Conflict Claims Insufficient for Derivative Claim to Survive

On December 23, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Bezio v. General Elec. Co., 2020 NY Slip Op. 34299(U), holding that conflict of interest claims against a trustee were insufficient to withstand a motion to dismiss, explaining:

The full facts of this matter are set forth in the court's prior decision and order dated November 16, 2019 (the Prior Decision; NYSCEF Doc. No. 54). As the court explained in its Prior Decision when it previously dismissed the Amended Derivative Complaint:

The critical issue which dooms the plaintiffs' case is whether the beneficiaries of a trust established pursuant to the Employment Retirement Savings Plan Act of 1974 (ERISA) must make a demand on the trustee or adequately plead demand futility in order to maintain a derivative action. Because the court answers this question in the affirmative and the plaintiffs have failed to do so, the defendants' motion pursuant to CPLR 3211(a)(5) is granted and the action is dismissed without prejudice, except as otherwise provided below.

. . .

The concern addressed by pleading demand futility centers on the potential conflict of interest by trustees in bringing a lawsuit against the company in which they themselves may be held liable. As the Appellate Division noted in Velez, under the trust agreement in that action, the trustees were appointed by the union and could be removed and replaced at will by the executive board of the union (id. at 317). Such control, thus, excuses demand on the trustees to sue the union that appoints and can at will remove them. The Velez court also recognized that different directors/trustees may have different potential conflicts. Here, the particularized facts show that the trustees were directed trustees and were not responsible for the performance of the trust assets, and this action was voluntarily dismissed by the plaintiffs against the trustee with prejudice. Accordingly, the plaintiffs have effectively removed issues of conflict of interest as to the trustee and have only left open the potential liability for failing to bring a claim when the trustee would be in breach of its fiduciary duties. To wit, if anything, under the facts of this case and based on the actions of the plaintiffs, demand is anything but futile.

This case also is markedly different than Velez. There is no direct line between GE and the trustee unlike the union in Velez. Previously, the plaintiffs argued that GE and Jeffrey Immelt (who has been dismissed from this action with prejudice per the court's Prior Decision) controlled the trustees without pleading any facts with particularity. Now, the plaintiffs again make this argument, only this time arguing that the trustee can be removed by the Named Fiduciary (hereinafter defined), and, as such, demand is futile. The trustee under the trust agreement is appointed by the Trustees of the GE Savings and Security Program (the GEAM Committee) and may be terminated by the Named Fiduciary. The Named Fiduciary is the GEAM Committee, the trustees of which have their own fiduciary duties, and the Benefits Plan Investment Committee (BPIC). It is not GE. In their opposition papers, the plaintiffs argue that because the GEAM Committee is comprised of high-ranking GE employees and is a Named Fiduciary of the Plan appointed by the BPIC, GE necessarily controls them. That argument, however, fails because it does not plead with particularity the domination and control of the Named Fiduciary so as to demonstrate control over the Named Fiduciary and the trustee. Accordingly, the SADC must be dismissed.

(Internal quotations and citations omitted).

This decision illustrates one of the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.