Opinion
No. 451488/2012.
2013-04-3
The PEOPLE of the State of New York, by Eric T. SCHNEIDERMAN, Attorney General of the State of New York, Plaintiff, v. O. Aldon JAMES, Jr., Defendant.
Nachman, David E., Quint, Barbara L., and Shiffman, Steven, Charities Bureau, New York, for Plaintiff, The People of the State of New York, by Eric T. Schneiderman, Attorney General of the State of New York. Jaffe & Asher, LLP, Bension D. Defunis and Ira N. Glauber, New York, for Defendant, O. Aldon James Jr.
Nachman, David E., Quint, Barbara L., and Shiffman, Steven, Charities Bureau, New York, for Plaintiff, The People of the State of New York, by Eric T. Schneiderman, Attorney General of the State of New York. Jaffe & Asher, LLP, Bension D. Defunis and Ira N. Glauber, New York, for Defendant, O. Aldon James Jr.
Roland G. Riopelle, Esq., Sercarz & Riopelle, LLP, New York, for the National Arts Club.
MEMORANDUM DECISION
CAROL R. EDMEAD, J.
In this action by the New York State Attorney General (the “Attorney General”) alleging mismanagement and waste of the assets belonging to the National Arts Club (“NAC” or the “Club”), defendant O. Aldon James, Jr. (“James”) now moves to dismiss the complaint on various grounds.
Factual Background
The NAC is a not-for-profit organization that was established in 1898 to promote public interest in the arts. It owns and occupies the landmarked Tilden Mansion in Gramercy Park in Manhattan.
James joined the NAC in 1980 and served as its President and as a member of its Board of Governors from 1986 through 2011. His twin brother, John James (“John”) was a member of the NAC, as well as his friend, Steven U. Leitner, an attorney (“Leitner”), who has served as an officer or director at various times.
In the spring of 2011, the Attorney General, along with the New York County District Attorney's Office, commenced an extensive investigation into the Club's operations and subpoened the Club's documents.
Thereafter, the NAC hired counsel to conduct an internal investigation, and on July 11, 2011, served James, John and Leitner with a Statement of Charges, noticing an evidentiary hearing for disciplinary charges against defendant.
James (and John and Leitner) sued the Club to enjoin it from proceeding with the disciplinary hearing, and for indemnification against the Club
Dianne Bernhard, the then Vice–President hired counsel (Roland Riopelle of Sercarz & Riopelle LLP) to investigate the Club's management during James's tenure as President. Counsel issued a memorandum dated June 15, 2011 of his “Summary of Internal Investigation,” which served as a basis for the Statement of Charges served upon James, John and Leitner.
(the “James Action”). The Club counterclaimed, asserting breach of fiduciary duty, waste of the Club real estate assets, diversion of corporate opportunity, replevin, an accounting, misappropriation of the Club's funds, and self-dealing.
See, O. Aldon James, Jr., John James and Steven U. Leitner v. The National Arts Club, the Board of Governors of the National Arts Club, Dianne Bernhard, as President of the National Arts Club, John Morisano, As First Vice President of the National Arts Club, and Tara Cortes, et al. (Index No. 109945/2011).
In January 2012, a disciplinary hearing was held, resulting in James being expelled from the Club. This Court vacated the Board's decision, but the Appellate Division, First Department reversed and reinstated the Board's decision.
