Chan v Zoullas

[*1] Chan v Zoullas 2012 NY Slip Op 50027(U) Decided on January 10, 2012 Supreme Court, New York County Kornreich, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 January 10, 2012
Supreme Court, New York County

Steven H. Chan, Derivatively on Behalf of Nominal, Defendant Eagle Bulk Shipping Inc., Plaintiff,

against

Sophocles N. Zoullas, ALEXIS P. ZOULLAS, DOUGLAS P. HAENSEL, JON TOMASSON, JOSEPH M. CIANCIOLO, DAVID B. HILEY, THOMAS B. WINMILL, FORREST WYLIE, and ALAN S. GINSBERG, Defendants, and EAGLE BULK SHIPPING INC., Nominal Defendant.



HARRY E. HARRIS, JR., Derivatively on Behalf of Nominal Defendant Eagle Bulk Shipping Inc., Plaintiff, - against -

against

SOPHOCLES N. ZOULLAS, ALEXIS P. ZOULLAS, DOUGLAS P. HAENSEL, JON TOMASSON, JOSEPH M. CIANCIOLO, DAVID B. HILEY, THOMAS B. WINMILL, FORREST WYLIE, and ALAN S. GINSBERG, Defendants, and EAGLE BULK SHIPPING INC., Nominal Defendant.



652335/11



Plaintiffs:

Robert J. Shapiro

The Shapiro Firm, LLP

500 Fifth Avenue, 14th Floor

New York, NY 10110

and

Eric L. Zagar

Robin Winchester

Ligaya T. Hernandez

Kessler Topaz Meltzer & Check, LLP

280 King of Prussia Road

Radnor, PA 19087

Defendants:

Shauna K. Friedman

Michael G. Bongiorno

Wilmer Cutler Pickering Hale and Dorr LLP

399 Park Avenue

New York, NY 10022

and

Bruce G. Paulsen

Jeffrey M. Dine

Seward & Kissel LLP

One Battery Park Plaza

New York, NY 10004

Shirley Werner Kornreich, J.

Motions in these two actions are hereby consolidated for disposition. Defendants in each action move separately, by order to show cause, for a stay pursuant to CPLR 2201, pending the disposition of a federal action.

Background

Plaintiffs in the state and federal actions are shareholders in the nominal defendant, Eagle Bulk Shipping (Eagle Bulk or the company). The instant actions are distinguished by the names [*2]of their respective plaintiffs, Steven N. Chan and Harry E. Harris, Jr. (the Chan action and the Harris action or together, the state actions). The nominal defendant and the defendants are the same in the state and federal actions. The defendants in the three actions are officers or directors of Eagle Bulk. The same counsel represents the defendants in the actions.

The federal action, Metcalf v Zoullas, index No. 11 Civ 3996 (the federal action), was filed June 13, 2011 in the United States District Court, Southern District of New York. The Chan case was filed August 23, 2011, and the Harris case on August 30, 2011. On September 12, 2011, the parties in the state actions filed a joint stipulation and proposed order requesting consolidation.[FN1] Also in September, in the federal action, defendants moved to dismiss on the grounds that the complaint failed to properly allege demand futility and failed to state a claim for breach of fiduciary duty regarding director compensation.

Apart from the identity of the plaintiff shareholders, the complaints in the state actions are the same. Moreover, all three cases are derivative actions brought by individual shareholders, Chan, Harris, and Metcalf, on behalf of Eagle Bulk, a holding company incorporated under the laws of the Republic of the Marshall Islands, with headquarters in New York City. Through its subsidiaries, Eagle Bulk owns ships which transport dry bulk cargoes, such as iron ore, coal and cement.

In all three cases, it is alleged that: 1) the directors of Eagle Bulk took inappropriately high compensation from the company; 2) such practices violate company by-laws and the Marshall Islands Business Corporations Act; 3) defendant Sophocles Zoullas, the CEO, caused Eagle Bulk to pay executives overly high compensation; 4) Zoullas formed another company, Delphin Shipping, LLC, which is in the same business as Eagle Bulk, and used Eagle Bulk's resources to operate Delphin, which competes with Eagle Bulk; 5) said practices violate Zoullas's employment agreement with Eagle Bulk; 6) Eagle Bulk and Delphin entered into a management agreement, which unreasonably favors the latter; 7) regarding the company's 2011 annual meeting, when it became clear that there were not enough votes to approve the pay proposal for company executives, defendants improperly adjourned the meeting, despite the presence of a quorum, for the purpose of soliciting more proxies in order to ensure that, at the next meeting, the pay proposal would be approved; and 8) plaintiffs did not demand that Eagle Bulk institute an action against its officers and directors because such a demand would be futile. The federal complaint is much more comprehensive than the state complaints in regard to explaining how Zoullas's employment agreement was one-sided and unjust to the company.

The first and second causes of action in the three cases allege breach of fiduciary duty based on excessive officer and director compensation. However, the second federal cause of action includes a claim that Zoullas's employment agreement should be rescinded. The third and fourth causes of action in the state cases allege unjust enrichment based on excessive officer and director compensation. The third cause of action in the federal case sounds in breach of fiduciary duty based on Zoullas's activities in connection with Delphin and alleges that Zoullas breached his employment agreement with Eagle Bulk. The fifth cause of action in the state cases alleges breach of fiduciary duty based on Zoullas's activities in connection with Delphin. The sixth cause of action in the state cases alleges that this conduct by Zoullas breached his employment [*3]agreement with Eagle Bulk. The fourth cause of action in the federal case alleges breach of fiduciary duty based on wasting company assets by adjourning the meeting and arranging a new one. The state complaints contain more detail about the adjournment, but do not base a cause of action on it.

