Levy v. Young Adult Inst., Inc.

• Decision Date: 30 April 2015
• Docket Number: No. 13–CV–2861 JPO.,13–CV–2861 JPO.
• Citation: 103 F.Supp.3d 426
• Parties: Joel M. LEVY and Judith W. Lynn, Plaintiffs, v. YOUNG ADULT INSTITUTE, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

103 F.Supp.3d 426

Joel M. LEVY and Judith W. Lynn, Plaintiffs,

v.YOUNG ADULT INSTITUTE, INC., et al., Defendants.

No. 13–CV–2861 JPO.

United States District Court, S.D. New York.

Signed April 30, 2015.

Melissa Yang, Michael C. Rakower, Rakower Lupkin PLLC, New York, NY, for Plaintiffs.

Michael Joseph Prame, B. Katherine Kohn, Edward J. Meehan, Nancy F. McTyre, Groom Law Group, Chartered, Washington, DC, Marcus Aaron Asner, Yue–Han Chow, Arnold & Porter, LLP, Ian Ross Shapiro, Cooley LLP, New York, NY, for Defendants.

OPINION AND ORDER ADOPTING REPORT AND RECOMMENDATION

J. PAUL OETKEN, District Judge:

Plaintiffs Joel M. Levy and Judith W. Lynn (together, “Plaintiffs”) have asserted claims pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”) and state law against the Young Adult Institute, Inc. (“YAI”), of which Levy is a former executive, and against other defendants (collectively, “Defendants”). YAI has answered the operative complaint and filed counterclaims against Levy for breach of fiduciary duty and for acting as a faithless servant. Now before the Court is the report and recommendation (“Report”) of the Honorable Sarah Netburn, U.S. Magistrate Judge, on Levy's motion to dismiss YAI's counterclaims, pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. The Report recommends that the motion be denied. For the reasons that follow, the Report is adopted, Plaintiffs' objections are overruled, and Levy's motion is denied.

I. Background¹

Plaintiffs filed their third amended complaint on June 19, 2014. (Dkt. No. 104.) On June 30, 2014, Defendants answered the complaint, and YAI asserted counterclaims against Levy. (Dkt. No. 105 (“Counterclaims”).) Levy moved to dismiss the counterclaims.²(Dkt. No. 168.) YAI opposed the motion (Dkt. No. 126), and Levy replied (Dkt. No. 171). Judge Netburn filed the Report on January 14, 2015. (Dkt. No. 179 (“Report”).) Levy filed an objection to the Report on February 2, 2015 (Dkt. No. 188 (“Objection”)), and YAI opposed Levy's objection on February 19, 2015 (Dkt. No. 196 (“Opposition”)). The Court denied YAI's request that discovery on its counterclaims be stayed pending the Court's consideration of Levy's objection. (Dkt. Nos. 190, 192.)

II. Standard of Review

Pursuant to 28 U.S.C. § 636(b)(1), a district court reviewing a magistrate judge's report and recommendation may “accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge.” The district court reviews a magistrate judge's report “strictly for clear error when no objection has been made,” but “will make a de novodetermination regarding those parts of the Report to which objections have been made.” Coach, Inc. v. O'Brien,No. 10 Civ. 6071(JPO)(JLC), 2012 WL 1255276, at *1 (S.D.N.Y. Apr. 13, 2012)(citing McDonaugh v. Astrue,672 F.Supp.2d 542, 547 (S.D.N.Y.2009)). “In DeJesus v. Comm'r of Soc. Sec.,No. 13 Civ. 2251(AJN)(HBP), 2014 WL 5040874, at *1 (S.D.N.Y. Sept. 29, 2014).”

III. Discussion

A. Business Judgment Rule

Under New York law, the business judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” Auerbach v. Bennett,47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994, 1000 (1979); see also Treadway Cos. v. Care Corp.,638 F.2d 357, 382 (2d Cir.1980)(“Under the business judgment rule, directors are presumed to have acted properly and in good faith....”). The rule's principles are reflected in a section of the statutory law governing corporations, New York Business Corporation Law § 717. See Lindner Fund, Inc. v. Waldbaum, Inc.,82 N.Y.2d 219, 604 N.Y.S.2d 32, 624 N.E.2d 160, 161 (1993)(recognizing that New York's business judgment rule provides that corporate officers must “perform their duties ‘in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances' ” (quoting N.Y. Bus. Corp. Law § 717(a))). An analogous statute, New York Not–for–Profit Corporation Law § 717, governs the directors and officers of nonprofit corporations. SeeN.Y. Not–for–Profit Corp. Law [hereinafter “N–PCL”] § 717(a)(providing that “[d]irectors and officers shall discharge the duties of their respective positions in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances”); see also S.H. & Helen R. Scheuer Family Found., Inc. v. 61 Assocs.,179 A.D.2d 65, 582 N.Y.S.2d 662, 665 (1st Dep't 1992)(“[I]t is well established that, as fiduciaries, board members [of a not-for-profit corporation] bear a duty of loyalty to the corporation and may not profit improperly at the expense of their corporation.” (internal quotation marks omitted)).