In September 2012, this action by the Attorney General against James ensued, alleging that he, with the help of John and Leitner, maintained unrestrained dominion and control over the NAC, its valuable real estate and assets, and finances, books, and records. The Attorney General alleges five causes of action against James: (1) breach of fiduciary duty under Not–for–Profit Corporation Law (“NPCL”) §§ 717 and 720, for using funds for his, John's and Leitner's personal use and failing to properly administer and maximize the value of the Club's rental apartments and office spaces; (2) accounting and restitution of value wasted in directing monies and benefits to himself, John and Leitner; (3) restitution and injunctive relief for failing to properly administer charitable assets pursuant to Estates, Powers & Trusts Law (“EPTL”) § 8–1.4; (4) breach of fiduciary duty under NPCL §§ 717 and 720 for failing to properly administer the “ “Kesselring Fund”
assets, which were received for specific purposes, in that James improperly used $274,000 of such restricted funds for general operating and capital expenses; and (5) violation of Executive Law (“ “Exec.L”) § 172–b(1) by filing with the Attorney General's Charities Bureau the “Annual Filing for Charitable Organizations” from 2006 through 2010, which contained material misstatements that he did not receive any compensation or benefits from the Club, when in fact, he was paying substantially all of his living expenses with the Club's funds.
This fund was established by the estate of Charlotte Kesselring.
The Attorney General seeks a judgment (1) directing James to account for all funds and other property obtained by him, his brother John, and Leitner; (2) requiring James to make restitution for all losses to the Club resulting from his waste, misappropriation and breaches of fiduciary duty; (3) permanently enjoining James from serving as an officer, director, or trustee of any charitable entity organized under New York law or entity that solicits charitable contributions in New York; (4) directing James to account and make restitution for his misconduct in connection with the Kesselring Fund; and (5) awarding the Attorney General costs, disbursements and fees.
James now moves to dismiss the complaint in its entirety. James contends that he built the NAC from a 375 member, marginal institution into a 2,100 member, vibrant entity with $4 million in annual revenues, based on donations, bequests, apartment rentals, rental of galleries, new membership, and dining room operations that he spent the last 25 years securing. James has been recognized for his charitable work by several organizations, and has been honored by the Italian government and Dowling College.
James claims that he was never compensated for his work for the Club, and that all the expenses he incurred were legitimate business expenses related to the above activities for NAC. James's receipts and “day file” which recorded all of his daily activities were destroyed and discarded by new management. And, any items allegedly purchased at flea markets, thrift shops and auction houses were for his personal use and purchased with his own money. The Club's money was only used to purchase items that were for the use by the Club or for display at the Club.
And, James, John, and Leitner leased apartments in the Club's building pursuant written lease agreements under terms approved by the Board. As demonstrated by the November 29, 2006 meeting minutes, the below market rent charged to James and John was approved by the Board since they worked full time for the Club without compensation and were on the premises day and night to handle emergencies. And, as with other members who rented apartments at the Club's building, James paid rent in accordance with the applicable rent stabilization rules. The other apartments referred to by the Attorney General were used for storage of the Club's property, and not “usurped” for personal use, and thus, no rent was due on them.
James also points out that Bernhard (the current Club President) and Morisano (the Vice–President) also have large duplex apartments for which they pay rent that is less than comparable, unstabilized apartments. Bernhard was equally responsible for running the Club in the years leading up to the litigation. As Chairperson, she oversaw all aspects of the Club's finances and operation.
James claims that he should not have been sued by the Attorney General or in the James Action for not paying rent on the studios on the upper floors defendant, John and Leitner had to move into due to water leaks, mold and general disrepair. Further, documentation shows that defendant legitimately did not pay rent on his studio because the Club did not make the required repairs on defendant's downstairs apartment in order to repair the facade.
James denies his control over the board and accounting firm used by the NAC. The 21 member Board consisted of members who were appointed by a nominating committee chaired by an independent Board member. Also, the accounting firm, which audits many large non-profits, approved all of the financial affairs at the Club.
