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Gabel v. Gabel
Summary of Opinion: Christopher Gabel, et al. v. Paul V. Gabel, et al. (N.Y. App. Div., Second Dept., Mar. 27, 2013)
Factual and Procedural Background
Christopher Gabel (hereafter "Christopher") and Gabel Equipment Corporation ("Gabel Equipment") commenced an action alleging, among other things, that defendant Paul V. Gabel ("Paul"), while president of Gabel Equipment, misappropriated corporate funds, diverted corporate assets, and breached his fiduciary duty. The complaint pleaded five causes of action. The fourth cause of action sought a judicial declaration that a certain shareholders' resolution concerning retirement payments to Paul—adopted while Paul was president and before Christopher became a shareholder—was invalid and unenforceable.
After issue was joined, the defendants moved, inter alia, to dismiss the complaint. As to the fourth cause of action, the defendants moved pursuant to CPLR 3211(a)(3), arguing that Christopher lacked standing because he was not a shareholder at the time the disputed resolution was adopted, as required by Business Corporation Law § 626(b). The Supreme Court, Westchester County (Giacomo, J.), granted that branch of the defendants' motion and dismissed the fourth cause of action in its entirety on the ground that both plaintiffs lacked standing. The plaintiffs appealed, limited to the contention that the court erred in dismissing the portion of the fourth cause of action asserted by Gabel Equipment.
The Appellate Division issued an order: it dismissed Christopher's appeal for lack of aggrievement, reversed the order insofar as appealed from by Gabel Equipment Corporation, awarded costs to Gabel Equipment, and denied the defendants' motion to dismiss the fourth cause of action insofar as asserted by Gabel Equipment.
Legal Issues Presented
- Whether Gabel Equipment Corporation had standing under Business Corporation Law § 720(b) to assert the fourth cause of action (a claim for waste and breach of fiduciary duty) even though Christopher was not a shareholder at the time the challenged resolution was adopted.
- Whether the defendants waived any defense based on lack of standing by failing to assert that defense in their answer or in a timely pre-answer motion pursuant to CPLR 3211(e).
- Whether, under the CPLR 3211(a)(7) standard (accepting the facts alleged as true and giving the pleader every favorable inference), Gabel Equipment stated a cause of action alleging waste of corporate assets under Business Corporation Law § 720.
Arguments of the Parties
Appellants' (Plaintiffs') Arguments
- The appeal (as limited by the plaintiffs' brief) challenged only the dismissal of the portion of the fourth cause of action asserted by Gabel Equipment, arguing that Gabel Equipment had standing to bring a claim under Business Corporation Law § 720(b) and that the complaint adequately stated a § 720 claim.
Respondents' (Defendants') Arguments
- The defendants contended that Christopher lacked standing to pursue the fourth cause of action because he was not a shareholder at the time the disputed resolution was adopted, and they invoked Business Corporation Law § 626(b) as requiring shareholder status at the time of the transaction complained of.
- The defendants argued (as reflected in their motion) that the fourth cause of action should be dismissed on the ground that both plaintiffs lacked standing.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rapoport v. Schneider, 29 N.Y.2d 396, 328 N.Y.S.2d 431, 278 N.E.2d 642 | Supports that Business Corporation Law § 720(b) authorizes a corporation or an officer/director to commence an action to redress corporate waste or breach of fiduciary duty. | The court relied on Rapoport to explain the scope of § 720(b) and to conclude that Gabel Equipment could pursue a § 720 claim for waste. |
| Brown v. Brown, 143 A.D.2d 248, 532 N.Y.S.2d 157 | Used in the discussion distinguishing § 626 (derivative actions by shareholders) from § 720(b) actions by the corporation, officer, or director. | Cited as supporting authority for the proposition that § 720(b) operates differently than § 626 and does not impose the same shareholder-at-the-time requirement. |
| Conant v. Schnall, 33 A.D.2d 326, 307 N.Y.S.2d 902 | Also cited to show that § 720(b) claims are not subject to the shareholder-at-the-time limitation applicable to § 626 derivative suits. | Referenced by the court in explaining that § 720(b) does not require the plaintiff to have been a shareholder at the time of the challenged transaction. |
| Tenney v. Rosenthal, 6 N.Y.2d 204, 189 N.Y.S.2d 158, 160 N.E.2d 463 | Cited (via treatise citation) in support of the rule that § 720(b) does not impose the § 626(b) timing requirement. | Included by the court (through citation in the treatise) as additional authority for the proposition that § 720(b) standing differs from § 626 standing requirements. |
