Mason-Mahon v. Flint

• Decision Date: 14 November 2018
• Docket Number: Index No. 602052/14,2015–12400
• Parties: Michael MASON–MAHON, etc., Appellant, v. Douglas J. FLINT, et al., Defendants, HSBC Holdings, PLC, et al., Nominal Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

166 A.D.3d 754

87 N.Y.S.3d 556

Michael MASON–MAHON, etc., Appellant,

v. Douglas J. FLINT, et al., Defendants,HSBC Holdings, PLC, et al., Nominal Defendants-Respondents.

2015–12400

Index No. 602052/14

Supreme Court, Appellate Division, Second Department, New York.

Argued—March 29, 2018

November 14, 2018

Kirby McInerney LLP, New York, N.Y. (David A. Bishop and Meghan J. Summers of counsel), and Rigrodsky & Long, P.A., Garden City, N.Y. (Seth D. Rigrodsky and Timothy J. MacFall of counsel), for appellant (one brief filed).

Boies, Schiller & Flexner LLP, New York, N.Y. (Nicholas A. Gravante, Jr., and Helen M. Maher of counsel), and Sullivan & Cromwell LLP, New York, N.Y. (Richard C. Pepperman II and Alexander J. Willscher of counsel), for nominal defendants-respondents (one brief filed).

WILLIAM F. MASTRO, J.P., SHERI S. ROMAN, BETSY BARROS, ANGELA G. IANNACCI, JJ.

DECISION & ORDER

In an action, inter alia, to recover damages for breach of fiduciary duty, the plaintiff appeals from an order of the Supreme Court, Nassau County (Timothy S. Driscoll, J.), entered November 19, 2015. The order, insofar as appealed from, granted the nominal defendants' motion to dismiss the amended complaint.

ORDERED that the order is reversed insofar as appealed from, with costs, and the nominal defendants' motion to dismiss the amended complaint is denied.

The nominal defendant HSBC Holdings, PLC (hereinafter HSBC Holdings), is a company organized under the laws of the United Kingdom and headquartered in London, and is one of the world's largest international financial institutions. It directly or indirectly owns the remaining nominal defendants, HSBC Bank USA, N.A. (hereinafter HSBC Bank), HSBC North America Holdings, Inc., and HSBC USA, Inc., all of which are either incorporated or headquartered in New York. The plaintiff is and was at all relevant times a shareholder in HSBC Holdings.

According to the complaint, in December 2012, HSBC Holdings and HSBC Bank reached agreements with banking regulators and New York and federal prosecutors in which they admitted to knowingly violating state and federal laws by failing to implement money laundering prevention safeguards and by circumventing sanctions imposed on Cuba, Iran, Libya, Sudan, and Burma (also known as Myanmar). The complaint alleges that the violations occurred despite repeated regulatory interventions and internal review findings that identified money laundering and sanctions evasions issues, and they occurred in part because of the manner in which HSBC Holdings managed the relationships among its many international subsidiaries. HSBC Holdings and HSBC Bank agreed to pay more than $1.5 billion in aggregate penalties and to implement significant internal structural and personnel changes as part of these settlements.

In May 2014, the plaintiff commenced this shareholder derivative action in the Supreme Court, Nassau County, on behalf of HSBC Holdings and the remaining nominal defendants against their current and former officers and directors, alleging breach of fiduciary duty and waste of corporate assets, among other things. The plaintiff filed an amended complaint in February 2015.

The nominal defendants thereafter moved pursuant to CPLR 327(a) and 3211(a) to dismiss the amended complaint. They argued that the internal affairs doctrine required the application of foreign law to questions of standing, and that the plaintiff lacked standing because he failed to seek permission from the English High Court pursuant to the United Kingdom Companies Act of 2006 (hereinafter UK Companies Act) prior to commencing this shareholder derivative action. In opposition, the plaintiff argued, among other things, that New York law governed the question of standing. Additionally, the nominal defendants argued that the amended complaint should be dismissed for lack of standing under New York law, and that dismissal was warranted based upon forum non conveniens.

In an order entered November 19, 2015, the Supreme Court applied the law of the United Kingdom pursuant to the internal affairs doctrine, and granted the nominal defendants' motion on the ground of lack of standing. The court rejected the alternate grounds asserted for dismissal by the nominal defendants, i.e., lack of standing under New York law and forum non conveniens. The plaintiff appeals.

