FILED: NEW YORK COUNTY CLERK 11/18/2011

NYSCEF DOC. NO. 15

INDEX NO. 652126/2011 RECEIVED NYSCEF: 11/18/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK --------------------------------------------------------------- x GEORGE L. OLSEN and EMPIRE : GATEWAY LLC, : : Plaintiffs and Counterclaim Defendants, : Index No.: 652126/2011 : vs. : : SANDRA DYCHE, : : Defendant and Counterclaimant. : --------------------------------------------------------------- x : SANDRA DYCHE, Individually and : derivatively on Behalf of Empire Gateway LLC, : New York City Regional Center LLC : and New Jersey Regional Center LLC, : : Third Party Index No.: 590787/2011 Third Party Plaintiff, : : vs. : : CHAMBERS HOLDINGS LLC, NEW YORK : CITY REGIONAL CENTER LLC, NEW : JERSEY REGIONAL CENTER LLC : and JOHN DOES #1 THROUGH 10, : : Third Party Defendants. : --------------------------------------------------------------- x MEMORANDUM OF LAW IN SUPPORT OF THIRD PARTY DEFENDANT REGIONAL CENTERS MOTION TO DISMISS THE THIRD PARTY COMPLAINT

FRESHFIELDS BRUCKHAUS DERINGER US LLP Marshall H. Fishman Robert J. McCallum 601 Lexington Avenue New York, NY 10022 Attorneys for New York City Regional Center LLC and New Jersey Regional Center LLC

TABLE OF CONTENTS Pages Preliminary Statement..........................................................................................................1 Statement Of Facts...............................................................................................................2 Argument .............................................................................................................................4 I The Documentary Evidence Conclusively Establishes That The Regional Centers Did Not Exist At The Time Of The Alleged Wrongdoing And, Therefore, Each Cause Of Action Must Be Dismissed..................................................5

II The First And Second Causes Of Action Must Be Dismissed Because Dyche Lacks Standing To Assert Derivative Claims On Behalf Of The Regional Centers ...........................................................................................................................7 A. Dyche Lacks Standing To Assert Derivative Claims On Behalf Of The Regional Centers......................................................................................................8 B. Dyche Has Failed To State A Cause Of Action For A Derivative Claim................9 III Each Cause Of Action Is Deficient And Should Be Dismissed...................................13 A. The Third Party Complaint Fails To State A Claim For Forfeiture (First Cause of Action) ....................................................................................................13 B. The Third Party Complaint Fails to State a Claim for Aiding and Abetting Breach of Fiduciary Duty (Second Cause Of Action) and For Aiding And Abetting Fraud (Seventh Cause Of Action)...........................................................13 C. The Third Party Complaint Fails To Establish Grounds For Appointment Of A Receiver Or Special Master (Third Cause Of Action)..................................15 D. The Third Party Complaint Fails To Establish Grounds For Inspection (Fourth Cause Of Action) ......................................................................................17 E. The Third Party Complaint Fails To State A Claim For A Constructive Trust (Fifth Cause Of Action)................................................................................17 F. The Third Party Complaints Claim For Injunctive Relief Must Fail Because It Is Not A Cause Of Action (Sixth Purported Cause Of Action) ...........19 Conclusion .........................................................................................................................19

TABLE OF AUTHORITIES Page(s) CASES Alpert v. Natl Assn of Sec. Dealers, LLC, 7 Misc. 3d 1010(A), 2004 WL 3270188 (Sup. Ct. N.Y. County July, 28 2004).........10 At the Airport v. Isata, LLC, 18 Misc.3d. 1106(A), 2007 WL 4532512 (Sup. Ct. Nassau County Dec. 7, 2007) ......................................................................................................................15, 17 Balk v. 125 W. 92nd St. Corp., 24 A.D.3d 193, 806 N.Y.S.2d 31 (1st Dept 2005) .......................................................8 Bankers Sec. Life Ins. Socy v. Shakerdge, 49 N.Y.2d 939, 406 N.E.2d 440, 428 N.Y.S.2d 623 (1980)........................................17 Billings v. Bridgepoint Partners, LLC, 21 Misc.3d 535, 863 N.Y.S.2d 591 (Sup. Ct. Erie County 2008) .................................8 Cords-Auth v. Crunk, LLC, No. 09-CV-8017 (KMK), 2011 WL 4471928 (S.D.N.Y. Sept. 27, 2011) ..................15 Davis v. CornerStone Tel. Co., LLC, 19 Misc.3d 1142(A), 2008 WL 2329176 (Sup. Ct. Albany County June 5, 2008) ..............................................................................................................................8 East Side Ventures, LLC v. J&M Land Co., No. A-1636-09T3, 2010 N.J. Super. Unpub. LEXIS 2442 (N.J. Super Ct. App. Div. Oct. 8, 2010). .........................................................................................................8 Ewart v Ewart, 78 A.D.3d 992, 912 N.Y.S.2d 265 (2d Dept 2010) ....................................................18 Ficus Invs., Inc. v. Private Capital Mgmt., LLC, 61 A.D.3d 1, 872 N.Y.S.2d 93 (1st Dept 2009) .........................................................16 Fine v N. Y. Cmty. Bank, 33 Misc.3d 1215(A), 2011 WL 5107728 (Sup. Ct. Queens County Sept. 6, 2011) ..............................................................................................................................9 Frank v. DaimlerChrysler Corp., 292 A.D.2d 118, 741 N.Y.S.2d 9 (1st Dept 2002) .......................................................4

