People ex rel. Spitzer v. Grasso

• Decision Date: 25 June 2008
• Docket Number: 120.
• Citation: 11 N.Y.3d 64,893 N.E.2d 105
• Parties: The PEOPLE of the State of New York, by Eliot SPITZER, Attorney General of the State of New York, Appellant, v. Richard A. GRASSO, Respondent, et al., Defendants. (And Other Actions.).
• Court: New York Court of Appeals Court of Appeals

893 N.E.2d 105

11 N.Y.3d 64

The PEOPLE of the State of New York, by Eliot SPITZER, Attorney General of the State of New York, Appellant, v. Richard A. GRASSO, Respondent, et al., Defendants (And Other Actions.).

120.

Court of Appeals of New York.

June 25, 2008.

Andrew M. Cuomo, Attorney General, New York City (Barbara D. Underwood, Benjamin E. Rosenberg and Jeffrey P. Metzler of counsel), for appellant.

Williams & Connolly LLP, Washington, D.C. (Gerson A. Zweifach, Brendan V. Sullivan, Jr., Steven M. Farina and Carl R. Metz of counsel), and Flemming Zulack Williamson Zauderer LLP, New York City (Mark C. Zauderer and Jonathan D. Lupkin of counsel), for respondent.

OPINION OF THE COURT

KAYE, Chief Judge.

This appeal arises out of compensation paid by the New York Stock Exchange (NYSE) to Richard A. Grasso, Chairman and Chief Executive Officer from 1995 until his resignation in September 2003. At all times relevant to this appeal the NYSE was a New York not-for-profit corporation regulated by the Not-For-Profit Corporation Law (N-PCL).¹ The present challenge is to four of the eight causes of action brought by the Attorney General charging that the compensation paid to Grasso was excessive.

The Allegations of the Complaint

Three agreements, executed in 1995, 1999 and 2003, governed Grasso's compensation by the NYSE. From 1995 through 2002, his base salary was roughly $1.4 million, but his bonus awards escalated from $900,000 in 1995 to $10.6 million in 2002. The 2003 agreement provided Grasso with an immediate lump sum payment of $139.5 million and an additional $48 million payable over four years — compensating him for past and future work.

The Attorney General alleges that the payments contemplated by the 2003 agreement were not reasonable or commensurate with the services performed by Grasso, and therefore violated N-PCL 202(a)(12) and 515(b). The complaint describes the situation as "a fundamental breakdown of corporate governance" predicated on numerous breaches of fiduciary duty, beginning with the composition of the Compensation Committee — its members hand-picked by Grasso — which ignored a benchmark system² designed to calculate Grasso's compensation. In 1999, 2000 and 2001, the Compensation Committee provided Grasso with awards exceeding the benchmark by 64%, 141% and 65%, respectively. In addition, the Attorney General alleges that information provided to Committee and Board members regarding the extent of Grasso's compensation under various benefit programs was inaccurate, incomplete and misleading.

The complaint then shifts to a description of the negotiation process for the 2003 agreement, beginning with Grasso's 2002 proposal. Instead of immediately approving the package, the Compensation Committee retained the law firm of Vedder Price to serve as independent consultant. By August 2003 an agreement still had not been reached and several Board members expressed disapproval of the $139.5 million figure. In light of these concerns, according to the complaint, the proposal was not included on the agenda for the August 7, 2003 Compensation Committee meeting or Board meeting. During the August 7 Committee meeting, however, the members present decided to approve the proposal and pass it on to the Board. Allegedly, as a result of this last-minute change, neither independent counsel nor opponents of the compensation package were at the meeting, and Board members who did attend had no opportunity to review the details of the package in advance of the meeting. The Board, nonetheless, approved the $187.5 million package.

Grasso's Resignation and the Instant Action

The negative reaction to Grasso's compensation package forced his resignation and prompted an internal investigation. Based on the investigation's results, the NYSE Interim Chairman wrote both to the Attorney General and to the Chairman of the Securities and Exchange Commission asking that they "pursue the matter on [the NYSE's] behalf and as part of [their] broader responsibilities." Five months later, the Attorney General commenced this action.

