Baptist Churches v. Galloway

• Decision Date: 09 May 2000
• Citation: 271 A.D.2d 92,710 N.Y.S.2d 12
• Court: New York Supreme Court — Appellate Division
• Parties: AMERICAN BAPTIST CHURCHES OF METROPOLITAN NEW YORK et al., Appellants,<BR>v.<BR>T. ERIC GALLOWAY et al., Respondents.

271 A.D.2d 92

710 N.Y.S.2d 12

AMERICAN BAPTIST CHURCHES OF METROPOLITAN NEW YORK et al., Appellants,

v.T. ERIC GALLOWAY et al., Respondents.

ROSENBERGER, J. P.

May 9, 2000.

James M. Hirschhorn of counsel, New York City (William J. Tinsley, Jr., on the brief; Sills Cummis Radin Tischman Epstein & Gross, P. A., attorneys), for appellants.

Howard Zelbo of counsel, New York City (Marco A. Lau and Papaya Van Dyke on the brief; Cleary, Gottlieb, Steen & Hamilton, attorneys), for respondents.

WALLACH, ANDRIAS and FRIEDMAN, JJ., concur.

OPINION OF THE COURT

ROSENBERGER, J. P.

This action involves the alleged misappropriation of a corporate opportunity by an officer of a charity, who was retained to help the charity develop an AIDS care facility but seized control of the project himself. The main issue presented is whether the IAS Court erred in dismissing the complaint on the ground that a not-for-profit corporation could never sustain compensable damages from the loss of a corporate opportunity.

Plaintiff American Baptist Churches of Metropolitan New York (ABC Metro) is a not-for-profit religious corporation whose charitable work includes operating Flemister House, an outreach program for AIDS patients, through two wholly owned subsidiaries (the Flemister plaintiffs). ABC Metro had retained defendant Settlement Housing Fund (SHF) in 1994 as a consultant to help develop an additional facility similar to Flemister House, namely the Noah House project at issue in the instant case.

Defendant T. Eric Galloway was first employed by SHF and later hired by ABC Metro in 1995 as Executive Director of the Flemister entities. One of his chief duties was to spearhead the Noah House project. When he was still employed by SHF, both Galloway and SHF Executive Director Carol Lamberg had developed contacts with Great Wall Development Corp., which owned a site that appeared suitable for Noah House. ABC Metro directed Galloway to proceed with negotiations and Galloway reached an oral agreement with Great Wall to purchase the property for $250,000.

Galloway also aided ABC Metro in obtaining all the necessary government approvals and securing financing for the Noah House project. Some funding was to come from a $5.6 million loan from New York City. Additionally, a private investor agreed to invest $1.8 million in return for the right to take advantage of ABC Metro's Federal income tax credits. Of these proceeds, $1.2 million would be available to ABC Metro for use in its charitable work. (As a developer of low-income housing, ABC Metro was entitled to Federal income tax credits, but it could not use them directly because it pays no Federal income taxes, so it planned to sell them to an investor in exchange for a partnership interest in the project.) ABC Metro also expected to receive a $144,000 developer's fee at closing.

By May 1996, the approvals and financing were in place. The closing of the loan from the City was contingent on a signed contract to purchase the property from Great Wall. According to the complaint, once Galloway had completed all the development work on ABC Metro's behalf, he embarked on a scheme to seize control of the Noah House project and cut ABC Metro out of the transaction entirely. Without telling ABC Metro or the Flemister plaintiffs, Galloway instructed ABC Metro's legal counsel to incorporate Community Lantern Corp. (CLC), a not-for-profit corporation, with himself and defendants Carol Lamberg and Craig Harwood as directors. Then, once again without plaintiffs' consent, Galloway instructed the law firm to substitute CLC's name for ABC Metro's on the purchase contract with Great Wall, and to tell Great Wall's counsel to delay the purchase.

