Barr v. Wackman

Decision Date01 April 1975
Citation36 N.Y.2d 371,329 N.E.2d 180,368 N.Y.S.2d 497
Parties, 329 N.E.2d 180, 99 A.L.R.3d 1023 Abraham BARR, Respondent, v. Kenneth B. WACKMAN et al., Appellants, et al., Defendants.
CourtNew York Court of Appeals Court of Appeals

Thomas A. Butler, Edward F. Beane and Raymond Fitzgerald, New York City, for appellants.

Robert M. Kornreich and Benedict Wolf, New York City, for respondent.

FUCHSBERG, Judge.

Plaintiff brought this shareholder's derivative action without first making a demand upon the corporation's board of directors to secure initiation of an action in favor of the corporation or otherwise to remedy the acts of which he complains. He alleges that a demand would have been futile because the board of directors participated in, authorized and approved the challenged acts and its members are themselves subject to liability and, therefore, cannot be expected to vote to sue themselves.

Three of the defendants moved to dismiss the complaint on the ground that the reasons offered in justification of the failure to make a demand are insufficient under subdivision (c) of section 626 of the Business Corporation Law, McKinney's Consol.Laws, c. 4. The issue is whether allegations of board participation in and approval of acts involving bias and self-dealing by minority 'affiliated' directors and breach of fiduciary duties of due care and diligence by the remaining majority 'unaffiliated' directors through their participation and approval, though there is no claim of self-dealing as to them, are sufficient to withstand a motion to dismiss for failure to make a demand.

Subdivision (c) of section 626 of the Business Corporation Law provides that, in any shareholder's derivative action brought in the right of the corporation to procure judgment in its favor, 'the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.'

The Supreme Court denied the motion to dismiss and the Appellate Division, one Justice dissenting, affirmed. This appeal is before us pursuant to leave granted by the Appellate Division upon the certified question whether the affirmed order denying the motion to dismiss was properly made.

For reasons which follow, we have concluded that the question should be answered in the affirmative and the determinatio denying appellants' motion to dismiss should, therefore, be upheld.

Plaintiff, a shareholder of Talcott National Corporation ('Talcott'), brought this shareholder's derivative action 1 against defendants Gulf & Western Industries ('Gulf & Western'), Associates First Capital Corporation ('First Capital'), a subsidiary of Gulf & Western, and 16 Talcott directors. Five of those 16 are affiliated with Talcott in official capacities in addition to their positions as directors. Defendant Silverman is chief executive officer as well as chairman of the board of directors. Defendant Wackman is Talcott's president, defendant Campbell the senior executive vice-president, defendant Kelsey executive vice-president, and defendant Remis the president and chief executive officer of Beggs & Cobb, Inc. ('Beggs'), a whollyowned subsidiary of Talcott. These affiliated directors, characterized as the 'controlling defendants' in the complaint, are alleged to have dominated and controlled Talcott and its board of directors.

The remaining 11 defendants are not alleged to be affiliated with Talcott otherwise than in their capacity as directors. In the complaint they are characterized as 'men of affairs actively engaged in the pursuit of their own substantial business interests', and hereinafter will be referred to as the unaffiliated directors. They are alleged to have failed to exercise their independent judgment as directors. The complaint also alleges that the individual defendants constitute the present members of Talcott's board of directors, and were directors at the time of the contested acts. 2

The motion to dismiss the complaint was made by defendan Wackman,Campbe and Kelsey (appellants herein), three of the affiliated directors. Since their motion goes to the sufficiency of the complaint, plaintiff's allegations must be described in some detail. We note at the outset the well known principle that on a motion to dismiss for failure to state a cause of action every fact alleged must be assumed to be true and the complaint liberally construed in plaintiff's favor (see, e.g., Sage v. Culver, 147 N.Y. 241, 245, 41 N.E. 513; see, also, Papilsky v. Berndt, D.C., 59 F.R.D. 95, 97, app. dsmd., 2 Cir., 503 F.2d 554).

According to the complaint, Talcott is engaged through its various subdivisions in the fields of commercial, industrial and real estate financing, product and equipment manufacturing, insurance, and leather processing. It is alleged that in late 1972 defendant Gulf & Western determined to acquire control of Talcott because Talcott's finance-related business (principally operated by its 93% Owned subsidiary, James F. Talcott, Inc.) represented a potential valuable expansion of the finance business conducted by Gulf & Western's wholly-owned subsidiary, defendant First Capital. This led to an 'agreement in principle' for the merger of Talcott into Gulf & Western at a value of $24 per Talcott share. The agreement was approved by the board of directors of each corporation. Thereafter, plaintiff asserts, the affiliated directors, in return for certain pecuniary and other personal benefits, entered into a 'plan and scheme' with Gulf & Western to help it obtain control over Talcott on an altered basis substantially less favorable to Talcott and its shareholders than the previously approved merger proposal.

