Kamin v. American Express Co. 445

Howard P. KAMIN and Robert J. Kamin, Plaintiffs, 445

v. 445

AMERICAN EXPRESS COMPANY, a New York Corporation, et al., Defendants 445

Supreme Court, New York County, New York, 445

Special Term, Part I 445

March 17, 1976. 445

EDWARD J. GREENFIELD, Justice: 445

In this stockholders' derivative action, the individual defendants, who are the directors of the American Express Company, move for an order dismissing the complaint for failure to state a cause of action pursuant to CPLR 3211(a)(7), and alternatively, for summary judgment pursuant to CPLR 3211(c) 445

The complaint is brought derivatively by two minority stockholders of the American Express Company, asking for a declaration that a certain dividend in kind is a waste of *811 corporate assets, directing the defendants not to proceed with the distribution, or, in the alternative, for monetary damages. The motion to dismiss the complaint requires the Court to presuppose the truth of the allegations. It is the defendants' contention that, conceding everything in the complaint, no viable cause of action is made out 446

After establishing the identity of the parties, the complaint alleges that in 1972 American Express acquired for investment 1,954,418 shares of common stock of Donaldson, Lufken and Jenrette, Inc. (hereafter DLJ), a publicly traded corporation, at a cost of $29.9 million. It is further alleged that the current market value of those shares is approximately $4.0 million. On July 28, 1975, it is alleged, the Board of Directors of American Express declared a special dividend to all stockholders of record pursuant to which the shares of DLJ would be distributed in kind. Plaintiffs contend further that if American Express were to sell the DLJ shares on the market, it would sustain a capital loss of $25 million, which could be offset against taxable capital gains on other investments. Such a sale, they **810 allege, would result in tax savings to the company of approximately $8 million, which would not be available in the case of the distribution of DLJ shares to stockholders. It is alleged that on October 8, 1975 and October 16, 1975, plaintiffs demanded that the directors rescind the previously declared dividend in DLJ shares and take steps to preserve the capital loss which would result from selling the shares. This demand was rejected by the Board of Directors on October 17, 1975 446

It is apparent that all the previously-mentioned allegations of the complaint go to the question of the exercise by the Board of Directors of business judgment in deciding how to deal with the DLJ shares. The crucial allegation which must be scrutinized to determine the legal sufficiency of the complaint is paragraph 19, which alleges: 446

'19. All of the defendant Directors engaged in or acquiesced in or negligently permitted the declaration and payment of the Dividend in violation of the fiduciary duty owed by them to Amex to care for and preserve Amex's assets in the same manner as a man of average prudence would care for his own property.' 446

Plaintiffs never moved for temporary injunctive relief, and did nothing to bar the actual distribution of the DLJ shares. The dividend was in fact paid on October 31, 1975. Accordingly, that portion of the complaint seeking a direction not to *812 distribute the shares is deemed to be moot, and the Court will deal only with the request for declaratory judgment or for damages 446

Examination of the complaint reveals that there is no claim of fraud or self- dealing, and no contention that there was any bad faith or oppressive conduct. The law is quite clear as to what is necessary to ground a claim for actionable wrongdoing. 446

'In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed; or unless it be made to appear that the acts were fraudulent or collusive, and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those entrusted with corporate management are largely discretionary.' Leslie v. Lorillard, 110 N.Y. 519, 532, 18 L.E. 363, 365. 446

See also, Winter v. Anderson, 242 App.Div. 430, 432, 275 N.Y.S. 373, 374; Rous v. Carlisle, 261 App.Div. 432, 434, 26 N.Y.S.2d 197, 200, affd. 290 N.Y. 869, 50 N.E.2d 250; 11 New York Jurisprudence, Corporations, Section 378 447

More specifically, the question of whether or not a dividend is to be declared or a distribution of some kind should be made is exclusively a matter of business judgment for the Board of Directors. 447

'* * * Courts will not interfere with such discretion unless it be first made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose. It is for the directors to say, acting in good faith of course, when and to what extent dividends shall be declared * * * The statute confers upon the directors this power, and the minority stockholders are not in a position to question this right, so long as the directors are acting in good faith * * *' Liebman v. Auto Strop Co., 241 N.Y. 427, 433--4, 150 N.E. 505, 506. 447

Accord: City Bank Farmers Trust Co. v. Hewitt Realty Co., 257 N.Y. 62, 177 N.E. 309; Venner v. Southern Pacific Co., 2 Cir., 279 F. 832, cert. denied 258 U.S. 628, 42 S.Ct. 461, 66 L.Ed. 799 447

