Jiminian v. Seabrook ( 2019 )

18-107
Jiminian et al. v. Seabrook et al.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT
ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
17th day of January, two thousand nineteen.
Present:
AMALYA L. KEARSE,
DEBRA ANN LIVINGSTON,
SUSAN L. CARNEY,
Circuit Judges.
_____________________________________
HERMAN JIMINIAN, JEANETTE FELICIANO, ALBIN
DULCET, ELIZABETH ROMAIN, MARIA MOREIRA,
Plaintiffs-Appellants,
v. 18-107
NORMAN SEABROOK, ELIAS HUSAMUDEEN, JOSEPH
BRACCO, ELIZABETH CASTRO, MICHAEL MAIELLO,
AMELIA WARNER, THOMAS FARRELL, KAREN
TYSON, BENNY BOSCIO, KENYATTA JOHNSON,
ALBERT CRAIG, DANIEL PALMEIRI, ANGEL CASTRO,
FREDERIC FUSCO, PAULETTE BERNARD, MURRAY
HUBERFELD, JONA RECHNITZ, KOEHLER & ISAACS,
LLP, THE CORRECTIONS OFFICERS BENEVOLENT
ASSOCIATION ANNUITY FUND, THE CORRECTIONS
OFFICERS BENEVOLENT ASSOCIATION GENERAL
FUND, CORRECTION OFFICER’S BENEVOLENT
ASSOCIATION, INC.,
Defendants-Appellees.
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PLATINUM MANAGEMENT NEW YORK LLC, DAVID BODNER,
JEREMY REICHBERG, BUCHBINDER TUNICK & COMPANY LLP,
DANIEL H. COOK AND ASSOCIATES INC.,
STERLING VALUATION GROUP INC., MARK NORDLICHT,
Defendants.*
_____________________________________
For Plaintiffs-Appellants: JEFFREY M. NORTON, Newman Ferrara LLP, PHILIP H.
SEELIG, Seelig Law Offices, LLC, New York, NY.
For Defendant-Appellee
Norman Seabrook: Nathaniel Z. Marmur, Law Offices of Nathaniel Z.
Marmur, PLLC, New York, NY.
For Defendants-Appellees
Elias Husamudeen, Joseph Bracco,
Elizabeth Castro, Michael Maiello,
Amelia Warner, Thomas Farrell,
Karen Tyson, Benny Boscio,
Kenayatta Johnson, Albert Craig,
Daniel Palmeiri, Angel Castro,
Frederic Fusco, Paulette Bernard,
Murray Huberfeld: NATHANIEL K. CHARNY, Charny & Wheeler,
Attorneys at Law, Rhinebeck, NY.
For Defendant-Appellee
Jonah Rechnitz: Eric M. Creizman, Pierce Bainbridge Beck Price &
Hecht LLP, New York, NY.
For Defendant-Appellee
Koehler & Isaacs: REED M. BRODSKY (Jonathan N. Soleimani, on the
brief), Gibson, Dunn & Crutcher LLP, New York, NY.
Appeal from a judgment of the United States District Court for the Southern District of
New York (Oetken, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the judgment of the district court is AFFIRMED.
*
The Clerk of Court is respectfully instructed to amend the caption as set forth above.
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Plaintiffs-Appellants Herman Jiminian, Elizabeth Romain, Jeanette Feliciano, Albin
Duclet, and Maria Moreira (together the “COBA Appellants”) appeal from the December 15, 2017
decision and order of the United States District Court for the Southern District of New York
(Oetken, J.) granting Defendants-Appellees’ motions to dismiss for failure to state a claim. We
assume the parties’ familiarity with the underlying facts, the procedural history of the case, and
the issues on appeal.
