Corso v Byron

[*1] Corso v Byron 2006 NY Slip Op 50520(U) [11 Misc 3d 1072(A)] Decided on March 22, 2006 Supreme Court, Suffolk County Sgroi, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 22, 2006
Supreme Court, Suffolk County

Steven Corso, Plaintiff,

against

Harry Byron, Defendant.



26226-2004



Weber & Pullin, LLP

Attorney for Plaintiff

7600 Jericho Turnpike

Woodbury, New York 11797

Scott Lockwood, Esq.

Attorney for Defendant

1600 Deer Park Avenue

Deer Park, New York 11729

Sandra L. Sgroi, J.

ORDERED that the motion of the Defendant to dismiss the complaint of the Plaintiff is granted. Enter Judgment. [*2]

The Defendant herein moved pursuant to CPLR § 3211 to dismiss the complaint alleging that the Plaintiff, Steven Corso, lacked standing to commence this suit. This Court adjourned that motion giving notice that it would treat the motion as one for summary judgment pursuant to CPLR § 3212, and the Court permitted the parties to submit additional affidavits for consideration.

Often a question as to whether a party has a standing to act may be a mixed question of law and fact, and to the extent that the issue before the Court was fact dependent, the parties were given leave to submit additional proof prior to the Court issuing a decision on the questions raised by this motion(see generally, Hauben v. Morris, 255 A.D. 35, judgment affirmed 281 NY 652, 22 NE2d 482). The Court directed that the parties submit any additional proof that they may have on the issues relevant to the Defendant's motion and gave the parties notice that the motion to dismiss would be converted and treated as a motion for summary judgment (see, CPLR § 3211 [c]; Mihlovan v. Grozavu, 72 NY2d 506, 508, 534 NYS2d 656, 531 NE2d 288; Excimer Assocs. v. LCA Vision, Inc., 292 F.3d 134). In response to that court order, the Plaintiff, Steven Corso, has submitted two additional affidavits, one from himself and one from Keith Jansen. The Court has received no additional submissions from the Defendant's attorney.

The Plaintiff, in his individual capacity, commenced this action against the Defendant alleging claims of fraud and conversion. The Defendant was the former majority owner of the stock in Byrber Properties Inc. and Wide Ridge Distributors Corp. and from 1984 through December of 2003, the Plaintiff owned 25% and the Defendant owned 75% of both corporations. In 2003, the Plaintiff purchased the Defendant's interests in those Corporations. The Plaintiff further alleges that from 1984 to 2003 both parties agreed that the profits of the corporations were to be split according to the same percentage as the ownership interests of the parties.

The Plaintiff alleges that after he purchased the Defendant's interest in the Corporations and he became the sole shareholder of both Corporations, he uncovered substantial financial irregularities in the books and records of the corporations. Sometime after he purchased the Defendant's interest in these Corporations, other individuals purchased ownership interests from him in these Corporations.

The Plaintiff commenced this action to recover monies from the Defendant in 2004. The Plaintiff alleges in the complaint and in his affidavit that the profits of the Corporations from 1984 through 2004 should have been divided according to the parties' ownership interests. The Plaintiff states that, after taking full ownership of the businesses, he found a box of old business papers and, from those records, he ascertained that the Defendant was taking substantial sums from the business without accounting for the Plaintiff's percentage interest in the businesses.

The Defendant moved to dismiss the complaint alleging that the Plaintiff did not have standing to sue in an individual capacity and that Plaintiff's action should be dismissed because his claims may only be maintained by a shareholder as a derivative action and, since this action should have been commenced as a derivative action, both Corporations also should be made parties to the [*3]action.

