SUPREME COURT - STATE OF NEW YORK COUNTY OF NASSAU. PRESENT: HON. IRA B. WARSHAWSKY Justice. TRIAL/IAS PART 16

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1 : SCAN SHORT FORM ORDER SUPREME COURT - STATE OF NEW YORK COUNTY OF NASSAU PRESENT: HON. IRA B. WARSHAWSKY Justice. TRIAL/IAS PART 16 THE TRI-STATE CONSUMER, INC. MINTZ & GOLD, L.L.P. Plaintiff Defendant. INDEX NO. : /2005 MOTION DATE: 09/13/2005 MOTION SEQUENCE: 002 -againstxxx The following papers read on this motion: Notice of Motion, Affnnations & Exhibits Anexed... Defendant Mintz & Gold, LLP' s Memorandum of Law in Support... 2 Affnnation of Daniel A. Zimmennan in Opposition & Exhibits Anexed... Plaintiffs Memorandum of Law in Opposition to Motion to Dismiss... 4 Defendant Mintz & Gold, LLP' s Memorandum of Law in Furher Support of its Motion to Dismiss and for Sanctions:.... This motion by Defendant, Mintz & Gold, LLP (hereinafter referred to as "Firm for an Order of this Court (1) dismissing the Plaintiff, The Tri-State Consumer, Inc. (herein referred to as "TSC" or "Corporation ) complaint pursuant to CPLR 3211; and (2) imposing sanctions upon Plaintiff and its counsel is granted in part and denied in part. The cross motion by the Plaintiff, TSC, for an Order, pursuant to CPLR 3212 granting it partial summary judgment against the Defendant, Firm, in the form of a money judgment on the first cause of action has been withdrawn. See letter dated September 12

2 2005 of Daniel A. Zimmerman. On or about September 5, 2003, Dean Hart, a 50% owner of the Plaintiff closely held corporation, TSC, commenced an action inter alia pursuant to BCL 9720, to compel his sister, Penny Hart, the other 50% owner of TSC, to account for her alleged misconduct in the management of the corporation, TSC. During the course of the derivative action, this Cour, directed in Orders dated January 22, 2004 and March that the disputes between Dean and Penny proceed to arbitration, before their father Ronald Hart, as arbitrator. The Arbitration resulted in the issuance of various awards dated June and July Among other things, these awards authorized Dean to become the President oftsc, and placed Ronald Hart on TSC' s board of directors along with Dean and Penny, thus increasing the board to three and seemingly giving Ronald and Dean majority control oftsc. On August , before the above referenced awards were confirmed, Dean and Ronald Hart held a Board of Directors meeting in which they demoted Penny Hart who had been president of TSC for over thirteen years, and elected Dean to the positions of President and Secretary of TSC. The aforesaid awards were confirmed in orders dated August 17, September 30 and October 26, 2004 (collectively known as the "Confirmation Orders ). On October , Penny fied a Notice of Appeal of the August and September 30, 2004 orders with the Appellate Division, Second Department. While the Awards were subject of appeal, a Board of Directors meeting was held on October , at which Dean and Ronald Hart voted to bring this action against the Defendant Firm. By notice of motion dated November 11, 2004, Penny Hart, moved for a stay of enforcement of the various awards and Orders confirming such awards pending the determination of her appeals. The Appellate Division, Second Department, granted the November 11 th Stay Motion on December It is noted that the language of the stay order did not address the efficacy of the appointment of Ronald Hart to Plaintiff's board

3 of directors or of the actions taken by the Interim Board. While the stay order was in effect, on or about March 30, 2005, this action was commenced by TSC to recover monies received by the Defendant, Mintz & Gold, LLP from the Plaintiff Corporation for legal services rendered by the Firm for and on behalf of Penny Hart in connection with the derivative law suit and arbitration initiated by Dean Hart pending under Index No /2003. In the aforesaid action, in response to a motion to disqualify the Firm as Penny Hart' s counsel, both principals of the firm namely, Steven Mintz and Steven Gold, submitted sworn affirmations stating that they represented Penny Hart and did not represent the Plaintiff, TSC, other than for the purose of obtaining an extension of time to answer the complaint while TSC obtained its own counsel. Hogan and Hartson was retained to represent TSC. Plaintiff Corporation, TSC, argues that Penny Hart had no authorization from TSC' s Board of Directors or shareholders to pay her personal legal bils with corporate fuds since Dean Hart, the other 50% shareholder and director, was the adverse part in the litigation and it was clear that Dean Hart would neither approve nor ratify such payments. Additionally, TSC argues that BCL 9714 precluded Penny Hart from taking a loan from TSC to pay her legal bils without shareholder approval; such approval would have required Dean Hart' s concurrence and was never obtained. When it was learned by Dean Hart that the Firm invoices for Penny Hart' s legal fees were being paid by the Plaintiff, TSC, Dean Hart wrote a letter to the Firm advising them that this was improper and demanding that all such monies be retued to TSC. The Firm refused to return the funds received and continued to accept checks from the Plaintiff TSC, on account of the invoices rendered to Penny Hart. During the course of the derivative action, the 50% shareholder Dean Hart' motion to disqualify the Firm as Penny Hart' s attorneys was denied by order dated April, Ultimately, on May , the Appellate Division issued two Decisions and