ii

Greenberg v. Falco Consrt. Corp., 29 Misc.3d 1202(A), 2010 WL 378129 (Sup. Ct. Kings County Sept. 29, 2010) ............................................................................................................................12 In re Harrison Realty Corp., 295 A.D.2d 220, 744 N.Y.S.2d 23 (1st Dept 2002) ...................................................16 Irving Serwer Adver., Inc. v. Salit,17 A.D.2d 918, 233 N.Y.S.2d 68 (1st Dept 1962), affd, 13 N.Y.2d 629; 191 N.E.2d 95; 240 N.Y.S.2d 610 (1963).......................6 Kliebert v. McKoan, 228 A.D.2d 232, 643 N.Y.S.2d 114 (1st Dept 1996) ...................................................4 Kristensen v. Charleston Square, Inc., 273 A.D.2d 312, 709 N.Y.S.2d 853 (2d Dept 2000) ..................................................16 La Potin v. Julius Lang Co., 30 A.D.2d 527, 290 N.Y.S.2d 619 (1st Dept 1968) .....................................................7 M. v. F., 27 Misc.3d 1205(A), 2010 WL 1379034 (Sup. Ct. N.Y. County Mar. 23, 2010) ............................................................................................................................18 Marx v. Akers, 88 N.Y.2d 189, 644 N.Y.S.2d 121 (1996) .........................................................9, 10, 11 In re Omnicom Grp. Inc. Sholder Derivative Litig., 43 A.D.3d. 766, 842 N.Y.S.2d 408 (1st Dept 2007) ..................................................10 McGuire Children, LLC v. Huntress, 24 Misc.3d 1202(A), 2009 WL 1693725 (Sup. Ct. Erie County June 17, 2009) ..........8 Peacock v. Herald Square Loft Corp., 67 A.D.3d 442, 889 N.Y.S.2d 22 (1st Dept 2009) ............................................... 14-15 Philipps v. Philipps, 61 A.D.2d 979, 402 N.Y.S.2d 610 (2d Dept 1978) ....................................................18 Romano v. Belt Painting Corp., 77 A.D.2d 565, 429 N.Y.S.2d 462 (2d Dept 1980) ....................................................16 Satler v. Merlis, 252 A.D.2d 551, 675 N.Y.S.2d 644 (2d Dept 1998) ..................................................18 Scott v. Bell Atl. Corp., 282 A.D.2d 180, 726 N.Y.S.2d 60 (1st Dept 2001) .....................................................4

iii

Shapsis v Kogan, 30 Misc.3d 1208(A), 2011 WL 61727(Table), (Sup. Ct. Kings County Jan. 7, 2011) ..............................................................................................................................8 Tal v. Malekan, 305 A.D.2d 281, 760 N.Y.S.2d 36 (1st Dept 2003) .....................................................8 Vardaris Tech, Inc. v. Paleros Inc., 49 A.D.3d 631, 853 N.Y.S.2d 601 (2nd Dept 2008) ..................................................16 Waxman Real Estate LLC v. Sacks, 32 Misc. 3d 1241(A), 2011 WL 4031522(Table), (Sup. Ct. N.Y. County Sept. 7, 2011) ........................................................................................................................12 Wilson v. Hochberg, 245 A.D.2d 116, 665 N.Y.S.2d 653 (1st Dept 1997) ...................................................7 STATUTES 8 U.S.C. 1153(b)(5) ...................................................................................................... 2-3 BCL 624..........................................................................................................................17 BCL 1203........................................................................................................................15 CPLR 3016(b)....................................................................................................................13 CPLR 3211(a) ......................................................................................................................4 CPLR 3211(a)(1) .....................................................................................................1, 2, 4, 7 CPLR 3211(a)(3) .................................................................................................................1 CPLR 3211(a)(7) .............................................................................................................1, 4 CPLR 6401(a) ..............................................................................................................16, 17 LLCL 203(d)......................................................................................................................6 LLCL 703(a) ....................................................................................................................15 LLCL 1102(b)..................................................................................................................17 N.J. Stat. 42:2B-11............................................................................................................6 N.J. Stat. 42:2B-61............................................................................................................8

iv

Defendants New York City Regional Center, LLC (NYCRC) and New Jersey Regional Center, LLC (NJRC and, collectively, the Regional Centers) respectfully submit this Memorandum of Law in support of their Motion to Dismiss the Third Party Complaint (the Third Party Complaint or TP Compl.) of Sandra Dyche (Dyche), pursuant to New York Civil Practice Law and Rules (CPLR) 3211(a)(1), (3) and (7).

