Opinion
INDEX NO. 651863/2012
03-19-2020
CULLIGAN SOFT WATER COMPANY, et al. Plaintiffs, v. CLAYTON DUBILIER & RICE, LLC, et al., Defendants.
NYSCEF DOC. NO. 530 MOTION DATE __________ MOTION SEQ. NO. 017 018 019 020 021 022
DECISION + ORDER ON MOTION
HON. ANDREA MASLEY: The following e-filed documents, listed by NYSCEF document number (Motion 017) 363, 364, 365, 366, 367, 368, 409, 410, 411, 476, 504 were read on this motion to/for DISMISS. The following e-filed documents, listed by NYSCEF document number (Motion 018) 369, 370, 377, 378, 379, 380, 381, 382, 383, 384, 385, 386, 387, 388, 389, 390, 391, 392, 393, 412, 413, 414, 415, 416, 417, 418, 419, 420, 421, 422, 477, 512 were read on this motion to/for DISMISSAL. The following e-filed documents, listed by NYSCEF document number (Motion 019) 371, 372, 373, 374, 375, 376, 423, 424, 425, 475 were read on this motion to/for PARTIES - ADD/SUBSTITUTE/INTERVENE. The following e-fiied documents, listed by NYSCEF document number (Motion 020) 394, 395, 396, 397, 398, 399, 400, 426, 427, 428, 429, 430, 431, 432, 433, 434, 435, 478 were read on this motion to/for DISMISS. The following e-filed documents, listed by NYSCEF document number (Motion 021) 436, 437, 438, 439, 440, 441, 442, 443, 444, 464, 465, 466, 467, 468, 469, 470, 471, 472, 473, 479, 481, 482, 483, 484, 485, 486, 487, 488, 489, 490, 491, 492, 501, 502, 503, 506 were read on this motion to/tor DISCOVERY. The following e-filed documents, listed by NYSCEF document number (Motion 022) 445, 446, 447, 448, 449, 450, 451, 452, 453, 454, 455, 456, 457, 458, 459, 460, 461, 462, 463, 493, 494, 495, 496, 497, 498, 499, 500, 505 were read on this motion to/for DISMISS.
In motion sequence number 017, defendants Advent International Corporation, Advent Partners GPE VIII-C Culligan (Cayman) Limited, Advent Partners GPE VIII-A Cayman Limited Partnership and AP GPE VIII GP Limited Partnership (together Advent Defendants) move, pursuant to CPLR 3211 (a) (1) and (7), for an order dismissing the claims in the Verified Shareholder Fourth Amended Derivative Complaint (FAC) as asserted against them.
In motion sequence number 018, defendants Clayton, Dubilier & Rice, LLC, Clayton, Dubilier & Rice, Inc. (collectively CDR) , Clayton, Dubilier & Rice Fund VI Limited Partnership (CDR Fund VI), Bruno Deschamps, Michael J. Duham, Daniel R. Frederickson, Thomas A. Hays, Mark Seals, Nathan K. Sleeper, George W. Tamke, James Uselton, and David H. Wasserman (the latter nine defendants collectively Director Defendants) also move, pursuant to CPLR 3211 (a) (1), (3) and (7), to dismiss the claims asserted against them in the FAC.
In motion sequence number 019, nominal defendants Culligan Ltd., and its liquidators, Michael W. Morrison and Charles Thresh (jointly Liquidators), move to substitute Morrison and Thresh as plaintiffs in place of the plaintiffs, minority shareholders of Culligan Ltd., or alternatively, for an order dismissing the action based on plaintiffs' failure to make a demand on the Liquidators.
In motion sequence number 020, defendants Centerbridge Special Credit Partners, L.P., CCP Acquisition Holdings, L.L.C., CCP Credit Acquisition Holdings, L.L.C., Angel, Gordon & Co., L.P., Silver Oak Capita, L.L.C. (collectively Lender Defendants) and Culligan Newco, Ltd. (Newco) move, pursuant to CPLR 3211, to dismiss the claims asserted against them in the FAC.
