This action arises out of a dispute between the widow of a minority shareholder and the controlling directors and officers of three family-owned and closely-held corporations regarding the management of these corporations. Arlene Rubenstein, the widow and executor of Edward Rubenstein's ("Plaintiff") estate, brings this action both individually and derivatively against the three corporations, Rubinstein-Klein Realty Corporation, Rubinstein Brothers & Lou Realty Corporation, and Lou & Phil Restaurant Corporation (collectively, the "Corporations"), and two [*2]of the Corporations' directors and officers, Kenneth Rubinstein ("Kenneth")^[FN1] and Barbara Rubenstein ("Barbara") (collectively, the "Individual Defendants"). Plaintiff alleges that the Individual Defendants have been running the Corporations for their personal benefit and for the benefit of members of Kenneth's immediate family, in disregard of the interests of the Corporations and its minority shareholders.

Plaintiff's amended complaint ("Complaint") alleges the following eight causes of action: (1) breach of fiduciary duties owed to the Corporations; (2) breach of fiduciary duties owed to Plaintiff; (3) misappropriation of corporate assets; (4) waste of corporate assets; (5) conversion of the Corporations' assets; (6) conversion of Plaintiff's assets; (7) demand for corporate books and records; and (8) equitable accounting.

In motion sequence number 002, the Individual Defendants move for dismissal of the sixth claim for conversion of Plaintiff's assets. The Individual Defendants assert a number of arguments for dismissal including Plaintiff's lack of standing to assert a claim for wrongs committed against the corporation only.

In motion sequence number 003, the Corporations move for dismissal of all the derivative claims, including the first, third, fourth, and fifth claims, because the Complaint fails to allege with particularity the reasons why demand on the Corporations to initiate this suit would have been futile.

Motion sequence numbers 002 and 003 are consolidated for disposition. The parties have submitted a transcript of the oral arguments heard on January 12, 2006 and memoranda of law on each motion. For the reasons stated below, the Individual Defendant's motion to dismiss the Plaintiff's claim for conversion is granted and the Corporations' motion to dismiss all derivative claims is denied.

On a motion to dismiss, plaintiff's allegations must be accepted as true. (Sokoloff v. Harriman Estates Dev. Corp., 96 NY2d 409, 414 [2001]). Further, a court must accord the plaintiff "the benefit of every possible favorable inference and determine only whether the facts as alleged fit within any cognizable legal theory." (Id.).

The Corporations were organized under the laws of New York and were in the business of, among other things, owning and managing real estate in New York City. Prior to the initiation of this suit by Plaintiff, the shareholders of the Corporations voted to sell all the assets of the Corporations and distribute the proceeds among the shareholders on a pro rata basis. The sale of the assets in July of 2005 yielded a net proceed of $94 million. Since the completion of the sale, approximately $75.6 million has been distributed to the shareholders. Currently, the Corporations are in the process of winding down and being dissolved.^[FN2] The Corporations hold [*3]$9.9 million in reserve for liabilities and potential liabilities.

Plaintiff owned a 8-1/3% share of each of the Corporations. The Individual Defendants each owned a 25% share in each of the Corporations. In addition, the Individual Defendants served as the only officers of the Corporations and were two of the three directors of the Corporations. Kenneth served as Chairman and President of the Corporations. Barbara served as Secretary-Treasurer of the Corporations. Plaintiff alleges that the Individual Defendants exercised control over the Corporations based on their status as officers and directors of the Corporations and their combined 50% ownership in the Corporations.

Plaintiff alleges a number of wrongdoings by the Individual Defendants including the charging of Kenneth's personal trips and personal services to the accounts of the Corporations, the use of corporate property by Kenneth's sons free of charge, the improper loans given to shareholders, a loan payoff to unidentified "affiliates," and Barbara's receipt of higher pro rata distributions than other shareholders.

Based on these allegations, the sixth cause of action asserts that "[t]he Individual Defendants unlawfully exercised dominion over assets owned by Arlene Rubenstein by engaging in a course of conduct including, but not limited to inequitably allocating lower pro rata distributions to minority shareholders." Plaintiff claims that as a direct result of the Individual Defendants' conversion of Plaintiff's assets, Plaintiff has been damaged in an amount to be determined at trial.