After this appeal was perfected, the Court of Appeals decided Davis v. Scottish Re Group Ltd., 30 N.Y.3d 247, 66 N.Y.S.3d 447, 88 N.E.3d 892, which held that a Cayman Islands court rule requiring plaintiffs in shareholder derivative actions to first apply to the Cayman Islands Grand Court for leave to continue the action is a procedural rule of the Cayman Islands, and "therefore does not apply where, as here, a plaintiff seeks to litigate his derivative claims in New York" ( id. at 250, 66 N.Y.S.3d 447, 88 N.E.3d 892 ). Thereafter, this Court allowed the litigants to submit additional papers on the issue of whether Davis had any impact on the determination of the issue of standing in this case. Based upon the analysis set forth in Davis, we find that the judicial-permission requirement set forth in the UK Companies Act is a procedural rule applicable only in England and Wales, or Northern Ireland. Therefore, we disagree with the Supreme Court's determination, and hold that the plaintiff was not required to obtain permission from the English High Court prior to commencing this derivative action in New York.

The internal affairs doctrine is a "conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands" ( Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 73 L.Ed.2d 269 ; see New Greenwich Litig. Trustee, LLC v. Citco Fund Servs. [Europe] B.V., 145 A.D.3d 16, 22, 41 N.Y.S.3d 1 ; Graczykowski v. Ramppen, 101 A.D.2d 978, 979, 477 N.Y.S.2d 454 ; In re MF Global Holdings Ltd. Inv. Litig., 998 F.Supp.2d 157, 179–180 [S.D.N.Y.] ). Based upon the internal affairs doctrine, the substantive law of the United Kingdom governs the merits of this action.

However, "under New York common-law principles, procedural rules are governed by the law of the forum" ( Davis v. Scottish Re Group Ltd., 30 N.Y.3d at 252, 66 N.Y.S.3d 447, 88 N.E.3d 892 ; see Tanges v. Heidelberg N. Am., 93 N.Y.2d 48, 53, 687 N.Y.S.2d 604, 710 N.E.2d 250 ; Martin v. Dierck Equip. Co., 43 N.Y.2d 583, 588, 403 N.Y.S.2d 185, 374 N.E.2d 97 ). "[T]he law of the forum normally determines for itself whether a given question is one of substance or procedure," and a "foreign jurisdiction's designation of the rule as procedural or substantive, while instructive, is not dispositive" ( Davis v. Scottish Re Group Ltd., 30 N.Y.3d at 253, 66 N.Y.S.3d 447, 88 N.E.3d 892 ).

In determining whether the subject judicial-permission rule is procedural or substantive, we must first look at its plain language (see id. ). Here, Part II, Chapter 1, section 260(1), of the UK Companies Act, entitled "Derivative Claims in England and Wales or Northern Ireland," provides, in pertinent part, that "[t]his Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—(a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company," and shall be referred to as a " ‘derivative claim.’ " UK Companies Act § 261(1) provides that "[a] member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it." Thus, by its own terms, UK Companies Act § 261(1) applies only to derivative claims brought in England and Wales, or Northern Ireland, and does not suggest that it applies in any other jurisdiction such as New York (see Davis v. Scottish Re Group Ltd., 30 N.Y.3d at 253, 66 N.Y.S.3d 447, 88 N.E.3d 892 ). Moreover, the plain meaning of the rule is that it applies to any derivative action commenced in England and Wales, or Northern Ireland, in respect of a cause of action vested in the "company" and seeking relief on behalf of the "company" irrespective of where such company is incorporated. Thus, as in Davis, the rule appears to "serve a gatekeeping function," but only as to derivative actions commenced in England and Wales, or Northern Ireland, not for derivative actions, wherever commenced, concerning companies incorporated in England and Wales, or Northern Ireland, specifically (see Davis v. Scottish Re Group, Ltd., 30 N.Y.3d at 254, 66 N.Y.S.3d 447, 88 N.E.3d 892 ).

Additionally, the UK Companies Act has no provision suggesting that it applies to derivative actions on behalf of companies incorporated in England, Wales, or Northern Ireland commenced which are outside of England, Wales, or Northern Ireland (see id. ).

Contrary to the defendants' contentions, the UK Companies Act is not analogous to the judicial-permission requirements in the British Virgin Islands' (BVI) Business Companies Act (2004) § 184C and the Canada Business Corporations Act (RSC 1985, c C–44, s 239), which the Court of Appeals in Davis described as substantive. Unlike the UK Companies Act, the British Virgin Islands' (BVI) Business Companies Act (2004) § 184C "requires that any shareholder intending to commence a derivative action on behalf of a BVI-incorporated company, first obtain leave from a BVI court" ( Davis v. Scottish Re Group Ltd., 30 N.Y.3d at 254, 66 N.Y.S.3d 447, 88 N.E.3d 892 [emphasis added] ). "Likewise, the Canada Business Corporations Act (RSC 1985, c C–44, s 239), requires any shareholder seeking to commence a derivative action on behalf of a Canadian corporation to obtain...