In the additional affidavits submitted by Plaintiff's attorney, the Plaintiff is asserting that the Defendant used the corporate businesses as if they were partnerships, apparently under the theory that this Court should ignore the incorporation of the entities, Byrber Properties Inc. and Wide Ridge Distributors Corp., because certain requirements in the Business Corporation Law were disregarded by the Corporate principals, including the Plaintiff, when they were conducting business. The new submissions by the Plaintiff do not specifically mention the equitable doctrine of piercing the corporate veil by name, but the affidavit of the Plaintiff, Steven Corso, states that the parties had "***only an oral agreement. This agreement was simple. Defendant told me what to do, and I received 25% of the profits"and "there was absolutely nothing to show that the businesses were corporate except for the forms which were filed for taxes."(Affidavit of Steven Corso dated March 10, 2006). The Plaintiff has also submitted an affidavit from Keith Jansen, presently an officer and shareholder of Wide Ridge Distributors, Inc. and Bryber Properties, Inc., wherein Jansen states that the Defendant Byron always called Corso his partner and that Byron never delivered the corporate books and records to the new owners of the Corporations when the Corporations were sold in 2003. The Plaintiff has not alleged that the Corporations were underfunded or that the Plaintiff and the Defendant misrepresented their corporate status to third persons dealing with the Corporations. The Plaintiff admits that corporate income tax forms were properly filed with the government. There is no showing that the parties' individual assets and their corporate assets were commingled to any great extent.

A shareholder, even a sole shareholder or one in a closely held corporation, typically does not have standing to sue directly for injuries to the corporation itself and that shareholder must instead commence a derivative action on behalf of the corporation (see, Abrams v. Donati, 66 NY2d 951, 953, 498 NYS2d 782, 489 NE2d 751). A direct action will be permitted if the Plaintiff stockholder has suffered an injury that is either separate and distinct from the injury suffered by the corporation or if the injury arises out of a violation of a special duty running from the alleged wrongdoer directly to the stockholder and that special duty is independent and extrinsic to the corporation (see, Solutia Inc. v. FMC Corp., 385 F.Supp.2d 324).

The case of Manacher v. Central Coal Co., (284 A.D. 380, 131 NYS2d 671) can be cited to clarify this principle, especially in a situation where the parties have formed a closely held corporation, and the Court therein stated: Relief is afforded the plaintiff not in his capacity as a stockholder but based upon an agreement derived from outside of the separate fictional existence of the corporation. Simply stated, the agreement or other factual situation upon which relief is granted runs alongside of the path of the corporation. When the two merge, however, and relief is sought upon the ground that the corporation has become a mere agency or instrumentality for the performance of an independent agreement of joint adventurers or partners the aggrieved party is relegated to his rights as a stockholder and may not sue in his individual capacity.[*4]

While a corporate officer or director who commits a fraud or another tortious act may be held personally liable for his acts and may be sued in his individual capacity by the person or persons injured by those acts (see, Kimmell v. Schaefer 89 NY2d 257, 652 NYS2d 715), the relationship of the injured person to the corporation and the nature of the injury suffered by the Plaintiff must be scrutinized to determine if the injured Plaintiff should commence the action in either his representative or personal capacity (see, Smerling Enterprises, Inc. v. Goldstein 184 AD2d 480, 585 NYS2d 428; 13 Street v. Vitti, 685 F. Supp. 379 (S.D.NY 1988); L.W. Kent & Co. v. Wolf, 143 AD2d 813, 533 NYS2d 119-holding that the Plaintiff, a 50-percent shareholder, may not proceed pursuant to BCL § 720(b) to recover on behalf of the corporation for waste and conversion as against the other 50-percent shareholder of the corporation because that action generally must be commenced by the corporation under authority of its board of directors and, therefore, the Plaintiff is relegated to seek relief through a shareholders' derivative action).

In Abrams v. Donati (supra ), it was alleged that the Defendant Donati conspired with the Defendant corporation to terminate Plaintiff's employment and that Plaintiff's compensation also was wrongfully reduced, with a resultant increase in the majority shareholder's profits and that this act was in furtherance of an attempt to "squeeze" the employee out of the Corporation. The Court held that a diversion of assets by a corporate officer for his own enrichment, without more, may give rise to a derivative shareholder's suit, but it does not substantiate or support an individual or direct claim by that shareholder against the corporate officer. In the decision, the Court of Appeals expressly recognized a right of the shareholder to sue in his individual capacity if the individual person sued owes a duty to the shareholder that is separate and independent from any duty that is owed to the corporation. However, the Court of Appeals in Abrams v. Donati (supra ) specifically stated: (b)ut allegations of mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually (see, e.g., Niles v New York Cent. & Hudson Riv. R. R. Co., 176 NY 119; Carpenter v Sisti, 45 AD2d 529, 531). A complaint the allegations of which confuse a shareholder's derivative and individual rights will, therefore, be dismissed (Greenfield v Denner, 6 NY2d 867, revg on dissenting opn of Breitel, J., 6 AD2d 263, 268; Brock v Poor, 216 NY 387; see, Witherbee v Bowles, 201 NY 427, 433), though leave to replead may be granted in an appropriate case (Greenfield v Denner, 6 AD2d, at p 271, supra ).

