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Attorney(S)

Murray I. Sommer for appellants. Edward L. Sadowsky for Irving Schneider, Seaton M. Scott and Frank Winter, respondents. Benjamin Gassman and Sidney O. Raphael for Harris Klein, Irving Klein and New York Equities, Inc., respondents.

Judges

Charles D. Breitel

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Rapoport et al. v. Schneider et al., Court of Appeals of the State of New York — Summary

Factual and Procedural Background

Plaintiffs, acting both as directors and stockholders of New York Equities, Inc., brought a derivative action on behalf of the corporation against several fellow directors. The complaint sought to prevent what plaintiffs alleged was the improper payment of a duplicate claim for real estate commissions (a Helmsley claim said to duplicate a claim by Strand Management, Inc.), and sought an accounting. The first cause of action was asserted by plaintiffs in their capacity as directors; a separate cause of action was asserted in their capacity as stockholders.

Relevant facts alleged in the complaint include: on September 17, 1970 a special board meeting was convened purportedly without notice to director Marantz; the stated purpose was to consider Equities' defense to a pending action by Strand for commissions (originally $190,000); the board adopted a resolution, by a vote of four to two, authorizing payment of a Helmsley claim alleged to "duplicate substantially the claims made by Strand"; Schneider and Winter (officers of Helmsley) voted for the resolution; Rapoport and Giber voted against it. Plaintiffs alleged that payment of the Helmsley claim would deplete corporate assets and expose Equities to double liability. The complaint demanded an accounting, a declaration that the resolution is void, and an injunction preventing payment. The record does not indicate whether the Helmsley claim has been paid.

Procedurally, Special Term dismissed only the first cause of action (the directors' cause) for legal insufficiency; it left the stockholders' cause intact. The Appellate Division affirmed the dismissal of the first cause of action. Plaintiffs obtained leave to appeal to the Court of Appeals.

Legal Issues Presented

Whether the resolution authorizing payment of the Helmsley claim was invalid because a director (Marantz) did not receive proper notice of the special meeting at which it was adopted.
Whether interested directors (specifically Schneider and Winter, officers of Helmsley, who voted for the resolution) created a conflict of interest that rendered the resolution invalid or exposed them to liability.
Whether the complaint alleged sufficient facts to charge the defendant directors with misconduct (waste or authorization/payment of an improper, duplicated claim) such that the directors' cause of action (brought under Business Corporation Law §720) should survive a motion to dismiss.

Arguments of the Parties

Plaintiffs' Arguments

Directors Schneider and Winter, as officers of Helmsley (a claimant), should have disqualified themselves from voting on the resolution; their participation created a conflict of interest and affected the outcome.
The Helmsley claim duplicated the earlier Strand claim and its payment would waste corporate assets and expose Equities to double liability; thus the directors' cause of action alleges misconduct and seeks an accounting and injunctive/declaratory relief.

