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Mobarak v. Mowad
Factual and Procedural Background
This appeal arises from a lawsuit initiated by Mamdouh R. Mobarak, a former shareholder of XYZ Two Way Radio Service, Inc. ("XYZ"), against several members of the corporation’s board of directors, including Mohamed Mowad and others. The plaintiff sought damages for breach of fiduciary duty and breach of contract, among other claims, both in his personal capacity and derivatively on behalf of the corporation. The Supreme Court, Kings County, granted summary judgment dismissing the complaint against the defendants on multiple causes of action. The plaintiff appealed the portions of the order dismissing the third and seventh causes of action against certain defendants.
Legal Issues Presented
- Whether the defendants were entitled to summary judgment dismissing the third cause of action alleging breach of fiduciary duty by defendant Mohamed Mowad regarding dealings between XYZ and Regal Insurance Brokerage, Inc.
- Whether the defendants were entitled to summary judgment dismissing the seventh cause of action alleging unjust enrichment of defendant Mowad related to benefits granted by XYZ to Regal.
- Whether the defendants were entitled to summary judgment dismissing other causes of action premised on the plaintiff’s removal from servicing a customer account and the alleged failure to provide an original stock certificate.
- Whether the plaintiff failed to raise triable issues of fact regarding various fiduciary duty claims and other derivative causes of action against the defendants.
Arguments of the Parties
Appellant's Arguments
- The plaintiff contended that Mowad breached his fiduciary duty to XYZ by allowing his own corporation, Regal Insurance Brokerage, Inc., to use XYZ’s resources without fair compensation.
- The plaintiff alleged that Mowad was unjustly enriched through benefits conferred upon Regal by XYZ.
- The plaintiff opposed summary judgment dismissing claims related to his removal from servicing a customer account and the failure to provide an original stock certificate, asserting factual disputes.
Respondents' Arguments
- The defendants demonstrated prima facie that no employment contract existed between the plaintiff and XYZ, and that their conduct removing the plaintiff from servicing the account was authorized by XYZ’s rules.
- They argued the business judgment rule protected their actions and negated allegations of fraud, bad faith, or breach of fiduciary duty.
- They submitted evidence proving the plaintiff received the original stock certificate, negating claims of failure to provide it.
- The respondents claimed they were entitled to summary judgment dismissing the breach of fiduciary duty and unjust enrichment claims related to Mowad and Regal, asserting no improper benefit was obtained.
- They further argued that the plaintiff failed to raise triable issues of fact on other derivative claims and procedural requirements such as timely challenging the 2005 election.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| McGimpsey v. J. Robert Folchetti & Assoc., LLC, 19 A.D.3d 658, 798 N.Y.S.2d 498 | Establishing no employment contract and validating authorized conduct by corporate directors. | Used to support defendants’ prima facie showing that no contract existed and their removal of plaintiff was authorized. |
| Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 | Business judgment rule protecting directors’ good faith actions in furtherance of corporate purposes. | Applied to bar judicial inquiry into defendants’ conduct absent evidence of fraud or bad faith. |
| North Fork Preserve, Inc. v. Kaplan, 68 A.D.3d 732, 890 N.Y.S.2d 93 | Requirement to produce evidence substantiating allegations of fraud or breach of fiduciary duty. | Referenced to emphasize plaintiff’s failure to raise triable issues on fraud or bad faith. |
| Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 508 N.Y.S.2d 923, 501 N.E.2d 572 | Standard for summary judgment and failure to raise triable issues of fact. | Supported dismissal of claims related to stock certificate where plaintiff failed to rebut defendants’ evidence. |
| Armentano v. Paraco Gas Corp., 90 A.D.3d 683, 935 N.Y.S.2d 304 | Prima facie showing required to dismiss fiduciary duty claims involving corporate directors. | Applied in assessing defendants’ failure to establish entitlement to dismissal of breach of fiduciary duty claim against Mowad. |
| Gjuraj v. Uplift El. Corp., 110 A.D.3d 540, 973 N.Y.S.2d 172 | Business judgment rule protection for corporate directors’ decisions. | Referenced in discussing defendants’ burden to establish protection under business judgment rule. |
| Murtha v. Yonkers Child Care Assn., 45 N.Y.2d 913, 411 N.Y.S.2d 219, 383 N.E.2d 865 | Personal liability of corporate directors requires proof of independent tortious acts. | Used to explain that Mowad could not be held personally liable absent such proof, which defendants failed to establish. |