PRELIMINARY STATEMENT The claims asserted by Dyche in the Third Party Complaint against the Regional Centers must be dismissed because they are flatly contradicted by irrefutable documentary evidence. In this regard, the documentary evidence establishes that Dyche is not a member of either of the limited liability company Regional Centers and therefore has no standing to bring derivative claims on their behalf. Even if Dyche had standing to sue derivatively -- which she does not -- the Third Party Complaint suffers from a litany of pleading deficiencies which warrant dismissal in their own right. Underpinning the entirety of the Third Party Complaint is the theme that George L. Olsen (Olsen), one of the principals of Empire Gateway, LLC (Empire), improperly transferred 45% of Empires membership interest in NYCRC to a third party in early 2008. But this assertion is flatly contradicted by the documentary evidence, which shows that Empire always has had a 55% membership interest in NYCRC since the day that NYCRC was formed and that no transfer ever took place. The documentary evidence also shows that the improper transfer for which Dyche seeks to hold the Regional Centers liable allegedly took place before the Regional Centers ever existed. The Regional Centers cannot be held liable for conduct that occurred prior to their

formation and, as a matter of indisputable fact and law, the Third Party Complaint against the Regional Centers must be dismissed. Moreover, the Third Party Complaint must be dismissed as against the Regional Centers on the entirely separate ground that Dyche lacks standing. Dyche purports to bring claims derivatively on behalf of the Regional Centers notwithstanding the fact that she is not -- and never has been -- a member of either of the Regional Centers. Under governing New York and New Jersey law, only members of a limited liability company can bring a derivative action on the companys behalf -- and then only after making a demand on management. As a non-member who has never made a demand on the management of either of the Regional Centers, Dyche simply cannot bring claims on behalf of these entities in a derivative capacity. In short, the Third Party Complaint is little more than a string of conclusory allegations by Dyche against entities of which she is not a member -- yet purportedly on their behalf -- regarding conduct that pre-dates the existence of the Regional Centers. The Third Party Complaint therefore should be dismissed insofar as it pertains to the Regional Centers. STATEMENT OF FACTS* The EB-5 Regional Center Program (the Program) was established by Congress pursuant to Section 203(b)(5) of the Immigration and Nationality Act, 8 U.S.C.
*

The facts are taken from the Third Party Complaint and the documents annexed to the accompanying Affidavit of George L. Olsen dated November 17, 2011 (the Olsen Aff.). Such documents may be considered on this motion pursuant to CPLR 3211(a)(1) (A party may move for judgment dismissing one or more causes of action asserted against him on the ground that: (1) a defense is founded upon documentary evidence.)

 1153(b)(5), with the aim of stimulating economic growth through foreign investment. The Program is overseen by the Department of Homeland Security and administered by the U.S. Citizenship and Immigration Services (USCIS). TP Compl. 5. In essence, the Program allows properly certified bodies to administer foreign investment by high net worth aliens in U.S. infrastructure projects in exchange for a PERM visa (commonly known as a green card) for the alien investor and his or her family. See id. NYCRC is a limited liability company (an LLC) organized under the laws of the State of New York; it was formed on May 9, 2008. Olsen Aff., Exh. A, Tab 3 (NYCRC Articles of Organization). NJRC is an LLC organized under the laws of the State of New Jersey; it was formed on May 6, 2008. Id., Exh. B, Tab 3 (NJRC Certificate of Formation). According to their operating agreements, both Regional Centers have as their purpose the administering of funds invested through the EB-5 Program of USCIS in qualified business and properties to provide investors a secure investment in prime real estate, businesses and loan programs. Id., Exhs. A and B, Tab 4 (Operating Agreements of NYCRC and NJRC) at 6. NYCRC was designated a regional center by USCIS on October 30, 2008 and NJRC was so designated on November 27, 2008. TP Compl. 19. As acknowledged in the Third Party Complaint, the Regional Centers are financially stable and able to cover their operating expenses. Id., 44. The Regional Center Operating Agreements show that the Regional Centers were both formed with two members: Empire (owning 55%) and Chambers Holdings LLC (Chambers, owning 45%). Olsen Aff., Exhs. A and B, Tab 4 (Operating Agreements of NYCRC and NJRC) at 22-23. Dyche has never been a member of either Regional Center.

Empire, one of the members of the Regional Centers, is an LLC organized under the laws of the State of New York and formed on November 27, 2007. TP Compl., 9. Olsen and Dyche are both members of Empire. Id. 2-3. As set forth below, the allegations in the Third Party Complaint against the Regional Centers must be dismissed because they are fundamentally inconsistent with these indisputable facts contained in the relevant documentary evidence.

ARGUMENT In evaluating a complaint on a motion to dismiss under CPLR 3211(a), a court must determine whether a cause of action is stated within the four corners of the complaint. Frank v. DaimlerChrysler Corp., 292 A.D.2d 118, 121, 741 N.Y.S.2d 9, 12 (1st Dept 2002) (citation omitted); CPLR 3211(a)(7). Although the court should accept as true the facts alleged in the complaint (Frank, 292 A.D.2d at 121), allegations consisting of bare legal conclusions, as well as factual claims either inherently incredible or flatly contradicted by documentary evidence, are not entitled to such consideration. Kliebert v. McKoan, 228 A.D.2d 232, 232, 643 N.Y.S.2d 114, 114 (1st Dept 1996) (citation omitted); CPLR 3211(a)(1). On a motion to dismiss pursuant to CPLR

3211(a)(1), the court must grant dismissal when documentary evidence submitted by the parties conclusively establishes a defense to the asserted claims as a matter of law. Scott v. Bell Atl. Corp., 282 A.D.2d 180, 183, 726 N.Y.S.2d 60, 63 (1st Dept 2001) (citing Leon v. Martinez, 84 N.Y.2d 83, 88, 614 N.Y.S.2d 972, 974 (1994)). As set forth below, the Third Party Complaint must be dismissed because: (1) it alleges wrongdoing that could not possibly implicate the Regional Centers because they

did not exist at the time of the alleged events, (2) Dyche has no standing to sue derivatively on behalf of an LLC of which she is not a member, and (3) each and every cause of action suffers from myriad pleading defects that cannot survive a motion to dismiss.

