ADDITIONAL CASES 18Blackbears, LLC, suing derivatively on Behalf of DACS Cybersecurity Holdings, LLC, Petitioner v. Atlas Cybersecurity LLC, and Benjamin Dynkin, Respondents; 609663/2021 The following e-filed documents, listed by NYSCEF document numbers (Motion Sequence 03) “54″, “55″, “56″, “59″, “60″, “76″, “77″, “78″, (Motion Sequences 08 and 09) “144″, “151″, “152″, “170″, “194″, “195″, “218″, “219″ attachments and exhibits have been read on these motions Motion Sequence 03 Notice of Motion and Affidavits/Affirmations X Memorandum of Law in Support X Affidavits/Affirmation in Opposition X Affirmation in Reply X Memorandum of Law in Reply X Motion Sequence 09 Notice of Motion and Affidavits/Affirmations X Memorandum of Law in Support X Affidavits/Affirmation in Opposition X Affirmation in Reply X Memorandum of Law in Reply X Background 18Blackbears, LLC (“18Blackbears”) initiated the action bearing Index Number 612875/2020 (“Action 1″) against DACS Cybersecurity Holdings, LLC (“DACS”), Benbar, LLC (“Benbar”) and Benjamin Dynkin (“Dynkin”) by way of Summons with Notice. The amended complaint asserts causes of action for judicial dissolution of DACS pursuant to Limited Liability Company Law (“LLCL”) §702, breach of fiduciary duty against Dynkin, aiding and abetting breach of fiduciary duty against Benbar, breach of contract, and recission of loan as to DACS and Benbar. DACS, Benbar and Dynkin filed an answer, which asserted eleven affirmative defenses and two counterclaims sounding in breach of contract and declaratory judgment. 18Blackbears also commenced the action bearing Index Number 609663/2021 (“Action 2″) against Atlas Cybersecurity, LLC (“Atlas”) and Dynkin seeking judicial dissolution of Atlas pursuant to LLC Law §702 and asserting a cause of action against Dynkin for breach of fiduciary duty and corporate waste. Atlas and Dynkin filed an answer, which asserted ten affirmative defenses. Action 1 and Action 2 were joined pursuant to a so-ordered stipulation, dated November 30, 2021, by the Honorable Leonard Steinman. On or about February 14, 2022, Dynkin filed a Voluntary Petition for Relief under Chapter 7 of the United States Bankruptcy Code in the United States District Court for the Eastern District of New York. On the same day, Dynkin’s counsel filed a letter to notify this Court that Mr. Dynkin filed the bankruptcy petition and to seek an automatic stay of the instant actions pursuant to 11 USCS §362. This Court granted Dynkin’s application, and the actions were stayed. Upon having received and unopposed email notification by plaintiff’s counsel that Dynkin was discharged from bankruptcy pursuant to the Order of Discharge issued by the United Stated Bankruptcy Court, Eastern District of New York, Action 1 and Action 2 were restored to the Court’s calendar pursuant to this Court’s order, dated February 27, 2023. Motion Sequence 03 18Blackbears moves this Court by way of Notice of Motion for an order dismissing Atlas’ and Dynkin’s affirmative defenses set forth in their answer filed in Action 2 and issuing sanctions pursuant to 22 N.Y.C.R.R. §130-1.1(b). Atlas and Dynkin opposes the motion and 18Blackbears submits a reply. 18Blackbears asserts that the affirmative defenses set forth in Atlas’ and Dynkin’s answer should be dismissed because they are vague, conclusory, insufficient to state a cause of action and are without merit as a matter of law. Specifically, 18Blackbears argues that each of the ten affirmative defenses asserted by Atlas and Dynkin “consists solely of one sentence, each of which merely assert a legal conclusion and is unsupported by any factual allegations.” As such, 18Blackbears claims that the affirmative defenses are not sufficient to assert a defense and should be dismissed. 