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PARKER CHAPIN FLATTAU & KLIMPL v. BLACKMAN

June 17, 1983

PARKER CHAPIN FLATTAU & KLIMPL, Plaintiff,
v.
SEYMOUR BLACKMAN, SOL SILVERANG, PREMO PHARMACEUTICAL LABORATORIES, INC., FEDERAL PHARMACAL, INC., KORO COMPANY, INC. and PREMO INTERNATIONAL SALES, INC., Defendants


Sweet, D.J.


The opinion of the court was delivered by: SWEET

SWEET, D.J.

Presently pending is the motion of defendants Premo Pharmaceutical Laboratories, Inc. ("Premo") and Federal Pharmacal, Inc. ("Federal") pursuant to Fed.R.Civ.P. 50(b), for judgment notwithstanding the verdict rendered in favor of Parker Chapin Flattau & Klimpl ("Parker Chapin") for its fees and disbursements in the amount of $97,321.71. Parker Chapin opposes the motion as do the individual defendants Seymour Blackman ("Blackman") and Sol Silverang ("Silverang"). For the reasons set forth below, the motion will be granted and judgment entered dismissing the complaint against Premo and Federal.

 The issue raised by the motion is easy to state but difficult to determine as a result of the complicated nature of the relationship of the parties. Was the action commenced by Parker Chapin on behalf of Blackman and Silverang in the course of a corporate control contest a derivative action under the New York Business Corporation Law ("B.C.L.") § 626 or an action by or on behalf of the corporation brought by officers or directors under B.C.L. § 720? The action in which Parker Chapin performed services was settled after Parker Chapin had been discharged. No payment of counsel fees was sought or obtained in the course of its discontinuance. Because I conclude the action was derivative in nature, under B.C.L. § 626, court approval for any counsel fees was required and cannot now be obtained against Premo and Federal, the stock of which was sold by the individual defendants and others to the Lemmon Company ("Lemmon") after the resolution of the control contest. To sort out the relationship of the parties a recital of the undisputed facts as established in the five-day jury trial is required.

 Prior to the spring of 1981, Premo, its subsidiary Federal and related companies Koro Company, Inc. ("Koro") and Premo International Sales, Inc. ("International"), were in the pharmaceutical business. The shares of Premo were wholly owned by Blackman, his two sons, John and Steven, and Silverang, and the four men were directors and officers. A shareholder's agreement among the four required unanimity for any action by the board of directors of Premo.

 A dispute arose between Blackman and his two sons over control and operation of the companies, exacerbated to a substantial degree by the employment and subsequent discharge of one of the sons' wives and the ownership of Premo shares previously held in the name of Blackman's wife prior to her death. In addition there were substantial differences relating to corporate operations. Also, Blackman believed that one of the sons had used corporate assets for his own personal benefit. These matters came to a head in the early spring of 1981, the sons were discharged, control over corporate accounts and office was at issue, and Blackman and Silverang consulted and then engaged Parker Chapin to take whatever measures were required to obtain control of the corporations. Parker Chapin was retained by all the defendants, corporate and individual.

 An action was commenced in the Supreme Court of the State of New York, County of New York, on March 19, 1981, entitled "Seymour Blackman and Sol Silverang, each one individually and derivatively on behalf of Premo Pharmaceutical Laboratories, Inc., Federal Pharmacal, Inc., Koro Company, Inc. and Premo International Sales, Inc. v. John Blackman and Steven Blackman." The complaint described the 1979 shareholders agreement as well as the sons' alleged intention to violate the shareholders agreement and oust Blackman and Silverang as directors and officers. In addition, a conspiracy by the defendants to interfere and damage the interests of the corporate defendants and the shareholders and to commit various alleged tortious and improper acts which were calculated to "disrupt . . . the business of the plaintiff corporations, divert the efforts of employees . . . injure the credit . . . and deplete the assets of those companies" was alleged. Paragraph 23 recited that:

 
No demand has been made on the boards of directors of the plaintiff corporations because such demand would be futile in that one or both of the defendants are members of the boards of those companies.

 Relief sought included an injunction against waste, conversion, or interference, as well as the noticing or conducting of any shareholder's meeting. Also, the return of books and records, an accounting, and costs and disbursements were sought.

 Although motion practice ensued, including a motion by the defendants to realign the parties, no decision on the merits or on the preliminary relief sought was obtained. The court did, however, issue a temporary restraint. Litigation was also undertaken in New Jersey concerning control over certain corporate accounts. Again, no decision was reached on the merits but the New Jersey court barred the use of corporate funds in connection with the New York litigation. Certain corporate funds already paid to Parker Chapin were returned, and demand was made upon the individual defendants.

 By the summer the parties to the contest had determined that the appropriate solution to their impasse was the sale of their stock to a third party, negotiations were undertaken, and an agreement to sell the Premo shares owned by the Blackmans and Silverang to Lemmon was entered into. Parker Chapin performed some services in connection with the sale.

 Parker Chapin sought payment for its outstanding statements for services rendered. A dispute developed concerning the propriety of the fees claimed and Parker Chapin's insistence that the liability created was joint and several and that no allocation of the respective fees owed could be made between the parties. Parker Chapin was discharged, the sales agreement with Lemmon was completed and the action initiated in March, 1981 was discontinued by stipulation on December 15, 1981. No application for counsel fees was submitted and none were approved.

 No evidence has been cited by the parties on this motion nor was any adduced at trial concerning any provision in the sales agreement with Lemmon which dealt with any liability for Parker Chapin's services. One of the Parker Chapin attorneys, Alvin Stein, testified that it was not possible to differentiate between services rendered for the individuals and the corporations for the purposes of allocation.

 Failing to obtain payment on its statements, Parker Chapin commenced this diversity action, which was tried to a jury in January, 1983. The jury rendered a Special Verdict which is set forth as Appendix A. All that remains is the instant motion.

 The complaint filed by Parker Chapin in the New York State court action described the corporate plaintiffs and, except as stated in the caption, described the individual plaintiffs only as shareholders, although it alleged that the defendants intended the ouster of Blackman and Silverang as officers and directors. The relief sought is typical of that sought in a shareholders derivative action, an injunction against the allegedly improper conduct, an accounting for waste, and costs and expenses. There is no allegation that the action was brought by an officer or director on behalf of the corporation under B.C.L. § 720, nor by a shareholder under B.C.L. § 626. Aside from the alignment of the corporations as plaintiffs, rather than nominal defendants, the complaint in form sets forth a typical derivative action. The New Jersey court so regarded it by not permitting ...


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