I THE DOCUMENTARY EVIDENCE CONCLUSIVELY ESTABLISHES THAT THE REGIONAL CENTERS DID NOT EXIST AT THE TIME OF THE ALLEGED WRONGDOING AND, THEREFORE, EACH CAUSE OF ACTION MUST BE DISMISSED The crux of Dyches claims against the Regional Centers is that, [i]n early 2008, Olsen proposed to the other two Founding Members and Managers of Empire Gateway, namely, Dyche and Shah, that they sell a certain percentage of Member Interest in the Companys two subsidiaries, i.e., NYCRC and NJRC to Paul Levinsohn . . . or a company controlled by him. TP Compl. 20. Dyche further alleges that, in early 2008, Olsen, having failed to persuade the other two Founding Members to agree to the sale, falsely represented to Levinsohn that he had the necessary consent of and authority from the Founding Members and managers of Empire . . . [and] thus proceeded unlawfully and fraudulently with the unilateral sale of a 45% ownership interest and majority voting rights in NYCRC and NJRC to Chambers. Id., 25-26. Dyches allegation of an improper and unilateral sale of a membership interest and voting rights in the Regional Centers to Chambers in early 2008 serves as the explicit or implicit basis for each and every one of the causes of action set forth in the Third Party Complaint. See id. 2-4, 20-26, 28-30, 32-33, 39, 50, 57, 60, 64, and 67-73. Insofar as

those allegations pertain to the Regional Centers, they cannot form the basis of a claim because the Regional Centers came into existence in May 2008 -- after this alleged wrongdoing took place -- as conclusively demonstrated by the formation documents for the Regional Centers. Olsen Aff. Exh. A, Tab 3 (NYCRC Articles of Organization); Exh. B, Tab 3 (NJRC Certificate of Formation).1 Moreover, the Regional Centers Operating Agreements conclusively show that there was never any transfer or sale of Empires membership interests because both Regional Centers were formed with Empire and Chambers as their members. Empire and Chambers were the founding members of the Regional Centers, and made capital contributions of 55% and 45%, respectively. Id., Exhs. A and B, Tab 4 (Regional Center Operating Agreements) at 22-23. Since the Third Party Complaint seeks to attribute liability to the Regional Centers for alleged wrongful conduct that pre-dates their existence, it must be dismissed because a corporation could not have participated prior to its existence in the wrongful acts of the individual defendants. Irving Serwer Adver., Inc. v. Salit, 17 A.D.2d 918, 233 N.Y.S.2d 68, 69 (1st Dept 1962), affd, 13 N.Y.2d 629; 191 N.E.2d 95; 240 N.Y.S.2d 610 (1963) (dismissing as conclusory an allegation that a corporation participated in a conspiracy perpetuated by individuals prior to the corporations
1

Section 203(d) of the New York Limited Liability Company Law (LLCL) provides that [t]he filing of the articles of organization shall, in the absence of actual fraud, be conclusive evidence of the formation of the [LLC] as of the time of filing or effective date if later. LLCL 203(d). The New Jersey LLC statute contains a similar provision. N.J. Stat. 42:2B-11 (A[n LLC] is formed at the time of the filing of the initial certificate of formation in the office of the Secretary of State or at any later date or time specified in the certificate of formation if, in either case, there has been substantial compliance with the requirements of this section.)

existence). Since the formation documents of the Regional Centers and their respective operating agreements contradict Dyches allegations of participation, dismissal under CPLR 3211(a)(1) is mandated. See Wilson v. Hochberg, 245 A.D.2d 116, 116-17, 665 N.Y.S.2d 653, 654 (1st Dept 1997) (action for breach of contract properly dismissed where plaintiffs allegations were flatly contradicted by the documentary evidence in the record); La Potin v. Julius Lang Co., 30 A.D.2d 527, 528, 290 N.Y.S.2d 619, 619-20 (1st Dept 1968) (Where a variance exists between the written contract and the conclusions drawn by the pleader, the writing must prevail over the allegations of the complaint.) (internal quotations and citations omitted). As the allegation of an improper and unlawful transfer of membership interests in the Regional Centers forms the basis for each of the causes of action, and because that fundamental allegation is contradicted by the governing documents, the Third Party Complaint must be dismissed against the Regional Centers.

