Opinion
150450/2011
03-20-2012
O. Aldon James, Jr., on behalf of the National Arts Club, Plaintiffs, v. Dianne Bernhard, JOHN MORISANO, HILLARY WELDON, CHERRY PROVOST, ROSE BILLINGS, STEPHEN HEDBERG, CANDICE PELTZ, DANIEL SCHIFFMAN, MILBRY POLK, FRANCK RAHIRANOSY, ALEX ROSENBERG, CHRIS POE, ROSS ZNAVOR, TARA CORTES, MARGUERITE YAGHJIAN, and the NATIONAL ARTS CLUB, Defendants.
Counsel are: Plaintiff's Counsel Barry G. Felder Foley & Lardner LLP Defendants' Counsel: Diane Ferrone, Esq. Sercarz & Riopelle, LLP Plaintiff's Counsel in Related Action 109945/2011 AdamB. Gilbert, Esq. Nixon Peabody LLP
Counsel are:
Plaintiff's Counsel
Barry G. Felder
Foley & Lardner LLP
Defendants' Counsel:
Diane Ferrone, Esq.
Sercarz & Riopelle, LLP
Plaintiff's Counsel in Related Action 109945/2011
AdamB. Gilbert, Esq.
Nixon Peabody LLP
, J.
MEMORANDUM DECISION
In this derivative action brought by O. Aldon James ("Aldon") on behalf of the National Arts Club (the "NAC"), defendants Dianne Bernhard, John Morisano, Hillary Weldon, Cherry Provost, Rose Billings, Stephen Hedberg, Candice Peltz, Daniel Schiffman, Milbry Polk, Franck Rahiranosy, Alex Rosenberg, Chris Poe, Ross Znavor, Tara Cortes, Marguerite Yaghjian, and the NAC (collectively, "defendants") move to dismiss the complaint or in the alternative, to strike certain allegations from the Complaint herein (the "Second Lawsuit") pursuant to CPLR 3211(a)(3), (a)(4), (a)(5), (a)(7) and (a)(10). Factual Background
The Factual Background is taken from the defendants' motion papers.
On August 29, 2011, Aldon, John James and Steven U. Leitner (collectively, the "James Group") moved by Order to Show Cause for a Temporary Restraining Order and filed a summons and complaint against the NAC, The Board of Governors of the NAC (the "Board"), and seven of the 16 governors sued herein: Dianne Bernhard, John Morisano, Tara Cortes, Stephen Hedberg, Milbry Polk, Alex Rosenberg and Ross Znavor (the "First Lawsuit"). The First Lawsuit sought to enjoin the NAC's internal disciplinary charges against the James Group, and alleged that the Statement of Charges was not served in the form of a summons; that the Statement of Charges was not authorized properly by the NAC's Board of Governors at an August 4, 2011 Board meeting; that the Statement of Charges was not supported by proper affidavits; and that the Statement of Charges was issued in "bad faith." It was also alleged that the May 2011 annual election was improper because a quorum of members was not present at the election. Further, the First Lawsuit alleged that the NAC had improperly arranged to sell a large number of decorative arts objects allegedly owned by the James Group.
Upon oral argument on September August 29, 2011, the Court granted an interim stay. This was followed by additional argument on September 20, 2011.
By Memorandum Decision and Order dated September 28, 2011, the Court held that: (1) the emailing of the August 3, 2011 notice to the Board Members was not a violation of the NAC Bylaws and thus, the August 4, 2011 meeting was not invalid (Exh. C, p. 15); (2) there was a quorum present at the August 4, 2011 Board meeting (id., pp. 15-16); (3) plaintiffs failed to establish the alleged bias of three Board members who voted in favor of the Statement of Charges (id., p. 16); (4) plaintiffs' argument that the Statement of Charges was improperly served lacked merit; (5) the Statement of Charges, coupled with counsel's memorandum served of August 5, 2011, is proper as to form and sufficient to satisfy the NAC's Bylaws (id., pp. 16-17) and (6) the date of the hearing on the Statement of Charges satisfied the Bylaws (id. at p. 18).
