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In this Shareholder Derivative Lawsuit, Causes of Action Not Subject to the “Internal Affairs” Doctrine Should Not Have Been Dismissed

The First Department determined many of the causes of action in this shareholder derivative suit were not governed by Bermuda law under the “internal affairs” doctrine and, therefore, should not have been dismissed:

Plaintiffs — minority shareholders of Culligan Ltd. — bring this derivative action on behalf of that entity, a Bermuda company that does business in New York. Supreme Court granted the motion to dismiss upon finding that Bermuda law applied to the case pursuant to the “internal affairs” doctrine. That doctrine “recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders”  Since the internal affairs doctrine does not apply to those defendants who are not current officers, directors, and shareholders of Culligan Ltd. … Bermuda law does not apply to claims asserted against them.

Nor does the internal affairs doctrine apply to claims based on sections of the Business Corporation Law (BCL) enumerated in BCL §§ 1317 and 1319. BCL § 1319(a)(1) expressly provides that BCL § 626 (shareholders’ derivative action) shall apply to a foreign corporation doing business in New York. Thus, the issue of plaintiffs’ standing to bring a shareholder derivative action is governed by New York law, not Bermuda law … . …

Pursuant to German-American Coffee Co. v Diehl (216 NY 57, 62-64 [1915]) and BCL §§ 1319(a)(1), 719(a)(1), and 510, New York law applies to the second cause of action, which alleges that the directors of Culligan Ltd. declared illegal dividends.

To the extent plaintiffs allege violations of BCL § 720 (e.g. waste and unlawful conveyance), which is made applicable to foreign corporations doing business in New York by BCL § 1317(a)(2), those claims are also governed by New York law … . However, to the extent plaintiffs allege a violation of a section of the Business Corporation Law not enumerated in BCL § 1317 (e.g. § 717, which is part of plaintiffs’ breach of fiduciary duty claim), New York law does not apply … . Those claims are governed by Bermuda law …, and were thus correctly dismissed. Culligan Soft Water Co v Clayton Dubilier & Rice LLC, 2014 NY Slip Op 03955, 1st Dept 6-3-14

 

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Demand for Jury Trial Properly Struck/Rescission Was Core of Action and Counterclaim

In a detailed opinion by Justice Moskowitz, the First Department methodically went through the issues raised in a trial stemming from the breakdown of a partnership including breach of fiduciary duty, tortious interference with contract and unjust enrichment. In the course of the opinion, the court noted that inclusion of a cause of action and counterclaim for rescission constituted a waiver of a jury trial:

Defendants next assert that the trial court improperly struck their jury demand in Action 1. This argument has no merit. Because defendants’ demand for the equitable remedy of rescission in Action 2 was not “incidental” to that action, and their demand for rescission was not “incidental” to their counterclaims in Action 1, defendants effectively waived their right to a jury trial by joining those demands with claims for legal relief … . In addition, defendants argued that rescission of the partnership’s license agreements … was “the core” of their claims in both actions, and defendants all asserted, as part of their Action 1 counterclaims, that they had “no adequate remedy at law.” New Media Holding Co LLC v Kagalovsky, 2014 NY Slip Op 02888, 1st Dept 4-29-14

 

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Breach of Fiduciary Duty Cause of Action Stated Against Actuary

After sorting out professional malpractice claims (negligence—three-year S/L) from breach of contract claims (intentional—six year S/L), the Third Department explained the elements of a “breach of fiduciary duty” cause of action in the context of actuarial services (provided by SGRisk):

Actuaries are not considered professionals for the purpose of the shortened statute of limitations applicable to malpractice claims … . Despite not being deemed professionals in that context, actuaries can still develop relationships of trust and confidence sufficient to give rise to a fiduciary duty. Courts must conduct a fact specific inquiry to determine whether a fiduciary relationship exists based on confidence on one side and “resulting superiority and influence on the other” … . Plaintiff alleged that SGRisk “held itself out as being a skilled and competent actuarial” firm that “adhered to accepted professional standards,” that it rendered services for the trusts’ benefit, provided advice and created “a relationship of trust and confidence between” itself and the trusts. Plaintiff also alleged that SGRisk agreed to exercise “good faith and undivided loyalty” when determining appropriate valuation of the trusts’ future claims liability and the trusts reasonably relied on this, placing confidence in SGRisk that it would accurately produce truthful annual actuarial reports with correct estimates of future claims reserves. Additionally, plaintiff alleged that SGRisk breached the duty by knowingly and consistently underestimating the claims liabilities and necessary reserves and failing to identify dangerous underfunding … .  New York State Workers’ Compensation Board… v SGRisk LLC, 517387, 3rd Dept 4-3-14

