Narayanan v. Sutherland Global Holdings Inc.

Filing 37

ORDER denying 20 Motion to Dismiss; denying 20 Motion to Strike ; denying 20 Motion to Dismiss for Lack of Jurisdiction; denying 20 Motion to Dismiss for Failure to State a Claim. Signed by Hon. Michael A. Telesca on 11/23/15. (JMC)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
_____________________________________________________________
MUTHU NARAYANAN,
Plaintiff,
DECISION
and ORDER
15-CV-6165
v.
SUTHERLAND GLOBAL HOLDINGS, INC.,
Defendant.
________________________________________
INTRODUCTION
Plaintiff Muthu Narayanan (“plaintiff”) brings this action
against his former employer, defendant Sutherland Global Holdings,
Inc. (“defendant” or “Sutherland” or “the company”) for breach of
contract and unjust enrichment because of defendant’s failure to
pay him for stock option share proceeds and additional share
proceeds.

In its Answer, defendant responds with a counterclaim

alleging that plaintiff breached fiduciary duties he owed to
Sutherland and that he also diverted company funds for his own
personal benefit, which resulted in a substantial monetary loss to
Sutherland that far exceeds the damages sought by plaintiff in the
complaint.
Although
received

any

defendant
proceeds

acknowledges
pursuant

to

that

the

plaintiff

parties’

has

Stock

not

Option

Agreement, it contends that plaintiff’s actions were in violation
of his employment duties and obligations to Sutherland in July

2014, which effectively terminated his role as a Sutherland service
provider and caused the options to expire under the terms of the
agreement.

In its Answer, defendant also seeks a judgment against

plaintiff in excess of six million dollars, plus interest, off
setting plaintiff’s demand, for the misappropriation of funds in
connection with a land acquisition deal that plaintiff fraudulently
conducted for his own benefit.
Presently before the Court is plaintiff’s motion to dismiss
defendant’s

counterclaim

pursuant

the

Federal

Rules

of

Civil

Procedure, alleging lack of subject-matter jurisdiction (Rule 12
[b][1]), improper venue (Rule 12[b][3]), failure to state a claim
upon which relief can be granted (Rule 12 [b][6]), and failure to
join

a

party

under

Rule

19

(Rule

12

[b][7])

and

defendant’s second defense (Fed. R. Civ. P. 12 [f]).

to

strike

Defendant

opposes the motion to dismiss the counterclaim, alleging that if
its allegations are accepted as true and all reasonable inferences
are drawn in its favor, a breach of fiduciary duty claim has been
adequately stated.
amend

the

As an alternative, defendant seeks leave to

counterclaim

to

include

facts

that

would

further

substantiate its breach of fiduciary duty claim.
For

the

plaintiff’s

reasons

motion

to

stated
dismiss

below,

the

defendant’s

Court

denies

counterclaim

both
and

plaintiff’s motion to strike defendant’s second defense, which
asserts that plaintiff’s demand in the complaint is off set by the
value of the diverted land acquisition funds.
Page -2-

FACTUAL BACKGROUND
Plaintiff was employed by Sutherland, a Delaware company
headquartered in New York, for more than a decade, until October
2014, serving as a director of the company and director or officer
of certain overseas subsidiaries.

In 2004, Sutherland granted

certain employees, officers, and directors options to purchase
shares of the company’s common stock under the “2004 Performance
Equity Incentive Plan.” (Docket No. 1, Exhibit 1).

Plaintiff

entered into a “Stock Option Agreement” to purchase 300,000 shares.
In October 2014, the parties entered into a “Net Exercise and Share
Sale” allowing plaintiff to receive 169,356 of the 300,000 shares
to offset the exercise price and taxes that would have been
otherwise owed by plaintiff.

On October 23, 2014, the parties

executed an agreement in which Sutherland agreed to buy back
100 percent of plaintiff’s 169,356 shares of the company’s common
stock. Plaintiff alleges that Sutherland has failed to pay him any
of

the

“Option

Share

Proceeds,”

which

total

$1,912,164.72.

Plaintiff further alleges that he is owed an additional $11,290.80
in share proceeds pursuant to an unrelated contract in which
defendant agreed to buy back another 1,000 shares of stock from
plaintiff.
Defendant does not dispute that plaintiff has not received
payment for his shares but raises three defenses and a counterclaim
based on (1) plaintiff’s misappropriation of company funds from the
land acquisition project, (2) plaintiff’s alleged abandonment of
Page -3-

his duties

and

obligations

to

Sutherland,

and

(3)

breach

of

plaintiff’s fiduciary duties as a member of Sutherland’s board of
directors.

Defendant asserts that plaintiff was responsible for

acquiring 26-contiguous acres of suburban land in Chennai, India
(the “Indian land acquisition”).

