Opinion
119177/02.
Decided May 20, 2004.
Third-party defendants move, pursuant to CPLR 3211 (a) (5) to dismiss the third-party plaintiffs' claim for breach of fiduciary duty, and pursuant to CPLR Article 75, to stay the action and compel arbitration of the remaining claims in the third-party complaint. Defendants Catherine Mahoney, Deanna Mahoney, Veronica Jacob a/k/a Diane Jacob, Alexandra Jacob, Winifred Feldman and Anthony Belmonte (the Family defendants) move, pursuant to CPLR 2221, to reargue this Court's decision, dated June 30, 2003, which denied the Family defendants' motion to dismiss the complaint.
The plaintiffs in the main action are preferred shareholders of defendant W.J. Nolan Company, Inc. (WJN), a securities broker-dealer firm, which was registered with the Securities and Exchange Commission and the National Association of Securities Dealers, but which went out of business on October 23, 2001. Defendant William J. Nolan (Nolan) was the majority owner, a member of the Board of Directors, and the Chief Executive Officer of WJN. Defendant Ivette Keenan was Nolan's assistant, a member of the Board of Directors, and an employee of WJN. Defendant Stuart Appleson was WJN's chief financial officer.
Plaintiffs, other than Bricks of New York, Inc. (Bricks), were clients of WJN, and were approached in 1998 to make capital investments in the company. Plaintiffs each paid $10,000 per share and invested a total of $1.8 million in the company. Bricks obtained its preferred shares of stock in May 2000, as part of the settlement of a dispute between Bricks, WJN, and others. The plaintiffs, other than Bricks, made their investments pursuant to a subscription agreement, which provided that shares were to receive dividends of $1,0000 per share per year, payable quarterly. Dividends were paid through June 30, 2001. Thereafter, no dividends were paid due to the financial difficulties of the company.
Plaintiffs allege that defendants Nolan, Keenan and Appleson (the Nolan defendants) fraudulently solicited the plaintiffs' investment in WJN by failing to reveal improprieties in the way the company was run. Specifically, plaintiffs allege that at the time they made their investments, Nolan's family and friends, the Family defendants, were on the payroll and received other benefits, despite not actually doing any work to earn those payments or benefits (Complaint, ¶ 22). Plaintiffs further allege that the Nolan defendants were funneling money to themselves through the payment of exorbitant and unjustified salaries (Complaint, ¶ 31) and excessive reimbursements for non-business expenses (Complaint, ¶ 32). The Nolan defendants also allegedly concealed the fact that the Company had been investigated in several states, that those investigations resulted in several instances in which WJN or Nolan paid substantial sums of money as fines, fees or restitution, and that the company had been censured or had similar order entered against it for engaging in improper practices (Complaint, ¶ 21).
In their first cause of action for fraud, plaintiffs allege that defendants Nolan, Appleson and Keenan knowingly failed to disclose to the company's brokers or to plaintiffs the true state of the company, including the payments to family and friends. In their second cause of action, which is a shareholders' derivative claim, plaintiffs claim that by receiving money from WJN which they had not earned, each of the defendants deprived the company of valuable assets that would otherwise have been available to pay the dividends and share redemption prices to which the WJN shareholders were entitled.
In July 2003, defendants WJN, Nolan, and Keenan filed a third party action against Leonard Boccia and Paul Chironis, for indemnification and contribution. In the third-party action, WJN, Nolan and Keenan allege that Boccia and Chironis, who were former employees and account executives of WJN had provided the plaintiffs with all the material information relating to their prospective investment as preferred shareholders in WJN, and that both Boccia and Chironis were aware at the time of the information concerning WJN that plaintiffs contend was withheld from them. The third-party plaintiffs plead causes of action for indemnification (first cause of action), contribution (second cause of action), and breach of fiduciary duty (third cause of action).
The Motion to Stay the Third-Party Action
Third-party defendants Boccia and Chironis contend that Rule 600 (a) of the Rules of the New York Stock Exchange (NYSE), requires that the third-party plaintiffs submit to arbitration. Rule 600(a) states that:
Any dispute, claim or controversy between a customer or nonmember and a member, allied member, member organization and/or associated person arising in connection with the business of such member, allied member, member organization and/or associated person in connection with his activities as an associated person shall be arbitrated under the Constitution and Rules of the New York Stock Exchange, Inc. as provided by any duly executed and enforceable written agreement or upon the demand of the customer or non-member.
The New York Stock Exchange Constitution, Article XI, entitled "Arbitration" provides, as follows:
Controversies Arbitrated
Sec. 1. Controversies Arbitrated. Any controversy between parties who are members, allied members or member organizations and any controversy between a member, allied member or member organization and any other person arising out of the business of such member, allied member or member organization, or the dissolution of a member organization, shall at the instance of any such party, be submitted for arbitration in accordance with the provisions of this Constitution and such rules as the Board may from time to time adopt.