| Hill v. Murphy, 63 A.D.3d 680, 881 N.Y.S.2d 133 | Requirement of independent tortious acts for personal liability of directors. | Supported the principle that defendants failed to negate personal liability for Mowad. |
| Paramount Film Distrib. Corp. v. State of New York, 30 N.Y.2d 415, 334 N.Y.S.2d 388, 285 N.E.2d 695 | Elements of unjust enrichment: enrichment, at plaintiff’s expense, against equity and good conscience. | Applied to assess unjust enrichment claim against Mowad regarding benefits to Regal. |
| Sperry v. Crompton Corp., 8 N.Y.3d 204, 831 N.Y.S.2d 760, 863 N.E.2d 1012 | Standard for unjust enrichment claims. | Referenced in evaluating plaintiff’s burden to prove unjust enrichment. |
| Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 919 N.Y.S.2d 465, 944 N.E.2d 1104 | Requirements to establish unjust enrichment claim. | Used to affirm that defendants failed to establish absence of unjust enrichment by Mowad. |
| Newswalk Condominium v. Shaya B. Pac., LLC, 102 A.D.3d 932, 961 N.Y.S.2d 203 | Evidence required to negate unjust enrichment claims. | Applied to find defendants failed to establish no improper benefit was obtained. |
| Moezinia v. Ashkenazi, 105 A.D.3d 920, 963 N.Y.S.2d 325 | Proof required to defeat unjust enrichment claims. | Referenced similarly in unjust enrichment claim analysis. |
| Zuckerbrod v. 355 Co., LLC, 113 A.D.3d 675, 979 N.Y.S.2d 119 | Standard for establishing breach of fiduciary duty and raising triable issues. | Applied to dismiss derivative causes of action where plaintiff failed to raise triable issues. |
| Acevedo v. Town 'N Country Condominium, Section I, Bd. of Mgrs., 51 A.D.3d 603, 857 N.Y.S.2d 691 | Requirement to raise triable issues to defeat summary judgment on fiduciary claims. | Used in conjunction with Zuckerbrod to affirm dismissal of fiduciary duty claims. |
| Esformes v. Brinn, 52 A.D.3d 459, 860 N.Y.S.2d 547 | Exclusive remedy for challenging corporate elections is CPLR article 78 proceeding. | Applied to dismiss plaintiff’s claim regarding March 2005 election for failure to pursue proper remedy. |
Court's Reasoning and Analysis
The court analyzed the plaintiff’s claims by applying established legal standards for summary judgment and fiduciary duty. It found that the defendants made a prima facie showing that the plaintiff had no employment contract with XYZ and that their removal of the plaintiff from servicing a customer account was authorized under corporate rules. The plaintiff failed to present evidence to contradict this, and the business judgment rule shielded the defendants’ actions absent proof of fraud or bad faith.
Regarding the stock certificate claims, the defendants submitted proof of delivery, and the plaintiff did not rebut this or show damages, justifying dismissal.
On the breach of fiduciary duty claim against Mowad related to dealings with Regal, the defendants did not establish prima facie entitlement to judgment because they failed to negate allegations of improper benefit or show protection under the business judgment rule. Similarly, the unjust enrichment claim against Mowad was not properly dismissed as the defendants failed to demonstrate that Mowad did not personally benefit improperly.
The court also found that the plaintiff did not timely challenge the 2005 election through the exclusive remedy of a CPLR article 78 proceeding, warranting dismissal of that claim. Other derivative fiduciary duty claims were dismissed because the defendants made a prima facie showing of no breach and the plaintiff failed to raise triable issues.
Consequently, the court modified the order to deny summary judgment dismissing the third and seventh causes of action but affirmed dismissal of all other claims.
Holding and Implications
The court MODIFIED the Supreme Court order by deleting the provisions granting summary judgment dismissing the third and seventh causes of action against the defendants and substituting a denial of those branches of the motion. As so modified, the order was AFFIRMED insofar as appealed from, without costs or disbursements.
This decision reinstates the plaintiff’s breach of fiduciary duty and unjust enrichment claims against defendant Mowad related to the dealings between XYZ and Regal Insurance Brokerage, Inc., allowing those claims to proceed. The ruling affirms summary judgment dismissing numerous other claims where the plaintiff failed to raise triable issues or meet procedural requirements. The court’s analysis reinforces the application of the business judgment rule, the necessity of evidentiary support to overcome summary judgment, and the importance of pursuing proper procedural remedies in corporate disputes. No new legal precedent was established; the decision applies existing principles to the facts presented.
WILLIAM F. MASTRO
Davis Shapiro & Lewit LLP, New York, N.Y. (Gary Adelman of counsel), for appellant. Arkin Solbakken, LLP, New York, N.Y. (Lisa C. Solbakken of counsel), for respondents.