James contends that the first, second, and third causes of action for breach of fiduciary duty, accounting and restitution, and injunctive relief are duplicative of the claims against him in the James Action, and therefore, should be dismissed pursuant to CPLR 3211(a)(4) as there is “prior action pending.” The Club has new leadership which investigated James and brought legal proceedings against him based on the allegations made in the instant complaint. And, the monetary damages sought herein, which the Attorney General states will be turned over to the Club, are duplicative of the monetary damages NAC seeks against James. The Attorney General has stepped into the shoes of the NAC, and thus, there is a substantial identity of parties. Further, the Attorney General lacks standing to seek damages on behalf of the NAC, which the NAC seeks on its own behalf (CPLR 3211(a)(3)). And, the alleged harm is confined to the economic interest of a private club, and not of the public at large. Thus, the first, second and third causes of action also fail to state a cause of action (CPLR 3211(a)(7)).
James also contends that the fourth cause of action for breach of fiduciary duty for failure to properly administer the Kesselring Fund should be dismissed pursuant to CPLR 3211(a)(1) (defense is founded upon documentary evidence) and (a)(7) (failure to state a cause of action) in light of the “business judgment rule.” The Club's minutes, a memorandum from a current Board member, Daniel Schiffman, and Riopelle's admission in his memorandum show that the Board authorized James to establish a restoration committee and decided to partially pay for the restoration of the facade of the Club's building by borrowing money from the Kesselring Fund, and the monies were paid back. Carrie Brandon, chair of the Club's audit committee, was overseeing the restoration fund. There is no claim that James personally benefitted from this facade project. James cannot be held solely responsible for a collective board action. James acted in the best interest of the NAC and the City of New York's Landmark Commission to restore the building, and gained nothing personally from restoring the facade of the NAC.
James also seeks a stay of the fifth cause of action pursuant to CPLR 3211(a)(4) and 2201 pending the final determination of the James Action, arguing that if James is first found not to have engaged in any inappropriate conduct in the James Action, it would necessarily be determined that James did not receive any compensation during his tenure as NAC president, and the fifth cause of action would be moot.
In opposition, the Attorney General argues that, in its capacity as the State's regulator of not-for-profit corporations, it has statutory standing to bring each of the claims in this action. The Attorney General is authorized to ensure that a public charity, like the NAC, is made whole for the charitable assets that were taken from it; that its officer who used his fiduciary position to engage in self-dealing and filed false documents with the Charities Bureau is held accountable for his conduct; and to ensure that James is prevented from repeating his actions at this or any other charity. Further, there is neither a substantial identity of parties nor an identity in the relief sought in the two actions. Moreover, the complaint seeks broader and different relief than is sought by the NAC on its counterclaims in the James Action, in that the Attorney General seeks to enjoin James from repeating his actions at other charities. In addition, the Attorney General's third and fifth claims are not substantially similar to any claims in the James Action, as they seek relief pursuant to the EPTL and the Executive Law. And, with respect to the counterclaims in the James Action, the Attorney General submits an affirmation by counsel for the NAC, asserting that the NAC is willing to stay those counterclaims pending the resolution of this action.
And, the business judgment rule has no application to unauthorized actions, such as the decision to violate the terms of a restricted fund. Further, the unsigned emails and corporate minutes that James refers to in order to establish a defense to the fourth cause of action are not “documentary evidence” as that term is used in CPLR 3211, and, in any event, do not conclusively establish a defense to the Attorney General's claim.
Further, the fifth cause of action is capable of resolution in this action. Whether the filings from 2006 to 2010 were false depends on whether James engaged in the misconduct alleged by the Attorney General. When that issue is adjudicated, the false filing issue can and will be adjudicated as well.
In reply, James contends that Kesselring Fund was repaid and thus the fourth cause of action should be dismissed. And, the business judgment rule bars this claim, as the minutes and the memorandum by Riopelle demonstrate that the loan was fully disclosed to and approved by the Board. Further, meeting minutes can support a motion under CPLR 3211(a)(1). And, the NAC's offer to “stay” the counterclaims in the James Action would prejudice James, by effectively giving the NAC two bites at the apple. If James prevails in this action, he may be deprived of the ability to assert the doctrines of res judicata and collateral estoppel in the James Action, as the NAC will argue that there was no identity of parties in both actions. The Court, if applying any stay, should stay this action, as significant discovery has taken place in the James Action, and should stay the third and fifth cause of action as premature. Discussion First, Second, Third, and Fifth Causes of Action
In matters concerning not-for-profit, private associations, like the NAC, Court intervention is anathema; State intervention and investigation is mandated.
