United States District Court, S.D. New York
April 5, 2005.
FREDERICK W. CRIGGER, DSMCKEE INVESTMENTS INC., DAVID S. McKEE, JACK SCHUELER, EVA SCHUELER, TERRY WILKINSON and CSDESIGN INC., Plaintiffs,
FAHNESTOCK AND COMPANY, INC., RAYMOND MINICUCCI and AURELIO VUONO, Defendants.
The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge
OPINION and ORDER
This is a fraud case that will be tried to a jury beginning on
April 7, 2005. Plaintiff DSMcKee Investments Inc. ("DSMcKee") is
a Canadian entity wholly owned by Plaintiff David S. McKee
("McKee"). (Compl. ¶ 6). Plaintiff CSDesign Inc. ("CSDesign") is
a Canadian entity wholly owned by Plaintiff Terry Wilkinson
("Wilkinson"). (Id. ¶ 9). Defendants have moved to dismiss
McKee and Wilkinson on standing grounds and to substitute
Momentum Investments Ltd. ("Momentum") for CSDesign pursuant to
Defendants contend that McKee and Wilkinson lack standing
because only DSMcKee and CSDesign suffered any alleged injury in
this matter. Defendants note that the corporations, not McKee and Wilkinson individually, (i) opened accounts with
Fahnestock, (ii) entered into funding agreements with Rayvon,
Inc. (Vuono's company) and (iii) received transfers of preferred
stock from Rayvon in 1995. Defendants also point out that
Minicucci addressed prospectuses for possible future investments
only to DSMcKee and CSDesign, not to McKee and Wilkinson
individually. The signing of documents and attending of meetings
on behalf of their companies, Defendants argue, are not enough to
give McKee and Wilkinson standing as individual plaintiffs in
this action. (Minicucci Mem. at 3-5).
Plaintiffs respond that the issue does not turn on whether
McKee or Wilkinson signed Fahnestock or Rayvon documents. Without
citing supporting case law, Plaintiffs allege that "defendants
defrauded the plaintiffs individually, by causing the plaintiffs
to commit (and eventually lose) their personal assets to a
fraudulent scheme. Whether such assets were held in individual or
corporate names, the question is the same: whether McKee and
Wilkinson were injured (i.e., were deprived of assets) as a
result of defendants." (Pl. Mem. at 3). Plaintiffs contend that
the Court "should not dismiss individual plaintiffs on the basis
that certain documents were executed in a corporate capacity
rather than an individual capacity." (Id. at 4).
It is settled that standing "is an essential and unchanging
part of the case-or-controversy requirement of Article III [of the Constitution]." Lujan v. Defenders of Wildlife,
504 U.S. 555, 560 (1992). As standing implicates the Court's subject
matter jurisdiction, the Court may consider the issue at any
time, upon request or sua sponte. It is also settled in New
York that "[f]or a wrong against a corporation a shareholder has
no individual cause of action, though he loses the value of his
investment or incurs personal liability in an effort to maintain
the solvency of the corporation." Abrams v. Donati,
66 N.Y.2d 951, 953 (1985). Simply put, "it has long been the law of New
York and this Circuit that a corporation cannot pierce the
corporate veil it created for its own protection whenever doing
so would be to its benefit." Bank of America Corp. v.
Lemgruber, 2005 WL 19274 at *15 (S.D.N.Y. Jan. 5, 2005) (Batts,
On the instant facts, the Court determines that McKee and
Wilkinson lack standing to sue individually. The Complaint itself
makes clear that the accounts at Fahnestock, into which McKee and
Wilkinson transferred funds, were in the names of DSMcKee and
CSDesign. (Compl. ¶ 43; Sandoval Aff. Exh. B, F).*fn2 The
Complaint also states that McKee and Wilkinson signed the funding
agreements and letters authorizing the transfer of funds from the
Fahnestock accounts into the Rayvon account "on behalf of" DSMcKee and CSDesign, respectively. (Id. ¶ 40). In
addition, the Complaint alleges that dividend payments were made
to DSMcKee and CSDesign, not to McKee and Wilkinson individually.
(Id. ¶ 47). In light of these facts, the Court cannot see how
McKee and Wilkinson have standing to step out from behind their
corporate veils and sue alongside their respective entities.