 

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Question of Fact About Whether Managing Member Breached Fiduciary Duty Owed to Nonmanaging Member with Respect to Managing Member’s Alleged Reliance Upon an Outside Professional

The First Department determined the defendant (Gary) was not entitled to summary judgment.  Gary was the managing member of a Limited Liability Company (LLC) and was sued by a nonmanaging member. Gary argued that, under the Limited Liability Company Law (section 409), he was entitled to rely on the advice of an accountant, and that the cause of action based upon Gary’s acting in accordance with the accountant’s advice should be dismissed. The court described the fiduciary duty owed by Gary to the plaintiff and the criteria for the managing member’s reliance on an outside professional:

As the managing member of the LLCs, Gary owed plaintiff — a nonmanaging member — a fiduciary duty … . “[I]t is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and inflexible rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty” … .Reliance on outside professionals under Limited Liability Company Law § 409(b)(2) must be in good faith (see Limited Liability Company Law § 409[a]…).  As described here, Gary does not meet his initial burden of showing that he acted in good faith and undivided loyalty to plaintiff so as to rely on Limited Liability Company Law § 409 or the business judgment rule. Pokoik v Pokoik, 2014 NY Slip Op 01502,, 1st Dept 5-6-14

 

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Suit by Beneficiaries to Recoup Estate Property, Alleging Breach of Fiduciary Duty by Executor, Allowed to Go Forward

The Third Department determined the beneficiaries of an estate had stated a cause of action to recoup property for an estate (the role of the executor).  The complaint alleged misappropriation of decedent’s assets and included a cause of action against the executor (DiMaggio) for breach of fiduciary duty:

Initially, we note that, absent extraordinary circumstances, beneficiaries of an estate generally do not have a right to bring an action seeking to recoup property for the estate since that role belongs to the executor … . However, such extraordinary circumstances may be implicated where the executor is allegedly directly involved in purported egregious conduct and self-dealing that negatively impacts the potential assets of the estate … . When asserting conduct involving fraud or undue influence, the complaint must set forth in detail the circumstances constituting the wrong (see CPLR 3016 [b]…). .

Plaintiffs’ amended complaint sets forth a series of purported acts by defendants occurring during the last two years of decedent’s life when she was allegedly suffering from cancer and depression. Among other things, defendants allegedly induced decedent to give DiMaggio power of attorney by telling decedent that she would retain control over her accounts, but then used the power of attorney to withdraw funds, modify ownership interest, and change beneficiaries on accounts. Plaintiffs contend that defendants convinced decedent to cash about $360,000 in United States savings bonds by informing her it was illegal to continue to hold the bonds and that the government would take all her money. Most of that money was moved into a trust that defendants allegedly falsely informed decedent would benefit her descendants when proceeds of the trust actually went to defendants and their families. Plaintiffs further assert thatDiMaggio, who was substituted for decedent’s daughter as executor when decedent executed a new will in 2007, neglected to make an effort to recover funds inappropriately diverted from the estate. Lewis v DiMaggio…, 516811, 3rd Dept 3-6-14

 

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Medical Corporation Not Responsible for Unauthorized Disclosure of Medical Information by Employee Acting Outside the Scope of Employment

In a full-fledged opinion by Judge Pigott, over a dissent, the Court of Appeals answered a certified question from the Second Circuit in the negative.  The question was: “Whether, under New York law, the common law right of action for breach of the fiduciary duty of confidentiality for the unauthorized disclosure of medical information may run directly against medical corporations, even when the employee responsible for the breach is not a physician and acts outside the scope of her employment?”:

… [A] medical corporation's duty of safekeeping a patient's confidential medical information is limited to those risks that are reasonably foreseeable and to actions within the scope of employment.  Doe v Guthrie Clinic Ltd, 224, CtApp 1-9-14

 

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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

 

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Fraud and Breach of Fiduciary Causes of Action Dismissed as Duplicative

The Fourth Department dismissed as duplicative causes of action sounding in fraud and breach of fiduciary duty in complaints against dentists also alleging malpractice, negligence, breach of General Business Law section 349 and 350, and failure to obtain informed consent, all based on dental treatment provided to children:

