659 N.Y.S.2d 276 | N.Y. App. Div. | 1997
OPINION OF THE COURT
Almost 70 years ago, Chief Judge Cardozo of the Court of Appeals set forth a fiduciary standard in words that have resounded down through tbs decades: "Many forms of conduct
As a .Court of law and equity, we can do no less than adhere to the unbending «tradition upholding this standard if behavior.
Our role in a motion to dismiss pursuant to CPLR 3211 (a) (7) is limited to determining whether the complaint states a cause of action, not whether there is evidentiary support for the complaint (LoPinto v J. W. Mays, Inc., 170 AD2d 582, 583). We must liberally construe the complaint in favor of the plaintiff and accept as true all factual allegations (supra).
Applying these principles to the complaint before us, the allegations of plaintiff present a picture of the management employees of a corporation scheming with a potential buyer to sell the corporation at the lowest possible price the principal and other shareholders would accept. It is asserted that the management employees ceajlt secretly with the buyer, furnishing it confidential information to aid it in making the most favorable offer (for the. buyer) in the transaction.
Plaintiff owned ^hares of Rabeo Health Services, Inc. as of August 31, 1993, and instituted this action on behalf of himself and others si-QÜl&rly situated for damages caused by the defendants’ pw^nreed fraud and breach of fiduciary duty in connection with the acquisition of General Medical Corp. through a purchase of the plaintiff’s stock in Rabeo, which was the parent corporation. Qf General Medical. In 1993, General Medical was a privately held corporation engaged in the nationwide distribution of l^edical end surgical supplies. The plaintiff was the Chairman nD(| President of Rabeo and was also the Chairman and conti- shareholder of General Medical. The complaint alleges ; in order to induce loyalty and provide incentives, Rabeo c- General Medical’s stock at a nominal price to certain mem J¿rs of its management, including the defendants Nielsen, Robison, Garber and Nedrow. The stock was restricted pursuant to a shareholders’ agreement which, absent a public offering or sale of all shares of Rabeo, precluded the management defendants from selling their stock to anyone but Rabeo for adjusted shareholders’ equity. The management defendants also signed voting agreements giving the plaintiff the sole power to dii bct the voting of their com
On July 6, 1993, the plaintiff and Kelso agreed on a price of $225 million in cash, plus an additional amount of $9.5 million, and on August 31, 1993, General Medical was acquired by defendant GM Holdings, Inc., controlled by the management defendants, Goldberg and Kelso. Two Kelso affiliates acquired an 82.8% interest in GM Holdings. All directors and executive officers of General Medical also received 10.6% of GM Holding's. The plaintiff asserted that he first learned of what had taken p\?úX hi May of 1995 when he read a deposition of defendant Nedrow in an unrelated Federal action in Virginia.
CPLR 3013 provides: "Statements in a pleading shall be sufficiently particular to give the court and parties notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved and the material elements of each cause of action or defense.”
CPLR 3016, which deals with particularity required in specific actions, provides, in subdivision (b), with respect to a cause of action for fraud: "Where a cause of action or defense is based upon misrepresentation, fraud, mistake, wilful default, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in detail.”
These provisions, read together, mandate only that the complaint allege the misconduct complained of in sufficient detail to inform the defendants of the substance of the claims. As the Court of Appeals has noted with respect to CPLR 3016 (b): "This provision requires only that the misconduct complained of be set forth in sufficient detail to clearly inform a defendant with respect to the incidents complained of and is not to be interpreted so strictly as to prevent an otherwise valid cause of action in situations where it may be 'impossible to state in detail the circumstances constituting a fraud’ (Jered Contr. Corp. v New York City Tr. Auth., 22 NY2d 187, 194).” (Lanzi v Brooks, 43 NY2d 778, 780.)
Although the IAS Court found that the complaint failed to specify which defendants were involved in the allegedly clandestine meetings, which defendants agreed to keep the meetings separate or who participated in the continuing secret contacts, the gravamen of the complaint was that the defendants secretly conspired to orchestrate a buyout of Rabeo at an unfairly low price using wrongfully disclosed and confidential and proprietary information. Under the cirgg¿_ stances, where the facts were "peculiarly within ..jibe?' knowledge of the party against whom the [fraud] is ¿eing asserted”
Further, as noted by plaintiff, the IAS Court erroneously decided factual issues in deciding the motion to dismiss. Thus, the court found that plaintiff Bernstein had full access to General Medical’s books and records and so could not have relied upon any of defendants’ fraudulent statements and omissions. However, there is no reason to believe the management defendants would have recorded possible wrongdoing in the company books and records. Also, the court improperly found that because the fairness opinion from Smith Barney concluded that the leveraged buyout price was fair, the complaint had to be dismissed. This improperly analyzed the "opinion” of Smith Barney and assumed that the brokerage house was given all the salient facts in rendering its opinion.
