Stockholder Standing and Documentary Evidence

• Posted on: May 23 2022

By: Jeffrey M. Haber

In prior articles, we have examined the rules governing the bringing of shareholder derivative litigations (e.g., here and here). Among other things, we discussed the rule requiring the plaintiff to be a shareholder of the company at the time of the wrongdoing to have standing to sue. The same principle applies to plaintiffs bringing direct claims against the corporation for wrongs allegedly inflicted on the plaintiff as a shareholder of the company.

As discussed below, the plaintiff in Sebrow v. Sebrow, 2022 N.Y. Slip Op. 03337 (1st Dept. May 19, 2022) (here), could not satisfy this elemental principle of standing.

Sebrow was brought as a shareholder derivative action against Zvi Sebrow (“Defendant”) to recover the damages allegedly incurred by Worbes Coproration (“Worbes” or the “Company”) as a consequence of Defendants’ malfeasance and misconduct. 

Worbes is a family-owned business for which there was a stockholders’ agreement that was signed by Defendant, Abraham Sebrow (“Abraham”), Joseph Sebrow (“Joseph”), and David Sebrow (“David”) (the “stockholders’ agreement”). The stockholders’ agreement provided that each of the foregoing individuals owned 25 shares of the Company. 

Plaintiff alleged that, prior to their deaths, Abraham and Joseph transferred their shares to their children, Defendant and David, respectively, through testamentary dispositions. As a result, Defendant and David became the owners of 50 shares of the Company.

In approximately 1991, David married Betty Sebrow (“Plaintiff”). In May 2017, David passed away. Although he had executed a will and testament, he never made a testamentary disposition of his shares in Worbes to his issue, or to any other person with Defendant’s consent. Following David’s death, Defendant became the sole shareholder of Worbes; Defendant has never consented to the transfer of Worbes shares to any third party.

Defendant moved for an order pursuant to CPLR § 3211(a) dismissing Plaintiff’s complaint for lack of legal capacity to bring the suit as a shareholder and for failure to state a claim. The motion court granted the motion.

Governing Legal Principles

On a motion to dismiss pursuant to CPLR § 3211, the pleading is to be liberally construed.¹ The court must accept the facts alleged in the complaint as true, accord the plaintiff the benefit of every possible favorable inference, and determine whether the facts as alleged fit within any cognizable legal theory.² A motion to dismiss under CPLR § 3211 should be granted only where “the essential facts have been negated beyond substantial question by the affidavits and evidentiary matter submitted.”³ 

Under CPLR § 3211(a)(1), a motion to dismiss will be granted only if the documentary evidence resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff’s claim.⁴ Dismissal is appropriate only where the documentary evidence submitted “utterly refutes plaintiff’s factual allegations,” and conclusively establishes a defense to the asserted claims as a matter of law.⁵ 

Under CPLR § 3211(a)(3), a defendant moving to dismiss based upon a plaintiff’s alleged lack of standing has the burden to establish, prima facie, the plaintiff’s lack of standing as a matter of law.⁶ “To defeat the motion, a plaintiff must submit evidence which raises a question of fact as to its standing.”⁷ 

The Motion Court’s Decision

In seeking dismissal, Defendant submitted the stockholders’ agreement. Pursuant to Section 6 of the stockholders’ agreement, stockholders were prohibited from selling, transferring, assigning, mortgaging, hypothecating or entering into any agreement that would result in a third party becoming a stockholder in Worbes or any of the other family businesses “without the unanimous consent of all the other stockholders.” The “sole exception” to the foregoing was a testamentary disposition of shares to the stockholders’ issue “in which event his issue shall own the shares of his deceased father….”

In opposition, Plaintiff submitted David’s last will and testament. The will and testament provided that all the rest, remainder and residue of David’s real or personal property, wherever situated and whether acquired before or after the execution of the will and testament, was left to Plaintiff.

Defendant maintained that the will and testament was not dispositive because David did not make a testamentary disposition of his Company shares, and Defendant had not consented to any third party becoming a shareholder of Worbes. The motion court agreed with Defendant.

According to the stockholders’ agreement, said the motion court, unless David made a testamentary disposition of his shares to his issue, or Defendant consented to David’s transfer of his shares in Worbes to his wife, such transfer or disposition of the shares in Worbes was a nullity and unenforceable. The motion court found no evidence that David made a testamentary disposition of his shares to his issue or obtained a consent from Defendant. 

Therefore, concluded the motion court, after David’s death, Defendant remained the sole shareholder of Worbes, and Plaintiff was not a shareholder of Worbes.

