Asserting a claim on behalf of a trust in the Commercial Division can be risky, as the party asserting the claim must establish that the claimed injury is independent of any injury to the trust, and that they are therefore not simply bringing a derivative claim. Recently, in 1993 Trust of Joan Cohen v. Baum, No. 150058/2015, 2017 NY Slip Op 30894(U), 2017 N.Y. Misc. LEXIS 1667 (May 2). Justice Shirley Werner Kornreich dismissed as derivative a third-party claim brought by a former trustee of two trusts against an individual who allegedly provided deficient tax advice to the trusts. The court ruled that the former trustee was owed no duty by the third-party defendant individually and could no longer prosecute claims that belonged to the trusts. Justice Kornreich also rejected the former trustee’s contribution claim against the tax adviser and another entity, explaining that those entities’ alleged wrongdoing was unrelated to the former trustee’s alleged wrongdoing, and thus did not make them subject to liability to the plaintiff for damages for the same injury.
Factual and Procedural Background
The plaintiffs in the ongoing 1993 Trust of Joan Cohen suit are two trusts that are members of Langham, a Delaware LLC that owns the Langham, a Beaux-Arts luxury apartment building located at 135 Central Park West, in the Upper West Side of Manhattan. As members of an LLC, the trusts are required to pay their taxes on a pass-through basis. E. Richard Baum and his employer, Anchin, Block & Anchin (ABA) (collectively, the “Baum Parties”) provided the trusts with tax and accounting services. Baum also served as a trustee of the Trusts, but he ceased serving as a trustee on June 11, 2013.
In October 2011, the IRS determined that a May 2005 charitable tax deduction that Langham had taken based on a non-cash $86 million charitable contribution of a conservation easement to the National Architectural Trust was improper. Langham challenged the IRS’s determination, and ultimately settled for approximately half of the deduction, without the imposition of any penalties or interest. However, the plaintiff trusts were unable to take advantage of the settlement because Baum signed an IRS Form 870PT waiver foreclosing their ability to contest the IRS’s determination. As a result of the waiver, the trusts were unable to maintain a $2,924,000 tax deduction.
The trusts brought suit against the Baum Parties on January 5, 2015, alleging that Baum’s signing of the waiver was ultra vires. Specifically, the trusts argued that the agreement of at least two of the trusts’ three trustees was required for the waiver to be signed, but Baum had acted unilaterally without notifying the other trustees. For his part, Baum argued that he had authority to sign the waivers based on the parties’ course of conduct.
After over a year of litigation, the Baum Parties filed a third-party complaint against Langham Mansions LLC (“Langham Mansions”) and Alan Manocherian (collectively, the “third-party defendants”), asserting two causes of action. First, the Baum Parties claimed that Manocherian, who was allegedly Langham’s “Tax Matters Partner,” breached duties to the trusts by, inter alia, failing to disclose the IRS’s audit of Langham. Second, the Baum Parties sought contribution under CPLR Article 14, maintaining that in the event the Baum Parties were held liable to the trusts, the third-party defendants would need to contribute their proportionate shares of the Baum Parties' responsibility. The third-party defendants moved to dismiss, and the court granted the motion.
Derivative Suit Analysis
First, the Commercial Division ruled that the Baum Parties lacked standing to maintain claims against Manocherian based on his alleged breach of duties to the trusts, as these claims were simply derivative, and given that Baum was not a current trustee, he had no right to prosecute these derivative claims on behalf of the trusts. Justice Kornreich began by explaining that to determine whether a claim is direct or derivative, a court must examine “the nature of the wrong and to whom the relief should go.” For a claim to be direct, the stockholder’s claimed direct injury must be independent of any injury to the corporation. The stockholder must demonstrate: (1) that the duty breached was owed to the stockholder, and (2) that the stockholder can prevail without showing an injury to the corporation. Viewed against this standard, the Baum Parties’ claims against Manocherian were derivative, as they were based on Manocherian’s duties to Langham and the trusts with respect to tax matters that he handled on their behalf, and not any duties to Baum individually. Further, there was no legal basis “for the proposition that a trustee is personally owed a duty by a fiduciary of an LLC of which the trust is a member,” nor was there any authority “for the proposition that a former trustee may maintain a derivative action on behalf of the trust.” Because Baum was not a beneficiary or a shareholder of the trusts, and because he was not a current trustee with authority to act on behalf of the trusts, Baum had no basis to prosecute claims belonging to the trusts. And to the extent the Baum Parties’ claims were based on an alleged breach of duties to Langham instead of the trusts, the same analysis applied, as Baum was neither a member nor a manager of Langham. Accordingly, the Baum Parties lacked standing to sue Manocherian.
The Commercial Division then rejected the Baum Parties’ CPLR Article 14 contribution claim “because the Langham Parties' alleged wrongdoing is unrelated to the reason Baum faces liability, which turns exclusively on Baum's alleged ultra vires actions as trustee.” Justice Kornreich explained that contribution is available where two or more persons are “subject to liability” for damages for the “same injury.” Here, the Langham Parties were not “subject to liability” in the suit brought by the trusts, because Baum’s alleged wrongdoing was his lack of authority to sign the waivers, and not whether his decision to sign the waivers was fully or properly informed. That is, the Baum Parties’ liability did not turn on whether Baum’s signing of the waivers was wise or a sound exercise of business judgment. As to whether the Langham Parties’ alleged misdeed contributed to the “same injury” as that allegedly suffered by the trusts, the court explained that the Baum Parties did not sufficiently allege that Manocherian’s or Langham’s conduct induced or caused Baum to sign the waivers. Thus, the Baum Parties’ claim for contribution failed.
1993 Trust of Joan Cohen demonstrates why claims brought on behalf of trusts must be carefully designed to avoid a challenge that they are derivative claims. The case also makes clear that a defendant filing a third-party claim must take care to set forth specific allegations as to how the third-party defendants’ wrongdoing could subject them to liability and make them liable for at least one of the injuries at issue in the plaintiffs’ main lawsuit.