This appeal centers on the pleading requirements associated with shareholder derivative
litigation. Members of the Corrections Officers Benevolent Association, Inc. (“COBA”)
commenced this derivative suit on behalf of COBA’s Annuity Fund (employee retirement benefits)
and General Fund (operating account) against, inter alia, COBA’s Executive Board, its former
President Norman Seabrook, and its legal counsel Koehler & Isaacs LLP. The case arose after
Seabrook was charged with honest services fraud in connection with a kickback scheme involving
investment of COBA funds. He was later convicted of that offense. The COBA Appellants allege
that COBA invested approximately $20 million dollars in Platinum Partners Value Arbitrage Fund
(“PPVA”)—a hedge fund now revealed to be a Ponzi scheme—at the behest of Seabrook, who
was being paid large sums of cash by a PPVA executive to direct COBA funds to PPVA. The
COBA investments in PPVA are now alleged to be “worthless.” App’x 46.
“We review the grant of a motion to dismiss under Rule 12(b)(6) de novo, construing the
complaint liberally, accepting all factual allegations in the complaint as true, and drawing all
reasonable inferences in the plaintiff’s favor.” Elias v. Rolling Stone LLC, 872 F.3d 97, 104 (2d
Cir. 2017) (internal quotation marks omitted). To withstand a Rule 12(b)(6) motion to dismiss, the
complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
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“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements,
do not suffice,” and pleadings that “are no more than conclusions . . . are not entitled to the
assumption of truth.” Iqbal, 556 U.S. at 678–79.
Additionally, under Federal Rule 23.1, a shareholder or member’s complaint bringing a
derivative action must “state with particularity . . . any effort by the plaintiff to obtain the desired
action from the directors or comparable authority” and “the reasons for not obtaining the action or
not making the effort.” Fed. R. Civ. P. 23.1(b)(3). Rule 23.1 is a pleading rule that “creates a
federal standard as to the specificity of facts alleged with regard to efforts made to urge a
corporation’s directors to bring the action in question.” RCM Sec. Fund, Inc. v. Stanton, 928 F.2d
1318, 1330 (2d Cir. 1991). “Because Rule 23.1 requires that plaintiffs make particularized
allegations, it imposes a pleading standard higher than the normal standard applicable to the
analysis of a pleading challenged under Rule 12(b)(6).” In re Am. Int’l Grp., Inc. Derivative Litig.,
700 F. Supp. 2d 419, 430 (S.D.N.Y. 2010) (internal quotation marks omitted), aff’d, 415 F. App’x.
285 (2d Cir. 2011). The adequacy of a plaintiff’s pre-suit demand efforts is determined by the
relevant state substantive law, in this case, the law of New York. See Kamen v. Kemper Fin. Servs.,
Inc., 500 U.S. 90, 97 (1991).
I. Standing Under Federal Rule of Civil Procedure 23.1
“The derivative form of action permits an individual shareholder to bring suit to enforce a
corporate cause of action against officers, directors, and third parties.” Kamen, 500 U.S. at 95
(internal quotation marks omitted). “Devised as a suit in equity, the purpose of the derivative action
was to place in the hands of the individual shareholder a means to protect the interests of the
corporation from the misfeasance and malfeasance of ‘faithless directors and managers.’” Id.
(quoting Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949)). Because derivative
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actions inherently interfere with the managerial discretion of corporate boards, New York has
“historically been reluctant to permit shareholder derivative suits, noting that the power of courts
to direct the management of a corporation’s affairs should be exercised with restraint.” Marx v.
Akers, 88 N.Y.2d 189, 194 (1996) (internal quotation marks omitted).
As a general matter, “equity courts established as a precondition for the [derivative] suit
that the shareholder demonstrate that the corporation itself had refused to proceed after suitable
demand, unless excused by extraordinary conditions.” Scalisi v. Fund Asset Mgmt., L.P., 380 F.3d
133, 138 (2d Cir. 2004) (emphasis added) (internal quotation marks omitted). The demand
requirement serves to relieve courts from deciding matters of internal corporate governance,
provide corporate boards with reasonable protection from harassment, and discourage “strike
suits” commenced by shareholders for personal gain. See Bansbach v. Zinn, 1 N.Y.3d 1, 8–9 (2003)
(“The demand requirement rests on basic principles of corporate control—that the management of
the corporation is entrusted to its board of directors, who have primary responsibility for acting in
the name of the corporation and who are often in a position to correct alleged abuses without resort
to the courts.” (quotation marks omitted)). Accordingly, New York courts have emphasized “that
pre-suit demand is the rule, that excusing demand is the exception, and that the exception should
not be permitted to swallow the rule.” In re Omnicom Grp Inc. Shareholder Derivative Litig., 842
N.Y.S.2d 408, 410 (1st Dep’t 2007) (citing Marx, 88 N.Y.2d at 200).
To plead demand futility under New York law, a complaint must allege with particularity
that “(1) a majority of the directors are interested in the transaction, or (2) the directors failed to
inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed
to exercise their business judgment in approving the transaction.” Marx, 88 N.Y.2d at 198. In other
words, plaintiffs’ allegations must “support their assertion that a majority of the board was so
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interested or so culpable regarding the complained-of conduct that it would have been futile to
demand that the board take legal action to make the company whole.” In re Comverse Tech., Inc.,
866 N.Y.S.2d 10, 15 (1st Dep’t 2008).
The COBA Appellants allege demand futility based on the Executive Board’s self-interest
and failure to self-inform. Applying the above principles to the matter before us, however, we
conclude that the district court did not err in granting the Defendants-Appellees’ motion to dismiss
for Plaintiffs’ failure to comply with Rule 23.1.
A. Self-Interest
First, the district court correctly rejected the COBA Appellants’ assertion that failure to
make a demand was justified by the Executive Board members’ interest in the challenged
transactions. “Under New York law, a director may be interested under either of two scenarios:
self-interest in the transaction or loss of independence due to the control of an interested director.”
In re Comverse Tech., Inc., 866 N.Y.S.2d at 15 (citing Bansbach, 1 N.Y.3d at 11). Here, neither
theory is availing.
The COBA Appellants first claim that the Executive Board members are “interested”
because they “face substantial likelihood of liability” resulting from this lawsuit. A 52. As the
court below correctly noted, however, this bare assertion fails as a matter of New York law to
establish director interest. “Directors are self-interested in a challenged transaction where they will
receive a direct financial benefit from the transaction which is different from the benefit to
shareholders generally.” Marx, 88 N.Y.2d at 202. By contrast, “[t]he bare claim that the directors
who served on the stock option and compensation committees should be viewed as interested
because they are ‘substantially likely to be held liable’ for their actions is not enough.” Wandel ex
rel. Bed Bath & Beyond, Inc. v. Eisenberg, 871 N.Y.S.2d 102, 105 (1st Dep’t 2009).
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The COBA Appellants’ claim of demand futility due to the alleged control of an interested
director (Seabrook) also fails. The COBA Appellants’ amended complaint (the “complaint”)
alleges that Seabrook “ensured the Executive Board’s acquiescence [to his schemes] through
liberal dispensations of gift cards, cars, and plush job assignments away from Rikers Island, which
ensured they exercised no due diligence over Seabrook’s activities.” A. 31. To state a claim for
demand futility, however, the COBA Appellants’ complaint must contain more than conclusory
allegations that Seabrook “ensured” his dominance of each Board Member. A. 47. The COBA
Appellants must instead plead with particularity how Seabrook “dominated” each individual board
member alleged to be interested. See Bansbach, 1 N.Y.3d at 11 (“Simply naming a majority of
the board as defendants with conclusory allegations of wrongdoing or control is insufficient to
circumvent the requirement of demand.”). Several of the specific facts alleged by the COBA
Appellants supposedly to demonstrate Seabrook’s “control” appear to constitute the generalized
benefits of serving on the COBA Board of Directors. As a matter of New York law, however,
merely benefiting generally from one’s position on a board after having been selected by its
president, does not, on its own, demonstrate that president’s “control.” See Zacharius v.
Kensington Publ’g Corp., 984 N.Y.S.2d 635 2014 WL 52892 (Sup. Ct. 2014) (“New York law
requires a description of self-interest or control with greater particularity than simply stating that
the board was ‘hand-picked.’”). In the absence of any meaningful allegations of director interest
pled with specificity, the COBA Appellants have failed to satisfy the futility exception on this
basis.
