RETIREMENT PLAN FOR GENERAL EMPLOYEES OF CITY OF NORTH MIAMI BEACH v. McGraw Hill Financial, Inc., Nominal Defendant–Respondent. (2018)

Order, Supreme Court, New York County (Jeffrey K. Oing, J.), entered December 29, 2016, which granted defendants' motions to dismiss the complaint, unanimously affirmed, with costs.

In this derivative action, plaintiff shareholders of nominal defendant McGraw Hill Financial, Inc. (McGraw Hill) allege breaches of fiduciary duty, mismanagement, and waste of corporate assets by McGraw Hill's board of directors and officers, in connection with McGraw Hill's former subsidiary Standard & Poor's Ratings Services' (S & P) rating of subprime-backed residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs).

The motion court correctly dismissed the complaint, as plaintiffs failed to adequately plead, with particularity, that the demand requirement, pursuant to Business Corporation Law § 626(c), was excused (see Bansbach v. Zinn, 1 N.Y.3d 1, 8, 769 N.Y.S.2d 175, 801 N.E.2d 395 [2003] ).

Plaintiffs' claim that six of the 12 members of the then current board of directors were self-interested is insufficient (see id. at 9, 769 N.Y.S.2d 175, 801 N.E.2d 395).  Four of these director defendants are alleged to be interested based solely on ties with companies that received credit ratings from S & P, with no explanation as to how these affiliations compromised their independence in evaluating a demand (see Security Police & Fire Professionals of Am. Retirement Fund v. Mack, 93 A.D.3d 562, 564, 940 N.Y.S.2d 609 [1st Dept. 2012] ).  The mere fact of director defendant Robert McGraw's fraternal relationship with director defendant Harold McGraw III, whom the complaint does not directly implicate in any misconduct, is insufficient to establish control (compare Voluto Ventures, LLC v. Jenkens & Gilchrist Parker Chapin LLP, 46 A.D.3d 354, 356, 847 N.Y.S.2d 559 [1st Dept. 2007] [futility demonstrated by allegations that chairman of board was the father of a criminal involved in a company project and that he dominated two of the other four members of the board] ).  The claim of self-interest for the sixth director defendant, based upon a role at S & P which began in 2011, long after the alleged misconduct, is also insufficient.

Plaintiffs' claims that the board of directors failed to fully inform themselves about S & P's ratings of RMBS and CDOs, that they turned a blind eye to various “red flags,” and that their abdication of oversight of S & P's business practices was so egregious that it could not constitute a valid exercise of business judgment, also lack the requisite particularity (see generally Bansbach, 1 N.Y.3d at 9, 769 N.Y.S.2d 175, 801 N.E.2d 395).  The board's regular meetings demonstrate that they were fulfilling their fiduciary obligations (see e.g. Fink v. Komansky, 2004 WL 2813166, *5, 2004 U.S. Dist. LEXIS 24660, *13 [S.D.N.Y., Dec. 8, 2004, No. 03–CV–0388(GBD) ] ).  Further, S & P took responsive action to the subpoenas and lawsuits filed, beginning in August 2007, concerning S & P's rating of RMBS and CDOs, by, among other things, downgrading thousands of securities and announcing new measures to strengthen their ratings criteria and improve transparency.

In any event, plaintiffs' claims, to the extent they accrued prior to August 2009, are time-barred (see CPLR 213[7];  Blake v. Blake, 225 A.D.2d 337, 638 N.Y.S.2d 632 [1st Dept. 1996] ).  Additionally, the breach of fiduciary duty claims were not alleged with the requisite particularity (see CPLR 3016[b];  Aetna Cas. & Sur. Co. v. Merchants Mut. Ins. Co., 84 A.D.2d 736, 444 N.Y.S.2d 79 [1st Dept. 1981] ).  Moreover, the exculpatory provision of the certificate of incorporation, which does not run afoul of Business Corporation Law § 402(b)(1), shields the director defendants from liability (see Teachers' Retirement Sys. of La. v. Welch, 244 A.D.2d 231, 231–232, 664 N.Y.S.2d 38 [1st Dept. 1997] ).