OPINION OF THE COURT
Thе order appealed from having dismissed the complaint for failure to state a cause of action, its allegations must, at this stage of the action, be accepted as true (Sanders v Winship,
As set forth in the complaint, defendant Beuret and Company, a securities dealer-broker established in 1985, earned its profits from underwriting initial public offerings. Plaintiff Giglio was a shareholder in, and consultant to, Beuret pursuant to agreements under which Giglio would be assigned 12Vi% of the warrants received by Beuret in connection with its underwriting or placement of securities at public offering. In 1986 the other six plaintiffs purchased shares in Beuret in separate agreements, in exchange for contractual assignments of interest in amounts ranging from .5% to 2% of the warrants received by Beuret.
The Beuret operation was financed by credit extended on margin from defendant Wall Street Clearing Company (WSC), whose chairman was dеfendant Kelleher. WSC was in turn controlled by its primary lender, defendant Barclays Bank. Beuret’s chief executive officer, Maucere, had his own personal trading account with WSC, a relationship that would provе to be in conflict with, and hasten the downfall of, the Beuret operation, and lead directly to this lawsuit.
When Maucere, Beuret and Beuret’s customers purchased
The level of credit thus extended was in violation of Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) regulations governing margin purchases, as well as National Association of Stock Dealers (NASD) requirements. To conceal these infractions, Beuret and Maucere, allegedly with knowledge and assistance from WSC and Kelleher, would "park” stock bоught on margin by Beuret in the accounts of Beuret customers, unbeknownst to those customers.
On December 1, 1987 WSC extended á cash loan of $750,000 to Beuret, and additional margin credit of $350,000, in further violation of SEC/NYSE/NASD rules and regulations. Bеuret returned the favor by granting WSC an option to purchase 10% of Beuret stock at a substantial discount. Thus, all defendants and Maucere were alleged to have been involved in this illicit scheme, which included the loans, extensions of credit, the "parking” of stock, etc.
Not only was this scheme illegal, but it was also fraught with risk. Predictably, Beuret’s financial operations failed in February 1988. In order to bail itself out, Beuret agreed to transfer the warrants it had acquired (in which plaintiffs had a contractual interest) to WSC, as security for Beuret’s and Maucere’s loan obligations and margin indebtedness. Among these warrants was an underwriter’s warrant for the purchase of 45,200 units of First World Cheese, Inc. (A similarly issued warrant is the subject of an interpleader action in Pentech Intl, v Wall St. Clearing Co.,
The complaint sets forth four claims. The first is that WSC and Kelleher tortiously interfered with plaintiffs’ rights in the valuable First World Cheese warrant. Second, plaintiffs allege that WSC’s acceptance of the First World Cheesе warrant and its registration in WSC’s name, with prior knowledge of plaintiffs’ contractual rights therein, constituted a wrongful taking of plaintiffs’ property. The third cause of action, asserted derivatively as corporate shareholders of Beuret, alleges that defendants, in acquiring a position of financial domination and control over Beuret, violated their fiduciary duty thereto by engaging in irresponsible lending practices, nаmely, the "parking” of stock in third-party accounts, and the causing of Beuret to divest itself of warrants known to be contractually obligated elsewhere. The fourth cause of action alleges, also derivаtively, injury to Beuret’s shareholders by reason of Maucere’s breach of his fiduciary duties as an officer and director of Beuret.
The first and second causes of action were dismissed on the ground that WSC was "justified” in tаking possession of the First World Cheese warrant because its later-perfected security interest was superior to plaintiffs’ unperfected contract rights therein. This was error. Whatever WSC acquired was subjeсt to Beuret’s preexisting liabilities, notwithstanding the former’s later perfection of a security interest. WSC’s acquired interest was secured only to the extent that Beuret had an unencumbered, transferable interest. To рut it another way, the assignee steps into the shoes of its assignor, and takes subject to any preexisting liabilities of the latter (UCC 8-301), basically a "first in time, first in right” rule (September-tide Publ. v Stein & Day, 884 F2d 675, 682).
WSC’s "secured interest” in the transferred warrant would have priority over plaintiffs’ contractual claims only if WSC were a bona fide purchaser, and that status cannot be attained where the transferee takes with knowledge of an adverse claim (UCC 8-302 [1]; see, In re Legel Braswell Govt. Sec. Corp., 695 F2d 506). An "adverse claim” is not limited striсtly to an adverse ownership interest, but rather could include, in this context, any transfer with knowledge of violation of an agreement (7 Hawkland, Alderman and Schneider, UCC Series § 8-302:05 [art 8]; see, e.g., McMillan, Ltd. v Warrior Drilling & Eng’g Co., 512 So 2d 14 [Ala]; cf., Center v Hampton Affiliates,
This was not—it should be noted—a contest between competing security interests. Plaintiffs assert not a security interest whose priority vis-á-vis WSC is governed by UCC 9-312, but rather a prior contract right of which defendants allegedly had notice.
WSC’s acceptance of the warrant with knowledge of the existence of the agreement between plaintiffs and Beuret states a cause of action for procurement of breach of a contract; the burden would be on defendants to plead and prove justification for such action (State Enters, v Southridge Coop. Section 1,
The third and fourth causes of action are partially defective in that Fallon and Rubin, as counsel for plaintiffs, are precluded, under conflict of interest principles, from asserting a derivative claim on their own behalf (Sweet v Bermingham, 65 FRD 551). Therefore, dismissal of these claims was proper at least with respect to these two plaintiffs.
The third and fourth claims variously allege breach of fiduciary duty causing harm to Beuret’s shareholders. The third alleges liability on the part оf WSC by reason of its financial domination over Beuret, and the fourth is based upon the acts of Beuret’s own chief executive officer, Maucere. The third cause was properly dismissed because there is insufficient showing that WSC exerted economic control over Beuret. The relationship between these two companies was maintained at arm’s length. A debtor-creditor relationship, standing alone, doеs not create a fiduciary duty of the latter to the former. Furthermore, it is only by establishment of this link that a further claim could be stated against Kelleher and Barclays Bank; accordingly, dismissal of the third cause of aсtion in its entirety was proper.
Accordingly, the order of Supreme Court, New York County (Edward J. Greenfield, J.), entered on or about October 28, 1991, as republication of an order earlier entered on September 11, 1991, dismissing the complaint in its entirety, should bе modified to the extent of denying defendants’ motion to dismiss the first and second causes of action and so much of the fourth cause of action as asserted by plaintiffs Hochberg, Nevyas, Rosenbaum, Winston and Giglio against defendants WSC, Beuret and Kelleher; those claims should be reinstated and remanded for further proceedings; and the order should be otherwise affirmed, without costs.
Rosenberger, J. P., Kupferman and Rubin, JJ., concur.
Order, Supreme Court, New York County, entered on оr about October 28, 1991, as republication of an order earlier entered on September 11, 1991, modified to the extent of denying defendants’ motion to dismiss the first and second causes of action and so much of the fourth cause of action as asserted by plaintiffs Hochberg, Nevyas, Rosenbaum, Winston and Giglio against defendants Wall Street Clearing Company, Beuret and Kelleher, and those claims reinstated and remanded for further proceedings and otherwise affirmed, without costs and disbursements.