People v. Grasso

• Decision Date: 01 July 2008
• Docket Number: No. 401620/04.,No. 82,401620/04.,82
• Citation: 861 N.Y.S.2d 627,54 A.D.3d 180,2008 NY Slip Op 5970
• 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, et al., Appellants, and THE NEW YORK STOCK EXCHANGE, INC., Respondent. RICHARD A. GRASSO, Crossclaim Plaintiff-Appellant, v. THE NEW YORK STOCK EXCHANGE, INC., et al., Crossclaim Defendants-Respondents. (And a Third-Party Action.)
• Court: New York Supreme Court — Appellate Division

54 A.D.3d 180

861 N.Y.S.2d 627

2008 NY Slip Op 5970

THE PEOPLE OF THE STATE OF NEW YORK, by ELIOT SPITZER, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Respondent, v. RICHARD A. GRASSO, et al., Appellants, and THE NEW YORK STOCK EXCHANGE, INC., Respondent.

RICHARD A. GRASSO, Crossclaim Plaintiff-Appellant, v. THE NEW YORK STOCK EXCHANGE, INC., et al., Crossclaim Defendants-Respondents. (And a Third-Party Action.)

No. 401620/04.

No. 82

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

July 1, 2008.

Williams & Connolly LLP, Washington, D.C. (Gerson A. Zweifach of counsel), and Flemming Zulack Williamson Zauderer, LLP, New York City (Mark C. Zauderer and Jonathan D. Lupkin of counsel), for Richard A. Grasso, appellant.

Andrew M. Cuomo, Attorney General, New York City (Avi Schick, David Axinn, Jeffrey P. Metzler and Robert Pigott of counsel), for state respondent.

Winston & Strawn LLP, New York City (Adam J. Schlatner of counsel), for The New York Stock Exchange, Inc. and another, respondents.

OPINION OF THE COURT

McGUIRE, J.

The principal issue on this appeal, and one that divides this Court, is how N-PCL 720 (b) should be construed. That provision authorizes the Attorney General to bring an action against directors or officers of a not-for-profit corporation for various forms of misconduct that injure the corporation. The interpretive issue before this Court is one that the text of N-PCL 720 (b) does not purport to address. That issue is this: if the not-for-profit corporation merges into and is succeeded by a for-profit entity, does the Attorney General continue to have authority to prosecute causes of action under N-PCL 720 (b) when the sole relief sought is the recovery of money that belongs to the for-profit entity and would inure to its benefit and the private parties who are its owners? On the basis of analogous case law, and construing N-PCL 720 (b) both in light of its evident purpose and in accordance with our obligation to construe a statute whenever reasonably possible so as to avoid serious constitutional questions, we conclude that the Attorney General's authority to prosecute the causes of action seeking that relief lapsed with the merger.

Panels of this Court have resolved two prior appeals in this action, People v Grasso (21 AD3d 851 [2005] [Grasso I]) and People v Grasso (42 AD3d 126 [2007], affd 11 NY3d 64 [2008] [Grasso II]). As detailed in Grasso II, the Attorney General brought this action against Richard A. Grasso, the former Chairman and Chief Executive Officer (CEO) of the New York Stock Exchange (the Exchange), Kenneth G. Langone, the Chairman of the Compensation Committee of the Exchange and a member of its Board of Directors at the relevant times alleged in the complaint, and the Exchange. Grasso appeals from an order of the Supreme Court, entered October 19, 2006, (the October 19 order) that, among other things, granted the Attorney General's motion for summary judgment on liability as to his third and sixth causes of action against Grasso. Grasso and Langone also appeal from those portions of the October 19 order that denied their respective motions for summary judgment dismissing the causes of action that N-PCL 720 (b) authorizes the Attorney General to bring against an officer or director of a not-for-profit corporation—with respect to Grasso, the second and third causes of action, and with respect to Langone, the seventh and sole cause of action asserted against him—on the ground that the Attorney General lost his standing to sue under N-PCL 720 (b) because the Exchange ceased to be a not-for-profit corporation, over which the Attorney General exercises regulatory and enforcement authority under the N-PCL, when it converted itself through a series of mergers into a for-profit company, NYSE LLC, that is wholly owned by a for-profit Delaware corporation, NYSE Group.

