United States District Court, S.D. New York
JOEL M. LEVY and JUDITH W. LYNN, Plaintiffs,
YOUNG ADULT INSTITUTE, INC., et al., Defendants
For Joel M. Levy, Judith W. Lynn, Plaintiffs: Melissa Yang, Michael C. Rakower, Rakower Lupkin PLLC, New York, NY.
For Young Adult Institute, Inc., in its Individual capacity and in its capacity as administrator of the Supplemental Pension Plan and Trust for Certain Management Employees of Young Adult Institute and the Life Insruance Plan and Trust for Certain Management Employees of YAI, doing business as Yai National Institute for People with Disabilities, Eliot P. Green, Defendants: Marcus Aaron Asner, Yue-Han Chow, Arnold & Porter, LLP, New York, NY.
For 1 John Doe as trustees of the Supplemental Pension Plan for Certain Management Employees of Young Adult Institute, 2 John Doe, as trustees of the Supplemental Pension Plan for Certain Management Employees of Young Adult Institute, 3 John Doe, as trustees of the Supplemental Pension Plan for Certain Management Employees of Young Adult Institute, Board of Trustees of Young Adult Institute, Inc., as administrator of the Supplemental Pension Plan and Trust for Certain Management Employees of Young Adult Institute, Pension Retirement Committee of the Board of Trustees of Young Adult Institute, as administrator of the Supplemental Pension Plan and Trust for Certain Management Employees of Young Adult Institute, Supplemental Pension Plan and Trust for Certain Management Employees of Young Adult Institute, Life Insurance Plan and Trust for Certain Management Employees of Yai, Defendants: Yue-Han Chow, Arnold & Porter, LLP, New York, NY.
OPINION AND ORDER ADOPTING REPORT AND RECOMMENDATION
J. PAUL OETKEN, United States District Judge.
Plaintiffs Joel M. Levy and Judith W. Lynn (together, " Plaintiffs" ) have asserted claims pursuant to the Employee Retirement Income Security Act of 1974 (" ERISA" ) and state law against the Young Adult Institute, Inc. (" YAI" ), of which Levy is a former executive, and against other defendants (collectively, " Defendants" ). YAI has answered the operative complaint and filed counterclaims against Levy for breach of fiduciary duty and for acting as a faithless servant. Now before the Court is the report and recommendation (" Report" ) of the Honorable Sarah Netburn, U.S. Magistrate Judge, on Levy's motion to dismiss YAI's counterclaims, pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. The Report recommends that the motion be denied. For the reasons that follow, the Report is adopted, Plaintiffs' objections are overruled, and Levy's motion is denied.
Plaintiffs filed their third amended complaint on June 19, 2014. (Dkt. No. 104.) On June 30, 2014, Defendants answered the complaint, and YAI asserted counterclaims against Levy. (Dkt. No. 105 (" Counterclaims" ).) Levy moved to dismiss the counterclaims. (Dkt. No. 168.) YAI opposed the motion (Dkt. No. 126), and Levy replied (Dkt. No. 171). Judge Netburn filed the Report on January 14, 2015. (Dkt. No. 179 (" Report" ).) Levy filed an objection to the Report on February 2, 2015 (Dkt. No. 188 (" Objection" )), and YAI opposed Levy's objection on February 19, 2015 (Dkt. No. 196 (" Opposition" )). The Court denied YAI's request that discovery on its counterclaims be stayed pending the Court's consideration of Levy's objection. (Dkt. Nos. 190, 192.)
II. Standard of Review
Pursuant to 28 U.S.C. § 636(b)(1), a district court reviewing a magistrate judge's report and recommendation may " accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." The district court reviews a magistrate judge's report " strictly for clear error when no objection has been made," but " will make a de novo determination regarding those parts of the Report to which objections have been made." Coach, Inc. v. O'Brien, No. 10 Civ. 6071 (JPO) (JLC), 2012 WL 1255276, at *1 (S.D.N.Y. Apr. 13, 2012) (citing McDonaugh v. Astrue, 672 F.Supp.2d 542, 547 (S.D.N.Y. 2009)). " In order to merit de novo review, a party's objections must be specific rather than conclusory or general." De Jesus v. Comm'r of Soc. Sec., No. 13 Civ. 2251 (AJN) (HBP), 2014 WL 5040874, at *1 (S.D.N.Y. Sept. 29, 2014).
A. Business Judgment Rule
Under New York law, the business judgment rule " bars judicial inquiry 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 N.Y.2d 619, 393 N.E.2d 994, 1000, 419 N.Y.S.2d 920 (N.Y. 1979); see also Treadway Cos. v. Care Corp., 638 F.2d 357, 382 (2d Cir. 1980) (" Under the business judgment rule, directors are presumed to have acted properly and in good faith . . . ." ). The rule's principles are reflected in a section of the statutory law governing corporations, New York Business Corporation Law § 717. See Lindner Fund, Inc. v. Waldbaum, Inc., 82 N.Y.2d 219, 624 N.E.2d 160, 161, 604 N.Y.S.2d 32 (N.Y. 1993) (recognizing that New York's business judgment rule provides that corporate officers must " perform their duties 'in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances'" (quoting N.Y. Bus. Corp. Law § 717(a)). An analogous statute, New York Not-for-Profit Corporation Law § 717, governs the directors and officers of nonprofit corporations. See N.Y. Not-for-Profit Corp. Law [hereinafter " N-PCL" ] § 717(a) (providing that " [d]irectors and officers shall discharge the duties of their respective positions in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances" ); see also S.H. Helen R. Scheuer Family Found., Inc. v. 61 Assoc., 179 A.D.2d 65, 582 N.Y.S.2d 662, 665 (App.Div. 1st Dep't 1992) (" [I]t is well established that, as fiduciaries, board members [of a not-for-profit corporation] bear a duty of loyalty to the corporation and may not profit improperly at the expense of their corporation." (internal quotation marks omitted)).
" It is black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply." In re Croton River Club, Inc., 52 F.3d 41, 44 (2d Cir. 1995) (citing, inter alia, Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 473 N.E.2d 19, 26, 483 N.Y.S.2d 667 (N.Y. 1984)); see also Treadway, 638 F.2d at 382 (stating that directors " are called to account for their actions only when they are shown to have engaged in self-dealing or fraud, or to have acted in bad faith" ). As the Report states, it is improper to dismiss a suit at the motion to dismiss stage on the basis of the business judgment rule if the plaintiff's pleadings allege that directors or officers did not act in good faith. ( See Report at 24 (citing, inter alia, Ackerman v. 305 E. 40th Owners Corp., 189 A.D.2d 665, 592 N.Y.S.2d 365, 367 (App.Div. 1st Dep't 1993)).)
The Report concludes that YAI's counterclaims should proceed because they allege that " Levy was a faithless servant and breached his fiduciary duties, resulting in harm to YAI through the loss of money unfairly paid to Levy and through the investigation, endangerment of services[,] and settlement paid by YAI." (Report at 25.) Levy objects, arguing that the business judgment rule and N-PCL § 717 shield him from the counterclaims because the decisions concerning his compensation were made not by him, but by YAI's Board of Trustees (the ...