joint venturer.

Because the evidence fails to raise a factual issue whether the Schulte
defendants knew about the alleged partnership or joint venture, they cannot be
charged with knowingly aiding and abetting the breach of the fiduciary duty that
Clingman would owe to McCagg as a partner or joint venturer. "Although a
plaintiff is not required to allege that the aider and abettor had an intent to
harm, there must be an allegation that such defendant had actual knowledge of
the breach of duty" (Kaufman v. Cohen, 307 AD2d at 125).

With respect to the fiduciary duty of a majority shareholder to a minority
shareholder, the Schulte defendants are charged with knowledge that Clingman was
the majority shareholder because they prepared the board of directors minutes
for Clearjets, in which the equity issuance was approved.

"Oppressive actions . . . refer to conduct that substantially defeats the
'reasonable expectations' held by minority shareholders in committing their
capital to the particular enterprise [citations omitted]" ( Matter of Kemp &
Beatley, Inc., 64 NY2d 63, 72-73 [1984]).

This fiduciary duty is rooted in Business Corporation Law §1104-a, captioned
"[p]etition for judicial dissolution under special circumstances," which
provides, as pertinent:

(a) The holders of shares representing twenty percent or more . . . may present
a petition of dissolution on one or more of the following grounds:

(1) The directors or those in control of the corporation have been guilty of
illegal, fraudulent or oppressive actions toward the complaining shareholders.

The Court of Appeals described the standard for assessing what constitutes

"oppressive actions":

A shareholder who reasonably expected that ownership in the corporation would
entitle him or her to a job, a share of corporate earnings, a place in corporate
management, or some other form of security, would be oppressed in a very real
sense when others in the corporation seek to defeat those expectations and there
exists no effective means of salvaging the investment.

Given the nature of close corporations and the remedial purpose of the statute,
this court holds that utilizing a complaining shareholder's "reasonable
expectations" as a means of identifying and measuring conduct alleged to be
oppressive is appropriate. A court considering a petition alleging oppressive
conduct must investigate what the majority shareholders knew, or should have
known, to be the petitioner's expectations in entering the particular
enterprise. Majority conduct should not be deemed oppressive simply because the
petitioner's subjective hopes and desires in joining the venture are not
fulfilled. Disappointment alone should not necessarily be equated with
oppression.

Rather, oppression should be deemed to arise only when the majority conduct
substantially defeats expectations that, objectively viewed, were both
reasonable under the circumstances and were central to the petitioner's decision
to join the venture

(Matter of Kemp & Beatley, Inc., 64 NY2d at 72-73).

Neither of the two alleged breaches of fiduciary duty involves oppressive
actions as a result of the abuse of Clingman's status as majority shareholder.
Neither entering the April 9, 2003 covenant not to compete, nor allegedly
executing the scheme to set up Clearjets as a ruse to induce Marquis to buy out
his 12 percent interest, involves oppressive conduct that flows from any
hegemonic abuse of Clingman's status as majority shareholder. Neither Clingman's
allegedly fraudulent inducement of McCagg to join Clearjets, nor his entry into
a non-competition agreement with Marquis, involves exercise of Clingman's
corporate control by virtue of his status as the majority shareholder.

Therefore, all that remains of the seventh cause of action is the derivative
claim that the Schulte defendants aided and abetted Clingman in the breach of
his fiduciary duty to Clearjets, as chairman and CEO. Again, the alleged
breaches are twofold: first, entering the non-compete, and second, carrying out
the alleged ruse.

Other than McCagg's bare assertion, there is no evidence that the Schulte
defendants had knowledge of this ruse or secret intention or knowingly rendered
substantial assistance to effectuating it.

Therefore, the only viable claim is whether the Schulte defendants rendered
substantial assistance to Clingman in effectuating the April 9, 2003 agreement
not to compete.

Under the particular circumstances presented, where the primary purpose for the
creation of Clearjets was to compete with Marquis, I cannot say as a matter of
law that Clingman's negotiation and execution of a non-competition agreement
with Marquis, while still chairman and CEO of Clearjets, was not a breach of his
fiduciary duty owed to Clearjets. Nor can I say as a matter of law, based on the
parties' submissions - including redacted and incomplete billing statements -
that Schulte and Weingarten did not aid and abet Clingman in this alleged
breach. As noted above, the statements show that Schulte advised Clingman on
"all aspects of Marquis relationship including . . . non-competition and release
agreements."

