Appellate Division, Second Department — Summary of Opinion

Brown v. Brown; Instrument Associates, Inc.; decision dated August 29, 1988. Appeal from Supreme Court, Nassau County (Justice Kelly).

Factual and Procedural Background

The litigation arises from disputes between the plaintiff (William L. Brown) and the defendant Leila F. Brown concerning the management and alleged misappropriation of corporate funds of Instrument Associates, Inc. The corporation was organized in 1982 by filing a certificate of incorporation. The plaintiff and Leila Brown are the only persons having an ownership interest in the corporation. The corporation was formed with the understanding that the plaintiff would act as president and Leila Brown as vice-president; although no formal election of officers was held and shares were never issued, the plaintiff thereafter conducted business in the corporation's name.

In matter No. 1 the trial court dismissed certain counterclaims asserted by Leila Brown (including a second counterclaim and portions of the first counterclaim) on the ground that she lacked standing under Business Corporation Law § 720 to pursue recovery for alleged misappropriation of corporate funds. The defendants also moved to punish the plaintiff for contempt and sought actual damages and restitution to the corporation for funds alleged to have been appropriated in violation of an earlier order (Justice Berman, July 16, 1984). An intermediate order dated December 5, 1986 was entered, and appeals were taken in two matters (No. 1 and No. 2).

The Appellate Division addressed the appealability of the intermediate order, modified the judgment on the law, affirmed the order in matter No. 2, remitted matter No. 1 to the Supreme Court for further proceedings on the derivative counterclaims and on the defendants' request for actual damages arising from alleged contempt, and awarded one bill of costs to Leila F. Brown payable by Instrument Associates, Inc.

Legal Issues Presented

Whether the defendant Leila F. Brown had the requisite standing under Business Corporation Law § 720 to recover, on behalf of the corporation, damages for alleged misappropriation of corporate funds by the plaintiff.
Whether portions of the counterclaims asserted by Leila Brown were derivative claims (brought on behalf of the corporation) or direct claims by Leila against the corporation (and therefore outside the scope of Business Corporation Law § 720).
Whether the appeal from an intermediate order (dated December 5, 1986, in matter No. 1) remained directly appealable after entry of judgment, or whether the right of direct appeal terminated with the judgment.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Matter of Aho, 39 N.Y.2d 241 (cited at 39 N.Y.2d 241, 248)	The right of direct appeal from an intermediate order terminates with the entry of final judgment (appealability principle).	Used to dismiss the direct appeal from the intermediate order in matter No. 1 and to explain that the issues raised are properly considered on appeal from the judgment (CPLR 5501[a][1]).
Bertoni v. Catucci, 117 A.D.2d 892	Permits derivative claims to be brought in the name of a shareholder/party under circumstances where the right of recovery belongs to the corporation.	Supported the court's conclusion that the defendant's claims alleging misappropriation on behalf of the corporation could be prosecuted in her name.
Conant v. Schnall, 33 A.D.2d 326	Holds that derivative claims may be prosecuted in the name of a shareholder and that joinder of the corporation as a party is not necessary in certain circumstances.	Supported the court's determination that Leila Brown could bring claims in her name on behalf of the corporation and that joinder of the corporation was not required.
Wolff v. Wolff, 67 N.Y.2d 638 (rearg. denied 67 N.Y.2d 918; mot. to amend remittitur denied 68 N.Y.2d 754)	Relates to the availability of an accounting and relief (including damages) for corporate waste or misappropriation where merits must be resolved by the trial court.	Supported the remittitur of matter No. 1 to the trial court for determination of the merits of the derivative claims seeking an accounting and damages for misappropriated corporate assets.

