Motion to Dismiss; Standing; Shareholder Derivative Action; CPLR 3211
By: James Clarke | Senior Staff Writer
Plaintiffs own 10% of Norsel Realties (“Norsel”), a New York partnership owning land in Manhattan. In 1995, Norsel leased the land to 575 Realties, which leased it to 575 Associates LLC. Under the lease with Norsel, 575 Realties was entitled to a ten-year lease renewal. The annual rent was to equal 5% of the land’s appraised value. Norsel later appraised the land at $76 million. Plaintiffs objected and conducted their own appraisal, valuing it at $216 million. A year after, Norsel conducted a second appraisal, valuing the land at $92 million. Based on Norsel’s appraisals, rent was set at $7.2 million and approved by 90% of Norsel’s partners, but not Plaintiffs. Subsequently, Plaintiffs presented a second appraisal, valuing the land at $406 million, and demanded that value be used to set the rent. After Norsel refused, Plaintiffs sued directly, as well as derivatively on behalf of Norsel, alleging damages of $131 million, the ten-year aggregate difference in rental income between the rent set by Norsel and the rent Plaintiffs sought.
Plaintiffs’ initial complaint alleged the rent approval was a breach of fiduciary duty by Norsel, its managers, 575 Realties, 575 Associates LLC, and the property management company. Defendants moved to dismiss. The court found that the business judgment rule applied, so the motion to dismiss was granted. Plaintiffs appealed, and the Appellate Division affirmed in part and reversed in part. The Appellate Division held that Plaintiffs overcame the presumptive application of the business judgment rule regarding Norsel and its management, and therefore remanded those claims, but affirmed the dismissal as to the remaining Defendants as there were no allegations they owed a fiduciary duty or engaged in misconduct. Defendants subsequently filed an answer to the initial complaint. Plaintiffs then filed an amended complaint that named thirty-nine new defendants, including all partners who approved the rent. It also contained a new cause of action regarding the transfer of Norsel’s interest in the land to Norsel LLC, allegedly for the purpose of avoiding the terms of Norsel’s partnership agreement after Plaintiffs filed suit.
The Court dismissed the amended complaint due to lack of standing. The Court noted that shareholders lack standing to bring a direct cause of action to redress wrongs suffered by the corporation; such claims must be asserted derivatively on behalf of the corporation. Since Plaintiffs’ direct claims alleged harm to Norsel, they were inherently derivative and improperly plead. The Court also found that Plaintiffs lacked standing to bring the derivative claims. Standing to bring a derivative claim requires that claimants show they fairly and adequately represent the interests of the shareholders and the corporation, free from adverse personal interest or animus. The Court held that Plaintiffs could not. First, by suing all of the partners, Plaintiffs could not also represent them. Second, Plaintiffs had an interest in 575 Associates LLC; they could not sue over the rent while receiving rent from 575 Associates LLC. Third, Plaintiffs did not appear to have any concern for Norsel; they sought money from partners based on extreme appraisals, ignoring any effect on the operations of 575 Associates LLC which could in turn jeopardize Norsel, but did not request rent revision or court oversight over the appraisal process. Finally, Plaintiffs had repeatedly sued business partners based on similar allegations in the past, and this action was likely a “weapon in the total arsenal” to gain leverage in other disputes.
Pokoik v. Norsel Realties, Index No. 653382/2014, 4/12/2017 (Oing, J.)