Given “the significant public interest in the management and affairs of not-for-profit corporations,” the “Attorney General has extensive supervisory and enforcement authority over not-for-profit corporations” (People v. Grasso, 54 AD3d 180, 191, 861 N.Y.S.2d 627 [1st Dept 2008] citing N–PCL 112, 907, 1008, 1214, 1216, 1303).
Accordingly, NPCL § 720, entitled “Actions on behalf of the corporation” expressly grants the Attorney General authority to bring suit against a director or officer of a not-for-profit corporation, such as the NAC for certain claims. It provides:
(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.
(See also, People v. Grasso, supra, stating that until the non-profit corporation converted to a for-profit corporation, the Attorney General was authorized by NPCL § 720 to bring causes of action alleging improper conduct by a director of a not-for-profit corporation).
It is undisputed that the NAC is a non-profit organization which was granted tax-exempt status by the Internal Revenue Service. The complaint alleges that James, John and Leitner used the NAC's apartments as residences as well as “to hoard the enormous volume of items they acquired in their frequent shopping sprees around the City, many of which they purchased with the [NACs] debit card and [NAC] checks.” Their use of these apartments in the NAC's building, without cost, was not authorized by the NAC's Board and deprived the NAC of at least $1.5 million in income. James allegedly used NAC funds to purchase a wide variety of personal items, took many meals in the NAC's dining room without paying, charged taxi and limousine services to the NAC, and charged the NAC for personal meals at restaurants. James also mismanaged a substantial project to restore the facade of the NAC's building, allowing the costs to skyrocket from the original estimate of $158,300 to over $709,000. To finance these excessive costs, James personally directed the use of money from the Kesselring Fund, which had been set up “to support and recognize the accomplishments of aspiring playwrights.” The Fund was not allowed to be used for the NAC's general operating and capital expenses, such as the facade restoration project.
Accepting the facts as alleged in the complaint as true, and according plaintiff the benefit of every possible favorable inference, and determining only whether the facts as alleged fit into any cognizable legal theory” (Nonnon v. City of New York, 9 NY3d 825 [2007];Leon v. Martinez, 84 N.Y.2d 83, 87–88, 614 N.Y.S.2d 972 [1994] ), the Court finds that such allegations are sufficient to support claims of breach of fiduciary duty and waste, and for injunctive relief for which the Attorney General has standing and authority to assert. Thus, dismissal of the first three causes of action for lack of standing and for failure to state a cause of action, is denied.
As to dismissal of these claims pursuant to CPLR 3211(a)(4), a motion to dismiss based on the ground that “there is another action pending between the same parties for the same cause of action ...,' shall be granted if it is established that the action for which dismissal is sought was initiated subsequent to another already pending action and that both actions share sufficient identity of parties and the causes of action asserted” (Murphy v. 317–319 Second Realty LLC, 95 AD3d 443, 445–446, 944 N.Y.S.2d 42 [1st Dept 2012] (emphasis added)). James need not establish a complete identity of the parties, as substantial identity of parties is all that is necessary to invoke CPLR 3211(a)(4) ( see AIG Financial Products Corp. v. Penncara Energy, LLC, 83 AD3d 495, 922 N.Y.S.2d 288 [1st Dept 2011] ).
Here, there is only one party in common, i.e., James, in the James Action and in this action. The Attorney General herein is not a party in the James Action, and the remaining parties in the James Action, including, but not limited to the NAC and Diane Bernhard, are not parties in this action. Thus, there is no substantial identity of the parties and the Attorney General did not “step into the shoes” of the NAC.