18Blackbears also claims that Atlas, Dynkin and their counsel should be sanctioned for their frivolous conduct in asserting affirmative defenses that are without merit in law or fact. “CPLR 3211(b) provides that[a] party may move for judgment dismissing one or more defenses, on the ground that a defenses is not stated or has no merit.” (Lewis v. U.S. Bank N.A., 186 AD3d 694, 697). “When moving to dismiss, the plaintiff bears the burden of demonstrating that the affirmative defenses are without merit as a matter of law because they either do not apply under the factual circumstances of [the] case, or fail to state a defense.” (Id.). However, “where the plaintiffs properly challenge the factual basis of a defense, the burden falls upon the defendant to come forth with sufficient evidence to raise an issue of fact with respect to the defense.’” (Becker v. Elm A.C. Corp., 143 AD2d 965, 965-966). Atlas and Dynkin have not met their burden. (Id.). Atlas and Dynkin submit an affirmation by their attorney in opposition to the motion, which alleges additional facts in support of the affirmative defenses in an attempt to remedy the defects alleged by 18Blackbears. “It is well established that a party may ‘remedy any defects’ in a pleading by submitting evidence in opposition to a motion to dismiss.” (Lewis, 186 AD3d at 697). However, counsel for Atlas and Dynkin does not have personal knowledge of the facts underlying the claim and, therefore, is insufficient to remedy the alleged defect. (Id.; Cullin v. Lynch, 113 AD3d 586, 586). Therefore, Atlas’ and Dynkin’s opposition fails to raise a material issue of fact with respect to the affirmative defenses asserted in their answer and, as so, the affirmative defenses should be stricken. (Becker, 143 AD2d at 965-966). 18Blackbears’ arguments regarding sanctions were considered and are unavailing as 18Blackbears has not establish that the, affirmative defenses asserted by Atlas and Dynkins in response to the petition were unreasonable or without merit regardless of whether they were unartfully pled. (Kantrowitz, Goldhamer & Graifman, P.C. v. Ayrovainen, 204 AD3d 652, 653). Moreover, 18Blackbears has not established that the affirmative defenses were asserted to delay or prolong this proceeding, especially considering the numerous motions filed by 18Blackbears coupled with the discord displayed by counsel for all parties during the conferences before this Court. (Id.). Accordingly, sanctions are not warranted under these circumstances. Motion Sequence 09 18Blackbears moves this Court by way of Notice of Motion for an order dismissing DACS’ Benbar’s and Dynkin’s (collectively referred to hereinafter as the “Defendants”) affirmative defenses set forth in their answer filed in Action 1. The Defendants oppose the motion. 18Blackbears submits a reply. 18Blackbears argues that the affirmative defenses asserted by the Defendants are insufficient as they contained one sentence statements that “merely assert[] a legal conclusion” and are unsupported by factual allegations. As such, 18Blackbears argues that Defendant’s affirmative defenses should be dismissed for failure to state a cause of action. “In reviewing a motion to dismiss an affirmative defense, the court must liberally construe the pleadings, in favor of the party asserting the defense and give that party the benefit of every reasonable inference.” (Mazzei v. Kyriacou, 98 AD3d 1088, 1089). As provided above, 18Blackbears bares the burden of demonstrating that the Defendants’ affirmative defenses are without merit as a matter of law because they either do not apply under the factual circumstances of the case or fail to state a defense. (Lewis at 697). However, the burden shifts to the Defendants to come forth with sufficient evidence to raise an issue of fact with respect to the defense if 18Blackbears meets its initial burden. (Becker at 965-966). “A court should not strike an affirmative defense when material issues of fact are unresolved.” (Lopez v. 121 St. Nicholas Ave. H.D.F.C., 28 AD3d 429, 430). Regarding the Defendant’s first and third affirmative defense alleging improper service under the CPLR and lack of personal jurisdiction, 18Blackbears argues the affidavits of service constitute documentary evidence that the Defendants were served and Dynkin admitted to having been served in the instant proceeding by way of his testimony in an unrelated proceeding in the State of Florida Circuit Court of Palm Beach County styled Ben-Zion Alcaly v. Atlas Cybersecurity, LLC, DACS Cybersecurity Holdings, LLC, Barry Dynkin and Benjamin Dynkin, Case No. 20-2020-CA-012935 (“Florida Action”). In support of its argument, 18Blackbears submits a transcript from the Florida Action as well as affidavits of service for Dynkin, DACS and Benbar, which provide that Benbar and DACS were served pursuant to CPLR §311(a) and Dynkin was personally served at his dwelling pursuant to CPLR §308(1). 