Sutherland asserts that it

allocated approximately ten million dollars to pay “third parties
only in exchange for deeds for, and to register, the land needed
for” this acquisition. Answer, ¶ 63.

“By early 2013, only a

fraction of the necessary land had been acquired. Nonetheless,
despite not receiving deeds to all of the required land, and
contrary to his authorization, Plaintiff had advanced all of
Defendant’s

money

to

a

land

aggregator”

for

“unenforceable

promissory notes, rather than land deeds.” Answer, ¶ 64, 68, 104.

DISCUSSION
I.

Standard of review

In reviewing a Rule 12(b)(6) motion to dismiss, the Court must
accept “all factual allegations in the complaint and draw . . . all
reasonable inferences in the [non-moving party’s] favor.” Ruotolo
v. City of New York, 514 F.3d 184, 188 (2d Cir.2008) (internal
quotation

marks omitted).

“While

a

complaint

attacked

by a

Rule 12(b)(6) motion to dismiss does not need detailed factual
allegations, [the non-moving party’s] obligation to provide the
grounds of [it’s] entitlement to relief requires more than labels

Page -4-

and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007) (citation omitted). Conclusory allegations are not
entitled to any assumption of truth and will not support a finding
that defendant has stated a valid claim. See Lundy v. Catholic
Health System of Long Island, Inc., 711 F.3d 106, 113 (2d Cir.
2013), citing Ashcroft v. Iqbal, 556 U.S. 662, 678, 679 (2009).
Defendant

is required

to provide

the grounds

upon

which

its

counterclaim “‘rests through factual allegations sufficient to
raise a

right

to

relief

above

the

speculative

level.’” ATSI

Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.
2007), quoting Twombly, 550 U.S. at 555.
Plaintiff’s central argument is that defendant’s counterclaim
must be dismissed as derivative because the company “had no direct
involvement in authorizing, funding, or executing” the Indian land
acquisition.

Plaintiff contends that he was formally hired as a

vice president of Sutherland’s newly-formed Indian subsidiary,
Sutherland Development Company Private Limited (hereafter “the
Indian subsidiary”) and that all of the Indian land acquisition
funds that he is alleged to have misappropriated belonged to the
Indian

subsidiary,

Sutherland

“never

not

defendant.

authorized

him

to

Plaintiff
conduct

the

asserts

that

Indian

Land

Acquisition directly for [defendant] because Plaintiff was not

Page -5-

employed by [defendant] and had no officer or executive role with
[it] . . . and because [Sutherland], as
a U.S. entity, was barred by Indian law from directly acquiring
land in India.” Plaintiff’s memorandum of law, p. 8.
Defendant, denying that the counterclaim is brought by or on
behalf

of

the

Indian

subsidiary,

responds

that

a

breach

of

fiduciary duty claim against plaintiff, as a former member of
Sutherland’s board of directors, has been sufficiently stated under
Delaware law. “Based on the breach alleged in the Counterclaim,
Sutherland Global had the right to bring, and has brought, a direct
claim against Plaintiff for the damages suffered by Sutherland
Global -- not those that may have been suffered separately by the
Indian subsidiary as well.” Defendant's memorandum of law, p. 2.
In

further

counterclaim
(1)

support

should

Sutherland

be

lacks

of

plaintiff’s

dismissed,
standing

assertion

however,
to

bring

he

that

contends

the

the
that:

“derivative”

counterclaim; (2) the “derivative” counterclaim fails to name the
Indian subsidiary as an indispensable party; (3) the presence of
the

Indian

subsidiary

would

destroy

diversity

jurisdiction,

resulting in the Court lacking subject-matter jurisdiction; and
(4) under the doctrine of forum non conveniens, India is the proper
forum for the counterclaim.

Page -6-

III.

Motion to dismiss defendant’s counterclaim as
impermissibly derivative.
In

its

counterclaim,

defendant

asserts

that

plaintiff,

director of Sutherland, breached his fiduciary duty, including a
duty of loyalty, when “he diverted Sutherland’s money for his
personal

benefit

and

then

made

repeated

misrepresentations

regarding the true nature of those transactions in order to conceal
his conduct.” Answer, ¶ 102.

Defendant further alleges that the

company has been damaged as a result of plaintiff misconduct by
improperly

exchanging

Sutherland’s

funds

for

“unenforceable

promissory notes, rather than land deeds.” Answer, ¶ 104.
As a preliminary matter, it is well settled that federal
courts sitting in diversity cases will apply the substantive law of
the forum state, which in this case is Delaware law, on outcome
determinative issues. See Travelers Ins. Co. v. 633 Third Assocs.,
14 F.3d 114, 119 (2d Cir. 1994), citing Erie R.R. Co. v. Tompkins,
304 U.S. 64 (1938). Fiduciary duties “under fundamental principles
of agency law . . . encompass the corollary duties of an agent to
disclose information that is relevant to the affairs of the agency
entrusted to him and to refrain from placing himself in a position
antagonistic to his principal concerning the subject matter of his
agency.” Beard Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch.
2010), aff'd sub nom., ASDI, Inc. v. Beard Research, Inc., 11 A.3d
749 (Del. 2010). A party pleading a breach of fiduciary duty claim

Page -7-

is required to establish that (1) a fiduciary duty existed and that
(2) said duty was breached. See id.
Here, it is clear that plaintiff, as a director of Sutherland,
was a fiduciary to the company. See Beard Research, Inc., 8 A.3d at
601.