Finally, the motion court rejected Plaintiff’s argument that Defendant forged David’s signature on the stockholders’ agreement. According to Plaintiff, Defendant routinely forged David’s signature when he needed it. The motion court held that even if it accepted the alleged facts as true and drew every possible favorable inference for Plaintiff, Plaintiff’s argument was, nevertheless, unavailing. Plaintiff did not raise an issue that the stockholders’ agreement was unenforceable in her complaint, said the motion court, and the factual allegations and causes of action in the complaint were based on the stockholders’ agreement. “If the stockholders’ agreement was actually forged,” reasoned the motion court, “then the plaintiff should not rely on such stockholders’ agreement to allege her causes of action.” The motion court explained that “plaintiff first has to allege that the stockholders’ agreement was forged and not enforceable, and show that David was a shareholder of Worbes, but not based on the allegedly forged stockholders’ agreement. However, the plaintiff failed to do so ….”

In conclusion, the motion court found that “the stockholders’ agreement submitted as … documentary evidence resolved all factual issues as a matter of law, and the defendant made a prima facie showing that the plaintiff does not have standing to sue as a matter of law.”

Accordingly, the motion granted Defendant’s motion under CPLR § 3211(a).

On appeal, the Appellate Division, First Department unanimously affirmed.

The First Department’s Decision

First, the Court held, like the motion court, that the stockholders’ agreement was dispositive and satisfied CPLR § 3211(a). 

The documentary evidence on the motion to dismiss established that plaintiff is not a shareholder of Worbes Corporation and thus does not have standing to bring either individual or derivative claims. Specifically, the terms of the stockholders’ agreement provide, among other things, that the shares owned by plaintiff’s deceased husband — shares that plaintiff claims she now owns — could be transferred only with the consent of defendant or by a testamentary disposition to the deceased husband’s issue. However, because neither one of these events occurred, the stock was never transferred to plaintiff.⁸

Second, the Court “reject[ed] plaintiff’s contention that the transfer restriction in the stockholders’ agreement should not be enforced.”⁹ The Court found Plaintiff’s allegation that her husband’s signature on the agreement was a forgery to be conclusory and insufficient “to create an issue of fact contesting the signature’s authenticity, as it amounts to nothing more than her opinion.”¹⁰ “Likewise,” said the Court, “plaintiff submitted no evidence supporting her argument that her husband had actually signed a different shareholder agreement that did not prevent him from bequeathing or otherwise transferring his ownership interest in Worbes to her.”¹¹ Consequently, there was no genuine dispute as to the authenticity of Defendant’s documentary evidence.¹² 

Finally, the Court held, like the motion court, that Plaintiff could not claim an interest in the Company based upon a document that she claimed was not legitimate: “In any event, given her complaint, which asserts her interest in the shares based upon the terms of the stockholders’ agreement, plaintiff cannot now be heard to argue that the agreement is not legitimate or is of no legal effect.”¹³ 

Takeaway

The rules concerning derivative standing are designed to prevent plaintiffs from buying into a lawsuit or commencing a derivative action by simply purchasing shares after the alleged wrong has occurred.¹⁴ Although there are exceptions to the rule (not applicable in Sebrow), the law has long required plaintiffs bringing a derivative action to have a stake in the company on whose behalf the action is commenced.  After all, if the plaintiff is not a shareholder of the company, then he or she has no right to vindicate the company’s rights and obtain a judgment on its behalf. In Sebrow, the Court reinforced this common-sense rule.

As shown in Sebrow, CPLR § 3211(a)(1) can be a powerful tool to secure dismissal of a complaint. While not every document will demonstrate the absence of a cause of action, Sebrow demonstrates that where the document is clear, unambiguous, and undeniable, and “utterly refutes” the claims asserted, dismissal is appropriate.

References

1. Leon v. Martinez, 84 N.Y.2d 83 (1994).
2. Chanko v. American Broadcasting Cos. Inc., 27 N.Y.3d 46 (2016); Leon, 84 N.Y.2d at 87-88.
3. Biondi v. Beekman Hill House Apt. Corp., 257 A.D.2d 76, 81 (1st Dept. 1999).
4. Leon, 84 N.Y.2d at 88.
5. Carlson v. American Intl. Group, Inc., 30 N.Y.3d 288, 298 (2017).
6. Berger v. Friedman, 151 A.D.3d 678, 679 (2d Dept. 2017).
7. U.S. Bank N.A. v. Guy, 125 A.D.3d 845, 847 (2d Dept. 2015).
8. Slip Op. at *1.
9. Id.
10. Id. (citing, Banco Popular N. Am. V. Victory Tax Mgt., 1 N.Y.3d 381, 383-384 (2004).
11. Id.
12. Id. (citation omitted).
13. Id.
14. See, e.g., Independent Investor Protective League v. Time, Inc., 50 N.Y.2d 259, 263 (1980).