New York Law Review

Tag: Breach of Fiduciary Duty

  • Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 18 N.Y.3d 341 (2011): Martin Act Preemption of Common Law Claims

    Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 18 N.Y.3d 341 (2011)

    The Martin Act does not preempt common-law claims for breach of fiduciary duty or gross negligence that are not solely predicated on violations of the Martin Act itself; mere overlap between the common law and the Martin Act is insufficient for preemption.

    Summary

    Assured Guaranty (UK) Ltd. sued J.P. Morgan, alleging breach of fiduciary duty, gross negligence, and breach of contract related to the mismanagement of an investment portfolio. J.P. Morgan argued that the Martin Act preempted the common-law claims. The Court of Appeals held that the Martin Act, which grants the Attorney General broad powers to investigate securities fraud, does not preempt common-law claims that are not exclusively based on violations of the Martin Act. The Court emphasized that legislative intent to override common law must be clear and specific, which was absent here.

    Facts

    Assured Guaranty guaranteed the obligations of Orkney Re II PLC. J.P. Morgan managed Orkney’s investment portfolio. Assured Guaranty alleged J.P. Morgan invested heavily in high-risk securities, failed to diversify the portfolio, and made investment decisions favoring another client, Scottish Re Group Ltd., to the detriment of Orkney and Assured Guaranty. These actions allegedly caused substantial financial losses for Orkney, triggering Assured Guaranty’s obligations under its guarantee.

    Procedural History

    J.P. Morgan moved to dismiss the complaint, arguing the Martin Act preempted the breach of fiduciary duty and gross negligence claims. Supreme Court granted the motion, dismissing the entire complaint. The Appellate Division modified the Supreme Court’s decision, reinstating the breach of fiduciary duty and gross negligence claims and part of the contract claim. The Appellate Division then granted J.P. Morgan leave to appeal to the Court of Appeals.

    Issue(s)

    Whether the Martin Act preempts common-law causes of action for breach of fiduciary duty and gross negligence when those claims arise from conduct related to securities and investment practices.

    Holding

    No, because the Martin Act does not explicitly or implicitly eliminate common-law claims that are not solely dependent on violations of the Martin Act for their viability.

    Court’s Reasoning

    The Court of Appeals determined that the Martin Act does not expressly or implicitly preempt common-law claims for breach of fiduciary duty or gross negligence. The Court emphasized that a clear and specific legislative intent is required to override the common law, and such intent was not evident in the Martin Act’s language or legislative history.

    The Court distinguished its prior holdings in CPC Intl. v McKesson Corp. and Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, explaining that those cases only prevent private litigants from pursuing common-law claims that are exclusively predicated on violations of the Martin Act. Here, Assured Guaranty’s claims were based on common-law duties independent of the Martin Act.

    The Court stated, “Read together, CPC Intl. and Kerusa stand for the proposition that a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute. But, an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability. Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.”

    The Court also noted that allowing private common-law actions complements the Attorney General’s enforcement authority under the Martin Act by further combating fraud and deception in securities transactions.

    The Court affirmed the Appellate Division’s order, allowing Assured Guaranty’s breach of fiduciary duty and gross negligence claims to proceed.

  • Roslyn Union Free School District v. Margaritis, 18 N.Y.3d 650 (2012): Statute of Limitations for School District Claims Against Board Members

    Roslyn Union Free School District v. Margaritis, 18 N.Y.3d 650 (2012)

    A school district is considered a corporation under New York law, and therefore a six-year statute of limitations applies to actions brought by a school district against a former board member for breach of fiduciary duty or negligence related to financial mismanagement.

    Summary

    The Roslyn Union Free School District sued a former board member, Carol Margaritis, alleging breach of fiduciary duty and negligence related to a massive theft of district funds. Margaritis argued the claims were time-barred by a three-year statute of limitations. The New York Court of Appeals held that a school district is a corporation under CPLR 213(7), thus a six-year statute of limitations applied, making the action timely. The Court reasoned that the General Construction Law defines a corporation to include a municipal corporation, which includes a school district.

    Facts

    The Roslyn Union Free School District suffered significant financial losses due to embezzlement by its employees, including the assistant superintendent and superintendent. The school district discovered initial irregularities in 2002. A later audit uncovered approximately $11 million in misappropriated funds between 1998 and 2004. Carol Margaritis was a member of the Board for approximately one year, beginning in 2000, before the criminal activities came to light. There were no allegations that Margaritis directly participated in the theft or benefitted from it, but she was on the board during the period when funds were being stolen.