The Court also noted that the plaintiffs' complaints about the scheduled sale of decorative art objects were moot, given the Club's agreement not to sell any objects until permitted to do so by the Court. (see id. at p. 1, note 1).
On September 19, 2011, the James Group filed a petition seeking a "summary determination" that the May 2011 election was invalid, primarily on the ground that a quorum was not present at the time of the election (the "Election Application/Petition").
Defendants contend that challenges to an election are brought by verified petition (see Non-Profit Corporation Law 618), and it may be appropriate to construe the plaintiffs' September 19, 2011 "application" as such a petition, since it appears to be tantamount to a petition to void the May 2011 election.
Thereafter, on October 24, 2011, Aldon filed this "second" derivative lawsuit (the "Second Lawsuit") against defendants, for breach of fiduciary duty and corporate waste. The complaint contains a section entitled "Facts Common To All Counts" which has the following subsections: (i) Background, (ii) Defendants' Instigation of Adverse Publicity and Law Enforcement Action Against the Club; (iii) Defendants' Rush to Appoint New Governors and Officers in Violation of NAC's Bylaws and Constitution; (iv) The Sercarz & Riopelle Investigation; (v) Defendants' Assertion of a Statement of Charges in Violation of the NAC's Bylaws and Constitution; (vi) Improper Sale of Art Scheduled for August 29, 2011; (vii) Despite a Court Injunction, Defendants Continue to Press for Removal of Aldon James; and (viii) Defendants' Improper Actions Against Other Board Members (id., pp. 5-21). The complaint seeks in the first cause of action an accounting based on the defendants' alleged mismanagement, and in the second cause of action, the removal of certain defendants from the Board for an alleged breach of their fiduciary duty as officers, as well as unspecified damages.
The following current members of the Board of Governors are not named as defendants in this second lawsuit: (1) Pat Hackett; (2) Mary Melikian Hayes; (3) Marguerite Jossel; and (4) Stacy Engman.
On November 18, 2011, upon a motion to disqualify the Board from deciding the Statement of Charges, the Court issued an order in which it declined to disqualify the Board as a whole, but found that Governor Dianne Bernhard should be disqualified as a trier of fact. The Court also granted the NAC's cross-motion to disqualify Governors Pat Hackett and Stacy Engman from acting as triers of fact for the Statement of Charges.
In support of dismissal of the Complaint pursuant to CPLR 3211(a)(3), defendants argue that the action should be dismissed as Aldon lacks standing to pursue this action. To the extent plaintiff's complaint is brought as a derivative action, plaintiff's derivative action fails because he has not represented, or provided any evidence, that he represents 5% of the NAC's membership as required pursuant to NPL 720. Further, this action, in which plaintiff seeks to vindicate his personal rights as an individual, is improperly brought as a derivative action. The vast majority of the allegations in this action arise out of Aldon's removal as President and the subsequent Statement of Charges issued against him, John James and Steven Leitner. All of these claims pertain to Aldon, John James and Steven Leitner personally, and they are not the proper subject of a derivative complaint.
According to defendants, Aldon claims that he was improperly removed from the Board as President; he and John James and Steven Leitner are being improperly expelled from the NAC and will face automatic eviction; he was the subject of a vindictive and defamatory media campaign; defendants started the process of turning public opinion against him and the other members of the "James Group"; plaintiff claims that the defendants are responsible for the law enforcement action against him and the other members of the "James Group"; defendants spread misinformation specifically about him; he and the other members of the James Group were intimidated and threatened; Sercarz & Riopelle investigation disproportionately focused on the interviewees' personal feelings about Aldon and elicited scurrilous and speculative accusations against him; the Board improperly issued a Statement of Charges against him and the James Group; and the Club scheduled an improper sale of items that belong to him and the other members of the James Group.
