Patrick v. Allen

Decision Date19 January 2005
Docket NumberNo. 04 Civ. 0657(WHP).,04 Civ. 0657(WHP).
Citation355 F.Supp.2d 704
PartiesStuart K. PATRICK, Plaintiff, v. Herbert ALLEN, III, Terry Allen Kramer, Nathaniel Kramer, Hans Kertess, Richard Rainwater, and Dixon Boardman, Defendants.
CourtU.S. District Court — Southern District of New York

John Halebian, Lovell, Stewart, Halebian LLP, New York, NY, for Plaintiff.

Joel C. Feffer, Wachsler Harwood LLP, New York, NY, for Plaintiff.

Richard A. Martin, Heller, Ehrman, White & McAuliffe LLP, New York, NY, for Defendants.

MEMORANDUM AND ORDER

PAULEY, District Judge.

Stuart K. Patrick ("Plaintiff" or "Patrick"), a shareholder and former director of Real Property Owners, Inc. ("RPO"), brings this diversity action against the directors of RPO (collectively, "Defendants"). Patrick alleges that Defendants breached their fiduciary duties to RPO and its shareholders and committed corporate waste by mismanaging RPO's lone asset: a 174-acre property in Nassau County that has been leased to Deepdale Golf Club ("Deepdale") at break-even rent for the past 48 years.

Presently before this Court is Defendants' motion to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendants argue that their decisions as directors are shielded from judicial review by the business judgment rule and that the Complaint fails to state a claim for either breach of fiduciary duty or waste.1 For the reasons set forth below, Defendants' motion to dismiss is granted in part and denied in part.

BACKGROUND

Deepdale is an exclusive golf club in North Hills, New York, with approximately 250 members and an initiation fee of nearly $100,000. (Complaint ("Compl.") ¶ 17.) Deepdale's members include prominent figures in sports, entertainment, fashion and finance. (Compl. ¶ 17.) In 1947, Deepdale Golf Club was located on the former Vanderbilt Estate in Lake Success. (Compl. ¶ 20.) At that time, members of Deepdale formed RPO as a privately traded New York corporation and organized it "as a real estate business, a real estate agency, and a real estate brokerage business" to purchase the tract occupied by Deepdale. (Compl. ¶¶ 16, 20.) RPO sold that property to private investors in 1954. (Compl. ¶ 20.) Two years later, RPO purchased the Grace Estate in North Hills (the "Property") and leased it to Deepdale. (Compl. ¶ 21.) A December 2000 appraisal valued the 174-acre Property at $35-40 million. (Compl. ¶ 28.)

Since acquiring the Property, RPO has leased it exclusively to Deepdale. (Com pl. ¶¶ 22-23.) The arrangement began by an oral agreement requiring Deepdale to pay annual rent equaling the Property's real estate taxes and liability insurance costs. (Compl. ¶ 22.) In 1976, the parties executed a written lease for the period from March 1, 1976 through February 28, 1977, with a provision that it could be extended for consecutive one-year terms by written agreement. (Compl. ¶¶ 22-23.) Such an agreement was executed for the 1977-78 term. (Compl. ¶ 23.) Although Deepdale has continued to use the Property and pay rent to RPO since 1978, no subsequent agreement or lease has been executed. (Compl. ¶ 23.) Currently, the annual rent is $330,000 — an amount sufficient only to cover the real estate taxes and insurance costs associated with the Property. (Compl. ¶ 27.) Plaintiff alleges that the fair market annual rent for the Property is at least $6 million, which would require Deepdale to increase its annual dues substantially. (Compl. ¶¶ 4, 29.)

At RPO's inception, most of its shareholders were members of Deepdale. (Compl. ¶ 2.) Over time, as non-members inherited or privately purchased RPO shares, the corporation's shareholders became more diversified. (Compl. ¶ 4.) In 1976, with approximately 14,000 shares outstanding, RPO embarked on a private offering of an additional 1,000 shares. (Compl. ¶ 24.) In order to sell the entire allotment, RPO sold shares to nonmembers, including Deepdale employees. (Compl. ¶ 25.) At present, only 35% of RPO shareholders are Deepdale members. (Compl. ¶ 5.)

Plaintiff has never been a member of Deepdale. (Compl. ¶ 12.) He was on the RPO board of directors from 1989 through June 2004. (Compl. ¶ 12; Hearing Transcript, dated June 30, 2004 at 15.)2 Two of the defendants, Herbert Allen, III ("Allen") and Terry Allen Kramer ("Kramer"), are descendents of Charles Allen, one of Deepdale's founders. (Compl. ¶¶ 13-14.) Allen and Kramer are both long-time members of Deepdale but were elected to the RPO board only in May 2000. (Compl. ¶¶ 13-14, 30.) The remaining four defendants, Nathaniel Kramer, Hans Kertess, Richard Rainwater and Dixon Boardman, are also Deepdale members and were elected to RPO's board on January 30, 2003. (Compl. ¶¶ 15, 46.)