Conversion is the unauthorized exercise of the right of ownership over property belonging to another to the exclusion of the owner's rights. (Vigilant Ins. Co. of America v. Hous. Auth. of the City of El Paso, 87 NY2d 36, 44 [1995]). To establish a claim of conversion, plaintiff "must demonstrate legal ownership or an immediate superior right of possession to a specific identifiable thing" and that the defendant exercised an unauthorized dominion over that property, which can be specific money, to the exclusion of the plaintiff's rights. (AMF Inc. v. Algo Distribs., 48 AD2d 352, 356 [2nd Dep't 1975]).

According to the Individual Defendants, Plaintiff's claim of conversion must fail for the following reasons: (1) Plaintiff's claim is based upon facts that are pleaded outside the statute of limitations, (2) Plaintiff cannot individually assert a claim for conversion of corporate assets, and (3) Plaintiff failed to allege all necessary elements for a claim of conversion, more specifically, Plaintiff failed to identify the converted asset.

Plaintiff argues that the claim is based upon facts that are pleaded within the statute of limitations such as the allegation that the Individual Defendants directed the payment of $432,530.00 to an unidentified affiliate in 2003. Second, Plaintiff argues that shareholders may state a conversion claim for all assets of the Corporations converted by the Individual Defendants, relying on Collins v. Telcoa In't Corp., 283 AD2d 128 (2d Dep't 2001). Third, Plaintiff argues that the property converted by the Individual Defendants is identified as money, in the amount of $432,530.00, which was paid to an unidentified affiliate.

The dispositive issue in this motion is whether Plaintiff has standing to pursue a claim of conversion of corporate assets. Generally, a shareholder has no individual cause of action for a wrong committed against a corporation. (Abrams v. Donati, 66 NY2d 951, 953 [1985]). These claims must be asserted derivatively. However, "exceptions to that rule have been recognized when the wrongdoer has breached a duty owed to the shareholder independent of any duty owing [*4]to the corporation wronged." (Id., citing General Rubber Co. v. Benedict, 215 NY 18 [1915]; Hammer v. Werner, 239 A.D. 38 [2nd Dep't 1933]).

Collins v. Telcoa In't Corp., supra, recognized such an exception where the defendants, while in control of the Telcoa companies, sold the companies' assets to another company without first informing the plaintiff, as required by Bus. Corp. Law § 909(a). Following the sale of the companies' assets, defendants absconded with plaintiff's share of the sale proceeds. The plaintiff then brought a claim of conversion based upon defendant's wrongful dominion and control of plaintiff's share of the proceeds arising from the sale of the Telcoa companies. The Appellate Division found that plaintiff adequately stated a cause of action for conversion, noting that plaintiff's allegations of conversion were "separate and apart" from plaintiff's other claim that sale of the companies' assets was improper.

Collins is distinguishable: Here, Plaintiff fails to allege acts independent from the wrongs committed against the corporation. In Plaintiff's opposition papers, Plaintiff points to the allegation that the Individual Defendants paid out $432,530.00 to an unidentified affiliate. Plaintiff alleges that Barbara received higher pro rata distributions than other shareholders. Basically, these are allegations that the Individual Defendants mismanaged and diverted corporate assets for their own enrichment, which are wrongs committed against the Corporations. These allegations are not "separate and apart" from Plaintiff's derivative claims as in Collins. Without more, the allegation that the $415,242 or more paid out to Barbara over the years in pro rata distributions belonged to the shareholders and would have been paid out to the shareholders. Thus, Plaintiff may only sue derivatively and not individually. (See, e.g., Wolf v. Rand, 258 AD2d 401, 403 [1st Dep't 1999] [where director diverted corporate profits and plaintiff sued both individually and derivatively, court found that the claim belongs to the corporation];Albany-Plattsburg United Corp. v. Bell, 307 AD2d 416, 420 [3rd Dep't 2003] [finding that claim of conversion did not arise from an independent duty owed to plaintiff individually]; Paradiso & DiMenna, Inc. v. DiMenna, 232 AD2d 257 [1st Dep't 1996] [when injury to plaintiff was only derivative, awarding of damages to individual plaintiff for conversion of corporate funds was error]).

