author: Smith, J.

text:
    [666 NE2d 1034, 644 NYS2d 121]
    Sylvia A. Marx, Appellant, v John F. Akers et al., Respondents.
    Argued February 7, 1996;
    decided April 25, 1996

      POINTS OF COUNSEL

      Silverman, Harnes & Harnes, New York City (John F. Harnes and Joan T. Harnes of counsel), for appellant.
    The court below erred when it dismissed this action pursuant to Business Corporation Law § 626. (Holmes, Booth & Haydens v Willard, 125 NY 75; O’Connor & Assocs. v Dean Witter Reynolds, Inc., 529 F Supp 1179; Alpert v 28 Williams St. Corp., 63 NY2d 557; Kavanaugh v Kavanaugh Knitting Co., 226 NY 185; Matter of Gordon v Bialystoker Ctr. & Bikur Cholim, 45 NY2d 692; Dimmer v Medallion Group, 75 AD2d 299; In re Croton Riv. Club, 52 F3d 41; Miller v Crown Perfumery Co., 57 Misc 383, 125 App Div 881; Gallin v National City Bank, 152 Misc 679; Glenmore Distilleries Co. v Seideman, 267 F Supp 915.)

      Cravath, Swaine & Moore, New York City (Evan R. Chesler of counsel), Clark, Gagliardi & Miller, P. C., White Plains, Milberg Weiss Bershad Hynes & Lerach, New York City, Riker, Danzig, Scherer, Hyland & Perretti, of the New Jersey Bar, admitted pro hac vice, and Donato A. Evanelista, of the Connecticut Bar, admitted pro hac vice, for respondents.
    I. The Court below properly affirmed the dismissal by the lower court of plaintiffs complaint for failure to make a precomplaint demand upon the board as required by Business Corporation Law § 626 (c). (Barr v Wackman, 36 NY2d 371; Kaster v Modification Sys., 731 F2d 1014; Auerbach v Bennett, 47 NY2d 619; Schmidt v Magnetic Head Corp., 101 AD2d 268; Curreri v Verni, 156 AD2d 420; Bennett v Instrument Sys. Corp., 66 AD2d 708; Lewis v Welch, 126 AD2d 519; MacKay v Pierce, 86 AD2d 655; Miller v Schreyer, 200 AD2d 492; Alpert v 28 Williams St. Corp., 63 NY2d 557.) II. Plaintiff’s complaint should be dismissed for failure to state a cause of action and for failure to plead fraud or breach of trust with particularity. (Gallin v National City Bank, 152 Misc 679; Glenmore Distilleries Co. v Seideman, 267 F Supp 915; Sandfield v Goldstein, 33 AD2d 376, 28 NY2d 794; Stoner v Walsh, 772 F Supp 790; Limmer v Medallion Group, 75 AD2d 299; Freedman v Barrow, 427 F Supp 1129; Winkelman v General Motors Corp., 44 F Supp 960;
      Rudd, v Robinson, 126 NY 113; Ecuador Importadora-Exportadoria v ITF [Overseas] Corp., 94 AD2d 113.)
   OPINION OF THE COURT

Smith, J.

Plaintiff commenced this shareholder derivative action against International Business Machines Corporation (IBM) and IBM’s board of directors without first demanding that the board initiate a lawsuit. The amended complaint (complaint) alleges that the board wasted corporate assets by awarding excessive compensation to IBM’s executives and outside directors. The issues raised on this appeal are whether the Appellate Division abused its discretion by dismissing plaintiff’s complaint for failure to make a demand and whether plaintiff’s complaint fails to state a cause of action. We affirm the order of the Appellate Division because we conclude that plaintiff was not excused from making a demand with respect to the executive compensation claim and that plaintiff has failed to state a cause of action for corporate waste in connection with the allegations concerning payments to IBM’s outside directors.

Facts and Procedural History

The complaint alleges that during a period of declining profitability at IBM the director defendants engaged in self-dealing by awarding excessive compensation to the 15 outside directors on the 18-member board. Although the complaint identifies only one of the three inside directors as an IBM executive (defendant Akers is identified as a former chief executive officer of IBM), plaintiff also appears to allege that the director defendants violated their fiduciary duties to IBM by voting for unreasonably high compensation for IBM executives.

Defendants moved to dismiss the complaint for (1) failure to state a cause of action, and (2) failure to serve a demand on IBM’s board to initiate a lawsuit based on the complaint’s allegations. The Supreme Court dismissed, holding that plaintiff failed to establish the futility of a demand. Supreme Court concluded that excusing a demand here would render Business Corporation Law § 626 (c) "virtually meaningless in any shareholders’ derivative action in which all members of a corporate board are named as defendants.” Having decided the demand issue in favor of defendants, the court did not reach the issue of whether plaintiffs complaint stated a cause of action.

The Appellate Division affirmed the dismissal, concluding that the complaint did not contain any details from which the futility of a demand could be inferred. The Appellate Division found that plaintiffs objections to the level of compensation were not stated with sufficient particularity in light of statutory authority permitting directors to set their own compensation.

Background

A shareholder’s derivative action is an action "brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates” (Business Corporation Law § 626 [a]). "Derivative claims against corporate directors belong to the corporation itself’ (Auerbach v Bennett, 47 NY2d 619, 631).

"The remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights [citations omitted]” (Isaac v Marcus, 258 NY 257, 264).

Business Corporation Law § 626 (c) provides that in any shareholders’ derivative action, "the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.” Enacted in 1961 (L 1961, ch 855), section 626 (c) codified a rule of equity developed in early shareholder derivative actions requiring plaintiffs to demand that the corporation initiate an action, unless such demand was futile, before commencing an action on the corporation’s behalf (Barr v Wack man, 36 NY2d 371, 377). The purposes of the demand requirement are to (1) relieve courts from deciding matters of internal corporate governance by providing corporate directors with opportunities to correct alleged abuses, (2) provide corporate boards with reasonable protection from harassment by litigation on matters clearly within the discretion of directors, and (3) discourage "strike suits” commenced by shareholders for personal gain rather than for the benefit of the corporation (Barr, 36 NY2d, at 378). "[T]he demand is generally designed to weed out unnecessary or illegitimate shareholder derivative suits” (id.).

By their very nature, shareholder derivative actions infringe upon the managerial discretion of corporate boards. "As with other questions of corporate policy and management, the decision whether and to what extent to explore and prosecute such [derivative] claims lies within the judgment and control of the corporation’s board of directors” (Auerbach, 47 NY2d, at 631, supra). Consequently, we have historically been reluctant to permit shareholder derivative suits, noting that the power of courts to direct the management of a corporation’s affairs should be "exercised with restraint” (Gordon v Elliman, 306 NY 456, 462).

In permitting a shareholder derivative action to proceed because a demand on the corporation’s directors would be futile,

"the object is for the court to chart the course for the corporation which the directors should have selected, and which it is presumed that they would have chosen if they had not been actuated by fraud or bad faith. Due to their misconduct, the court substitutes its judgment ad hoc for that of the directors in the conduct of its business” (id., at 462).

Achieving a balance between preserving the discretion of directors to manage a corporation without undue interference, through the demand requirement, and permitting shareholders to bring claims on behalf of the corporation when it is evident that directors will wrongfully refuse to bring such claims, through the demand futility exception, has been accomplished by various jurisdictions in different ways. One widely cited approach to demand futility which attempts to balance these competing concerns has been developed by Delaware courts and applies a two-pronged test to each case to determine whether a failure to serve a demand is justified. At the other end of the spectrum is a universal demand requirement which would abandon particularized determinations in favor of requiring a demand in every case before a shareholder derivative suit may be filed.

The Delaware Approach

Delaware’s demand requirement, codified in Delaware Chancery Court Rule 23.1, provides, in relevant part,

"In a derivative action brought by 1 or more shareholders or members to enforce a right of a corporation * * * [the complaint shall allege] with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.”

Interpreting Rule 23.1, the Delaware Supreme Court in Aronson v Lewis (473 A2d 805) developed a two-prong test for determining the futility of a demand. Plaintiffs must allege particularized facts which create a reasonable doubt that,

"(1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board’s approval thereof’ (473 A2d, at 814).

The two branches of the Aronson test are disjunctive (see, Levine v Smith, 591 A2d 194, 205). Once director interest has been established, the business judgment rule becomes inapplicable and the demand excused without further inquiry (Aronson, 473 A2d, at 814). Similarly, a director whose independence is compromised by undue influence exerted by an interested party cannot properly exercise business judgment and the loss of independence also justifies the excusa! of a demand without further inquiry (see, Levine, 591 A2d, at 205-206, supra). Whether a board has validly exercised its business judgment must be evaluated by determining whether the directors exercised procedural (informed decision) and substantive (terms of the transaction) due care (Grobow v Perot, 539 A2d 180, 189).