Court's Reasoning and Analysis

The Appellate Division undertook several discrete lines of analysis, detailed below and based solely on the language in the opinion:

Appealability: The court first addressed appellate jurisdiction. Citing Matter of Aho, it held that the right of direct appeal from the intermediate order in matter No. 1 terminated with the entry of final judgment. Consequently, the direct appeal from that intermediate order was dismissed, and the court reviewed the issues on the appeal from the judgment pursuant to CPLR 5501(a)(1).
Standing under Business Corporation Law § 720: The court concluded that the trial court erred in dismissing the first and second counterclaims to the extent they alleged that the plaintiff misappropriated corporate funds for personal benefit. The trial court had found that Leila Brown lacked standing under BCL § 720. The Appellate Division examined the corporate formation and ownership facts: the corporation was formed in 1982; the plaintiff and Leila Brown were the sole owners; the corporation was operated by the plaintiff as its president and Leila Brown as vice-president by understanding, despite no formal officer elections and no issuance of shares; and the plaintiff conducted business in the corporation's name. On these facts the Appellate Division found that Leila Brown had the requisite standing to recover damages on behalf of the corporation for alleged breaches of the plaintiff's managerial duties.
Ability to Proceed in Shareholder's Name; Joinder of the Corporation: The court relied on precedents (Bertoni; Conant) to state that although the right of recovery belongs to the corporation, claims for corporate injury may be brought in Leila Brown's name and that it was not necessary to join the corporation as a party in these circumstances.
Derivative Versus Direct Claims: The court differentiated between those counterclaims that seek relief on behalf of the corporation and those that assert personal claims by Leila Brown against the corporation. It held that the third counterclaim and portions of the first counterclaim were direct claims by Leila against the corporation (rather than derivative claims) and therefore fell outside the scope of Business Corporation Law § 720; those claims were properly dismissed by the trial court.
Remittal and Relief Sought: Because the appellate court determined the derivative counterclaims alleging corporate misappropriation required further adjudication, it remitted matter No. 1 to the trial court to determine the merits of the derivative claims, including accounting and damages for any corporate funds found to have been misappropriated. The court also directed that the trial court reconsider the branch of the defendants' motion to punish the plaintiff for contempt insofar as it sought restitution to the corporation for sums allegedly appropriated in violation of an earlier order (Justice Berman, July 16, 1984).
Modification of Judgment and Final Disposition: On the law, the Appellate Division modified the judgment by deleting the provision that dismissed Leila Brown's second counterclaim and the portion of the first counterclaim asserted on behalf of Instrument Associates, Inc. The court also modified the December 5, 1986 order in matter No. 1 by deleting the provision denying the defendants actual damages on their motion to punish the plaintiff for contempt. As so modified, the judgment was affirmed. The appeal in matter No. 1 from the intermediate order was dismissed; the order in matter No. 2 was affirmed. The court awarded one bill of costs to Leila F. Brown payable by Instrument Associates, Inc., and remitted matter No. 1 for further proceedings as described.

Holding and Implications

Holding:

- The appeal from the intermediate order in matter No. 1 is dismissed for lack of a continuing right of direct appeal after entry of judgment (per Matter of Aho).
- The order dated December 5, 1986 in matter No. 2 is affirmed.
- The judgment is modified on the law to delete the provision dismissing Leila Brown's second counterclaim and so much of the first counterclaim as asserted on behalf of Instrument Associates, Inc., and to delete the provision denying defendants actual damages on their motion to punish the plaintiff for contempt; as modified, the judgment is affirmed.
- Matter No. 1 is remitted to the Supreme Court, Nassau County, for further proceedings on the derivative counterclaims and on the branch of the defendants' motion seeking actual damages arising from the plaintiff's contempt.
- Leila F. Brown is awarded one bill of costs payable by Instrument Associates, Inc.

Core Ruling: The Appellate Division held that Leila F. Brown had standing under Business Corporation Law § 720 to pursue, on behalf of the corporation, claims for misappropriation of corporate funds and remitted those derivative claims for determination on the merits; however, direct claims by Leila against the corporation remain outside § 720 and were properly dismissed.

Implications for the Parties

Leila Brown may pursue the derivative portions of her counterclaims (accounting and damages for corporate misappropriation) on remittal to the trial court.
Claims that assert personal rights of Leila Brown against the corporation (the third counterclaim and parts of the first counterclaim) were dismissed and remain outside the scope of relief under BCL § 720 in this action.
The trial court must reconsider defendants' motion to punish the plaintiff for contempt insofar as it seeks restitution to the corporation for funds allegedly appropriated in violation of the earlier court order.
No broad new precedent was announced beyond the court's application of established principles (as reflected in the cited authorities); the decision modifies the judgment and remits issues for further factual and legal determination at the trial level.