II THE FIRST AND SECOND CAUSES OF ACTION MUST BE DISMISSED BECAUSE DYCHE LACKS STANDING TO ASSERT DERIVATIVE CLAIMS ON BEHALF OF THE REGIONAL CENTERS Dyche is not a member of either of the Regional Centers. Thus, she lacks

standing to sue on their behalf and the claims that she purports to bring derivatively must be dismissed. Even if Dyche had standing to sue, the purported derivative claims should still be dismissed because of her failure to plead a demand (or demand futility), her failure to allege that the Regional Centers suffered damage, and because the Third Party Complaint impermissibly comingles individual and derivative claims.

A.

Dyche Lacks Standing To Assert Derivative Claims On Behalf Of The Regional Centers It is hornbook New York law that only a stockholder may bring a derivative suit

against a corporation. Balk v. 125 W. 92nd St. Corp., 24 A.D.3d 193, 193-94, 806 N.Y.S.2d 31, 32 (1st Dept 2005) (former shareholder has no standing to bring a derivative suit against corporation); Tal v. Malekan, 305 A.D.2d 281, 282, 760 N.Y.S.2d 36, 38 (1st Dept 2003) (dismissing derivative claims by non-shareholder of corporation for lack of standing). The New York courts recently have extended these principles to the LLC context to dismiss claims by non-members purporting to sue derivatively on behalf of LLCs. See e.g., Shapsis v Kogan, 30 Misc.3d 1208(A), 2011 WL 61727, at *6 (Sup. Ct. Kings County Jan. 7, 2011) (dismissing derivative claims by non-members of LLCs for lack of standing); McGuire Children, LLC v. Huntress, 24 Misc.3d 1202(A), 2009 WL 1693725, at *20 (Sup. Ct. Erie County June 17, 2009) (same); Billings v. Bridgepoint Partners, LLC, 21 Misc.3d 535, 541, 863 N.Y.S.2d 591 (Sup. Ct. Erie County 2008) (same); Davis v. CornerStone Tel. Co., LLC, 19 Misc.3d 1142(A), 2008 WL 2329176, at *11 (Sup. Ct. Albany County June 5, 2008) (same).2 Dyche is not -- and has never been -- a member of either of the Regional Centers. As such, she lacks standing to bring a derivative action on behalf of either of the Regional Centers.
2

Unlike New York, the New Jersey LLC statute specifically provides for the bringing of a derivative action by members. See N.J. Stat. 42:2B-61 (In a derivative action, the plaintiff must be a member . . . at the time of bringing the action.) Like New York, New Jersey courts will dismiss derivative actions purportedly brought by non-members of LLCs. See East Side Ventures, LLC v. J&M Land Co., No. A-1636-09T3, 2010 N.J. Super. Unpub. LEXIS 2442, at *5-6 (N.J. Super Ct. App. Div. Oct. 8, 2010) (affirming trial courts holding that nonmembers could not bring derivative action under N.J. Stat. 42:2B-61).

B.

Dyche Has Failed To State A Cause Of Action For A Derivative Claim In order to bring a derivative claim on behalf of a corporation (and, by analogy,

on behalf of an LLC), a plaintiff must (1) make a demand that the corporation investigate the alleged wrongdoing or plead with particularity why such a demand would be futile, (2) allege that the harm done was to the corporation and not to the plaintiff in an individual capacity, and (3) demonstrate that the plaintiff will be a fair and adequate representative of the corporation. The Third Party Complaint fails to meet any of these requirements. First, the Third Party Complaint fails to allege that any demand was made upon the Regional Centers that they investigate the alleged wrongdoing or otherwise show that such a demand would have been futile (nor could it because Dyche was never a member of the Regional Centers). See Marx v. Akers, 88 N.Y.2d 189, 193-94, 644 N.Y.S.2d 121, 123-24 (1996) (shareholders must demand that the corporation initiate an action, unless such a demand would be futile, before bringing an action on the corporations behalf).3 A demand is properly pled as being futile where a complaint alleges with particularity either that: (1) a majority of directors were interested in the transaction, (2) the board did
3

New York courts have recently recognized the requirement of a demand in the LLC context. See Fine v N. Y. Cmty. Bank, 33 Misc.3d 1215(A), 2011 WL 5107728, at *3 (Sup. Ct. Queens County Sept. 6, 2011). The demand requirement is arguably even more stringent in the LLC context because LLCs may be member-managed or manager-managed. Id. at *2 ([B]ecause a limited liability company may be a member-managed LLC, or a manager-managed LLC . . . a plaintiff in a derivative action must identify to whom the demand was made, so that the court may determine whether the person or persons entrusted with the management of the limited liability company have been given the opportunity to address the alleged abuses without resort to the courts . . . and avoid second-guessing the business judgment of the individuals charged with managing the company.) (footnotes and citations omitted).

not fully inform themselves about the challenged transaction, or (3) the transaction was so egregious on its face that it could not [be] the product of sound business judgment. Marx, 88 N.Y.2d at 200-01. In Marx, [t]he Court of Appeals emphasized that pre-suit demand is the rule, that excusing demand is the exception, and that the exception should not be permitted to swallow the rule. In re Omnicom Grp. Inc. Sholder Derivative