Because there are material issues of fact whether the Schulte defendants
knowingly rendered substantial assistance to Clingman in negotiating and
executing the non-competition agreement, while he was chairman and CEO of
Clearjets, the seventh cause of action is not dismissed (see State Of New York
v. Grecco, 43 AD3d 397 [2nd Dept 2007]).

The Eighth Cause of Action

The eighth cause of action charges the Schulte defendants with legal malpractice
by engaging in an impermissible conflict by "adversely representing the
interests of Clingman over [McCagg] and the joint venture, which was completely
outside of the realm of the attorney-client relationship established with
Clearjets." The eighth cause of action is brought by McCagg individually, as
well as derivatively on behalf of Clearjets. It alleges that the Schulte
defendants knew or should have known that Clingman's execution of a
non-competition agreement would "ring the death knell" for Clearjets.

The malpractice claim in the verified amended complaint involves the same
allegations in the original complaint, except it includes Kiesel and is asserted
derivatively. It is predicated on the theory that Schulte represented both
McCagg and an alleged Clearjets joint venture, two allegations for which I have
held that there is insufficient evidence to raise a factual issue. It alleges
that the Shulte defendants "engaged in an unpermitted conflict of interest in
adversely representing the interests of Clingman over McCagg and the joint
venture" (Proposed Verified Amended Complaint, ¶147, Ex. S to Langer Aff. in
Support of Cross-Motion).

The second alleged basis for malpractice is that the Schulte defendants did not
disclose to McCagg the alleged fact that "it was materially advising and
assisting Clingman how to benefit and prosper from his negotiations with Marquis
to the detriment of the venture" (id. at ¶148).

Absent an independent duty to McCagg, the Schulte defendants were not under any
duty to disclose Clingman's negotiations with Marquis to McCagg (National
Westminster Bank USA v. Weksel, 124 AD2d 144 [1st Dept 1987]; Jebran v. LaSalle
Bus. Credit, LLC, 33 AD3d 424, [1st Dept 2006]). Nonetheless, the negotiations
were disclosed on the February 2003 Schulte statement, and billed to Clearjets.

To sustain a legal malpractice claim, a plaintiff must present "proof of the
attorney's negligence, a showing that the negligence was the proximate cause of
the plaintiff's loss or injury, and evidence of actual damages" (Pellegrino v.
File, 291 AD2d 60, 63 [1st Dept 2002]).

"For a defendant in a legal malpractice case to succeed on a motion for summary
judgment, evidence must be presented in admissible form establishing that the
plaintiff is unable to prove at least one of the essential elements" of legal
malpractice (Crawford v. McBride, 303 AD2d 442, 442 [2d Dept. 2003]). The three
elements are "that the attorneys were negligent, that their negligence was the
proximate cause of the plaintiff's damages, and that the plaintiff suffered
actual damages as a direct result of the attorneys' actions" (Franklin v.
Winard, 199 AD2d 220, 220 [1st Dept 1993]).

As counsel to Clearjets, Schulte was under no duty to make efforts to prevent
the departure of a key employee, or, absent an independent duty, to disclose the
impending departure to other corporate officers. Next, the proposed verified
amended complaint alleges that the Schulte defendants "knew or should have known
that Clingman's entry into a non-competition agreement . . . with Marquis . . .
would ring the death knell for the venture and cause McCagg to lose the entire
value of his investment" (id. at ¶149). It alleges that the Schulte defendant
committed malpractice by their silence. As set forth above, the Schulte
defendants owed no duty to inform McCagg of Clingman's intention. Also, the
Schulte defendants owed no duty to Clearjets to prevent its CEO from negotiating
his separation from the corporation.

The Marquis Action

The verified complaint contains two causes of action. The first cause of action
alleges that Marquis and Netjets tortiously interfered with McCagg and
Clearjet's existing business relationship with Clingman. The second cause of
action charges that Marquis and Netjets tortiously interfered with both an
existing and a prospective business relationship between Clearjets and
Bomabardier/Flexjets.

