Opinion
No. 01 Civ. 781 (JFK).
April 5, 2005
OPINION and ORDER
This is a fraud case that will be tried to a jury beginning on April 7, 2005. Plaintiff DSMcKee Investments Inc. ("DSMcKee") is a Canadian entity wholly owned by Plaintiff David S. McKee ("McKee"). (Compl. ¶ 6). Plaintiff CSDesign Inc. ("CSDesign") is a Canadian entity wholly owned by Plaintiff Terry Wilkinson ("Wilkinson"). (Id. ¶ 9). Defendants have moved to dismiss McKee and Wilkinson on standing grounds and to substitute Momentum Investments Ltd. ("Momentum") for CSDesign pursuant to Fed.R.Civ.P. 17(a).
This motion was brought by former defendant Minicucci, and joined by defendant Fahnestock.
Defendants contend that McKee and Wilkinson lack standing because only DSMcKee and CSDesign suffered any alleged injury in this matter. Defendants note that the corporations, not McKee and Wilkinson individually, (i) opened accounts with Fahnestock, (ii) entered into funding agreements with Rayvon, Inc. (Vuono's company) and (iii) received transfers of preferred stock from Rayvon in 1995. Defendants also point out that Minicucci addressed prospectuses for possible future investments only to DSMcKee and CSDesign, not to McKee and Wilkinson individually. The signing of documents and attending of meetings on behalf of their companies, Defendants argue, are not enough to give McKee and Wilkinson standing as individual plaintiffs in this action. (Minicucci Mem. at 3-5).
Plaintiffs respond that the issue does not turn on whether McKee or Wilkinson signed Fahnestock or Rayvon documents. Without citing supporting case law, Plaintiffs allege that "defendants defrauded the plaintiffs individually, by causing the plaintiffs to commit (and eventually lose) their personal assets to a fraudulent scheme. Whether such assets were held in individual or corporate names, the question is the same: whether McKee and Wilkinson were injured (i.e., were deprived of assets) as a result of defendants." (Pl. Mem. at 3). Plaintiffs contend that the Court "should not dismiss individual plaintiffs on the basis that certain documents were executed in a corporate capacity rather than an individual capacity." (Id. at 4).
It is settled that standing "is an essential and unchanging part of the case-or-controversy requirement of Article III [of the Constitution]." Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). As standing implicates the Court's subject matter jurisdiction, the Court may consider the issue at any time, upon request or sua sponte. It is also settled in New York that "[f]or a wrong against a corporation a shareholder has no individual cause of action, though he loses the value of his investment or incurs personal liability in an effort to maintain the solvency of the corporation." Abrams v. Donati, 66 N.Y.2d 951, 953 (1985). Simply put, "it has long been the law of New York and this Circuit that a corporation cannot pierce the corporate veil it created for its own protection whenever doing so would be to its benefit." Bank of America Corp. v. Lemgruber, 2005 WL 19274 at *15 (S.D.N.Y. Jan. 5, 2005) (Batts, J.).
On the instant facts, the Court determines that McKee and Wilkinson lack standing to sue individually. The Complaint itself makes clear that the accounts at Fahnestock, into which McKee and Wilkinson transferred funds, were in the names of DSMcKee and CSDesign. (Compl. ¶ 43; Sandoval Aff. Exh. B, F). The Complaint also states that McKee and Wilkinson signed the funding agreements and letters authorizing the transfer of funds from the Fahnestock accounts into the Rayvon account "on behalf of" DSMcKee and CSDesign, respectively. (Id. ¶ 40). In addition, the Complaint alleges that dividend payments were made to DSMcKee and CSDesign, not to McKee and Wilkinson individually. (Id. ¶ 47). In light of these facts, the Court cannot see how McKee and Wilkinson have standing to step out from behind their corporate veils and sue alongside their respective entities.
The "New Account Information" form for DSMcKee lists the following in the "Name" line: "David S. McKee For: D.S. McKee Investments Inc." (Sandoval Aff., Exh. B). In the case of CSDesign, the "Name" line reads: "C.S. Design Inc. (Terry Wilkinson President, Secretary, Treasury)." (Id., Exh. F).