Grasso also appeals from that portion of the October 19 order that denied in part his motion to dismiss the eighth cause of action asserted by the Attorney General against the Exchange. Supreme Court granted the motion to the extent of dismissing the claim for injunctive relief against the Exchange but denied the motion as to the claim for declaratory relief. The claim for injunctive relief sought an injunction designed to ensure compliance by the Exchange with the N-PCL, and Supreme Court agreed with Grasso that the conversion of the Exchange into a for-profit entity had mooted that claim. Supreme Court, however, rejected Grasso's contention that the claim for declaratory relief (i.e., a declaration that the Exchange had made unlawful and ultra vires payments to Grasso) was moot for the same reason. Supreme Court also rejected Grasso's contention that, because the Exchange had taken the position in its answer that the compensation at issue was ultra vires, the claim for declaratory relief should be dismissed on the ground that there was no actual controversy between the Attorney General and the Exchange.

In addition, Grasso appeals from those portions of the October 19 order that: (a) granted the Exchange's motion for summary judgment dismissing Grasso's cross claims for breach of contract, and (b) granted the motion for summary judgment of the Exchange and John Reed, Grasso's interim successor as Chair and CEO of the Exchange, dismissing Grasso's cross claims for defamation and disparagement.

I

The third cause of action alleges that Grasso violated his fiduciary duties to the Exchange under N-PCL 717 (a) and 720 (a) (1) (A) and (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 alleged breaches of his fiduciary duties, the third cause of action seeks a money judgment. Specifically, it seeks "restitution to the [Exchange] of all payments to the extent [Grasso] fails to account for the lawfulness of such payments."

In granting summary judgment on liability as to the third cause of action, Supreme Court determined that Grasso had breached his fiduciary duties to the Exchange with respect to his participation in two distinct benefit programs provided by the Exchange: the Supplemental Executive Retirement Plan (SERP) and the Supplemental Executive Savings Plan (SESP). SERP is a nonqualified deferred benefit plan available to Exchange executives, with benefits determined on the basis of such factors as the executive's years of service and highest average compensation earned over a period of three consecutive years. Although Grasso did not actually participate in SERP itself, his employment agreements with the Exchange provided for an essentially equivalent benefit that the parties refer to as Grasso's SERP benefit. The SESP is a savings plan permitting Exchange executives to defer a portion of their salaries; on an annual basis, the Exchange matched, dollar-for-dollar, the first 6% of salary deferred. As discussed below, Supreme Court erred in granting summary judgment on liability with respect to SERP and SESP.

With respect to SERP, Supreme Court ruled that Grasso had "thwarted the Compensation Committee from performing its duty of care and obedience" by "fail[ing] to disclose the amount of the SERP" (13 Misc 3d 1227[A], 2006 NY Slip Op 52019[U] *29). As a result, and despite "inadvertent knowledge the Board may have achieved" about Grasso's SERP benefit, Supreme Court concluded that the Board was not "fully informed" about the benefit (id. at *30). However, on the basis of the evidence relied upon by Grasso in opposing the Attorney General's motion for summary judgment, a rational trier of fact could come to a different conclusion regarding the Board's knowledge of Grasso's SERP benefit. From the deposition testimony of numerous directors and documentary evidence, the trier of fact could conclude that: the Board knew of the SERP benefit in 1995 when it authorized the payment to Grasso of the accumulated amount of the benefit in connection with its approval of Grasso's 1995 employment agreement; the Board knew of the accumulated amount of the benefit in 1999 when it approved Grasso's 1999 employment agreement, which contained a provision transferring the then-accumulated benefit to his SESP account; the Board thereafter knew the amount of the benefit when it took various actions to limit its growth; the Board knew of the accumulated amount of the benefit in 2003 when, pursuant to the 2003 employment agreement with Grasso that the Board approved after vigorous discussion and with the advice of attorneys, consultants and other experts, the Board authorized the payment of the then-accumulated benefit and provided for changes to Grasso's SERP that would cap future benefits and reduce the amount of the accumulated benefit.

Supreme Court also erred in concluding that Grasso "knew or should have known" about the Board's alleged lack of knowledge concerning his SERP benefit (id.). In opposing the Attorney General's motion for summary judgment, Grasso relied not only on his own testimony that he believed the directors had "complete knowledge" of his SERP benefits but also on various facts from which the trier of fact could conclude that he reasonably believed the members of the Compensation Committee and Board were knowledgeable about the fact and extent of his SERP benefit. Accordingly, Supreme Court improperly decided a disputed issue of fact in thus concluding that Grasso breached the statutory standard of care set forth in N-PCL 717 (a) and was liable despite the good faith reliance provisions of N-PCL 717 (b).

With respect to SESP, Supreme Court granted summary judgment as to liability on the basis of its conclusion of law that "an effective amendment to SESP was not made" when Grasso was paid the money credited to his SESP account pursuant to a provision of his 2003 employment agreement that the Board had approved (id. at *20). According to Supreme...