Defendants' Arguments

Special Term purportedly treated the action as one that should be brought only by stockholders (a stockholders' derivative action), a position that respondents evidently abandoned on appeal (the Court notes respondents have abandoned that view).
Defendants contended that plaintiff directors may lack standing because some plaintiffs (notably Rapoport) have a conflict of interest (Rapoport owned Strand). Defendants' counsel also orally argued that plaintiffs Giber and Marantz had conflicts, but the record contained no allegation or evidence supporting that claim.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Manix v. Fantl, 209 App. Div. 756	Illustration that predecessor statutory provisions embraced common-law and statutory causes of action imposing liability on directors.	Used as an example to show §720 and its predecessors historically covered director liability for misconduct.
People v. Equitable Life Assur. Soc., 124 App. Div. 714	Support for the proposition that predecessor statutes and the present statute embrace director liability causes of action.	Cited to demonstrate statutory and common-law bases for actions against directors are within the statute's scope.
Tenney v. Rosenthal, 6 N.Y.2d 204, 210	Reference to the question of standing of conflicted directors (not fully decided in that case).	Cited to note that standing issues as to conflicted directors had been reserved in prior decisions, but the Court declined to decide the standing question here.
Hamilton Print. Co. v. Payne Corp., 26 A.D.2d 876	Permits consideration of the complaint and undisputed facts in the answer and affidavits on a CPLR 3211(c) motion.	Invoked to justify looking beyond the complaint to undisputed facts when assessing whether plaintiffs other than Rapoport had conflicts of interest.
Epps v. Yonkers Raceway, 21 A.D.2d 798	Also cited for the proposition that courts may consider the complaint and undisputed matters on a motion to dismiss.	Used with Hamilton Print to support examination of the record for evidence of conflicts among plaintiffs.
Cirrincione v. Polizzi, 14 A.D.2d 281, 283	Failure to notify directors of a special meeting renders actions taken at the meeting invalid (absent ratification).	Applied to conclude that the allegation that Marantz received no notice sufficiently put the adequacy of notice in issue and could sustain the directors' cause of action.
People v. Batchelor, 22 N.Y. 128, 134	Authority relating to validity of actions taken without proper notice.	Included among authorities supporting the principle that lack of notice invalidates special meeting actions.
Prince Mfg. Co. v. Prince's Metallic Paint Co., 20 N.Y.S. 462, 467; revd. on other grounds 60 Hun 583; opn. in 15 N.Y.S. 249; revd. 135 N.Y. 24	Historical authority on notice and validity of corporate actions taken without proper notice.	Cited in support of the rule that failure to notify directors of a special meeting renders actions invalid.
Sturndorf v. Samurai Co., 121 N.Y.S. 217	Another authority addressing the effect of lack of notice on corporate actions.	Listed among authorities corroborating the rule on notice for special meetings.
General Rubber Co. v. Benedict, 215 N.Y. 18, 21	Longstanding rule that a director may be held accountable for waste of corporate assets.	Cited to support the proposition that directors can be liable for authorizing payment of a false or duplicate claim even if they do not personally benefit.
Bosworth v. Allen, 168 N.Y. 157, 165-166	Authority for director accountability for waste or improper disposition of corporate assets.	Used with other cases to show the general law imposing liability for waste upon directors.
Leslie v. Lorillard, 110 N.Y. 519, 536	Additional authority on directors' liability for improper actions affecting corporate assets.	Cited to reinforce the general rule of director accountability for waste.
Brinckerhoff v. Bostwick, 88 N.Y. 52, 56	Earlier case law supporting director liability for corporate waste.	Included among historical authorities relied upon for the principle that directors may be held accountable for waste.
Jersawit v. Kaltenbach, 253 App. Div. 265, 268	Recent authority cited on director accountability for waste.	Applied as part of the line of cases showing directors' liability is not limited to transactions from which they benefit personally.
Foley v. D'Agostino, 21 A.D.2d 60, 68	Addresses when allegations are conclusory and the requisite sufficiency of pleading for derivative claims.	The Court distinguished the present complaint from Foley, concluding the duplication allegations were adequate to provide notice and were not impermissibly conclusory.

Court's Reasoning and Analysis

The Court of Appeals reversed the Appellate Division and held the motion to dismiss the first cause of action should have been denied. The court's analysis proceeded in several discrete steps:

Statutory authorization for a directors' suit: The Court observed that Business Corporation Law §720 expressly authorizes actions by directors against other directors to procure relief including accounting, setting aside unlawful transfers, and enjoining proposed unlawful transfers. The Court concluded that a directors' cause of action alleging payment of a duplicated (false) claim falls within §720.
Standing and conflicts among plaintiff directors: The Court acknowledged defendants' contention that plaintiffs might lack standing because of conflicts of interest (notably Rapoport's ownership of Strand). The Court declined to decide whether a conflict would always bar a director's action; instead it examined the complaint and undisputed materials under CPLR 3211(c) and found no allegation or evidence that two plaintiffs (Giber and Marantz) had conflicts. Thus at least two directors were alleged to be disinterested, and because the benefit of the suit would accrue to the corporation, the action should not be barred on that basis.
Adequacy of notice: The Court emphasized that because the meeting was a special meeting, notice to directors was required (Business Corporation Law §711). Failure to give notice (absent waiver or ratification) renders actions taken at such a meeting invalid. The unqualified allegation that Marantz received no notice was sufficient to put the adequacy of notice in issue under CPLR 3013; therefore the first cause of action was sustainable on the basis of alleged lack of notice alone.
Interested directors and statutory voting rule: The Court examined the statutory rule governing interested directors (former §713, subd. [a]). An "interested" director may be counted if he discloses his interest and a majority of disinterested directors vote in favor. The Court tallied the votes excluding the interested directors and concluded the resolution was not invalid under §713 because, excluding the interested directors, two disinterested directors voted in favor and one opposed. Thus, under §713 the resolution would be valid despite interested directors' participation.
Liability for waste independent of personal benefit: Even though the resolution might be valid under §713, the Court recognized that interested directors might still be liable if they participated in authorizing a transaction that caused waste or unauthorized disposition of corporate assets. The Court stated it was unnecessary to reach the question whether Schneider and Winter derived an indirect personal benefit; it was sufficient that plaintiffs alleged the directors knowingly authorized payment of a duplicate claim out of corporate funds — a form of waste actionable under general law.
Sufficiency of pleading regarding duplication: The Court considered defendants' contention that plaintiffs' allegations of duplication were conclusory. It concluded that the complaint, while "rather skimpy," plainly alleged that Equities had been sued by Strand for commissions, that the lawsuit had partly been settled, and that the Helmsley claim sought substantially the same services. This was adequate to provide notice and to allege a false/duplicative claim capable of supporting the cause of action.
Consistency with treatment of stockholders' cause: The Court noted Special Term had denied dismissal of the stockholders' cause of action, which was pleaded in short form with incorporation by reference to the directors' cause; Special Term's acceptance of the stockholders' allegations further supported the sufficiency of the directors' allegations.