The reasonable doubt threshold of Delaware’s two-fold approach to demand futility has been criticized. The use of a standard of proof which is the heart of a jury’s determination in a criminal case has raised questions concerning its applicability in the corporate context (see, Starrels v First Natl. Bank, 870 F2d 1168, 1175 [7th Cir] [Easterbrook, J., concurring]). The reasonable doubt standard has also been criticized as overly subjective, thereby permitting a wide variance in the application of Delaware law to similar facts (2 American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 7.03, Comment d, at 57 [1992]).

Universal Demand

A universal demand requirement would dispense with the necessity of making case-specific determinations and impose an easily applied bright line rule. The Business Law Section of the American Bar Association has proposed requiring a demand in all cases, without exception, and permits the commencement of a derivative proceeding within 90 days of the demand unless the demand is rejected earlier (Model Business Corporation Act § 7.42 [1] [1995 Supp]). However, plaintiffs may file suit before the expiration of 90 days, even if their demand has not been rejected, if the corporation would suffer irreparable injury as a result (Model Business Corporation Act § 7.42 [2]).

The American Law Institute (ALI) has also proposed a "universal” demand. Section 7.03 of ALI’s Principles of Corporate Governance would require shareholder derivative action plaintiffs to serve a written demand on the corporation unless a demand is excused because "the plaintiff makes a specific showing that irreparable injury to the corporation would otherwise result” (2 ALI, Principles of Corporate Governance: Analysis and Recommendations § 7.03 [b], at 53-54 [1992]). Once a demand has been made and rejected, however, the ALI would subject the board’s decision to "an elaborate set of standards that calibrates the deference afforded the decision of the directors to the character of the claim being asserted” (Kamen v Kemper Fin. Servs., 500 US 90, 104).

At least 11 States have adopted, by statute, the universal demand requirement proposed in the Model Business Corporation Act. Georgia, Michigan, Wisconsin, Montana, Virginia, New Hampshire, Mississippi, Connecticut, Nebraska and North Carolina require shareholders to wait 90 days after serving a demand before filing a derivative suit unless the demand is rejected before the expiration of the 90 days, or irreparable injury to the corporation would result (see, Ga Code Annot § 14-2-742 [enacted 1988]; Mich Comp Laws § 450.1493a [enacted 1989]; Wis Stat Annot § 180.0742 [enacted 1991]; Mont Code Annot § 35-1-543 [enacted 1991]; Va Code Annot § 13.1-672.1 [enacted 1992]; NH Rev Stat Annot § 293-A:7.42 [enacted 1992]; Miss Code Annot § 79-4-7.42 [enacted 1993]; Conn Gen Stat Annot § 33-722 [enacted 1994, eff Jan. 1, 1997]; Neb Rev Stat § 21-2072 [enacted 1995]; NC Gen Stat § 55-7-42 [enacted 1995]). Arizona additionally permits shareholders to file suit before the expiration of 90 days if the Statute of Limitations would expire during the 90-day period (Ariz Rev Stat Annot § 10-742 [enacted 1994]). Florida also appears to have adopted a universal demand requirement, although the statutory language does not track the Model Business Corporation Act. Florida’s statute provides, "A complaint in a proceeding brought in the right of a corporation must be verified and allege with particularity the demand made to obtain action by the board of directors and that the demand was refused or ignored” (Fla Stat Annot § 607.07401 [2] [emphasis added]).

New York State has also considered and continues to consider implementing a universal demand requirement. However, even though bills to adopt a universal demand have been presented over three legislative sessions, the Legislature has yet to enact a universal demand requirement (see, e.g., NY Senate-Assembly Bill S 6395/A 8897 [1991/1992 legislative session] ["An act to amend the business corporation law, in relation to shareholder derivative suits”]; NY Senate Bill S 1018 ["An act to amend the business corporation law and the civil practice law and rules, in relation to shareholder derivative suits”] and NY Senate Bill S 6222 ["An act to amend the business corporation law and the civil practice law and rules, in relation to shareholder derivative suits and providing for the repeal of certain provisions upon expiration thereof’] [1993/ 1994 legislative session]; NY Senate-Assembly Bill S 1117/A 1629 [1995/1996 legislative session] ["An act to amend the business corporation law and the civil practice law and rules, in relation to shareholder derivative suits and providing for the repeal of certain provisions upon expiration thereof’]).

New York’s Approach to Demand Futility

Although instructive, neither the universal demand requirement nor the Delaware approach to demand futility is adopted here. Since New York’s demand requirement is codified in Business Corporation Law § 626 (c), a universal demand may only be adopted by the Legislature. Delaware’s approach, which resembles New York law in some respects, incorporates a "reasonable doubt” standard which, as we have already pointed out, has provoked criticism as confusing and overly subjective. An analysis of the Barr decision compels the conclusion that in New York, a demand would be futile if a complaint alleges with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.

In Barr v Wackman (36 NY2d 371, supra), we considered whether the plaintiff was excused from making a demand where the board of Talcott National Corporation (Talcott), consisting of 13 outside directors, a director affiliated with a related company and four interested inside directors, rejected a merger proposal involving Gulf & Western Industries (Gulf & Western) in favor of another proposal on allegedly less favorable terms for Talcott and its shareholders. The merger proposal, memorialized in a board-approved "agreement in principle,” proposed exchanging one share of Talcott common stock for approximately $24 consisting of $17 in cash and 0.6 of a warrant to purchase Gulf & Western stock, worth approximately $7. This proposal was abandoned in favor of a cash tender offer for Talcott shares by Associates First Capital Corporation (a Gulf & Western subsidiary) at $20 per share — $4 less than proposed for the merger.

The plaintiff in Barr alleged that Talcott’s board discarded the merger proposal after the four "controlling” inside directors received pecuniary and personal benefits from Gulf & Western in exchange for ceding control of Talcott on terms less favorable to Talcott’s shareholders. As alleged in the complaint, these benefits included new and favorable employment contracts for nine Talcott officers, including five-year employment contracts for three of the controlling directors. In addition to his annual salary of $125,000 with Talcott, defendant Silverman (a controlling director) would allegedly receive $60,000 a year under a five-year employment contract with Associates First Capital, and an aggregate of $275,000 for the next five years in an arrangement with Associates First Capital to serve as a consultant. This additional compensation would be awarded to Silverman after control of Talcott passed to Associates First Capital and Gulf & Western. Plaintiff also alleged that Gulf & Western and Associates First Capital paid an excessive "finder’s fee” of $340,000 to a company where Silverman’s son was an executive vice-president. In addition to alleging that the controlling defendants obtained personal benefits, the complaint also alleged that Talcott’s board agreed to sell a Talcott subsidiary at a net loss of $6,100,000 solely to accommodate Gulf & Western.

In Barr, we held that insofar as the complaint attacked the controlling directors’ acts in causing the corporation to enter into a transaction for their own financial benefit, demand was excused because of the self-dealing, or self-interest of those directors in the challenged transaction. Specifically, we pointed to the allegation that the controlling directors "breached their fiduciary obligations to Talcott in return for personal benefits” (id., at 376).

We also held in Barr, however, that as to the disinterested outside directors, demand could be excused even in the absence of their receiving any financial benefit from the transaction. That was because the complaint alleged that, by approving the terms of the less advantageous offer, those directors were guilty of a "breach of their duties of due care and diligence to the corporation” (id., at 380). Their performance of the duty of care would have "put them on notice of the claimed self-dealing of the affiliated directors” (id.). The complaint charged that the outside directors failed "to do more than passively rubber-stamp the decisions of the active managers” (id., at 381) resulting in corporate detriment. These allegations, the Barr Court concluded, also excused demand as to the charges against the disinterested directors.

Barr also makes clear that "[i]t is not sufficient * * * merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by wrongdoers” (id., at 379) to justify failure to make a demand. Thus, Barr reflects the statutory requirement that the complaint "shall set forth with particularity the * * * reasons for not making such effort” (Business Corporation Law § 626 [c]).

Unfortunately, various courts have overlooked the explicit warning that conclusory allegations of wrongdoing against each member of the board are not sufficient to excuse demand and have misinterpreted Barr as excusing demand whenever a majority of the board members who approved the transaction are named as defendants (see, Miller v Schreyer, 200 AD2d 492; Curreri v Verni, 156 AD2d 420; MacKay v Pierce, 86 AD2d 655; Joseph v Amrep Corp., 59 AD2d 841; see also, Allison Publs. v Mutual Benefit Life Ins. Co., 197 AD2d 463). As stated most recently, "[t]he rule is clear in this State that no demand is necessary if 'the complaint alleges acts for which a majority of the directors may be liable and plaintiff reasonably concluded that the board would not be responsive to a demand’ ” (Miller v Schreyer, supra, at 494 [quoting from Barr, 36 NY2d, at 377, supra]’, but see, Lewis v Welch, 126 AD2d 519, 521). The problem with such an approach is that it permits plaintiffs to frame their complaint in such a way as to automatically excuse demand, thereby allowing the exception to swallow the rule.

