People v. Grasso

• Decision Date: 08 May 2007
• Docket Number: M-2216.,8719.
• Citation: 2007 NY Slip Op 03990,836 N.Y.S.2d 40,42 A.D.3d 126
• Parties: THE PEOPLE OF THE STATE OF NEW YORK, by ELIOT SPITZER, Attorney General of the State of New York, Respondent, v. RICHARD A. GRASSO, Appellant, et al., Defendants. (And Other Actions.)
• Court: New York Supreme Court — Appellate Division

42 A.D.3d 126

836 N.Y.S.2d 40

2007 NY Slip Op 03990

THE PEOPLE OF THE STATE OF NEW YORK, by ELIOT SPITZER, Attorney General of the State of New York, Respondent, v. RICHARD A. GRASSO, Appellant, et al., Defendants. (And Other Actions.)

8719.

M-2216.

Appellate Division of the Supreme Court of the State of New York, First Department.

May 8, 2007.

Williams & Connolly LLP, Washington, D.C. (Gerson A. Zweifach, Brendan V. Sullivan, Jr., Victoria Radd Rollins, 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 appellant.

Andrew M. Cuomo, Attorney General, New York City (Avi Schick and David Axinn of counsel), for respondent.

OPINION OF THE COURT

McGUIRE, J.

The central issue on this appeal is whether the Attorney General has the legal authority to assert against defendant Richard A. Grasso four of the six causes of action that the Attorney General asserts against him in his complaint.¹ Although these four causes of action, the first, fourth, fifth and sixth causes of action, refer to and rely on various provisions of the Not-For-Profit Corporation Law (N-PCL), neither the N-PCL nor any other statute purports to confer authority upon the Attorney General to assert any of them. Indeed, none of them are mentioned in, let alone defined by, the N-PCL or any other statute, and Grasso's position at bottom is that none of them are valid causes of action. By contrast, the N-PCL expressly recognizes the other two causes of action—the second and third causes of action—the Attorney General asserts against Grasso, and they are among the causes of action the N-PCL expressly authorizes the Attorney General to bring. We conclude that the Attorney General does not have the authority to assert the first, fourth, fifth and sixth causes of action. Regardless of whether the Attorney General's authority to bring causes of action against directors and officers of not-for-profit corporations relating to the affairs of the corporations is limited to the causes of action the Legislature expressly has authorized the Attorney General to bring, these four causes of action are not within the scope of the Attorney General's authority. As discussed below, the assertion of these causes of action is inconsistent with the policy judgments made by the Legislature in enacting the N-PCL and, specifically, both with core provisions of the N-PCL relating to the duties and liability of officers and directors and with the enforcement scheme of the N-PCL.

The second cause of action is premised on N-PCL 720 (a) (2), which expressly authorizes a cause of action against an officer or director of a not-for-profit corporation "[t]o set aside an unlawful conveyance, assignment or transfer of corporate assets, where the transferee knew of its unlawfulness." Moreover, the same statute expressly authorizes the Attorney General, the corporation and, in the right of the corporation, directors, officers and others, to bring such a cause of action (N-PCL 720 [b]). According to the second cause of action, the payment to Grasso of annual compensation and certain other benefits represented "unlawful conveyance[s], assignment[s] or transfer[s] of corporate assets." The necessary allegation that these payments were unlawful rests on the provisions of N-PCL 202 (a) (12) and 515 (b). The former provision authorizes not-for-profit corporations to, inter alia, fix the "reasonable compensation" of officers and directors and specifies that "[s]uch compensation shall be commensurate with services performed" (N-PCL 202 [a] [12]); the latter provision makes clear what could not be doubted in any event: that the prohibition of N-PCL 515 on the payment by a not-for-profit corporation of dividends or "any part of its income or profit to its members, directors, or officers" (N-PCL 515 [a]) does not apply to the payment of "compensation in a reasonable amount to members, directors, or officers for services rendered" (N-PCL 515 [b]). Thus, to prevail on this claim and secure a judgment both setting aside these payments and directing Grasso to return them, the Attorney General is required to prove that the payments were "unlawful" (i.e., not "reasonable" compensation "commensurate with services performed") and that Grasso "knew of [their] unlawfulness" (N-PCL 720 [a] [2]).

