| Owen v Hamilton |
| 2007 NY Slip Op 07762 [44 AD3d 452] |
| October 16, 2007 |
| Appellate Division, First Department |
| James Owen, Individually and as a Shareholder of StarpointPublishing Corp., Respondent, v Lindsay Hamilton et al.,Appellants. |
—[*1] Tofel & Partners, LLP, New York City (Robert L. Tofel of counsel), forrespondent.
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered September 12,2005, which granted plaintiff's motion for summary judgment on the issue of liability on hiscauses of action for waste of corporate opportunity (second cause of action) and breach offiduciary duty (third cause of action), and denied defendants' cross motion for summary judgmentdismissing the complaint, unanimously modified, on the law, the motion denied, and thoseaspects of defendants' cross motion seeking summary judgment dismissing the second and thirdcauses of action and the claim for punitive damages granted, and otherwise affirmed, with costsin favor of defendants payable by plaintiff.
Defendant Starpoint Publishing Corp. (Starpoint) publishes "Winning Points," a periodicalthat provides information for sports handicappers. During most of the 1990s, plaintiff served aspresident of Starpoint and held a substantial portion of its shares (approximately 40%). In 1999,plaintiff was removed as president and replaced by defendant Lindsay Hamilton, who was alsoone of Starpoint's four directors. Around the time plaintiff was replaced, Mr. Hamilton purchaseda portion of the shares plaintiff owned. As a result, Mr. Hamilton owned 51% of the shares,defendant Edward Bomze, another director, owned 30% and plaintiff owned the remaining 19%.Simultaneously with the sale, plaintiff entered into an employment agreement with Starpointpursuant to which plaintiff received, among other things, a yearly salary through June 2007. Atsome point in 1999, plaintiff entered into another agreement, a shareholders' agreement, pursuantto which he agreed not to "interfere in any manner with the management, operation and controlof [Starpoint]," and to vote his shares "as directed by [Mr.] Hamilton."
In 2001 Richard Bomze, Edward Bomze's brother, decided to sell a publication that heowned called "Sports Reporter." Like Winning Points, Sports Reporter provided information tosports handicappers. Richard Bomze informed his brother's wife, Gail Bomze, a Starpointdirector, that Sports Reporter was for sale. Edward and Gail Bomze subsequently relayed thatinformation to Mr. Hamilton. Mr. Hamilton proposed to Starpoint's board of directors that he andhis wife, Linda, another director of Starpoint, purchase Sports Reporter and move its operationsto Starpoint's office. By operating both Starpoint and Sports Reporter out of the same [*2]office, the entities could share expenses and thereby reduceStarpoint's operating costs. Each member of the board—Mr. Hamilton, Mrs. Hamilton,Edward Bomze and Gail Bomze—approved of the Hamiltons' purchase of Sports Reporter,reasoning that the reduction in expenses would be beneficial for Starpoint, which was in aprecarious financial state. The Hamiltons subsequently purchased Sports Reporter for $450,000.Plaintiff did not learn of the transaction until after it was consummated.
Plaintiff commenced this action against Mr. Hamilton, Edward Bomze, Starpoint and SportsReporter, asserting causes of action for unjust enrichment, waste of corporate opportunity andbreach of fiduciary duty. Plaintiff moved for summary judgment on the issue of liability on hiscauses of action for waste of corporate opportunity and breach of fiduciary duty. Defendantscross-moved for summary judgment dismissing the complaint. Supreme Court granted themotion and denied the cross motion.
Defendants assert two principal grounds for reversal: Starpoint itself was unable to purchaseSports Reporter, and Starpoint's board of directors approved of the transaction, i.e., consented tothe Hamiltons' purchase of Sports Reporter. With respect to the latter, defendants also assert thatthe board's determination is insulated from judicial review by the business judgment rule.
