Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: August 17, 2014

No Need for a Corporate Officer to Make Demand on Board Before Bringing BCL 706, 716 or 720 Actions

On August 6, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Kotlyar v. Khlebopros, 2014 NY Slip Op. 51185(U), holding that there is no need for a corporate officer to make a demand on the board of directors before bringing an action pursuant to BCL 706, 716 or 720.

In Kotlyar, the plaintiffs, “each an officer, director, and shareholder of Seagate Mini Mall, Inc., Seagate Banya Corp., and Za Zaborom, Inc. (the ‘Corporations’)” brought an action “seeking to remove defendant as a director and officer of the Corporations, pursuant to BCL 706(d) and 716(c), and for money damages, pursuant to BCL 720.” The defendant moved to dismiss arguing, among other things, that “the complaint fails to state a derivative cause of action under BCL 626(c)” because the “plaintiffs did not attempt to first secure the initiation of an action by the board as required under BCL 626(c) and that this failure deprives the plaintiffs of standing and a cause of action and deprives the court of subject matter jurisdiction.” The court rejected this argument, explaining:

Unlike BCL 626(c), which authorizes a shareholder to bring a derivative action on behalf of the corporation, BCL 720 does not require an officer or director to first demand that the board initiate an action. As stated by the Third Department in Conant v. Schnall, 33 AD2d 326, 328 [3d Dept 1970]:

An action under section 720 differs from an action under section 626 in many crucial respects. It is not derivative but original, being a statutory right of action rather than an equitable one. This being so, the director may sue in his own name and need not allege his representative capacity. While the cause of action and right of recovery actually belong to the corporation, and the director is suing as a representative, the corporation is only a proper party, neither necessary nor indispensable. Thus, as intended by the Legislature, none of the traditional rules (e.g., demand, stock ownership, judicial approval of settlements) surrounding a derivative action apply to an action under section 720.

Plaintiffs state in paragraph 20 of their Affirmation in Opposition that they have not brought this action as shareholders instituting a derivative action under BCL 626 but as an officer and director seeking compensation for defendant’s alleged breach of fiduciary duties and wasteful management under BCL 720(a)(1)(A). Plaintiffs are suing in their capacities as officers and directors on behalf of the Corporations to enforce a right of recovery belonging to the Corporations. Because the present suit is not a derivative action, but is a statutorily authorized direct action brought on the Corporations’ behalf, the motion to dismiss the action due to lack of subject matter jurisdiction, lack of standing, and failure to state a cause of action is denied.

(Internal quotations and citations omitted). The court went on to hold, however, that the dispute was subject to an agreement to arbitrate.

View posts