In motion sequence number 021, plaintiffs move, pursuant to CPLR 3124, for an order requiring defendants CDR, CDR Fund VI, the Director Defendants, the Lender Defendants, Newco and the Advent Defendants to comply with plaintiffs' first request for production of documents dated February 5, 2019.
In motion sequence number 022, defendant KPMG Advisory Limited (Bermuda) (KPMG) moves, pursuant to CPLR 3211, for dismissal of the claims asserted against it in the FAC.
Background
This derivative action was commenced on May 31, 2012 by plaintiffs, minority shareholders of Culligan Ltd., asserting claims on behalf of Culligan Ltd. Plaintiffs have now filed five separate derivative complaints in this action, including the FAC filed in 2019, which alleges 10 causes of action: breach of fiduciary duty against the Director Defendants and CDR (first); illegal distributions and corporate waste against the Director Defendants (second and third); unjust enrichment and constructive trust against the Director Defendants, CDR and CDR Fund VI (fourth and fifth); breach of fiduciary duty against KPMG (sixth); breach of fiduciary duty and aiding and abetting breach of fiduciary duty against the Lender Defendants (seventh and eighth); and unjust enrichment and constructive trust against the Lender Defendants, Newco, and the Advent Defendants (ninth and tenth) (NYSCEF Doc. No. [NYSCEF] 332, the FAC).
Motion Sequence Number 019
On April 29, 2013, after this action was first commenced, Culligan, Ltd. entered into a members' voluntary liquidation in Bermuda, pursuant to the Bermuda Companies Act 1981 (the Act), and, by shareholder resolution, the Liquidators, who are also the managing directors at KPMG, were appointed joint and severally as liquidators for Culligan, Ltd. (see NYSCEF 450, Shareholders Unanimous Written Resolution dated 4/19/13). On August 23, 2019, the Supreme Court of Bermuda issued a Winding Up Order, ordering the winding up of Culligan Ltd. by the Bermuda Court and the continuation of the appointment of Morrison and Thresh as joint liquidators (NYSCEF 523, Winding Up Order).
In motion sequence number 019, the Liquidators seek to be substituted as plaintiffs pursuant to CPLR 1017 and 1021, or in the alternative, dismissal of this action. The Liquidators argue that, under New York and Bermuda law, they have the sole authority to act on behalf of Culligan, Ltd., and replace the corporation's board of directors and any shareholders who are seeking to sue derivatively. The Liquidators also argue that, although they are employees of KPMG, which is named as defendant in the FAC, they serve as individual fiduciaries for Culligan, Ltd., and not on behalf of any KPMG entity. Alternatively, the Liquidators seek dismissal of the action, arguing that such relief is appropriate because, prior to filing the FAC, plaintiffs failed to make a demand on them or plead any excuse therein for not making a demand on them.
Plaintiffs oppose the Liquidators' motion, arguing that the CPLR provides for the substitution only "[i]f a receiver is appointed for a party" (CPLR 1017), and the Liquidators' appointment is not akin to that of a receiver. They further contend that, even if the Liquidators are considered receivers, they have not complied with the applicable sections of the Business Corporation Law (BCL), requiring the filing of an oath and bond with the Clerk of the Court (BCL § 1204 [a] [1] [2]) and filing of notices with the Secretary of State (BCL § 1311). They note that neither the Liquidators or Culligan, Ltd. ever requested the Liquidators' substitution, although the Liquidators were appointed in April 2013, and Culligan, Ltd. has actively participated in this action for five years.
Plaintiffs further maintain that because KPMG is now a defendant in the action, there is an existence of a lack of independence and inherent conflicts by the Liquidators. Additionally, plaintiffs argue that they are specifically authorized to bring their claims under BCL §§ 510, 719 and 720, which are applicable to foreign corporations, and that, if the requirements of BCL § 626 (c) are met, the Liquidators' appointment after the commencement of this action would not affect plaintiffs' ability to maintain this action. Plaintiffs also assert that the Liquidators step into the shoes of Culligan Ltd. and its former board, and thus, are not entitled to any additional relief or rights than the ones the original board had at the time the action was commenced in 2012.
