Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Decided on February 14, 2012 Saxe, J.P., Friedman, Moskowitz, Freedman, Richter, JJ. 5759-
Order, Supreme Court, New York County (Barbara R. Kapnick, J.), entered January 20, 2009, which, to the extent appealed from as limited by the briefs, granted the individual defendants' motion to dismiss the first amended complaint and the corporate defendant's motion to dismiss the causes of action for common-law dissolution and appointment of a temporary receiver, denied plaintiff's motion for a preliminary injunction prohibiting the individual defendants from using corporate funds to pay their litigation expenses, and granted the individual defendants' cross motion seeking advancement of such expenses, unanimously modified, on the law, to deny defendants' motions to dismiss the causes of action for conversion, breach of fiduciary duty and dissolution, and otherwise affirmed, without costs. Order, same court and Justice, entered July 13, 2010, which, to the extent appealed from as limited by the briefs, granted the individual defendants' motion to dismiss the permanent injunction cause of action in the second amended complaint and denied their motion to dismiss the fraud cause of action, and, upon granting only so much of plaintiff's motion for reargument and renewal as sought reargument of the individual defendants' motion to dismiss the accounting claims in the first amended complaint, denied the individual defendants' motion to dismiss those claims, unanimously affirmed, without costs.
Defendant 132 West 31st Street Realty Corp. is a corporation owned and managed by the Lemle family. Plaintiff Michael Lemle and his three siblings, defendants Florence Lemle, Douglas Lemle and Deanne Lemle Bosnak, are shareholders, directors and officers of the corporation. Plaintiff and his siblings each owns approximately 4.6% of the corporation's outstanding shares. Nonparty Edna Lemle, the deceased mother of plaintiff and his siblings, also served as a director and was the majority shareholder, holding beneficial ownership of approximately 80% of the corporation's stock.
According to plaintiff, the corporation's principal asset is an underlease for an office building located in Manhattan. Plaintiff contends that although the corporation once actively managed the building, the building is now managed by an independent company, and the corporation is essentially a holding company that receives passive income from the underlease. The corporation's only other assets are securities, gold, and real property, and, according to plaintiff, the income derived from these assets is passive.
Plaintiff and his siblings each receives an annual director's fee of $40,000 and an annual officer's salary of $50,000. Florence Lemle, the corporation's chief financial officer and acting chief executive officer, receives an additional salary of $125,000. In addition, the corporation has extended loans to plaintiff and his siblings, in various amounts and subject to various terms.
Over time, controversies arose between plaintiff and his siblings with respect to the loan balances, interest rates, due dates and other terms. In June 2004, plaintiff and his siblings each entered into a loan modification agreement with the corporation. In those agreements, the parties agreed that each of the loan balances, "as they will ultimately be determined," will be payable "on the later of" the death of Edna Lemle and distribution of her estate or December 30, 2012.[FN1]
In 2007, plaintiff brought this action, individually and derivatively as a shareholder, alleging that his siblings have converted millions of dollars from the corporation in breach of their fiduciary duties. Plaintiff alleges, among other things, that they have falsified their corporate loan accounts and other corporate records to eliminate millions of dollars of principal and interest owed by them to the corporation. In addition, plaintiff claims that his siblings have wrongfully transferred corporate assets to themselves and others by way of excessive compensation and benefits, reimbursement for inappropriate personal expenses, and salaries or bonuses paid to individuals who performed no work for the corporation.
In the first amended complaint, plaintiff asserted derivative claims against his siblings for breach of fiduciary duty, conversion, fraud, and an accounting. In his individual capacity, plaintiff asserted claims against the corporation for common-law dissolution and the appointment of a temporary receiver, and sought injunctive relief against his siblings. The siblings and the corporation each moved to dismiss pursuant to CPLR 3211(a). In addition, plaintiff sought a preliminary injunction prohibiting the individual defendants from using corporate funds to pay their litigation expenses, and the individual defendants cross-moved pursuant to Business Corporation Law § 724(c) for advancement of those expenses. In a decision and order entered January 20, 2009, the motion court dismissed the complaint in its entirety, but granted leave to replead the fraud and injunction causes of action. The court denied plaintiff's request for a preliminary injunction and granted the individual defendants' cross motion for advancement of their litigation expenses.
The motion court should not have dismissed the conversion and breach of fiduciary duty claims. Conversion is the unauthorized assumption and exercise of the right of ownership over another's property to the exclusion of the owner's rights (Thyroff v Nationwide Mut. Ins. Co., 8 NY3d 283, 288-289 ). "Where the property [alleged to have been converted] is money, it must be specifically identifiable and be subject to an obligation to be returned or to be otherwise treated in a particular manner" (Republic of Haiti v Duvalier, 211 AD2d 379, 384 ). Thus, conversion occurs when funds designated for a particular purpose are used for an unauthorized purpose (see Meese v Miller, 79 AD2d 237, 243 ).
Here, reading the complaint in a light most favorable to plaintiff, the conversion claim is sufficiently stated by, inter alia, allegations that plaintiff's siblings (1) falsified loan documents so as to eliminate millions of dollars in principal and interest they owed to the corporation; (2) used corporate funds to pay for personal vacation, shopping and other non-business-related expenses; and (3) used corporate funds to pay excessive compensation and benefits to themselves and other individuals who did little or no work for the corporation. Likewise, these allegations of self-dealing are sufficient to state a cause of action that plaintiff's siblings breached their fiduciary duties to the corporation.
At this early stage of the litigation, it cannot be said that those parts of the complaint alleging excessive compensation are barred as a matter of law by the business judgment rule. The business judgment rule prevents courts from inquiring into "actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes" (Auerbach v Bennett, 47 NY2d 619, 629 . However, "pre-discovery dismissal of pleadings in the name of the business judgment rule is inappropriate where ...