Litig., 43 A.D.3d. 766, 768, 842 N.Y.S.2d 408, 410 (1st Dept 2007). Nor does Dyche plead with particularity facts which would allow the court to infer that a demand upon the Regional Centers would have been futile. At most, Dyche makes insufficient conclusory allegations that Olsen improperly controlled Empire for his own benefit. See TP Compl. 3, 38; Alpert v. Natl Assn of Sec. Dealers, LLC, 7 Misc. 3d 1010(A), 2004 WL 3270188, at *10 (Sup. Ct. N.Y. County July, 28 2004) (holding that plaintiff cannot establish demand futility by making conclusory allegations of wrongdoing or control) (citation omitted). A complaint which merely alleges that a corporations management rendered a decision with which plaintiff[ is] dissatisfied fails to establish demand futility. Id, at *13. Here, Dyche has made no effort to articulate how Olsen, as one of three members of Empire, has improperly controlled Empire for his own benefit and improperly excluded Dyche from the corporate affairs of [NYCRC]. TP Compl., 3. Nor has Dyche articulated how it is that Olsen allegedly exercised domination and control over Empire. Id., 38. Second, the Third Party Complaint fails to properly plead that the challenged transactions harmed the Regional Centers, as opposed to Dyche in her personal capacity. Claims are derivative in nature where [t]he remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure

10

to the benefit of the corporation. Marx, 88 N.Y.2d at 193 (quoting Isaac v Marcus, 258 N.Y. 257, 264, 179 N.E. 487 (1932)). Dyche states only bare, conclusory allegations that Olsens actions caused damage to the financial interests of the Regional Centers. TP Compl. 29. See also id., 37 (alleging serious financial damage to . . . NYCRC and NJRC.) To the contrary, the entire Third Party Complaint is premised on purported damages suffered by Dyche and Empire -- not by the Regional Centers. See id., 43, 58 (alleging that Dyche and unnamed others will suffer irreparable injury); id., 55 (alleging refus[al] to pay Dyche her share of the profits); id., 57 (alleging that Dyche, Empire and Shah were defrauded and suffered substantial detriment); id., 61 (alleging conversion of a substantial portion of Dyches equity interest and investment in [Empire]); id., 74 (alleging Dyche has been damaged in an amount to be determined at trial.). Significantly, Third Party Plaintiffs only attempt to quantify the damages allegedly suffered as a result of Olsens actions is a demand for $5 million in damages to Dyche and $25 million in damages to Empire -- Dyche makes no attempt to quantify the damage allegedly suffered by the Regional Centers notwithstanding that she purports to bring claims on their behalf. TP Compl., 35; see also id. 75(B), (G) (requesting compensatory and punitive damages for Dyche and Empire only). These allegations, which are unsupported by any facts, fail to state a cause of action for a derivative claim. See Marx, 88 N.Y.2d at 204 (dismissing complaint for failure to state a cause of action where there were no factually based allegations of wrongdoing or waste which would, if true, sustain a verdict in plaintiffs favor.)

11

Third, the derivative claims must be dismissed because Dyche asserts substantial direct claims in tandem with her purported derivative claims; therefore she cannot be a fair and adequate representative of the Regional Centers. See Waxman Real Estate LLC v. Sacks, 32 Misc. 3d 1241(A), 2011 WL 4031522(Table), at *5 (Sup. Ct. N.Y. County Sept. 7, 2011) (derivative claims brought on behalf of an LLC may not be intermingled with direct claims within the same causes of action); Greenberg v. Falco Consrt. Corp., 29 Misc.3d 1202(A), 2010 WL 378129, at *3-4 (Sup. Ct. Kings County Sept. 29, 2010) (same). At almost every turn in the Third Party Complaint, Dyche impermissibly

comingles her direct and purported derivative claims by asserting simultaneously that duties were owed to her, Empire and the Regional Centers, and that harm was suffered by all of them to varying degrees. See TP Compl. 29, 32, 35, 37, 39, 43, 57-58, 60, and 62. This is fatal to her purported derivative claims and warrants dismissal. See

Greenberg, 2010 WL 378129, at *4 (dismissing claims by a member of an LLC alleging a fiduciary duty was owed to both her and the LLC and seeking relief on behalf of herself and the LLC). The first and second causes of action must be dismissed because they are conclusory in nature, inextricably intertwined with direct claims, and brought by a nonmember who lacks standing to prosecute those claims. As such, the derivative claims against the Regional Centers must be dismissed.

12

III EACH CAUSE OF ACTION IS DEFICIENT AND SHOULD BE DISMISSED The claims against the Regional Centers also should be dismissed because they suffer from fundamental pleading defects which warrant dismissal for the reasons set forth below. A. The Third Party Complaint Fails To State A Claim For Forfeiture (First Cause of Action) With respect to the first cause of action, the Regional Centers incorporate and rely upon the Memorandum of Law in Support of Third Party Defendant Chambers Motion to Dismiss the Third Party Complaint. As set forth therein, the New York Business Corporation Law (the BCL) does not apply here and, even if it were to apply, the facts alleged do not give rise to a forfeiture claim. Therefore, the first cause of action must be dismissed. B. The Third Party Complaint Fails to State a Claim for Aiding and Abetting Breach of Fiduciary Duty (Second Cause Of Action) and For Aiding And Abetting Fraud (Seventh Cause Of Action) For the reasons set forth in the Memorandum of Law in Support of Third Party Defendant Chambers Motion to Dismiss the Third Party Complaint, the second and seventh causes of action alleging aiding and abetting must be dismissed. Dyche has failed to set forth more than conclusory statements that the Regional Centers aided and abetted the alleged breach of fiduciary duty. Moreover, Dyche has failed to plead with particularity, as she must under CPLR 3016(b) for claims sounding in fraud, that the Regional Centers had actual knowledge of the alleged fraud, or that they substantially

