The opinion of the court was delivered by: Denise Cote, District Judge
Defendants have moved to dismiss plaintiffs' second amended complaint. Defendants contend that the claims asserted derivatively on behalf of plaintiff M Savitt should be dismissed for failure to plead demand or demand futility adequately, and that certain of plaintiff Wynne Savitt's individual claims against defendants should be dismissed for failure to state a claim. For the reasons that follow, defendants' motion to dismiss the derivative claims is granted. Defendants' motion to dismiss Wynne's individual claims is granted as to all claims except Wynne's claim for defamation against defendant Janis Savitt.
M Savitt, Inc. ("M Savitt") is a privately held corporation organized under the laws of the State of New York, with its principal place of business located in New York City. Three siblings -- Wynne Savitt, Janis Savitt, and Michelle Savitt -- each own 27% of M Savitt. Their mother, Mildred Savitt owns the other 19%.
At the time the original complaint in this action was filed, the Board of Directors of M Savitt consisted of Wynne and Mildred (the "Old Board"). Following a November 18, 2008 Special Shareholder Meeting ("Special Meeting"), a new Board of Directors was chosen: Paul Savitt (Mildred's husband and the siblings' father), Janis, and Michelle (collectively the "New Board"). The New Board was in place when the first and second amended complaints were filed.
Plaintiffs withdrew their original complaint in the face of a motion to dismiss, and they filed an amended complaint ("first amended complaint") on December 22, 2008. On February 4, 2009, this Court addressed defendants' motion to dismiss the first amended complaint at a conference with the parties. The Court addressed only the part of the motion that pertained to requirements for derivative claims; it did not address defendants' other arguments for dismissing certain causes of action. Plaintiffs' brief in opposition to that motion stated that when the first amended complaint was filed, "the Corporation's Board was comprised of three (3) members: Janis, Paul and Michelle Savitt (the 'New Board')." Plaintiffs argued in that brief that "[t]he Board that is in place at the time the operative pleading is filed is the one that must be considered in determining whether a demand is excuse [sic]." As such, this Court addressed whether Wynne had met the pleading requirements of Fed. R. Civ. P. 23.1 and New York State law for bringing her derivative claims in relation to the "New Board."
The Court found that the first amended complaint's allegations were "far too conclusory to meet either the demand requirement or the futility requirement, either of which has to be pleaded with particularity." Specifically, the Court found that while the complaint could be read in its entirety to plead that demand would be futile because Janis was "an interested director with respect to the transactions that are at issue," plaintiffs had not adequately pled that either Paul or Michelle were interested "with respect to the transactions that are at issue here." The Court therefore granted this part of defendants' motion to dismiss, and granted leave to plaintiffs to file an amended pleading to cure the defects the Court noted. The Court informed plaintiffs' that this was their final opportunity to amend, and that the purpose of this permitted amendment was to address whether the defects the Court noted in the pleading as to demand and demand futility could be cured.*fn1
Plaintiffs' then filed the instant complaint, their second amended complaint, which contains many entirely new allegations. Most of the new allegations pertain to alleged misconduct on the part of Michelle and her husband Sepp Donahower that is distinct from the allegations that had previously been the core of the Wynne's derivative claims (which had primarily concerned alleged misconduct on the part of Janis). With these new allegations of wrongdoing, the plaintiffs added Michelle and other defendants to many of the claims previously pleaded. Plaintiffs' claims that are asserted against new defendants Sepp Donahower and Seppe1, Inc. are outside the scope of the permitted amendment, which was allowed solely to cure defects in the pleading of demand and demand futility as to the actions challenged in the claims of the first amended complaint, and will be stricken. Similarly, any claims newly asserted against the defendants named in the first amended complaint are also beyond the scope of the permitted amendment. For example, the second amended complaint asserts nine causes of action against Michelle that were not previously asserted against her (as well as three new claims against Mildred and one new claim against Paul). These new allegations of liability as to these defendants will be considered only insofar as the facts relating to these new allegations bear upon the issues of demand and demand futility as to the transactions plaintiffs challenged in their claims in the first amended complaint. Additionally, the second amended complaint's 17th cause of action for negligence and 18th cause of action for gross negligence are now pleaded on behalf of both Wynne and M Savitt, whereas previously the negligence claim was only asserted on behalf of the corporation and the gross negligence claim was only asserted on behalf of Wynne. These amendments are also outside the scope of the permitted amendment and will be stricken. To the extent that the second amended complaint added new factual allegations to cure defects identified in the motion to dismiss the claims that were pleaded in the first amended complaint, these allegations have been considered and are addressed below.
The following facts are drawn from the second amended complaint and attached exhibits, and are assumed to be true for the purposes of deciding the motion to dismiss. M Savitt is engaged in the business of designing, manufacturing, and wholesaling fine and semi-precious designer jewelry. M Savitt sells its products to stores such as Neiman Marcus and Saks Fifth Avenue.
The main allegation in the second amended complaint is that Janis Savitt used and is using M Savitt's trademarks and intellectual property for her own personal benefit without the authorization of the corporation. The complaint alleges that Janis, on or about December 31, 2007, formed a company called "Designs by Janis Savitt, Inc." which uses M Savitt's word mark SAVITT within its name. Janis is using this entity to compete with M Savitt. These actions have created confusion among consumers who do not realize that Designs by Janis Savitt is not affiliated with M Savitt.