We agree with defendants that the court erred in denying those parts of their respective motions seeking dismissal of the fraud and breach of fiduciary duty causes of action, and we therefore modify the order by dismissing the first and third causes of action of the amended complaints against defendants.  “Dismissal of a fraud cause of action is required ‘[w]here [it] gives rise to damages which are not separate and distinct from those flowing from an alleged [dental] malpractice cause of action’ ” … .  Inasmuch as the damages sought by plaintiffs, including punitive damages, are the same for the fraud and dental malpractice causes of action, we conclude that the fraud cause of action must be dismissed.  We further conclude that the breach of fiduciary duty cause of action must be dismissed because it is duplicative of the malpractice cause of action … .  Both the breach of fiduciary duty cause of action and dental malpractice cause of action are based on the same facts and seek identical relief… . Matter of Small Smiles Litigation … v Forba Holdings LLC…, 996, 4th Dept 9-27-13

 

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Irreparable Injury to Plaintiffs Not Demonstrated and Balance of Equities Did Not Favor Plaintiffs Who Sought Injunction Prohibiting Landlord from Proceeding with a Water-Damage-Repair Plan Plaintiffs Thought Inadequate

In a full-fledged opinion by Justice Saxe, the First Department affirmed the denial of a preliminary injunction where plaintiffs-tenants sought to prohibit the landlord from going forward with repairs necessitated by water damage. The landlord proposed a repair-plan which involved the installation of insulation in the walls which would reduce the interior space of the 1400 square-foot apartment by about 50 square feet.  The plaintiffs wanted the exterior walls completely removed and replaced.  The First Department applied the standard criteria for injunctive relief and determined plaintiffs did not show irreparable harm and the balance of equities did not favor plaintiffs:

…[A]n alteration to residential quarters may be so minor that even though the tenant may be entitled to some form of compensation, a finding of irreparable harm is not warranted. Cases in which interference was sufficient to justify either injunctive relief or orders preventing the work from proceeding … do not preclude the possibility that interference in other circumstances may be so minimal as to fail to justify injunctive relief. Plaintiff failed to make a clear showing that the possible square footage reduction, a small fraction of the total footprint of the apartment, was more than de minimis. This conclusion, however, does not preclude compensation by other means.

Moreover, the balance of the equities does not weigh in plaintiff’s favor. Although plaintiff proposed an alternative method of performing the work on the exterior, she failed to respond to defendant’s assertion that this method would entail substantial extra expenses that defendant was under a fiduciary duty to avoid imposing on the other cooperative shareholders … . The claimed impact to plaintiff of the planned modifications to her apartment, most of which will be compensable based on plaintiffs’ breach of contract theory, is far outweighed by the expense to the co-op of demolishing and rebuilding exterior walls, especially when those walls have already been repaired and treated for waterproofing. Goldstone v Gracie Terrace Apt Corp, 2013 NY Slip Op 05725, 1st Dept 8-27-13

 

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Fraud Sufficiently Pled; Six-Year Statute of Limitations Applied

In reversing Supreme Court, the Second Department determined plaintiff had adequately pled a cause of action sounding in fraud and that, therefore, the six-year statute of limitations applied to both the fraud and the related breach of fiduciary duty causes of action.  In explaining the pleading requirements for fraud, the Second Department wrote:

To state a cause of action sounding in fraud, a plaintiff must allege that “(1) the defendant made a representation or a material omission of fact which was false and the defendant knew to be false, (2) the misrepresentation was made for the purpose of inducing the plaintiff to rely upon it, (3) there was justifiable reliance on the misrepresentation or material omission, and (4) injury”… . “A cause of action to recover damages for fraudulent concealment requires, in addition to allegations of scienter, reliance and damages, an allegation that the defendant had a duty to disclose material information and that it failed to do so”… .

In assessing a motion pursuant to CPLR 3211(a)(7) to dismiss a complaint for failure to state a cause of action, the facts pleaded are accepted as true and the plaintiff is accorded every possible favorable inference … . The court is then to “determine only whether the facts as alleged fit within any cognizable legal theory” … . Pursuant to CPLR 3016(b), a cause of action alleging fraud must be pleaded with particularity so as to inform the defendant of the alleged wrongful conduct and give notice of the allegations the plaintiff intends to prove .. . This pleading requirement “should not be confused with unassailable proof of fraud,” and “may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct.” … .  McDonnell v Bradley, 2013 NY Slip Op 05681, 2nd Dept 8-21-13

 

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