    Procedural History

    The school district commenced an action in April 2005 against former and current board members, including Margaritis. Margaritis moved to dismiss, claiming the three-year statute of limitations in CPLR 214(4) barred the claims. Supreme Court agreed and dismissed the claims. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a school district is a “corporation” within the meaning of CPLR 213(7), which would provide a six-year statute of limitations for actions against former officers or directors for waste or injury to property.

    Holding

    Yes, because a school district falls within the definition of “corporation” as defined by the General Construction Law and other provisions of state law, the six-year statute of limitations in CPLR 213(7) applies to actions brought by the school district against a former board member for breach of fiduciary duty and negligence.

    Court’s Reasoning

    The Court reasoned that the General Construction Law defines “corporation” to include a “public corporation,” which in turn includes a “municipal corporation.” The term “municipal corporation” expressly includes a “school district.” Therefore, a school district is a corporation under CPLR 213(7). The Court stated, “Because a school district is both a municipal corporation and a public corporation, it falls within the ambit of the term “corporation” in CPLR 213 (7).” The Court also noted that other state laws and the State Constitution recognize school districts as corporations. The legislative history of CPLR 213(7) supports the conclusion that it applies to both equitable and non-equitable causes of action. The Court rejected the argument that the Legislature’s use of the specific term “school district” in other statutes, such as Education Law § 3813, meant that the general term “corporation” in CPLR 213(7) should not apply to school districts, holding that the legislature would have been redundant to specifically include the term “school districts” in the statute, since they are already included under the definition of “corporation.” The Court did, however, dismiss the claim for an accounting, stating that it was unnecessary given the extensive forensic audit already conducted.

  • IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132 (2009): Statute of Limitations for Breach of Fiduciary Duty Claims

    IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132 (2009)

    The applicable statute of limitations for a breach of fiduciary duty claim in New York depends on the substantive remedy sought; a three-year statute of limitations applies when the remedy is purely monetary, while a six-year statute applies when equitable relief is sought or when the claim is based on fraud.

    Summary

    IDT sued Morgan Stanley, alleging breach of fiduciary duty, tortious interference with contract, misappropriation of confidential information, and unjust enrichment. IDT claimed Morgan Stanley, acting as Telefonica’s investment banker, used confidential information obtained from IDT to induce Telefonica to breach a Memorandum of Understanding (MOU) with IDT. The New York Court of Appeals held that IDT’s claims for breach of fiduciary duty, tortious interference, and misappropriation were time-barred under the three-year statute of limitations. The court also found that the unjust enrichment claim failed to state a cause of action because it was based on a valid contract and because Morgan Stanley was not unjustly enriched at IDT’s expense.

    Facts

    IDT and Telefonica entered an MOU for IDT to buy a 10% equity share in NewCo, a corporation that would operate an underwater fiber-optic cable network. Morgan Stanley, acting as Telefonica’s investment banker, allegedly advised Telefonica to breach the MOU. IDT claimed Morgan Stanley used confidential information obtained from prior engagements with IDT. In 2000, Telefonica informed IDT it intended to modify the MOU, replacing NewCo with a larger entity, Emergía, offering IDT a five percent share. IDT rejected this proposal and initiated arbitration proceedings against Telefonica in 2001.

    Procedural History

    IDT commenced an arbitration against Telefonica in 2001, alleging breach of the MOU. In 2004, IDT sued Morgan Stanley. The Supreme Court dismissed one claim but otherwise denied Morgan Stanley’s motion to dismiss. The Appellate Division affirmed, holding the claims were not barred by collateral estoppel. The Court of Appeals reversed, answering the certified question in the negative, holding that IDT’s claims were either time-barred or failed to state a cause of action.

    Issue(s)

    1. Whether IDT’s breach of fiduciary duty claim is governed by a three-year or six-year statute of limitations.

    2. Whether IDT’s claims for breach of fiduciary duty, tortious interference with contract, and misappropriation of confidential information were time-barred.

    3. Whether IDT’s unjust enrichment claim stated a valid cause of action.

    Holding

    1. The three-year statute of limitations applies, because IDT primarily sought monetary damages, and the equitable relief sought was incidental.