M Savitt sent Janis cease and desist letters concerning her conduct on May 11, 2007 and February 26, 2008. The May 2007 letter was signed by Wynne and Michelle Savitt. Also in May 2007, Wynne sent Paul and Mildred a note informing them that cease and desist letters were sent to Janis. Wynne's note said that Janis should respond to these letters and that the letters "should serve as a formal document to bring discussions to the table, formally."
The second amended complaint also alleges that Michelle, along with her husband Sepp, are using M Savitt "Marks, Copyrights and designs" for their own interest and in competition with M Savitt without authorization. It further alleges that Michelle and Sepp created a corporate entity, Seppe1, Inc., that is competing with M Savitt and selling jewelry that Michelle stole from M Savitt. The complaint also alleges that Michelle, upon information and belief, is incapacitated. Michelle would frequently fail to show up for work at M Savitt or work for only a few hours, and she improperly paid personal expenses on her corporate credit card from M Savitt funds. In addition, Michelle falsely represented to Wynne that Michelle was not going to attend the Special Meeting.
The second amended complaint also describes additional wrongdoing relating to the operation of M Savitt, including the following: Janis failed to sign certain factoring agreements that would allow M Savitt to generate capital, as well a settlement agreement between M Savitt and the State of New York regarding past due M Savitt taxes; Janis signed certain documents as "President" of M Savitt when she had represented to plaintiffs that she would sign them as "Secretary"; Janis verbally abused and defamed Wynne and other M Savitt employees, using foul language and profanity -- specifically, Janis accused Wynne of "fucking the bookkeeper" in front of M Savitt employees during business hours; Janis forged Michelle's signature on a check, and accessed and changed Wynne's personal email account; and Michelle and Janis failed to keep adequate M Savitt inventory and financial records, purchased the wrong inventory, and used M Savitt petty cash for personal expenses. In addition to the items of inventory that Michelle stole from M Savitt, Janis stole various other items.
As to Paul Savitt, he originally funded M Savitt, and was the inspiration for many of its jewelry designs. He was an "absentee" officer who was not compensated and did not sign corporate tax returns. Both Paul and Mildred provided Janis and Designs by Janis with financial aid, including a home office in Westhampton, New York and certain antiques. In addition, Paul and Mildred gave Janis and Designs by Janis jewelry designs, inventory, and customer information.
As for allegations against all individual defendants, the complaint states that all defendants are assisting one another in selling products that bear M Savitt marks to compete with M Savitt. In addition, all defendants are providing each other with the jewelry Janis stole, the jewelry Michelle stole, and other inventory and merchandise.
The second amended complaint alleges 21 causes of action against various combinations of defendants. Claims 1-9, 12-14, 17 and 20 are brought only on behalf of M Savitt to redress injuries to M Savitt;*fn2 claims 10-11 and 15-16 are brought on behalf of both Wynne and M Savitt. Claims 18 and 19 are brought on behalf of Wynne alone.*fn3
At the outset, it is well-settled that "[a]n action to redress injuries to a corporation cannot be maintained by a shareholder in his own name but must be brought in the name of the corporation through a derivative action." Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1101 (2d Cir. 1988) (citation omitted). Thus, despite the fact that only the 21st cause of action in the second amended complaint is styled as a derivative claim, the claims described above that are asserting injury to M Savitt cannot be brought by Wynne as plaintiff except via a derivative action.*fn4
"The derivative form of action permits an individual shareholder to bring suit to enforce a corporate cause of action against officers, directors, and third parties." Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (citation omitted). Under Fed. R. Civ. P. 23.1, the complaint of a shareholder bringing a derivative action must, inter alia, "state with particularity . . . any effort by the plaintiff to obtain the desired action from the directors or comparable authority" and "the reasons for not obtaining the action or not making the effort." Fed. R. Civ. P. 23.1(b)(3). The Supreme Court has stated that this rule is one of procedure that "speaks only to the adequacy of the shareholder representative's pleadings," Kamen, 500 U.S. at 96, and therefore the substance of the demand requirement and any exception for demand futility is analyzed by looking to state law. Id. at 108-09; see also Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d 133, 138 (2d Cir. 2004) ("The substantive law which determines whether demand is, in fact, futile is provided by the state of incorporation of the entity on whose behalf the plaintiff is seeking relief."); Kalin v. Xanboo, Inc., 526 F. Supp. 2d 392, 409 (S.D.N.Y. 2007) ("adequacy of the demand is governed by state law").
Under New York law, Business Corporation Law § 626(c) similarly states that "the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort." This statute "codified a rule of equity developed in early shareholder derivative actions requiring plaintiffs to demand that the corporation initiate an action, unless such demand was futile, before commencing an action on the corporation's behalf." Marx v. Akers, 88 N.Y.2d 189, 193-94 (1996) (citation omitted). "On the one hand, derivative actions are not favored in the law because they ask courts to second-guess the business judgment of the individuals charged with managing the company." Bansbach v. Zinn, 1 N.Y.3d 1, 8 (2003). "On the other hand, derivative actions serve the important purpose of protecting corporations and minority shareholders against officers and directors who, in discharging their official responsibilities, place other interests ahead of those of the corporation." Id.
The purposes of the demand requirement are to (1) relieve courts from deciding matters of internal corporate governance by providing corporate directors with opportunities to correct alleged abuses, (2) provide corporate boards with reasonable protection from harassment by litigation on matters clearly within the discretion of directors, and (3) discourage "strike ...