Opinion
No. 21900–11.
2012-02-3
Gloria GILLETTE and Richard Sembler, as officers and directors and as shareholders derivatively on behalf of South Shore Dredging Company, Inc., Plaintiffs, v. Edward SEMBLER, Sandra Sembler, South Shore Boat Yard, Inc, and South Shore Dredging Company, Inc., Defendants.
Bracken Margolin Besunder LLP, Islandia, for Plaintiffs. Wickham, Bressler, Gordon & Geasa, P.C., Mattituck, for Defendants.
Bracken Margolin Besunder LLP, Islandia, for Plaintiffs. Wickham, Bressler, Gordon & Geasa, P.C., Mattituck, for Defendants.
ELIZABETH H. EMERSON, J.
ORDERED that this motion by the defendants for an order dismissing the complaint is granted to the extent indicated below; and it is further
ORDERED that the motion is otherwise denied; and it is further
ORDERED that the parties are directed to appear for a preliminary conference, which shall be held on March 12, 2012 at 10:00 a.m., Supreme Court, 1 Court Street, DCM Courtroom A362, 3rd Floor, Riverhead, New York 11901.
The plaintiffs, Gloria Gilette and Richard Sembler, and the defendant Edward Sembler are siblings, and the defendant Sandra Sembler is Edward's wife. Gloria, Richard, and Edward each own 25% of the shares of the defendant South Shore Dredging Company, Inc. (“South Shore Dredging”). The other 25% shareholder is their brother, William Sembler, who is not a party to this action. Gloria and Richard aver that they and Edward are officers and directors of South Shore Dredging. Edward avers that all four siblings are officers and directors of South Shore Dredging. South Shore Dredging owns a five-acre parcel of waterfront property located in Patchogue, New York, that is used as a boatyard and marina.
The plaintiffs, Gloria and Richard, commenced this shareholder derivative action on behalf of South Shore Dredging against Edward, his wife, and South Shore Boat Yard, Inc. (“South Shore Boat Yard”), a corporation solely owned by Edward.
The plaintiffs allege, inter alia, that Edward has transferred South Shore Dredging's assets to South Shore Boat Yard, that he has used those assets for his personal benefit without paying compensation to South Shore Dredging, that South Shore Boat Yard has used the real property owned by South Shore Dredging without paying fair rental value therefor, that Edward has collected rents from tenants of South Shore Dredging's real property without turning those rents over to South Shore Dredging, that Edward has paid himself and his wife compensation from South Shore Dredging that was not authorized by the board of directors, that Edward has denied the plaintiffs access to South Shore Dredging's books and records, and that Edward and his wife have established South Shore Boat Yard for the purpose of concealing their self-dealing and misappropriation of South Shore Dredging's corporate opportunities.
South Shore Dredging is also named as a nominal defendant.
The defendants move to dismiss the complaint pursuant to CPLR 3211(a)(3), (5), and (7). The defendants contend, inter alia, that the plaintiffs may not maintain this action because they have not made a pre-suit demand on the South Shore Dredging, as required by Business Corporation Law § 626(c).
In order for a plaintiff to obtain standing to commence a shareholder derivative action, a shareholder must make a demand upon the corporation's board of directors to pursue the claim. This demand requirement may be excused, however, upon a showing that a demand would be futile. New York law requires that the complaint set forth with particularity the efforts by the plaintiff to secure the initiation of the action by the board or the reasons for not making such an effort ( see,Business Corporation Law § 626[c]; Haig, Commercial Litigation in New York State Courts, Shareholder Derivative Actions § 82:8 [3rd ed] ). No demand is necessary if the complaint alleges acts for which a majority of the directors may be liable and the plaintiff has reasonably concluded that the board would not be responsive to a demand (Marx v, Akers, 88 N.Y.2d 189, 200). To justify the failure to make a demand, it is not sufficient merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by the wrongdoers ( Id. at 199–200). A demand is futile and will be excused when the directors are incapable of making an impartial decision as to whether to bring suit (Bansbach v. Zinn, 1 NY3d 1, 9). This occurs in three circumstances, which must be pled with particularity: (1) a majority of the board of directors is interested in the challenged transaction either because of self-interest or because a director with no direct interest in the transaction is controlled by a self-interested director, (2) the board members did not fully inform themselves of the challenged transaction to the extent reasonably appropriate under the circumstances, or (3) the challenged transaction is so egregious on its face that it could not have been the product of sound business judgment ( Id., citing Marx v. Akers, supra at 200–201). While the plaintiffs contend that Edward is an interested director, he is only one director and does not constitute a majority of the board of directors.