CPLR 1017 provides that "[i]f a receiver is appointed for a party, or a corporate party is dissolved, the court shall order substitution of the proper parties." CPLR 1021 states that "[a] motion for substitution may be made by the successors or representatives of a party or by any party... ." Relying on SNR Holdings, Inc. v Ataka Am., 54 AD2d 406, 409 (1st Dept 1976), the Liquidators argue that the term "receiver", as used in CPLR 1017, is not limited to court-appointed receivers, but also includes liquidators, bankruptcy trustees and other similar fiduciaries appointed to manage or wind up a corporation's affairs pursuant to law.
In SNR Holdings, Inc., the Appellate Division, First Department, in applying the principles of comity involving a Newfoundland bankruptcy trustee, determined that "[f]or the purpose of applying [CPLR 1017], no difference exists between a receiver and a trustee in bankruptcy" (id. at 409). The Court further held that because the trustee had been named a party defendant, and there were allegations that the trustee participated in actions which were contrary to the interests of the entities in bankruptcy, including the plaintiff, the trustee "could not reasonably be expected to sue or enter a judgment against itself" (id.). Thus, the Court denied the trustee's application for substitution as plaintiff because of a possible conflict.
Clarkson & Co. Limited, the bankruptcy trustee, was initially appointed as interim receiver, and later, on March 12, 1976, was appointed trustee in bankruptcy by the Newfoundland court.
Here, this court must also apply the principal of international comity to determine whether the Liquidators should be substituted as plaintiff (see id.). "International comity has been described by the Supreme Court as 'the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws'" (Duff & Phelps, LLC v Vitro S.A.B. de C.V., 18 F Supp 3d 375, 382 [SD NY 2013], quoting JP Morgan Chase Bank v Altos Hornos de Mexico, S.A. de C.V., 412 F3d 418, 423 [2d Cir 2005]). The decision to grant comity is a matter within a court's discretion (see Banco Nacional De Mexico, S.A., Integrante Del Grupo Financiero Banamex v Societe Generale, 34 AD3d 124, 131 [1st Dept 2006]; In re Oi Brasil Holdings Cooperatief U.A., 578 BR 169 [Bankr SD NY 2017]), and the burden of proof to establish its appropriateness is on the moving party (Duff & Phelps, LLC., 18 F Supp 3d at 382).
In arguing that their role as liquidators should be considered akin to that of a receiver for purposes of applying CPLR 1017, the Liquidators assert that, pursuant to Section 175 of the Act, they have the exclusive power to bring or defend any action or any other legal proceeding in the name and on behalf of Culligan, Ltd. and to wind up the affairs of the company. The Liquidators refer to those excerpts, which set forth their powers, which include: "to bring or defend any action or other legal proceeding in the name and on behalf of the company;" and "to carry on the business of the company so far as may be necessary for the beneficial winding up thereof" (NYSCEF 462, the Act, §§175 [1] [a ,b]), as well as "to do all such other things as may be necessary for winding up the affairs of the company and distributing its assets" (id., the Act, §§ 175 [2] [h]).
The powers granted to the Liquidators are similar to those of a bankruptcy trustee, in that such trustee's duties include the liquidation of the property of the estate (see In re Jackson, 388 BR. 40, 42 [Bankr WD NY 2008]); 11 USCA § 704 [a] [1] ["the trustee (1) shall collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest"]). The court notes that the BCL and the Act similarly require receivers and liquidators, respectively, to provide an appropriate bond or surety to the County Clerk (BCL §1204 [a] [2]) or "security to the satisfaction of the Registrar" (NYSCEF 462, The Act § 172 [a]). Accordingly, no difference should exist between a receiver and the Liquidators for purposes of applying CPLR 1017 (see SNR Holdings, Inc. v Ataka Am., Inc., 54 AD2d at 409).
The Liquidators have not demonstrated compliance with this requirement.
However, while the Liquidators' counsel contended during oral argument that, under the Act, the Liquidators had the exclusive power to bring the action, they acknowledged that such power thereunder is subject to "the sanction either of this court or the committee of inspection" (NYSCEF No. 512, tr. at 12). Therefore, in exercising its discretion, as acknowledged by counsel, this court denies the Liquidators' request to be substituted as plaintiffs.
