| Armentano v Paraco Gas Corp. |
| 2011 NY Slip Op 09075 [90 AD3d 683] |
| December 13, 2011 |
| Appellate Division, Second Department |
| Robert Armentano, Individually and on Behalf of All OtherShareholders of Paraco Gas Corporation Similarly Situated, Appellant, v Paraco GasCorporation et al., Respondents. |
—[*1] The DeIorio Law Firm, LLP, Rye Brook, N.Y. (Howard B. Cohen of counsel), forrespondents.
In a shareholders' derivative action, inter alia, to recover damages for breach of fiduciary dutyand unjust enrichment, the plaintiff appeals from an order of the Supreme Court, WestchesterCounty (Smith, J.), dated August 11, 2010, which granted the defendants' motion pursuant toCPLR 3211 (a) (7) to dismiss the complaint.
Ordered that the order is reversed, on the law, with costs, and the defendants' motionpursuant to CPLR 3211 (a) (7) to dismiss the complaint is denied.
The plaintiff, Robert Armentano, is a minority shareholder in the defendant Paraco GasCorporation (hereinafter the corporation). The plaintiff commenced the instant action against thecorporation and its officers and directors, the defendants Joseph Armentano and John Armentano(hereinafter the Armentano defendants), alleging, inter alia, that they breached their fiduciaryduty to him, and the other shareholders similarly situated, when they issued to themselves sharesof stock from the corporate treasury without a legitimate business purpose, and for the solereason of diluting the equity interest held by the plaintiff and the other shareholders. The firstcause of action, commenced derivatively on behalf of the corporation, alleged that theArmentano defendants breached their fiduciary duty and sought an order rescinding the issuanceof the treasury shares, and directing that those shares be returned to the corporate treasury. Thesecond and third causes of action, both commenced derivatively on behalf of the corporation,sought to recover from the Armentano defendants damages for unjust enrichment and breach offiduciary duty, respectively. The fourth cause of action, commenced individually by the plaintiff,sought to recover damages for breach of fiduciary duty. The Supreme Court granted thedefendants' motion pursuant to CPLR 3211 (a) (7) to dismiss the complaint. We reverse.
"A cause of action sounding in breach of fiduciary duty must be pleaded with theparticularity required by CPLR 3016 (b)" (Palmetto Partners, L.P. v AJW Qualified Partners, LLC, 83 AD3d804, 808 [2011]; see Chiu v ManChoi Chiu, 71 AD3d 621, 623 [2010]; Tsutsui v Barasch, 67 AD3d 896, 898 [2009]; DeRaffele v 210-220-230 OwnersCorp., 33 AD3d 752, 752-753 [2006]; Ozelkan v Tyree Bros. Envtl. [*2]Servs.,Inc., 29 AD3d 877, 879 [2006]; Rasmussen v A.C.T. Envtl. Servs., 292 AD2d710, 712 [2002]). "The elements of a cause of action to recover damages for breach of fiduciaryduty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3)damages directly caused by the defendant's misconduct" (Rut v Young Adult Inst., Inc., 74 AD3d 776, 777 [2010]; see Robert I. Gluck, M.D., LLC v KennethM. Kamler, M.D., LLC, 74 AD3d 1167, 1167 [2010]; Fitzpatrick House III, LLC v NeighborhoodYouth & Family Servs., 55 AD3d 664, 664 [2008]; Kurtzman v Bergstol, 40 AD3d 588, 590 [2007]). Members of aboard of directors of a corporation "owe a fiduciary responsibility to the shareholders in generaland to individual shareholders in particular to treat all shareholders fairly and evenly"(Schwartz v Marien, 37 NY2d 487, 491 [1975]; see Alpert v 28 Williams St.Corp., 63 NY2d 557, 569 [1984]; Goldberg v Goldberg, 139 AD2d 695, 696-697[1988]). As a component of this duty, "[d]irectors, being fiduciaries of the corporation, must, inissuing new stock, treat existing shareholders fairly" (Katzowitz v Sidler, 24 NY2d 512,518 [1969]; see Schwartz v Marien, 37 NY2d at 491; Goldberg v Goldberg, 139AD2d at 696-697). "[D]irectors shall not breach the obligations which they owe as trustees for allthe stockholders in connection with stock, the issue of which is within their control, (a) byincreasing their voice in the control of the corporation through the secret purchase of such stock,or (b) increasing their proportionate share in the surplus in that manner, or (c) obtaining the stockat an inadequate price" (Hammer v Werner, 239 App Div 38, 42 [1933]). "Departurefrom precisely uniform treatment . . . may be justified . . . where abona fide business purpose indicates that the best interests of the corporation would be served bysuch departure" (Schwartz v Marien, 37 NY2d at 492).
Here, affording the complaint liberal construction, accepting the facts alleged therein as true,and according the plaintiff the benefit of every possible favorable inference (see Leon vMartinez, 84 NY2d 83, 87-88 [1994]), the complaint sufficiently alleged that the Armentanodefendants, as directors of the corporation, breached a fiduciary duty owed to the plaintiff, andthe other shareholders similarly situated, by issuing to themselves treasury shares without alegitimate business purpose and for the sole reason of diluting the equity interest held by theplaintiff and the other shareholders (see Collins v Telcoa Intl. Corp., 283 AD2d 128[2001]; Hammer v Werner, 239 App Div 38 [1933]; cf. Schwartz v Marien, 37NY2d 487 [1975]; Goldberg v Goldberg, 139 AD2d 695 [1988]). Moreover, thecomplaint sufficiently stated a cause of action to recover damages for unjust enrichment, as italleged that the Armentano defendants were unjustly enriched by receipt of the treasury shares, atthe expense of the corporation and its shareholders, and that it is against equity and goodconscience for them to retain the treasury shares (see generally Paramount Film Distrib. Corp.v State of New York, 30 NY2d 415, 421 [1972]; AHA Sales, Inc. v Creative Bath Prods., Inc., 58 AD3d 6, 19[2008]; Cruz v McAneney, 31AD3d 54, 59 [2006]). Moreover, given the allegations of misconduct, it was improper forthe Supreme Court to rely on the business judgment rule in granting the defendants' motion todismiss pursuant to CPLR 3211 (a) (7). "The business judgment doctrine does not forecloseinquiry by the courts into the disinterested independence of members of the board of directors ofa corporation and cannot shelter individuals from responsibility for breaches of duty of care theyowe as directors" (Ench v Breslin, 241 AD2d 475, 476 [1997]; see Auerbach vBennett, 47 NY2d 619, 629 [1979]; Pugliese v Mondello, 57 AD3d 637, 639 [2008]; Shapiro v Rockville Country Club,Inc., 22 AD3d 657, 658 [2005]).
Accordingly, the Supreme Court should have denied the defendants' motion pursuant toCPLR 3211 (a) (7) to dismiss the complaint. Dillon, J.P., Angiolillo, Florio and Dickerson, JJ.,concur.