The Complaint alleges that from 2000 through 2002, Plaintiff pushed for a higher rent and urged the full board to consider selling the Property, but defendants Allen and Kramer refused to entertain any alteration of the status quo. (Compl. ¶¶ 32-39.) For instance, when Patrick suggested that RPO raise the rent to $500,000, Allen and Kramer rejected his proposal outright. (Com pl. ¶¶ 33-34.) Similarly, in March 2002, Bayswater Development, LLC indicated its intent to purchase the Property for $35 million (the "Bayswater Letter of Intent"). (Compl. ¶ 38; Affidavit of Richard A. Martin, dated May 3, 2004 ("Martin Aff.") Ex. M.) Allen and Kramer refused to meet with Bayswater and indicated that they would vote their shares against any such a sale. (Compl. ¶ 39; Martin Aff. Ex. B: Letter from Allen and Kramer to RPO Shareholders, dated July 1, 2002; Martin Aff. Ex. N: Letter from Plaintiff to RPO Shareholders, dated June 25, 2002.) Like Allen and Kramer, the newer directors have refused to consider any changes because, according to Plaintiff, their loyalties are "hopelessly" divided between RPO and Deepdale. (Compl. ¶ 47.)

In July 2002, Allen and Kramer offered to purchase from RPO shareholders 2,000 shares at a price of $900 per share, plus a subsequent payment if and when Allen and Kramer "voluntarily" sold the purchased shares within ten years. (Compl. ¶ 41.) Plaintiff alleges that Allen and Kramer materially misled RPO shareholders because they failed to mention the strong likelihood that the shares would be liquidated by governmental action or court decree. (Compl. ¶¶ 41-44.) For instance, the offer did not mention that the Mayor of North Hills intimated in May 2000 that he would condemn the Property and transform it into a public golf course. (Compl. ¶ 42.) Nor did the offer disclose that Plaintiff had threatened a lawsuit to compel dissolution of RPO. (Compl. ¶ 43.)

On January 27, 2004, Patrick filed this action against the balance of the then-existing RPO board pursuant to BCL § 720. (Compl. ¶ 1.) Section 720 permits a director of a corporation to sue another director for, inter alia, mismanagement and waste of corporate assets. N.Y. Bus. Corp. Law § 720(a)(1). The Complaint alleges that Defendants breached their fiduciary duties and committed corporate waste by failing to extract a reasonable rent from Deepdale and "by failing to allow the RPO [b]oard to negotiate in good faith for a possible sale of the Property." (Compl. ¶¶ 53, 58.) The Complaint also alleges that Defendants Allen and Kramer breached their fiduciary duties by "offering to purchase additional shares so as to entrench their unlawful scheme and acquire such shares at an unfairly low price." (Compl. ¶ 53; see Compl. ¶ 58.)3

DISCUSSION

Defendants move pursuant to Rule 12(b)(6) to dismiss the Complaint for failure to state a claim. Defendants contend that their decisions regarding the Property and Deepdale are shielded by New York's business judgment rule and that Plaintiff has not sufficiently alleged a breach of fiduciary duty or corporate waste.

I. Legal Standard on a Motion to Dismiss

On a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a court must accept the material facts alleged in the complaint as true and construe all reasonable inferences in the plaintiff's favor. Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir.1998). A court should not dismiss a complaint for failure to state a claim unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In this limited task, the issue is not whether a plaintiff will ultimately prevail on his claim, but whether the plaintiff is entitled to offer evidence in support of the allegations in the complaint. Hamilton Chapter of Alpha Delta Phi, Inc. v. Hamilton Coll., 128 F.3d 59, 62 (2d Cir.1997).

A. Matters Outside the Pleadings

In resolving a motion to dismiss for failure to state a claim, a court's "consideration is limited to facts stated on the face of the complaint, in documents appended to complaint or incorporated in the complaint by reference, and to such matters of which judicial notice may be taken." Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991); see Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002). Such documents are considered to be part of the complaint. Cortec Indus. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir.1991). A court may also consider "documents either in plaintiff['s] possession or of which plaintiff[] had knowledge and relied on in bringing suit." Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993). "A plaintiff's reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough." Chambers, 282 F.3d at 153 (emphasis in original). However, for a court to take into account any documents other than those meeting the above standards, the court must convert the motion to dismiss into one for summary judgment and afford the parties an opportunity to present additional materials....

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