18Blackbears also submits affidavits of service indicating that service upon DACS and Benabar was also effectuated by service on the Secretary of State pursuant to LLCL §303. Ordinarily, the affidavits of service filed by plaintiff constitute prima facie evidence that proper service was made on the defendants, which would be sufficient to establish jurisdiction over them. (Bankers Trust Co. of California, N.A. v. Tsoukas, 303 AD2d 343). “However, a sworn denial of service containing specific facts generally rebuts the presumption of proper service established by the process server’s affidavit, and necessitates an evidentiary hearing.” (Trovato v. Galaxy Sanitation Servs. of N.Y., Inc., 171 A.D.3d 830, 831). The defendants, by way of opposition, argue that the affidavits of service “incorrectly and inaccurately identified and physically described” Dynkin creating a contradiction that defeats the prima facie presumption of valid service. In particular, the Defendants claim that the affidavit of service for personal service on Dynkin, signed on November 19, 2020, describes Dynkin as “5’9″-6’0″ White Male with Dirty Blonde hair” whereas the affidavit of service in Action 2, dated August 20, 2021, describes Dynkin as “a White Male with Brown hair standing over 6 feet tall.” However, a “minor discrepancy between the appearance of the person allegedly served and the description of the person served contained in the affidavit of service is generally insufficient to raise an issue of fact warranting a hearing.” (Bank of NY Mellon v. Blackwood, 210 AD3d 1040, 1041). As argued by 18Blackbears, the Defendants do not deny that they were served and, as so, the discrepancy as to Dynkin’s appearance fails to raise an issue of fact. (Id.). Therefore, the Defendants first and third affirmative defenses should be dismissed. As to the Defendants second affirmative defense asserting lack of subject matter jurisdiction, 18Blackbears argues that this Court has subject matter jurisdiction pursuant to LLCL §702 because the DACS Cybersecurity Holdings Operating Agreement (“Operating Agreement”) provides that its principal office is located at 107 Northern Boulevard, Great Neck, New York. LLCL §702 provides that “[o]n application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” As an initial matter, the Defendants do not dispute that DACS principal offices are located in Great Neck, New York, which falls within this judicial district. (LLCL §702). Moreover, the Defendants do not cite any authority to support their argument that 18Blackbears’ application should be rejected in the interest of judicial economy because 18Blackbears chose to pursue “numerous, interrelated actions in multiple venues, and pursuing voluminous motions therein instead of availing themselves of the tools specifically contemplated by the parties” in the Operating Agreement. Accordingly, the Defendants’ have failed to raise an issue of fact with respect to whether this Court has subject matter jurisdiction. (Becker, supra). Under these circumstances, the Defendants’ second affirmative defense should be dismissed. The Defendants’ fourth affirmative defense alleges that 18Blackbears failed to comply with the terms and conditions of the Operating Agreement and eighth affirmative defense alleges that any damage or loss suffered by 18Blackbears were caused by 18Blackbears own conduct or wrongdoing. 18Blackbears argues that the Defendants’ fourth and eighth affirmative defenses should be dismissed for failure to state a cause of action because Defendants did not allege “a single fact” to support the assertion that 18Blackbears breached the Operating Agreement. The “essential elements of a breach of contract cause of action are the existence of a contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach of his or her contractual obligations, and damages resulting from the breach.” (LMEG Wireless, LLC v. Farro, 190 AD3d 716, 718). In addition, the specific contract provisions that were breached must be identified. (Id.). As provided above, “a party may ‘remedy any defects’ in a pleading by submitting evidence in opposition to a motion to