Summary
This New York Appellate Division opinion addresses an appeal and cross-appeal regarding partial summary judgment in a corporate dispute involving breach of fiduciary duty and shareholder claims. The court modified the lower court's order by dismissing the plaintiff's individual causes of action due to lack of standing, while reinstating her derivative claims for undercharging after finding triable issues of fact. Additionally, the court adjusted the scope of disgorgement under the faithless servant doctrine to align with the period of alleged disloyalty and dismissed a claim for breach of the implied covenant of good faith and fair dealing.
Topics
Practice areas
Questions Presented
- Whether a shareholder may maintain an individual cause of action for breach of fiduciary duty against a corporation.
- Whether a shareholder who was not a stockholder at the time of the alleged wrongdoing can maintain a derivative action under the contemporaneous ownership rule.
- Whether the executor of an estate has standing to bring a derivative action on behalf of the estate.
- Whether summary judgment is appropriate on the first through twelfth, nineteenth, and twentieth causes of action.
- Whether the faithless servant doctrine applies to compensation earned from 2017‑2019 versus a later period.
Holdings
- A shareholder has no individual cause of action to recover damages for a wrong against the corporation; such claims are limited to derivative actions.
- The contemporaneous ownership rule must be rigorously enforced, but an exception applies when shares devolve to the plaintiff by operation of law.
- The executor lacks standing because the estate was not a holder of the corporate shares or a beneficial interest at the time the action was commenced.
- Summary judgment is proper; the plaintiff lacks an independent duty owed to her individually, so those causes of action are dismissed.
- Defendants are entitled to summary judgment dismissing the twentieth cause of action.
- The doctrine applies only to the period of disloyalty; the court substituted the period beginning in late 2019.
Key quotations
“'It is axiomatic that a shareholder has no individual cause of action to recover damages for a wrong against a corporation, even if that shareholder loses the value of [their] investment or incurs personal liability in an effort to maintain the solvency of the corporation'” (*2)
“'While a faithless agent forfeits [the] right to compensation, such forfeiture is limited "to compensation paid during the time period of disloyalty"'” (*3)
Factual background
Christine Owen, as a shareholder of ROHM Services Corp. and as executor of the estate of Barbara A. Hurlbut, sued Robert W. Hurlbut and Hurlbut Health Consulting, LLC alleging breach of fiduciary duty, undercharging, excessive compensation, and other claims. The defendants moved to dismiss numerous causes of action under CPLR 3211 and the court converted the motion to summary judgment. The plaintiff cross‑moved for partial summary judgment on several claims.
Procedural history
The trial court granted in part and denied in part the parties' summary‑judgment motions. Both plaintiff and defendants appealed the order. The appellate division reviewed the motions and modified the order.