The Court of Appeals in Greenfield v. Denner (supra ) specifically affirmed the dissenting opinion written by Judge Breitel in the decision of the Appellate Division, First Department (108 AD2d 704, 485 NYS2d 1012). In that dissenting opinion Judge Breitel expressly stated: In the first place, if the first cause of action is for damage to plaintiff's 'investment', then, by definition, all damage to the investment is damage to the [*5]corporation, and the derivative cause of action in the complaint provides unrestricted scope to assess and recover that damage. This seems to be the uniform teaching of the authorities (cites omitted).

While Judge Breitel recognized the possibility that an individual could maintain a cause of action based upon a shareholders agreement, it is clear from his decision that generally a direct cause of action is not permitted when the Plaintiff is seeking a return on his investment (see, also Greenfield v. Denner, 6 NY2d 867, 160 NE2d 118, 188 NYS2d 986) .

In an opinion consistent with Abrams v. Donati (supra ) , the Appellate Division, First Department in Wolf v. Rand, (258 AD2d 401, 685 NYS2d 708) held that a shareholder in a closely held corporation who commenced an action for breach of fiduciary duty against operators of the corporation, seeking vindication of her rights as a shareholder and the recovery of corporate assets and profits allegedly wrongfully diverted from her despite her status of a shareholder, had standing only to sue derivatively as a shareholder, and she could not bring suit in her individual capacity for recovery of the assets and profits (see, Resnick v. Socolov, 5 AD3d 125, 771 NYS2d 889).

Consistent with the above cited authorities and Wolf v. Rand (supra ) the Appellate Division, Second Department found in Brancaleone v. Mesagna, (290 AD2d 467, 736 NYS2d 685) that a shareholder, even in a closely-held corporation, may not recover in his individual capacity for the corporation's losses and in Elenson v. Wax, (215 AD2d 429, 626 NYS2d 531) that where the standing of the plaintiff is that of a shareholder who is suing other shareholders for converting corporate assets and profits, the plaintiff may sue only derivatively (see, Glenn v. Hoteltron Systems, 74 NY2d 386, 392, 547 NYS2d 816, 547 NE2d 71; Paradiso & DiMenna v. DiMenna, 232 AD2d 257, 649 NYS2d 126).

Even where the corporation is a closely held, small, sub-chapter S corporation, and the defendants may share in the award of damages, the claims to recover for the conversion of corporate assets belong to the corporation not the individual, and damages will be awarded by the Court to the corporation rather than directly to the derivative plaintiff (see, Paradiso & DiMenna v. DiMenna, supra ). The underlying purpose of this rule requiring that the recovery be paid to the corporation is to prevent the impairment of the rights of creditors of the corporation whose claims may be superior to those of the admittedly innocent plaintiff shareholder (see, Glenn v. Hoteltron Systems, supra ).

While this court is cognizant that other states may recognize a right of direct action on behalf of a shareholder in a small or close corporation to recover for waste or fraud, New York does not favor such litigation on behalf of the shareholder as an individual (see, Oppression of Min. Shareholders and LLC Members s 7:8, s 7:8. Distinguishing direct from derivative claims; A [*6]minority shareholder's individual action for oppression (2005); American Jurisprudence, Second Edition, Database updated August 2005,Corporations, Actions by Shareholders§ 1941). Although the Plaintiff herein has stated that an oral shareholders agreement existed between the Plaintiff and the Defendant that provided that the profits of the two Corporations should be divided according to the relative ownership interests of the parties, this Court must conclude that the alleged oral shareholders agreement does not create an independent duty upon which the Plaintiff may sue in his personal capacity(see generally, Hoheb v Pathology Associates of Albany, P.C. 146 AD2d 919, 536 NYS2d 894). There is no showing that the Plaintiff is seeking anything more than a return on his investment.

The Plaintiff argues that since there were no corporate meetings or corporate resolutions, the Court should disregard the fiction of the existence of the corporate entities and permit the Plaintiff to bring this suit in his own name.