| U.S. Bank N.A. v. Denaro, 98 A.D.3d 964, 950 N.Y.S.2d 581 | Supports the procedural principle that a defense under CPLR 3211(e) is waived if not asserted in the answer or a timely pre-answer motion. | The court cited Denaro to hold that the defendants waived any defense based on Gabel Equipment's alleged lack of standing by failing to timely assert it. |
| 32nd Ave., LLC v. Angelo Holding Corp., 88 A.D.3d 986, 932 N.Y.S.2d 79 | Also supports the waiver principle under CPLR 3211(e) for defenses not timely interposed. | Used by the court as additional authority to support the conclusion that the defendants waived the standing defense. |
| Leon v. Martinez, 84 N.Y.2d 83, 614 N.Y.S.2d 972, 638 N.E.2d 511 | Explains the CPLR 3211(a)(7) pleading standard: accept the facts alleged in the complaint as true and give the pleader the benefit of every favorable inference. | The court applied Leon to evaluate whether, under the CPLR 3211(a)(7) standard, Gabel Equipment had stated a cause of action alleging waste pursuant to § 720. |
Court's Reasoning and Analysis
The court began by distinguishing two statutory mechanisms for corporate litigation: Business Corporation Law § 626 (derivative actions by shareholders in the right of the corporation) and Business Corporation Law § 720(b) (which authorizes a corporation, or an officer or director thereof, to commence an action to redress corporate waste or breaches of fiduciary duty by officers and directors). Citing Rapoport and other authorities, the court explained that, unlike § 626(b), § 720(b) does not impose a requirement that the plaintiff was a shareholder at the time of the transaction complained of.
Applying that principle, the court held that Christopher's status as a shareholder at the time the resolution was adopted was irrelevant to whether the corporate plaintiff, Gabel Equipment, had standing under § 720(b) to assert the fourth cause of action.
The court also addressed the procedural posture: it found that the defendants had waived any standing defense by failing to raise it in their answer or in a timely pre-answer motion, citing CPLR 3211(e) and supporting authority (U.S. Bank N.A. v. Denaro; 32nd Ave., LLC v. Angelo Holding Corp.). Because the defense was not timely asserted, the court determined the defense could not be used to justify dismissal on the motion before it.
Finally, applying the CPLR 3211(a)(7) standard—accepting the allegations of the complaint as true and giving the plaintiff every favorable inference (Leon v. Martinez)—the court concluded that Gabel Equipment had adequately stated a cause of action alleging waste of corporate assets under § 720. The court therefore determined that the branch of the defendants' motion seeking dismissal of the fourth cause of action as asserted by Gabel Equipment should have been denied.
Holding and Implications
Holding: The Appellate Division dismissed Christopher's appeal for lack of aggrievement, reversed the Supreme Court's order insofar as appealed from by Gabel Equipment Corporation, awarded costs, and held that the defendants' motion to dismiss the fourth cause of action insofar as asserted by Gabel Equipment should have been denied.
Implications and immediate effect:
- The portion of the Supreme Court's order that dismissed the fourth cause of action as to Gabel Equipment was reversed, and that claim remains pending against the defendants.
- The appeal by Christopher in his individual/derivative capacity was dismissed on the ground that he was not aggrieved by the order he appealed from.
- The court concluded (based on existing authorities) that a corporate plaintiff may bring an action under Business Corporation Law § 720(b) without the shareholder-at-the-time limitation found in § 626(b), and that the defendants had waived a standing defense by failing to raise it timely. The opinion did not purport to announce a new rule of law beyond applying settled precedents to the facts of this case.
MARK C. DILLON
Samuel B. Mayer, Pleasantville, N.Y., for appellants. Gerosa & Vanderwoude, Carmel, N.Y. (Neil Vanderwoude of counsel), for respondents.
MARK C. DILLON, J.P., DANIEL D. ANGIOLILLO, THOMAS A. DICKERSON, and JEFFREY A. COHEN, JJ.
In an action pursuant to Business Corporation Law §§ 626(b) and 720(b), inter alia, to recover damages for diversion of corporate assets and breach of fiduciary duty, the plaintiffs appeal, as limited by their brief, from so much of an order of the Supreme Court, Westchester County (Giacomo, J.), entered October 11, 2011, as, in effect, granted that branch of the defendants' motion which was pursuant to CPLR 3211 to dismiss the fourth cause of action, which sought a judgment declaring that a certain resolution of the shareholders is invalid and unenforceable insofar as asserted by the plaintiff Gabel Equipment Corporation.
