KINGSTON v. BRESLIN (2008)

In a shareholder's derivative action, inter alia, to recover damages for waste of corporate assets and breach of fiduciary duty, the plaintiff appeals from an order of the Supreme Court, Westchester County (Rudolph, J.), dated March 23, 2007, which granted the motion of the defendants Michael Breslin, John Breslin, Ave. Woodward Corp, and 2 Ave. Woodward Corp., for summary judgment dismissing the plaintiff's first, second, and third causes of action insofar as asserted against them.

ORDERED that the order is affirmed, with costs.

The plaintiff was a 15% shareholder of the defendants Ave. Woodward Corp. and 2 Ave. Woodward Corp. (hereinafter together the Woodward Company), which were engaged in the business of erecting, constructing, and renting scaffolding (hereinafter the scaffolding business).   On May 1, 1997, the Woodward Company entered into an asset purchase agreement (hereinafter the agreement) with the defendants Atlantic-Heydt Corporation and Atlantic Rental Corp. (hereinafter together the Atlantic Company) to sell the Woodward Company's scaffolding business to the Atlantic Company.   The agreement was executed by Michael Breslin and John Breslin (hereinafter the individual defendants), each in his capacity as president of the seller and buyer thereunder, respectively.

On May 1, 1997, the plaintiff, as a shareholder of the Woodward Company, signed a written consent to the agreement.

In 2000 the plaintiff commenced this action in connection with the sale of the scaffolding business asserting, inter alia, three derivative causes of action (hereinafter the first, second, and third causes of action) on behalf of the Woodward Company to recover damages for waste of corporate assets and breach of fiduciary duty, and for an accounting.

The Atlantic Company and the individual defendants (hereinafter collectively the respondents) moved for summary judgment dismissing the first, second, and third causes of action insofar as asserted against them.   The Supreme Court granted the motion.   We affirm.

 The respondents met their initial burden of establishing their entitlement to summary judgment by demonstrating that the transfer of the scaffolding business pursuant to the agreement constituted “a sale ․ of all or substantially all the assets,” as contemplated by Business Corporation Law § 909(a), of the Woodward Company to the Atlantic Company (see Collins v. Telcoa Intl. Corp., 283 A.D.2d 128, 131, 726 N.Y.S.2d 679;  see generally Winegrad v. New York Univ. Med. Ctr., 64 N.Y.2d 851, 853, 487 N.Y.S.2d 316, 476 N.E.2d 642).   In opposition, the plaintiff failed to raise a triable issue of fact.

 The test applied by the courts to determine whether a sale is within the purview of Business Corporation Law § 909(a) is not the dollar amount of the assets involved in the transfer (see Eisen v. Post, 3 N.Y.2d 518, 523, 169 N.Y.S.2d 15, 146 N.E.2d 779;  Matter of Miglietta [2660 Broadway Corp.], 287 N.Y. 246, 254-255, 39 N.E.2d 224;  Vig v. Deka Realty Corp., 143 A.D.2d 185, 531 N.Y.S.2d 633;  see also Matter of Timmis, 200 N.Y. 177, 181-182, 93 N.E. 522;  Matter of Schutte, 114 N.Y.S.2d 162, 165-166).   Rather, the test is whether the sale was made in the regular course of the business actually conducted by the corporation in furtherance of the objects of its existence, or something outside of its normal and regular course of business (see Eisen v. Post, 3 N.Y.2d at 523, 169 N.Y.S.2d 15, 146 N.E.2d 779;  Matter of Miglietta [2660 Broadway Corp.], 287 N.Y. at 254-255, 39 N.E.2d 224;  Vig v. Deka Realty Corp., 143 A.D.2d 185, 531 N.Y.S.2d 633;  see also Matter of Timmis, 200 N.Y. at 181-182, 93 N.E. 522;  Matter of Schutte, 114 N.Y.S.2d at 165-166).   Thus, where, as here, the sale of assets ultimately resulted in the liquidation of the scaffolding business, whose operations were effectively assumed by the Atlantic Company (cf. Posner v. Post Rd. Dev. Equity, 253 A.D.2d 866, 678 N.Y.S.2d 350;  Matter of Resnick v. Karmax Camp Corp., 149 A.D.2d 709, 540 N.Y.S.2d 503;  Dukas v. Davis Aircraft Prods. Co., 131 A.D.2d 720, 516 N.Y.S.2d 781), the sale constituted a transaction contemplated by Business Corporation Law § 909(a).

 Consequently, the sale gave rise to the plaintiff's individual right to an appraisal and to receive payment for his shares pursuant to Business Corporation Law § 623 (hereinafter the appraisal rights). Pursuant to Business Corporation Law § 623(k), “[t]he enforcement by a shareholder of his right to receive payment for his shares in the manner provided [in Business Corporation Law § 623] shall exclude the enforcement by such shareholder of any other right to which he might otherwise be entitled by virtue of share ownership” (hereinafter the exclusivity provision).   Here, having failed to avail himself of his appraisal rights, the plaintiff contends, inter alia, that he was fraudulently induced to sign the consent to the agreement and thus, can invoke the exception to the exclusivity provision predicated on a claim of fraud.

The Supreme Court properly rejected the plaintiff's claims regarding fraud.   While the exclusivity provision of Business Corporation Law § 623(k) permits an individual shareholder who foregoes the statutory appraisal proceeding pursuant to Business Corporation Law § 623 to bring an action for equitable relief on the ground that the corporate action was fraudulent as to that shareholder (see e.g. Walter J. Schloss Assoc. v. Arkwin Indus., 90 A.D.2d 149, 155-160, 455 N.Y.S.2d 844 [Mangano, J., dissent], revd. 61 N.Y.2d 700, 472 N.Y.S.2d 605, 460 N.E.2d 1090 for reasons stated in the dissenting opinion), the exclusivity provision is not applicable to derivative causes of action, such as those at bar, which were asserted on behalf of the Woodward Company and not on behalf of the plaintiff in his individual capacity (see Breed v. Barton, 54 N.Y.2d 82, 85-86, 444 N.Y.S.2d 609, 429 N.E.2d 128;  Norte & Co. v. New York & Harlem R.R. Co., 222 A.D.2d 357, 358, 635 N.Y.S.2d 629).

Accordingly, the Supreme Court properly granted the respondents' motion for summary judgment dismissing the plaintiff's first, second, and third causes of action insofar as asserted against them.

The plaintiff's remaining contentions are without merit.