The doctrine of piercing the corporate veil is used by an injured third party to circumvent the protections of corporate existence and avoid the limited liability of the owners of the corporation and hold those owners liable for corporate obligations or, in the alternative, the doctrine may be resorted to by a corporate owner seeking to personally claim a deduction or other benefit due to the corporation (see, Morris v. New York State Dept. of Taxation and Finance, 82 NY2d 135, 603 NYS2d 807, 623 NE2d 1157).

Piercing the corporate veil is an equitable doctrine and the Court will not exercise that power without a showing that it is appropriate (see, Walkovsky v. Carlton, 18 NY2d 414, 276 NYS2d 585, 223 NE2d 6). It is typically utilized when the Corporation is incapable of paying a debt and the persons owed monies are permitted to pursue the principals of the corporation in their individual capacity. However, it is improper to pierce the corporate veil for the benefit of the shareholders of the corporation, as the Plaintiff is asking the Court to do here (see, Boise Cascade Corp. v. Wheeler, 419 F. Supp. 98 (S.D.NY 1976); 2-6 White, New York Business Entities § B628.01, Copyright 2005, Matthew Bender & Company, Inc.).

Although the Plaintiff has not alleged that he is pursuing a remedy under Business Corporation Law § 720, the Plaintiff has not alleged that he was a director and/or officer of either of the Corporations involved in this litigation when this action was commenced by him in 2004 (see, Alan v. Landau-Alan Gallery, Inc., 66 Misc 2d 350, 320 NYS2d 853).[FN1] [*7]

There is no showing herein that relief cannot be obtained against the Defendant if the Plaintiff is required to commence a derivative action. The Plaintiff, unlike the typical case where the Court is asked to ignore the corporate entity and pierce the corporate veil, is seeking to recover for himself monies that were actually due to the Corporation. The individual Plaintiff cannot disregard the existence of the corporate entity in an attempt to obtain monetary damages in his own name for waste of corporate assets committed by another shareholder of that corporation (see, New Castle Siding Co. v Wolfson 97 AD2d 501, 468 NYS2d 20, affd 63 NY2d 782, 481 NYS2d 70, 470 NE2d 868; see also Gmerek v Scrivner, Inc. 221 AD2d 991, 634 NYS2d 299).

Further, the Plaintiff has failed to show that the corporate veil should be disregarded in this case since there is no allegation that the Corporations were underfunded, that the incorporated status of the entities were misrepresented to third parties, or that assets were extensively commingled (see, Port Chester Elec. Constr. Corp. v. Atlas, 40 NY2d 652, 656-657, 389 NYS2d 327, 357 NE2d 983; see generally, Helfand v. Cohen, 110 AD2d 751, 487 NYS2d 836). Unfortunately, if the Court was to ignore the corporate status of an entity, especially a close corporation, because the corporate books were not properly maintained by the principals of the corporation or a stockholder referred to another stockholder as his partner or some personal expenses of the principal may have been improperly paid by the corporation as business expenses, many owners of small corporations would find that they have lost the protection of their corporate status (see generally, Wolff v. Wolff, 67 NY2d 638, 499 NY2d 665, 490 NE2d 532).

The motion to dismiss the complaint of the Plaintiff on the grounds that the Plaintiff does not have standing to sue because he has not commenced a derivative suit to recover the profits allegedly wrongfully appropriated by the Defendant must be granted (see, Glenn v. Hoteltron Systems, Inc., 74 NY2d 386, 547 NE2d 71, 547 NYS2d 816; Furia v. Cerone, 218 AD2d 682, 630 NYS2d 551; Albany Plattsburgh United Corp. v. Bell, 307 AD2d 416, 763 NYS2d 119 lv. to app'l dism'd in part, den'd in part 1 NY3d 620, 777 NYS2d 14, 808 NE2d 1273). The Plaintiff has not requested that he be permitted to serve an amended complaint.

Dated: 3/22/06 ________________________ SANDRA L. SGROI, J. S. C. Footnotes

Footnote 1:Even if it was alleged that he was a director or an officer of the Corporations, any recovery of monies would be payable to the Corporations and not to the individual Plaintiff (see, Bertoni v. Catucci, 117 AD2d 892, 498 NYS2d 902).