| Deblinger v Sani-Pine Prods. Co., Inc. |
| 2013 NY Slip Op 03963 [107 AD3d 659] |
| June 5, 2013 |
| Appellate Division, Second Department |
| Jay L. Deblinger, Individually and on Behalf of Himselfand All Other Shareholders of Sani-Pine Products Co., Inc. and Another, SimilarlySituated, Appellant-Respondent, v Sani-Pine Products Co., Inc., et al.,Defendants, and H. Cecile Deblinger, Also Known as Helen Cecile Deblinger,Respondent-Appellant. |
—[*1] Forchelli, Curto, Deegan, Schwartz, Mineo & Terrana, LLP, Uniondale, N.Y.(Danielle B. Gatto of counsel), for respondent-appellant.
In a shareholders' derivative action, inter alia, to recover damages for breach offiduciary duty, the plaintiff appeals from so much of an order of the Supreme Court,Nassau County (Bucaria, J.), entered April 13, 2012, as granted those branches of themotion of the defendant H. Cecile Deblinger, also known as Helen Cecile Deblinger,which were pursuant to CPLR 3211 (a) to dismiss so much of the complaint as sought torecover damages for breach of fiduciary duty based on allegations that she delayeddistribution of corporate assets, commenced unnecessary legal proceedings, and delayedthe sale of stock owned by the defendant Sani-Pine Products Co., Inc., and the defendantH. Cecile Deblinger, also known as Helen Cecile Deblinger, cross-appeals from so muchof the same order as denied that branch of her motion which was pursuant to CPLR 3211(a) to dismiss so much of the complaint as sought to recover damages for breach offiduciary duty based on allegations that she paid herself excessive compensation.
Ordered that the order is affirmed, without costs or disbursements.
The plaintiff, Jay L. Deblinger, is one of three shareholders in the corporationsSani-Pine Products Co., Inc. (hereinafter Sani-Pine), and Leemar Leasing Corp.(hereinafter together the corporations). The three shareholders were also the sole officersand directors of the corporations. The plaintiff commenced the instant shareholders'derivative action against the corporations and one of the shareholder-directors, thedefendant H. Cecile Deblinger, also known as Helen Cecile Deblinger (hereinafter CecileDeblinger), alleging, inter alia, that Cecile Deblinger breached her fiduciary duty to theplaintiff and the other shareholders similarly situated by delaying distribution ofcorporate assets, commencing unnecessary legal proceedings to dissolve thecorporations, delaying the sale of stock owned by Sani-Pine, and paying herselfexcessive compensation from the corporations during a two-year period in which theyhad "no active on-going business to conduct."
Cecile Deblinger moved pursuant to section 3211 (a) to dismiss the complaint. TheSupreme [*2]Court determined that the plaintiff failed tosufficiently state causes of action alleging breach of fiduciary duty based on allegationsthat Cecile Deblinger delayed distribution of corporate assets, commenced unnecessarylegal proceedings, and delayed the sale of stock owned by Sani-Pine. The Supreme Courtheld, however, that the complaint sufficiently stated causes of action alleging breach offiduciary duty based on allegations that Cecile Deblinger paid herself excessivecompensation. The plaintiff appeals and Cecile Deblinger cross-appeals.
"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, 83AD3d 804, 808 [2011]; seeArmentano v Paraco Gas Corp., 90 AD3d 683, 684-685 [2011]; Chiu v Man Choi Chiu, 71AD3d 621, 623 [2010]). "The elements of a cause of action to recover damages forbreach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconductby 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 Kenneth M. Kamler, M.D.,LLC, 74 AD3d 1167 [2010]; Kurtzman v Bergstol, 40 AD3d 588, 590 [2007]).Members of a board of directors of a corporation "owe a fiduciary responsibility to theshareholders in general and to individual shareholders in particular to treat allshareholders fairly and evenly" (Schwartz v Marien, 37 NY2d 487, 491 [1975];see Armentano v Paraco Gas Corp., 90 AD3d at 684-685).
The business judgment rule "bars judicial inquiry into actions of corporate directorstaken in good faith and in the exercise of honest judgment in the lawful and legitimatefurtherance of corporate purposes" (Auerbach v Bennett, 47 NY2d 619, 629[1979]; see Consumers Unionof U.S., Inc. v State of New York, 5 NY3d 327, 372 n 20 [2005]; Matter ofLevandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 538 [1990]; North Fork Preserve, Inc. vKaplan, 68 AD3d 732, 733 [2009]; see also Quinones v Board of Mgrs. ofRegalwalk Condominium I, 242 AD2d 52, 54 [1998]).
Here, the Supreme Court properly dismissed, pursuant to CPLR 3211 (a) (7), thecauses of action which were based on allegations that Cecile Deblinger delayeddistribution of corporate assets, commenced unnecessary legal proceedings, and delayedthe sale of stock owned by Sani-Pine. According to the allegations in the complaint,Cecile Deblinger, the director responsible for dissolving the corporations pursuant to anagreement of all three shareholder-directors, treated all the shareholder-directors equallyin determining the timing and method to be employed in selling stock owned bySani-Pine and distributing corporate assets. Moreover, according to the allegations in thecomplaint, Cecile Deblinger commenced legal proceedings to judicially dissolve thecorporations only after all three shareholder-directors agreed to dissolution of the twocorporations, the real property owned by the corporations had been sold, and initialdistributions had been made to each of the shareholder-directors. Accepting the facts asalleged in the complaint as true and according the plaintiff the benefit of every possiblefavorable inference (seeNonnon v City of New York, 9 NY3d 825, 827 [2007]), these allegations fail tosufficiently state a viable cause of action alleging breach of fiduciary duty. Theallegations are insufficient to support a finding that Cecile Deblinger committed theseacts in bad faith, or without exercising her "honest judgment in the lawful and legitimatefurtherance of corporate purposes" (Auerbach v Bennett, 47 NY2d at 629;see Consumers Union of U.S., Inc. v State of New York, 5 NY3d at 372 n 20;Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d at 538; cf.Armentano v Paraco Gas Corp., 90 AD3d at 684-686; cf. also North ForkPreserve, Inc. v Kaplan, 68 AD3d at 733).
However, the Supreme Court properly declined to dismiss so much of the complaintas alleged that Cecile Deblinger paid herself excessive compensation after thecorporations no longer had "active on-going business to conduct." According to theallegations in the complaint, Cecile Deblinger continued to receive compensation fromeach of the corporations at a rate of $40,000 per year for a two-year period after the realproperty owned by the corporations had been sold and a final accounting of the corporateassets had been obtained. Accepting the facts as alleged in the complaint as true andaccording the plaintiff the benefit of every possible favorable inference, the complaintsufficiently alleged facts which "call into question" whether the compensation rate wasfair to the corporations, whether Cecile Deblinger's decision to set or continue that rate ofcompensation was made in good faith, and whether that decision was the "product ofvalid business judgment" (Marx v Akers, 88 NY2d 189, 204 [1996]).[*3]
The parties' remaining contentions are withoutmerit or need not be reached in light of our determination. Dillon, J.P., Lott, Austin andHinds-Radix, JJ., concur. [Prior Case History: 2012 NY Slip Op 31033(U).]