    2. Yes, because the claims accrued when IDT first suffered damages resulting from Telefonica’s refusal to comply with the MOU, which occurred more than three years before IDT commenced the action against Morgan Stanley.

    3. No, because the unjust enrichment claim was based on services governed by a valid contract (regarding the $10 million fee) and because Morgan Stanley was not unjustly enriched at IDT’s expense regarding the fees obtained from Telefonica.

    Court’s Reasoning

    The Court of Appeals determined the applicable statute of limitations for the breach of fiduciary duty claim based on the remedy sought. Since IDT primarily sought monetary damages, the court applied the three-year statute of limitations for injury to property under CPLR 214(4). The court rejected IDT’s argument that the claim was essentially a fraud action requiring a six-year statute of limitations because IDT did not justifiably rely on Morgan Stanley’s alleged misrepresentations. The court found that the claims accrued when Telefonica refused to comply with the MOU, which was before May 25, 2001, rendering the action time-barred. Regarding the unjust enrichment claim, the court stated: “Where the parties executed a valid and enforceable written contract governing a particular subject matter, recovery on a theory of unjust enrichment for events arising out of that subject matter is ordinarily precluded” (Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382, 388 [1987]). The court also held that Morgan Stanley’s profits from Telefonica did not unjustly enrich Morgan Stanley at IDT’s expense because IDT did not pay those fees. The court rejected equitable estoppel arguments as IDT was aware of Morgan Stanley’s disparaging comments yet failed to inquire further.

  • Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (1996): Limits on Recoverable Damages in Fraud and Breach of Fiduciary Duty Claims

    Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413 (1996)

    In fraud and breach of fiduciary duty claims, damages are limited to actual pecuniary loss directly resulting from the wrong, and do not include speculative lost profits or tax liabilities arising from intervening events.

    Summary

    Lama Holding Company sued Smith Barney, alleging fraud, breach of fiduciary duty, and other claims related to Smith Barney’s merger with Primerica Corporation. Lama argued that Smith Barney’s misrepresentations induced them to vote in favor of the merger, resulting in a $33 million tax liability. The New York Court of Appeals held that Lama could not recover damages for fraud or breach of fiduciary duty because the tax liability was a consequence of the Tax Reform Act of 1986, not the alleged misrepresentations. The court emphasized that damages in fraud cases are limited to actual pecuniary loss, not speculative profits or losses caused by intervening events.

    Facts

    Lama Holding Company, owned by foreign entities, held a significant stake in Smith Barney stock. In 1987, Smith Barney merged with Primerica. Prior to the merger vote, Smith Barney representatives met with Lama and allegedly failed to disclose key information about the merger, including Primerica’s identity and potential tax consequences. Following the merger vote but prior to closing, Lama learned that the repeal of the General Utilities Doctrine would result in a substantial tax liability from the sale of its Smith Barney shares. Lama sought to restructure the deal to avoid this tax liability, but Primerica refused.

    Procedural History

    Lama initially sued Smith Barney and others in federal court, but the federal claims were dismissed, and the state claims were not retained. Lama then filed suit in New York State court. The Supreme Court dismissed several claims, and the Appellate Division modified, dismissing the entire complaint. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether Smith Barney’s alleged misrepresentations at the May 19, 1987 meeting constituted actionable fraud, entitling Lama to recover its tax liability as damages.

    2. Whether Smith Barney breached a fiduciary duty to Lama by failing to disclose material information about the merger, and if so, whether Lama’s damages were compensable.

    3. Whether Smith Barney tortiously interfered with Lama’s contract or advantageous business relationship with Bankers Trust.

    4. Whether Smith Barney breached the June 1982 shareholders’ agreement with Lama.

    Holding

    1. No, because Lama’s tax liability was a result of the Tax Reform Act of 1986, not any act or omission by Smith Barney.

    2. No, because Lama received the undisclosed information in the proxy materials before the merger vote, making its decision an informed one.

    3. No, because there was no allegation that Smith Barney intentionally procured Bankers Trust’s breach of contract, nor that Bankers Trust actually breached its contract with Lama.

    4. No, because the complaint failed to allege any specific breach of the 1982 agreement by Smith Barney, and any damages were speculative.