Defendants also argue that CPLR 3211(a)(4) permits the Court to make an order that is "just" when "there is another action pending between the same parties for the same cause of action ... the court need not dismiss upon this ground but may make such order as justice requires." As Aldon's allegations are already subject to at least one lawsuit pending before this court, the Court should dismiss and/or strike most or all of the allegations contained in the plaintiff's Complaint. The Complaint in this action repeats, almost verbatim, the allegations made in the First Lawsuit concerning the purportedly improper manner in which the Statement of Charges was commenced and the allegedly improper sale of items that the plaintiff claims to own. The Complaint in this action also challenges the May 3, 2011 election on the ground that a quorum was not present, a claim that has been made before in both the First Lawsuit and the Election Application/Petition. The Complaint also alleges an improper and biased removal of Aldon, which was the subject of the motion in First Lawsuit already decided on November 18, 2011. And, leave to amend the Complaint in this action to assert individual causes of action and include them in the Second Lawsuit should not be granted because the individual claims by the plaintiff are already the subject of at least one other pending law suit before this Court. The Court has already issued an order that resolves many of these issues in a prior proceeding, and it will no doubt issue additional orders that will resolve the rest of the repetitive claims asserted by the plaintiff here. Thus, the Court should strike paragraphs 55 through 77 (the allegations pertaining to the commencement of the Statement of Charges and the sale of the decorative art), paragraphs 37 through 43 (the allegations concerning the May 2011 Election) and paragraphs 78 through 86 (the allegations concerning the purported bias of the Board) from the Complaint, as the only truly new and "derivative claims" made by the plaintiff are claims for an accounting and for alleged breach of fiduciary duty by the members of the NAC's Board.
Defendants point out that because CPLR 217 requires a claim challenging an election to be asserted within 120 days of such election, this claim would be time barred, if it were first raised in this action.
Alternatively, as the Court has already decided the merits of many of the allegations in the Complaint, such allegations are barred by collateral estoppel pursuant to CPLR 3211(a)(5). This Second Lawsuit asserts, as one basis for the accounting and removal of defendants from the Board, that the Statement of Charges was issued in violation of the NAC's Bylaws and Constitution. (Exh. D at pp. 14-18). However, the Court's September 28, 2011 Memorandum Decision found that the Statement of Charges against Aldon, John James and Steven Leitner was properly issued and that it was not issued in violation of the NAC's Bylaws or Constitution. (Exh. C at pp. 15-17). Aldon is a plaintiff in both the First and Second Lawsuits, and was given a full and fair opportunity to contest the issues decided in the September 28, 2011 Memorandum Decision. Therefore, paragraphs 55 through 72 should be stricken from the Complaint as the validity of the Statement of Charges was already decided against the plaintiff.
In addition, the Court should strike paragraphs 78-86 of the Complaint in this Second Lawsuit, as those paragraphs amount to a claim that the Board is biased against the plaintiff, John James and Steven Leitner, and therefore cannot properly decide the Statement of Charges. In its November 18, 2011 Order, the Court decided these allegations against the plaintiff, and he should not be permitted to restate them again here, now that they have been decided against him.
In opposition, Aldon argues that NPL §720(b)(3) explicitly authorizes a director, such as Aldon, to institute a derivative action without the consent of members or the necessity of a demand made on the organization. Similarly, Aldon's action under NPL 714 (c) to remove certain officers may be brought "by any director" and thus, participation by 5% of the members is not required. Further, Aldon's claims that "defendants are liable to account for their mismanagement and to compensate the Club for damages" and that defendants breached their fiduciary duties are the essence of a derivative action, sought solely on behalf of the NAC. It is irrelevant that a portion of the mismanagement claims relates to actions taken against Aldon.