Various actions are claimed to have been taken pursuant to this scheme, not only by the individual affiliated directors and the corporate defendants but also by Talcott's board itself. (1) The Talcott-Gulf & Western merger was abandoned by Talcott's board of directors and in its place was substituted a tender offer by First Capital of $20 per Talcott share. Talcott's board of directors is claimed to have approved this tender offer as 'fair and reasonable' and recommended it to Talcott's common shareholders. The complaint alleges that '(s)uch approval and recommendation were not in the exercise of an honest business appraisal of the tender offer but was (sic) made for the benefit of G & W and the controlling defendants.' (2) Nine Talcott officers, three of whom are presently directors, entered into favorable new employment contracts with James F. Talcott, Inc., Talcott's coveted finance-related subsidiary and the principal object of the proposed acquisition of Talcott. These contracts were authorized by Talcott's board of directors. (3) If the tender offer proved successful and First Capital acquired control of Talcott, defendant Silverman (Talcott's board chairman and chief executive), in addition to his $125,000 approved annual salary with Talcott, was to become vice chairman of First Capital under a five-year employment contract providing an annual salary of $60,000; for the following five years he was to be denominated a consultant under an arrangement with First Capital, providing for an aggregate compensation of $275,000. (4) Gulf & Western and First Capital agreed to pay an allegedly excessive finder's fee of $340,000 in connection with the tender offer to a corporation whose executive vice-president was defendant Silverman's son. (5) Talcott's board of directors decided to sell Talcott's non-finance-related subsidiary, Beggs. The complaint alleges that '(s)aid decision was in disregard of the interests of Talcott and its shareholders, who would be greatly harmed thereby, and was taken solely to accommodate G & W, which was interested in acquiring only the finance related business of Talcott.' Pursuant to this board decision, the affiliated directors allegedly caused Talcott to sell Beggs for $7,000,000 cash and to repurchase for $13,100,000 Series D Preferred Shares which Talcott had originally issued when it acquired Beggs. These relat transactions to accomplish the sale of Beggs are said to have resulted in a $6,100,000 net loss to Talcott.

The complaint goes on to assert that the 'controlling defendants', the six affiliated directors, including the three appellants, have breached their fiduciary obligations to Talcott in return for personal benefits, have failed to exercise due care, skill and diligence in the conduct of Talcott's affairs and have wasted its assets. The complaint then alleges that 'the other defendants, as directors of Talcott, by participating in, authorizing or approving the acts and transactions complained of, have breached their fiduciary duties to Talcott and its shareholders, have failed to exercise due care and diligence in discharging their duties, and have wasted Talcott's assets.'

Specifically relevant to the matter at issue in this case is paragraph 25 of the complaint which alleges: 'Plaintiff has made no demand on the Board of Directors of Talcott to take action with respect to the wrongs herein alleged since the majority of the Talcott Board of Directors participated in, authorized, and approved the acts and transactions complain of herein and are liable therefor. Said directors are defendants in this action. They cannot be expected to vote to prosecute an action against themselves. By reason of the foregoing, such demand would be futile and is therefore unnecessary.'

On behalf of Talcott (see n. 1, Supra) the complaint seeks judgment directing defendants to account to Talcott for profits they gained by reason of the acts alleged and for damages sustained by Talcott. It also seeks to enjoin the defendants from effectuating the employment and consulting agreements already described as well as to enjoin Gulf & Western and First Capital from voting any shares acquired in the tender offer and exercising any control over Talcott.

Appellants claim that the...

To continue reading

Request your trial
98 cases
  • Hill v. State Farm Mutual Automobile Ins. Co.
    • United States
    • California Court of Appeals Court of Appeals
    • 19 de setembro de 2008
    ...F.3d 779.) A board must "do more than passively rubber-stamp the decisions of the active managers." (Barr v. Wackman (1975) 36 N.Y.2d 371, 381 [368 N.Y.S.2d 497, 507, 329 N.E.2d 180, 188].) Plaintiffs contend that (1) the Board merely rubberstamped management's—the officers'—decisions, (2) ......
  • Francis v. United Jersey Bank
    • United States
    • New Jersey Supreme Court
    • 1 de julho de 1981
    ...section 717, the New York courts have not exonerated a director who acts as an "accommodation." Barr v. Wackman, 36 N.Y.2d 371, 329 N.E.2d 180, 188, 368 N.Y.S.2d 497, 507 (Ct.App.1975) (director "does not exempt himself from liability by failing to do more than passively rubber-stamp the de......
  • Crouse-Hinds Co. v. Internorth, Inc.
    • United States
    • U.S. District Court — Northern District of New York
    • 25 de outubro de 1980
    ...(of which there is none here) the courts must and properly should respect their determinations. Accord, Barr v. Wackman, 36 N.Y.2d 371, 368 N.Y.S.2d 497, 507, 329 N.E.2d 180, 187 (1975); Case v. New York Central Railroad Co., 15 N.Y.2d 150, 256 N.Y.S.2d 607, 611-12, 204 N.E.2d 643, 646-47 (......
  • Kamen v. Kemper Financial Services, Inc
    • United States
    • U.S. Supreme Court
    • 20 de maio de 1991
    ...when a majority of the directors have participated in or approved the alleged wrongdoing, see, e.g., Barr v. Wackman, 36 N.Y.2d 371, 381, 368 N.Y.S.2d 497, 507, 329 N.E.2d 180, 188 (1975), or are otherwise financially interested in the challenged transactions, see, e.g., Aronson v. Lewis, 4......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT