Summary
holding that damages for conversion of profits belonged to the closely held corporation and not the shareholder bringing the suit
Summary of this case from Kitzen v. Peter Hancock, Land & Sea Constr. Corp.Opinion
February 25, 1999
Appeal from the Supreme Court, New York County (Stuart Cohen, J.).
Plaintiff Rita Wolf commenced this action on her own behalf and as a 20% shareholder of the closely-held family corporation operated by her brother, defendant Frederick Rand, by her deceased brother Richard Rand, and, after his death, by Richard Rand's estate, for which Frederick Rand served as executor, and by Richard's widow, defendant Claire Rand. The basis of the claim is that defendants over a course of years ordered substantial amounts of inventory which were not recorded on the corporate books, on which they earned profits that also were not recorded in the corporate ledgers, and that they converted these profits to their own use, for which plaintiff sought to recover her 20% of the concealed profits as well as unpaid sales tax for this amount. That egregious wrongdoing occurred in this case is amply demonstrated by the record. However, the court erred in some procedural respects and failed to clearly resolve or address certain claims, for which modification is necessary.
Initially, in view of the well-established doctrine that the determination of a court sitting as finder of fact should not be disturbed if it constitutes a fair interpretation of the evidence ( Thoreson v. Penthouse Intl., 80 N.Y.2d 490, 495), we find no basis to disturb the court's methodology for establishing the diverted profits for the years 1990 to 1995. The court, having evidence of the gross amounts of unrecorded inventory during the relevant time period, used the corporation's usual profit margin on legitimately inventoried goods as a benchmark to approximate the profits on the unrecorded inventory as a measure of loss. Since the breach of fiduciary duty was proved, the court may be accorded significant leeway in ascertaining a fair approximation of the loss ( see, Milbank, Tweed, Hadley McCloy v. Boon, 13 F.3d 537, 543), as contrasted with the more precise, compensatory, standard of a contract or tort case ( Diamond v. Oreamuno, 24 N.Y.2d 494, 498), so long as the court's methodology and findings are supported by inferences within the range of permissibility ( Whitney v. Citibank, 782 F.2d 1106, 1118), which is the case herein. After all, "[w]hen a difficulty faced in calculating damages is attributable to the defendant's misconduct, some uncertainty may be tolerated" ( supra, at 1118).
Although plaintiff sued individually as well as derivatively, this case actually seeks vindication of her rights as a shareholder, and recovery of corporate assets and profits diverted from her in that status. Her standing is that of a shareholder, suing other shareholders who converted corporate assets and profits, entitling her to sue only derivatively ( Glenn v. Hoteltron Sys., 74 N.Y.2d 386, 392; Paradiso DiMenna v. DiMenna, 232 A.D.2d 257). Even where the corporation is closely held, and the defendants might share in the award, the claims belong to the corporation, and damages are awarded to the corporation rather than directly to the derivative plaintiff ( supra). The purpose of the rule is to prevent impairment of the rights of creditors of the corporation whose claims may be superior to those of the innocent shareholder ( Glenn v. Hoteltron Sys., supra). Accordingly, we vacate the award of damages to the individual plaintiff and modify to award damages to the corporation ( Paradiso DiMenna v. DiMenna, supra). In so doing, we also modify to the extent of deleting the IAS Court's reduction of damages to what would have been the individual plaintiff's 20% equitable share, with the directive that the corporation should recover in toto for the misappropriations and other damages in issue.
The IAS Court estimated sales tax arrears to be approximately $1 million, plus interest. However, to the extent that tax-related damages to the corporation, such as penalties and interest, caused by defendants' conduct cannot be ascertained prior to the determinations of tax authorities, the LAS Court must make further findings on the basis of the outcome of such tax proceedings.
Additionally, the IAS Court imposed liability on the estate of Richard Rand for the fiscal years ending in 1990 through 1995, but did not explain its decision, especially insofar as the decedent died in 1990 and the estate appears to have been closed in 1991. Moreover, despite amending the order and judgment to indicate that Claire Rand was a party, the IAS Court failed to address why Claire Rand, who appears to have exercised bookkeeping and managerial responsibilities for the corporation, was held not liable. Since these decisions were left unclear, remand is necessary for more explicit findings as to each party ( see, Balemian v. LB Real Estate Dev. Corp., 226 A.D.2d 223, 224). The trial court also failed to even address damages for the period from 1982 to 1989, although claims were also made as to those years, suggesting denial sub silentio. The appellate record is inadequate for our evaluation of liability or damages as to those years ( Weckstein v. Breitbart, 111 A.D.2d 6), requiring remand. On remand, the IAS Court must address, decide and explain the relevant issues as to that earlier time period.
Regarding plaintiff's claim for recovery of benefits to defendants derived in connection with car expenses, insurance payments, union dues, temple dues, personal income taxes, and other incidental expenses, the trial court, construing such to be reasonable business expenses falling within the business judgment rule ( cf., Auerbach v. Bennett, 47 N.Y.2d 619), declined to incorporate these into the judgment. However, since the business judgment rule does not protect corporate officials who engage in fraud or self-dealing ( cf., Simpson v. Berkley Owner's Corp., 213 A.D.2d 207) or corporate fiduciaries when they make decisions affected by inherent conflict of interest, the burden shifts to defendants to prove the fairness of the challenged acts ( Scheuer Family Found. v. 61 Assocs., 179 A.D.2d 65, 69; Amfesco Indus. v. Greenblatt, 172 A.D.2d 261, 264), in this case the reasonableness of the items of expenses charged to the corporation. Since the court utilized the wrong standard, this branch of the order and judgment is reversed and on remand, the LAS Court must make new factual findings regarding whether defendants' conduct in this regard was in violation of their fiduciary duties.
The trial court erroneously awarded pre-judgment interest on the entire amount of damages found to have been incurred over the six-year period, commencing from the ending date of the first year, February 28, 1990. However, pre-judgment interest should have been awarded only as the damages arose, i.e., on the ending date of each year from 1990 to 1995.
Prior to trial, another IAS Part (Carol Arber, J.), by order dated May 2, 1995, denied plaintiff's motion to amend the complaint to assert a claim for punitive damages. Since an appeal from a final judgment brings up for review any non-final order affecting the final judgment (CPLR 5501 [a] [1]), the issue is appropriately before us. The reasoning of the LAS Court, that punitive damages are unavailable in breach of contract actions involving only private rights ( cf., Trans-State Hay Feed Corp. v. Faberge, Inc., 35 N.Y.2d 669, affg 42 A.D.2d 535), misconstrued the fiduciary nature of these claims, for which recovery of punitive damages would have been available ( Giblin v. Murphy, 73 N.Y.2d 769, 772). Hence, on remand, the IAS Court is directed to also consider whether an award of punitive damages is appropriate.
Concur — Wallach, J. P., Lerner, Tom and Andrias, JJ.