S.H., Helen R. Scheuer Family Foundation, Inc., By and Through Scheuer v. 61 Associates

• Decision Date: 26 March 1992
• Citation: 179 A.D.2d 65,582 N.Y.S.2d 662
• Parties: S.H. AND HELEN R. SCHEUER FAMILY FOUNDATION, INC., By and Through Steven H. SCHEUER, as Director, Member and Individually, Plaintiff-Appellant, v. 61 ASSOCIATES, a New York Partnership, 61 Associates Corp., a New York Business Corporation, Harvey Brecher, Amy S. Cohen, Harold Cohen, Saul Z. Cohen, Eli S. Garber, George M. Heyman, Jr., Leon Meyers, and Richard J. Scheuer, Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 662

582 N.Y.S.2d 662

179 A.D.2d 65

S.H. AND HELEN R. SCHEUER FAMILY FOUNDATION, INC., By and Through Steven H. SCHEUER, as Director, Member and Individually, Plaintiff-Appellant, v. 61 ASSOCIATES, a New York Partnership, 61 Associates Corp a New York Business Corporation, Harvey Brecher, Amy S Cohen, Harold Cohen, Saul Z. Cohen, Eli S. Garber, George M Heyman, Jr., Leon Meyers, and Richard J. Scheuer Defendants-Respondents.

Supreme Court, Appellate Division, First Department.

March 26, 1992.

Henry P. Wasserstein, New York City, of counsel (Daniel L. Kurtz and Robert D. Balin, with him, on the brief, Lankenau & Bickford and Skadden, Arps, Slate, Meagher & Flom, attorneys), for plaintiff-appellant.

Aaron Rubinstein, New York City, of counsel (Peter M. Fishbein, Mark D. Godler and Michael K. Rozen, with him, on the brief, Kaye, Scholer, Fierman, Hays & Handler, attorneys), for defendants-respondents.

Before CARRO, J.P., and MILONAS, ELLERIN and KUPFERMAN, JJ.

ELLERIN, Justice.

Resolution of this appeal is dependent upon whether or not the "business judgment rule" is applicable to the complained of acts by the defendant corporate directors.

Plaintiff, Steven H. Scheuer, is one of five children of Simon H. and Helen R. Scheuer. From 1984 until September, 1989, he served as one of twelve directors and members of the S.H. and Helen R. Scheuer Family Foundation ["Foundation"], a charitable not-for-profit corporation. The Foundation, which in 1989 made charitable donations of approximately $9,000,000, is funded largely by revenues from trusts created under the will of Helen R. Scheuer, including the Helen R. Scheuer Charitable Lead Trust. The Foundation is presently governed by a board of eleven directors, who are also the Foundation's only members and who include the eight individual defendants. The within derivative action seeks, inter alia, to remove the director defendants as directors, members and officers of the Foundation and to enjoin them permanently from exercising any power for, or on behalf of, the Foundation. At the time the action was brought, plaintiff was still both a member and director of the Foundation but, in September, 1989, shortly after commencing the action, plaintiff was removed from the Foundation.

In June, 1990, plaintiff served the amended complaint which is at issue on this appeal. The gravamen of the complaint is that the director defendants, along with defendants 61 Associates and 61 Associates Corp. [referred to collectively as "61 Associates"], which serve as investment advisor and asset manager of the Foundation and of which, it is alleged, the individual defendants are either owners, partners, or agents, have imprudently and negligently invested the Foundation's assets, thereby causing it substantial losses, have engaged in self dealing while acting in their directorial capacity, and have improperly withheld information from the other directors and engaged in bribery and coercion in order to cover up such wrongdoing.

Upon defendants' motion to dismiss for failure to state a cause of action, the IAS court held that the defendant directors were entitled to the protection of the business judgment rule. Applying this rule to the within allegations, the court upheld only the fourth cause of action, which alleged that the defendants had improperly charged the Foundation $581,200 for office space, and the fifth cause of action, which alleged that the defendants improperly caused the Foundation to make a loan to a partnership in which two of the director defendants are general partners. However, the court found that the business judgment rule required dismissal of the first, second, third, sixth and seventh causes of action. Plaintiff now appeals that finding as to the first, second, third and sixth causes of action. Because we find that the business judgment rule should not have been applied here to the transactions covered by such causes of action, we reverse.

The business judgment rule "bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." (Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 393 N.E.2d 994.) Clearly, such a rule is necessary in order to avoid judicial second guessing of corporate decision making (Id., at 630-631, 419 N.Y.S.2d 920, 393 N.E.2d 994). Just as clearly, however, the rule will govern only where such decision making, although perhaps misguided, has been honest and disinterested and the doctrine will not be enforced when the good faith or oppressive conduct of the officers and directors is in issue (Koral v. Savory, Inc., 276 N.Y. 215, 11 N.E.2d 883). Thus, the rule does not foreclose the courts from making an initial inquiry as to the status of those members of the board who are charged with misfeasance. As the Court of Appeals has held, "the rule shields the deliberations and conclusions of the chosen representatives of the board only if they possess a disinterested independence and do not stand in a dual relation which prevents an unprejudicial exercise of judgment." (Auerbach v. Bennett, supra, 47 N.Y.2d at 631, 419 N.Y.S.2d 920, 393 N.E.2d 994; see also, Parkoff v. General Telephone & Electronics Corp., 53 N.Y.2d 412, 417-418, 442 N.Y.S.2d 432, 425 N.E.2d 820.)

At this stage of the proceedings, if plaintiff has made a prima facie showing of a lack of such disinterested independence or such dual relation, the complaint may not be dismissed for failure to state a cause of action solely upon application of the business judgment rule. Thus, here, we must first ascertain whether plaintiff's pleading contains sufficient allegations to demonstrate that defendants, who constitute a sizeable majority of the board of directors, failed to possess the independence and disinterested status which is a prerequisite to insulation from liability by virtue of the business judgment rule. Contrary to the IAS, we conclude that the allegations that each of the individual defendants participated in or had a significant interest in 61 Associates as well as the Foundation are sufficient to plead precisely the type of dual interest and potential for self-interest which would create an exception to the shield provided by the business judgment rule and render open to judicial scrutiny allegations of improprieties by the board in its relationship to 61 Associates and the latter's relationship with Southdown, Inc. Those allegations of improprieties must therefore be examined to see if, without application of the business judgment rule, they would otherwise state causes of action.

The standard of care to which directors and officers of a not-for-profit corporation must subscribe is set forth in Not-For-Profit Corporation Law § 717(a), which requires that they "discharge the duties of their...