The Court notes that the first and second causes of action for breach of fiduciary duty, and for an accounting and restitution, respectively, are based, in part, on allegations which were asserted in the James Action against him as well as allegations arising from James's use of personal taxis and limousines, and of the NAC dining room. However, the NAC has agreed to stay its counterclaims in order to permit this action to proceed.
Further, the unique relief sought by the Attorney General herein in the third and fifth causes of action cannot be adjudicated in the James Action, as they are brought under the EPTL and Executive Law which grant the Attorney General exclusive rights thereunder. The third and fifth causes of action also seek to preclude James from serving as an officer in any New York based charitable organization, relief which cannot be obtained in, or rendered moot by, the James Action. Thus, it cannot be said that the causes of action in both proceedings are substantially identical. As James failed to establish a substantial identity of parties and substantial identity of causes of action, dismissal pursuant to CPLR 3211(a)(4) is also denied.
Fourth Cause of Action
Pursuant to CPLR 3211(a)(1), a party may move for judgment dismissing one or more causes of action asserted against him on the ground that “a defense is founded upon documentary evidence.” A motion to dismiss on the basis of a defense founded upon documentary evidence may be granted “only where the documentary evidence utterly refutes [the complaint's] factual allegations, conclusively establishing a defense as a matter of law” (DKR Soundshore Oasis Holding Fund Ltd. v. Merrill Lynch Intern., 80 AD3d 448, 914 N.Y.S.2d 145 [1st Dept 2011] citing Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858 [2002] ).
To be considered “documentary,” evidence must be unambiguous and of undisputed authenticity (Fontanetta v. Doe, 73 AD3d 78, 898 N.Y.S.2d 569 [2d Dept 2010] citing Siegel, Practice Commentaries, McKinney's Cons.Laws of NY, Book 7B, CPLR C3211:10, at 21–22; Philips South Beach, LLC v. ZC Specialty Ins. Co., 55 AD3d 493, 867 N.Y.S.2d 386 [1st Dept 2008] (documentary evidence “apparently aims at paper whose content is essentially undeniable and which assuming the verity of its contents and the validity of its execution will itself support the ground on which the motion is based”)).
Here, the documents on which James relies to dismiss the claim concerning the use of the Kesselring Fund for the facade project fail to conclusively establish his defense to the fourth cause of action. James's affidavit attempting to explain the history behind the facade project and that his actions regarding this Fund were authorized by the Board and done in good faith cannot support dismissal since affidavits do not qualify as “documentary evidence” for purposes of this rule ( see Williamson, Picket, Gross v. Hirschfeld, 92 A.D.2d 289, 290 [1st Dept 1983] [stating that affidavits do not qualify as “documentary evidence” for purposes of this rule]; Realty Investors v. Bhaidaswala, 254 A.D.2d 603, 679 N.Y.S.2d 179 [3d Dept 1988] [rejecting use of reply affidavit to support a motion to dismiss based on documentary evidence]; Kearins v. Gruberg, McKay & Stone, 2 Misc.3d 1001, 2004 WL 316521 [Supreme Court Bronx County 2004] [affidavits and depositions cannot be the basis for this motion] ). Further, while the numerous minutes of the Board meetings in 2005, 2006, 2007, 2008, and 2009 may, under First Department caselaw, constitute documentary evidence for purposes of CPLR 3211(a)(1) ( see Buttitta v. Greenwich House Co-op. Apartments, Inc., 11 AD3d 250, 783 N.Y.S.2d 26 [1st Dept 2004] ), the minutes submitted are insufficient concerning the manner in which the decision to use the Kesselring Fund for the facade project was made. The meeting minutes show that the facade project was discussed, as well as the need to finance this project. The meeting minutes also make mention, in very few instances, of the Kesselring Fund, and report that “The President pointed out that there was $855,772.00
in the Kesselring account.” (Exhibit U) However, in only one instance, the minutes expressly reflect that “The Club had borrowed from the Kesselring Fund to complete the summer facade restoration which everyone agreed was a desirable capital improvement.” The minutes do not mention who, and how it was agreed upon to borrow from the Fund; the minutes do not mention that a vote was ever taken; the minutes also do not discuss the scope or terms of the Kesselring Fund, and whether the Board agreed to borrow the monies from the Fund with knowledge of the terms of the Fund.