The First Cause of Action

In the first cause of action, the verified complaint alleges that Marquis and
Netjets both knew that McCagg and Clingman were partners in Clearjets; that
Marquis improperly sent a letter to Clingman alleging that he was under a duty
not to compete; that Marquis made implied threats to McCagg; that Marquis
threatened and misled potential investors, employees and prospective employees
of Clearjets; that Marquis wrongfully induced Clingman to sign a non-competition
agreement; and that Marquis and Netjets provided the funding for the repurchase
of Clingman's Marquis shares and thus procured the agreement not to compete. It
also alleges that defendants used "other wrongful means" to injure McCagg and
deprive McCagg and Clearjets of their advantageous business relation with
Clingman.

The first cause of action further alleges that Marquis and Netjets induced
Clingman to breach his fiduciary duty to McCagg. The alleged inducement was the
payment, allegedly by both defendants, for Clingman's Marquis stock and his
agreement not to compete.

It also alleges that Marquis and Netjets induced Clingman to breach his
fiduciary duty to Clearjets and to McCagg by "secretly turning the Schulte law
firm against both McCagg and Clearjets" (Verified Complaint at ¶14).

The Second Cause of Action

The second cause of action charges that defendants tortiously interfered with an
"existing and prospective business relationship" between Clearjets, Inc. and
Bombardier/Flexjets " . . . with respect to becoming Flexjet's exclusive
reseller of 25 hour jet cards." It alleges that defendants knew of the
relationship with Bombardier/Flexjets, and intentionally interfered by
"improperly communicating with and disseminating palpably false information to
Bombardier/Flexjets in an attempt to derail the incipient
Clearjets/Bombardier/Flexjets contract" (Verified Complaint at ¶18).

It further alleges that defendants determined that Bombardier/Flexjets would not
proceed with the Clearjets contract if Clingman were not involved, and also
determined that the non-competition agreement would "scuttle" Clearjets and
cause McCagg and Clearjets to lose the Bombardier/Flexjets business
relationship.

The verified complaint alleges, without specificity, that defendants used
"dishonest, unfair and improper" means to interfere with the negotiations and
business relationship between Clearjets and Bombardier/Flexjets.

Tortious Interference

Because the first cause of action does not allege that Clingman was induced to
breach any existing contract, and because the submissions establish that no
binding contract existed between Bombardier/Flexjets and Clearjets at the time
of the alleged interference, both causes of action must be considered to be for
tortious interference with a prospective business relationship.

The distinction thus made between the possible liability of a competitor for
interference with performance of an existing contract and the more demanding
requirements to establish liability for interference with prospective
contractual relations reflects a recognition of the difference in the two
situations in the relationship of the parties and in the substance and quality
of their resulting interests; greater protection is accorded an interest in an
existing contract (as to which respect for individual contract rights outweighs
the public benefit to be derived from unfettered competition) than to the less
substantive, more speculative interest in a prospective relationship (as to
which liability will be imposed only on proof of more culpable conduct on the
part of the interferer)

(Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 NY2d 183, 191 [1980]).

"Tortious interference with contract requires the existence of a valid contract
between the plaintiff and a third party, defendant's knowledge of that contract,
defendant's intentional procurement of the third party's breach of contract
without justification, actual breach and damages [citation omitted]" (Vigoda v.
DCA Productions Plus Inc., 293 AD2d 265, 266 [1st Dept 2002).

Defendants' status as prospective competitors

may excuse [them] from the consequences of interference with prospective
contractual relationships, where the interference is intended at least in part
to advance the competing interest of the interferer, no unlawful restraint of
trade is effected, and the means employed are not wrongful. 'Wrongful means'
include physical violence, fraud or misrepresentation, civil suits and criminal
prosecutions, and some degrees of economic pressure; they do not, however,
include persuasion alone although it is knowingly directed at interference with
the contract.

(Guard Life Corp., 50 NY2d at 191).