A review of the Shareholders Unanimous Written Resolution reflects the resolution that Morrison and Thresh "of [KPMG] be appointed Joint Liquidators, both jointly and severally for the purposes of winding up" (NYSCEF 450, Shareholders Unanimous Written Resolution dated 4/19/13). As noted by the Liquidators, the FAC contains a breach of fiduciary duty claim against KPMG (NYSCEF 398, FAC, ¶¶ 207 -212), an entity which allegedly "served as auditors, accountants and advisers to Culligan Ltd., each of its subsidiaries, and each of the CDR and Director Defendants, and currently serves as the liquidator of Culligan Ltd." (id., ¶ 104). A "trustee stands in a fiduciary relationship to all creditors and should be wholly free from any alliances or associations which might affect his complete independence and judgment" (Phoenix Elec. Contr. Corp. v New York Tel. Co., 155 Misc 2d 250, 252 [Sup Ct, NY County 1992] [citation omitted]). At this juncture, it is unclear as to whether the Liquidators' relationship with KMPG raises a "possible conflict of interest which, if established, would make impossible that undivided loyalty requisite for the protection" of Culligan, Ltd. and the claims raised by plaintiffs (see SNR Holdings, Inc., 54 AD2d at 409 [citations omitted]).
Alternatively, the Liquidators request that the action be dismissed because plaintiffs failed to make a demand on them when they filed the FAC. They argue that, since there was no complaint validly in litigation when the FAC was filed, plaintiffs were required to make a demand on them or plead with particularity in the FAC their reasons why demand on the Liquidators would have been futile, which they failed to do.
Plaintiffs oppose this branch of the Liquidators' motion, claiming that the time to make a demand or determine if a demand would be futile is before a derivative action is commenced. They maintain that they made demands over several months prior to Culligan, Ltd. entering bankruptcy. They further contend that, contrary to the Liquidators' argument, the original complaint survived.
"Business Corporation Law § 626 (c) requires that a shareholder bringing a derivative action seeking to vindicate the rights of the corporation allege, with particularity, either that an attempt was first made to get the board of directors to initiate such an action or that any such effort would be futile" (Wandel v Eisenberg, 60 AD3d 77, 79 [1st Dept 2009]). Demand futility is assessed with respect to the board of directors extant 'as of the time the complaint was filed'" (In re Citigroup Inc. Shareholder Derivative Litigation, 788 F Supp 2d 211, 213 [US Dist Ct, SD NY 2011], quoting Braddock v Zimmerman, 906 A2d 776, 785 [Del Sup 2006]). It is undisputed that demand futility was properly evaluated with respect to the existing board at the time plaintiffs initiated the action. The parties, however, dispute as to whether to continue looking at the board or instead to the Liquidators for assessing demand and demand futility with respect to the FAC.
Plaintiff allege in the FAC alleges that plaintiffs made multiple demands on Culligan Ltd.'s's board in 2012 prior to the commencement of the action (NYSCEF 332, ¶¶ 7, 155-Doc. 162), and that the demand was nonetheless futile because of the Director Defendants' self-interest (NYSCEF 332, ¶¶ 6-7, 137- 147). The Liquidators contend that the demand should have been made on them since at the time of the filing of the FAC there was no purported viable complaint.
The record discloses that, while the trial court had dismissed the initial complaint on the ground that the claims were governed by Bermuda Law (NYSCEF 51, so-ordered transcript of the hearing held on 3/13/13 at 66-69), the Appellate Division held that New York law, not Bermuda law, governs plaintiffs' standing to bring the shareholder derivative action, and certain other claims pursuant to sections of the BCL (Culligan Soft Water Co. v Clayton Dubilier & Rice LLC, 118 AD3d 422, 423-423 [1st Dept 2014]). It further held that "[b]ecause [the trial court] found that Bermuda law applied to this case, [it] did not reach defendants' arguments that the complaint should be dismissed even if New York Law applied" (id. at 423-424). Accordingly, the original complaint was not properly dismissed by the trial court, and, as a result, it was still viable.
