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No Fiduciary Duty Re: Purchase of One Shareholder’s Stock by Another in a Close Corporation

In affirming Supreme Court’s dismissal of a cause of action for breach of fiduciary duty based on one shareholder’s purchase of another shareholder’s stock in a close corporation, the Second Department noted that the status of an officer, director or shareholder of a close corporation does not, without more, create a fiduciary relationship:

“The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct” … . “A fiduciary relationship exists between two persons when one of them is under a duty to act for . . . the benefit of another upon matters within the scope of the relation” …

Contrary to the plaintiff’s contention, [the purchaser’s] status as an officer, director, or shareholder of a close corporation “does not, by itself, create a fiduciary relationship as to his individual purchase of [another shareholder’s] stock” … .  Varveris v Zacharakos, 2013 NY Slip Op 07028, 2nd Dept 10-30-13

 

Plaintiffs Not Entitled to Attorneys Fees in Shareholder Derivative Action Because They Did Not Go to the Board Before Going to Court

In a full-fledged opinion by Justice Friedman, the First Department determined the plaintiffs in a (putative) shareholder derivative action were not entitled to an award of legal fees pursuant to Business Corporation Law 626 because the plaintiffs went straight to court without first making a pre-suit demand upon the board for the desired action.  The plaintiffs sued the Goldman Sachs Group (GPS) to demand a reduction in employee compensation based on the prediction GPS would announce excessive employee compensation. When GPS announced a lower level of compensation, plaintiffs, claiming that the action had attained its objective, moved for a voluntary dismissal and for an award of legal fees.  In affirming Supreme Court’s denial of legal fees, the court wrote:

Plaintiffs argue that Business Corporation Law § 626(e) (quoted in pertinent part at footnote 5, supra) does not expressly require a showing that the demand requirement was complied with or excused as a prerequisite to an award of attorneys’ fees for bringing an action that brought a substantial benefit to the corporation (as plaintiffs claim—and defendants deny—that this action did). Plaintiffs further argue that there is no reason to construe the statute to imply such a requirement. We disagree. * * *

The demand requirement, far from being a meaningless formality, “rests on basic principles of corporate control–that the management of the corporation is entrusted to its board of directors, who have primary responsibility for acting in the name of the corporation and who are often in a position to correct alleged abuses without resort to the courts. The demand requirement thus relieves the courts of unduly intruding into matters of corporate governance by first allowing the directors themselves to address the alleged abuses. The requirement also provides boards with reasonable protection from harassment on matters clearly within their discretion, and it discourages strike suits commenced by shareholders for personal rather than corporate benefit” … . Central Laborers’ Pension Fund v Blankfein, 2013 NY Slip Op 05857, 1st Dept 9-17-13

 

 

Criteria for Shareholder’s Derivative Action and Shareholder’s Action to Inspect Corporate Books Explained

The Second Department explained the pleading criteria for a shareholder’s derivative action for inspection of corporation records.  Here the court determined the shareholders failed to first demand that the corporation initiate an action before bringing the derivative action, and the shareholders’ speculative and conclusory allegations were not sufficient to demonstrate a “proper purpose” for the inspection of corporate records:

A plaintiff in a shareholders’ derivative action must demand that the corporation initiate an action before commencing an action on the corporation’s behalf, and the complaint must “set forth with particularity” his or her efforts “to secure the initiation of such action by the board or the reasons for not making such effort” … . Demand may be excused because of futility where the complaint alleges with particularity, inter alia, that a majority of the board of directors is interested in the challenged transaction[s] … . However, “[i]t is not sufficient . . . merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by wrongdoers to justify failure to make a demand” … . Here, the plaintiffs’ submissions failed to allege specific facts supporting their contention that the defendant directors were interested, such that demand was not required, and the Supreme Court … properly granted that branch of the defendants’ motion which was to dismiss [the relevant] causes of action on that ground… . * * *

…”[A] shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose” (…Business Corporation Law § 624[f]). However, the plaintiffs failed to allege that their demand for an inspection of [the] books and records met the requirements for such relief under the Business Corporation Law (see Business Corporation Law § 624[b]). The plaintiffs also failed to state a cause of action for an inspection of [the] corporate books and records at common law, since a plaintiff asserting his or her common-law right must plead a “proper purpose” for the inspection …. Apart from the claim concerning the nonpayment of profit distributions …, the plaintiffs’ asserted purposes for the inspection were speculative, vague, and conclusory. As such, they were insufficient to establish a proper purpose for the inspection… . JAS Family Trust v Oceana Holding Corp, 2013 NY Slip Op 05734, 2nd Dept 8-28-13

 

Complaint Sufficiently Alleged Facts to Support Piercing the Corporate Veil

In a full-fledged opinion by Justice Mazzarelli (which dealt with many corporation law issues not mentioned here), the First Department determined the complaint alleged sufficient facts to meet the criteria for piercing the corporate veil:

To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court in equity will intervene … . Piercing of the corporate veil is not a cause of action independent of that against the corporation; it is established when the facts and circumstances compel a court to impose the corporate obligation on its owners, who are otherwise shielded from liability… . “Because a decision whether to pierce the corporate veil in a given instance will necessarily depend on the attendant facts and equities, the New York cases may not be reduced to definitive rules governing the varying circumstances when the power may be exercised” … . Indeed, this Court has observed:  “In determining the question of control, courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity . . . [n]o one factor is dispositive”… .   Tap Holdings LLC v Orix Fin Corp, 2013 NY Slip Op 05293, 1st Dept 7-16-13

 

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Only Attorney Can Represent Voluntary Association—Appeals Dismissed