The first argument can be disposed of with dispatch. While some authority supportsdefendants' contention that a director cannot be liable for usurping a corporate opportunity wherethe corporation would have been unable to avail itself of the opportunity (see Moser v Devine Real Estate, Inc.[Florida], 42 AD3d 731 [3d Dept 2007], citing DiPace v Figueroa, 223 AD2d949 [3d Dept 1996] [transaction could not be considered corporate opportunity where sellersunequivocally averred that they would not have sold assets at issue to corporation]; seealso Haig, Commercial Litigation in New York State Courts § 80.7 [4A West's NYPrac Series 2d ed]), we have consistently held to the contrary. In Foley v D'Agostino (21AD2d 60 [1964]) we stated the following principle, which we have repeatedly affirmed: "the factthat the competing business undertaken presented itself in the form of a corporate opportunitywhich the corporation was financially unable or for other reasons unwilling to undertake shouldbe no excuse for an officer undertaking it individually. Despite the corporation's inability orrefusal to act it is entitled to the officer's undivided loyalty" (id. at 68 [internal quotationmarks omitted]; see Bankers Trust Co. v Bernstein, 169 AD2d 400 [1991]; Alexander& Alexander of N.Y. v Fritzen, 147 AD2d 241 [1989]; Robert N. Brown Assoc. vFileppo, 38 AD2d 515 [1971]). Accordingly, neither Richard Bomze's unwillingness to sellSports Reporter to Starpoint nor Starpoint's alleged financial inability to avail itself of theopportunity had it been offered is a valid defense to plaintiff's action.
Defendants' second argument—that Starpoint's board of directors approved of thetransaction—warrants more attention. A director may avoid liability for usurping acorporate opportunity where the board of directors consents to the director's conduct (seeAckerman v 305 E. 40th Owners Corp., 189 AD2d 665 [1993]; Commodities ResearchUnit [Holdings] v Chemical Week Assoc., 174 AD2d 476 [1991]; Bankers TrustCo., supra; Alexander & Alexander of N.Y., supra; Robert N.Brown Assoc., supra; Haig, Commercial Litigation in New York State Courts§ 80:8 [4A West's NY Prac Series][*3]; see also MillerMfg. Co. v Zeiler, 72 AD2d 338 [1980], lv denied 50 NY2d 894 [1980]).[FN1]
Here, prior to the consummation of the transaction, each member of Starpoint's board ofdirectors—Mr. Hamilton, Mrs. Hamilton, Edward Bomze and Gail Bomze—wasaware of and approved of the sale of Sports Reporter to the Hamiltons. To be sure, Edward andGail Bomze mentioned to Mr. Hamilton that Richard Bomze was interested in selling SportsReporter, and they did so because they wanted Mr. Hamilton to purchase Sports Reporter. Eachof the directors knew, before the Hamiltons purchased Sports Reporter, that Starpoint was inserious financial trouble; Starpoint was losing money annually, facing increased competition andlacked the resources to improve its product, Winning Points.
Of course, neither of the Hamiltons could cast a vote in favor of the transaction. Both ofthese directors "receive[d] a direct financial benefit from the transaction which is different fromthe benefit to shareholders generally" (Marx v Akers, 88 NY2d 189, 202 [1996]). Theywere, therefore, interested directors who were disqualified from consenting to the transaction.Neither Edward nor Gail Bomze, however, received a direct financial benefit from the sale ofSports Reporter to the Hamiltons that was different from the benefits to the shareholdersgenerally (id.; Shapiro vRockville Country Club, Inc., 22 AD3d 657, 659 [2005], lv denied 6 NY3d 705[2006]). Pursuant to the 1999 shareholders' agreement, Edward received a $66,000 per yearsalary. This additional interest of Edward in Starpoint's success did not render him an interesteddirector in the transaction. While plaintiff asserts that Edward and Gail were "conflicted,"plaintiff does not support this conclusory assertion with any evidence that they received a directfinancial benefit from the sale which was different from the benefits to the shareholdersgenerally. Moreover, there is no evidence that Edward and Gail Bomze were controlled ordominated by the interested directors (see Park Riv. Owners Corp. v Bangser Klein Rocca &Blum, 269 AD2d 313 [2000]; 3 Fletcher, Cyclopedia of Corporations § 941 [2002]).Thus, Edward and Gail Bomze were not interested directors and their consent to the transactionis binding on the corporation (see Business Corporation Law § 713 [a] [1];Rapoport v Schneider, 29 NY2d 396, 402 [1972]).