Nor is the complaint barred under CPLR 3211(a)(4) as containing allegations that mirror allegations in the First Lawsuit because the two cases involve different claims and different parties, since the nature of the relief sought herein is not the same or substantially the same as the relief sought in the prior actions. The fact that two actions share allegations is no ground for striking them from either case. This derivative action asserts causes of action under NPL 714 and 720 for removal of NAC officers and an accounting (and for damages to the NAC) based on defendants' wasteful expenditure of NAC funds. The First Lawsuit seeks declaratory and injunctive relief to stop the hearing on and invalidate the Statement of Charges, prevent suspension of Aldon as governor, and obtain a new election of officers and governors. Furthermore, this action names eight defendants not named in the First Lawsuit and plaintiffs in the First Lawsuit are three individuals, while the real plaintiff-in-interest here is the NAC.
And, black letter law accords no collateral estoppel effect to preliminary injunction orders, such as the September 28, 2011 Memorandum Decision issued in the First Lawsuit. A preliminary injunction order is an interim order issued without discovery or an evidentiary hearing and therefore does not constitute the "full and fair opportunity" to litigate the issues, let alone the required adjudication and decision on the merits. Thus, the grant or denial of a preliminary injunction has no collateral estoppel effect. Further, September 28, 2011 Memorandum Decision is not decisive as to any issue in this action. Said Decision determined "whether the Notice of Hearing and procedural format of the Hearing violate plaintiffs' rights, so as to permit the Court to enjoin the disciplinary proceeding against plaintiffs." In contrast, this action will require a decision as to whether defendants' procedural improprieties, among other evidence of their bad faith and dereliction of duty, require them to account for their wrongdoing and compensate the NAC for its damages.
Discussion
CPLR 3211(a)(3) permits dismissal of an action by a party lacking standing to sue. It is uncontested that NPL 720, entitled "Actions on behalf of the corporation" provides that:
(b) An action may be brought for the relief provided in this section [i.e., corporate waste, mismanagement] . . . by any of the following:
(1) A director or officer of the corporation.
(3) Under section 623 (Members' derivative action brought in the right of the corporation to procure a judgment in its favor), by one or more of the members thereof.
NPL 720(a) An action may be brought against one or more directors or officers of a corporation to procure a judgment for the following relief:
(1) To compel the defendant to account for his official conduct in the following cases:
(A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.
(B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.
As a director and member of the NAC Board, Aldon has standing to pursue this action to remove certain officers. Therefore, dismissal for lack of standing is denied.
As to whether dismissal is warranted pursuant to CPLR 3211(a)(7), the Court turns to whether the allegations are not the proper subject of a derivative complaint. On a motion to dismiss for failure to state a cause of action, every fact alleged must be assumed to be true and the complaint liberally construed in plaintiff's favor (Amfesco Industries, Inc. v. Greenblatt,
172 AD2d 261, 568 N.Y.S.2d 593 [1st Dept. 1991] citing Barr v. Wackman, 36 NY2d 371, 375, 368 N.Y.S.2d 497, 329 N.E.2d 180). However, it has been held that the "mingling of derivative claims and individual claims requires dismissal of the causes of action so affected" (Barbour v. Knecht, 296 AD2d 218, 743 N.Y.S.2d 483 [1st Dept. 2002] citing Abrams v. Donati, 66 NY2d 951, 489 N.E.2d 751 [1985] ("A complaint the allegations of which confuse a shareholder's derivative and individual rights will, therefore, be dismissed . . . though leave to replead may be granted in an appropriate case"); and Baliotti v. Walkes, 134 AD2d 554, 521 N.Y.S.2d 453 [2d Dept. 1987] ("Even if the plaintiffs have erroneously joined their individual claims with those of the corporation it would not require dismissal of the complaint . . . since they have not confused individual and derivative claims within each cause of action")). However, leave to replead may be granted under the proper circumstances, if necessary (Abrams, supra).