Holding and Implications

Holding: The Court reversed the order of the Appellate Division and held that the motion to dismiss the first cause of action (the directors' cause of action) should be denied. The Court ordered costs in all courts.

Implications and immediate effects:

The directors' cause of action alleging (1) lack of notice to a director of a special meeting and (2) authorization/payment of a duplicated claim survives a motion to dismiss and may proceed for further litigation and adjudication on the merits.
The statutory grant in Business Corporation Law §720 to directors to sue other directors for accounting and related relief applies to allegations of waste or payment of a false/duplicative claim.
The decision does not establish any broad new precedent beyond the application of existing statutory and common-law principles to these facts; it primarily reinstates the directors' claim and sends the case back for further proceedings. The Court did not fully decide the standing issue as to conflicted directors, and instead proceeded on the basis that at least two plaintiffs were alleged to be disinterested.

This summary reflects only information contained in the provided opinion and does not add facts or matters not present in the text.

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DAVID RAPOPORT et al., Indi v. dually, as Directors and as Stockholders of New York Equities, Inc., Appellants,

BREITEL, J.

Plaintiffs, in their status both as directors and stockholders, brought this derivative action on behalf of the corporation against other directors to prevent the allegedly improper payment of a duplicate claim for real estate commissions and for an accounting. Plaintiffs appeal from the dismissal of the first cause of action alleged in their status as directors. The issues are the invalidity of the resolution authorizing payment of the claim for lack of proper notice and the conflict of interest of some directors who voted for it, and the sufficiency of facts alleged to charge the directors with misconduct for authorization or payment of the improper claim.

Special Term, on motion addressed to the whole complaint, dismissed only the first cause of action for legal insufficiency with an opinion. The second cause of action alleged on behalf of plaintiffs as stockholders was not disturbed. The Appellate Division affirmed. Plaintiffs appeal by permission of this court.

There should be a reversal, and the motion to dismiss denied. A cause of action is stated by allegations that one director lacked notice of the directors' meeting at which the resolution in question was adopted, and by allegations that the defendant directors knowingly authorized payment of an improper claim.

All plaintiffs and all individual defendants are directors of New York Equities, Inc., a publicly-held corporation. Its real properties were first managed by Strand Management Inc., and later by Helmsley-Spear, Inc. At relevant times, plaintiff Rapoport was the sole owner of Strand; and three of the defendants, Schneider, Scott, and Winter, were respectively executive vice-president, vice-president, and treasurer of Helmsley.

On September 17, 1970, a special meeting of the board of Equities was convened allegedly without notice to plaintiff Marantz. The stated purpose of the meeting was to consider any defense Equities might have against a pending action by Strand for commissions originally in the amount of $190,000. The directors, by a vote of four to two, adopted a resolution to pay a claim by Helmsley alleged to "duplicate substantially the claims made by Strand". Schneider and Winter, two officers of Helmsley present, voted for the resolution. Plaintiffs Rapoport and Giber voted against it. Plaintiffs argue that defendants Schneider and Winter should have disqualified themselves because of their conflict of interest, and that, if they had, the result would have been different. Payment of the Helmsley claim, it is alleged, "depletes the assets" of Equities by unnecessary disbursement and exposure to a double liability for the same sum.