The complaint asserts eight causes of action — six against Grasso, one against Kenneth Langone (Chairman of the Compensation Committee from 1999 through June 2003), and one for declaratory and injunctive relief against the NYSE. The causes of action against Grasso can be separated into two categories — the statutory causes of action and the nonstatutory causes of action that are the subject of this appeal. The two statutory claims against Grasso — the second and third causes of action — are for unlawful transfer of corporate assets and breach of fiduciary duty (see N-PCL 720[a], [b]). Section 720(b) expressly authorizes the Attorney General to bring these two causes of action and that authority is uncontested in this appeal.³

The four nonstatutory claims against Grasso are at bottom premised on provisions of the N-PCL but clothed in the common law. The first and fourth causes of action for a constructive trust and payment had and received, based on a theory of unjust enrichment, are premised on the reasonable compensation provisions of the N-PCL (see N-PCL 202[a][12]; 515[b]). The fifth cause of action seeks restitution of certain benefit awards alleging that a majority of the Board failed to approve them as required by N-PCL 715(f). Finally, the sixth cause of action alleges that the NYSE's advance payments from a retirement plan violated the prohibition against loans to officers under N-PCL 716 and that the NYSE is entitled to reasonable interest thereon.

Grasso moved to dismiss the four nonstatutory claims on the ground that the Attorney General lacked authority to maintain them. Supreme Court denied defendant's motion to dismiss, holding that the Attorney General had standing to sue under the parens patriae doctrine to vindicate the interests of the investing public.⁴

A majority at the Appellate Division reversed and dismissed the four nonstatutory causes of action against Grasso, viewing them as an attempt to circumvent the fault-based claims provided by the N-PCL. The dissenting Justices would have permitted the claims to proceed based on the parens patriae doctrine. We now affirm the order of the Appellate Division.

Analysis

Although several provisions of the N-PCL mirror those regulating for-profit entities under the Business Corporation Law, one unique characteristic is the legislative codification of the Attorney General's traditional role as an overseer of public corporations (see e.g. People v. Lowe, 117 N.Y. 175, 22 N.E. 1016 [1889]).

At least 18 provisions of the statute detail the Attorney General's varied enforcement powers. These powers include the ability to provide structural relief with respect to the corporation and to bring actions against individual directors or officers. Section 112 expressly authorizes actions or special proceedings to annul or dissolve corporations that have acted beyond their authority or to restrain unauthorized activities (N-PCL 112[a][1]). In addition, the Attorney General may enforce any right given to members of Type B or Type C corporations and, upon an order from Supreme Court, may do the same for Type A corporations (N-PCL 112[a][7], [9]). In addition, sections 719 and 720 permit the Attorney General to seek redress for injuries resulting from — to name only a few — unlawful distributions of corporate cash, property or assets (N-PCL 719[a][1], [4]), improper loans (N-PCL 719[a][5]), waste of corporate assets (N-PCL 720[a][1][B]) and breach of fiduciary duties (N-PCL 720[a][1][A]). The Attorney General's authority to maintain these actions is explicitly codified under N-PCL 720(b).

The Legislature's comprehensive enforcement scheme, however, is not without limitation. First, any action or special proceeding brought by the Attorney General under the N-PCL "is triable by jury as a matter of right" (N-PCL 112[b][1]). Second, and most relevant to the issue before us, the Legislature has provided directors and officers with the protections of the business judgment rule (see N-PCL 717). The statute provides that officers and directors must discharge "the duties of their respective positions in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions" (N-PCL 717[a]). Officers and directors are permitted to rely on information, opinions or reports of reasonable reliability so long as the officer or director acts in good faith (N-PCL 717[b]). Moreover, the statute dictates that persons "who so perform their duties shall have no liability by reason of being or having been directors or officers of the corporation" (N-PCL 717[b]).

Despite the numerous causes of action explicitly made available to the Attorney General, the four nonstatutory claims that are the subject of this appeal rest on an assertion of parens patriae authority to vindicate the public's interest in an honest marketplace. Here, however, as the dispositive defect stems from the inconsistency between the two sets of claims, we need not and do not reach the scope of any such authority. Instead, a side-by-side comparison of the challenged claims and the statutory claims reveals that the Attorney General has crafted four causes of action with a lower burden of proof than that specified by the statute, overriding the fault-based scheme codified by the Legislature and thus reaching beyond the bounds of the Attorney General's authority.

In an analogous context, we have consistently held that a private right of action may not be implied from a statute where it is "incompatible with the enforcement mechanism chosen by the Legislature" (Sheehy v. Big Flats Community Day, 73 N.Y.2d...