Pappas v. Tzolis

Steve Tzolis (defendant), Steve Pappas, and Constantine Ifantopoulos (plaintiffs) formed Vrahos LLC (Vrahos) (defendant), a limited liability company (LLC), under Delaware law. The company was formed for the single purpose of leasing a Manhattan building. Tzolis paid the security deposit in exchange for the right to sublease the building, provided he paid additional rent to Vrahos. Vrahos’s operating agreement, which was governed by New York law, provided that the members were free to engage in any outside business, even competing business, and owed no obligation to the company or other members. Tzolis subleased the building but made no rent payments. A few months later, Tzolis negotiated to purchase Pappas’s interest for $1 million and Ifantopoulos’s interest for $500,000. As part of the buyout, the plaintiffs signed a handwritten “certificate” stating that they had done due diligence, secured legal counsel, and not relied on Tzolis’s representations. The certificate also provided that Tzolis owed no fiduciary duties related to the transaction. Seven months later, Tzolis leased the building to Charlton Soho LLC (Charlton) for $17.5 million. The plaintiffs sued for breach of fiduciary duty and misappropriation of a business opportunity when they learned that Tzolis began negotiating the deal with Charlton before buying them out. The motion court dismissed the complaint on the ground that the operating agreement eliminated Tzolis’s fiduciary duties, pursuant to either Delaware or New York law. The plaintiffs appealed.