Plaintiffs have demanded an accounting by the defendant directors, a declaration that the resolution authorizing payment of the Helmsley claim is void, and defendants be enjoined from paying the claim. Nothing in the record indicates whether or not the claim has in fact been paid.

Special Term appears to have dismissed the directors' cause of action on the ground that only a stockholders' derivative action was appropriate. This view is erroneous, and has evidently been abandoned by respondents. Section 720 (subd. [b]) of the Business Corporation Law expressly authorizes directors to sue other directors for misconduct.

Section 720 of the Business Corporation Law under which this action was brought provides:

"(a) An action may be brought against one or more directors or officers of a corporation to procure a judgment for the following relief:

"(1) To compel the defendant to account for his official conduct in the following cases:

"(A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.

"(B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties.

"(2) To set aside an unlawful conveyance, assignment or transfer of corporate assets, where the transferee knew of its unlawfulness.

"(3) To enjoin a proposed unlawful conveyance, assignment or transfer of corporate assets, where there is sufficient evidence that it will be made.

"(b) An action may be brought for the relief provided in this section, and in paragraph (a) of section 719 (Liability of directors in certain cases) by a corporation, or a receiver, trustee in bankruptcy, officer, director or judgment creditor thereof, or, under section 626 (Shareholders' derivative action brought in the right of the corporation to procure a judgment in its favor), by a shareholder, voting trust certificate holder, or the owner of a beneficial interest in shares thereof." Section 720 was derived from sections 60 and 61, and their predecessors, former sections 90 and 91, of the General Corporation Law. The present statute and the predecessor sections embrace common-law and statutory causes of action imposing liability on directors (12 N.Y. Jur., Corporations, § 783; see, e.g., Manix v. Fantl, 209 App. Div. 756; People v. Equitable Life Assur. Soc., 124 App. Div. 714, 733-735). The statute is broad and covers every form of waste of assets and violation of duty whether as a result of intention, negligence, or predatory acquisition. Since this case involves payment of a duplicated claim and, therefore, a false one, if plaintiffs' allegations are true, the cause of action by plaintiffs in their status as directors is within the statute's compass.

Defendants argue, however, that plaintiff directors may not maintain an action under section 720 because they too have a conflict of interest. This question of standing, once reserved in passing in Tenney v. Rosenthal ( 6 N.Y.2d 204, 210), still need not be decided. True, plaintiff Rapoport has a conflict of interest as a result of his sole ownership of Strand. In searching for a conflict of interest, however, on the part of the other two plaintiffs, the court may look to the complaint and undisputed facts contained in the answer and affidavits (CPLR 3211, subd. [c]; Hamilton Print. Co. v. Payne Corp., 26 A.D.2d 876; Epps v. Yonkers Raceway, 21 A.D.2d 798; 4 Weinstein-Korn-Miller, N.Y. Civ. Prac., ¶ 3211.43; 6 Carmody-Wait, 2d, N.Y. Prac., § 38:38). Although defendants' attorney argued orally that plaintiffs Giber and Marantz have a conflict of interest, the record reveals no allegation or evidence of it. It follows, therefore, that at least two plaintiffs are directors without a personal interest in the questioned transaction. Since any benefit derived from this action would accrue to the corporation, the action should not be barred, assuming that a conflict in interest might create a bar, at least where one or more of the complaining directors have no conflict of interest.

As noted above, it is alleged that one director, Marantz, received no notice of the directors' meeting. The lawfulness of the payment or proposed payment of the claim under sections 720 (subd. [a], par. [2]) and 720 (subd. [a], par. [3]) above depends on the validity of the resolution adopted. If lack of notice renders actions taken at that meeting invalid, then the authorization would be unlawful.

