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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