13

assisted Olsen in perpetrating the alleged fraud. Indeed, the Regional Centers could not have had actual knowledge of, or provided substantial assistance in connection with, a fraud or breach of fiduciary duty that allegedly took place prior to their formation. As discussed in section I supra, the documentary evidence conclusively establishes that the alleged fraudulent transfer of a membership interest in the Regional Centers from Empire to Chambers -- the crux of Dyches aiding and abetting causes of action -- never took place. Olsen Aff., Exhs. A and B, Tab 4 (Operating Agreements of NYCRC and NJRC) at 22-23. Even assuming, arguendo, that such a transfer did take place, Dyche has failed to allege that the Regional Centers had actual knowledge of Olsens alleged fraud and breach of fiduciary duty. To the contrary, Dyche alleges that Olsen unilaterally agreed to and carried out the sale on behalf of Empire. TP Compl. 21, 26. Nor has Dyche alleged that the Regional Centers rendered Olsen substantial assistance. In this regard, the only allegations in the Third Party Complaint which could possibly pertain to the Regional Centers are Dyches conclusory statements that the Regional Centers failed to act. TP Compl. at 68-69 (alleging that the Regional Centers failed to advise Dyche and others that Olsens representations were false and failed to correct Olsens statements . . . when they well knew that such representation was false.). An alleged failure to act, however, can only give rise to a claim for aiding and abetting liability where the defendant owes a fiduciary duty directly to the plaintiff. Dyche has not alleged that the Regional Centers owed her a direct fiduciary duty, nor could she, because limited liability companies such as the Regional Centers do not even owe their members such a duty -- let alone a non-member such as Dyche. See Peacock v. Herald

14

Square Loft Corp., 67 A.D.3d 442, 443, 889 N.Y.S.2d 22, 24 (1st Dept 2009) (a corporation owes no fiduciary duty to its shareholders); see also Cords-Auth v. Crunk, LLC, No. 09-CV-8017 (KMK), 2011 WL 4471928, at *13, n.14 (S.D.N.Y. Sept. 27, 2011) (finding it reasonable to extend the rule that corporations owe no duty to their shareholders to the LLC context). Thus, the second and seventh causes of action must be dismissed. C. The Third Party Complaint Fails To Establish Grounds For Appointment Of A Receiver Or Special Master (Third Cause Of Action) Dyches request for the appointment of a receiver or special master must be dismissed because there is no such right under the governing statute. The Third Party Complaint seeks to rely upon section 1203 of the BCL as the basis for appointment of a receiver or special master. TP. Compl., 47. But the BCL has no application here: the New York LLC statute governs and provides for appointment of a receiver only in connection with the winding up of the affairs of an LLC. LLCL 703(a) (Upon cause shown, the supreme court in the judicial district in which the office of the [LLC] is located may wind up the limited liability companys affairs upon application of any member, . . . and in connection therewith may appoint a receiver or liquidating trustee.) (emphasis added). Because the Regional Centers have not been dissolved, the Court cannot properly appoint a receiver pursuant to LLCL 703(a). See At the Airport v. Isata, LLC, 18 Misc.3d. 1106(A), 2007 WL 4532512, at *6, (Sup. Ct. Nassau County Dec. 7, 2007). Unlike the New York LLC statute, the CPLR does permit the appointment of a temporary receiver to preserve specific and identifiable property that is the subject of an

15

action. See CPLR 6401(a). In any event, the Third Party Complaint has not met the requirements for the appointment of a receiver, a drastic remedy which should only be granted when the moving party produces clear and convincing evidence that there is no other adequate remedy at law. Ficus Invs., Inc. v. Private Capital Mgmt., LLC, 61 A.D.3d 1, 12, 872 N.Y.S.2d 93, 101 (1st Dept 2009). See also Kristensen v. Charleston Square, Inc., 273 A.D.2d 312, 312, 709 N.Y.S.2d 853, 853 (2d Dept 2000) (appointment of receiver not appropriate where the minority shareholders can recover through an accounting). Here, Dyches conclusory and unsupported allegations that Olsen has

caused serious financial damage and improperly retained . . . profits, TP Compl. 37, 40, fail to establish circumstances that would justify appointment of a receiver, such as insolvency or a present danger that the corporation assets will be materially impaired, destroyed, or lost. Romano v. Belt Painting Corp., 77 A.D.2d 565, 566, 429 N.Y.S.2d 462, 463 (2d Dept 1980) (citations omitted); CPLR 6401(a) (temporary receiver of property may only be appointed where there is danger that the property will be removed from the state, or lost, materially injured or destroyed.)4 As the Third Party Complaint specifically states, NYCRC and NJRC are, . . . at present, solvent and able to pay their legitimate and non-related obligations in due

See also In re Harrison Realty Corp., 295 A.D.2d 220, 220-21, 744 N.Y.S.2d 23, 23-24 (1st Dept 2002) (grounds for appointment of a receiver not established where the allegations do not demonstrate danger of irreparable loss); Vardaris Tech, Inc. v. Paleros Inc., 49 A.D.3d 631, 631-32, 853 N.Y.S.2d 601, 602 (2nd Dept 2008) (unsupported allegations and accusations [fall] far short of the required clear evidentiary showing) (citations and quotations omitted).