    Court’s Reasoning

    The court emphasized that in fraud actions, the measure of damages is indemnity for the actual pecuniary loss sustained as a direct result of the wrong, known as the “out-of-pocket” rule. The court stated, “The true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong’ or what is known as the ‘out-of-pocket’ rule.” Lama’s tax liability was not caused by Smith Barney’s actions but by the intervening change in tax law. Even if fraud were sufficiently alleged, Lama received more than fair market value for its shares, negating any claim of loss. Regarding the breach of fiduciary duty claim, the court found that Lama had access to the allegedly undisclosed information before the merger vote through the proxy materials, meaning Lama’s decision was informed. The court also rejected the tortious interference and breach of contract claims due to a lack of evidence of intentional procurement of a breach and speculative damages, respectively. The court relied on prior case law, including Reno v. Bull, to reinforce the principle that damages in fraud cases are limited to actual losses and do not extend to speculative profits or consequential damages arising from independent events.

  • Parkoff v. General Telephone & Electronics Corp., 53 N.Y.2d 454 (1981): Res Judicata in Stockholder Derivative Suits

    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.

  • Hadden v. Consolidated Edison Co., 34 N.Y.2d 88 (1974): Waiver of Right to Discharge Based on Fraudulent Misrepresentation

    Hadden v. Consolidated Edison Co., 34 N.Y.2d 88 (1974)

    An employer’s waiver of its right to discharge an employee before retirement is not binding if induced by the employee’s fraudulent misrepresentation or concealment of material facts regarding misconduct.

    Summary

    This case addresses whether Consolidated Edison (Con Edison) validly waived its right to discharge Hadden, a former vice-president, before his retirement. Hadden sought to recover damages and retirement benefits, while Con Edison counterclaimed, alleging Hadden received bribes and secret gifts from construction firms doing business with Con Edison. The court held that Hadden’s misrepresentation and concealment of these bribes, which constituted grave misconduct, vitiated Con Edison’s waiver of its right to discharge him. This decision highlights that a waiver obtained through fraud is ineffective, reinforcing the principle that an employee owes a duty of utmost good faith to their employer.

    Facts

    Hadden, a vice-president at Con Edison, was responsible for construction projects. During his tenure, he received $16,000 in bribes from Fried, connected with construction companies, and a secret gift of $14,750 plus approximately $1,000 in expenses from Benesch, another construction company president. When questioned about these dealings, Hadden falsely stated that he had done nothing wrong and concealed the payments and gifts. Based on Hadden’s misrepresentations, Con Edison initially forebore from discharging him, but later rescinded his pension rights upon discovering the truth.

    Procedural History

    Hadden sued Con Edison to recover damages and secure retirement benefits. Con Edison counterclaimed for a declaration that Hadden’s pension rights were properly rescinded and for disgorgement of the bribes and gifts. The initial summary judgment was appealed, with the Court of Appeals remanding for a determination of whether Con Edison’s waiver was induced by Hadden’s material misrepresentation. Trial Term dismissed Hadden’s complaint and upheld Con Edison’s rescission of pension rights. The Appellate Division reversed, holding that there was no specific agreement not to discharge Hadden. The Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    Whether Con Edison’s waiver of its right to discharge Hadden before retirement was knowingly induced by Hadden through material misrepresentation, thereby invalidating the waiver.

    Holding

    No, because Hadden’s misrepresentation and concealment of material facts, specifically his acceptance of bribes and gifts, constituted fraud, which vitiated Con Edison’s waiver of its right to discharge him.

    Court’s Reasoning

    The court reasoned that while an employer can waive its right to discharge an employee for misconduct, such a waiver is ineffective if induced by fraud. Hadden, as an officer of Con Edison, had a duty to exercise utmost good faith. His concealment of the bribes and gifts, coupled with his false assertion that he had done nothing wrong, constituted a fraudulent misrepresentation that induced Con Edison to forbear from discharging him. The court stated that “fraud vitiates everything which it touches.” The court emphasized that it was not necessary for there to be a discrete “agreement not to discharge” for rescission to be permitted. The intentional relinquishment of a known right can be nullified by fraudulent inducement. The court found that Hadden’s actions were “calculated to induce a false belief and was the predicate for reliance,” making the distinction between concealment and affirmative misrepresentation legally insignificant. The court cited precedents like Jones Co. v Burke, stating that Hadden’s failure to disclose material facts was a breach of his duty to his employer. The court concluded that the inaction by Con Edison due to Hadden’s purposeful concealment was as actionable as fraud inducing positive action, thus justifying the rescission of Hadden’s pension rights.