The plaintiffs, relying on Bouhayer v. Georgalis (169 Misc.2d 779 [Sup Ct, Queens County] ), contend that, since they represent a majority of the board of directors, a demand would be unnecessary and is not required. Bouhayer v. Georgalis expanded the Marx v.. Akers rationale to include actions brought by a majority of shareholders derivatively on behalf of a closely held corporation against the minority for fraud, conversion, and corporate waste. Bouhayer v. Georgalis has not been followed, nor is it binding on this court. Moreover, at least two Appellate Division cases have found that the first test for demand futility under Marx v. Akers is not met when only a minority of the directors are interested in the transaction ( see, Wandel v. Eisenberg, 60 AD3d 77 [three out of ten directors interested]; Matter of Comverse Technology, Inc. v. Sollins, 56 AD3d 49 [three out of seven directors interested] ). To follow Bouhayer v. Georgalis would eliminate the pre-suit demand when the interested directors are in the minority as well as the majority, in effect, doing away with the pre-suit demand altogether under the first test for demand futility under Marx v. Akers. Accordingly, the court declines to follow it.
The plaintiffs contend that Edward is in the process of buying William's 25% interest in South Shore Dredging. Therefore, Edward owns or controls 50% of the shares and half of the board of directors. Edward denies that he purchased William's 25% interest and contends that, although he has been advised that William transferred his stock to his daughter, corporate records continue to show William as a 25% shareholder of South Shore Dredging.
The plaintiff's argument presumes that, if Edward owns 50% of the shares of South Shore Dredging, he gets two votes on the board of directors. However, Business Corporation Law § 708(d) provides that, if a quorum is present, the vote of a majority of the directors present at the time of the vote shall be the act of the board. If Gloria, Richard, and Edward were present at a meeting of the board, a majority thereof would be two. Since Edward is the only director out of the three who is alleged to be interested, the plaintiff cannot show that a majority of the board of directors is interested. Alternatively, if Edward refuses to attend a meeting at which both Gloria and Richard are present, as the plaintiffs contend, Gloria and Richard would constitute a quorum of the board of directors ( see,Business Corporation Law § 707) and could vote to authorize the corporation to pursue the claim.
On the other hand, if William is a director of South Shore Dredging, as Edward contends, the plaintiffs would have to show that William is dominated or controlled by Edward and that the board is deadlocked. The plaintiffs have made no such showing. Allegations of wrongdoing and control must be made with particularity and conclusory allegations are insufficient to circumvent the requirement of a demand ( see, Bansbach v. Zinn, supra at 11). The plaintiffs simply allege that Edward is in the process of buying William's shares. Such conclusory allegations, without more, are insufficient to establish domination or control of William by Edward. Accordingly, the complaint is dismissed insofar as it asserts claims derivatively under Business Corporation Law § 626.
The complaint fails to state a cause of action under Business Corporation Law § 719. Under that section, directors who vote for or concur in the following corporate actions are jointly and severally liable to the corporation for the benefit of its creditors or shareholders: (1) the improper declaration or payment of any dividend or other improper cash or property contrary to Business Corporation law § 510, (2) the improper purchase of shares of the corporation contrary to Business Corporation Law § 513, (3) the improper distribution of assets to shareholders after dissolution of the corporation, and (4) making unauthorized loans to directors contrary to Business Corporation Law § 714 ( see,Business Corporation Law § 719[a]; Haig, Commercial Litigation in New York State Courts, Director and Officer Liability § 83:46 [3rd ed] ). While the plaintiffs allege that Edward made improper payments of cash or property to himself and his wife, they do not allege that such payments were made when South Shore Dredging was insolvent or that it would be made insolvent thereby ( see,Business Corporation Law § 510). Moreover, the plaintiffs do not allege that Edward improperly purchased shares, made unauthorized loans to himself, or improperly distributed assets after dissolution. Accordingly, the complaint is dismissed insofar as it asserts claims under Business Corporation Law § 719.