4 Orders which vacated the arbitration awards rendered by Ronald Har as well as this Court' s confirmation orders, dated August 17th, October 8 and October 26 In the motion sub judice, Dean Hart argues both individually and as president of TSC that the Interim Board was legally constituted, that the actions of the Interim Board were and remain legal, valid and enforceable and that it is for the shareholders or the curent board of directors oftsc to rescind, withdraw, amend or modify the actions of the Interim Board. Upon the instant application, Defendant moves inter alia to dismiss Plaintiff's complaint on two grounds: (1) Plaintiff's complaint fails to state a cause of action for conversion and should be dismissed pursuant to CPLR 321 (a)(7); and (2) Plaintiff's complaint should be dismissed pursuant to CPLR 321 (a)(3) because the PlaintiffTSC has no legal capacity to sue. The rule is clear that, to establish a cause of action in conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff's rights. Independence Discount Corp. v. Bressner 47 AD2d 756, 757 (citations omitted); see also Firoenti v. Central Emergency Physicians, 305 AD2d 453, 454. On a motion pursuant to CPLR 3211, it is settled that a pleading attacked for insufficiency must be accorded a liberal construction, and "if it states, in some recognizable form, any cause of action known to our law " it cannot be dismissed. Clevenger v. Baker Voorhis Co. 8 N. 2d 187, N. 2d 812; see Cooney v. Cooney, 13 A.D.3d N. 2d 67; Home Reporter v. Brooklyn Spectator, 34 2d 956, 312 N. 2d 433. The allegations in the complaint, and in any supporting affidavit, must be taken as true (see Gingold v. Beekman 183 A. 2d N. 893), and the plaintiff must be accorded "the benefit of every possible favorable inference. Leon v. Martinez 84 N. 2d N. 2d 972; see Goshen v. Mut.

5 Life Ins. Co. of New York 98 N. 2d N. 2d 858. With these guidelines in mind, this Cour finds that Plaintiff's have not plead a critical element of the conversion claim; namely, that the Defendant "exercised an unauthorized dominion over" the funds to the exclusion of the Plaintiff, Corporation rights. It is clear that the May 16th Appellate Division orders, authorized Penny Hart, as the President of the Plaintiff, Corporation, not only to retain counsel to represent her in the derivative action, but that she was authorized to pay the Firm with corporate funds. Also, this Court finds that Plaintiff's Complaint alleging, inter alia a cause of action for conversion, did not constitute a valid filing as it was done in direct contravention of the Second Department's December stay order. As such, and even according the Plaintiff the benefit of every favorable inference, this Cour herewith grants Defendant' motion to dismiss Plaintiff's complaint for failure to state a cause of action for conversion. Defendant, Firm s motion seeking imposition of sanctions upon Plaintiff and its counsel, however, is denied. Subpart (a) of the New York State s Rules of the Chief Administrator of the Cours provides, in pertinent part: The court, in its discretion, may award to any part or attorney in any civil action or proceeding before the cour, except where prohibited by law, costs in the form of reimbursement for actual expenses reasonably incured and reasonable attorney s fees, resulting from frivolous conduct as defined in this Part. In addition to or in lieu of awarding costs, the court, in its discretion may impose financial sanctions upon any part or attorney in a civil action or proceeding who engages in frivolous conduct as defined in this Part... Despite the fact that in this case, that Plaintiff's " new board" had no authority to file this action, as demonstrated by the Appellate Division s unanimous vacature of the arbitration awards upon which TSC' s claims rely and that TSC fied the complaint in violation of the Second Department' s stay order and despite the fact that the Complaint

6 ~~~ fails to state a cause of action for conversion, Defendant' s motion for sanctions is denied. The conduct here is not so egregious as to warrant sanctions in the circumstances of this case. It is not clear that wilful conduct justifying the drastic sanctions Defendant seeks exists. See, 22 NYCRR (a). Dated: October 26, 2005 "''1..O XXX ()C\ co\j '\ 1\\\\1 N''l U CC? orr\ce. c\.