Of course, "where the plaintiff's injury is direct, the fact
that [the corporation] may also have been injured and could
assert its own claims does not preclude the plaintiff from
asserting its claim directly." Excimer Assocs., Inc. v. LCA
Vision, Inc., 292 F.3d 134, 140 (2d Cir. 2002). Direct injury
occurs, however, "if the defendant has violated an independent
duty to the shareholder." Ceribelli v. Elghanayan, 990 F.2d 62,
63 (2d Cir. 1993); see Abrams, 66 N.Y.2d at 953. Plaintiffs'
overly general argument that McKee and Wilkinson were deprived of
assets as a result of Defendants' actions does not persuade the
Court that McKee and Wilkinson have suffered a direct,
independent injury. Revealingly, Plaintiffs cite neither
allegations in the Complaint nor case law in support of their
position. The Court therefore finds that Plaintiffs McKee and
Wilkinson lack standing and should be dismissed.
Defendants also have moved for substitution of Momentum for
CSDesign under Fed.R.Civ.P. 17(a). They argue that four years
before commencement of this action, CSDesign assigned all of its interests associated with the case (40,000 shares of Class
B preferred stock in Rayvon) to Momentum. (Minicucci Mem. at
9-10; Sandoval Aff., Exh. H). In their opposition papers,
Plaintiffs take "no position regarding that portion of the
defense motion that requests a substitution of Momentum
Investments for CS Design, Inc." (Pl. Mem. at 4). In reply,
Defendants inform the Court that Plaintiffs changed their
position in a "`supplemental [letter] memorandum' attaching Mr.
Wilkinson's purported affirmation." (Minicucci Reply Mem. at 3).
Apparently, these supplemental papers requested that Momentum
and CSDesign be dropped and that Wilkinson be allowed to sue
individually. (Id. at 4). The Court uses the word "apparently"
because Plaintiffs' supplemental papers never came to Chambers,
and never were filed with the Clerk's office.*fn3
Furthermore, the Court never gave permission for supplemental
filings. Therefore, the Court will ignore whatever supplemental
papers are floating around and decide the issues on the papers
before it. In these papers, Plaintiffs take no position on
Under Fed.R.Civ.P. 17(a), "[e]very action shall be
prosecuted in the name of the real party in interest." Some
courts have held that a Rule 17(a) objection must be made with
reasonable promptness or it is deemed waived. Steger v. Gen. Elec. Co., 318 F.3d 1066, 1080 (11th Cir. 2003); Richardson v.
Edwards, 127 F.3d 97, 99 (D.C. Cir. 1997); Hefley v. Jones,
687 F.2d 1383, 1388 (10th Cir. 1982); see Charles Alan Wright,
Arthur R. Miller & Mary Kay Kane, Federal Practice and
Procedure § 1554 (2d ed. 1990). While the definition of
"reasonable" is not entirely clear, and the Second Circuit has
not made a definitive statement on this issue, these holdings
find support in the text of the rule itself:
No action shall be dismissed on the ground that it is
not prosecuted in the name of the real party in
interest until a reasonable time has been allowed
after objection for ratification of commencement of
the action by, or joinder or substitution of, the
real party in interest. . . .
Fed.R.Civ.P. 17(a) (emphasis added).
On the other hand, the Second Circuit has held that
substitution of plaintiffs under Rule 17(a) "should be liberally
allowed when the change is merely formal and in no way alters the
original complaint's factual allegations as to the events or the
participants." Advanced Magnetics, Inc. v. Bayfront Partners,
Inc., 106 F.3d 11, 20 (2d Cir. 1997). While this approach
comports with the Rule's plaintiff-friendly purpose, which is "to
insure against forfeiture and injustice," Lunney v. United
States, 319 F.3d 550, 557 (2d Cir. 2003), it must be borne in
mind that the Rule also gives the defendant the ability "to
present his defenses against the proper persons, to avoid
subsequent suits, and to proceed to finality of judgment." 6A Wright, Miller & Kane, supra, § 1541, at 324 (quoting Rackley
v. Bd. of Trustees, 35 F.R.D. 516, 517 (E.D.S.C. 1964)). Absent
prejudice, the Court sees no problem with a liberal approach to
Rule 17(a) regardless of which side benefits from the rule.
In view of the foregoing, the Court will allow the alteration
of the caption. The substitution of Momentum for CSDesign is a
mere formality that does not substantively alter the Complaint or
the allegations therein. While timeliness may have been an issue,
there is no hard-and-fast rule. Discretion lies with the Court,
and Plaintiffs make no argument that they will be prejudiced by a
Rule 17(a) substitution at this time.
Defendants' motion to dismiss McKee and Wilkinson on standing
grounds is granted. Defendants' motion to dismiss CSDesign and
substitute Momentum as the real party in interest under
Fed.R.Civ.P. 17(a) is granted. The Clerk of the Court is directed to
remove David S. McKee, Terry Wilkinson and CSDesign Inc. from the
caption and to add Momentum Investments Ltd. as a plaintiff.