Article Archives >> Lead Stories >> May 1-15, 2007

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Court Limits Attorney General’s Claims
To Recover Grasso’s Compensation
Divided Appellate Court rejects “common law” basis
but allows AG to pursue more difficult statutory claims

A sharply divided Appellate Court in New York has dismissed four “common law” claims brought by New York Attorney General Eliot Spitzer (before he became Governor) against former New York Stock Exchange President Richard Grasso to recover his “objectively unreasonable” compensation.  But the case will continue on two claims based on the state’s Not-for-Profit Corporation Law that require a more difficult standard of proof. (People v. Grasso, N.Y. Supreme Court, App. Div., First. Dept., No. 8719, Index 401620/04, 5/8/07.)

Spitzer had sued for breach of fiduciary duty when it was reported that Grasso received nearly $140 million in compensation at the time of his resignation as President of the NYSE.  (See Ready Reference Page: “Spitzer Challenges Grasso’s Salary as ‘Objectively Unreasonable.’”)

Spitzer had alleged six separate counts for recovery.  Grasso had moved to dismiss four “common law” counts not based on the N-PCL. A trial court had refused to dismiss them, but the Appellate Division, 3-2, reversed.

The N-PCL specifically gives the Attorney General the right to sue to recover if compensation is not “reasonable” and “commensurate with services performed,” but only if the defendant knew of its unlawfulness.  It also allows the AG to sue for breach of fiduciary duty when an officer or director did not act in “good faith.”  These two counts of the complaint were apparently not contested by Grasso on his motion to dismiss.

The AG had also sued, however,  on the basis of his claim of common law rights in addition to those set out in the statute to impose a constructive trust of the excessive compensation, for money “had and received” improperly, for lack of proper approval of the compensation, and for improper advancement of funds as a “loan” to Grasso.  None of these counts was specifically authorized by the N-PCL.

The Attorney General did not cite any authority for his right to bring such claims, the Court said, and his general supervisory powers over not-for-profit corporations “affords no support.”  Although it did not decide whether the AG was precluded generally, it held that the claims were barred by the “reasonable intendment” of the N-PCL.  The N-PCL was a “comprehensive enactment” and authorized certain claims, but not others.  “The four non-statutory causes of action are plainly inconsistent with core provisions of the legislative scheme governing the duties and liabilities of officers and directors,” the Court said.

That inconsistency is “most palpable” in reviewing the two common law counts seeking to require repayment of unreasonable compensation.  They would require only that the AG prove the compensation was not reasonable or commensurate with services performed.  By contrast, the Court said, the two counts under the N-PCL would require the AG “to prove more.” The statute would require that “the transferee knew of its unlawfulness,” or had not acted in good faith.  The two common law counts “would impose liability on Grasso without regard to either of these fault-based requirements of the legislative scheme,” the Court wrote.

“Under the Attorney General’s view of his authority, he is free to avoid the burden of proving either requirement – each of which is likely to be the most difficult element to prove of the statutory causes of action,” the Court said.  But it ruled that only the Legislature could eliminate the fault-based requirements of the N-PCL in the name of sound public policy.

The majority opinion also dismissed the arguments of the dissenters who argued that the doctrine of parens patriae permitted the suit.  “The authority to assert a cause of action hardly entails the authority to amend the elements of a cause of action,” the Court held.

YOU NEED TO KNOW

Only the nonprofit corporation law includes a provision limiting compensation of executives to “reasonable” amounts.  There is no corresponding provision in the business corporation law.

Article Archives >> Lead Stories >> May 1-15, 2007