103 F. Supp. 3d 426
S.D.N.Y.2015Background
- YAI, a New York nonprofit that largely depends on Medicaid reimbursement, sued former CEO Joel Levy in counterclaims alleging he served as a "faithless servant" and breached fiduciary duties by manipulating compensation processes and certifying inaccurate Consolidated Fiscal Reports (CFRs), which inflated Medicaid reimbursements and YAI’s reported financial performance.
- Levy served as YAI’s CEO (1979–2009) and consultant (2009–2011); he allegedly helped draft YAI’s 1999 Compensation Philosophy, influenced selection of compensation consultants, and provided financial reports to the Board.
- Federal and state False Claims Act investigations (qui tam) and related intervention led to an $18 million settlement by YAI and heightened regulatory oversight; an Independent Review Organization found cost-allocation noncompliance.
- YAI seeks disgorgement/forfeiture of compensation (including SERP/deferred payments), declaratory relief, and other damages/fees based on alleged self-dealing, false certifications of CFRs, and failure to disclose improper accounting to the Board.
- Levy moved to dismiss YAI’s counterclaims under Rules 12(b)(1) and 12(b)(6), arguing (inter alia) the business judgment rule and N-PCL § 717 shield him, Rule 9(b) applies and the pleading fails to meet it, and (in reply) that a shorter statute of limitations applies.
- The Magistrate Judge recommended denying the motion; the district court reviewed objections de novo where raised, adopted the Report, overruled Levy’s objections, and denied the motion to dismiss.
Issues
| Issue | Plaintiff's Argument (YAI) | Defendant's Argument (Levy) | Held |
|---|---|---|---|
| Business judgment rule / N-PCL § 717 applicability | Levy manipulated information and certified false CFRs, so Board decisions relied on his misstatements and the rule does not bar inquiry | Board was disinterested and set compensation; rule (and N-PCL § 717) protects those Board decisions | Business judgment rule doesn't bar claims where officer self-dealing or misrepresentations to the board are alleged; YAI's facts overcome dismissal |
| Rule 9(b) heightened pleading | Claims are breach of fiduciary duty/faithless servant, not fraud; Rule 8 suffices | Counterclaims allege inducement by false statements and therefore sound in fraud, so Rule 9(b) applies | Even if Rule 9(b) applied, YAI pleaded fraud-related allegations (CFR certifications and specific statements to the Board) with sufficient particularity; court denies dismissal on this ground |
| Statute of limitations for breach of fiduciary duty | Six-year period applies (CPLR 213(7)) because YAI is a corporation suing a former officer/director | Three-year period applies (argued belatedly in reply) | Court exercised discretion to consider the argument and held CPLR 213(7)’s six-year period governs; claim timely |
| Sufficiency of pleadings re: faithless servant / breach elements | Allegations of drafting compensation policy, influencing consultants, certifying false CFRs, and misrepresenting finances state plausible claims for breach and faithless servant forfeiture | Such allegations merely second-guess Board's compensation decisions and are barred | Under Rule 8(a) YAI sufficiently pleaded duties, knowing breach, and damages; motion to dismiss denied |
Key Cases Cited
- Auerbach v. Bennett, 47 N.Y.2d 619 (N.Y. 1979) (sets out New York business judgment rule and its limits)
- Treadway Cos. v. Care Corp., 638 F.2d 357 (2d Cir. 1980) (directors presumed to act properly under business judgment rule)
- In re Croton River Club, Inc., 52 F.3d 41 (2d Cir. 1995) (business judgment rule inapplicable where director has an interest/self-dealing)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (guide for when non-fraud claims "sound in fraud" and trigger Rule 9(b))
- IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132 (N.Y. 2009) (limitations period for fiduciary breach depends on remedy sought; governs analysis)
- Phansalkar v. Andersen Weinroth & Co., 344 F.3d 184 (2d Cir. 2003) (discusses New York "faithless servant" doctrine)