Independent Investor Protective League v. Time, Inc.

• Decision Date: 08 May 1980
• Citation: 428 N.Y.S.2d 671,50 N.Y.2d 259,406 N.E.2d 486
• Parties: , 406 N.E.2d 486 INDEPENDENT INVESTOR PROTECTIVE LEAGUE et al., Appellants, v. TIME, INC., Respondent, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 671

428 N.Y.S.2d 671

50 N.Y.2d 259, 406 N.E.2d 486

INDEPENDENT INVESTOR PROTECTIVE LEAGUE et al., Appellants, v. TIME, INC., Respondent, et al., Defendants.

Court of Appeals of New York.

May 8, 1980.

I. Walton Bader, New York City, for appellants.

Calvin R. House and Frederick A. O. Schwarz, Jr., New York City, for respondent.

OPINION OF THE COURT

COOKE, Chief Judge.

It is determined here that a shareholder derivative action may be maintained even though commenced after the subject corporation has effected a dissolution and distributed its assets.

This derivative suit, brought in the name and on behalf of Sterling Communications, Inc., was commenced by plaintiffs against defendants, Time, Inc., and the officers and directors of Sterling. The thrust of the litigation is directed at the relationship of Time and Sterling. Beginning in 1965, Time made investments in Sterling and by 1973 Time played a dominant role in the corporation, owning approximately 80% of the stock and controlling Sterling's management. A majority of Sterling's directors are alleged to have been officers of Time.

On September 7, 1973, Sterling shareholders approved the sale of all corporate assets to Time, and authorized the dissolution of Sterling and distribution of its assets. These actions were accomplished almost immediately and the present action was commenced approximately six months later. According to the complaint, the officers and directors of Sterling, at the behest of Time, engaged in a course of deliberate mismanagement between 1970 and 1973 which depressed the value of Sterling stock, enabling Time to acquire Sterling at a price below its true value. The relief sought, on behalf of Sterling, is the difference between the 1970 value and the 1973 depressed value, approximately $15,000,000 as measured by the decline in the price of stock.

At Special Term, Time moved for summary judgment on the ground that plaintiffs lacked standing to sue. The motion was granted, with a finding that plaintiffs were not shareholders of Sterling at the time the suit was brought, and thus a derivative action would not lie under subdivision (b) of section 626 of the Business Corporation Law. A unanimous Appellate Division agreed, and stated "since Sterling had been dissolved prior to commencement of the action, plaintiffs lack necessary standing to proceed by or in the right of the corporation * * * (A)t the time suit was instituted, the corporate entity did not exist" (66 A.D.2d 391, 393, 412 N.Y.S.2d 898, 899). The order of the Appellate Division should be reversed.

The common law, as developed in England, held that causes of action in favor of or against a corporation abated upon dissolution (e. g., Shayne v. Evening Post Pub. Co., 168 N.Y. 70, 75-77, 61 N.E. 115). Whatever the origins of this rule, the New York courts long ago rejected it, and held that a cause of action accruing before dissolution may be interposed by or against the dissolved corporation (id.). A similar approach is now codified in the Business Corporation Law, which permits a dissolved corporation to "sue or be sued in all courts and participate in actions and proceedings" (Business Corporation Law, § 1006, subd. (a), par. (4)). And, the predecessor to the Business Corporation Law has been construed to allow a dissolved corporation to participate in a proceeding, even after distribution of assets (see Matter of Milton L. Ehrlich, Inc. (Unit Frame & Floor Corp.), 5 N.Y.2d 275, 184 N.Y.S.2d 334, 157 N.E.2d 495). Thus a corporation continues to exist as a legal entity after dissolution in New York, at least for the purposes of actions and proceedings. Moving a step further, the question now arises as to whether a shareholder has standing to maintain an action on behalf of such a corporation.

Subdivision (b) of section 626 of the Business Corporation Law imposes upon the plaintiff in a derivative action a dual requirement as to the ownership of stock: "it shall be made to appear that the plaintiff is * * * (a shareholder) at the time of bringing the action and * * * at the time of the transaction of which he complains". ¹ Ownership at the time of the alleged wrong, known as the contemporaneous ownership doctrine, originated in the Federal courts to preclude a shareholder from manufacturing diversity jurisdiction by transferring stock to a nonresident after a cause of action has accrued (see Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827; Henn, Corporations (2d ed.), § 362, p. 766). Later, the rule was adopted by State courts and Legislatures "to prevent litigious persons from buying stock for the purpose of bringing suit as to alleged past mismanagement" (e. g., Myer v. Myer, 271 App.Div. 465, 473, 66 N.Y.S.2d 83, affd., 296 N.Y. 979, 73 N.E.2d 562, accord Henn, Corporations (2d ed.), § 362, p. 766). Because it seeks to foster public policy by inhibiting speculation in litigation, the contemporaneous ownership rule must, as a general matter, be rigorously enforced.

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