Tuesday, May 7, 2013

Conflict Of Interests Leads To Substituted Plaintiff

The New York Appellate Division for the First Judicial Department has reversed a trial court order and substituted for the plaintiff in litigation involving the National Arts Club.

Order, Supreme Court, New York County (Carol R. Edmead, J.), entered January 16, 2013, which denied defendants' motion pursuant to CPLR 1021 to remove plaintiff in this derivative action and substitute the special litigation committee of the board of governors of the National Arts Club ("Club") as plaintiff, unanimously reversed, on the law, with costs, and the motion granted.

Defendants have established a "persuasive case" that "the proper protection of the corporation's interest or the proper conduct of the litigation would be better served by the elimination or a change in the identity" of the plaintiff...due to a conflict of interest. Plaintiff was expelled from the Club on whose behalf he is suing and the entire complaint in this derivative action alleges waste of corporate assets and breach of fiduciary duties by defendants, current and former directors of the Club, based entirely on their decision to investigate and expel him. We note that, although a complaint filed against plaintiff by the Attorney General alleging waste and misuse of corporate assets is not proof of any misconduct, it reinforces the existence of a conflict.

Furthermore, plaintiff filed this derivative suit in October 2011, two months after the Club filed a Statement of Charges against him and shortly before internal disciplinary proceedings were scheduled to continue, suggesting that he was motivated not by the Club's interests but by a desire to gain leverage to force the Club to reinstate his membership and end the litigation...

As defendants propose to substitute plaintiff with a special litigation committee comprised of newly elected directors who are not named in the derivative suit and were not involved in the underlying investigation of plaintiff, they have established that substitution is warranted at this stage and is not premature...

The New York Daily News had this report on allegations against the removed plaintiff:

The state Attorney General slammed the former head of the National Arts Club  with a lawsuit Friday, charging that he cost the group $1.7 million by stuffing  its landmark brownstone with antiques and junk.

The suit claims that Aldon James and his brother took over as many as 20  apartments and other rentable rooms within the 15 Gramercy Park South house,  cramming them with private flea-market collections.

The hoarding cost the club more $1.5 million in lost rental income, court  papers filed Friday in Manhattan Supreme Court allege.

James, who took over the National Arts Club in 1986 and ran it until 2011,  is also accused of using $250,000 in club funds since 2006 to pay for meals and  cabs — and to purchase items at antique shops, flea markets and vintage clothing  stores. The brothers would then resell the merchandise for a profit, according  to court papers.

Roland Riopelle, the art club’s lawyer, said the lawsuit “validates the  club's view that it was victimized.”

“The lawsuit shows that Aldon James is roadkill and the club has its foot on  the gas and is going full speed ahead into the future,” Riopelle said.

Attorney General Eric Schneiderman said an 18-month investigation by lawyers  in his charities bureau found that James “took advantage of his role” for  years.

 (Mike Frisch)

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