Parkoff v. General Telephone & Electronics Corp., 53 N.Y.2d 454 (1981)

A judgment in a stockholder derivative action bars a subsequent similar action by another shareholder if the first action was not collusive or fraudulent, the second shareholder wasn’t excluded from the first action, and both actions arise from the same transactions.

Summary

Parkoff, a GTE stockholder, initiated a derivative action alleging corporate waste and breach of fiduciary duty by officers and directors. The lower courts dismissed the complaint based on the business judgment rule and the ruling in *Auerbach v. Bennett*. The New York Court of Appeals affirmed the dismissal, not on the lower court’s reasoning regarding the business judgment rule, but based on *res judicata*. The Court found that a prior derivative suit, *Cramer v. General Telephone & Electronics*, covered the same underlying issues and barred Parkoff’s claim because Parkoff wasn’t excluded from participating in the *Cramer* action. The Court clarified that while *Auerbach* did not bar Parkoff’s suit because he was denied intervention in that case and the *Auerbach* claim was distinct, *Cramer* did preclude Parkoff’s suit.

Facts

Following a report by GTE’s audit committee concerning questionable payments, several shareholders filed derivative actions, including Auerbach, Limmer, and Cramer. GTE’s board created a special litigation committee to assess these actions. The committee concluded that pursuing the actions was not in the corporation’s best interest. Parkoff later filed a similar derivative action. Parkoff’s suit alleged four instances of misuse of corporate funds and assets concerning the disposition of GTE’s interest in the Philippine Long Distance Telephone Company, bribes to domestic state government employees and private domestic customers, illegal domestic political contributions, and illegal compensation to GTE subsidiaries in foreign countries.

Procedural History

Special Term denied the defendant’s motion to dismiss, but the Appellate Division reversed and granted summary judgment, dismissing the complaint. The Appellate Division reasoned that absent evidence of fraud or bad faith, the business judgment rule barred inquiry. The Court of Appeals reversed in part and affirmed in part, dismissing based on *res judicata*, not the business judgment rule. The Court considered the effect of previous decisions in *Auerbach v. Bennett* and *Cramer v. General Telephone & Electronics*.

Issue(s)

1. Whether the dismissal of a prior stockholder derivative action, *Auerbach v. Bennett*, bars a subsequent similar action by another shareholder, Parkoff?
2. Whether the dismissal of a prior stockholder derivative action, *Cramer v. General Telephone & Electronics*, bars a subsequent similar action by another shareholder, Parkoff?

Holding

1. No, because Parkoff was denied intervention in the *Auerbach* action, and the underlying misconduct in *Auerbach* was separate from Parkoff’s claims.
2. Yes, because the *Cramer* action involved the same underlying issues as Parkoff’s claims, and Parkoff did not seek intervention and was not excluded from participating in that action.

Court’s Reasoning

The Court reasoned that a judgment in a shareholder’s derivative action generally precludes other actions based on the same wrong by other shareholders. This rule is subject to exceptions: (1) the prior judgment was not the product of collusion or fraud, and (2) the shareholder sought to be bound wasn’t prevented from joining the prior action. The Court stated, “corporate shareholders — who in principle have an equal interest and right in seeing that claims for wrongs done to the corporation are prosecuted — should not be compelled against their will to have the prosecution of the corporate claims depend on the diligence and ability of the first shareholder to institute litigation when their own attempts to participate in the litigation have been rebuffed”. Because Parkoff was denied intervention in *Auerbach*, that case did not bar his claim. Furthermore, the *Auerbach* case only concerned improper payments to foreign officials, unlike the broader scope of Parkoff’s claims. However, the *Cramer* action did include similar allegations to Parkoff’s, and Parkoff was not excluded from participating in the *Cramer* litigation. The court emphasized that the District Court in *Cramer* decided the state law claims on the merits, and that the decision was affirmed. The court noted that “the preclusive effect of a prior valid judgment in subsequent litigation on the same claim is in no way dependent on the correctness of the earlier judgment”. Therefore, *res judicata* applied, and Parkoff’s action was barred.