We thus deem it necessary to offer the following elaboration of Barr’s demand/futility standard. (1) Demand is excused because of futility when a complaint alleges with particularity that a majority of the board of directors is interested in the challenged transaction. Director interest may either be self-interest in the transaction at issue (see, Barr v Wackman, supra, at 376 [receipt of "personal benefits”]), or a loss of independence because a director with no direct interest in a transaction is "controlled” by a self-interested director. (2) Demand is excused because of futility when a complaint alleges with particularity that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances (see, Barr, supra, at 380). The "long-standing rule” is that a director "does not exempt himself from liability by failing to do more than passively rubber-stamp the decisions of the active managers” (id., at 381). (3) Demand is excused because of futility when a complaint alleges with particularity that the challenged transactian was so egregious on its face that it could not have been the product of sound business judgment of the directors.

The Current Appeal

Plaintiff argues that the demand requirement was excused both because the outside directors awarded themselves generous compensation packages and because of the acquiescence of the disinterested directors in the executive compensation schemes. The complaint states:

"Plaintiff has made no demand upon the directors of IBM to institute this lawsuit because such demand would be futile. As set forth above, each of the directors authorized, approved, participated and/or acquiesced in the acts and transactions complained of herein and are liable therefor. Further, each of the Non-Employee [outside] Directors has received and retained the benefit of his excessive compensation and each of the other directors has received and retained the benefit of the incentive compensation described above. The defendants cannot be expected to vote to prosecute an action against themselves. Demand upon the company to bring action [sic] to redress the wrongs herein is therefore unnecessary.”

Defendants argue that neither the Supreme Court nor the Appellate Division abused its discretion in holding that plaintiffs complaint did not set forth the futility of a demand with particularity.

As in Barr, we look to the complaint here to determine whether the allegations are sufficient and establish with particularity that demand would have been futile. Here, the plaintiff alleges that the compensation awarded to IBM’s outside directors and certain IBM executives was excessive.

Defendants’ motion to dismiss for failure to make a demand as to the allegations concerning the compensation paid to IBM’s executive officers was properly granted. A board is not interested "in voting compensation for one of its members as an executive or in some other nondirectorial capacity, such as a consultant to the corporation,” although "so-called 'back-scratching’ arrangements, pursuant to which all directors vote to approve each other’s compensation as officers or employees, do not constitute disinterested directors’ action” (1 ALI, op. cit, § 5.03, Comment g, at 250). Since only three directors are alleged to have received the benefit of the executive compensation scheme, plaintiff has failed to allege that a majority of the board was interested in setting executive compensation. Nor do the allegations that the board used faulty accounting procedures to calculate executive compensation levels move beyond "conclusory allegations of wrongdoing” (Barr v Wackman, supra, at 379) which are insufficient to excuse demand. The complaint does not allege particular facts in contending that the board failed to deliberate or exercise its business judgment in setting those levels. Consequently, the failure to make a demand regarding the fixing of executive compensation was fatal to that portion of the complaint challenging that transaction.

However, a review of the complaint indicates that plaintiff also alleged that a majority of the board was self-interested in setting the compensation of outside directors because the outside directors comprised a majority of the board.

Directors are self-interested in a challenged transaction where they will receive a direct financial benefit from the transaction which is different from the benefit to shareholders generally (see, Rales v Blasband, 634 A2d 927, 936 [Del Sup Ct]; Bergstein v Texas Intl. Co., 453 A2d 467, 472-473 [Del Ch]; 1 ALI, Principles of Corporate Governance § 1.23, at 25; 13 [1995 rev vol] Fletcher, Cyclopedia of Private Corporations § 5965, at 138 [perm ed]). A director who votes for a raise in directors’ compensation is always "interested” because that person will receive a personal financial benefit from the transaction not shared in by stockholders (see, 1 ALI, Principles of Corporate Governance § 5.03, Comment g, at 250 ["if the board votes directorial compensation for itself, the board is interested”]; see also, Steiner v Meyerson, [1995 Transfer Binder] Fed Sec L Rep [CCH] ¶ 98,857, at 93, 152 [Del Ch], 1995 WL 441999, 11 ["As the outside directors comprise a majority of the Telxon board and are personally interested in their compensation levels, demand upon them to challenge or decrease their own compensation is excused”]). Consequently, a demand was excused as to plaintiff’s allegations that the compensation set for outside directors was excessive.

Corporate Waste

Our conclusion that demand should have been excused as to the part of the complaint challenging the fixing of directors’ compensation does not end our inquiry. We must also determine whether plaintiff has stated a cause of action regarding director compensation, i.e., some wrong to the corporation. We conclude that plaintiff has not, and thus dismiss the complaint in its entirety.

Historically, directors did not receive any compensation for their work as directors (see, 5A [1995 rev vol] Fletcher, Cyclopedia of Private Corporations § 2109 [perm ed]). Thus, a bare allegation that corporate directors voted themselves excessive compensation was sufficient to state a cause of action (e.g., Walsh v Van Ameringen-Haebler, Inc., 257 NY 478, 480; Jacobson v Brooklyn Lbr. Co., 184 NY 152, 162). Many jurisdictions, including New York, have since changed the common-law rule by statute providing that a corporation’s board of directors has the authority to fix director compensation unless the corporation’s charter or bylaws provides otherwise. Thus, the allegation that directors have voted themselves compensation is clearly no longer an allegation which gives rise to a cause of action, as the directors are statutorily entitled to set those levels. Nor does a conclusory allegation that the compensation directors have set for themselves is excessive give rise to a cause of action.

"The courts will not undertake to review the fairness of official salaries, at the suit of a shareholder attacking them as excessive, unless wrongdoing and oppression or possible abuse of a fiduciary position are shown. However, the courts will take a hand in the matter at the instance of the corporation or of shareholders in extreme cases. A case of fraud is presented where directors increase their collective salaries so as to use up nearly the entire earnings of a company; where directors or officers appropriate the income so as to deprive shareholders of reasonable dividends, or perhaps so reduce the assets as to threaten the corporation with insolvency” (5A [1995 rev vol] Fletcher, Cyclopedia of Private Corporations § 2122, at 46-47 [perm ed]).

Thus, a complaint challenging the excessiveness of director compensation must — to survive a dismissal motion — allege compensation rates excessive on their face or other facts which call into question whether the compensation was fair to the corporation when approved, the good faith of the directors setting those rates, or that the decision to set the compensation could not have been a product of valid business judgment.

Applying the foregoing principles to plaintiffs complaint, it is clear that it must be dismissed. The complaint alleges that the directors increased their compensation rates from a base of $20,000 plus $500 for each meeting attended to a retainer of $55,000 plus 100 shares of IBM stock over a five-year period. The complaint also alleges that ”[t]his compensation bears little relation to the part-time services rendered by the Non-Employee Directors or to the profitability of IBM. The board’s responsibilities have not increased, its performance, measured by the company’s earnings and stock price, has been poor yet its compensation has increased far in excess of the cost of living.”

These conclusory allegations do not state a cause of action. There are no factually based allegations of wrongdoing or waste which would, if true, sustain a verdict in plaintiffs favor. Plaintiffs bare allegations that the compensation set lacked a relationship to duties performed or to the cost of living are insufficient as a matter of law to state a cause of action.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

Chief Judge Kaye and Judges Simons, Titone, Levine and Ciparick concur; Judge Bellacosa taking no part.

Order affirmed, with costs.

      . The other inside directors, although identified as Employee Directors, are never explicitly identified as executive officers in the complaint. However, the names of these directors appear on a chart disclosing "payments to certain executives.”

      . Executives at IBM are compensated through a fixed salary and performance incentives. Payouts on the performance incentives are based on IBM’s earnings per share, return on equity and cash flow. Plaintiff’s complaint criticizes only the performance incentive component of executive compensation as excessive because of certain accounting practices which plaintiff alleges artificially inflate earnings, return on equity and cash flow.

      . Section 626 (c) was also partially based on former rule 23 (b) (now rule 23.1) of the Federal Rules of Civil Procedure (see, Legislative Studies and Reports, McKinney’s Cons Laws of NY, Book 6, Business Corporation Law § 626, at 351).

      . The most recent bill (NY Senate-Assembly Bill S 1117/A 1629), which is currently pending in the 1995/1996 legislative session, proposes the following requirement:
      "(C) Demand. No shareholder may commence a derivative proceeding until:
      "(1) a written demand has been made on the corporation to take suitable action; and
      "(2) ninety days have expired from the date the demand was made, unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation or extinguishment of the claim would result by waiting for the expiration of the ninety day period.”

      . "A director shall perforin his duties as a director * * * in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances” (Business Corporation Law § 717 [a]; see also, Auerbach, 47 NY2d, at 629 [observing that the business judgment doctrine "bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”]).