Because Plaintiff lacks standing to sue for conversion, there is no need to consider defendant's other arguments regarding this claim. Plaintiff's sixth cause of action is dismissed.

The Corporations also seek dismissal of the four derivative claims, which include breach of fiduciary duty, misappropriation, waste, and conversion. In a shareholder's derivative action, the complaint must set forth, with particularity, the efforts taken by the plaintiff to secure the initiation of a shareholder's derivative action by the board or the reasons for not making such an effort. (Bus. Corp. § 626 [c]). Cognizant of this rule, the Complaint alleges that "it would be futile to make a demand that the Corporations initiate litigation to pursue these claims because [the Individual Defendants] control the boards of all three Corporations, and were interested parties in the challenged transactions."

In response, the Corporations assert that Plaintiff failed to allege, with specificity, the reasons why demand on the board of directors of the Corporations to initiate this lawsuit would have been futile. The Corporations contend that Plaintiff's allegation of futility are conclusory and insufficient to satisfy section 626 ( c).

As recognized by both parties, the standard for futility of demand is set out in Marx v. [*5]Akers, 88 NY2d 189 (1996), where the New York Court of Appeals stated that demand is futile and excused when directors are incapable of making an impartial decision as to whether to bring suit. This occurs in three circumstances: (1) a majority of the board of directors is interested in the challenged transaction; (2) the board of directors did not fully inform themselves about the challenged transactions to the extent reasonably appropriate under the circumstances; (3) the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors. When a complaint alleges with particularity any of these three circumstances, demand is considered futile and excused.

Plaintiff alleges that demand is futile because of the first circumstance recognized in Marx, i.e., that a majority of the board of directors is interested in the challenged transaction. Kenneth and Barbara are two of three directors of the Corporations. Together, they clearly constitute a majority of the board. The issue then becomes whether they were both interested directors. According to Marx, a director is interested when (i) the director stands to receive a personal benefit from the transaction at issue that is different from that received by all shareholders, or (ii) where there is a loss of independence because a director with no direct interest in a transaction is controlled by a self-interested director. (Marx v. Akers, 88 NY2d at 200).

Assuming the allegations in the Complaint to be true and applying the standards set out in Marx, both Kenneth and Barbara qualify as interested directors. The Complaint alleges numerous instances where Kenneth used corporate funds for his own benefit. For example, Kenneth allegedly charged personal trips to the corporate account. He also allegedly used corporate funds to pay for real estate brokerage fees incurred by a building owned solely by him.With regard to Barbara, the Complaint alleges that Barbara received higher pro rata distributions than the other shareholders and that she allowed Kenneth and his family to personally benefit at the Corporations' expense. These allegations sufficiently support a claim that Barbara was an interested director. She received a personal benefit which other shareholders did not, in an amount totaling at least $415,242.

Moreover, it can be reasonably inferred from the Complaint that Barbara suffered a loss of independence and was controlled by Kenneth. As the Treasurer, Barbara had a duty to manage the funds of the Corporations and to know how the funds were being used. It may be inferred from the allegations that she either turned a blind eye to Kenneth's numerous self-interested transactions or she went along with them. The fact that she was not without recourse against Kenneth further demonstrates her lack of independence. She was one of three directors and could have alerted the third director, Leslie Rubenstein,^[FN3] of Kenneth's self-interested transactions. As two of three directors, they could have voted to remove Kenneth from office or called a shareholder's meeting to have him removed from office.

Since Plaintiff has sufficiently pleaded futility of demand, there is no need to address Plaintiff's second argument that demand should be excused because the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment.

For the reasons stated above, the defendant Corporation's motion to dismiss all derivative claims is denied. [*6]

Accordingly, it is

ORDERED that the Individual Defendants' motion to dismiss (Seq No.002) is granted with regard to the sixth claim.

ORDERED that the Corporations' motion to dismiss (Seq #003) is denied.

Dated: March 13, 2006

ENTER:

_________________________

J.S.C.