The business judgment rule "bars judicial inquiry into actions of corporate directors taken ingood faith and in the exercise of honest judgment in the lawful and legitimate [*4]furtherance of corporate purposes" (Auerbach v Bennett, 47NY2d 619, 629 [1979]).[FN2]Here, Edward and Gail Bomze did not "passively rubber-stamp the decision[ ]" of the Hamiltonsto purchase Sports Reporter (Ault v Soutter, 204 AD2d 131 [1994], quoting Barr vWackman, 36 NY2d 371, 381 [1975]). Rather, they considered Starpoint's financialcondition and the potential benefits to it of an expenses-sharing relationship with SportsReporter. Notably, it was Edward and Gail Bomze, the disinterested directors, who approachedMr. Hamilton with the idea for him to purchase Sports Reporter because they believed thattransaction could help Starpoint avoid financial collapse. Thus, the decision of Edward and GailBomze to consent to the Hamiltons' purchase of Sports Reporter was taken in furtherance ofStarpoint's interests, was within the scope of the board's authority and was taken in good faith(see Barbour v Knecht, 296 AD2d 218, 224 [2002]; see also Auerbach, 47 NY2dat 629).
The business judgment rule, however, does not foreclose judicial inquiry into the decision ofa board of directors where the board acted in bad faith, e.g., deliberately singled out an individualfor harmful treatment (Barbour v Knecht, 296 AD2d at 224; Smukler v 12 LoftsRealty, 178 AD2d 125, 125 [1991]), or the transaction is tainted by fraud (see 10 E. 70thSt. v Gimbel, 309 AD2d 644 [2003]; Haig, Commercial Litigation in New York State Courts§ 75:36 [4A West's NY Prac Series][*5]). However,plaintiff presented no evidence raising a triable issue of fact in this regard. Thus, Supreme Courtshould have granted that aspect of defendants' cross motion seeking summary judgmentdismissing plaintiff's cause of action for waste of corporate opportunity.[FN3]
For similar reasons, Supreme Court should have granted that aspect of the cross motionseeking summary judgment dismissing the cause of action for breach of fiduciary duty.Defendants made a prima facie showing that the disinterested directors acted within the scope oftheir authority and in good faith, and plaintiff failed to raise a triable issue of fact (seeKimeldorf v First Union Real Estate Equity & Mtge. Invs., 309 AD2d 151, 156-159 [2003];Hochman v 35 Park W. Corp., 293 AD2d 650, 651-652 [2002]; Sirianni vRafaloff, 284 AD2d 447, 448 [2001]; Sherry Assoc. v Sherry-Netherland, Inc., 273AD2d 14, 14-15 [2000]).
We take no position on plaintiff's remaining cause of action, unjust enrichment, since neitherparty specifically addressed it on appeal. We note, however, that plaintiff has no claim forpunitive damages. Defendants' alleged conduct does not "demonstrat[e] a high degree of moralturpitude and wanton dishonesty . . . imply[ing] criminal indifference to civilobligations to the public" (Parker vCrown Equip. Corp., 39 AD3d 347, 348 [2007]; see Ross v Louise Wise Servs., Inc., 8 NY3d 478, 489 [2007]).Concur—Mazzarelli, J.P., Friedman, Buckley, Sweeny and McGuire, JJ.
Footnote 1: A board of directors cannotconsent to a transaction that is void, such as waste of corporate assets, use of corporate funds todischarge personal obligations, distribution of surplus earnings under guise of additional salariesto directors and officers, transfer of assets without consideration, payment of a false claim, andpayment of excessive investment fees to directors (Aronoff v Albanese, 85 AD2d 3, 4-5[1982]). Plaintiff, however, does not claim on appeal that defendants engaged in any of theseforbidden acts. Rather, plaintiff claims that defendants usurped a corporate opportunity, atransaction that can be ratified (Commodities Research, 174 AD2d at 477 ["Thecorporate opportunity doctrine provides that a corporate fiduciary may not, withoutconsent, divert and exploit for his own benefit any opportunity that should be deemed anasset of the corporation" (emphasis added)]).
Footnote 2: Contrary to plaintiff's assertion,defendants raised the business judgment rule before Supreme Court.
Footnote 3: Of course, the tension betweenthe fiduciary duties owed by the Hamiltons as directors of Starpoint and their ownership of acompetitor of Starpoint is apparent. On this appeal, however, plaintiff only presses his causes ofaction for waste of corporate opportunity and breach of fiduciary duty based on usurpation of acorporate opportunity.