WILLIAM F. MASTRO, J.P., PETER B. SKELOS, JEFFREY A. COHEN, and HECTOR D. LaSALLE, JJ.
In an action, inter alia, to recover damages for breach of fiduciary duty and breach of contract, the plaintiff appeals from so much of an order of the Supreme Court, Kings County (Partnow, J.), dated September 20, 2012, as granted the motion of the defendants Mohamed Mowad, Sandy Check, Michael Hatzidakis, Joseph Rozen, Arnon Sadok, Ahmed Moharrem, Chi Yuen Lo, and Khaled Maher for summary judgment dismissing the complaint insofar as asserted against them.
ORDERED that the order is modified, on the law, by deleting the provisions thereof granting those branches of the motion which were for summary judgment dismissing the third and seventh causes of action insofar as asserted against the defendants Mohamed Mowad, Sandy Check, Michael Hatzidakis, Joseph Rozen, Arnon Sadok, Ahmed Moharrem, Chi Yuen Lo, and Khaled Maher, and substituting therefor a provision denying those branches of the motion; as so modified, the order is affirmed insofar as appealed from, without costs or disbursements.
In this action, the plaintiff seeks, among other things, to recover damages from several members of the board of directors (hereinafter the board) of XYZ Two Way Radio Service, Inc. (hereinafter XYZ), a corporation in which the plaintiff had been a shareholder. The plaintiff seeks damages in his personal capacity. He also asserts several shareholders' derivative causes of action in his capacity as a shareholders' representative.
The plaintiff alleged that, in 2005, the defendants improperly prevented him from continuing to service the account of a certain customer of XYZ. Based on that conduct, the plaintiff, in his personal capacity, asserted causes of action against XYZ board members Mohamed Mowad, Sandy Check, Michael Hatzidakis, Joseph Rozen, Arnon Sadok, Ahmed Moharrem, Chi Yuen Lo, and Khaled Maher (hereinafter collectively the respondents), sounding in breach of contract and fraudulent inducement. The respondents demonstrated, prima facie, that there was no employment contract between the plaintiff and XYZ, and that, further, the conduct of the respondents in removing the plaintiff from servicing the subject account were expressly permitted by XYZ's rules and regulations. The plaintiff presented no proof refuting those showings ( see McGimpsey v. J. Robert Folchetti & Assoc., LLC, 19 A.D.3d 658, 659, 798 N.Y.S.2d 498). In addition, the business judgment rule bars “judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes” ( Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 393 N.E.2d 994). Here, the plaintiff failed to produce any evidence to substantiate his allegations of fraud, bad faith, or breach of fiduciary duty in connection with his removal from the subject customer account ( see North Fork Preserve, Inc. v. Kaplan, 68 A.D.3d 732, 733, 890 N.Y.S.2d 93). The Supreme Court properly concluded that the respondents established their entitlement to judgment as a matter of law dismissing the fifth, sixth, eighth, twelfth, seventeenth, twenty-second, twenty-seventh, thirty-second, thirty-seventh, and forty-second causes of action, which were premised on the removal of the plaintiff from servicing the subject account ( see McGimpsey v. J. Robert Folchetti & Assoc., LLC, 19 A.D.3d at 659, 798 N.Y.S.2d 498;see also North Fork Preserve., Inc. v. Kaplan, 68 A.D.3d at 733, 890 N.Y.S.2d 93). In opposition, the plaintiff failed to raise a triable issue of fact. Accordingly, the Supreme Court properly granted those branches of the respondents' motion which were for summary judgment dismissing those causes of action.
The plaintiff also asserted causes of action, in his individual capacity, based on the respondents' purported failure to provide him with an original XYZ stock certificate. However, the respondents submitted proof showing that they indeed provided the plaintiff with an original stock certificate. In opposition, the plaintiff failed to rebut that showing, and also submitted no evidence of any damages caused by the respondents' alleged conduct and, thus, failed to raise a triable issue of fact in opposition. Accordingly, the Supreme Court properly granted those branches of the respondents' motion which were for summary judgment dismissing the ninth, thirteenth, eighteenth, twenty-third, twenty-eighth, thirty-third, thirty-eighth, and forty-third causes of action ( see Alvarez v. Prospect Hosp., 68 N.Y.2d 320, 508 N.Y.S.2d 923, 501 N.E.2d 572).