Subsequently, the trial court granted a motion to dismiss the third amended complaint without prejudice on the ground that plaintiffs failed to sufficiently allege that they have standing to maintain the derivative lawsuit (NYSCEF 159, so-ordered transcript of the hearing held on 5/28/15 at 27-28). The trial court later denied plaintiffs' motion for reargument or renewal of the trial court's dismissal, and their alternate relief for leave to file a fourth amended complaint on the grounds that they failed to allege particularized facts that the board's refusal was wrongful (NYSCEF 216, ordered dated August 17, 2015). While the Appellate Division affirmed the trial court's dismissal of the third amended complaint (Culligan Soft Water Co. v Clayton Dubilier & Rice LLC, et. al, 139 AD3d 621, 621 [1st Dept 2016]), it also reversed, on the law, the trial court's denial of plaintiff's motion for leave to file a fourth amended complaint (id.). It held that, "[w]hile the proposed [fourth amended] complaint submitted by plaintiffs was also palpably insufficient with respect to its allegation of demand futility, plaintiffs repleaded the complaint to comply with the dictates of the erroneous prior order, which held that allegations of demand futility were irrelevant given the fact plaintiff had made pre-suit demands" (id. at 621). It further held that "[p]laintiffs should be afforded the opportunity to amend their complaint to satisfy the correct pleading standard" (id.).
When, as here, a complaint is amended following a dismissal without prejudice, demand and demand futility must be assessed by reference to the board in place at the time the amended pleading is filed (see Korsinsky v Winkelreid, 143 AD3d 427, 427 [1st Dept 2016]; see Brody v Chemical Bank, 517 F2d 932, 934 [2d Cir 1975]). Thus, the FAC does not relate back to 2012 for demand or demand futility purposes, as argued by plaintiffs, because the third amended complaint was not "validly in litigation", since, as previously noted, it was dismissed by the trial court, and its dismissal was affirmed by the Appellate Division (see Korsinsky v Winkelreid, 143 AD3d at 427 ["[a] complaint that is dismissed without prejudice but with express leave to amend is nevertheless a dismissed complaint"]). Thus, the demand or demand futility needs to be measured in terms of the 2019 board, or in this case, the Liquidators who had already been appointed, at the time of the FAC. Accordingly, to avoid dismissal of the FAC, plaintiffs are required to show that they made a demand on the Liquidators or that it would have been futile to have made a demand on them. Here, the FAC is devoid of any allegations that such demand was made or excusing plaintiffs for not making the demand on the Liquidators. Therefore, the derivative claims asserted by plaintiffs on behalf of Culligan Ltd. are dismissed without prejudice for failure to make a demand on the Liquidators or plead demand futility regarding the Liquidators.
A review of the FAC reflects that that the claims asserted therein consists of breach of fiduciary duty against Director Defendants and CDR (first); illegal distributions and corporate waste against Director Defendants (second and third); unjust enrichment and constructive trust against Director Defendants, CDR and CDR Fund VI (fourth and fifth); breach of fiduciary duty against KPMG (sixth); breach of fiduciary duty and aiding and abetting breach of fiduciary duty against the Lender Defendants (seventh and eighth); and unjust enrichment and constructive trust against the Lender Defendants, Newco and the Advent Defendants (ninth and tenth) (NYSCEF 332, Verified Shareholder Fourth Amended Derivative Complaint). Since these claims all seek damages or relief on behalf of Culligan Ltd. for harm allegedly suffered by the corporation, they are derivative in nature (Yudell v Gilbert, 99 AD3d 108 [1st Dept 2012]).
Accordingly, the Liquidators' motion to dismiss the complaint is granted.
In view of the foregoing, the motions to dismiss the claims asserted in the FAC as asserted against them by the Advents Defendant, in motion sequence no. 17; the Director Defendants, CDR and CDR Fund VI, in motion sequence 018; the Lender Defendants and Newco, in motion sequence no. 20; and KPMG, in motion sequence no. 22, are granted without prejudice.
Additionally, in view of the dismissal of the FAC, plaintiffs' motion, in motion sequence no. 021, pursuant to CPLR 3124, for an order requiring defendants CDR, CDR Fund VI, Director Defendants, The Lender Defendants, Newco and the Advent Defendants to comply with their first request for production of documents dated February 5, 2019, after the filing of the FAC on January 17, 2019, is denied.