16

course. TP Compl. 44. Accordingly, there is no basis for the appointment of a receiver under CPLR 6401(a).5 D. The Third Party Complaint Fails To Establish Grounds For Inspection (Fourth Cause Of Action) Dyche seeks to rely upon BCL 624 as the foundation for her request for inspection of the records of the Regional Centers. See TP Compl., 52. That section has no application here because New Yorks LLC Statute provides its own statutory framework for inspection of LLC records, and explicitly provides that only members have such a right. See LLCL 1102(b). Thus, Dyche is not entitled to inspect records in her personal capacity because she is not a member of either the Regional Centers. E. The Third Party Complaint Fails To State A Claim For A Constructive Trust (Fifth Cause Of Action) The Third Party Complaint fails to plead the necessary elements of a constructive trust. Under New York law, to establish a constructive trust there must be: (1) a confidential or fiduciary relation[ship], (2) a promise, express or implied, (3) a transfer made in reliance on that promise, and (4) unjust enrichment. Bankers Sec. Life Ins. Socy v. Shakerdge, 49 N.Y.2d 939, 940, 406 N.E.2d 440, 441, 428 N.Y.S.2d 623, 624 (1980) (citations omitted). The Third Party Complaint pleads itself out of a cause of action by alleging that the transfer of the 45% member interest in the Regional Centers was undertaken unilaterally by Olsen, TP Compl. 26, rather than by Dyche, Empire or
5

Moreover, while Dyche seeks appointment of a receiver or special master to oversee the future operations of the Regional Centers, TP Compl., 47, neither the CPLR nor the Limited Liability Corporation Law authorize the Court to appoint a receiver to monitor or supervise [an LLC]s financial operations in the absence of a judicial dissolution. At the Airport, 2007 WL 4532512, at *7 (citing N.Y. CLS LLC 703(b)).

17

the Regional Centers in reliance on any promise made by Olsen. Ewart v Ewart, 78 A.D.3d 992, 993, 912 N.Y.S.2d 265, 267 (2d Dept 2010) (dismissing complaint for fail[ure] to state a cause of action to impose a constructive trust . . . because it [did] not contain factual allegations demonstrating an express or implied promise and a transfer made in reliance thereon) (citations omitted); Philipps v. Philipps, 61 A.D.2d 979, 979, 402 N.Y.S.2d 610, 610 (2d Dept 1978) (dismissing complaint where neither a promise nor detrimental reliance were alleged). Unjust enrichment, for the purposes of a constructive trust, results when a person acquires property by abusing the trust inherent in a confidential relationship. M. v. F., 27 Misc. 3d 1205(A), 2010 WL 1379034, at *4 (Sup. Ct. N.Y. County Mar. 23, 2010). Dyches conclusory allegations that Olsen was unjustly enriched, TP Compl. 61, are insufficient to support a claim for a constructive trust. See M. v. F., 2010 WL 1379034, at *4 (plaintiff failed to show unjust enrichment for the purpose of establishing a constructive trust where there was no allegation that defendant acquired any of the property at issue by such an abuse of trust); Satler v. Merlis, 252 A.D.2d 551, 551, 675 N.Y.S.2d 644, 646 (2d Dept 1998) (claim for constructive trust dismissed where plaintiff failed to show any legally cognizable transfer in reliance or any unjust enrichment enjoyed by the defendants.) Having failed to properly plead the essential elements for the imposition of a constructive trust -- most notably a transfer in reliance on a promise and unjust enrichment as a result -- the fifth cause of action should be dismissed.

18

F.

The Third Party Complaints Claim For Injunctive Relief Must Fail Because It Is Not A Cause Of Action (Sixth Purported Cause Of Action) With respect to Dyches request for injunctive relief, the Regional Centers

incorporate and rely upon the Memorandum of Law in Support of Third Party Defendant Chambers Motion to Dismiss the Third Party Complaint. As set forth in that

memorandum, the sixth purported cause of action must be dismissed because injunctive relief in and of itself is not a cause of action. CONCLUSION For the reasons set forth in this Memorandum, the Regional Centers respectfully submit that the Third Party Complaint be dismissed in its entirety against them. Dated: November 18, 2011 New York, New York Respectfully submitted,

FRESHFIELDS BRUCKHAUS DERINGER US LLP By: /s/ Marshall H. Fishman Marshall H. Fishman Robert J. McCallum 601 Lexington Avenue New York, NY 10022 Phone: (212) 277-4000 Fax: (212) 277-4001 marshall.fishman@freshfields.com robert.mccallum@freshfields.com Attorneys for New York City Regional Center LLC and New Jersey Regional Center LLC

19