Kleeberg v. Eber

Background

The case involves a dispute among members of the Eber family over a family wine and liquor business and a trust that held controlling stock in Eber Bros. & Co., Inc. Lester Eber was both a trustee and a beneficiary of the trust. Plaintiffs Daniel Kleeberg, Audrey Hays, and Lisa Stein were also trust beneficiaries.

Lester made loans to related businesses, secured by interests in Eber Metro and Eber-CT. In 2012, Alexbay, a company Lester owned, pursued a state-court foreclosure action and accepted Eber Metro’s ownership interest, including Eber Metro’s 79 percent interest in Eber-CT, as full satisfaction of the loans. The trust and its beneficiaries were not named in or given notice of that foreclosure action.

In an earlier ruling on the parties’ motions for partial summary judgment, the court denied plaintiffs’ motion in full. It also denied most of the Eber Defendants’ motion, granting it only as to plaintiffs’ declaratory-judgment claim. The parties then sought reconsideration under Local Civil Rule 6.3.

Plaintiffs’ Motion

Plaintiffs argued that the court had applied the wrong standard when considering whether the trust beneficiaries consented to Lester’s self-interested foreclosure. They also argued that the court should have ruled on whether Lester could use a transfer restriction in Eber Bros. & Co.’s bylaws to try to purchase all of the company’s shares for $0.

The court reconsidered its prior ruling on consent. Under New York law, the court explained, a trustee may avoid the usual duty of undivided loyalty only if the beneficiaries consent after receiving full disclosure of the material facts. The burden of proving that consent rested on the Eber Defendants.

The court held that no reasonable factfinder could conclude that Sally Kleeberg and Audrey Hays consented, expressly or impliedly, to the foreclosure and resulting transfer. Lester had provided loan documents and informed them that the businesses were struggling, but the record did not show that he explained the consequences of a default or the possibility that foreclosure would transfer the trust’s most valuable asset to his company. The court also rejected the argument that the trust’s will automatically authorized Lester to foreclose. The will permitted trustees to make loans secured by trust assets, but it did not clearly authorize a trustee-creditor to foreclose without notice to the beneficiaries or consideration of alternative collection methods.

The court therefore held that Lester breached his duty of undivided loyalty by foreclosing on Eber-CT without notice to the beneficiaries and that the transfer of Eber-CT to Alexbay was void under the rule against trustee self-dealing. However, it declined to impose a constructive trust or order immediate reconveyance. A constructive trust is an equitable remedy intended to prevent unjust enrichment. The court found that the amount of the loans, the value of the businesses, and the availability of other financing or sale options remained disputed. Those issues had to be resolved at trial before the court could determine the proper remedy.

The court denied reconsideration concerning Lester’s attempted purchase of all EB&C shares for $0. Plaintiffs had not moved for summary judgment on the claim addressing that issue, so the court had not been required to decide it in the earlier ruling. The validity of the transfer restriction would be addressed at trial.

Estate’s Motion

The Estate of Lester Eber argued that the will’s authorization to secure loans with trust collateral also automatically authorized foreclosure on that collateral. The court denied the Estate’s motion in its entirety. It concluded that the Estate largely repeated arguments already considered and identified no controlling authority requiring reconsideration. The court again held that permission to secure loans did not give Lester unrestricted authority to foreclose for himself without notice to the beneficiaries, and that the will did not eliminate his duty of undivided loyalty.

Disposition

Judge Katharine H. Parker ordered that plaintiffs’ motion for reconsideration was granted in part and denied in part. The Estate’s motion for reconsideration was denied in its entirety. The court stated that the case was ready for trial and scheduled a telephonic conference.