      . There is general agreement that the allocation of the burden of proof differs depending on whether the compensation was approved by disinterested directors or shareholders, or by interested directors. Plaintiffs must prove wrongdoing or waste as to compensation arrangements regarding disinterested directors or shareholders, but directors who approve their own compensation bear the burden of proving that the transaction was fair to the corporation (see, Block, Barton and Radin, Business Judgment Rule, at 149 [4th ed]; 2 [1990 rev vol] Fletcher, op. cit.„ § 514.1, at 632; 1 ALI, op. cit., § 5.03). However, at the pleading stage we are not concerned with burdens of proof.


source: Caselaw Access Project

license: Public Domain

text:
    [666 NE2d 1043, 644 NYS2d 130]
    In the Matter of Willie E., a Person Alleged to be a Juvenile Delinquent, Appellant. George Dentes, as Tompkins County District Attorney, Respondent.
    Argued March 20, 1996;
    decided May 7, 1996

      POINTS OF COUNSEL

      Paul J. Connolly, Albany, for appellant.
    I. The 60-day period for commencing the initial appearance on the second petition commenced upon the initial appearance on the first petition, which was dismissed for failure to afford appellant a prompt initial appearance and for jurisdictional insufficiency. (Matter of Robert O., 87 NY2d 9; Matter of Tommy C., 182 AD2d 312; Matter of Marcus A., 155 Misc 2d 482; Matter of Shannon FF., 189 AD2d 420; Matter of Gabriel R., 208 AD2d 984; People v Lomax, 50 NY2d 351; Matter of Randy K., 77 NY2d 398; People v Osgood, 52 NY2d 37; People v Hamilton, 46 NY2d 932.) II. The Court below erred in rejecting appellant’s contention that his parents’ absence from the fact-finding hearing requires that he be afforded a new hearing. (Matter of Dennis NN., 107 AD2d 914; Matter of Roman, 144 AD2d 315; Matter of John L., 125 AD2d 472; Matter of John D., 104 AD2d 885; People v Antommarchi, 80 NY2d 247; People v Dokes, 79 NY2d 656; People v Parker, 57 NY2d 136; People v Epps, 37 NY2d 343; People v Smith, 68 NY2d 725.)

      George M. Dentes, District Attorney of Tompkins County, Ithaca (Stephen B. Flash of counsel), for respondent pro se.

    I. The 60 days within which a fact-finding hearing is to be held recommences upon the completion of a second initial appearance where the first petition is dismissed. (Matter of Rodney J., 83 NY2d 503; Matter of Atthis D., 205 AD2d 263; Matter of Robert O., 87 NY2d 9; Matter of Tommy C., 182 AD2d 312; Matter of Frank C., 70 NY2d 408.) II. The Court below correctly found dismissal of the first petition to be without prejudice to filing a second and correctly found no merit to appellant’s argument that there was no good cause shown on the record for adjournment of the fact-finding hearing to 78 days from the first initial appearance. (Matter of Robert O., 87 NY2d 9; Matter of Robert S., 192 AD2d 612; Matter of Randy K., 77 NY2d 398; Matter of Gabriel R., 208 AD2d 984.) III. The Court below correctly found no merit in appellant’s argument that, though the parents were outside the courtroom with the Law Guardian’s consent, the absence of appellant’s parents in the courtroom during the hearing requires dismissal. (Matter of Latrice R., 93 AD2d 838; Matter of John L., 125 AD2d 472; Matter of Roman, 144 AD2d 315; Matter of John D., 104 AD2d 885; Matter of Atthis D., 205 AD2d 263.)
   OPINION OF THE COURT

Smith, J.

The primary issues here are (1) whether the 60-day period for commencing a fact-finding hearing in the Family Court begins after the initial appearance on the first petition when the petition is refiled due to the dismissal of the first petition, and (2) whether the facts here constitute good cause for an adjournment despite the court’s failure to so state on the record. We conclude that the initial appearance on the first petition commences the 60-day period and that good cause for the adjournment of the fact-finding hearing appears on the record.

The first petition, filed in this case on November 9, 1993, was an order of removal from the Tompkins County Court to the Family Court pursuant to CPL article 725. A Grand Jury hearing the case had made a request for removal pursuant to CPL 190.71. Pursuant to Family Court Act § 311.1 (7), the order of removal was deemed to be a petition in the Family Court. The document charged that on or about September 23, 1993, appellant committed (1) sexual abuse in the first degree by subjecting a person to sexual contact by forcible compulsion (Penal Law § 130.65 [1]), and (2) sexual misconduct by engaging in sexual intercourse with a female without her consent (Penal Law § 130.20 [1]).

An initial appearance on the petition originally scheduled for November 22,1993 was rescheduled for November 24,1993. Appellant moved to dismiss the petition on the grounds that the initial appearance was not scheduled within 10 days after the filing of the petition as required (Family Ct Act § 320.2 [1]; § 340.1 [3]) and that the petition was jurisdictionally defective because the Grand Jury minutes had not been filed within 30 days after the order of removal was filed (Family Ct Act § 311.1 [7]). The motion was granted on January 10, 1994 on both grounds.

A new petition with the same charges was made on January 11, 1994. The initial appearance of appellant on the new petition occurred on January 12, 1994. The appellant did not respond affirmatively to the court’s inquiry as to whether he intended to proceed with the fact-finding hearing scheduled, on the original petition, for January 14, 1994. The Law Guardian orally moved for a dismissal of the second petition on the grounds that the first petition had been dismissed for failure to grant a speedy trial in that the initial appearance had not occurred within 10 days of the filing of the petition, and the petition had, therefore, been dismissed with prejudice. The court denied the motion, stating that the dismissal was based on the sufficiency of the petition.

The Law Guardian then asked for the statutorily required 15 days for discovery (Family Ct Act § 331.7 [2]) and 30 days to make motions (Family Ct Act § 332.2 [1]). The Assistant District Attorney commented that any adjournment would have to be based upon a finding of good cause stated on the record. The court adjourned the matter to February 10, 1994, without stating on the record that it was for good cause.

By order to show cause dated February 2, 1994, appellant moved to dismiss the second petition on the ground the court lacked jurisdiction to adjudicate a refiled petition previously dismissed on speedy trial grounds. The court denied the motion, stating that the circumstances of the adjournment on January 10, 1994, including appellant’s request for time to make motions, "were deemed good cause” by the court even though not explicitly stated on the record. The court reiterated that the dismissal of the first petition was "upon the grounds of jurisdictional deficiency,” that a delay in the initial appearance beyond 10 days was not intended to be a speedy trial ground for dismissal, and that a hearing within 60 days of the initial appearance on the petition was still possible at the time of the dismissal.

Appellant’s first argument is that the 60-day time period in which the fact-finding hearing must commence when a juvenile is not detained (Family Ct Act § 340.1 [2]) begins after the initial appearance on the first petition. Respondent contends that because a petition dismissed for a jurisdictional defect is a nullity, the 60-day period commences only upon the initial appearance on the second petition.

In Matter of Robert O. (87 NY2d 9), this Court did not reach the issue of whether the 60-day period commences with the initial appearance on the first petition or with a subsequent petition. We hold that under the facts here the 60-day period commences with the initial appearance on the first petition. This conclusion is consistent with the legislative mandate that there be a swift determination of the charges brought against juveniles. (See, Matter of Frank C., 70 NY2d 408 [dismissal of petition upheld where adjournments beyond the 60-day period had not been based on good cause or special circumstances]; Matter of Randy K., 77 NY2d 398 [failure of a juvenile to appear would not stop the 60-day period from running absent an adjournment for good cause].) If the 60-day period does not commence until an initial appearance on a second petition or a nondefective petition, the policy of speedy determinations is subject to abuse.

A fact-finding hearing may be adjourned pursuant to Family Court Act § 340.1 (4) on good cause. However, appellant argues that the 15 days for discovery and 30 days for motions permitted by statute rendered a speedy trial impossible and that good cause for adjourning the fact-finding hearing did not exist.

Although many fact-finding hearings in juvenile delinquency proceedings are governed by the 60-day speedy trial requirement, some hearings must be held in as little as 14, and even 3 days after the initial appearance (see, Family Ct Act § 340.1 [1]). The expedited nature of these hearings makes it impossible to provide the statutory periods for motions; nevertheless, the Family Court Act does not exempt these hearings from section 332.2 (1). Consequently, when counsel seeks time for motions, which would delay the fact-finding hearing beyond the statutory speedy trial period, counsel arguably waives a speedy trial (see, Sobie, Practice Commentary, McKinney’s Cons Laws of NY, Book 29-A, Family Ct Act § 332.2, at 430-431), or, equivalently, the court may adjourn the proceedings for good cause.

Here, appellant’s request for time in which to conduct discovery and file motions made compliance with the 60-day speedy trial requirement impossible. Consequently, at the time of the adjournment on January 12, 1994, the issue of good cause was explicitly raised by the respondent and when the court granted appellant’s request for additional time, the case was adjourned for good cause. When good cause is granted under these circumstances, the court should consider any motions which are made on an expedited basis in order to ensure that the fact-finding hearing occurs in timely manner. In this case, the hearing occurred on February 10, 1994, within 30 days of the January 12 adjournment and 78 days from the first initial appearance.