Business Corporation Law § 720 permits an action to be brought against directors or officers to compel an accounting for their violation of fiduciary duties, specifically for the neglect, failure to perform, or other violation of their duties in the management and disposition of corporate assets and for the acquisition by themselves, transfer to others, loss or waste of corporate assets due to their neglect, failure to perform, or other violation of their duties ( see,Business Corporation Law § 720[a]; Haig, Commercial Litigation in New York State Courts, Director and Officer Liability § 83:45 [3rd ed] ). The statute also permits an action to be brought to set aside an unlawful conveyance, assignment, or transfer of corporate assets ( see,Business Corporation Law § 720[b]; Haig, supra ) and to enjoin an anticipated unlawful conveyance, assignment, or transfer of corporate assets ( see,Business Corporation Law § 720[c]; Haig, supra ). The statute permits a director or officer to bring a direct action in his or her own name on behalf of the corporation against a director or officer for corporate waste or other misconduct (Haig, supra ). Because the director or officer may sue in his official capacity on behalf of the corporation, it is not necessary to institute a derivative action, and the action is not subject to the traditional rules of derivative actions, including demand, stock ownership, and judicial approval of settlements ( Id.). Although the statutory language does not expressly provide for the recovery of monetary damages, cases construing § 720 have concluded that monetary damages resulting from a breach of fiduciary duty may be sought; and, as in a shareholder derivative action, any damages recovered belong to the corporation ( Id.).
Liberally construing the complaint, accepting the alleged facts as true, and according the plaintiff the benefit of every possible favorable inference ( see, Leon v. Martinez, 84 N.Y.2d 83, 87), the court finds that it is legally sufficient to state a cause of action under Business Corporation Law § 720. The plaintiff seeks an accounting and related relief due to the defendants' purported trespass, conversion, waste, and misappropriation of South Shore Dredging's corporate assets. While causes of action of action sounding in breach of fiduciary duty must be pleaded with the particularity required by CPLR 3016 (Armentano v. Paraco Gas Corp., 90 AD3d 683 [2011 WL 6225194 at * 1] ), the court finds that the plaintiffs' allegations are sufficiently particular to withstand the defendants' motion to dismiss. Accordingly, the court declines to dismiss the first cause of action for ultra vires acts and trespass, the second cause of action for breach of fiduciary duty, the third cause of action for aiding and abetting a breach of fiduciary duty, the fourth cause of action for a constructive trust, and the sixth cause of action for an accounting insofar as those causes of action are asserted under Business Corporation Law § 720.
The fifth cause of action for piercing the corporate veil is dismissed. Piercing the corporate veil is not, in and of itself, an independent cause of action ( see, Samuel L. Hagan II, P.C. v. J.P. Morgan Chase Bank, 33 Misc.3d 1211[A] at * 17–18; Sahu v. Union Carbide Corp., 418 F Supp 2d 407, 408 n 1,appeal dismissed475 F3d 465 [2nd Cir] ).
The court declines to dismiss the complaint as time-barred. There are issues of fact as to whether the doctrine of equitable estoppel should apply to toll the statute of limitations ( see, Local No. 4, Intl. Assn. of Heat & Frost & Asbestos Workers v. Buffalo Wholesale Supply Co., Inc., 49 AD3d 1276, 1277;Nick v. Greenfield, 299 A.D.2d 172, 173) and whether the purported trespass is a continuing one ( see, Bloomingdale's, Inc. v. New York City Tr. Auth., 13 NY3d 61, 66). The statute of limitations, as well as the defendants' claims of laches, waiver, ratification, and estoppel, may be raised as affirmative defenses in the answer ( see,CPLR 3018[b]; Connors, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C3018:20).
In view of the foregoing, the motion is granted to the extent of dismissing the fifth cause of action. The remaining causes of action are dismissed only insofar as they are asserted pursuant to Business Corporation Law §§ 626 and 719.