The third cause of action is premised, in the first instance, on N-PCL 720 (a) (1) (A) and (B). These provisions expressly authorize an action against an officer or director:

"(1) To compel the defendant to account for his official conduct in the following cases:

"(A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge.

"(B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties."

Like the second cause of action, this cause of action is among the causes of action that N-PCL 720 expressly authorizes the Attorney General, the corporation and specified others (including, in the right of the corporation, a director or officer) to bring against an officer or director of the corporation. The scope of the duties of directors and officers is defined by paragraph (a) of N-PCL 717. In relevant part, it provides that "[d]irectors and officers shall 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." In addition, this statute stipulates that "[i]n discharging their duties, directors and officers, when acting in good faith, may rely on information, opinions, reports or statements ... prepared or presented" by various individuals, including fellow officers and directors and other agents of the corporation (N-PCL 717 [b]). Provided that they so rely in good faith, directors and officers "shall have no liability by reason of being or having been directors or officers of the corporation" (id.).

In short, as the Attorney General puts it in his brief, the third cause of action alleges that Grasso "violated his fiduciary duties to the NYSE under N-PCL 717 (a), 720 (a)-(b) by influencing and accepting awards of excessive compensation during his tenure as Chairman and CEO." In addition to seeking a judgment directing Grasso to account for the complained-of conduct, the third cause of action, like the second cause of action, seeks a money judgment. Specifically, it seeks "restitution to the NYSE of all payments to the extent [Grasso] fails to account for the lawfulness of such payments."

The first, fourth, fifth and sixth causes of action against Grasso, the ones at issue on this appeal, are described by the Attorney General as "common law" causes of action. Grasso, however, describes them as "hybrid" causes of action, because "they expressly allude to the N-PCL, and according to the Attorney General, are brought as part of an effort to enforce that statute (and are therefore not pure common law claims)...." How best to characterize these four causes of action is of no legal moment. For convenience, we will refer to them as the nonstatutory causes of action.

The first cause of action, "for Imposition of a Constructive Trust and Restitution," relies on the provisions of the N-PCL authorizing the payment of "reasonable" compensation (N-PCL 202 [a] [12]; 515 [b]) which "shall be commensurate with services performed" (N-PCL 202 [a] [12]). It alleges that the annual compensation and other benefits Grasso received were neither "reasonable" nor "commensurate with the services performed," and asserts that to the extent these payments were not "reasonable" and not "commensurate with the services performed," they were "unlawful and ultra vires under N-PCL §§ 202 (a) (12) and 515 (b)," they were "against public policy," and they "unjustly enriched" Grasso, and that Grasso "cannot in equity and good conscience retain such payments."

In essence, this cause of action differs from the second cause of action under N-PCL 720 (a) (2) only in that it does not allege one of the essential elements of that cause of action, viz., that Grasso "knew of [the] unlawfulness" of the payments. Thus, the Attorney General necessarily contends in bringing the first cause of action that he is authorized to sue an officer or director of a not-for-profit corporation for the receipt of excess compensation and obtain a judgment requiring the officer or director to repay the amount of the excess compensation solely on the basis of a showing that the compensation is not "reasonable" and not "commensurate with [the] services performed." Neither knowledge of the unlawfulness of the payments nor any state of mind, fault-based or otherwise, on the part of an officer or director is required under the Attorney General's view of his authority.

The fourth cause of action differs from the first cause of action only in formal terms. Styled as a claim "for Payment Had and Received," the crux of this cause of action is that the annual compensation and other benefits Grasso received were "not reasonable and not commensurate with the services Grasso performed under N-PCL §§ 202 (a) (12) and 515 (b)." It goes on to allege that restitution of the "unlawful compensation" would promote the purposes of these two provisions of the N-PCL, and that Grasso "has been unjustly enriched and ... retention of the fruits of the unlawful compensation is against equity, good conscience and public policy." As with the first cause of action, the only factual showing that the Attorney General would have to make to recover from Grasso is that the annual compensation and other benefits were "not reasonable and not commensurate with the services Grasso performed."

The fifth cause of action relies on N-PCL 715, entitled "Interested...