On July 13, 2023, Justice Reed of the New York County Commercial Division issued a decision in Youyi Chen v. 215 Chrystie Venture, LLC, 2023 NY Slip Op. 50716(U), holding that a promoter has a duty to disclose material facts, explaining:
Plaintiffs further assert that defendants, as promoters of investments in the project, owed each plaintiff a fiduciary duty of good faith, loyalty, and full and fair disclosure of all material facts and information relevant to the investment decision presented to plaintiffs. Defendants allegedly breached their respective duties by concealing and failing to disclose the true structure of plaintiffs’ investment. Plaintiffs argue that defendants also breached their fiduciary duties by failing to disclose defendants’ intentions concerning their own investment of capital and their intention to eliminate their exposure to the risk by taking their capital out through excessive and unwarranted distributions.
Ignoring plaintiffs’ assertion that defendants acted as promoters of the project, defendants seek to dismiss plaintiffs’ fiduciary duty cause of action on the basis that plaintiffs’ indirect investment in 215 Investors, by virtue of plaintiffs’ direct investment in MCSDF, is so remote that it cannot create the necessary link between the parties to justify an imposition of fiduciary duty on defendants in relation to plaintiffs. To support this argument, defendants cite to the string of cases standing for the proposition that managing members of an LLC do not owe any fiduciary duty to persons or entities that are not members of the LLC. This is true even where the person claiming the fiduciary relationship is himself a member of an LLC, which is in turn a member of the LLC in question. Thus, defendants take the position that plaintiffs’ fiduciary duty claim must be dismissed since plaintiffs’ only allegation of fiduciary duty involves plaintiffs’ indirect investment in 215 Investors, of which they are not members.
Defendants are mistaken regarding the basis asserted for the fiduciary duty. Plaintiffs are not claiming that defendants owed them a fiduciary duty because plaintiffs’ direct investment in MCSDF eventually turned into an indirect investment in 215 Investors, creating a link between plaintiffs and 215 Investors. Rather, plaintiffs allege that defendants acted as promoters for plaintiffs’ original investment in MCSDF and that their role as promoters justifies the finding of a fiduciary duty.
As a general matter, a fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation. Put differently, a fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other. Ascertaining the existence of a fiduciary relationship “inevitably requires a fact-specific inquiry. Thus, the determination of the existence of a fiduciary duty is not properly decided on a motion to dismiss and instead the court must determine if one has been alleged, not whether it can be proven at this point.
More specifically, on the issue of promoters’ fiduciary duty, the Court of Appeals has held that where there are allegations that defendants planned the business venture, solicited investments and exercised control over the invested funds, the promoters have a duty to disclose material facts to investors, since the promoters can reveal those facts more efficiently than individual investors, who would otherwise incur expense investigating what the promoters already know. In affirming the denial of motion to dismiss on the basis that plaintiffs alleged sufficient facts that could support the finding of promoters’ fiduciary duty, the Court of Appeals focused on the fact that the complaint alleged that the promoter defendants solicited plaintiffs’ investments and have represented to the foreign investors that they had particular experience and expertise in the New York real estate market. And although the promoter defendants described plaintiffs as sophisticated prospective investors, the Court of Appeals concluded that the complaint painted a different picture, stating that plaintiffs were overseas investors who had little or limited knowledge of New York real estate or United States laws, thereby further supporting the possibility of establishing promoters’ duties and corresponding liabilities.
As in Roni, plaintiffs here allege that defendants acted as promoters for plaintiffs’ investment in MCSDF. Indeed, plaintiffs assert that defendants repeatedly solicited plaintiffs’ investment in the project — by communicating with plaintiffs in ways other than just through the OM and OA — which, as explained above, cannot properly be seen as evidence of solicitation or direct communication between the parties in this action. Plaintiffs allege that defendants were the ultimate recipients of plaintiffs’ invested funds, that they controlled those funds once they were invested in the project, and that defendants represented themselves as having particular and specialized experience with the New York real estate market. The complaint also alleges that plaintiffs have little or no knowledge of New York real estate market, and that they have little or no proficiency in the English language, and that, as a result of these factors, defendants were able to, and did, encourage plaintiffs, beyond communicating through the OM alone, to repose trust and confidence in defendants by dint of their special expertise. Given these allegations, and in light of the caution that determination of the existence of a fiduciary duty not be decided on a motion to dismiss (and that the court must only determine if the existence of fiduciary duty has been alleged, not whether it can be ultimately proven), this court concludes that plaintiffs’ claim for breach of promoters’ fiduciary duty survives defendants’ motion to dismiss.
(Internal quotations and citations omitted).