On June 4, 2019, this court stayed the motion pending a determination of the pending dismissal motions.
Accordingly, it is
ORDERED that, in motion sequence no. 017, the motion of defendants Advent International Corporation, Advent Partners GPE VIII-C Culligan (Cayman) Limited, Advent Partners GPE VIII-A Cayman Limited Partnership and AP GPE VIII GP Limited Partnership, pursuant to CPLR 3211 (a) (1) and (7), for an order dismissing the Verified Shareholder Fourth Amended Derivative Complaint as asserted against them is granted, and the Verified Shareholder Fourth Amended Derivative Complaint as asserted against them is dismissed in its entirety as against the defendants, with costs and disbursements to said defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor the defendants; and it is further
ORDERED that, in motion sequence no. 018, the motion of defendants Clayton, Dubilier & Rice, LLC, Clayton, Dubilier & Rice, Inc., Clayton, Dubilier & Rice Fund VI Limited Partnership, Bruno Deschamps, Michael J. Duham, Daniel R. Frederickson, Thomas A. Hays, Mark Seals, Nathan K. Sleeper, George W. Tamke, James Uselton, and David H. Wasserman, pursuant to CPLR 3211 (a) (1), (3) and (7), to dismiss the Verified Shareholder Fourth Amended Derivative Complaint (FAC) is granted, and the Verified Shareholder Fourth Amended Derivative Complaint as asserted against all defendants is dismissed in its entirety against the defendants, with costs and disbursements to the defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor the defendants; and it is further
ORDERED that, in motion sequence no. 019, the motion by nominal defendants Culligan Ltd., and its liquidators, Michael W Morrison (Morrison) and Charles Thresh (Thresh) (jointly the Liquidators) to substitute Morrison and Thresh as plaintiffs in place of plaintiffs, minority shareholders of Culligan Ltd., or alternatively, for an order dismissing the action based on plaintiffs' failure to make a demand on them is granted; and it is further
ORDERED that, in motion sequence no. 20, the motion by defendants Centerbridge Special Credit Partners, L.P., CCP Acquisition Holdings, L.L.C., CCP Credit Acquisition Holdings, L.L.C., Angel, Gordon & Co., L.P., Silver Oak Capita, L.L.C. (collectively, the Lender Defendants) and Culligan Newco, Ltd. (Newco), pursuant to CPLR 3211, to dismiss the claims asserted against them is granted, and the Verified Shareholder Fourth Amended Derivative Complaint as asserted against all defendants is dismissed in its entirety against the defendants, with costs and disbursements to the defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor the defendants; and it is further
ORDERED that, in motion sequence no. 021, plaintiffs' application, pursuant to CPLR 3124, for an order requiring defendants CDR, CDR Fund VI, Director Defendants, The Lender Defendants, Newco and the Advent Defendants to comply with plaintiffs' first request for production of documents dated February 5, 2019 is denied; and it is further
ORDERED that, in motion sequence no. 022, defendant KPMG Advisory Limited motion, pursuant to CPLR 3211, to dismiss the claims asserted against it is granted, and the Verified Shareholder Fourth Amended Derivative Complaint as asserted against all defendants is dismissed in its entirety against the defendants, with costs and disbursements to the defendants as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor the defendants moves for dismissal of the claims asserted against them; and it is further
ORDERED that the dismissal of Fourth Amended Complaint is without prejudice and plaintiffs have 45 days from the date of this decision's entry on to NYSCEF to file a fifth amended complaint to address the deficiencies discussed in this decision. Motion Seq. No. 017 3/19/2020
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ANDREA MASLEY, J.S.C. Motion Seq. No. 018 3/19/2020
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ANDREA MASLEY, J.S.C. Motion Seq. No. 019 3/19/2020
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ANDREA MASLEY, J.S.C. Motion Seq. No. 020 3/19/2020
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ANDREA MASLEY, J.S.C. Motion Seq. No. 021 3/19/2020
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ANDREA MASLEY, J.S.C. Motion Seq. No. 022 3/19/2020
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ANDREA MASLEY, J.S.C.