B. Failure to Self-Inform
Next, “[d]emand is excused because of futility when a complaint alleges with particularity
that the board of directors did not fully inform themselves about the challenged transaction to the
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extent reasonably appropriate under the circumstances.” Marx, 88 N.Y.2d at 200. For example, in
Comverse, New York’s Appellate Division found that demand was excused where the plaintiffs
had alleged with “particularity” that the board in question failed to exercise reasonably appropriate
oversight in a stock option granting process. In re Comverse Tech., Inc., 866 N.Y.S.2d at 16. The
plaintiffs’ complaint in Comverse asserted that “unanimous written consents” for grants of stock
options were sometimes presented to the compensation committee for signature more than a month
after the grant date and approved “unquestioningly”; compensation committee members often
approved option grants orally in direct violation of the company’s bylaws; and the committee did
not make even a “cursory check” of the list of individuals receiving option grants, which contained
dozens of individuals who were not Comverse employees. Id. Additionally, the Comverse directors
“failed to take action to correct the damage . . . even after the scheme came to light.” Wandel, 871
N.Y.S.2d at 106.
The “open and egregious” conduct alleged in Comverse is quite distinct from the conduct
alleged by the COBA Appellants here. Id. (labeling the conduct at issue in Comverse “open and
egregious”). The COBA Appellants’ complaint fails to plead with the requisite particularity that
the directors had “specific information or reason to inform themselves about the details of” the
PPVA investments and failed to do so. Id. Although the complaint does list a few investments that
the COBA Appellants claim were rubber stamped, “there are no particularized allegations as to
what the board members should have considered or investigated to properly inform themselves
about the challenged transactions.” Goldstein v. Bass, 31 N.Y.S.3d 15, 17 (1st Dep’t 2016).
“Vague allegations that the board was willfully blind do not fill this void.” M+J Savitt, Inc. v.
Savitt, No. 08-cv-8535, 2009 WL 691278, at *7 (S.D.N.Y. Mar. 17, 2009).
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II. Standing Requirements Under N-PCL
The district court also held that the COBA Appellants failed to state a claim for demand
futility on the ground that they have not satisfied the standing requirements in New York’s Not-
for-Profit Corporation Law (“N-PCL”). N-PCL § 623(a) requires that plaintiffs bringing a
derivative action on behalf of a not-for-profit corporation represent “five percent or more of any
class of members.” The five COBA Appellants here concede that they do not represent five percent
of COBA’s members, an organization that has “upwards of 18,000 active and retired members.”
Pls.-Appellants Br. at 22. The COBA Appellants instead seek safe harbor in New York’s Labor
and Management Improper Practices Act (“LMIPA”), which provides that
[a]ny member of [any] labor organization shall have the right to bring [certain
claims as derivative actions] or proceeding[s] if (a) after request by any member
that such action or proceeding be brought, such organization shall fail to do so, or
(b) such request would be futile. . . .
N.Y. Lab. Law § 725(1) (emphasis added). COBA is a “labor organization” under the LMIPA.
This case thus implicates a potential conflict between the LMIPA and the heightened pleading
requirements of the N-PCL.
The COBA Appellants acknowledge that New York’s Appellate Division has already
issued a decision on the question at issue here, holding that a plaintiff seeking to prosecute a
derivative action on behalf of an incorporated labor union had to satisfy the N-PCL’s “five percent”
requirement. Clark v. Trois, 801 N.Y.S.2d 330, 331 (2d Dep’t 2005). The COBA Appellants,
however, argue that Clark did not definitively address the potential conflict between the two
statutes, and request that we certify this question to the New York Court of Appeals for resolution.
When “determinative questions of New York law are involved in a case pending before [us] for
which no controlling precedent of the Court of Appeals exists,” we may certify those questions to
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New York’s highest court for it to provide a controlling answer. N.Y. Comp. Codes R. & Regs.
tit. 22, § 500.27(a). We decline to do so here, however, because, inter alia, the question of New
York law is not determinative in this case. Indeed, we need not (and do not) reach it. Even
assuming that the COBA Appellants could bring their claims under the LMIPA, they have failed
to meet the standard for pleading demand futility. This conclusion is sufficient to resolve this case.
* * *
We have considered Plaintiffs-Appellants’ remaining arguments and find them to be
without merit. Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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