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Culligan Soft Water Co. v Clayton Dubilier & Rice LLC

Supreme Court of New York, Appellate Division, First Department

May 31, 2016; May 31, 2016, Entered

651863/12, -1302, 1301, 1300, 1299

Opinion

 [**35]  [*621] Order, Supreme Court, New York County (Jeffrey Oing, J.), entered June 11, 2015, which, based on the so-ordered transcript of a hearing dated May 28, 2015, granted the motion to dismiss the third amended complaint without prejudice, unanimously affirmed, without costs. Order, same [***2]  court and Justice, entered August 17, 2015, which insofar as appealable and appealed from, denied plaintiffs' motion for leave to file a fourth amended complaint, unanimously reversed, on the law, without costs, and the motion granted. Order, same court and Justice, entered September 24, 2015, which denied plaintiffs' motion to disqualify Debevoise & Plimpton, LLP from representing any party in this action, unanimously affirmed, without costs.

Contrary to the decision of the lower court and the decision in Kenney v Immelt (41 Misc 3d 1225[A], 981 NYS2d 636, 2013 NY Slip Op 51831[U] [Sup Ct, NY County 2013]), under Business Corporation Law § 626 (c), there is no pleading standard requiring that a shareholder bringing a derivative action who alleges the efforts [*622]  he or she made, in making a pre-suit demand on the board to take action, also allege that the board wrongfully rejected the demand, and this Court's decision in Tomczak v Trepel (283 AD2d 229, 724 NYS2d 737 [1st Dept 2001], lv denied, dismissed 96 NY2d 930, 759 NE2d 364, 733 NYS2d 365 [2001]) should not be read to support such conclusion. However, plaintiffs here, who made pre-suit demands but then filed the complaint without giving the board a reasonable opportunity to investigate and respond to the demands, did not satisfy the demand requirement and cannot satisfy the Business Corporation Law § 626 (c) pleading standards based on their allegations of their efforts to obtain board action (see Barr v Wackman, 36 NY2d 371, 381, 329 NE2d 180, 368 NYS2d 497 [1975]; MacKay v Pierce, 86 AD2d 655, 446 NYS2d 403 [2d Dept 1982]). But, [***3]  compliance may be found in [****2]  these circumstances where the complaint alleges "demand futility" (see Marx v Akers, 88 NY2d 189, 198, 666 NE2d 1034, 644 NYS2d 121 [1996]) with adequate particularity (Mackay, 86 AD2d at 655; see also Soho Snacks Inc. v Frangioudakis, 129 AD3d 636, 13 NYS3d 31 [1st Dept 2015]). Here we find that the allegations of demand futility in the third amended complaint were inadequate to satisfy the pleading requirements [**36]  of Business Corporation Law § 626 (c), and thus the complaint was properly dismissed.

We further find that the court erred in denying plaintiffs' motion for leave to file a fourth amended complaint. While the proposed complaint submitted by plaintiffs was also palpably insufficient with respect to its allegations of demand futility, plaintiffs repleaded the complaint to comply with the dictates of the erroneous prior order, which held that allegations of demand futility were irrelevant given the fact plaintiffs had made pre-suit demands. Plaintiffs should be afforded the opportunity to amend their complaint to satisfy the correct pleading standard.

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139 A.D.3d 621 *; 33 N.Y.S.3d 34 **; 2016 N.Y. App. Div. LEXIS 3993 ***; 2016 NY Slip Op 04129 ****; 2016 WL 3043595

 [****1]  Culligan Soft Water Company et al., Appellants, v Clayton Dubilier & Rice LLC et al., Respondents.

Prior History: CULLIGAN SOFT WATER COMPANY, v. CLAYTON DUBILIER & RICE, LLC., 2015 N.Y. Misc. LEXIS 4980 (N.Y. Sup. Ct., Aug. 17, 2015)CULLIGAN SOFT WATER COMPANY, v. CLAYTON DUBILIER & RICE, LLC., 2015 N.Y. Misc. LEXIS 4979 (N.Y. Sup. Ct., Sept. 24, 2015)CULLIGAN SOFT WATER CO. v. CLAYTON DUBILIER & RICE, LLC;, 2015 N.Y. Misc. LEXIS 4981 (N.Y. Sup. Ct., June 11, 2015)

CORE TERMS

allegations, plaintiffs', futility, unanimously, pre-suit, demands, costs, third amended complaint, amended complaint, motion for leave, disqualify, repleaded