Finally, in the absence of any request from the appellant’s attorney or his parents that appellant’s parents attend the hearing, the parents’ absence from the hearing, despite their presence in the hall outside of the courtroom, is not a basis for reversal pursuant to Family Ct Act § 341.2 (3) which requires the presence of a parent or other responsible person at any hearing.

Accordingly, the order of the Appellate Division should be affirmed, without costs.

Chief Judge Kaye and Judges Simons, Titone, Bellacosa, Levine and Ciparick concur.

Order affirmed, without costs.

      . The Court held that the failure of the Family Court to hold an initial appearance within 10 days of the filing of the petition did not preclude a dismissal of and a refiling of the petition since the juvenile’s right to a speedy fact-finding hearing was not violated.

      . Where the juvenile is detained on a petition charging an A, B or C felony, the hearing must be held within 14 days. Where the juvenile is detained and the highest charge in the petition is less than a C felony, the hearing must be held within three days (Family Ct Act § 340.1 [1]).

      . Of course, where a fact-finding hearing cannot be held within the statutory time period because the presentment agency has engaged in truly dilatory conduct, Family Court retains the discretion to find that no good cause for adjourning the hearing exists.


author: Simons, J.

text:
    [666 NE2d 1046, 644 NYS2d 133]
    William M. Walton, Appellant, v Lumbermens Mutual Casualty Company, Respondent.
    Argued April 30, 1996;
    decided June 5, 1996

      POINTS OF COUNSEL

      Bohl, Della Rocca & Dorfman, P. C., Albany (John E. Dorfman of counsel), for appellant.
    Plaintiff’s injury arose out of the "use or operation” of a motor vehicle, thereby entitling him to the payment of first-party benefits under the no-fault law from the motor vehicle’s no-fault insurance carrier when the injury was sustained while unloading the motor vehicle, but said motor vehicle was not the actual instrumentality which produced the injury. (Wagman v American Fid. & Cas. Co., 304 NY 490; McConnell v Fireman’s Fund Am. Ins. Co., 79 Misc 2d 219; Glosson Motor Lines v Platt, 80 Misc 2d 675; Aetna Cas. & Sur. Co. v Liberty Mut. Ins. Co., 91 AD2d 317; Matter of 20th Century Ins. Co. [Lumbermen’s Mut. Cas. Co.], 80 AD2d 288; Kessler v Liberty Mut. Ins. Co., 158 AD2d 974; Yanis v Texaco, Inc., 85 Misc 2d 94; Thomas v Travelers Ins. Co., 87 Misc 2d 136; Matter of Manhattan & Bronx Surface Tr. Operating Auth. [Gholson], 71 AD2d 1004; Matter of New York Cent. Mut. Fire Ins. Co. [Hayden — Allstate Ins. Co.], 209 AD2d 927.)

      Thuillez, Ford, Gold & Conolly, LLP, Albany (Michael J. Hutter of counsel), for respondent.
    I. A person is not entitled to the payment of no-fault first-party benefits for injuries sustained in connection with an activity related to the use or operation of a motor vehicle unless the use or operation of the motor vehicle is the proximate cause of the injuries. (Montgomery v Daniels, 38 NY2d 41; Licari v Elliott, 57 NY2d 230; Perkins v Merchants Mut. Ins. Co., 41 NY2d 394; Johnson v Hartford Ins. Co., 100 Misc 2d 367; Pavone v Aetna Cas. & Sur. Co., 91 Misc 2d 658; Matter of Skeels v Paul Smith’s Hotel Co., 195 App Div. 39; Matter of New York Cent. Mut. Fire Ins. Co. [Hayden — Allstate Ins. Co.], 209 AD2d 927; Duroseau v Town of Hempstead, 117 AD2d 579; Lumbermens Mut. Cas. Co. v Logan, 88 AD2d 971.) II. Plaintiff is not entitled to first-party benefits as his injuries did not arise out of the use or operation of a motor vehicle as his injuries were proximately caused by the failure of the levelator on which he was standing while unloading the tractor-trailer. (Matter of Manhattan & Bronx Surface Tr. Operating Auth. [Gholson], 71 AD2d 1004.)
   OPINION OF THE COURT

Simons, J.

Plaintiff was injured while unloading a truck at a supermarket loading dock and sought no-fault benefits from defendant, the insurer of the truck. The sole issue before the Court is whether plaintiffs injuries arose out of the use or operation of the truck within the meaning of Insurance Law § 5102 (b). We hold that where a person’s injuries were produced by an instrumentality other than the vehicle itself, no-fault first-party benefits are not available.

Plaintiff William Walton was employed as a truck driver by Crowley Foods, Inc. On the day he was injured he was delivering dairy products to a Grand Union supermarket in Niskayuna. He backed his employer’s tractor-trailer up to the supermarket’s loading dock, got out of the truck and opened the rear cargo door. The supermarket provided an apparatus called a "levelator” to facilitate delivery and, after obtaining a control device from the supermarket, Walton raised the levelator to the same height as the truck bed and attached plates from the levelator to the truck. A ramp was thus created that enabled him to transfer goods from the truck to the levelator. He could then lower the levelator to the height of the loading dock and transport the goods from the levelator to the loading dock. Walton employed the levelator as described and while he was standing on it with a load of dairy products the levelator tipped over, throwing him to the ground causing him to sustain injuries which required medical care and resulted in his losing time from work.

Walton filed a claim for no-fault benefits. Defendant denied the claim and Walton commenced this action to recover his "basic economic loss,” demanding the statutory cap of $50,000 (see, Insurance Law § 5102 [a]). Supreme Court granted defendant’s cross motion for summary judgment and dismissed the complaint (162 Misc 2d 560). The Appellate Division affirmed, holding that no-fault first-party benefits are available only when the motor vehicle is the actual instrumentality that causes the injury and that plaintiff’s injury here was caused by the levelator (218 AD2d 858, 859).

The Insurance Law provides that a person is entitled to first-party benefits from the insurer of a vehicle "for loss arising out of the use or operation * * * of such motor vehicle” (Insurance Law § 5103 [a] [1]). The statute does not define "use or operation” (cf., Insurance Law § 5102), but the Mandatory Personal Injury Protection Endorsement required by the regulations implementing the no-fault statute states that "use or operation of a motor vehicle * * * includes the loading or unloading of such vehicle” (11 NYCRR 65.12 [e]).

Walton has never disputed that the truck itself did not cause his injuries or that the failure of the levelator was the proximate cause of his injuries. However, relying on 11 NYCRR 65.12 (e) and this Court’s decision in Wagman v American Fid. & Cas. Co. (304 NY 490), he contends that he is entitled to no-fault benefits because he was unloading the vehicle at the time he was injured and thus he was using the vehicle within the meaning of the no-fault provisions.

In Wagman, we interpreted the scope of a loading and unloading provision in an insurance policy to determine the mutual intent of the parties to that contract. We concluded that the insurer had undertaken to provide coverage not only for injuries arising while loading or unloading goods from the vehicle itself, but for "the 'complete operation’ ” of transporting goods from the vehicle to the place to or from which they were being delivered (id., at 494). Our task here is somewhat different because the coverage in this case is defined by statute, not contract. Thus, we must determine the scope of the statutory no-fault benefits intended by the Legislature.

New York’s no-fault insurance law, formally known as the "Comprehensive Automobile Insurance Reparations Act,” was enacted in 1973. It was prompted by the significant problems which had arisen in common-law, fault-based litigation of automobile accidents. Its purposes were to remove the vast majority of claims arising from vehicular accidents from the sphere of common-law tort litigation, and to establish a quick, sure and efficient system for obtaining compensation for economic loss suffered as a result of such accidents (see, L 1973, ch 13; Governor’s Mem approving L 1973, ch 13, 1973 NY Legis Ann, at 298; see generally, Montgomery v Daniels, 38 NY2d 41, 46-51; see also, Perkins v Merchants Mut. Ins. Co., 41 NY2d 394, 396). Those purposes help to define the scope of the coverage provided by the statute (see, Perkins v Merchants Mut. Ins. Co., supra). They reflect the Legislature’s intent to draw a line between motor vehicle accidents and all other types of torts and to remove only the former from the domain of common-law tort litigation. Where, as here, the plaintiff’s injury was caused by an instrumentality other than the insured vehicle, liability for the losses sustained are more properly addressed outside the area of no-fault motor vehicle insurance.

Defendant maintains that because plaintiffs injuries were caused by the failure of the levelator, they did not "arise out of’ his use of the insured vehicle. Its position is consistent with the language of the no-fault statute which provides that first-party benefits are available only if the injury sustained arose out of the use or operation of the motor vehicle (see, Insurance Law § 5102 [b]; § 5103 [a] [1]). The mere fortuity that plaintiffs injury occurred while he was engaged in unloading the truck does not support a claim for no-fault benefits because the vehicle itself was not a cause of the damage. The vehicle must be a proximate cause of the injury before the absolute liability imposed by the statute arises. Any other rule would permit recovery for claims based on back strains, slip-and-fall injuries, and other similar injuries occurring while the vehicle is being used but which are wholly unrelated to its use.

