Where’s the Beef? Causation and Culpability Are Fatal Pitfalls in Zaycon Foods Lawsuit

Farrell Fritz, P.C.
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When representing an aggrieved plaintiff in a commercial matter, there are certain business torts that I tend to rely on more heavily than others.  If business torts were foods, for example, a claim like breach of contract would be an entrée, while tortious interference with prospective business relations would be more of a side dish.  Those types of tort-lite claims are difficult to plead (and even more difficult to prove) because they require a showing of causation and culpability, the lack of which is fatal if not appropriately pleaded as Justice Robert R. Reed reminds us in Braddock v Shwarts and Vertical Group, Supreme Court, New York County (Index No. 158142/2018).

Background

Formed in 2010, Zaycon Foods LLC was in the business of proving fresh, affordably priced farm-to-table meats shipped direct to consumers until it went out of business in 2018. Between 2014 and 2015, the Plaintiff, Richard Braddock, invested $1 million into the company together with loans and other investments. By 2015, Braddock was Chairman of the Board, CEO, and co-managing member of Zaycon.

In 2015, Zaycon retained the services of the Vertical Group, a New York investment bank, under a Financial Advisory Agreement, to assist Zaycon in attracting institutional capital investment. As is critical here, the Financial Advisory Agreement provided that Zaycon (not Vertical) retained sole responsibility for the company’s decision-making, and that Vertical was not responsible for Zaycon’s operational, organization or administrative decisions. More on that in a moment.

In 2016, Great Hill, a private equity firm, submitted an indication of interest letter for a $25 million investment in Zaycon. The indication of interest letter contained certain terms and conditions for the proposed investment, including significant due diligence requirements, the satisfaction of numerous closing conditions, and a focused review of Zaycon’s internal operations, customer satisfaction, technology systems, and management team.

By April 21, 2016, the other members of Zaycon removed Braddock as co-managing member, removed him as Chairman, and terminated his employment as CEO. Braddock claims that Vertical’s senior banker who handled the Zaycon account, Michael Shwarts, made a series of false statements that the other members of Zaycon relied on that led to Braddock’s termination.  Shortly after Braddock’s termination, Great Hill advised that it would not proceed with the investment.

In 2016, Braddock sued Zaycon and its members in Washington State alleging that Zaycon fraudulently induced him to invest in Zaycon and improperly removed him under the terms of the governing agreements. After extensive discovery, the parties cross-moved for summary judgment, where the Washington Court held that Braddock’s termination was proper under Zaycon’s operating agreement, dismissing those claims.

Braddock commenced this action in August 2018, which action was stayed by court order to allow for the balance of the Washington Action to conclude. Braddock then filed the amended complaint as against Vertical and Shwarts, asserting a claim for tortious interference with business relations as between Braddock and Great Hill and as between Braddock and Zaycon, and a claim for aiding and abetting fiduciary duty.

Analysis

Justice Reed dismissed the amended complaint in its entirety. Among the many reasons for dismissal, the Court ultimately found that Braddock failed to plead the elements of causation and culpability necessary to make out both claims.

The Court found that Braddock failed to plead but-for causation in connection with Vertical/Shwarts’ alleged tortious interference with the prospective contractual relationship with Great Hill. Braddock failed to allege that but for Vertical/Shwarts’ interference, the material preconditions contained in Great Hill’s indication of interest letter—including significant due diligence as well as other material financial conditions prior to closing—would have been satisfied, and that Great Hill would have closed on the investment.

The Court further held that Braddock failed to plead the requisite level of culpable conduct, since the only alleged conduct directed at Great Hill was Shwarts informing Great Hill that Braddock objected to the valuation amount in the indication of interest letter. The pleading otherwise failed to allege that this comment was “maliciously motivated.”

Likewise, Justice Reed found no basis to sustain the claim as to Vertical/Shwarts’ alleged tortious interference with the prospective ongoing relationship as between Braddock and Zaycon (i.e., his continued employment as Chairman, CEO, and co-managing member), holding that not only was this an improper second attempt at his failed breach of operating agreement claim (already heard and decided by the Washington Court), Braddock failed to plead the requisite level of culpability. The complained-of statements were not alleged to be maliciously motivated nor intentionally targeted for the sole purpose of harming Braddock (as opposed to economically motivated, which does not rise to the level of culpability required for this claim).

As for Braddock’s aiding and abetting breach of fiduciary duty claim, because Zaycon properly terminated Braddock (per the determination in the Washington Action), Vertical and Shwarts cannot be said to possess actual knowledge sufficient to aid and abet a breach of fiduciary duty by Zaycon’s other members. To the contrary, the Court found that, “rather than having knowledge of a breach of fiduciary duty, Shwarts actually shepherded the Zaycon members through the removal process to assure that they acted in compliance with the corporate documents and their duties to Zaycon” (i.e., the exact opposite of aiding and abetting a breach of fiduciary duty).   

The ultimate knock-out blow to the amended complaint was that the Financial Advisory Agreement under which Vertical was retained by Zaycon expressly provided that all investment decisions and corporate governance decisions were to be at Zaycon’s sole discretion. Justice Reed concluded that because both causes of action were premised on the theory that Zaycon’s members relied on Vertical/Shwarts’ statements in terminating Braddock, the Financial Advisory Agreement provided a complete defense as it “clearly establishes that Zaycon was unilaterally responsible for its own decision-making, and that Vertical was not legally responsible for any business decision Zaycon elected to make.”

Takeaway

Tortious interference with prospective business relations and aiding and abetting breach of fiduciary duty claims are often more difficult to plead and to prove than their sister claims (i.e. tortious interference with contract/breach of contract and breach of fiduciary duty) precisely for the reasons highlighted in Justice Reed’s decision: causation and culpable conduct.

Postscript: While this post focused on the causation and culpable conduct, Justice Reed’s decision is worth a closer read for the mélange of interesting substantive and procedural issues he addressed relevant to any commercial litigator’s practice, and which we often blog about here (e.g., statute of limitations; relation back doctrine; direct vs. derivative claims; assignment of claims; choice of law; standing; collateral estoppel).

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