Kaye Scholer Wins Dismissal of NEC Trustee and Dissident Board Member Suit Against Fellow Board Members

July 3, 2013

New York―A Kaye Scholer litigation team successfully secured the dismissal of a lawsuit brought by the bankruptcy trustee and a dissident board member against two other board members, two former officers and the company’s former Chief Restructuring Officer that alleged NEC Holdings Inc. had to file for bankruptcy because the defendants put their individual interests above the interests of the company.

Before it filed for bankruptcy in 2011 and ultimately sold off its assets, NEC was the largest privately held envelope manufacturer in the country. According to industry reports, before the 2008 recession hit, the company held a 21 percent market share of the overall US envelope industry, selling primarily to wholesale and merchant customers.

The plaintiffs alleged that the defendant board members, working in concert with the NEC’s former chief restructuring officer, took advantage of NEC’s financial problems to attempt to obtain control of the company and reap personal benefits at the expense of NEC, its creditors, shareholders and employees.

On behalf of the one of the defendant directors as well as the former CEO, Kaye Scholer Litigation Partner Jeff Fuisz filed a brief asking for dismissal of the case, arguing that the claims were precluded by Delaware’s business judgment rule and that plaintiffs were unable to demonstrate that a majority of NEC’s board was not disinterested. He further argued that that the dissident board member did not “suffer some individual harm not suffered by all of the stockholders at large.”

Judge O. Peter Sherwood of the Supreme Court of the State of New York for New York County agreed, holding that the plaintiff provided no evidence that the defendants were not independent or stood to personally gain substantially by their attempts to raise investment funds through relationships with various private equity firms any more than the plaintiff did with her relationship with a bank to advance the high yield alternative plan, and therefore the business judgment rule applied. Secondly, he held that the dissident board member lacked standing because all of NEC’s shareholders suffered the exact same alleged loss.

“This is a classic case for application of the business judgment rule. While the defendants' business decisions might ultimately have been unwise, under Delaware law, the court may not second-guess the board's decision making where it is essentially uncontested that a majority of the board was disinterested. Accordingly, the complaint must be dismissed in its entirety,” wrote Judge Sherwood in his decision.

In addition to Fuisz, Kaye Scholer associate John Cahalan also advised on the matter.  The case is Giuliano et al., v. Stephen Gawrylewski et al (654215/2012).

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