Sorin v. Shahmoon Industries, Inc.

• Decision Date: 20 February 1962
• Citation: 231 N.Y.S.2d 6,34 Misc.2d 1008
• Parties: Murray SORIN and Patricia Sorin, suing on behalf of themselves and of all other stockholders of the defendant Warren Foundry & Pipe Corporation similarly situated, and on behalf of the said Warren Foundry & Pipe Corporation, Charles Perry, Peoples First National Bank & Trust Company, Edward J. Schoenbrod, Rose E. Alcott, Herbert Fielman, Germaine Pinon, Bernard H. Lagowitz, Gilbert DeVore, Blanche Imhof, Dorothy Justin, Josephine N. Burke, Emanuel Unger, Norman Pell, Alexander Cadoux, Robert J. Berner, William Berner, Doris Kirschbaum, Shirley Dash, Dorothy Hennesey, doing business as Hennesey & Co., Elsie L. Shapiro, A. Edward Masters and Sam Rosen, as Executors of the Last Will and Testament of Seymour Rosen, Deceased, individually and as stockholders of Shahmoon Industries, Inc., suing on behalf of themselves and other stockholders of Shamoon Industries Inc., similarly situated and in the right of Shahmoon Industries, Inc., Plaintiffs, v. SHAHMOON INDUSTRIES, INC., Solomon E. Shahmoon, Haron Darzi, Howard Lederer, Robert Salomon, Manning Stires, Kheduri Nissan, John P. McLaughlin, William L. Newton, Louis Maier, G. W. Taylor, Fred Gruner, H. D. Pullen and the Warren Foundry & Pipe Corporation, and Jack E. Hay, Defendants.
• Court: New York Supreme Court

Page 6

231 N.Y.S.2d 6

34 Misc.2d 1008

Murray SORIN and Patricia Sorin, suing on behalf of themselves and of all other stockholders of the defendant Warren Foundry & Pipe Corporation similarly situated, and on behalf of the said Warren Foundry & Pipe Corporation Charles Perry, Peoples First National Bank & Trust Company Edward J. Schoenbrod, Rose E. Alcott, Herbert Fielman Germaine Pinon, Bernard H. Lagowitz, Gilbert DeVore, Blanche Imhof, Dorothy Justin, Josephine N. Burke, Emanuel Unger Norman Pell, Alexander Cadoux, Robert J. Berner, William Berner, Doris Kirschbaum, Shirley Dash, Dorothy Hennesey, doing business as Hennesey & Co., Elsie L. Shapiro, A. Edward Masters and Sam Rosen, as Executors of the Last Will and Testament of Seymour Rosen, Deceased, individually and as stockholders of Shahmoon Industries, Inc., suing on behalf of themselves and other stockholders of Shamoon Industries Inc., similarly situated and in the right of Shahmoon Industries, Inc., Plaintiffs, v. SHAHMOON INDUSTRIES, INC., Solomon E. Shahmoon, Haron Darzi, Howard Lederer, Robert Salomon, Manning Stires, Kheduri Nissan, John P. McLaughlin, William L. Newton, Louis Maier, G. W. Taylor, Fred Gruner, H. D. Pullen and the Warren Foundry & Pipe Corporation, and Jack E. Hay, Defendants.

Supreme Court, Special Term, New York County, Part I.

Feb. 20, 1962.

Davies, Hardy & Schenck, and Nemerov & Shapiro, New York City (John W. Burke, New York City, of counsel), for plaintiffs.

Julius Zizmor, New York City, for defendants Solomon E. Shahmoon and Shahmoon Industries, Inc.

MATTHEW M. LEVY, Justice.

The plaintiffs in the present derivative stockholders' action have heretofore been ordered to post security for expenses, pursuant to General Corporation Law, Section 61-b (30 Misc.2d 429, 220 N.Y.S.2d 760, 783). They now move for reargument. They urge that I overlooked my prior decision after trial requiring the defendants to account (30 Misc.2d 408, 422ff, 220 N.Y.S.2d 760, 777ff). They argue that the corporation can be entitled to security only where it may become liable to other parties for expenses pursuant to Section 64, and that, in the present case, no such liability will be possible since the defendants have, after trial, been unsuccessful on at least some of the issues.

The motion for reargument is denied, both procedurally and substantively. Since the plaintiffs did not apply for or obtain leave to reargue, the bringing on of this motion was impermissible and it is not entertained. (Bankers Commercial Corp. v. American Home Assurance Co., 21 Misc.2d 282, 193 N.Y.S.2d 916; Ellis v. Central Hanover Bank & Trust Co., 198 Misc. 912, 102 N.Y.S.2d 337.) Nevertheless, I shall state why, in my view, the application should be denied on the merits.

Section 61-b of the General Corporation Law, as pertinent here, provides that a defendant corporation in a stockholders' derivative action may 'require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorney's fees, which may be incurred by it in connection with such action and by the other parties defendant in connection therewith for which it may become subject pursuant to section sixty-four of this chapter.' Section 64, insofar as applicable here, provides that any person made a party to an action by reason of his being 'a director, officer or employee of a corporation shall be entitled to have his reasonable expenses, including attorneys' fees', assessed against the corporation 'except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such officer, director or employee is liable for negligence or misconduct in the performance of his duties.' Section 67, as pertinent here, provides that an application by such a person for payment of expenses shall be granted if 'the court shall find that the applicant, his testator or intestate was successful in whole or in part'.

The plaintiffs point to the fact that an interlocutory decree directing an accounting has been awarded against the defendants, and therefore there was necessarily a finding that there was 'negligence or misconduct in the performance of [their] duties.' But, as I see it, in the light of the proof presented in this case, the interlocutory decree (which, by the way, has not yet been submitted for entry) would not necessarily be res judicata of the question as to whether the defendants or some of them may or may not be entitled to recover their expenses in connection with the accounting phases of the action. That issue can be definitively resolved in all respects only after the accounting has been had and the proceedings finally concluded. Assuming, arguendo, a failure duly to account as to certain items, as directed, before the referee, that would, of course, disallow a recovery as to the expense of the defense of the 'negligence or misconduct' involved therein. On the other hand, ultimate dismissal of at least some of these charges might allow the defendants to recover their expenses in that connection.

Moreover, the fact that this case has already gone to trial and that substantially most of the issues have been resolved on the merits allows me to state with reasonable certainty that the corporation will likely become subject to certain expenses and attorney's fees for some, if not all, of the defendants. For example, as to one defendant, all of the causes of action against him were, on consent, dismissed with prejudice (30 Misc.2d 408, 411, 427, 220 N.Y.S.2d 760). As to some of the other defendants, the complaints were, after trial, dismissed in whole or in part (30 Misc .2d 408, 427-429, 220 N.Y.S.2d 760). As to the principal defendant, too, several of the major charges against him were dismissed (30 Misc.2d 408, 415, 417, 220 N.Y.S.2d 760). Statutory recognition that a defendant who has prevailed as to some matters and lost as to others may recover his expenses as to the former is found in Section 67, where, I repeat, it is expressly stated that such a party may be reimbursed therefor where be was successful either 'in whole or in part'.

I recognize that implicit in this analysis is a holding that the security provided for in Section 61-b may be required to be posted for the expenses incurred in defense of the action notwithstanding that the expenditures were made or the services were rendered prior to the application or direction for such security. Since I have been unable to find any precedent resolving the precise point, I look to the language of the...