As relief, the federal action requests a declaratory judgment setting forth each defendant's breach of fiduciary duty, rescinding compensation payments to officers and directors for the years 2008, 2009, and 2010, and rescinding the company's employment agreement with Zoullas and management agreement with Delphin. The federal action seeks an order enjoining Zoullas from competing with Eagle Bulk and directing each defendant to account to Eagle Bulk for all damages caused by the waste of corporate assets and breach of fiduciary duty. The remedies sought in the state actions are monetary damages, disgorgement of excessive compensation, and unnamed equitable relief. All three actions request litigation costs.

Discussion

CPLR 2201 provides that the court "may grant a stay of proceedings in a proper case, upon such terms as may be just." Defendants contend that the state cases and the federal case are so much alike that the former should be stayed until the adjudication of the latter. They argue that any resolution in the federal action will dispose of all the issues in the state actions.

When a stay is requested because another related action is pending, the court inquires whether there is substantial identity of parties, claims, and relief sought between the cases; complete identity is not required (Trinity Prods., Inc. v Burgess Steel LLC, 18 AD3d 318, 319 [1st Dept 2005]; Asher v Abbott Labs., 307 AD2d 211, 211 [1st Dept 2003]). A stay is a provident exercise of discretion when, despite claims and parties not being identical, there are "overlapping issues and common questions of law and fact and the determination of the prior action may dispose of or limit issues which are involved in the subsequent action" (Belopolsky v Renew Data Corp., 41 AD3d 322, 322-323 [1st Dept 2007] [internal citations and quotation marks omitted]).

The purpose of a stay is to promote "comity, orderly procedure, and judicial economy" (Asher, 307 AD2d at 211). "Judicial economy requires that the action be disposed of in one court, if at all possible, and that litigants and court should not be burdened with prosecuting, defending, and adjudicating the cases in two courts" (Wechsler v Exxon Corp., 55 AD2d 875, 876 [1st Dept 1977]). In deciding whether to stay one case pending the resolution of another, the court takes into account the order in which the cases commenced, the risk of inconsistent rulings, and any prejudice that a stay may cause to the party opposing it (Asher, 307 AD2d at 211-212; see also Belopolsky, 41 AD3d at 322).

Here, the federal and state cases share the same background and alleged misconduct by the same actors. Though not completely identical, the federal and state claims overlap to a large extent. The underlying facts are the same, and the causes of action are sufficiently alike so that resolution of the federal action may have preclusive effect in the state actions. Indeed, the granting of the motion to dismiss the federal action will most likely lead to the dismissal of the state actions. Further, if the federal action is not dismissed, the shareholders' claims can be adjudicated in that forum. Plaintiffs do not show that any of the issues in the state cases are outside the scrutiny of the federal court.

A stay is appropriate where, as seems likely here, the decision in one action will determine all the questions in the other action or will, at least, reduce the issues in the other [*4]actions (see Wechsler v Exxon Corp., 55 AD2d at 876). This is not an instance "where it appears that the action[s] sought to be stayed will have to be determined no matter which way the case in the federal jurisdiction is decided" (Grand Cent. Bldg. v New York Harlem & R.R. Co., 59 AD2d 207, 210 [1st Dept 1977]). Here, there is very little chance that the federal action will not decide all the issues in the state cases.

Plaintiffs argue that a stay will prejudice them, as the state and federal cases are subject to different discovery rules and procedures. They point out that, in this court, discovery is not automatically stayed when a dispositive motion is made, unlike federal court where discovery is stayed pending the resolution of the motion.

The fact that discovery may be delayed until the federal motion is decided does not present so great a disadvantage to plaintiffs as to necessitate that such similar actions should be proceeding in separate courts at the same time. Plaintiffs fail to show that waiting to conduct discovery until the federal motion is resolved will cause them any detriment or defendants any advantage. In addition, if the motion in the federal case is granted and the case dismissed, there may not be any need for discovery in the state actions, as those might also be dismissed. Moreover, discovery during the pendency of a dispositive motion, in the commercial part, is not a rule written in stone. The court has discretion to stay such discovery and is likely to do so in a case such as this.

Further, plaintiffs point to the differences between the state and federal complaints. They claim that only the state actions contain a breach of contract claim against Zoullas. The federal case makes the same claim, although not in a separate cause of action. Plaintiffs state that unjust enrichment (in the state actions) and rescission (in the federal action) are different claims requiring different evidence. The court disagrees. The evidence that defendants took unfair compensation would be the same in the state and federal actions. If the federal court granted plaintiffs' request for rescission, defendants would have to return the compensation that they received from the company (see 11 Lord, Williston on Contracts § 1:6 [Westlaw 4th ed]). Similarly, to recover based on unjust enrichment in the state actions, plaintiffs must show that defendants were enriched at Eagle Bulk's expense and that defendants should restore what they received (see Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 182 [2011]). Plaintiffs are seeking disgorgement of compensation in the state actions, the same remedy that rescission would afford them in the federal action. If other monetary damages are due to plaintiffs, that can be determined in the federal case. Accordingly, it is

ORDERED that the motion for a stay by the defendants in the above-captioned action of Chan v Zoullas, index No. 652335/11, and the motion for a stay by the defendants in the above-captioned action of Harris v Zoullas, index No. 652398/11, are granted and further proceedings in these actions are stayed; and it is further

ORDERED that any party may make an application by order to show cause to vacate or modify this stay upon the final determination of the action known as Metcalf v Zoullas, Index No. 11-CV-03996, pending before the United States District Court, Southern District of New York; and it is further

ORDERED that movants are directed to serve a copy of this order with notice of entry on the Trial Support Office. [*5]

Dated: January 10, 2012ENTER:

____________________

J.S.C. Footnotes

Footnote 1: The court declines to so order the stipulation.