Defendant asserts that the breach of fiduciary duty claim is

based on plaintiff’s diversion of the land acquisition funds for
his own personal benefit and his misrepresentation of “the true
nature of those transactions in order to conceal his conduct.”
Answer,

¶

102.

It

is

well

established

that

directors

of

a

corporation owe duties of care and loyalty to the corporation. See
N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla,
930 A.2d 92, 99 (Del. 2007); Malone v. Brincat, 722 A.2d 5, 10
(Del. 1998).

“A breach of fiduciary duty occurs when a fiduciary

commits an unfair, fraudulent, or wrongful act.” Beard Research,
Inc., 8 A.3d at 602; see also Gantler v. Stephens, 965 A.2d 695,
705-706 (Del. 2009).

Further, “‘[t]he liability of the directors

must be determined on an individual basis because the nature of
their breach of duty (if any) . . . can vary for each director.”
Chen v. Howard-Anderson, 87 A.3d 648, 677 (Del. Ch. 2014), quoting
In re Emerging Commc'ns, Inc. S'holders Litig., 2004 WL 1305745, at
*40 (Del. Ch. 2004).
The Court rejects plaintiff’s contention that the Indian land
acquisition, an undertaking which he contends was authorized by
Sutherland’s Indian subsidiary, and defendant’s breach of fiduciary

Page -8-

duty claim are so wholly inextricable that defendant has no direct
cause of action apart from a derivative claim on behalf of the
subsidiary.

Under Delaware law, the directors and officers of

wholly-owned subsidiary owe fiduciary duties to the subsidiary, and
directors and officers of a corporation owed fiduciary duties to
the corporation and its shareholders. See In re Scott Acquisition
Corp., 344 B.R. 283, 286 (Bankr. D. Del. 2006)

Consequently, the

director and officer of a subsidiary who is also a director of the
parent corporation owes fiduciary duties to both the subsidiary and
the parent corporation.

There is no authority for the proposition

implicit in plaintiff’s argument that he, as a director and officer
of the Indian subsidiary, owed fiduciary duties to the subsidiary
but not to the parent corporation.
Plaintiff’s assertions about his responsibilities as director,
officer, and employee of the Indian subsidiary, if true, do not
preclude a direct and independent claim by Sutherland against him
for breach of the fiduciary duties he owed to the parent company.
Under Delaware law, “directors are subject to the fundamental
fiduciary duties of loyalty and disinterestedness. Specifically,
directors

cannot

.

.

.

derive

any

personal

benefit

through

self-dealing. [I]n a parent and wholly-owned subsidiary context,
the directors of the subsidiary are obligated . . . to manage the
affairs of the subsidiary in the best interests of the parent.”

Page -9-

Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d 1171, 1174
(Del. 1988).
The Court finds that the facts alleged in the counterclaim
provide a plausible basis to conclude, at this early stage of the
proceedings, that plaintiff, as a director of the company, breached
his fiduciary duties to defendant by diverting funds allocated to
the Indian land acquisition favoring his personal benefit against
the best interest of Sutherland.
II.

Lack of Standing and Subject Matter Jurisdiction,
Venue, and failure to join a necessary party.

Improper

Plaintiff further asserts that defendant’s counterclaim must
be dismissed for lack of subject matter jurisdiction on the ground
that the presence of the Indian subsidiary as a party would destroy
diversity jurisdiction.

The Court finds that since the Indian

subsidiary has not been named as a party in the counterclaim,
plaintiff’s contention has no merit.

The Court further rejects

plaintiff’s remaining contentions, including lack of standing,
improper venue, and the failure to join the Indian subsidiary as a
necessary party because those claims are based on plaintiff’s
erroneous theory that Sutherland has no independent claim for
plaintiff’s breach of fiduciary duty.
CONCLUSION
For the reasons set forth above, I deny both plaintiff’s
motion to dismiss defendant’s counterclaim and plaintiff’s motion
to

strike

defendant’s

second

defense,

Page -10-

which

asserts

that

plaintiff’s demand in the complaint is offset by the value of the
diverted land acquisition funds.

SO ORDERED.
S/ MICHAEL A. TELESCA
HON. MICHAEL A. TELESCA
United States District Judge
Dated:

Rochester, New York
November 23, 2015

Page -11-