On July 7, 1996, Galloway informed plaintiffs that he was resigning and that CLC was taking control of the Noah House project. Because of his prior relationship with Great Wall, he claimed, the property owner would not sell to ABC Metro against Galloway's wishes. Indeed, Great Wall did refuse to go through with the sale, not wishing to be caught in the dispute between CLC and ABC Metro. Great Wall subsequently offered to sell the property to ABC Metro for $350,000 if defendants approved, but ABC Metro could not finance the transaction at this substantially higher price.

The Noah House project never came to fruition. Without a signed contract, ABC Metro could not obtain the loan from the City. ABC Metro alleges that as a result, it lost the $144,000 development fee and the use of $1.2 million in proceeds from the transfer of the Noah House tax credits.

Plaintiffs then brought this action alleging fraud, breach of fiduciary duty, misappropriation of corporate opportunity, and tortious interference with prospective contractual relations. In addition to challenging the sufficiency of the 17 causes of action in the amended complaint on substantive grounds, defendants also argued that the Flemister plaintiffs had no standing because they had no interest in the Noah House project. The IAS Court agreed, and dismissed the Flemister entities from the lawsuit on this basis. With respect to ABC Metro, the IAS Court dismissed all its claims on the sole ground that "[a]s a not-for-profit corporation, ABC Metro cannot satisfactorily allege damages, which would otherwise be premised upon lost profits." The court cited no legal authority for this proposition.

The Flemister plaintiffs were properly dismissed from the action. Since they were not involved in the Noah House project, any proceeds received in connection with the project, such as the New York City loan or the developer's fee, would have inured to the benefit of ABC Metro alone. Thus, they were not real parties in interest (see, Columbus Natl. Leasing Corp. v Perkin-Elmer Corp., 177 AD2d 1035).

However, the order below should be modified to reinstate all but two of ABC Metro's claims. The IAS Court erred in concluding that a not-for-profit corporation could never sustain compensable damages. First of all, as a matter of public policy, it would be unfair and counterproductive for a charitable organization to have no recourse against a dishonest fiduciary who thwarts the organization's endeavors and renders futile the expenditures of time and money invested in developing the project. Second, the IAS Court's ruling rests on a fundamental misunderstanding of the nature of a not-for-profit corporation. A not-for-profit corporation is not the same as a corporation that loses money. It is simply a corporation that devotes whatever proceeds it receives from its operations to charitable causes rather than disbursing the funds as dividends to shareholders and compensation to executives. Just as the goal of a for-profit corporation is to make money for its investors, the goal of a not-for-profit is to make money that can be spent on furthering its social welfare objectives. Both types of companies have suffered an injury when a fiduciary's misconduct frustrates these goals.

The foregoing analysis is supported by the New York Not-For-Profit Corporation Law, which clearly contemplates that not-for-profit corporations may receive income and even make an incidental profit. What distinguishes a not-for-profit is not whether it receives money, but what it does with the money. Not-For-Profit Corporation Law § 102 (a) (5) defines a not-for-profit as a corporation which is organized "exclusively for a purpose or purposes, not for pecuniary profit or financial gain," and "no part of the assets, income or profit of which is distributable to, or enures to the benefit of, its members, directors or officers except to the extent permitted under this statute" (emphasis added). Section 508 allows a not-for-profit to earn an "incidental profit" from fees or charges, so long as such profits are "applied to the maintenance, expansion or operation of the lawful activities of the corporation," and not "divided or distributed in any manner whatsoever among the members, directors, or officers of the corporation."

Not-for-profit corporations in New York routinely bring actions seeking damages for breach of contract, breach of fiduciary duty and fraud (e.g., Spingold Found. v Wallin, Simon, Black & Co., 184 AD2d 464; Cobble Hill Nursing Home v Henry & Warren Corp., 196 AD2d 564, 568-569, lv denied 83 NY2d 756). While no New York case appears to have dealt with a not-for-profit's claim for diversion of a corporate opportunity, a number of cases from other States recognize that a not-for-profit may bring such a claim (e.g., White Gates Skeet Club v Lightfine, 276 Ill App 3d 537, 658 NE2d 864; Valle v North Jersey...