See also Exhibit V, December 29, 2009 minutes regarding the amount in the Kesselring account.
Further, the “Summary of Internal Investigation” by Riopelle, which does not constitute documentary evidence, is insufficient, as he merely states that “it appears that the Board had some notice of the borrowing and approved it.” (Page 9). (Emphasis added).
And, even if the memorandum from Daniel Schiffman constituted documentary evidence to support James's claim that the monies borrowed from this Fund for the facade project were paid back, there is no documentary evidence establishing, as a matter of law, that the use of the Fund in this manner was ever proper. Pursuant to CPLR 3211(a)(1), dismissal may be “granted only where the documentary evidence [tendered by defendant] utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law” (Gomez–Jimenez v. New York Law School, 103 AD3d 13, 956 N.Y.S.2d 54 [1st Dept 2012] citing Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 [2002] ), and the Attorney General alleges that James caused the restricted Funds to be applied in a manner inconsistent with the Fund's purpose. Moreover, the Attorney General seeks a judgment directing that James “account for his conduct with respect to the Kesselring Fund” and the submissions do not establish his nonliability as to the use of the Funds, at this juncture.
Further, the minutes fail to establish, as a matter of law, that the use of the Kesselring Fund to finance the facade project was protected under the business judgment rule. Pursuant to this rule, “absent a showing of discrimination, self-dealing or misconduct by board members, corporate directors are presumed to be acting in good faith” and judicial inquiry into the board's actions will be prohibited (Board of Managers of 25 Charles Street Condominium v. Seligson, 85 AD3d 515, 925 N.Y.S.2d 450 [1st Dept 2011] citing Jones v. Surrey Coop. Apts., 263 A.D.2d 33, 36, 700 N.Y.S.2d 118 [1999] ). The complaint clearly alleges self-dealing and misconduct on the part of James in regard to the use of this Fund.
Therefore, these minutes do not establish James's defense as a matter of law to the claims of his misuse of the Fund to finance the facade project in order to support dismissal under CPLR 3211(a)(1).
Conclusion
Based on the foregoing, it is hereby
ORDERED that defendant's motion to dismiss the complaint pursuant to CPLR 3211 is denied; and it is further
ORDERED that defendant shall serve a copy of this order with notice of entry upon plaintiff within 20 days of entry; and it is further
ORDERED that based on the representation of counsel for the National Arts Club in the action entitled James, et al. v. The National Arts Club, et al., Index No. 109945/2011, the counterclaims in said action are stayed; and it is further
ORDERED that defendant shall serve and file his answer within 20 days of entry of this order; and it is further
ORDERED that the parties appear for a preliminary conference on May 14, 2013, 2:15 p.m.
This constitutes the decision and order of the Court.
Dated: April 3, 2013 ____
Hon. Carol Robinson Edmead, J.S.C.
Based on the foregoing, it is hereby
ORDERED that defendant's motion to dismiss the complaint pursuant to CPLR 3211 is denied; and it is further
ORDERED that defendant shall serve a copy of this order with notice of entry upon plaintiff within 20 days of entry; and it is further
ORDERED that based on the representation of counsel for the National Arts Club in the action entitled James, et al. v. The National Arts Club, et al., Index No. 109945/2011, the counterclaims in said action are stayed; and it is further
ORDERED that defendant shall serve and file his answer within 20 days of entry of this order; and it is further
ORDERED that the parties appear for a preliminary conference on May 14, 2013, 2:15 p.m.
This constitutes the decision and order of the Court.