In motion sequence 002, the defendants Diane B. Cavanaugh, Arthur M. Levine, Charles A. Martinek, Kenneth A. Martinek, John [*2]F. Mckenzie, Salvatore Randazzon, Harry (Jeff) A.S. Read, Linda M. Swan, Kenneth H. Thomas, Eugene M. Magier (collectively the "Directors"), and Northeast Community Bancorp, MHC ("MHC") move pursuant to CPLR 3211(a)(7) to dismiss the plaintiff Stilwell Value Partners, IV, L.P.'s ("Stilwell") second amended and supplemental complaint (the "Complaint").

Northeast Community Bancorp, Inc. ("NCB") is a publicly traded bank stock holding company and is the sole shareholder and parent of Northeast Community Bank (the "Bank"). NCB is a nominal defendant in this action.

Stilwell is a minority shareholder of NCB, owning 9.67% of its shares.

MHC is a federally chartered mutual holding company and is the majority shareholder of NCB, owning 55% of its shares. The remaining 45% of NCB's shares are publicly traded.

The Directors serve on the boards of the Bank, NCB, and MHC.

For a full recitation of the facts, please see this Court's decision, entered on September 28, 2012.

In its decision, the Court granted defendants' motion to dismiss the complaint finding that Stilwell never demanded that the Directors undertake a second step conversion, but granted leave to amend the complaint to plead "particularized facts sufficient to overcome the business judgment rule" (NYSCEF #22, p. 5).^[FN1]

Subsequently, in October 2012, Stilwell sent a demand to NCB demanding that they initiate a second step conversion. When the Directors declined to do so, Stilwell served and filed the Complaint, asserting causes of action against the Directors and MHC for breach of fiduciary duty, and a cause of action against MHC for aiding and abetting the Director's breach of fiduciary duty.

Stilwell alleges that a second step conversion would "increase the liquidity of [NCB's] stock, increase [NCB's] market capitalization, increase the probability of [NCB] being acquired by another institution, and make the managers more accountable to public shareholders" (Complaint, ¶ 37).

Thereafter, the defendants moved to dismiss the Complaint on the basis that it fails to state a cause of action.

"It has been the consistent policy of the courts of this State to avoid interference with the internal management and operation of corporations" (Grace v Grace Inst., 19 NY2d 307, 313 [1967]). "The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings" (40 W. 67th St. Corp. v Pullman, 100 NY2d 147, 153 [2003]).

"The business judgment rule bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes..." (In re Comverse Tech., Inc., 56 AD3d 49, 56 [1st Dept 2008]). However, it "does not protect corporate officials who engage in fraud or self-dealing 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" (Wolf v Rand, 258 AD2d 401, 404 [1st Dept 1999]).

"Under New York law, a director may be interested under either of two scenarios: self-interest in the transaction or loss of independence due to the control of an interested director"

(In re Comverse Tech., Inc. at 54).

As a preliminary matter, Stilwell is not challenging a transaction undertaken by the Directors. Rather, it is challenging the Directors' decision to not initiate a transaction, namely a second step conversion.

This Court finds that Stilwell's allegations that the Directors declined to initiate a second step conversion in bad faith to the extent they have acted "much like trustees of a family business, perpetuating Martinek family control and nepotism" that are "focused on maintaining the mutual holding company structure to entrench themselves and the Martinek family" to be vague and conclusory (Complaint, ¶¶ 39, 40). Stilwell fails to plead facts with the required particularity to demonstrate that the Directors lacked independence due to the dominion or control of the Martinek family (Bansbach v Zinn, 1 NY3d 1, 11 [2003]).

Stilwell further argues that the Directors have an inherent conflict of interest as a result of their dual service on the boards of NCB and MHC.

By its nature, the second step conversion contemplates the dissolution of one company, MHC, for the benefit of the other, NCB. Consequently, the Directors cannot act in the best interest of one without forsaking the other.

Clearly, the second step conversion is not in the best interest of MHC because it would result in its dissolution. [*4]However, Stilwell contends that foregoing the second step conversion would purportedly result in the continued depression of NCB's stock price, NCB's lower market capitalization, a lower chance of NCB being acquired, and less managerial accountability, while preserving the existing corporate structure and the existence fo MHC.

In addition, Stilwell alleges that the Directors are self-interested because the preservation of MHC allows the Directors to perpetually reappoint themselves as directors to the boards of the Bank, MHC, and NCB.

In the presence of a "common directorship or majority ownership, the inherent conflict of interest and the potential for self-dealing requires careful scrutiny of the transaction" (Alpert v 28 Williams St. Corp., 63 NY2d 557, 570 [1984]). "[W]hen there is an inherent conflict of interest, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the [transaction]" (id. at570 [1984]).

However, it is unclear at this stage if there is a conflict of interest. This Court's determination of the potential for a conflict, given a lack of the particulars of the directors' interest beyond holding office and a possible determination of the entire fairness of the Directors' decision to not undertake the second step conversion cannot be made at this stage of the litigation and is more appropriately reserved for a motion for summary judgment or a trial, after there has been discovery on these issues.

Accepting Stilwell's allegations as true, as this Court must on a motion to dismiss, this Court finds that it has sufficiently pled that the defendants breached their fiduciary duties as a result of an alleged conflict of interest (Marcus v Hemphill Harris Travel Corp., 193 AD2d 543, 544 [1st Dept 1993]). Consequently, dismissal is not warranted because Stilwell has pled a cognizable cause of action (id.).

Accordingly it is,

ORDERED that the defendants motion for to dismiss is denied, and it is further

ORDERED that defendant is directed to serve an answer to the complaint within 20 days after service of a copy of this order with notice of entry, and it is further

ORDERED that the parties are to contact the Clerk of Part 53 to schedule a status conference to be held on or before December 20, 2013.

This constitutes the decision and order of the Court.

Dated:October 21, 2013

_________________________

J.S.C.