Of course, "where the plaintiff's injury is direct, the fact that [the corporation] may also have been injured and could assert its own claims does not preclude the plaintiff from asserting its claim directly." Excimer Assocs., Inc. v. LCA Vision, Inc., 292 F.3d 134, 140 (2d Cir. 2002). Direct injury occurs, however, "if the defendant has violated an independent duty to the shareholder." Ceribelli v. Elghanayan, 990 F.2d 62, 63 (2d Cir. 1993); see Abrams, 66 N.Y.2d at 953. Plaintiffs' overly general argument that McKee and Wilkinson were deprived of assets as a result of Defendants' actions does not persuade the Court that McKee and Wilkinson have suffered a direct, independent injury. Revealingly, Plaintiffs cite neither allegations in the Complaint nor case law in support of their position. The Court therefore finds that Plaintiffs McKee and Wilkinson lack standing and should be dismissed.
Defendants also have moved for substitution of Momentum for CSDesign under Fed.R.Civ.P. 17(a). They argue that four years before commencement of this action, CSDesign assigned all of its interests associated with the case (40,000 shares of Class B preferred stock in Rayvon) to Momentum. (Minicucci Mem. at 9-10; Sandoval Aff., Exh. H). In their opposition papers, Plaintiffs take "no position regarding that portion of the defense motion that requests a substitution of Momentum Investments for CS Design, Inc." (Pl. Mem. at 4). In reply, Defendants inform the Court that Plaintiffs changed their position in a "`supplemental [letter] memorandum' attaching Mr. Wilkinson's purported affirmation." (Minicucci Reply Mem. at 3). Apparently, these supplemental papers requested that Momentumand CSDesign be dropped and that Wilkinson be allowed to sue individually. (Id. at 4). The Court uses the word "apparently" because Plaintiffs' supplemental papers never came to Chambers, and never were filed with the Clerk's office. Furthermore, the Court never gave permission for supplemental filings. Therefore, the Court will ignore whatever supplemental papers are floating around and decide the issues on the papers before it. In these papers, Plaintiffs take no position on substitution.
The affirmation fails to appear on the Civil Docket Sheet for this case (No. 1:01-cv-00781).
Under Fed.R.Civ.P. 17(a), "[e]very action shall be prosecuted in the name of the real party in interest." Some courts have held that a Rule 17(a) objection must be made with reasonable promptness or it is deemed waived. Steger v. Gen. Elec. Co., 318 F.3d 1066, 1080 (11th Cir. 2003); Richardson v. Edwards, 127 F.3d 97, 99 (D.C. Cir. 1997); Hefley v. Jones, 687 F.2d 1383, 1388 (10th Cir. 1982); see Charles Alan Wright, Arthur R. Miller Mary Kay Kane, Federal Practice and Procedure § 1554 (2d ed. 1990). While the definition of "reasonable" is not entirely clear, and the Second Circuit has not made a definitive statement on this issue, these holdings find support in the text of the rule itself:
No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest. . . .
Fed.R.Civ.P. 17(a) (emphasis added).
On the other hand, the Second Circuit has held that substitution of plaintiffs under Rule 17(a) "should be liberally allowed when the change is merely formal and in no way alters the original complaint's factual allegations as to the events or the participants." Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 20 (2d Cir. 1997). While this approach comports with the Rule's plaintiff-friendly purpose, which is "to insure against forfeiture and injustice," Lunney v. United States, 319 F.3d 550, 557 (2d Cir. 2003), it must be borne in mind that the Rule also gives the defendant the ability "to present his defenses against the proper persons, to avoid subsequent suits, and to proceed to finality of judgment." 6A Wright, Miller Kane, supra, § 1541, at 324 (quoting Rackley v. Bd. of Trustees, 35 F.R.D. 516, 517 (E.D.S.C. 1964)). Absent prejudice, the Court sees no problem with a liberal approach to Rule 17(a) regardless of which side benefits from the rule.
In view of the foregoing, the Court will allow the alteration of the caption. The substitution of Momentum for CSDesign is a mere formality that does not substantively alter the Complaint or the allegations therein. While timeliness may have been an issue, there is no hard-and-fast rule. Discretion lies with the Court, and Plaintiffs make no argument that they will be prejudiced by a Rule 17(a) substitution at this time.
CONCLUSION
Defendants' motion to dismiss McKee and Wilkinson on standing grounds is granted. Defendants' motion to dismiss CSDesign and substitute Momentum as the real party in interest under Fed.R.Civ.P. 17(a) is granted. The Clerk of the Court is directed to remove David S. McKee, Terry Wilkinson and CSDesign Inc. from the caption and to add Momentum Investments Ltd. as a plaintiff.