  • Barr v. Wackman, 36 N.Y.2d 371 (1975): Excusing Demand in Derivative Suits Based on Board’s Breach of Duty

    Barr v. Wackman, 36 N.Y.2d 371 (1975)

    A shareholder derivative suit demand on the board of directors is excused when the complaint alleges particularized facts demonstrating that a majority of the directors may be liable for breach of their duties of due care and diligence to the corporation, even without allegations of fraud or self-dealing.

    Summary

    A shareholder derivative action was brought against Talcott National Corporation directors, alleging they breached their fiduciary duties. The plaintiff didn’t demand the board initiate action, claiming it would be futile because the board participated in the alleged wrongdoing. The court addressed whether allegations of board participation and approval of acts involving bias by affiliated directors, coupled with the remaining directors’ alleged failure to exercise due care, were sufficient to excuse demand. The court held that the demand was excused because the complaint sufficiently alleged that a majority of the directors might be liable, making it unlikely they would pursue the action.

    Facts

    Plaintiff, a shareholder of Talcott National Corporation, brought a derivative action against several directors, including affiliated directors (those with official capacities beyond their directorships) and unaffiliated directors (those whose only connection was as directors). The complaint alleged that the affiliated directors, seeking personal benefits, conspired with Gulf & Western Industries to facilitate its acquisition of Talcott on terms less favorable to Talcott’s shareholders. As part of this scheme, the board allegedly abandoned a merger agreement, approved a tender offer, authorized favorable employment contracts for officers, and sold a subsidiary at a loss, all to benefit Gulf & Western and the affiliated directors. The unaffiliated directors allegedly failed to exercise independent judgment and due care.

    Procedural History

    The defendants moved to dismiss the complaint for failure to make a demand on the board as required by Business Corporation Law § 626(c). The Supreme Court denied the motion, and the Appellate Division affirmed. The case was appealed to the New York Court of Appeals by permission of the Appellate Division on a certified question regarding the propriety of the denial of the motion to dismiss.

    Issue(s)

    Whether allegations of board participation in and approval of acts involving bias and self-dealing by minority affiliated directors and breach of fiduciary duties of due care and diligence by the remaining majority unaffiliated directors are sufficient to withstand a motion to dismiss for failure to make a demand.

    Holding

    Yes, because the complaint alleges acts for which a majority of the directors may be liable, and therefore, the plaintiff reasonably concluded that a demand would be futile. The court emphasized that the board’s actions, as part of a series of events benefiting the affiliated directors rather than Talcott, were not immune from question in a derivative action.

    Court’s Reasoning

    The court reasoned that the demand requirement, codified in Business Corporation Law § 626(c), is rooted in the principle that corporate management is entrusted to the board of directors. The demand rule aims to allow directors to correct alleged abuses without court intervention and to protect them from harassment by litigious shareholders. However, a demand is excused when it would be futile, such as when the alleged wrongdoers control or comprise a majority of the directors. The court emphasized that it is insufficient to merely name a majority of directors as defendants with conclusory allegations. Here, the complaint presented particularized transactions benefiting Gulf & Western and the affiliated directors, while the unaffiliated directors allegedly disregarded Talcott’s interests. The court stated, “Plaintiff may prove that the exercise of reasonable diligence and independent judgment under all the circumstances by the unaffiliated directors, at least to meaningfully check the decisions of the active corporate managers, would have put them on notice of the claimed self-dealing of the affiliated directors and avoided the alleged damage to Talcott. If the unaffiliated directors abdicated their responsibility, they may be liable for their omissions.” The court explicitly rejected the notion that directorial fraud or self-interest is always required to excuse demand, noting that directors have affirmative duties of due care and diligence beyond avoiding self-dealing. The court emphasized, “Particular allegations of formal board participation in and approval of active wrongdoing may, as here, suffice to defeat a motion to dismiss.” The court concluded that the determination of whether a demand is necessary rests in the sound discretion of the court, based on a liberal construction of the complaint. The court cited Kavanaugh v Commonwealth Trust Co., 223 NY 103, 106 stating, “No custom or practice can make a directorship a mere position of honor void of responsibility, or cause a name to become a substitute for care and attention. The personnel of a directorate may give confidence and attract custom; it must also afford protection.”