dismiss.” (Lewis, 186 AD3d at 697). Here, the Defendants submit an affidavit by Dynkin, which sets forth facts to support the asserted affirmative defenses and to remedy the alleged defects in their answer. (Id.). Dynkin claims that 18Blackbears breached Schedule I and Section 2.11-Confidential Information of the Operating Agreement. With respect to Schedule I, 18Blackbears was required to provide DACS with a $500,000 investment within two days of the Operating Agreement’s execution. However, Dynkin attests that 18Blackbears breached Schedule I by “wait[ing] over [six] months to fully fund their obligation.” In addition, Dynkin states that Eliahu Alcalay, one of the two members of 18Blackbears divulged confidential financial and operational data to Michael Silverman and Garett Kramer over Dynkin’s objections. Considering that there is no dispute as to the existence if the operating agreement, the facts set forth in Dynkin’s affidavit raises material issues of fact as to whether 18Blackbears breached Schedule I and Section 2.11-Confidential Information of the Operating Agreement. (LMEG Wireless, LLC, 190 AD3d at 718; Becker at 965-966). Dynkin’s affidavit also raises a question of fact as to whether 18Blackbears’ financial losses were the result of its own conduct or wrongdoing. “Pursuant to CPLR 1412, culpable conduct is an affirmative defense that is to be pleaded and proved by the party asserting such a defense. Upon an appropriate demand, a defendant is required to particularize this affirmative defense.” (McLean by Brunell v. Huntington Hosp., 227 AD2d 533, 534). In addition to divulging confidential financial information, Dynkin’s states Eliahu Alcalay insisted on joining a call with a prospective lender for debt financing, which would enable the Defendants to pursue a substantial corporate opportunity. During the call, Eliahu Alcalay allegedly states that he would “never finance this sort of death through debt, and would only do so for equity.” Dynkin claims that the Defendants were willing to finance the opportunity with equity, but 18Blackbears refused to allow anyone else to invest in equity, which “led directly to the lender withdrawing from negotiations,” “losing the opportunity” and “suffering significant financial and reputational harm.” Dynkin also claims to have been present when Eliahu Alcalay, a member of 18Blackbears, made “false, disparaging and defamatory statements to third parties.” Moreover, the Court is not persuaded by 18Blackbears argument that the Defendants cannot assert an affirmative defense alleging culpable conduct because the causes of action alleged in the amended complaint are grounded in breach of contract. As previously stated, 18Blackbears’ amended complaint alleges, among others, a cause of action sounding in breach of fiduciary duty and, since breach of fiduciary duty is a tort, an affirmative defense sounding in culpable conduct can be pled. (see, Sergeants Benevolent Assn. Annuity Fund v. Renck, 19 AD3d 107). As such, Dynkin’s affidavit sets forth facts that sufficiently particularize the Defendants’ affirmative defense alleging 18Blackbears culpable conduct. (McLean by Brunell, 227 AD2d at 534). Affording the Defendants every favorable inference, and accepting the facts alleged as true, the Defendants have raised a material issue of fact as to whether 18Blackbears breached the Operating Agreement and whether their losses were caused by their own conduct. (Mazzei, 98 AD3d at 1089; Lewis at 697; Becker at 965-966). Therefore, dismissing the Defendants’ fourth and eighth affirmative defenses is not appropriate. Turning to the Defendants’ sixth affirmative defense alleging unclean hands, 18Blackbears argues that the Defendants failed to plead any facts demonstrating that 18Blackbears engaged in conduct that would constitute unclean hands or that 18Blackbears’ conduct harmed the Defendants. “The doctrine of unclean hands applies when the complaining party shows that the offending party is guilty of immoral, unconscionable conduct and even then only when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct.” (Filan v. Dellaria, 144 AD3d 967, 973). Dynkin’s affidavit in opposition to the instant motion addresses the Defendants affirmative defense alleging unclean hands to ‘remedy any defects’ in their answer. (Lewis at 697). Dynkin asserts that 18Blackbears sought to appropriate corporate opportunities when Atlas entered into an agreement with Alec Epstein and David Epstein (collectively, the “Epsteins”) to partner for cybersecurity opportunities together. The affidavit provides that Eliahu Alcalay prevented Dynkin from having direct contact with the Epsteins but Eliahu Alcalay continued personally negotiating different terms that benefitted 18Blackbears and the Epsteins, not Atlas. When the Defendants refused the new terms, the collaboration with the Epsteins ceased, which allegedly caused the loss of valuable business opportunities and significant financial and reputational harm. The Defendants further argue that 18Blackbears breached the Operating Agreement, engaged in appropriation of corporate opportunities, and breached their fiduciary duty as illustrated by the facts previously discussed. Taking the facts asserted by the Defendants as true, the Defendants alleged sufficient facts to allege 18Blackbears engaged in conduct directly relating to the claims asserted in the amended complaint, to wit, breach of contract, breach of fiduciary duty and corporate dissolution, which allegedly resulted in financial and reputational harm to the Defendants. (Id.; Lewis at 697; Becker at 965-966). Thus, under these circumstances, it is inappropriate to dismiss the Defendants’ sixth affirmative defense. 18Blackbears also argues that the Defendants’ seventh affirmative defense, which alleges that 18Blackbears failed to comply with section 3.03-Deadlock of Operating Agreement by failing to resolve the disputes through mediation before the commencement of litigation, should be dismissed on the ground that Section 3.03 of the Operating Agreement does not require that the claims asserted in the amended complaint be resolved in arbitration, the Defendants waived their right to arbitrate this matter and, since the Defendants do not seek to compel arbitration, the affirmative defense sounds in breach of contract. At the outset, the Court is not convinced that the Defendants waived their affirmative defense alleging a failure to arbitrate. 18Blackbears avers that the Defendants waived their right to arbitrate by actively participating in this proceeding for over a year as demonstrated by the Defendants moving to dismiss the initial complaint, serving notice to take depositions, and consenting to joining Action 1 with Action 2. “A determination that a party has waived the right to arbitrate requires a finding that the party engaged in litigation to such an extent as to manifest a preference clearly inconsistent with its later claim that the parties were obligated to settle their differences by arbitration…and thereby elected to litigate rather than arbitrate.” (Matter of Cusimano v. Berita Realty, LLC, 103 AD3d 720, 721). A review of the record before the Court reveals that discovery is in the infancy stages and depositions have not yet been held. It appears that the Defendants’ activity in this proceeding has primarily been in connection with opposing the numerous motions filed by 18Blackbears. Therefore, it cannot be said that the Defendants have engaged in litigating this matter so as to manifest a preference to litigate rather than arbitrate. (Matter of Cusimano, 103 AD3d at 721). However, the Court is persuaded that section 3.03-Deadlock of the Operating Agreement does not require the parties to resolve disputes through mediation before initiating a litigation proceeding. Section 3.03-Deadlock provides in pertinent part that if the “Members are equally divided…over a material matter…affecting the operating of the Company (a “Deadlock”), one or more Members may notify the other Member or Members of the existence of a deadlock…If after three months the Member have failed to resolve the Deadlock, the Members have the right to request, in writing a arbitration.” (Emphasis added). The plain language of this section is permissive rather than mandatory and, therefore, 18Blackbears was not required to implement a deadlock or arbitrate disputed material issues raised in this proceeding. The Defendants arguments that 18Blackbears was required to exhaust its remedies under section 3.03-Deadlock of the Operating Agreement by