| Tsutsui v Barasch |
| 2009 NY Slip Op 08607 [67 AD3d 896] |
| November 17, 2009 |
| Appellate Division, Second Department |
| Arthur Tsutsui, Appellant, v Richard A. Barasch et al.,Respondents. |
—[*1] Dechert, LLP, New York, N.Y. (Andrew J. Levander and Joseph F. Donley of counsel), forrespondents.
In a shareholders' derivative action, inter alia, to recover damages for breach of fiduciaryduty, the plaintiff appeals from an order of the Supreme Court, Westchester County (Rudolph,J.), entered May 20, 2008, which granted those branches of the defendants' motion which werepursuant to Business Corporations Law § 626 (c), CPLR 3016 (b) and 3211 (a) (7) todismiss the complaint.
Ordered that the order is modified, on the law, by deleting the provisions thereof grantingthose branches of the defendants' motion which were to dismiss the second and third causes ofaction and substituting therefor a provision denying those branches of the motion; as somodified, the order is affirmed, with costs to the plaintiff, and the matter is remitted to theSupreme Court, Westchester County, to determine that branch of the defendants' motion whichsought, in the alternative, the imposition of a security bond pursuant to Business CorporationLaw § 627.
The requirement in Business Corporation Law § 626 (c) that a shareholder firstdemand action from the board of directors before commencing a derivative suit is excusedbecause of futility, inter alia, "when a complaint alleges with particularity that a majority of theboard of directors is interested in the challenged transaction" (Marx v Akers, 88 NY2d189, 200 [1996]). "Director interest may either be self-interest in the transaction at issue, or aloss of independence because a director with no direct interest in a transaction is 'controlled' by aself-interested director" (id. at 200 [citation omitted]). Contrary to the Supreme Court'sdetermination, the plaintiff alleged with sufficient particularity that a majority of the ninedirectors of the nominal defendant Universal American Financial Corporation (hereinafterUniversal) was interested in the challenged transactions. The defendant Richard A. Barasch,Universal's chairman of the board and chief executive officer, clearly was interested, as he wasaccused of receiving a direct financial benefit by personally engaging in insider trading (id.at 202; Barr v Wackman, 36 NY2d 371 [1975]). The defendant directors Bradley E.Cooper, Eric W. Leathers, and Robert A. Spass were interested by virtue of their ownership orclose affiliation with Capital Z, a business entity which was alleged to have profited through thesale of Universal stock on the basis of inside information (see Marx v Akers, 88 NY2d at202; see [*2]also Bansbach v Zinn, 1 NY3d 1, 11 [2003]). Thedefendant director Bertram Harnett, although not alleged to have engaged in any improperinsider trading, lacked independence and therefore was interested due to the substantial fees thathis small, three attorney law firm earned for services rendered to Universal, amounting to nearly$1 million over the two years prior to the filing of the complaint (see Marx v Akers, 88NY2d at 200-201; see also In re Infousa, Inc. Shareholders Litig., 953 A2d 963, 985 [Ctof Chancery, Del). Under these circumstances, demand upon the board of directors was excused.
In reviewing the sufficiency of the allegations of insider trading under CPLR 3211 (a) (7),we "give the pleading a liberal construction, accept all of the facts alleged in the pleading to betrue, and accord the plaintiff the benefit of every possible favorable inference in determiningwhether the allegations fit under any cognizable legal theory" (Zane v Minion, 63 AD3d 1151,1152 [2009]; see Leon v Martinez, 84 NY2d 83 [1994]). Additionally, as this suitinvolves allegations of a breach of fiduciary duty, the complaint is subject to the more stringentpleading requirements mandated by CPLR 3016 (b) (see DeRaffele v 210-220-230 Owners Corp., 33 AD3d 752[2006]).
A corporate officer breaches his or her fiduciary duty when he or she profits by trading onthe basis of material inside information (see Diamond v Oreamuno, 24 NY2d 494,497-498 [1969]). "[A] person who acquires special knowledge or information by virtue of aconfidential or fiduciary relationship with another is not free to exploit that knowledge orinformation for his [or her] own personal benefit but must account to his [or her] principal forany profits derived therefrom" (id. at 497). Although trading on inside information doesnot always cause a direct harm to the corporation, it is the corporation that has the higher claimto profits resulting from the use of inside information which has been entrusted to a fiduciary(id. at 498). Where a misappropriation of corporate inside information is established,equity requires the imposition of a constructive trust over any profits gained from the use of suchinformation in order to prevent an unjust enrichment (id. at 501; Restatement [Second]of Agency § 388, Comment c).
Here, the complaint alleges with the requisite particularity that the stock sales in questionwere made on the basis of inside information that Universal's quarterly earnings would steadilydecline and fail to meet expectations. The allegations are supported, inter alia, by the timing,volume, and frequency of these transactions, the positions of the transacting corporate officerswithin the company, the scrutiny and timeliness with which management monitored thecompany's financial situation, and the fact that these transactions occurred during the relevantperiod in which the company failed to meet its earnings projections. Contrary to the defendants'contention, the allegations regarding these transactions satisfied the requirements of CPLR 3016(b), since the complaint gave the defendants notice of the "incidents complained of" (Pludeman v Northern Leasing Sys., Inc.,10 NY3d 486, 491 [2008]). CPLR 3016 (b) "should not be so strictly interpreted as toprevent an otherwise valid cause of action in situations where it may be impossible to state indetail the circumstances constituting a fraud" (id. [internal quotation marks omitted]).Accordingly, the plaintiff's claims in the second and third causes of action must be permitted toproceed.
However, the allegations in the first cause of action of the complaint, concerning inaccurateand misleading corporate statements, are wholly conclusory and, in any event, pertain toopinions and predictions of future occurrences which are not actionable (see Hershfang vCiticorp, 767 F Supp 1251, 1256 [1991]; see generally Platus Corp. Pension Plan vNazareth, 271 AD2d 422 [2000]; Zanani v Savad, 217 AD2d 696 [1995]). Thus, thefirst cause of action was properly dismissed.
On remittal, the Supreme Court should determine that branch of the defendants' motionwhich sought, in the alternative, the imposition of a security bond pursuant to BusinessCorporation Law § 627 before permitting the action to proceed. Mastro, J.P., Miller,Angiolillo and Austin, JJ., concur.