"In order to recover damages for interference with existing economic relations
in a nonbinding relationship, a 'defendant's conduct must amount to a crime or
an independent tort [citation omitted].' A sole exception to this general rule
has been recognized where a defendant has engaged in conduct 'for the sole
purpose of inflicting intentional harm on plaintiff'" (Lawrence v. Union of
Orthodox Jewish Congregations of Am., 32 AD3d 304 [1st Dept 2006]).

The record does not support the characterization that either defendant's conduct
in the second cause of action amounted to a crime or independent tort, or was
engaged in for the sole purpose of inflicting harm on either McCagg or
Clearjets.

Aiding and Abetting Breach of Fiduciary Duty

In an apparent effort to demonstrate that defendants' conduct constituted an
independent tort, the first cause of action pleads that defendants aided and
abetted Clingman's breach of fiduciary duty to both Clearjets and McCagg.

A claim for aiding and abetting breach of fiduciary duty requires allegations of
a breach of fiduciary obligations to another, "that the defendant knowingly
induced or participated in the breach," and, "that the plaintiff suffered damage
as a result of the breach," (see Kaufman v. Cohen, 307 AD2d at 125. "A person
knowingly participates in a breach of fiduciary duty only when he or she
provides 'substantial assistance' to the primary violator [citations omitted]"
(id. at 126).

A cause of action for aiding and abetting breach of fiduciary duty must be
pleaded with sufficient particularity (CPLR 3016 [b]), "to apprise defendants of
the conduct on which this claim was predicated" (Wiener v. Lazard Freres & Co.,
241 AD2d 114, 123 [1st Dept 1998]).

The verified complaint alleges two separate breaches by Clingman of his alleged
fiduciary duty to McCagg that defendants allegedly aided and abetted.

The first claimed breach of fiduciary duty by Clingman that defendants allegedly
aided and abetted is secretly turning the law firm of Schulte Roth & Zabel LLP
against McCagg. The verified complaint does not contain any allegations of
conduct by either defendant that would constitute participation in this alleged
breach.

The second alleged breach by Clingman that defendants allegedly aided and
abetted is Marquis's execution of the non-competition agreement with Clingman.
The pleadings and affidavits contain numerous allegations that both Marquis and
Netjets induced Clingman to enter the non-competition provision.

While on a motion pursuant to CPLR 3211 (a) (7), I must assume the truth of the
allegations in the pleadings, I need not assume the truth of allegations that
are "inherently incredible" (Ullmann v. Norma Kamali, Inc., 207 AD2d 691, 692
[1st Dept 1994];

Roberts v. Pollack, 92 AD2d 440, 444 [1st Dept 1983]).

On this record I decline to assume the truth of the allegation that either
Marquis or Netjets knew that McCagg and Clingman owned Clearjets, Inc., as
partners. This allegation is necessary to sustain the cause of action, because a
defendant charged with aiding and abetting breach of fiduciary duty must do so
knowingly - with actual knowledge of the existence of the fiduciary duty (see
Eurycleia Partners, LP v. Seward & Kissel, LLP, 46 AD3d 400, 402 [1st Dept
2007]). Absent knowledge on the part of defendants that Clingman owed a
fiduciary to Mccagg as a partner, defendants cannot be held to have aided and
abetted breach of that duty.

Nor is there any basis for me to assume the truth of the allegation that Marquis
or Netjets knew that Clingman owed McCagg a fiduciary duty as a minority
shareholder in a closely held corporation.

Because none of the actions allegedly taken by Marquis or Netjets would
constitute improper means or a crime or independent tort under the
circumstances, the first and second causes of action are dismissed for failure
to state a cause of action (CPLR 3211 [a] [7]).

Accordingly, it is

ORDERED, that defendants motion for summary judgment (CPLR 3212) dismissing the
complaint is granted, to the extent of dismissing the sixth and eighth causes of
action, and otherwise denied; and it is

ORDERED, that the motion for summary judgment is granted to the extent of
dismissing the verified complaint as against Davis; and it is

ORDERED, that the cross-motion is granted to the extent of granting leave to
file the proposed verified amended complaint, except leave is denied to add
Kiesel as a defendant, and the cross-motion is otherwise denied.

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