implementing a deadlock fails to raise an issue of fact. (Becker at 965-966). As such, the Defendants’ seventh affirmative defense should be dismissed. The Defendants’ eleventh affirmative defense alleges that 18Blackbears lacks standing to seek dissolution of DACS. 18Blackbears argues that the eleventh affirmative defense should be dismissed because the Defendants do not assert what section of the Operating Agreement bars 18Blackbears from seeking judicial dissolution of DACS. Nevertheless, 18Blackbears avers that it is authorized under section 11.01-Events of Dissolution of the Operating Agreement to seek judicial dissolution. Section 11.01-Events of Dissolution of the Operating Agreement provides, in pertinent part, that DACS “shall be dissolved and its affairs wound up only upon the occurrence of…(c) The entry of a decree of judicial dissolution under Section 702 of the NY LLCL.” As previously discussed, LLCL §702 provides that the Supreme Court may issue a judicial decree to dissolve a limited liability company on “application by or for a member.” The plain language of the Operating Agreement permits DACS to be dissolved by judicial decree pursuant to LLCL §702, which permits the application to be made by any member of DACS. Since 18Blackbears is a member of DACS, it has established standing to initiate this proceeding seeking to dissolve DACS. The Defendants argue in opposition that under Article III of the Operating Agreement, the only entities that can cause DACS to act are either Dynkin, as manager, or a majority of the members. The Defendants claim that 18Blackbears failure to obtain the consent of a majority of the members prohibits it from taking action to dissolve DACS. While section 3.01-Managmenent of the Company provides that no member of the company, other than Dynkin acting as manager, “shall have the authority or right to act on behalf of or bind the Company,” section 3.02-Actions Requiring Approval of Member sets forth the instances where express approval of a majority of its members is required. Specifically, section 3.02(i) provides that express approval of a majority of its members is requires to “[d]issolve, wind up or liquidate the Company…” Based on the provision in section 3.02, the Defendants have raised an issue of fact as to whether 18Blackbears has standing to bring this action for judicial dissolution in the absence of obtaining the consent of a majority of DACS’ members. (Becker at 965-966). Therefore, it is not appropriate to strike the Defendants’ eleventh affirmative defense. The Court has considered the remaining contentions of the parties and finds that they do not require discussion or alter the determination herein. Accordingly, the remaining affirmative defenses not specifically addressed herein should not be dismissed. 18Blackbears’ arguments in favor of sanctions were considered and, as discussed in detail above, sanctions are not appropriate in this matter. Upon the foregoing, it is hereby ORDERED, that the branch of 18Blackbears’ motion (Motion Sequence 03) for an order dismissing Atlas Cybersecurity, LLC’s and Benjamin Dynkin’s affirmative defenses is granted, and it is further ORDERED, that the branch of 18Blackbears’ motion (Motion Sequence 03) for an order and issuing sanctions pursuant to 22 N.Y.C.R.R. §130-1.1(b) is denied, and it is further ORDERED, that the branch of 18Blackbears’ motion (Motion Sequence 09) for an order dismissing DACS Cybersecurity Holdings, LLC’s, Benbar, LLC’s, and Benjamin Dynkin’s affirmative defenses is granted as provided herein, and it is further ORDERED, that DACS Cybersecurity Holdings, LLC’s, Benbar, LLC’s, and Benjamin Dynkin’s first, second, third and seventh affirmative defenses are dismissed, and it is further ORDERED, that DACS Cybersecurity Holdings, LLC’s, Benbar, LLC’s, and Benjamin Dynkin’s fourth, fifth, sixth, eighth, nineth, tenth and eleventh affirmative defenses shall remain, and it is further ORDERED, that the branch of 18Blackbears Motion (Motion Sequence 09) for an order issuing sanctions is denied, and it is further ORDERED, that counsel for all parties shall appear before the undersigned for an in-person compliance conference on June 29, 2023 at 9:30 AM. The foregoing constitutes the Order of this Court. Dated: May 23, 2023