“It is black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply.” In re Croton River Club, Inc.,52 F.3d 41, 44 (2d Cir.1995)(citing, inter alia, Alpert v. 28 Williams St. Corp.,63 N.Y.2d 557, 483 N.Y.S.2d 667, 473 N.E.2d 19, 26 (1984)); see also Treadway,638 F.2d at 382(stating that directors “are called to account for their actions only when they are shown to have engaged in self-dealing or fraud, or to have acted in bad faith”). As the Report states, it is improper to dismiss a suit at the motion to dismiss stage on the basis of the business judgment rule if the plaintiff's pleadings allege that directors or officers did not act in good faith. (SeeReport at 24 (citing, inter alia, Ackerman v. 305 E. 40th Owners Corp.,189 A.D.2d 665, 592 N.Y.S.2d 365, 367 (1st Dep't 1993)).)

The Report concludes that YAI's counterclaims should proceed because they allege that “Levy was a faithless servant and breached his fiduciary duties, resulting in harm to YAI through the loss of money unfairly paid to Levy and through the investigation, endangerment of services[,] and settlement paid by YAI.” (Report at 25.) Levy objects, arguing that the business judgment rule and N–PCL § 717shield him from the counterclaims because the decisions concerning his compensation were made not by him, but by YAI's Board of Trustees (the “Board”), whose members were not interested in those decisions. (Objection at 8–10.) Levy's argument is without merit.

YAI's counterclaims challenge Levy'sactions, not those of the Board. Levy is alleged to have knowingly certified inaccurate financial documents and otherwise placed the corporation's legal and financial status in jeopardy through his actions. Moreover, while it is true that the counterclaims place the propriety of Levy's compensation in question, YAI does not contend that the source of the impropriety is that the members of the Board had a financial stake in the compensation decisions. Rather, YAI alleges, Levy “skew[ed] the information provided to the Board, causing the Board to grant him excessive and unreasonable compensation based on false information.” (Counterclaims ¶ 23.) Levy allegedly did this through a “multi-faceted scheme,” including drafting “in substantial part” YAI's 1999 Compensation Philosophy and directing the Board to “retain specific compensation consultants which he believed he could convince to bless his excessive compensation levels.” (Id.¶¶ 25–26, 29.) Furthermore, and most significantly, Levy “repeatedly made false representations to the Board and its committees ... concerning YAI's financial performance,” which was “a significant factor in the Board's compensation decisions.” (Id.¶ 30.)³

Levy argues that YAI's claims are foreclosed by the business judgment rule, which generally requires the dismissal of claims “premised upon ... decisions made by officers and directors,” unless it is alleged that those officers and directors lacked independence or good faith. (Objection at 8.) Accepting the allegations of the counterclaims as true, however, the Court must assume that the Board relied on Levy'sfinancial misconduct in their decisions on his compensation. The basis for YAI's claims is not an assertion that the Board's decisions were “unwise or inexpedient,” as Levy argues (Objection at 11)—a theory which would properly be barred by the business judgment rule. Instead, YAI asserts that Levy's misstatements of YAI's financial performance—on which the Board is alleged to have relied—may have led Levy to be compensated more substantially than he otherwise would have been. (SeeCounterclaims ¶ 87.) For this reason, the fact that a disinterested Board voted on the compensation decisions cannot insulate Levy from YAI's claims. Cf.N.Y. Bus. Corp. Law § 713(a)(1)(permitting transactions involving interested directors upon approval by a disinterested board, but only where the material facts regarding the interest at stake are disclosed to the board). Accordingly, Levy's objection on this basis is overruled.

B. Rule 9(b)

The Report concludes that YAI's counterclaims do not sound in fraud, and therefore, that they need not meet the heightened pleading standard set out in Rule 9(b) of the Federal Rules of Civil Procedure. (Report at 12–22.) Levy objects, arguing that YAI's counterclaims do sound in fraud because they assert that Levy “induced the Board to award him compensation based on false statements.” (Objection at 14.) The Court does not need to reach this potentially thorny question, because even assuming that Rule 9(b)applies, the counterclaims satisfy its requirements.

Rule 9(b)requires that allegations of fraud or mistake “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). “A complaint making such allegations must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Novak v. Kasaks,216 F.3d 300, 306 (2d Cir.2000)(internal quotation marks and brackets omitted). The...