Case Summary: Petrou v. Karl Ehmer International Foods, Inc., App. Div. (Nov. 5, 1990)

Factual and Procedural Background

On September 15, 1981, the plaintiff's brother assigned 20,000 shares of stock in Karl Ehmer International Foods, Ltd., a Delaware corporation, to the plaintiff. The assignment was not recorded on the corporate books. In July 1988 the plaintiff commenced a shareholder's derivative action alleging that, between May 1981 and December 1982, the defendants conspired and willfully engaged in a plan to defraud the corporation and its shareholders and wrongfully deprived the corporation of assets, causing its insolvency. The complaint also alleged that, from May 1, 1981 through August 24, 1982, the defendants wrongfully converted to their own use substantial sums believed to exceed $121,000, and that these wrongful acts were concealed until May 1988.

The defendant Jerome E. Goldman moved to dismiss the complaint as to him on the grounds that the claims were time-barred and failed to state a cause of action, asserting that he was never a director of the corporation. He later added a third basis for dismissal: that the plaintiff lacked standing to bring a derivative action because he was not a shareholder of record at the time of the alleged wrongful acts. The Appellate Division's disposition was: "Ordered that the order is affirmed, with costs."

Legal Issues Presented

Whether the plaintiff's derivative claims were time-barred or otherwise failed to state a cause of action such that dismissal was proper.
Whether the plaintiff had standing to bring a derivative action despite the assignment of shares not having been recorded on the corporate books (i.e., whether an equitable owner qualifies as a shareholder for standing purposes under Delaware law).
Whether there was a factual dispute as to whether Jerome E. Goldman was a director of the corporation, affecting the propriety of dismissal.

Arguments of the Parties

Appellant (Jerome E. Goldman)

Moved to dismiss the complaint against him as time-barred.
Argued that the complaint failed to state a cause of action, asserting that he was never a director of the subject corporation.
Later contended the plaintiff lacked standing to maintain the derivative action because the plaintiff was not a shareholder of record at the time of the alleged wrongful acts.

Respondent (Plaintiff: George Petrou)

The opinion does not contain a detailed account of the plaintiff's specific legal arguments beyond the allegations set forth in the complaint and the factual assertions summarized above.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Harff v. Kerkorian, 324 A.2d 215, 216 (Del.) (modified on other grounds, 347 A.2d 133)	Establishes that, under Delaware law, an equitable owner of shares is considered to have shareholder status within the meaning of 8 Del. C. § 327.	The court relied on this principle to treat the plaintiff as a shareholder for standing purposes despite the assignment not being recorded on the corporate books.
Central Trust Co. v. Goldman, 70 A.D.2d 767	States that when a complaint asserts both fraud and conversion, the longer statute of limitations for fraud (CPLR 213) applies if the complaint sets forth at least a semblance of the elements of fraud at the pleading stage.	The court applied this rule to conclude that the longer fraud limitations period governs so long as the complaint sufficiently alleges fraud elements at that stage.
Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321	Addresses the two-year discovery rule (CPLR 213; 203[f]) and principles regarding diligence in uncovering fraud.	The court noted that because there was no evidence the plaintiff lacked due diligence in uncovering the alleged fraud, dismissal based on the statute of limitations was not appropriate under the discovery rule.

Court's Reasoning and Analysis

The court examined three interrelated legal strands from the record and governing law:

Shareholder standing under Delaware law: The court relied on Delaware authority (Harff v. Kerkorian) construing 8 Delaware Code Annotated § 327 to hold that an equitable owner of shares is to be treated as a shareholder for purposes of standing. Given the unrecorded assignment of 20,000 shares to the plaintiff, this principle supported treating the plaintiff as a shareholder notwithstanding the lack of book entry.
Statute of limitations and the applicable period: The court explained that when causes of action sound in both fraud and conversion, the longer limitations period applicable to fraud (CPLR 213) applies at the pleading stage provided the complaint sets forth at least a semblance of the elements of fraud. The court referenced Central Trust Co. v. Goldman for this rule and determined that the complaint in this case met the requisite pleading threshold for fraud at that stage, so the longer period governed.
Discovery rule and diligence: The court noted that the two-year discovery rule (CPLR 213; 203[f]) may extend the limitations period where the plaintiff exercises due diligence in uncovering the fraud. Citing Erbe v. Lincoln Rochester Trust Co., the court observed that there was no evidence the plaintiff was guilty of a lack of due diligence. On that basis, dismissal on statute-of-limitations grounds was properly denied.

In addition, the court found that the record contained an issue of fact as to whether Goldman was a director of the corporation. Because that factual dispute was present, dismissal on the ground that he was not a director was not appropriate at that stage.

Holding and Implications

Holding: The order is affirmed, with costs.

Direct effect: The appellate court affirmed the lower court's denial of defendant Goldman's motion to dismiss. The court concluded dismissal was not appropriate on statute-of-limitations grounds given the pleading of fraud and no showing of plaintiff's lack of diligence, and there remained a factual dispute concerning Goldman's status as a director.

Broader implications: The opinion does not announce a new rule of law beyond applying existing Delaware and New York authority (as cited) to the facts before it. The court's decision leaves the underlying derivative claims to proceed rather than disposing of them on the motion to dismiss.

Concurring: Brown, J.P., Lawrence, Kunzeman and Kooper, JJ., concurred.

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GEORGE PETROU, Indi v. dually and as a Shareholder of KARL EHMER INTERNATIONAL FOODS, INC., Respondent,

Ordered that the order is affirmed, with costs.

On September 15, 1981, the plaintiff's brother assigned 20,000 shares of stock in Karl Ehmer International Foods, Ltd., a Delaware corporation, to the plaintiff. It is undisputed that the assignment was not recorded on the corporate books.

In July 1988 the plaintiff commenced a shareholder's derivative action alleging that, between May 1981 and December 1982, the defendants conspired and willfully embarked upon a plan designed to defraud and deceive the corporation and its shareholders, and wrongfully deprived it of its assets, thereby causing its insolvency. The complaint further alleged that, from May 1, 1981 through August 24, 1982, the defendants wrongfully converted to their own use substantial sums of money believed to be in excess of $121,000, and concealed their wrongful acts until May 1988.

The defendant Goldman moved to dismiss the complaint insofar as it is asserted against him as time barred and for failure to state a cause of action, alleging that he, Goldman, was never a director of the subject corporation. The defendant Goldman subsequently added a third basis for dismissal, namely, that the plaintiff lacked standing to commence the derivative action inasmuch as he was not a shareholder of record of the corporation at the time of the alleged wrongful acts.

Under Delaware law, an equitable owner of shares in a corporation is considered to have shareholder status within the meaning of 8 Delaware Code Annotated § 327 (see, Harff v. Kerkorian, 324 A.2d 215, 216, mod on other grounds 347 A.2d 133 [Del]).

When a plaintiff asserts causes of action sounding in both fraud and conversion, the longer Statute of Limitations period for fraud (see, CPLR 213) will apply, provided that the complaint sets forth at least a semblance of the elements of fraud at that stage (see, Central Trust Co. v. Goldman, 70 A.D.2d 767). The two-year discovery rule (see, CPLR 213; 203 [f]) may apply, provided that the plaintiff uses diligent efforts to uncover the fraud. Inasmuch as there was no evidence that the plaintiff was guilty of a lack of due diligence, dismissal of the complaint was properly denied (see, Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321).

Moreover, the record presents an issue of fact as to Goldman's status as a director of the corporation. Brown, J.P., Lawrence, Kunzeman and Kooper, JJ., concur.

PETROU v. KARL EHMER INT'L FOODS, INC