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WILLIAM L. BROWN, Respondent, v. LEILA F. BROWN, Indi

Ordered that the appeal from the order dated December 5, 1986, and made in matter No. 1 is dismissed; and it is further,

Ordered that the order dated December 5, 1986, and made in matter No. 2 is affirmed; and it is further,

Ordered that the judgment is modified, on the law, by (1) deleting the provision thereof dismissing the defendant Leila Brown's second counterclaim and so much of the first counterclaim as is asserted on behalf of Instrument Associates, Inc. (2) adding thereto a provision modifying the order dated December 5, 1986, and made in matter No. 1, by deleting the provision thereof denying the defendants actual damages on their motion to punish the plaintiff for contempt; as so modified, the judgment is affirmed, for reasons stated by Justice Kelly in his memorandum decision; and it is further,

Ordered that the petitioner Leila F. Brown is awarded one bill of costs payable by Instrument Associates, Inc.; and it is further,

Ordered that matter No. 1 is remitted to the Supreme Court, Nassau County, for further proceedings with respect to the second counterclaim and so much of the first counterclaim as is asserted on behalf of Instrument Associates, Inc., and with respect to that branch of the defendants' motion which was to recover actual damages arising from the plaintiff's contempt.

The appeal from the intermediate order in matter No. 1 must be dismissed because the right of direct appeal therefrom terminated with the entry of judgment in the action (see, Matter of Aho, 39 N.Y.2d 241, 248). The issues raised on appeal from the order are brought up for review and have been considered on the appeal from the judgment (CPLR 5501 [a] [1]).

We conclude that the trial court erred in dismissing the first and second counterclaims interposed in matter No. 1 by the defendant Leila Brown insofar as they allege that the plaintiff misappropriated corporate funds for his personal benefit. The trial court determined that that defendant did not have standing under Business Corporation Law § 720. Under the circumstances of this case, we find that that defendant had the requisite standing to recover damages, on behalf of the corporation, for the plaintiff's alleged violation of his duties in managing this family-owned corporation.

The evidence presented at the trial established that the corporation came into existence in 1982 upon the filing of a certificate of incorporation with the Secretary of State (Business Corporation Law § 403). The plaintiff and the defendant Leila Brown, his mother, are the sole owners of the corporation. The corporation was formed with the understanding that the plaintiff would be president and the defendant Leila Brown would be vice-president. Although there was no formal election of officers and shares were never issued, the plaintiff thereafter conducted business in the name of the corporation. Clearly the defendant Leila Brown is the only person besides the plaintiff who owns an interest in this corporation. Although the right of recovery for the alleged improper actions of the plaintiff belongs to the corporation, the claims can be brought in the defendant Leila Brown's name (see, e.g., Bertoni v Catucci, 117 A.D.2d 892; Conant v Schnall, 33 A.D.2d 326). Furthermore, it was not necessary to join the corporation as a party (see, Conant v Schnall, supra).

Matter No. 1 is remitted to the trial court for a determination of the merits of so much of the first and second counterclaims as sought an accounting by the plaintiff of corporate assets and damages for any corporate funds found to have been misappropriated (see, Wolff v Wolff, 67 N.Y.2d 638, rearg denied 67 N.Y.2d 918, mot to amend remittitur denied 68 N.Y.2d 754). However, the third counterclaim and portions of the first counterclaim assert claims by the defendant Leila Brown against the corporation, rather than on behalf of the corporation, which is not a party to this action. Such claims fall outside the scope of Business Corporation Law § 720 and were properly dismissed.

In view of the fact that the matter is being remitted for a determination of the allegations of corporate waste, the trial court should also reconsider that branch of the defendants' motion which was to punish the plaintiff for contempt which sought restitution to the corporation of any sums appropriated by the plaintiff in violation of the order of Justice Berman dated July 16, 1984. Bracken, J.P., Kunzeman, Rubin and Spatt, JJ., concur.

BROWN v. BROWN