This decision is consistent with others which have considered the scope of the no-fault statute and have generally held that no-fault benefits are unavailable when a party is injured by an instrumentality other than the vehicle itself. Victims of intentional torts perpetrated while the vehicle was being used or operated have uniformly been denied no-fault benefits (see, Horney v Tisyl Taxi Corp., 93 AD2d 291, 294; Matter of Manhattan & Bronx Surface Tr. Operating Auth. [Gholson], 71 AD2d 1004; see also, United Servs. Auto. Assn. v Aetna Cas. & Sur. Co., 75 AD2d 1022).

Similarly, courts have critically analyzed whether the vehicle was being "used or operated” within the meaning of the no-fault provisions of the Insurance Law to distinguish between vehicular accidents and other torts (see, e.g., cases denying benefits, Reisinger v Allstate Ins. Co., 58 AD2d 1028, affd 44 NY2d 881 [injury arising from explosion of gas stove in motor home]; Wausau Underwriters Ins. Co. v St. Barnabas Hosp., 145 AD2d 314 [failure to escort patient from ambulette to hospital door]; Lumbermen’s Mut. Cas. Co. v Logan, 88 AD2d 971 [fall in icy parking lot]; McConnell v Fireman’s Fund Am. Ins. Co., 49 AD2d 676 [snowmobile operator striking parked automobile]; compare, Matter of 20th Century Ins. Co. [Lumbermen’s Mut. Cas. Co.], 80 AD2d 288, 289-290 [insured unloading trunk was "using” the vehicle when struck and pinned between his car and another]; Gering v Merchants Mut. Ins. Co., 75 AD2d 321 [car was being "used” while under repair when metal chip from car caused injury]).

The common thread in these decisions is that no-fault liability will not attach when the injury is caused by something other than a motor vehicle because in such circumstances the incident cannot be considered an accident related to the use of the motor vehicle.

In sum, no-fault insurance was adopted in this State to provide a system to compensate victims of vehicular accidents. A person engaged in loading or unloading the vehicle may be using it within the meaning of the statute, but that does not necessarily mean that his or her injuries arose out of the use of the vehicle. In such circumstances, if the injuries are caused by something other than the vehicle itself, the injuries cannot be said to have arisen out of the use of the vehicle and thus no-fault first-party benefits are unavailable to the injured party.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

Chief Judge Kaye and Judges Titone, Bellacosa, Smith and Ciparick concur; Judge Levine taking no part.

Order affirmed, with costs.

       In the courts below, plaintiff argued that defendant had not disclaimed coverage in a timely manner, and was therefore precluded from doing so. The lower courts rejected this argument, and plaintiff does not argue the point in his appeal to this Court.


author: Levine, J.

text:
    [666 NE2d 1333, 644 NYS2d 460]
    The People of the State of New York, Respondent, v Richard Angelo, Appellant.
    Argued February 14, 1996;
    decided March 28, 1996

      POINTS OF COUNSEL

      Brenner & Scott, Melville (Jonathan C. Scott and Joel A. Brenner of counsel), for appellant.
    I. The evidence was legally insufficient to convict Angelo of depraved indifference murder. (People v Register, 60 NY2d 270; People v Roe, 74 NY2d 20; People v Fenner, 61 NY2d 971; People v Gomez, 65 NY2d 9; People v Contes, 60 NY2d 620; People v Jones, 73 NY2d 427; Caton v Doug Urban Constr. Co., 65 NY2d 909; People v Cronin, 60 NY2d 430.) II. The court applied the wrong standard in denying defense counsel’s application to permit Dr. Schwartz to state the facts on which his opinion was based, and thereby deprived Angelo of his State and Federal constitutional right to present witnesses in his defense and to due process of law. (People v Bleakley, 69 NY2d 490; People v Stone, 35 NY2d 69; People v Sugden, 35 NY2d 453; United States v A & S Council Oil Co., 947 F2d 1128; Chambers v Mississippi, 410 US 284; People v Keough, 276 NY 141; People v DiPiazza, 24 NY2d 342; People v Jones, 73 NY2d 427; Washington v United States, 390 F2d 444.) III. The court’s supplemental instruction on depraved indifference imparted the wrong legal standard and deprived Angelo of due process and a constitutionally fair trial. (People v La Marca, 3 NY2d 452; People v Flynn, 290 NY 220; United States v Hastings, 918 F2d 369; People v Gaines, 74 NY2d 358; People v Gonzalez, 293 NY 259; People v Malloy, 55 NY2d 296; People v Miller, 6 NY2d 152.) IV. Angelo’s absence from post-submission proceedings deprived him of his State and Federal rights to be present at all material stages of the proceedings. (People v O’Rama, 78 NY2d 270; People v Ciaccio, 47 NY2d 431; People v Mehmedi, 69 NY2d 759.)

      James M. Catterson, Jr., District Attorney of Suffolk County, Riverhead (Michael J. Miller of counsel), for respondent.
    I. The issues presented in defendant’s first three points are not preserved for appellate review because he failed to interpose proper, specific, contemporaneous objections at trial. (People v Belge, 41 NY2d 60; People v Gray, 86 NY2d 10; People v Dekle, 56 NY2d 835; People v Cona, 49 NY2d 26; People v Bynum, 70 NY2d 858; People v Stahl, 53 NY2d 1048.) II. Defendant was properly found guilty beyond a reasonable doubt. (People v Register, 60 NY2d 270; People v Macana, 84 NY2d 173; People v Canty, 60 NY2d 830; People v Gray, 86 NY2d 10; People v Fenner, 61 NY2d 971; People v Chrysler, 85 NY2d 413; People v Gomez, 65 NY2d 9; People v Goode, 175 AD2d 181; People v Brown, 173 AD2d 318; People v Roe, 74 NY2d 20.) III. Defendant was denied neither his right to present his defense nor due process of law when the trial court properly excluded testimony about the results of a polygraph examination of defendant. (Crane v Kentucky, 476 US 683; Washington v Texas, 388 US 14; Chambers v Mississippi, 410 US 284; Rock v Arkansas, 483 US 44; People v Chipp, 75 NY2d 327; Matter of Sowa v Looney, 23 NY2d 329; People v Ciaccio, 47 NY2d 431; People v Allweiss, 48 NY2d 40; People v Cronin, 60 NY2d 430; People v Wilson, 133 AD2d 179.) IV. The trial court’s supplemental charge on depraved indifference murder was correct and therefore did not deprive defendant of a fair trial or due process of law. (People v Register, 60 NY2d 270; People v Udzinski, 146 AD2d 245.) V. Defendant was not denied the right to be present at any material stage of his trial. (People v Kinchen, 60 NY2d 772; People v Hannigan, 193 AD2d 8; People v Ciaccio, 47 NY2d 431; People v Mehmedi, 69 NY2d 759; People v Harris, 76 NY2d 810; People v Velasco, 11 NY2d 469; People v O’Rama, 78 NY2d 270; People v Boyne, 174 AD2d 103; People v Rodriguez, 76 NY2d 918; People v Owens, 69 NY2d 585.)

      Malvina Nathanson, New York City, for New York State Association of Criminal Defense Lawyers, amicus curiae.

    Appellant was entitled, as a matter of constitutional right, to the testimony of his expert that his opinion was based, in part, on the findings of the court-ordered polygraph examination. (People v Leone, 25 NY2d 511; People v Sugden, 35 NY2d 453.)
   OPINION OF THE COURT

Levine, J.

Defendant was charged with multiple counts of second degree murder (depraved indifference murder) and assault in connection with the unauthorized injection of seven patients with a neuromuscular blocking agent at the hospital at which he was employed as a nurse, resulting in the deaths of six of them from respiratory failure. At trial, defendant did not deny that he had engaged in such conduct, but attempted to demonstrate that he suffered from a mental illness which precluded him from forming the mental state required for the charged offenses — awareness of a grave risk of death of the patients by reason of his injections. To that end, defendant presented two psychological experts who testified that he suffered from a dissociative disorder which prevented him from recognizing, and thus consciously disregarding, the risks associated with his conduct of injecting patients with an agent that caused respiratory distress. The experts testified that defendant had feelings of extreme inadequacy and sought to create a situation in which he could prove his competence; as an emergency medical technician he had once successfully resuscitated a patient in respiratory distress and when overcome by self-doubt in his responsible position as Charge Nurse, defendant injected patients with an agent that would cause respiratory distress so that he could then participate in the successful heroic efforts to save them. His dissociative disorder, they testified, caused defendant to be unaware that the injections he had given these patients were the cause of their potential respiratory failure and ultimate deaths.

