Culligan Soft Water Co. v Clayton Dubilier & Rice LLC

Culligan Soft Water Co. v Clayton Dubilier & Rice LLC 2014 NY Slip Op 03955 Decided on June 3, 2014 Appellate Division, First Department 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 June 3, 2014
Tom, J.P., Renwick, Andrias, Freedman, Clark, JJ.
12644 651863/12

[*1] Culligan Soft Water Co., et al., Plaintiffs-Appellants,

v

Clayton Dubilier & Rice LLC, et al., Defendants-Respondents.

Singler & Dillon, LLP, Sebastopol, CA (Brian W. Dillon of the bar of the State of California, admitted pro hac vice, of counsel), and Einbinder & Dunn, LLP, New York (Michael Einbinder of counsel), for appellants.

Debevoise & Plimpton LLP, New York (Shannon Rose Selden of counsel), for respondents.

Order, Supreme Court, New York County (Jeffrey K. Oing, J.), entered March 18, 2013, which granted defendants' motions to dismiss the complaint without prejudice, unanimously modified, on the law, to vacate the order as to claims asserted against any defendant not a current officer, director, or shareholder of nominal defendant Culligan Ltd. and as to claims based on sections of the Business Corporation Law enumerated in Business Corporation Law §§ 1317 and 1319, and the matter remanded for consideration of the motion to dismiss those claims under New York law, and otherwise affirmed, without costs.

Plaintiffs — minority shareholders of Culligan Ltd. — bring this derivative action on behalf of that entity, a Bermuda company that does business in New York. Supreme Court granted the motion to dismiss upon finding that Bermuda law applied to the case pursuant to the "internal affairs" doctrine. That doctrine "recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders" (Edgar v MITE Corp. , 457 US 624, 645 [1982]; see also Hart v General Motors Corp. , 129 AD2d 179, 184 [1st Dept 1987], lv denied 70 NY2d 608 [1987]). Since the internal affairs doctrine does not apply to those defendants who are not current officers, directors, and shareholders of Culligan Ltd., namely, Angelo, Gordon & Co., L.P., Silver Oak Capital, L.L.C., Centerbridge Special Credit Partners, L.P., CCP Credit Acquisition Holdings, L.L.C., CCP Acquisition Holding, L.L.C., and Clayton Dubilier & Rice LLC, Bermuda law does not apply to claims asserted against them.

Nor does the internal affairs doctrine apply to claims based on sections of the Business Corporation Law (BCL) enumerated in BCL §§ 1317 and 1319. BCL § 1319(a)(1) expressly provides that BCL § 626 (shareholders' derivative action) shall apply to a foreign corporation doing business in New York. Thus, the issue of plaintiffs' standing to bring a shareholder derivative action is governed by New York law, not Bermuda law (see Pessin v Chris-Craft Indus. , 181 AD2d 66, 70-71 [1st Dept 1992]; Norlin Corp. v Rooney, Pace Inc. , 744 F2d 255, 261 [2d Cir 1984]). We note that Matter of CPF Acquisition Co. v CPF Acquisition Co. (255 AD2d 200 [1st Dept 1998]) held that the plaintiff's standing to sue was governed by Delaware [*2]law because Delaware was the State of the corporation's incorporation. However, there is no indication that the plaintiff in that case raised BCL § 1319.

Pursuant to German-American Coffee Co. v Diehl (216 NY 57, 62-64 [1915]) and BCL §§ 1319(a)(1), 719(a)(1), and 510, New York law applies to the second cause of action, which alleges that the directors of Culligan Ltd. declared illegal dividends.

To the extent plaintiffs allege violations of BCL § 720 (e.g. waste and unlawful conveyance), which is made applicable to foreign corporations doing business in New York by BCL § 1317(a)(2), those claims are also governed by New York law (see Seghers v Thompson , 2006 WL 2807203, *5-6, 2006 US Dist LEXIS 71103, *16, *18 [SD NY, Sept. 27, 2006, 06 Civ 308 (RMB) (KNF)]). However, to the extent plaintiffs allege a violation of a section of the Business Corporation Law not enumerated in BCL § 1317 (e.g. § 717, which is part of plaintiffs' breach of fiduciary duty claim), New York law does not apply (see e.g. Seghers , 2006 WL 2807203 at *5, 2006 US Dist LEXIS 71103 at *16). Those claims are governed by Bermuda law (see e.g. Kikis v McRoberts Corp. , 225 AD2d 455 [1st Dept 1996]), and were thus correctly dismissed.

BCL § 1317 permits plaintiffs to sue Culligan Ltd.'s directors and officers. However, defendant Clayton Dubilier & Rice Fund VI Limited Partnership (CDR Fund VI) is neither a director nor an officer of Culligan Ltd.; it is Culligan Ltd.'s majority shareholder. Hence, there is no basis for applying New York law to the claims against CDR Fund VI. It is undisputed that, under Bermuda law, plaintiffs' claims against CDR Fund VI, as currently pleaded, were correctly dismissed.

Because it found that Bermuda law applied to this case, the motion court did not reach defendants' arguments that the complaint should be dismissed even if New York law applied. We remand so that the court may consider those arguments.

THIS CONSTITUTES THE DECISION AND ORDER

OF THE SUPREME COURT, APPELLATE DIVISION, FIRST DEPARTMENT.

ENTERED: JUNE 3, 2014

CLERK