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holding that where “approval of the board of directors was not formally requested,” a demand would have been futile, “ it could hardly be expected that if approval of the board of directors were sought, [defendant], who controlled 50% of the board, would have authorized the action against himself”
Summary of this case from Barry v. CurtinOpinion
October 17, 1988
Appeal from the Supreme Court, Kings County (Shaw, J.).
Ordered that the order is reversed, on the law, with costs, the plaintiffs' motion is dismissed as academic, the defendants' cross motion is granted, and the complaints are dismissed without prejudice to the commencement of a shareholder's derivative action.
William Blum, who was a director, officer, and 50% shareholder of the two corporate plaintiffs, initiated these actions against the defendant Larry S. Wolf, the other director, officer, and 50% shareholder, seeking to recover for the alleged waste of and conversion of corporate assets. Also named as defendants in each action were Wolf's wife and two separate business entities owned and operated by Wolf. The Supreme Court denied the defendants' motion for summary judgment dismissing the complaints on the ground that Blum had the authority to commence these actions on behalf of the corporations pursuant to Business Corporation Law § 720. The court's reliance on Di Dominici v Parmet ( 118 A.D.2d 618, lv denied 68 N.Y.2d 601) is misplaced and, accordingly, we reverse.
While it is well settled that under Business Corporation Law § 720 (b) Blum was entitled, as a director of the corporations, to bring suit on their behalf for waste and conversion committed by another officer or director (see, Rapoport v Schneider, 29 N.Y.2d 396; Tenney v Rosenthal, 6 N.Y.2d 204; Siegel v Protiva, 130 A.D.2d 569; Di Dominici v Parmet, supra), in these actions Blum has not proceeded on behalf of the corporations. On the contrary, in these actions, unlike in Di Dominici v Parmet (supra), the corporations are the only named plaintiffs.
The issue at hand is whether Blum could properly initiate these actions by the corporations against Wolf, the other 50% shareholder and director. It has consistently been held that the statutory mandate which provides that the business of a corporation shall be managed by its board of directors (Business Corporation Law § 701) cannot be circumvented (Sterling Indus. v Ball Bearing Pen Corp., 298 N.Y. 483; see, Matter of Paloma Frocks [Shamokin Sportswear Corp.], 3 N.Y.2d 572, 575; Rothman Schneider v Beckerman, 2 N.Y.2d 493, 498). However, "'Where there has been no direct prohibition by the board * * * the president has presumptive authority, in the discharge of his duties, to defend and prosecute suits in the name of the corporation'" (Matter of Paloma Frocks [Shamokin Sportswear Corp.], supra, at 575-576, quoting from Rothman Schneider v Beckerman, supra, at 497). In the present case "approval of the board of directors was not formally requested * * * [f]or it could hardly be expected that if approval of the board of directors were sought, [Wolf], who controlled 50% of the board, would have authorized the action against himself' (Tidy-House Paper Corp. v Adlman, 4 A.D.2d 619, 621). As to Blum's presumptive authority, "[t]he query then is whether such a presumption applies when the president seeks to maintain an action against one who has as much control over the plaintiff corporation as the president himself" (Tidy-House Paper Corp. v Adlman, supra, at 621). We agree with the holding in Tidy-House Paper Corp. v Adlman (supra, at 623) that the appropriate avenue of relief is a stockholder's derivative action (see, Abelow v Grossman, 91 A.D.2d 553, 554).
Accordingly, the order should be reversed and the actions dismissed without prejudice to the commencement of shareholder's derivative actions. It should be noted that such an action is proper to assert the claims raised in action No. 2 despite the dissolution of Industry Wide Ltd. (see, Independent Investor Protective League v Time, Inc., 50 N.Y.2d 259, rearg denied 50 N.Y.2d 1059).
In light of this holding, we need not consider the merits of the plaintiffs' motion to consolidate. Lawrence, J.P., Kunzeman, Sullivan and Balletta, JJ., concur.