Kleeberg v. Eber

Background

The dispute concerned a testamentary trust created under Allen Eber’s will to hold controlling stock in Eber Bros. & Co., Inc. The trust benefited Allen Eber’s three children and, after two of them died, their descendants. Lester Eber, Allen’s son, served as a trustee and held leadership positions in the Eber companies. Wendy Eber, Lester’s daughter and sole heir, also held leadership positions in some of those companies.

The plaintiffs—Daniel Kleeberg, Audrey Hays, and Lisa Stein—claimed that Lester and Wendy breached fiduciary duties by diverting value from the trust and the Eber companies. The challenged conduct included Lester’s personal consulting arrangement with Southern Wine and Spirits, the transfer of Eber Metro and its interest in Eber-CT to Lester’s company Alexbay through a foreclosure, the Polebridge transfer of part of Eber-CT, transfers of Slocum Maine and Eber Metro interests to Lester and Wendy, employment agreements, the issuance of voting preferred shares to Lester, and other transactions.

The case was tried to Judge Kaplan without a jury. Before trial, Magistrate Judge Katharine H. Parker had granted the plaintiffs partial summary judgment concerning Lester’s breach of trust and the Alexbay foreclosure, while leaving the appropriate relief for trial. Judge Kaplan also rejected jurisdictional and claim-preclusion defenses that defendants raised after trial.

Court’s findings and remedies

Judge Kaplan held that Lester’s attempt to use EB&C’s transfer restriction to acquire the trust’s EB&C voting stock for $0 violated his fiduciary duties. The court ordered Canandaigua National Bank & Trust Company to distribute the stock one-third to Wendy Eber as executrix of Lester’s estate, one-third to Audrey Hays, one-sixth to Daniel Kleeberg, and one-sixth to Lisa Stein. The defendants were ordered to take steps needed to carry out that distribution.

The court held that Lester’s Southern consulting agreements were self-dealing transactions and were void under New York’s “no further inquiry” rule, which generally requires setting aside a transaction when a trustee acts in a conflict of interest. The court also held that the arrangement took a corporate opportunity belonging to EBWLC. It awarded EBWLC a money judgment against Wendy as executrix of Lester’s estate for $5,438,399, with nine-percent prejudgment interest accruing from the years in which Southern made the payments.

The court set aside the Alexbay foreclosure and ordered the defendants to reconvey to EBWLC the assets Alexbay received, including stock in Eber Metro and Eber-CT. The court found that EBWLC owed Alexbay $803,265.86 in valid debt and offset that amount against the money judgment in favor of EBWLC against Lester’s estate.

The court ruled that the $400,000 Harris Beach assignment was not a valid expense of the Eber companies and refused to treat it as a credit against the damages. It set aside Lester’s April 2012 employment agreement and ordered the return to Eber-CT of the $675,991 paid to Lester’s estate, with nine-percent prejudgment interest from May 31, 2020. It also held that the 750 EBWLC preferred shares issued to Lester were void and canceled, and ordered an accounting and disgorgement of related distributions with nine-percent prejudgment interest.

The court held that the Polebridge transaction was void and that Wendy’s later acquisition of the six-percent Eber-CT interest was canceled. It imposed a constructive trust—a court-created obligation to return property obtained through misconduct—on that interest and related distributions, ordered Wendy to reconvey the interest to Eber Metro, and canceled the Polebridge promissory note. The court also ordered the return of the Slocum Maine shares taken by Lester and Wendy, along with related distributions and nine-percent prejudgment interest. Wendy’s August 2012 employment agreement and her receipt of 2,000 Eber Metro shares were likewise held void; the shares and related distributions were ordered returned to EBWLC.

Disgorgement, punitive damages, and corporate control

Applying the faithless-servant doctrine, which requires a disloyal fiduciary or employee to forfeit compensation, the court ordered Lester’s estate to disgorge specified compensation paid by EBWLC, Eber-CT, and Slocum Maine after Lester’s first established disloyal act. The court ordered Wendy to disgorge specified compensation paid by Eber-CT and Slocum Maine beginning February 26, 2010, and to account for and disgorge compensation paid by the Eber companies from January 1, 2021 through the date of judgment. The stated amounts were subject to nine-percent prejudgment interest.

The court awarded the plaintiffs $650,000 in punitive damages against Wendy individually. It found that Wendy’s conduct involved a high degree of moral culpability and that she repeatedly aided Lester’s breaches and breached her own corporate fiduciary duties.

The court removed Wendy as an officer, director, or manager of EB&C, EBWLC, Eber Metro, and Slocum Maine for two years from the date of the opinion. She could remain president of Eber-CT at the discretion of that company’s board. The court required an EB&C shareholder election within seven days and barred Wendy from nominating or voting for herself as a director. Until the required elections and corporate appointments were completed, Daniel Kleeberg was appointed temporary receiver, with the duties and responsibilities of a director, president, and secretary of EB&C, EBWLC, Eber Metro, and Slocum Maine. The plaintiffs were directed to submit a proposed final judgment by April 5, 2023.