First Department dismisses 626(c) claim in split decision.

In Goldstein v Bass, 2016 NY Slip Op 03060 (First Dept., April 21, 2016), in a split decision, the First Department  affirmed the lower court’s decision and dismissed the Plaintiff’s derivative action.  The Plaintiff failed to make a demand on the Board pursuant to BCL § 626(c), arguing in the complaint that doing so would be futile. However, on appeal, Plaintiff argued that the demand requirement had been fulfilled.

The case involved the sale of cooperative units being sold at below market rates.   In 1995, the co-op obtained more than 300 units after a failed conversion.  The board approved the sale of 71 units at below market rates and in addition, agreed to pay above market rates to a managing agent for a period of ten years.

The lower court dismissed the complaint on the grounds that the Plaintiff failed to comply with BCL 626(c) and failed to plead demand futility.  Under BCL 626(c), “the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort”.  The Court citing Marx v Akers, 88 NY2d 189, 66 N.E.2d 103, 644 N.Y.S.2d 121, stated the Plaintiff must plead with “particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgement in approving the transaction” (internal citations omitted).

Here,  the Plaintiff failed to establish any of the elements that would satisfy demand futility.  The complaint failed to specify that any of the directors were interested in the direction; that the directors failed to apply any due diligence and failed to inform themselves about the transaction or that the directors were acting in bad faith or self-dealing with respect and therefore violating the business judgment rule.

The dissent had some interesting points.  First it agreed with the majority that the the Plaintiff failed to make a demand on the board and the various communication indicating that such demand had been made was not sufficient.  Secondly, while the lower court did not consider the other causes of action, the dissent also agreed that the cause of action for aiding and abetting breach of fiduciary duty and the cause of action and unjust enrichment would have been dismissed against the Leifer defendant.  The Plaintiff had failed to plead with particularity that Lefier had actual knowledge as opposed to constructive knowledge for any breaches of fiduciary duty.

However, the dissent disagreed with the majority in that making a demand would have been futile (agreeing wth the Plaintiff’s original position in the complaint).  Contrary to the majority’s position, the dissent was persuaded that it would have been futile because; (1) board approved the sale of 43 units at lower market rates to defendants, Leifer; 27 units were sold to Monarch that also happened to be a principal of a managing agency thereby perpetuating a potential conflict of interest; and finally, the board also approved a sale of one unit to a board member, which makes at least one member an interested member.  In addition, the board paid an above market rate of $288,000 a year in a ten year non-cancellable contract to a managing agent which would make a justified cause of action for corporate waste as well.  Considering the totality of the circumstances, the dissent agreed that it would have been futile to make a demand on the board.

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Royal Bank of Canada prevails against Balanced Return Fund.

In Balanced Return Fund Ltd. v Royal Bank of Can., 2016 N.Y. Slip Op. 02928 (First Dept., April 19th, 2016), the First Appellate Division affirmed the lower court’s order granting summary judgment to Royal Bank of Canada (“RBC”), thereby dismissing Balanced Fund’s claims for breach of fiduciary duty, fraud, aiding and abetting breach of fiduciary duty and aiding and abetting fraud.

The Court held that there was no fiduciary relationship between the parties.  The relationship was more of a debtor-creditor relationship as RBC was merely a depository bank for investors in the transaction.  The Court emphasized that the fiduciary relationship must exist at the onset of the transaction and “not as a result of it”.

The fraud clam was also dismissed as RBC lacked a duty to disclose the “overvaluation and illiquidity of investment assets”.  In any case, RBC was not directly transacting with the plaintiff and again, had no fiduciary relationship with the plaintiff.

Finally, the aiding and abetting claim was dismissed as the plaintiff failed to establish the elements of the cause of action, namely, substantial assistance and actual knowledge.  Here, the plaintiff failed to establish that RBC “knew it was structuring the transaction to plaintiff’s detriment in order to benefit the non-party primary wrongdoer”.  Furthermore, the Court noted that inaction was not sufficient to establish such a claim as it would not be considered as actual knowledge.

Breach of fiduciary duty complaint against Archstone dismissed.

In Cambridge Capital Real Estate Invs., LLC v Archstone Enter. LP, 2016 NY Slip Op 02017 (1st Dept., 2016), the First Department reversed the lower court and dismissed the complaint filed in its entirety.

The plaintiff invested $20 million in Archstone Multifamily  JV LP (the “Fund”) for 1% interest.  Archstone Multifamily GP, LLC is a general partner of the fund.  The Fund acquired Archstone Enterprise, LP which then controlled the assets of Archstone-Smith Real Estate Investment Trust, a $23.7 billion REIT.  As part of the deal, Lehman Brothers was a sponsor and provided financing for the acquisition in the amount of $3 billion in secured financing, which amounted to 47% of the total financing.  Bank of America provided 28% and Barclays provided the balance at 25%.

In 2009, the sponsors provided an additional $485 million in funding to Archstone and later in the year, the original limited partnership agreement was amended. The following year, sponsors exchanged $5.2 billion in debt for preferred shares in Archstone.  This resulted in a bifurcation of two share classes: (1) preferred interested held by the sponsors and (2) common interest held by the Fund itself.

In 2012, Lehman bought out the other sponsor’s shares in two separate transactions: $1.33 billion in January and the balance in June for $1.65 billion.  Lehman then sold its assets to  Equity Residential and AvalonBay Communities, Inc. via a asset purchase agreement for $2.7 billion in cash, $3.8 billion in stock, and the assumption of $9.5 billion in debt.  The transactions closed on February 27th, 2013.

In November 2012, plaintiff became aware of Lehman’s transaction.   On December 2012, Plaintiff filed a complaint alleging “breach of the limited partnership agreement, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty as against the fund’s general partner; aiding and abetting breach of fiduciary duty as against the other defendants; and fraud and conversion as against all defendants.”

The lower court dismissed the breach of contract action as time barred.  Pursuant to Section 6.01 (e) and (g) of the amended limited partnership agreement, there is no requirement that there be a delivery of written notice to all limited partners.  The provision only requires that a “major decision” be approved by a “Requisite Interest of the Limited Partners”, which pursuant to the agreement, applies to limited partners holding more than 50% of the total percentage interest   Furthermore, consent was not required as the transaction had been approved by 99% of all the partnership interests and no partner responds within ten days.

The Court also reversed the lower court’s and dismissed the cause of action relating to breach of fiduciary duty against the general partner of the Fund.  IN applying Delaware law, the court examined the application of the heightened “entire fairness” standard, which focuses on two elements: (1) fair dealing and (2) fair price quoting In re Crimson Exploration Inc. Stockholder Litig. , 2014 WL 5449419, *9, 2014 Del Ch LEXIS 213, *30 [Del Ch 2014]).

Here, the Plaintiff failed to demonstrate that it did not “receive the substantial equivalent in value of what [it] had before”.  Furthermore, the facts indicate that the GP attained $16 billion in value, which was the current value of Archstone at the time of the transaction.  In addition, the Plaintiff conceded it “represented a premium of approximately 15% over the implied purchase price of Lehman’s combined acquisitions of the interests of the other [s]ponsor [b]anks’ interests earlier in 2012.”  Plaintiff merely asserted a conclusory statement that the transaction was “unfair” without any detail.

Since there was an express contract, the Court affirmed the dismissal for the cause of action relating to the breach of the implied covenant of good faith and fair dealing.

Thus, upon examining the transaction, the Court held that there was no breach of fiduciary duty and dismissed the Plaintiff’s complaint in its entirety.