Thus, a complaint must be dismissed if all that is presented is a decision to pay dividends rather than pursuing some other course of conduct. Weinberger v. Quinn, 264 App.Div. 405, 35 N.Y.S.2d 567, affd. 290 N.Y. 635, 49 N.E.2d 131. A complaint which alleges merely that some course of action other than that pursued by the Board of Directors would have been more advantageous gives rise to no cognizable cause of action. Courts have more than enough to do in adjudicating legal rights and devising remedies for wrongs. The directors' room rather than the courtroom is **811 the appropriate forum for thrashing out purely business questions *813 which will have an impact on profits, market prices, competitive situations, or tax advantages. As stated by Cardozo, J., when sitting at Special Term, the substitution of someone else's business judgment for that of the directors 'is no business for any court to follow.' Holmes v. St. Joseph Lead Co., 84 Misc. 278, 283, 147 N.Y.S. 104, 107, quoting from Gamble v. Queens County Water Co., 123 N.Y. 91, 99, 25 N.E. 201, 208 447

It is not enough to allege, as plaintiffs do here, that the directors made an imprudent decision, which did not capitalize on the possibility of using a potential capital loss to offset capital gains. More than imprudence or mistaken judgment must be shown. 447

'Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.' Pollitz v. Wabash Railroad Co., 207 N.Y. 113, 124, 100 N.E. 721, 724. 447

Section 720(a)(1)(A) of the Business Corporation Law permits an action against directors for 'the neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.' This does not mean that a director is chargeable with ordinary negligence for having made an improper decision, or having acted imprudently. The 'neglect' referred to in the statute is neglect of duties (i.e., malfeasance or nonfeasance) and not misjudgment. To allege that a director 'negligently permitted the declaration and payment' of a dividend without alleging fraud, dishonesty or nonfeasance, is to state merely that a decision was taken with which one disagrees 447

Nor does this appear to a be a case in which a potentially valid cause of action is inartfully stated. The defendants have moved alternatively for summary judgment and have submitted affidavits under CPLR 3211(c), and plaintiffs likewise have submitted papers enlarging upon the allegations of the complaint. The affidavits of the defendants and the exhibits annexed thereto demonstrate that the objections raised by the plaintiffs to the proposed dividend action were carefully considered and unanimously rejected by the Board at a special meeting called precisely for that purpose at the plaintiffs' request. The minutes of the special meeting indicate that the *814 defendants were fully aware that a sale rather than a distribution of the DLJ shares might result in the realization of a substantial income tax saving. Nevertheless, they concluded that there were countervailing considerations primarily with respect to the adverse effect such a sale, realizing a loss of $25 million, would have on the net income figures in the American Express financial statement. Such a reduction of net income would have a serious effect on the market value of the publicly traded American Express stock. This was not a situation in which the defendant directors totally overlooked facts called to their attention. They gave them consideration, and attempted to view the total picture in arriving at their decision. While plaintiffs contend that according to their accounting consultants the loss on the DLJ stock would still have to be charged against current earnings even if the stock were distributed, the defendants' accounting experts assert that the loss would be a charge against earnings only in the event of a sale, whereas in the event of distribution of the stock as a dividend, the proper accounting treatment would be to charge the loss only against surplus. While the chief accountant for the SEC raised some question as to the appropriate accounting treatment of this transaction, there was no basis for any action to be taken by the SEC with respect to the American Express financial statement 448

The only hint of self-interest which is raised, not in the complaint but in **812 the papers on the motion, is that four of the twenty directors were officers and employees of American Express and members of its Executive Incentive Compensation Plan. Hence, it is suggested, by virtue of the action taken earnings may have been overstated and their compensation affected thereby. Such a claim is highly speculative and standing alone can hardly be regarded as sufficient to support an inference of self-dealing. There is no claim or showing that the four company directors dominated and controlled the sixteen outside members of the Board. Certainly, every action taken by the Board has some impact on earnings and may therefore affect the compensation of those whose earnings are keyed to profits. That does not disqualify the inside directors, nor does it put every policy adopted by the Board in question. All directors have an obligation, using sound business judgment, to maximize income for the benefit of all persons having a stake in the welfare of the corporate entity. See, Amdur v. Meyer, 15 A.D.2d 425, 224 N.Y.S.2d 440, appeal dismissed 14 N.Y.2d 541, 248 N.Y.S.2d 639, 198 N.E.2d 30. What we have here as revealed *815 both by the complaint and by the affidavits and exhibits, is that a disagreement exists between two minority stockholders and a unanimous Board of Directors as to the best way to handle a loss already incurred on an investment. The directors are entitled to exercise their honest business judgment on the information before them, and to act within their corporate powers. That they may be mistaken, that other courses of action might have differing consequences, or that their action might benefit some shareholders more than others presents no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith. The question of to what extent a dividend shall be declared and the manner in which it shall be paid is ordinarily subject only to the qualification that the dividend be paid out of surplus (Business Corporation Law Section 510, subd. b). The Court will not interfere unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust 448