ORDERED that the appeal by the plaintiff Christopher Gabel, in his capacity as a shareholder in Gabel Equipment Corporation, in the right of Gabel Equipment Corporation, and on behalf of all other shareholders similarly situated, is dismissed, as that plaintiff is not aggrieved by the portion of the order appealed from ( seeCPLR 5511); and it is further,
ORDERED that the order is reversed insofar as appealed from by the plaintiff Gabel Equipment Corporation, on the law, with costs, and that branch of the defendants' motion which was to dismiss the fourth cause of action insofar as asserted by the plaintiff Gabel Equipment Corporation is denied.
Christopher Gabel (hereinafter Christopher), as a shareholder in Gabel Equipment Corporation (hereinafter Gabel Equipment), in the right of Gabel Equipment and on behalf of all other shareholders similarly situated, and Gabel Equipment commenced this action alleging, inter alia, that the defendant Paul V. Gabel (hereinafter Paul), while he was president of Gabel Equipment, had misappropriated corporate funds, diverted corporate assets, and breached his fiduciary duty. The complaint alleged five causes of action. In the fourth cause of action, the plaintiffs sought a judgment declaring a certain resolution, which concerned retirement payments to Paul and which was passed while Paul was president and before Christopher became a shareholder, is invalid and unenforceable.
After issue was joined, the defendants moved, inter alia, to dismiss the complaint in its entirety. In support of the branch of their motion which was pursuant to CPLR 3211(a)(3) to dismiss the fourth cause of action, the defendants contended that Christopher lacked standing because he was not a shareholder at the time the disputed resolution was adopted, as required by Business Corporation Law § 626(b). The Supreme Court granted the defendants' motion in part and denied it in part. As relevant hereto, the Supreme Court, in effect, granted that branch of the defendants' motion which was to dismiss the fourth cause of action in its entirety on the ground that both plaintiffs lacked standing. The plaintiffs appeal on the limited ground that the Supreme Court erred in directing the dismissal of so much of the fourth cause of action as was asserted by Gabel Equipment.
Unlike Business Corporation Law § 626, which authorizes a shareholder to bring a derivative action in the right of the corporation, Business Corporation Law § 720(b) authorizes a corporation, or an officer or director thereof, to commence an action to redress corporate waste or breach of fiduciary duty owed by officers and directors of the corporation ( see Rapoport v. Schneider, 29 N.Y.2d 396, 400, 328 N.Y.S.2d 431, 278 N.E.2d 642;Brown v. Brown, 143 A.D.2d 248, 249, 532 N.Y.S.2d 157;Conant v. Schnall, 33 A.D.2d 326, 327–328, 307 N.Y.S.2d 902). While Business Corporation Law § 626(b) requires the plaintiff to be a shareholder at the time of the transaction of which he or she complains, there is no similar rule when a corporation, a director, or an officer commences an action pursuant to Business Corporation Law § 720(b) ( see 2–7 White, New York Business Entities, PB720.02[2], citing Tenney v. Rosenthal, 6 N.Y.2d 204, 189 N.Y.S.2d 158, 160 N.E.2d 463;Conant v. Schnall, 33 A.D.2d at 327–328, 307 N.Y.S.2d 902).
Contrary to the defendants' contention, Christopher's status as a shareholder was irrelevant to the standing of the corporate plaintiff, Gabel Equipment, pursuant to Business Corporation Law § 720(b) to assert the fourth cause of action. Moreover, the defendants waived any defense based on Gabel Equipment's alleged lack of standing because they failed to interpose that defense in their answer or in a timely pre-answer motion to dismiss the complaint ( seeCPLR 3211[e]; U.S. Bank N.A. v. Denaro, 98 A.D.3d 964, 964–965, 950 N.Y.S.2d 581;32nd Ave., LLC v. Angelo Holding Corp., 88 A.D.3d 986, 987, 932 N.Y.S.2d 79). Further, contrary to the defendants' contention, accepting the facts as alleged in the complaint as true and according the corporate plaintiff the benefit of every possible favorable inference ( seeCPLR 3211[a][7]; Leon v. Martinez, 84 N.Y.2d 83, 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511), Gabel Equipment stated a cause of action alleging waste of corporate assets pursuant to Business Corporation Law § 720 ( see Rapoport v. Schneider, 29 N.Y.2d at 400, 328 N.Y.S.2d 431, 278 N.E.2d 642). Accordingly, that branch of the defendants' motion which to dismiss the fourth cause of action insofar as asserted by Gabel Equipment should have been denied.
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