Before Dr. Schwartz, defendant’s psychiatric expert, testified, defense counsel sought a ruling from the trial court that Dr. Schwartz would be permitted to testify that his opinion as to defendant’s mental state was based, in part, on the results of a polygraph examination defendant had undergone. According to defense counsel, it was relevant to Dr. Schwartz’s diagnosis of defendant that during the polygraph examination defendant’s statement that he had not been present when any of the injected patients had died registered as "truthful”, when the facts demonstrated that defendant was actually present during at least one of the patients’ deaths. The trial court ruled that Dr. Schwartz would not be permitted to testify to his reliance on the evaluation of defendant’s responses during the polygraph examination because the appellate courts of New York have consistently held polygraph testing inadmissible as scientifically unreliable. Defense counsel objected to the court’s ruling but stated that Dr. Schwartz would still be called to testify and would simply not refer to the polygraph results. Following examination of defendant’s experts, the People presented the testimony of two psychological experts who were of the opinion that defendant suffered from a personality disorder but was capable of appreciating the risks and consequences of his actions.

Defendant was ultimately convicted of two counts of depraved indifference murder, one count of second degree manslaughter, one count of criminally negligent homicide and six counts of assault with respect to five of the patients and was sentenced accordingly. The Appellate Division affirmed his conviction and sentence. A Judge of this Court granted defendant leave to appeal, and we now affirm.

I

Defendant argues that County Court erred in prohibiting Dr. Schwartz from testifying that his conclusions were based in part on the results of defendant’s polygraph examination and that the court’s ruling violated his constitutional rights to due process and to present witnesses in his own defense. Because defendant failed to present these constitutional claims to County Court, however, they are unpreserved for this Court’s review.

Alternatively, defendant bases his claim of error on two other grounds, one statutory and one common law. The statute upon which defendant relies is CPL 60.55 which concerns the testimony of a mental health expert regarding the affirmative defense of not responsible by reason of mental disease or defect and provides that the expert "must be permitted to make a statement as to the nature of any examination of the defendant” and "must be permitted to make any explanation reasonably serving to clarify his [or her] diagnosis and opinion” (CPL 60.55 [1]). However, that statute, by its terms, does not apply to this case where defendant did not assert the insanity defense, but sought instead to use psychiatric testimony to negate a necessary element of the offenses charged.

Defendant also relies on the common-law rule that under certain circumstances an expert may base his or her opinion on out-of-court evidence, citing People v Sugden (35 NY2d 453). However, as stated in Sugden, an expert witness may rely on nonrecord evidence only if it "is of a kind accepted in the profession as reliable in forming a professional opinion” or "comes from a witness subject to full cross-examination on the trial” (id., at 460-461; accord, People v Jones, 73 NY2d 427, 430; Hambsch v New York City Tr. Auth., 63 NY2d 723, 726).

These exceptions thus provide no support for defendant’s position because they specifically incorporate the customary admissibility test for expert scientific evidence — which looks to general acceptance of the procedures and methodology as reliable within the scientific community (see, People v Wesley, 83 NY2d 417, 422, citing Frye v United States, 293 F 1013; People v Hughes, 59 NY2d 523, 537; People v Middleton, 54 NY2d 42, 49; see also, Hambsch v New York City Tr. Auth., 63 NY2d, at 726, supra [to meet the "professional reliability” exception, the out-of-court evidence must be established as reliable]). Because defendant did not demonstrate that polygraph test results are generally accepted by the scientific community as reliable, County Court did not err in excluding defendant’s polygraph results (see, People v Shedrick, 66 NY2d 1015, 1018 [upholding exclusion of polygraph evidence because it was not generally accepted as reliable by the scientific community], rearg denied 67 NY2d 758; see also, Pereira v Pereira, 35 NY2d 301, 306-307; People v Leone, 25 NY2d 511, 517; People v Forte, 279 NY 204, 206, rearg denied 279 NY 788).

Defendant’s alternate claim that County Court erred in ruling on the admissibility of the polygraph evidence without holding a Frye hearing is unpreserved. The record demonstrates that defendant did not request a hearing to establish the current acceptance of polygraph testing as reliable or argue that the scientific consensus on this point had changed since such evidence had previously been ruled inadmissible under this standard. In responding to the People’s position that the polygraph evidence must be demonstrated to be generally accepted, defense counsel stated equivocally: "I cannot categorically state that that would be [Dr. Schwartz’s] testimony. I don’t know * * * With regard to it’s [sic] inherent unreliability, again, as the — cases seem to state that would go to the weight of the evidence”. Likewise, defense counsel referred to a hearing in the most ambivalent terms stating: "I would not oppose preliminary hearings on — outside the presence of the jury to establish [general acceptance]” (emphasis supplied). Additionally, because defendant did not argue below that the grounds upon which this Court had previously rejected polygraph evidence were no longer sound, defendant’s argument on appeal that polygraph evidence has now reached the state of being generally accepted as reliable in the relevant scientific community, is unpreserved.

Neither may defendant avoid the requirement of demonstrating the scientific acceptance of the polygraph test by arguing that the validity of the test results here was not at issue. To the contrary, the polygraph evidence was offered as proof of the honesty of defendant’s belief, in response to the polygraph examiner’s question, that he was not present when any of the patients he had injected died, and thus to support his defense of being unable to form an awareness of the grave risks associated with his conduct. Therefore, the probative value of this evidence clearly depended on the reliability of the test results.

II

Defendant also argues on appeal that County Court erred in submitting a verdict sheet to the jury that contained identifying explanations of the various charges submitted. As this Court has held, unless the parties consent it is error for a trial court to give the jury an annotated verdict sheet (e.g., People v Damiano, 87 NY2d 477, 483; People v Spivey, 81 NY2d 356, 361; People v Taylor, 76 NY2d 873, 874). The record in this case reveals that defense counsel was shown the verdict sheet before it was submitted to the jury and expressly approved it. Thus, unlike the record in Damiano (supra), the trial record in this case establishes that the annotated verdict sheet was submitted to the jury with defendant’s consent and, accordingly, no error in its submission occurred.

Defendant’s remaining contentions are unpreserved or without merit.

Accordingly, the order of the Appellate Division should be affirmed.

Chief Judge Kaye and Judges Simons, Titone, Bellacosa, Smith and Ciparick concur.

Order affirmed.


text:
    [666 NE2d 1336, 644 NYS2d 463]
    In the Matter of New York City Transit Authority, Respondent, v New York State Department of Labor et al., Appellants.
    Argued February 8, 1996;
    decided March 28, 1996

      POINTS OF COUNSEL

      Dennis C. Vacco, Attorney-General, New York City (Pica Paul Ben-Amotz, Victoria A. Graffeo, Peter H. Schiff, Daniel F. De Vita and M. Patricia Smith of counsel), for appellants.
    I. The Public Employee Safety and Health Act (PESH Act) penalty guidelines do not constitute rules that must be promulgated pursuant to the State Administrative Procedure Act and the NY Constitution because they are not applied as fixed principles without regard to the facts and circumstances of each violation. (Matter of Roman Catholic Diocese v New York State Dept. of Health, 66 NY2d 948; Matter of Schwartfigure v Hartnett, 83 NY2d 296; Matter of Duflo Spray-Chem. v Jorling, 153 AD2d 244; Matter of Dry Harbor Nursing Home v Axelrod, 137 AD2d 962; Matter of Trustees of Masonic Hall & Asylum Fund

      v Axelrod, 174 AD2d 199; Matter of Guptill Holding Corp. v Williams, 140 AD2d 12; Matter of New York State Coalition of Public Empls. v New York State Dept. of Labor, 89 AD2d 283, 60 NY2d 789; Louisiana Chem. Assn. v Bingham, 657 F2d 777; Matter of Swalbach v State Liq. Auth., 7 NY2d 518; Matter of Amsterdam Nursing Home Corp. v Axelrod, 135 AD2d 331.) II. The Industrial Board of Appeals and Department of Labor reasonably determined that the mere presence of the hazardous chemicals list on the New York City Transit Authority’s computer system did not satisfy the PESH Act’s hazard communication standard. (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451.)

      Mary McCorry, Brooklyn, Martin B. Schnabel and Ellen Deirdre Murphy for respondent.
    I. The Court below correctly held that the Department of Labor’s penalty imposition procedures are rules which are invalid unless duly promulgated and published. (Matter of Jones v Smith, 64 NY2d 1003; Matter of Schwartfigure v Hartnett, 83 NY2d 296; Matter of Cordero v Corbisiero, 80 NY2d 771; People v Cull, 10 NY2d 123; Matter of Sheehan v Ambach, 136 AD2d 25, 72 NY2d 804; New York State Coalition of Pub. Empls. v New York State Dept. of Labor, 89 AD2d 283, 60 NY2d 789; State of New York v Town of Wallkill, 170 AD2d 8; Matter of Callanan Indus. v White, 118 AD2d 167, 69 NY2d 601; Matter of Roman Catholic Diocese v New York State Dept. of Health, 66 NY2d 948; Duflo Spray-Chem. v Jorling, 153 AD2d 244.) II. This Court should affirm the Court below’s interpretation of access requirements of the Occupational Safety and Health Administration standard. (Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451; Matter of Howard v Wyman, 28 NY2d 434; New York State Coalition of Pub. Empls. v New York State Dept. of Labor, 89 AD2d 283, 60 NY2d 789; Matter of Abraham & Straus v Tully, 47 NY2d 207; Matter of Adamides v Chu, 134 AD2d 776, 71 NY2d 806; New York State Assn. of Life Underwriters v New York State Banking Dept., 83 NY2d 353; Matter of Adams [Government Empls. Ins. Co.], 52 AD2d 118; Doctor’s Council v New York City Employees’ Retirement Sys., 71 NY2d 669; Matter of Moran Towing & Transp. Co. v New York State Tax Commn., 72 NY2d 166; 300 Gramatan Ave. Assocs. v State Div. of Human Rights., 45 NY2d 176.)

