Commercial Division Blog

Posted: February 28, 2022 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Categories Fiduciary Duties, Derivative Actions

Claims of Potential Personal Civil and Criminal Liability Are Not Duplicative of Derivative Claims of Corporation

On February 3, 2022, in Newman v. Newman, 2022 NY Slip. Op. 00731, the First Department affirmed the Decision and Order of Justice Barry R. Ostrager, denying plaintiff’s motion to dismiss plaintiff’s individual causes of actions.  The Court explained:

The motion court correctly determined that plaintiff's individual claims for breach of fiduciary duty, unjust enrichment, and constructive trust were not duplicative of the derivative claims asserted on behalf of nominal defendant Port Parties Ltd. and therefore, that plaintiff's individual claims could proceed based on the allegations that he, individually, was exposed to personal criminal and civil liability as a result of defendants' conduct (see Yudell v Gilbert, 99AD3d 108, 114 [1st Dept 2012]; see also Gjuraj v Uplift El. Corp., 110 AD3d 540, 540 [1stDept 2013]). The alleged harm to plaintiff — namely, potential personal civil and criminal liability as a result of defendants' alleged misappropriations from the corporation — is an individual harm sufficiently "separate and distinct" from the harm suffered by the corporation on account of defendants' failure to pay certain state and federal taxes (see Matter of Yellin v New York State Tax Commn., 81 AD2d 196, 198 [3d Dept 1981]). Likewise, the benefit the corporation seeks to recover on its claim to compensate it for the alleged failure to pay certain taxes would not necessarily be the same benefit sought by plaintiff, who seeks the resolution of the potential civil and criminal liability for the conduct alleged. Indeed, "[f]ederal courts consider the penalty imposed upon individuals for willful failure to pay withholding taxes to be neither derivative of nor secondary to the corporate employer's liability for the same tax"(id.).

 

 

The attorneys at Schlam Stone & Dolan frequently litigate both individual and derivative claims.  Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such disputes.