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Lerner v. Prince

Supreme Court of New York, First Department

October 1, 2013

Stanley Lerner, etc., Plaintiff-Appellant,
Charles O. Prince, III, et al., Defendants-Respondents, Citigroup Inc., Nominal Defendant-Respondent.

Greenfield & Goodman LLC, New York (Richard D. Greenfield of counsel), for appellant.

Cravath, Swaine & Moore LLP, New York (Richard W. Clary of counsel), for respondents.

Moskowitz, J.P., Richter, Manzanet-Daniels, Gische, JJ.

Order, Supreme Court, New York County (Bernard J. Fried, J.), entered May 5, 2011, which denied plaintiff's motion to compel discovery and convert defendants' motions to dismiss into motions for summary judgment, unanimously affirmed. Appeal from order, same court and Justice, entered May 17, 2012, which granted defendants' motions to dismiss the amended complaint, deemed an appeal from judgment, same court and Justice, entered June 5, 2012, and, so considered, the judgment unanimously affirmed.

The IAS court providently exercised its discretion in refusing to convert the dismissal motions into summary judgment motions (see CPLR 3211[c]), since the record "does not establish that the parties deliberately chart[ed] a summary judgment course" (Wadiak v Pond Mgt., LLC, 101 A.D.3d 474, 475 [1st Dept 2012][internal quotation marks omitted]; cf. Fagin v Gilmartin, 432 F.3d 276, 280 [3d Cir 2005]).

Defendants stated, both on the motions and on appeal, that they do not consider the June 25, 2010 letter in which nominal defendant Citigroup, Inc., a Delaware corporation, refused plaintiff's December 7, 2007 demand that it sue various of its executives and directors (the Refusal Letter) to be documentary evidence; rather, they offered it to show that the instant action was a demand-refused case rather than a demand-excused case (see generally Levine v Smith, 591 A.2d 194, 212 [Del 1991][explaining the difference between the two types of cases], overruled in part on other grounds by Brehm v Eisner, 746 A.2d 244, 253 [Del 2000]). The IAS court properly considered the Refusal Letter for that limited purpose. However, when granting defendants' motions to dismiss, the court relied on facts that could be found only in the Refusal Letter. Regardless of whether the court should have done so, the court's action does not require reversal.

Under either Delaware or New York law, plaintiff was not entitled to discovery (see e.g. Scattered Corp. v Chicago Stock Exchange, Inc., 701 A.2d 70, 77 [Del 1997], overruled in part on other grounds by Brehm, 746 A.2d at 253; Stoner v Walsh, 772 F.Supp. 790, 800, 807 [SD NY 1991]), and the allegations in his amended complaint are insufficient to infer that defendants' actions in investigating plaintiff's demand were unreasonable, inappropriate, or conducted in bad faith (see Stoner, 772 F.Supp. at 806-807).

In particular, plaintiff alleges that nonparty Potter Anderson & Corroon LLP (counsel to the Demand Committee) was conflicted because it had previously represented a Citigroup subsidiary. Plaintiff, however, does not allege that Potter Anderson represented defendants in a prior proceeding involving the same subject matter. Thus, Stepak v Addison (20 F.3d 398, 403-404 [11th Cir 1994]), upon which plaintiff relies, is not controlling, and plaintiff's allegation is insufficient to withstand the motions to dismiss (see Sterling v Stewart, 158 F.3d 1199, 1203 [11th Cir 1998]).

Plaintiff also alleges that, by July 31, 2009 (more than 1½ years after his demand letter), the Demand Committee had not yet ascertained whether Citigroup's directors' and officers' insurance contained an "insured vs. insured" exclusion. However, "the insured/insured exclusion appears to be a standard clause designed to prevent collusive suits between parties whose interests in the litigation might not be genuinely adverse" (Stoner, 772 F.Supp. at 805). "Plaintiff's assertion that the exclusion automatically renders a board member interested' with respect to a decision to reject [a] demand finds no support in either case authority or logic" (id.; see also Stepak, 20 F.3d at 411).

Plaintiff alleges various structural biases, such as the fact that Potter Anderson was selected based in part on the recommendation of Citigroup's former general counsel, and the unlikelihood that the successive members of the single-member Demand Committee would recommend that Citigroup sue their fellow directors. However, "[t]he majority view recognizes that independent directors are capable of rendering an unbiased decision even though they were appointed by the defendant directors and share a common experience with defendants" (Peller v Southern Co., 707 F.Supp. 525, 527-528 [ND Ga 1988][applying Delaware law], affd 911 F.2d 1532 [11th Cir 1990]; see also Auerbach v Bennett, 47 N.Y.2d 619, 633 [1979]).

Plaintiff notes that the successive members of the Demand Committee were paid substantial sums to be Citigroup directors. However, "[a] director is not interested with respect to all board decisions merely because he or she is paid to be a director. By plaintiff's logic, no paid director could ever vote properly to reject a demand" (Stoner, 772 F.Supp. at 805 [internal citations omitted]; see also Grobow v Perot, 539 A.2d 180, 188 [Del 1988], overruled in part on other grounds by Brehm, 746 A.2d at 253).

Plaintiff also criticizes the Demand Committee's procedures, including the fact that it consisted of only one member. These allegations are insufficient, as "there is... no prescribed procedure that a board must follow" in responding to a shareholder's demand (Levine, 591 A.2d at 214). Furthermore, a Delaware statute (8 Del C § 141[c][1]) permits a board to delegate matters to a committee, and the committee may consist of one or more directors (id.; see Scattered, 701 A.2d at 75 n 20).

Lastly, the amended complaint alleges that the Demand Committee retained counsel and that Potter Anderson gathered as many as 15 million documents and billed at least $2 million. Thus, given Delaware precedent, defendants' ...

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