Thus, the issue is whether the allegations in this Second Lawsuit confuses Aldon's personal claims with those that are derivative in nature. The Complaint in the instant action contains only two causes of action: (1) Accounting Pursuant to NPL 720 and (2) Removal of the individual defendants as officers of NAC. As pointed out by defendants, the Complaint alleges that Aldon was improperly ousted as president, that he was the subject of a vindictive and defamatory media campaign, that the defendants' are responsible for the law enforcement action against him and the "James Group," that he was intimidated and threatened, that the investigation by Sercarz & Riopelle disproportionately focused on the interviewees' personal feelings about Aldon and elicited scurrilous and speculative accusations against him, that the Board improperly issued of a Statement of Charges against Aldon, and that the NAC began an allegedly improper sale of Aldon's personal items, and Aldon may have sustained personal harm from the alleged acts of the defendants, Aldon does not seek personal redress for these harms. Instead, Aldon claims that defendants' actions amount to corporate waste, warranting an accounting and removal of the defendants as officers of the NAC. And, while the allegations giving rise to the two causes of action were alleged in the First Lawsuit and Election Petition, and the Court issued rulings in those cases as to those allegations, the relief sought herein is markedly different, and therefore, is impacted differently by those allegations. The allegations here that defendants breached their fiduciary duties are alleged solely on behalf of the NAC, with Aldon as the subject of those allegations. However, Aldon does not seek any relief personal to him. Therefore, as there are no individual rights being asserted, it cannot be said that there is a mingling of derivative claims and individual claims so as to warrant dismissal of any of the causes of action.
Turning to whether dismissal is warranted pursuant to CPLR 3211(a)(4), this section permits dismissal of an action where "there is another action pending between the same parties for the same cause of action in a court of any state or the United States." It is noted, however, that "the court need not dismiss upon this ground but may make such order as justice requires." (CPLR 3211(a)(4)). As the movant, defendants must establish that there is a "complete identity of the parties, causes of action and of the relief sought in the two actions or that a determination in the [previously filed] action will necessarily determine and dispose of all the issues in both actions. . . ." (Guilden v. Baldwin Securities Corp., 189 AD2d 716, 592 N.Y.S.2d 725 [1st Dept. 1993]). Dismissal is not warranted under CPLR 3211(a)(4) where "the nature of the relief sought is not the same or substantially the same" (Kent Dev. Co. v. Liccione, 37 NY2d 899, 901, 378 N.Y.S.2d 377, 378 [1975]; Crest Shipping Agency (NY) Inc. v. Commodore Consulting Inc.
294 AD2d 192, 741 N.Y.S.2d 699 [1st Dept. 2002] (dismissal properly denied where "the parties and issues raised in this action are not substantially identical to those in the action previously commenced'); Morgulas v. J. Yudell Realty, Inc., 161 AD2d 211, 213, 554 N.Y.S.2d 597, 600 [1st Dept. 1990] (denying dismissal of action between joint venturers for accounting despite pending action for dissolution of the joint venture and partition of property)). As pointed out by plaintiff, the Complaint herein is brought under NPL §§ 714 and 720 to remove certain officers of the NAC and for an accounting based on defendants' alleged wasteful expenditure of NAC funds. However, the First Lawsuit seeks declaratory and injunctive relief to enjoin the hearing and invalidate the Statement of Charges, prevent suspension of Aldon as governor of the NAC, and obtain a new election of officers and governors, and the Election Action seeks to invalidate the May 2011 election. Further, the Complaint herein names eight defendants not named in the First Lawsuit, and there is no showing that the eight individuals named herein, who, although like the defendants in the First Lawsuit are also Governors of the Board, are sufficiently "identical" for purposes of CPLR 3211(a)(4) relief. And, as noted by plaintiff, the three plaintiffs in the First Lawsuit are three individuals, and the plaintiff herein is essentially the NAC. Therefore, dismissal pursuant to CPLR 3211(a)(4) is unwarranted.