Boccia and Chironis contend that, since the third-party action is a controversy involving WJN, a member of the NYSE, which arises out of the business of WJN, that therefore, Boccia and Chironis are entitled to demand arbitration. In addition, since the other third-party plaintiffs, Nolan and Keenan are "associated persons" with WJN, as are Boccia and Chironis, that they are further entitled to arbitration.
The third-party plaintiffs assert that the claims raised in the third-party complaint are not referable to arbitration since they do not arise out of the business of WJN. The third-party plaintiffs cite Paine, Webber Jackson Curtis v. Chase Manhattan Bank ( 728 F2d 577 [2d Cir 1984]), which held that the reach of rule 600(a) "should be limited, at least in cases * * * in which the alleged improper conduct is on the part of the non-member, to controversies arising out of the member's exchange-related business" (at 580-581).
However, it is also well established that a nonmember can compel a member to submit to arbitration in disputes where the nonmember has challenged the member's business practices, whether or not they are "exchange related" ( Nomura Securities International, Inc. v. Citibank, N.A., 81 NY2d 614; Tradex Brokerage Service, Inc., v. Miller, 249 AD2d 221 [1st Dept 1998]). This distinction is the result of two factors. The first is that, in becoming a signatory to the Exchange's rules, its members have agreed to be bound by rule 600(a) and have a "reasonable expectation" that they will be required to arbitrate disputes relating to their business practices. The second factor is the Exchange's interest in the business conduct of its members. * * * * * * * * * * * *
Under the NYSE, the definition of an "associated person" is the same as that found in the Securities Exchange Act of 1934, which defines associated person as any partner, officer, director, or branch manager of such member, or any employee of such member ( 15 USC § 78c(21); see Pearce v. E.F. Hutton Group, Inc., 828 F.2d 826, 830 [US DC 1987]).
Here, although the primary action relates to the business conduct of WJN, a member, and may have been subject to arbitration, had the plaintiff nonmembers demanded arbitration, the plaintiffs did not do so and the action remains in this court. On the other hand, third party complaint relates to the conduct of the third-party defendants, who were not members of the Exchange. Since the third-party complaint is not related to exchange business, it is not within the purview of 600(a) and the controversy is therefore not arbitrable.
Boccia and Chironis also assert that, as associated persons, each of the individual third-party plaintiffs, as well as the third-party defendants, signed Form U-4, which constitutes an express arbitration agreement. However, Form U-4 states only that "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm * * * that is required to be arbitrated under the rules * * * (emphasis added). I have already determined that 600(a) does not require arbitration of the third-party complaint.
Boccia and Chironis also seek to dismiss the third cause of action in the third-party complaint which alleges breach of fiduciary duty. They assert that on April 30, 2003, they entered into a Settlement Agreement and Mutual Release with Nolan and WJN, which stated, inter alia, that "WJN specifically and expressly release [sic] Boccia and Chironis from any and all claims arising from their status as minority shareholders" (Campbell Aff., Ex. 3). Although the prior litigation involved the termination of employment of Chironis, Boccia, and others, the stipulation is intended to be broad. Inasmuch as the third cause of action for breach of fiduciary duty is based upon Boccia and Chironis' status as shareholders, the motion is granted.
The Motion to Reargue
The family defendants move to reargue this Court's decision, dated June 30, 2003, which denied their motion to dismiss plaintiffs' derivative claims against them. The motion to reargue is denied. As previously noted, the gist of plaintiffs' claim against these defendants, is that by receiving money from WJN which they had not earned, each of the defendants deprived WJN of valuable assets that otherwise would have been, and would be, available to pay the dividends and share redemption prices to which the preferred shareholders were entitled (Complaint, ¶ 49). Assuming the truth of plaintiffs' allegations, the moving defendants are the recipients of the corporate assets. A shareholders' derivative action for waste and diversion of corporate assets is the proper vehicle for relief against not only corporate officials, but also third parties who were the beneficiaries of their misconduct ( Blank v. Schafrann, 70 NY2d 887, reversing and adopting the dissenting opinion by Levine, J., 129 AD2d 830 [3rd Dept]).
Accordingly, based upon the foregoing, it is
ORDERED that the third-party defendants' motion to stay the third-party complaint pending arbitration of the claims asserted therein, is denied; and it is further
ORDERED that part of the third-party defendants' motion to dismiss the third cause of action in the third-party complaint is granted, and the third cause of action is dismissed; the remainder of the action is severed; and it is further
ORDERED that the motion to reargue is denied; and it is further
ORDERED that the clerk shall enter judgment accordingly.