Because this was a special meeting, notice to directors was required (Business Corporation Law, § 711, subd. [a]; 12 N.Y. Jur., Corporations, § 607). Notice may be waived (see Business Corporation Law, § 711, subd. [c]), but, absent ratification, failure to notify directors of a special meeting renders actions taken at the meeting invalid ( Cirrincione v. Polizzi, 14 A.D.2d 281, 283; 2 Fletcher's Cyclopedia Corporations [Perm. ed.], § 406, p. 255; 12 N.Y. Jur., Corporations, § 609; cf. People v. Batchelor, 22 N.Y. 128, 134; Prince Mfg. Co. v. Prince's Metallic Paint Co., 20 N.Y.S. 462, 467, revd. on other grounds 60 Hun 583, opn. in 15 N.Y.S. 249, revd. 135 N.Y. 24; Sturndorf v. Samurai Co., 121 N.Y.S. 217). Although it may eventuate upon a trial that notice may have been adequate under the by-laws of Equities (see Business Corporation Law, § 711, subd. [b]), or, perhaps, by the statutory mailing presumption (Business Corporation Law, § 108, subd. [c]), the unqualified allegation that one director did not receive any notice of the meeting should be sufficient to put the adequacy of notice in issue (CPLR 3013). Consequently, the first cause of action is sustainable, if for no other reason than on the basis of the alleged lack of notice.

Plaintiffs allege in addition that the resolution is invalid because of participation by interested directors. Defendant directors Schneider and Winter, who voted for the resolution, were, as observed earlier, officers of Helmsley. Plaintiff Rapoport, who voted against the resolution, was the sole owner of Strand, the competing claimant for the commissions. The outside relationships of these three directors were undoubtedly known to all the directors of Equities.

The Business Corporation Law provides that where "interested" directors, who have disclosed their interest, vote on a resolution, the resolution is nonetheless valid if a majority of the disinterested directors vote in its favor (former § 713, subd. [a], par. [1], as last amd. by L. 1965, ch. 803, § 29). A director is "interested" if he is an officer or director of another corporation apparently involved in the questioned transaction ( id., former § 713, subd. [a]; 2 Fletcher's Cyclopedia Corporations [Perm. ed.], § 428). Thus, all three of the directors mentioned are "interested". Not counting the votes of these directors, there remain the votes of two disinterested directors in favor of the resolution, H. Klein and I. Klein, and the vote of one disinterested director, Giber, opposed to the resolution. A quorum of votes cast by disinterested directors is not required (Business Corporation Law, § 713, subd. [c]). Under the rule of section 713, therefore, the resolution is not invalid because of the participation of interested directors.

Despite the validity of the resolution under section 713, the interested directors may in any event be liable for having participated in a transaction from which they may derive an indirect personal benefit. It is not necessary, however, to reach this question. To assert liability for waste, it is sufficient to allege that the directors have knowingly authorized payment of a duplicate claim out of corporate funds. It is and has always been general law that a director may be held accountable for the waste of corporate assets whether intentional or negligent without limitation to transactions from which he benefits (e.g., General Rubber Co. v. Benedict, 215 N.Y. 18, 21; Bosworth v. Allen, 168 N.Y. 157, 165-166; Leslie v. Lorillard, 110 N.Y. 519, 536; Brinckerhoff v. Bostwick, 88 N.Y. 52, 56; Jersawit v. Kaltenbach, 253 App. Div. 265, 268; 12 N.Y. Jur., Corporations, § 719).

The allegations of the "duplication" of the Helmsley claim are adequate to meet the criticism that they are conclusory (cf. Foley v. D'Agostino, 21 A.D.2d 60, 68). The cause of action alleges that Equities had been sued by Strand to recover commissions, that the lawsuit had already been partly settled, and that the Helmsley claim was for substantially the same services as the Strand claim. Although this is a rather skimpy allegation of a duplicated claim, its thrust is plain and unmistakable in establishing, if true, that the claim was a false one. The primary purpose of pleadings, that of notice, is, therefore, served (CPLR 3013; Foley v. D'Agostino, supra, at pp. 62-63).

Notably, Special Term did not find the allegations insufficient with respect to the stockholders' cause of action, a cause of action alleged in a short form to depend upon the allegations of the first cause of action by incorporation by reference. On the contrary, the motion to dismiss was denied in that respect.

Accordingly, the order of the Appellate Division should be reversed and the motion to dismiss the complaint denied, with costs in all courts.

Chief Judge FULD and Judges BURKE, SCILEPPI, BERGAN, JASEN and GIBSON concur.

Order reversed, etc.

RAPOPORT v. SCHNEIDER