In dismissing the appeals, the First Department held that only an attorney can represent a voluntary association

Petitioner is a voluntary association comprised of rent-regulated tenants in the subject building. Patricia Pillette is a member of the association and appears pro se purportedly on behalf of the association. However, Pillette is not an attorney, and a voluntary association may only be represented by an attorney and not by one of its members who is not an attorney admitted to practice in the state of New York (see CPLR 321[a]). Accordingly, petitioner’s failure to appear by attorney requires dismissal of the appeals… .  Matter of Tenants Comm of 36 Gramercy Park v NYS Div of Hous & Community Renewal, 2013 NY Slip Op 04984, 1st Dept 7-2-13

 

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Breach of Fiduciary Duty Allegations Not Specific Enough

The First Department determined plaintiff’s allegations in support of a breach of fiduciary duty cause of action were not specific enough to survive a motion to dismiss:

Because the underlying allegations of wrongdoing were inadequately pleaded, the fiduciary breach and injunction causes of action were not sustainable. Although plaintiff alleges, among other things, that defendant tried to prevent her from having any meaningful participation in the companies’ operation, her allegations are vague and conclusory, made without any specific instances of the alleged misconduct…. The lack of particularity with respect to plaintiff’s allegations of breach of fiduciary duty (CPLR 3016[b]) is not excused by the individual defendant’s alleged refusal to provide information or by the lack of discovery, as information regarding the alleged denial of participation in corporate management was not solely in the individual defendant’s possession…. Moreover, plaintiff failed to assert specific dates that she had requested information, or to specify the information she had requested….  Berardi v Beradi, 2013 NY Slip Op 04976, 1st Dept 7-2-13

 

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Elements of Breach of Fiduciary Duty

The Second Department explained the elements of a cause of action for breach of fiduciary duty in the context of the board of directors of a corporation and the business judgment rule:

A cause of action sounding in breach of fiduciary duty must be pleaded with the particularity required by CPLR 3016(b)”…. “The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct”… . Members of a board of directors of a corporation “owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly”….

The business judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”… .   Deblinger v Sani-Pine Prods Co, Inc, 2013 NY Slip Op 03963, 2nd Dept, 6-5-13

 

No Standing to Bring Judicial Dissolution Action; Could Not Demonstrate 50% Ownership​

In upholding Supreme Court’s determination that the petitioner did not have standing to bring the judicial dissolution action because 50% ownership of the corporation stock (by the petitioner) was not demonstrated, the Third Department explained the relevant review process:

As  the  party  seeking  judicial dissolution of the corporation, petitioner bore the burden of demonstrating by a preponderance of the evidence his standing to seek such relief based on  his ownership of at least one half of the votes of all of Sunburst’s  outstanding  shares  (see  Business  Corporation  Law§ 1104 [a]…).Our review of Supreme Court’s determination, made after a hearing, “is not limited to whether [its] findings were supported by credible evidence; rather, if it appears that a finding different from that of Supreme Court is not unreasonable, we must weigh the probative force of the conflicting evidence and the relative strength of conflicting inferences that may  be drawn, and grant judgment as warranted” …. However, deference is given to the trial court’s credibility determinations, as that court “had the advantage of observing the witnesses firsthand and was in a better position to assess the evidence and weigh credibility” … .  Matter of Dissolution of Sunburst Associates, Inc v Vilardi, 515011, 3rd Dept, 5-9-13

 

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The Term “Release” (Re Hazardous Substances) Did Not Apply to Migration of Hazardous Substance to Neighbor’s Property Underground​

The Third Department determined there were two equally plausible interpretations of the term “sellers” as used in the contract, rendering the contract ambiguous.  Therefore, the motion to dismiss the complaint prior to discovery was properly denied. In addition, the Third Department determined that the term “release” (re: hazardous substances) did not extend to the migration of hazardous substances to neighboring properties under ground:

…[The provision] requires  indemnification  for environmental  claims  related  to, among other things, a “Release” of hazardous substances “at locations other than [500 Beech].” “Release”  is defined  to include  “any  spilling, leaking, pumping,  pouring,  emitting, emptying, discharging, injecting, dumping  or disposing of any Hazardous  Material  into  the  environment.” In its Canadian action, the neighbor alleged that contaminants – which would be classified as “Hazardous Materials” under the agreement – in the ground  at 500 Beech migrated into the soil and  groundwater at 606 Beech. There is no allegation that hazardous substances were spilled, leaked or otherwise disposed of directly onto the property at 606 Beech. Rather, the allegation is that the flow of underground water carried those substances from 500 Beech, where they had been spilled or leaked, to the neighboring property. Although the hazardous substances eventually wound up at 606 Beech, there is no support for an allegation that the “Release” of those substances occurred at a location other than 500 Beech. Vectron International, Inc, v Corning Oak Holding, Inc, 515408, 3rd Dept, 5-2-13

 

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Criteria for Holding Parent Company Liable for Torts of Subsidiary

In a products liability case, the Third Department determined a question of fact had been raised about whether the parent company could be liable for the torts of a subsidiary.  The relevant legal standard was described as follows:

Liability of a parent company for the torts of a subsidiary does not arise from the mere ownership of a controlling shareholder interest. “Rather ‘there must be direct intervention by the parent in the management of the subsidiary to such an extent that the subsidiary’s paraphernalia of incorporation, directors and officers are completely ignored'” … .   The  parent  company  must  “exercise[] complete  dominion  and  control over the subsidiary” ….  Goodspeed, et al, v Hudson Sharp Machine Company, 515490, 3rd Dept, 4-11-13

 

 

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