Courts should not shrink from the responsibility of dismissing complaints or granting summary judgment when no legal wrongdoing is set forth. As stated in Greenbaum v. American Metal Climax Inc., 27 A.D.2d 225, 231--2, 278 N.Y.S.2d 123, 130: 449

'It is well known that derivative actions by stockholders generally involve extensive pretrial procedures, including lengthy examinations before trial, and then, finally, prolonged trials; and that they also entail large litigation costs, including the probability of a considerable liability upon the corporation for the defense costs of defendant officers. Such actions are a heavy burden upon the courts and litigants. Consequently, the summary judgment remedy should be fully utilized and given due effect to challenge such an action which appears to be in the nature of a strike suit or otherwise lacks apparent merit * * * (plaintiffs) are bound to bear in mind that matters depending on business judgment are not actionable (Cf. Steinberg v. Carey, 285 App.Div. 1131, 140 N.Y.S.2d 574). They are required to set forth something more than vague general charges of wrongdoing; the charges must be supported by factual assertions of specific wrongdoing; conclusory allegations of breaches of fiduciary duty are not enough.' 449

In this case it clearly appears that the plaintiffs have failed as a matter of law to make out an actionable claim. Accordingly, the motion by the defendants for summary judgment and dismissal of the complaint is granted. 449

Joy v. North 449

Athalie Doris JOY, Plaintiff-Appellant, 449

v. 449

Nelson L. NORTH, et al., Defendants, 449

Nelson L. North, et al., Defendants-Appellees 449

No. 1050, Docket 81-7729 449

United States Court of Appeals, 449

Second Circuit 449

Argued April 23, 1982 449

Decided Nov. 4, 1982. 449

RALPH K. WINTER, Circuit Judge: 449

This is an appeal from a grant of summary judgment for defendants by the District Court for the District of Connecticut, Eginton, Judge, dismissing a derivative action against certain directors and officers of Citytrust upon a recommendation of a special litigation committee and placing that report under seal. 519 F.Supp. 1312 (D.Conn.1981) 449

We reverse 450

BACKGROUND 450

In October of 1977, Dr. Athalie Doris Joy brought this shareholder's derivative suit on behalf of Connecticut Financial Services Corporation (now Citytrust Bancorp, Inc.) against its wholly-owned banking subsidiary, Citytrust, [FN1] and the officers and directors of Citytrust. Both corporations are incorporated in Connecticut. The complaint alleged diversity of citizenship, common law breach of trust and of fiduciary duty as well as violations of the National Bank Act, 12 U.S.C. § 84 (1976), which limits aggregate loans to a single person or entity to 10% of a bank's combined stockholder equity and capital. The allegations concern loans made by Citytrust to the Katz Corporation ("Katz") for construction of an office building in a redevelopment area of Norwalk, Connecticut. Plaintiff seeks a $6 million recovery plus interest and attorney's fees. 450

FN1. Citytrust became a federal bank on June 30, 1971. It became a state bank again on January 1, 1977. 450

The underlying transactions need only be briefly summarized at this point. In 1967, Citytrust entered into a 20-year term lease agreement for approximately 9% of an office building which Katz was planning to build in Norwalk. Katz, then a respected developer, signed a $4 million construction mortgage for a one-and-a-half year term on January 12, 1971. Although the mortgage was written through and recorded in the name of Citytrust, Chase Manhattan Bank provided the bulk of the financing, $3.5 million, with Citytrust participating to the extent of $500,000. At this time, Katz had already borrowed, largely in unsecured form, an additional $250,000 from Citytrust to finance construction of the office building. As the building neared completion in early 1972, Katz had drawn down the full value of the $4 million mortgage. At its expiration in June, 1972, the Chase mortgage *883 was replaced by a $4.5 million mortgage by First National City Bank, with Citytrust both issuing the mortgage and participating to the extent of $90,000. Meanwhile, Katz continued to receive unsecured loans from Citytrust. By December, 1972, that unsecured debt reached $900,000, for a total of $990,000 in Citytrust loans related to the building 450

In June, 1973, with the building only half rented, the First National City mortgage was extended for a year. Katz's unsecured debt to Citytrust had by now climbed to $1,840,000. In November, in conjunction with the issuance of yet another loan to Katz, Citytrust obtained a blanket second mortgage on the building and on other Katz properties to secure what was now a total loan balance of $2,140,000. Shortly thereafter, the First National City mortgage was extended to August, 1975, and Citytrust lent Katz another $300,000. Just prior to this extension of credit, the National Bank Examiners classified the Katz loans 450

In April, 1975, a refinancing plan was completed with Lincoln National Life Insurance Company providing a $6 million loan to a Katz-related partnership which had taken title to the building. The loan was secured by a first mortgage on the building and was used to consolidate Katz's debt. As a condition of the new financing, Citytrust was required to take a 30-year master lease on the still largely unrented building at a rental equaling the mortgage payments to Lincoln National, in effect guaranteeing Katz's $6 million obligation to Lincoln. In addition to undertaking the master lease, Citytrust had by now extended $2,665,000 in loans to Katz 450