      Paul A. Crotty, Corporation Counsel of New York City (Stephen J. McGrath and Ellen Ravitch of counsel), for the City of New York, amicus curiae.

    The Court below correctly held that the Department of Labor’s guidelines for imposing fines under the PESH Act were rules required to be promulgated and filed with the Secretary of State. Thus, the Court correctly concluded that, because the guidelines had not been promulgated and filed, fines imposed pursuant thereto were invalid and are unenforceable. (Matter of Cordero v Corbisiero, 80 NY2d 771; Matter of Schwartfigure v Hartnett, 83 NY2d 296; Matter of Jones v Smith, 64 NY2d 1003; People v Cull, 10 NY2d 123; Matter of Guptill Holding Corp. v Williams, 140 AD2d 12, 73 NY2d 820; Matter of Sheehan v Ambach, 136 AD2d 25, 72 NY2d 804; Leichter v Barber, 120 AD2d 776; Dairy Barn Stores v State Liq. Auth., 67 AD2d 691, 47 NY2d 705; Matter of Trustees of Masonic Hall & Asylum Fund v Axelrod, 174 AD2d 199.)
   OPINION OF THE COURT

Levine, J.

During 1988, employees from respondent Department of Labor conducted health and safety inspections at five facilities in petitioner’s Surface Transit Division. The inspectors found various violations of the regulations under the Public Employee Safety and Health Act (Labor Law § 27-a [the PESH Act]) at each facility and issued a Notice of Violation and Order to Comply for each facility. At follow-up inspections, the inspectors found that some violations had not been corrected. Specifically, at five of its facilities, petitioner did not have available for inspection a list of hazardous chemicals to which employees might be exposed, as required by 29 CFR 1910.1200 (e) (1), and, at one facility, petitioner did not implement a written Respiratory Protection Program, as required by 29 CFR 1910.134 (b) (1). The inspectors computed penalties for each facility pursuant to the penalty-assessment guidelines in the Department’s Field Operations Manual.

Petitioner challenged the citations with respect to all five facilities, and hearings were conducted before respondent Industrial Board of Appeals. In two separate orders, the Board upheld the penalties with respect to all five facilities, but reduced the amounts assessed because it disagreed with the inspectors’ application of the Department’s penalty guidelines.

Petitioner commenced this CPLR article 78 proceeding challenging the Board’s determinations and also asserting that the penalty guideline provisions were unenforceable because they were not filed and published as a rule or regulation as required by NY Constitution, article IV, § 8 and State Administrative Procedure Act § 102 (2) (b) (i). The Appellate Division granted the petition and annulled the orders. This Court granted the Department leave to appeal, and we now reverse.

As to the Department’s penalty guidelines, we disagree with the Appellate Division’s conclusion that the guidelines constitute a rule or regulation required by NY Constitution, article IV, § 8 and State Administrative Procedure Act § 102 (2) (b) (i) to be filed with the Secretary of State and published in the State Register. We have previously held that "only a fixed, general principle to be applied by an administrative agency without regard to other facts and circumstances relevant to the regulatory scheme of the statute it administers constitutes a rule or regulation required by NY Constitution, article IV, § 8” or State Administrative Procedure Act § 102 (2) (b) (i) to be filed in the office of the Department of State and published in the State Register (Matter of Roman Catholic Diocese v New York State Dept. of Health, 66 NY2d 948, 951; see also, Matter of Schwartfigure v Hartnett, 83 NY2d 296, 301; Matter of Cordero v Corbisiero, 80 NY2d 771, 772-773). The penalty guidelines at issue vest inspectors with significant discretion, and allow for flexibility in the imposition of penalties, all with the view of imposing the appropriate sanction for the individual offense and offender in the particular case.

While the guidelines cap the maximum amount of daily penalties assessed for serious and nonserious violations, penalties "may be assessed” in any amount up to those statutory limits. In assessing penalties, inspectors are first directed to determine the gravity of the violation based on a weighing of three factors: (!) the probability of injury from the violation; (2) the severity of the injury or illness that could result from the violation; and (3) whether the violation is willful or repeated. Inspectors derive a numerical value for each factor on a scale of 1 to 10, and are directed to use their professional judgment to adjust the penalty scale based on consideration of mitigating and contributing factors. The values obtained for each of the three components are then averaged to obtain a "gravity based quotient”. Inspectors determine the per diem penalty by referring to a penalty table, and may reduce the penalty by up to 60% based on the size of the employer, the employer’s good faith and the employer’s history.

Thus, although the guidelines specify numerical formulas for calculating the ultimate amount of the penalty, they do not establish "a rigid, numerical policy invariably applied across-the-board to all claimants without regard to individualized circumstances or mitigating factors” (Schwartfigure, supra, at 301). Rather, "they encompass both fixed and variable factors unique to a facility to be considered * * * on a case-by-case analysis” (Matter of Trustees of Masonic Hall & Asylum Fund v Axelrod, 174 AD2d 199, 204). The penalty guidelines do not dictate the result; the ultimate amount of the penalty is dependent on inspectors’ independent exercise of their professional judgment.

Furthermore, also contrary to the holding of the Appellate Division, Matter of New York State Coalition of Pub. Empls. v New York State Dept. of Labor (89 AD2d 283, affd 60 NY2d 789) is not controlling. The fact that record-keeping requirements relating to matters of employee safety under the PESH Act were required to be promulgated as a rule or regulation in that case does not mandate that the penalty guidelines at issue here had to be incorporated in a rule or regulation. Labor Law § 27-a (6) authorizes the imposition of penalties for violations of the PESH Act or the safety and health standards promulgated thereunder. The statute does not mandate the promulgation of regulations regarding penalties to be imposed for a violation of the regulatory standards. Instead, the PESH Act leaves it to the Department to opt in favor of the imposition of penalties on a case-by-case basis, including " 'establishing a guideline for a case-by-case analysis of the facts’ ” (Matter of Roman Catholic Diocese v New York State Dept. of Health, 109 AD2d 140, 148 [dissenting in part opn] [quoting Long Is. Coll. Hosp. v Whalen, 68 AD2d 274, 276], revd on dissenting opn below 66 NY2d 948, supra).

The Appellate Division alternatively held that the Board’s determination upholding the finding that petitioner violated 29 CFR 1910.1200 (e) (1) was unsupported by substantial evidence. We disagree. Employers are required to "develop, implement, and maintain at each workplace, a written hazard communication program * * * which also includes * * * [a] list of the hazardous chemicals known to be present” (29 CFR 1910.1200 [e] [1] [i]). While conceding that they did not have a written list of hazardous chemicals available at the five facilities at issue, petitioner argued and the Appellate Division agreed that the regulation was complied with because petitioner had developed an authoritywide computerized chemical inventory system which was in operation at all of the cited facilities long before the Department’s compliance inspections.

The Department and Board construed 29 CFR 1910.1200 (e) (1) as requiring that chemical inventories be made available and readily accessible to employees to inform them of the hazards inherent in the day-to-day handling of these materials. This construction, pertaining to a matter within the area of expertise of the Department and the Board, appears reasonable (see, Kurcsics v Merchants Mut. Ins. Co., 49 NY2d 451, 459). Moreover, the Board’s conclusion that petitioner’s computer-stored inventory did not satisfy the regulatory standard is supported by substantial evidence. The record indicates that at one facility, the inspector was told no chemical inventory had been compiled; at another facility, the inspector was not told of any chemical inventory, even in an alternative form; no chemical inventory existed at a third facility; and no written hazard communication programs had been developed or implemented at the remaining two facilities. Thus, employees clearly lacked the access to the inventories that was required by the regulation.

Finally, petitioner’s failure to keep a written Respiratory Protection Program at one of its facilities pursuant to 29 CFR 1910.134 (b) (1) was noted in the inspector’s report, and petitioner’s citation for that violation is supported by substantial evidence.

Accordingly, the judgment of the Appellate Division should be reversed, with costs, and the article 78 petition dismissed.

Chief Judge Kaye and Judges Simons, Titone, Bellacosa, Smith and Ciparick concur.

Judgment reversed, etc.

       As authorized by Labor Law § 27-a (4), the Department of Labor has adopted Federal safety and health standards and regulations promulgated pursuant to the Federal Occupational Safety and Health Act (see, 12 NYCRR 800.3).