The complaint asserted several shareholders' derivative causes of action against Mowad, who is the president of XYZ and a member of the board. The plaintiff alleged, inter alia, that Mowad breached his fiduciary duty to the corporation by permitting another corporation that he owns, the defendant Regal Insurance Brokerage, Inc. (hereinafter Regal), to utilize certain resources of XYZ, without fair compensation. The respondents failed to establish, prima facie, that Mowad did not breach his fiduciary duty to XYZ with respect to the dealings between XYZ and Regal, or that his dealings with respect to Regal were protected by the business judgment rule ( see Armentano v. Paraco Gas Corp., 90 A.D.3d 683, 686, 935 N.Y.S.2d 304;see also Gjuraj v. Uplift El. Corp., 110 A.D.3d 540, 973 N.Y.S.2d 172). In addition, although a corporate director may not be held personally liable for damages absent proof of commission of independent tortious acts ( see Murtha v. Yonkers Child Care Assn., 45 N.Y.2d 913, 915, 411 N.Y.S.2d 219, 383 N.E.2d 865;Hill v. Murphy, 63 A.D.3d 680, 681, 881 N.Y.S.2d 133), the respondents failed to submit any evidence establishing that Mowad's conduct with respect to Regal did not constitute such acts. Since the respondents failed to establish their prima facie entitlement to judgment as a matter of law dismissing the third cause of action, which was asserted against Mowad and based on this alleged breach of fiduciary duty, the Supreme Court should have denied that branch of their motion which was for summary judgment dismissing the third cause of action, regardless of the sufficiency of the plaintiff's opposition papers.
The Supreme Court also erred in granting that branch of the respondents' motion which was for summary judgment dismissing the seventh cause of action, which alleged that Mowad was unjustly enriched as a result of benefits granted by XYZ to Regal. “The essential inquiry in any action for unjust enrichment or restitution is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered” ( Paramount Film Distrib. Corp. v. State of New York, 30 N.Y.2d 415, 421, 334 N.Y.S.2d 388, 285 N.E.2d 695;see Sperry v. Crompton Corp., 8 N.Y.3d 204, 215, 831 N.Y.S.2d 760, 863 N.E.2d 1012). A plaintiff must show that (1) the defendant was enriched, (2) at the plaintiff's expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered ( see Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182, 919 N.Y.S.2d 465, 944 N.E.2d 1104). Here, the respondents failed to establish, prima facie, that Mowad did not improperly personally obtain a benefit as a result of any benefits conferred by XYZ upon Regal ( see Newswalk Condominium v. Shaya B. Pac., LLC, 102 A.D.3d 932, 961 N.Y.S.2d 203;see also Moezinia v. Ashkenazi, 105 A.D.3d 920, 921, 963 N.Y.S.2d 325).
However, the Supreme Court properly granted those branches of the respondents' motion which were for summary judgment dismissing the remaining derivative causes of action, which were asserted against each of the respondents individually.
The plaintiff alleged, inter alia, that the respondents breached their fiduciary duty to XYZ in connection with their handling of misconduct by the former comptroller of XYZ. However, the subject events occurred subsequent to the filing of the complaint, and the plaintiff failed to seek leave to amend the complaint pursuant to CPLR 3025(b). In any event, the respondents established, prima facie, that they did not breach their fiduciary duty to XYZ in this regard, and the plaintiff raised no triable issues of fact in opposition to that showing ( see Zuckerbrod v. 355 Co., LLC, 113 A.D.3d 675, 979 N.Y.S.2d 119;Acevedo v. Town 'N Country Condominium, Section I, Bd. of Mgrs., 51 A.D.3d 603, 604, 857 N.Y.S.2d 691).
The plaintiff further alleged that the respondents breached their fiduciary duty to XYZ in connection with an election held in March 2005. However, the plaintiff failed to commence a proceeding pursuant to CPLR article 78 to challenge that election, which was his sole and exclusive remedy to challenge the election ( seeBusiness Corporation Law § 619; Esformes v. Brinn, 52 A.D.3d 459, 462, 860 N.Y.S.2d 547).
With respect to the remaining shareholders' derivative causes of action, which alleged breach of fiduciary duty against the respondents, including allegations based on, inter alia, certain disciplinary actions taken against shareholders, the respondents demonstrated, prima facie, that no actionable breach of fiduciary duty occurred with respect to those acts, and the plaintiff failed to raise triable issues of fact in opposition to that showing ( see Zuckerbrod v. 355 Co., LLC, 113 A.D.3d at 676, 979 N.Y.S.2d 119;Acevedo v. Town 'N Country Condominium, Section I, Bd. of Mgrs., 51 A.D.3d at 604, 857 N.Y.S.2d 691).
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