In May, 1975, the National Bank Examiners classified $2 million of the Katz loans as doubtful and required a charge off of $665,000. On August 18, 1976, in an apparent effort to salvage what was left of its position, Citytrust's Board of Directors authorized loans which exceeded the 10% federal statutory limit. After these loans were consummated, Katz's total indebtedness to Citytrust reached $3,545,000. On October 20, 1976, Citytrust charged off the $2 million remaining on the second mortgage 451

On June 13, 1977, the Katz-related partnership relinquished title to the building to Citytrust in exchange for a release from its obligation to Lincoln National and a release of personal guarantees previously assumed by members of the Katz family. Citytrust thus directly assumed the $6 million Lincoln National mortgage. In October, 1977, Second Nutmeg Financial purchased the building for $9,600,000 which consisted of its assumption of the $6 million Lincoln National mortgage and a $3,600,000 note to Citytrust secured by a second mortgage. There is an indication in the District Court record that an affiliate of Second Nutmeg which later acquired the building has defaulted and Citytrust once again owns it, along with the concurrent obligations. There is no indication that rental income is now adequate to meet those obligations, and we appear free to assume that the other Katz properties covered by the second mortgage are not of any significant value 451

In October, 1977, Joy commenced this action after making an unsuccessful demand on the Directors of Citytrust. During the pendency of this case, the Supreme Court decided Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979), holding that federal courts must apply state law in determining the authority of a committee of independent directors to discontinue derivative suits even in many cases which arise under federal law. Immediately following the Burks decision, the Board of Directors of Citytrust and Connecticut Financial Services Corporation authorized the establishment of a Special Litigation Committee to determine whether continued prosecution of this derivative action would be in the best interests of the corporation. The Committee consisted of two Board members, Marion S. Kellogg and Ernest C. Trefz. [FN2] Kellogg was elected to the Board *884 of Directors on July 21, 1976 and commenced service on September 15, 1976. Trefz was elected to the Board on December 15, 1976 and commenced service on January 3, 1977. Neither is a defendant in this action. [FN3] 451

FN2. Alexander L. Stott was also named to the Committee. However, he resigned on March 3, 1980. 451

FN3. Trefz and Kellogg did, however, vote to refuse plaintiff's demand that the corporation bring suit against those involved in the Katz transaction. 451

By resolution dated August 15, 1979, the full Board of Directors, a majority of whom were defendants, voted to delegate to the Committee the power to review, investigate and analyze the circumstances surrounding the pending derivative action. The Committee retained independent counsel, John Murtha, Esquire, to assist its investigation 451

Nine months later, the Committee issued a Report recommending that the suit be discontinued as to 23 defendants, 20 of whom were outside directors of either Citytrust or Connecticut Financial Services and three of whom were either officers or directors or both. (The 23 will hereafter be referred to as the "outside defendants"). The Committee concluded there was "no reasonable possibility" that the outside defendants would be found liable. Its Report also recommended that settlement be considered with regard to seven defendants who were the senior officers most directly involved in the Katz loans. (These seven will hereafter be referred to as the "inside defendants"). As to them, the Committee found there was a "possibility" that one or more might be found to have been negligent. Counsel for the Committee made it clear to the District Court, however, that the decision to pursue settlement was not necessarily a decision to press the litigation against the inside defendants. If settlement is not reached, the Committee will reconsider whether to recommend termination of that portion of the action also 451

When plaintiff declined to withdraw the action as to the outside defendants, the corporation filed a motion to dismiss the case as to them. The District Court permitted discovery on the limited issue of the Committee's "bona fides, motivation and thoroughness." 519 F.Supp. at 1315. Portions of the Committee Report, consisting of a summary and a detailed presentation of the Committee's factual findings, supplemented by expert opinion letters and counsel's memorandum of law, were produced. These documents were put under seal pursuant to a protective order. Plaintiff was also allowed to depose a variety of persons involved in the underlying transactions and in preparation of the Report, to pose interrogatories to others, and to see various documents relating to the Report 452

After discovery, Judge Eginton granted the defendants' motion for summary judgment, the protective order remaining in force. Concluding that no dispositive Connecticut case or statute exists, Judge Eginton referred to the weight of authority in cases reported elsewhere. He held that Connecticut law permits the use of a Burks committee and that the business judgment rule limits judicial scrutiny of its recommendations to the good faith, independence and thoroughness of the Committee. 519 F.Supp. at 1325. He resolved these issues favorably to the Committee and, therefore, entered summary judgment in favor of the 23 outside defendants. Plaintiff appeals from the ruling. We reverse as to both the grant of summary judgment and the sealing of the Committee report. [FN4] 452