Dweck v. Nasser

2012 WL 161590 (2012)

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Nature of the Case

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Facts

In 2005, after thirteen years in business together, P and D parted ways. P was the CEO, a director, and 30% stockholder in Kids International Corporation (Kids). Both before and after the split, D was the Chairman and controlling stockholder of Kids. P and D both claimed a breach of fiduciary duties. All the witnesses at trial exhibited credibility problems under cross-examination. P denied having any ownership interest in cash payments made by Kids to certain foreign entities. The most credible witness at trial was Amnon Shiboleth, a member of the New York and Tel Aviv bars who acted as corporate counsel to Kids. P and D met each other in their bottom fishing in the purchase of EJ Gitano. P and D purchased the assets of EJ Gitano. D provided all the money and once paid back plus 10% he would transfer 50% of the equity to P and Haim. Nasser would serve as Chairman of the Board; P and Haim would be in charge of day-to-day management. Kids was profitable from day one. In 1994, Taxin who previously worked at Gitano as a sales executive for nearly a decade expanded Kids' business dramatically. He had strong ties to Target and K-Mart, which he used to win new private label business for Kids. He expanded Kids' existing relationship with Wal-Mart and established relationships with other discount retailers such as Hills and Ames. With Taxin on board, Kids' sales increased by a factor of five over a four-year period. By 1998, D had received back his original investment plus 10% interest, and it was time for P and Haim to receive equity in Kids. p and Haim were issued 45% of Kids' outstanding equity because D had issued a warrant to Shiboleth for 5% of the equity as compensation for his role in setting up Kids. P and Haim acquiesced to the new arrangement, and D left it to P and Haim to divvy up their shares. P received 27.5% of Kids' stock, which she held individually and through trusts for the benefit of her children. Haim received the remaining 17.5%. Around the same time, Taxin was promoted to President of Kids. The entire structure of Kids was a tax dodge, and P participated in it eventually getting 30% of the take. P and D began to get greedy. P felt she should own a percentage of Kids equity that more fairly represented her responsibility for Kids' success. She complained but to no avail. D would not give P any more equity, nor would he sell her any of his shares. P decided to bypass Kids by starting a new company into which she would channel 'new opportunities.' P formed Success Apparel LLC (Success). Taxin, who also had grown dissatisfied with his remuneration, suggested the idea. Taxin was offered the opportunity to purchase the Bugle Boy license in 2001. Taxin discussed the matter with P, and they decided to take it for themselves. P granted Taxin a 20% membership interest in Success and retained 80% for herself. From 2001 until 2005, Success operated out of Kids' premises using Kids' employees. Success drew on Kids' letters of credit, sold products under Kids' vendor agreements, used Kids' vendor numbers, and capitalized on Kids' relationships. P decided that Success would pay an administrative fee equal to 1% of total sales. Success also reimbursed Kids for the salaries of certain employees (but not for their benefits) and a portion of Kids' rent. Taxin estimated at trial that he spent approximately 20% of his time on Success, which likely was a self-interestedly conservative figure. In 2004, P's companies reimbursed Kids for rent of $14,594. In 2005, after obtaining space of its own, P's companies paid $437,689 for rent. To win over customers, Success used marketing materials that listed the logos of Kids and Success side by side, cited industry awards won by Kids and touted Kids' lengthy record in the apparel business. This resulted in confusion amongst the licensors. In June 2004, P founded Premium Apparel Brands LLC (Premium). It too operated out of Kids' premises and used Kids' employees and resources. P owned 100% of Premium and served as its CEO. Taxin had no equity stake in Premium. When P originally negotiated the Gloria Vanderbilt license, the owner of the brand, Jones Apparel, understood that the license could be with Kids. P switched the agreement to Premium. P billed Kids for a luxurious lifestyle. Between 2002 and 2005, P charged at least $466,948 in expenses to Kids. P admitted that at least $171,966 was for personal expenses, including Club Med vacations and assorted luxury goods from Armani, Prada, Gucci, and Bergdorf Goodman. D was upset and began to take actions that made P want to leave Kids. P and Taxin started to look for office space and organized a campaign to divert Kids' future orders to Success. Kids employees carried out the campaign by contacting Kids' customers on behalf of Success. At the direction of P and Taxin, Kids employees systematically switched the vendor information and customer contacts from Kids to Success, thereby ensuring that when the orders came in, they came to Success. At a March 2005 stockholder meeting, P announced that she could not serve as a director of Kids because she had a conflict of interest as a result of operating competing businesses. P admitted that she was selling 'overlapping product' from Kids' premises. P was removed as an officer of Kids. P and Taxin kept taking business from Kids and also arranged for Kids' employees to join Success. As part of a May 18 mass departure, Taxin resigned to join P at Success. Fine remained at Kids until May 25, 2005, when he too joined P. To protect their customer relationships, P and Taxin made sure that a handful of employees remained at Kids to fill the Fall 2005 orders. P and Taxin oversaw their efforts, effectively running Kids from afar. Kids received the profits on the Fall 2005 orders. Beginning with the Holiday 2005 and Spring 2006 seasons, Success took all of the orders and profits for itself. The employees who remained at Kids were offered jobs at Success once the Fall 2005 orders were completed. D failed to restart Kids' business. In November 2008, before shuttering Kids' operations, D caused Kids to wire more than $8.3 million overseas to pay off the Maubi Loan. Since the end of 2008, Kids has not engaged actively in business. D alleges that P, Taxin, and Fine breached their fiduciary duties by usurping Kids' corporate opportunities and by charging P's personal expenses to Kids. P claims D breached his fiduciary duties by causing Kids to make payments to Maubi and the Foreign Licensors, taking unearned consulting fees through RAJN, and engaging in post-split activities such as the Seabreeze joint venture. P contends that D should pay $25.4 million in damages to Kids and account for an additional $21 million.