Armentano v. Paraco Gas Corp.
935 N.Y.S.2d 304
N.Y. App. Div.
2011
Check Treatment

ROBERT ARMENTANO, Individually and on Behalf of All Other Shareholders of PARACO GAS CORPORATION Similarly Situated, Appellant, v PARACO GAS CORPORATION et al., Respondents.

Supreme Court, Appellate Division, Second Department, New York

[935 NYS2d 304]

ROBERT ARMENTANO, Individually and on Behalf of All Other Shareholders of PARACO GAS CORPORATION Similarly Situated, Appellant, v PARACO GAS CORPORATION et al., Respondents. [935 NYS2d 304]—

“A cause of action sounding in breach of fiduciary duty must be pleaded with the particularity required by CPLR 3016 (b)” (; see ; ; ; ; ). “The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct” (; see ; ; ). Members of a board of directors of a corporation “owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly” (; see ; ). As a component of this duty, “[d]irectors, being fiduciaries of the corporation, must, in issuing new stock, treat existing shareholders fairly” (; see ; ). “[D]irectors shall not breach the obligations which they owe as trustees for all the stockholders in connection with stock, the issue of which is within their control, (a) by increasing their voice in the control of the corporation through the secret purchase of such stock, or (b) increasing their proportionate share in the surplus in that manner, or (c) obtaining the stock at an inadequate price” (). “Departure from precisely uniform treatment . . . may be justified . . . where a bona fide business purpose indicates that the best interests of the corporation would be served by such departure” ().

Here, affording the complaint liberal construction, accepting the facts alleged therein as true, and according the plaintiff the benefit of every possible favorable inference (see ), the complaint sufficiently alleged that the Armentano defendants, as directors of the corporation, breached a fiduciary duty owed to the plaintiff, and the other shareholders similarly situated, by issuing to themselves treasury shares without a legitimate business purpose and for the sole reason of diluting the equity interest held by the plaintiff and the other shareholders (see ; ; cf. ; ). Moreover, the complaint sufficiently stated a cause of action to recover damages for unjust enrichment, as it alleged that the Armentano defendants were unjustly enriched by receipt of the treasury shares, at the expense of the corporation and its shareholders, and that it is against equity and good conscience for them to retain the treasury shares (see generally ; [2008]; ). Moreover, given the allegations of misconduct, it was improper for the Supreme Court to rely on the business judgment rule in granting the defendants’ motion to dismiss pursuant to CPLR 3211 (a) (7). “The business judgment doctrine does not foreclose inquiry by the courts into the disinterested independence of members of the board of directors of a corporation and cannot shelter individuals from responsibility for breaches of duty of care they owe as directors” (; see ; ; ).

Accordingly, the Supreme Court should have denied the defendants’ motion pursuant to CPLR 3211 (a) (7) to dismiss the complaint. Dillon, J.P., Angiolillo, Florio and Dickerson, JJ., concur.

DILLON, J.P., ANGIOLILLO, FLORIO AND DICKERSON, JJ.