Since no discovery had taken place at the time the motion to dismiss was made, the plaintiff had no way of knowing the precise dates, the participants in or the extent of the conversations alleged to have taken place in furtherance of the alleged scheme to defraud. However, contrary to the conclusion of the IAS Court, the allegations in the complaint, considered in conjunction with the deposition testimony of Nedrow, an attorney who was the general counsel to Rabeo and General Medical, and considering the fact that specific details of the alleged fraud were peculiarly within the knowledge of the defendants, sufficiently complied with the requirements of CPLR 3016 (b) and 3013.
The IAS Court also erred when it dismissed the fraud cause of action for failure to allege scienter, justifiable reliance and damages. Giving the allegations their most favorable intendment (Arrington v New York Times Co., supra), the complaint adequately alleged misrepresentation of or failure to disclose a material fact, falsity, scienter, justifiable reliance by plaintiff and injury, the elements of fraud Ambassador Factors v Kandel & Co., 215 AD2d 305, 307). Even without discovery, the allegations that the management defendants schemed with Kelso to induce plaintiff to sell his stock at a price they deemed
Finally, the court erred when it found that plaintiff failed to plead adequate damages to sustain a cause of action for fraud since the plaintiff actually earned a profit in the transaction. " 'The true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong’ or what is known as the 'out-of-pocket’ rule (Reno v Bull, 226 NY 546, 553; Hanlon v MacFadden Publ., 302 NY 502). Under this rule, the loss is computed by ascertaining the 'difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain’ (Sager v Friedman, 270 NY 472, 481). Damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained.” (Lama Holding Co. v Smith Barney, 88 NY2d 413, 421.)
Contrary to the conclusion reached by the IAS Court, the plaintiff was not trying to recover profits received by the company after his sale. Instead, he sought to recover the difference between the price he received in the sale of the company and the price he would have received had his employees and Kelso not deceived him.
The IAS Court also found that plaintiff lacked standing to bring a direct action for breach of fiduciary duty and inducing breach of fiduciary duty. Where a corporation is dissolved or sold in a transaction marred by breaches of fiduciary duty, the wronged shareholders of the former corporation are not left without a remedy. "No one would assert that a former owner suing for loss of property through deception or fraud has lost standing to right the wrong that arguably caused the owner to relinquish ownership or possession of the property.” (Cede & Co. v Technicolor, Inc., 542 A2d 1182, 1188 [Del Sup Ct].) The Delaware Supreme Court later expressly found that complaining shareholders have standing to pursue individual
The IAS Court also erred in prematurely dismissing the class action allegations in the complaint before an answer had been served. Pursuant to CPLR 902, a motion to determine whether a class action may be maintained is to be made within 60 days after the time to serve the responsive pleading has expired. The requirements for class certification, as set forth in CPLR 901, are:
"a. One or more members of a class may sue or be sued as representative parties on behalf of all if:
"1. the class is so numerous that joinder of all members, whether otherwise required or permitted, is impracticable;
"2. there are questions of law or fact common to the class which predominate over any questions affecting only individual members;
"3. the claims or defenses of the representative parties are typical of the claims or defenses of the class;
"4. the representative parties will fairly and adequately protect the interest of the class; and
"5. a class action is superior to other available methods for the fair and efficient adjudication of the controversy.”
While we do not decide the issue herein, we note that the "prerequisites” for declaring a class action are, at least, arguably present under the circumstances. Prior to the acquisition, Rabeo had more than 150 shareholders, making joinder of each
The IAS Court also erred in dismissing the punitive damages claim. It has been held that such damages are available "only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as 'gross’ and 'morally reprehensible,’ and of' "such wanton dishonesty as to imply a criminal indifference to civil obligations” ’ (Rocanova [v Equitable Life Assur. Socy.], 83 NY2d, at 614, supra, quoting, Walker v Sheldon, 10 NY2d 401).” (New York Univ. v Continental Ins. Co., 87 NY2d 308, 315-316.)
However, the Court of Appeals, in that case, noted that where a lawsuit has its genesis in a contractual relationship between the parties, "the threshold task for a court considering defendant’s motion to dismiss a cause of action for punitive damages is to identify a tort independent of the contract” (supra, at 316). Here, the allegations of breach of fiduciary duty and inducing the breach constitute actions "outside the contract but intended to defeat the contract,” and thus are sufficient to support an independent tort claim (supra, at 316).
Finally, the IAS Court, in view of its dismissal, did not reach the issue raised by the management defendants of lack
Accordingly, the judgment of the Supreme Court, New York County (Ira Gammerman, J.), entered October 15, 1996, and order of the same court and Justice, entered September 30, 1996, which granted defendants’ motion to dismiss the verified class action complaint, should be reversed, on the law, with costs, the motion denied, and the complaint reinstated.
Rosenberger, J. P., Wallach and Rubin, JJ., concur.
Order and judgment, Supreme Court, New York County, entered September 30, 1996 and October 15, 1996, respectively, reversed, on the law, with costs, defendants’ motion to dismiss the verified class action complaint denied, and the complaint reinstated.