CPLR 3211(a)(5) permits dismissal of a cause of action barred by collateral estoppel. "In order to invoke the doctrine of collateral estoppel, there must be an identity of issue which was necessarily decided in the prior action and which is decisive of the present action and there must have been a full and fair opportunity to contest the prior determination" (Browning Ave. Realty Corp. v. Rubin, 207 AD2d 263, 615 N.Y.S.2d 360 [1st Dept. 1994]). "Under the doctrine of collateral estoppel, issues of law and questions of fact necessarily decided by a court of competent jurisdiction remain binding upon the parties and those in privity with them in all subsequent litigation in which the same issues are material. A party asserting collateral estoppel must demonstrate that there is an identity of issue that has necessarily been decided in the prior action and is decisive of the present action, and that there must have been a full and fair opportunity to contest the decision now said to be controlling" (Ginezra Associates LLC v. Ifantopoulos, 70 AD3d 427, 895 N.Y.S.2d 355 [1st Dept. 2010]).
At the outset, the grant or denial of a preliminary injunction, such as the September 28, 2011 Memorandum Decision, has no collateral estoppel effect(Wall St. Garage Parking Corp. v. NY Stock Exch., Inc., 2004 WL 2889743 at *3 [Sup. Ct., New York County 2004] (stating that "neither the granting of the initial injunction, nor the subsequent reversal reflect an adjudication on the merits or constitute finding of facts, and as such, neither collateral estoppel nor law of the case apply"), citing Coinmach Corp. v. Fordham Hill Owners Corp., 3 AD3d 312, 314, 770 N.Y.S.2d 310, 313 [1st Dept. 2004] ("It is settled law that the grant or denial of a request for a preliminary injunction, a provisional remedy designed for the narrow purpose of maintaining the status quo, is not an adjudication on the merits and will not be given res judicata effect"]).
In any event, the previous orders of the Court did not necessarily decide the issues in this action. Paragraphs 55 through 72 of the Complaint challenge the validity of the Statement of Charges, and paragraphs 78-86 discuss the Board's zealous pursuit to remove Aldon as a Governor of the Board. While the Court previously found in its September 28, 2011 Memorandum Decision that the issuance of the Statement of Charges did not violate the NAC Bylaws and Constitution, and the Court also found that there was an insufficient showing of bias on the part of three Board members to disqualify them from voting to initiate the Statement of Charges, technically, said Memorandum Decision determined the issue of "whether the Notice of Hearing and procedural format of the Hearing violate plaintiffs' rights, so as to permit the Court to enjoin the disciplinary proceeding against plaintiffs." Here, the instant action raises the issue of whether defendants' actions, in part or in their entirety, constitute bad faith and a breach of fiduciary duty, so as to warrant damages in favor of the NAC, issues totally different from those raised in the prior actions. The same distinction exists regarding the Court's prior holding concerning whether a quorum was present for the May 2011 election.
Thus, the Court declines to strike from the Complaint paragraphs 55 through 77 (the allegations pertaining to the manner in which the Statement of Charges arose and the sale of the decorative art), paragraphs 37 through 43 (concerning the May 2011 Election) and paragraphs 78 through 86 (the alleged bias of the Board).
Finally, CPLR 3211(a)(10) permits dismissal of an action it determines that it should "not proceed in the absence of a person who should be a party." Defendants asserted no arguments establishing the applicability of this section to this action. Further, to the extent that defendants argue that the Complaint was not brought by at least 5% of the not-for-profit corporation's members, it is sufficient that this action was brought by a director of the NAC, for the reasons noted above. Therefore, dismissal pursuant to CPLR 3211(a)(10) is unwarranted. Conclusion
Based on the foregoing, it is hereby
ORDERED that the motion by defendants to dismiss the Complaint or in the alternative, to strike certain allegations from the Complaint herein pursuant to CPLR 3211(a)(3), (a)(4), (a)(5), (a)(7) and (a)(10) is denied; and it is further
ORDERED that defendants shall serve a copy of this order with notice of entry upon all parties within 20 days of entry.
This constitutes the decision and order of the Court.
Dated: March 20, 2012
_______________________________________
Hon. Carol Robinson Edmead, J.S.C.