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Chris Dearnley

BLW203
Case Brief
PATRICK v. ALLEN
STUART K. PATRICK, Plaintiff, v. HERBERT ALLEN, III, TERRY ALLEN KRAMER,
NATHANIEL KRAMER, HANS KERTESS, RICHARD RAINWATER, and DIXON BOARDMAN,
Defendants.
United States District Court, S.D. New York.
January 19, 2005. *705705
Facts:
Stuart K. Patrick (Plaintiff), a shareholder and past director of Real Property Owners, Inc. (RPO) brought
an action against the directors of RPO and its shareholders for committing corporate waste through
mismanagement of their property, Deepdale Gold Club. Deepdale is an exclusive gold club in New York
that have many prominent members, in 1947 some of these members formed RPO as a real estate business
to purchase and tract the property occupied by Deepdale. RPO leased it exclusively to Deepdale and
required them to pay annual rent equaling the Propertys real estate taxes and liability insurance costs. This
agreement continued, with Deepdale only paying enough rent to cover the real estate taxes and insurance
costs of the property, being $330,000. The Plaintiff alleges that the fair market value of annual rent should
be at least $6 million, meaning rent should be increased. In the beginning most of RPOs shareholders were
Deepdale members, however over time diversified. The Plaintiff was never a Deepdale member. The
Plaintiff pushed for a higher rent and for the board to consider selling the property, but was refused. On
July 2002, two of the Defendants offered to purchase shares from RPO shareholders, which the Plaintiff
alleges that they materially misled RPO shareholders, the Plaintiff threatened a lawsuit to compel
dissolution of RPO. In January 2004, the Plaintiff filed this action against the board of RPO for
mismanagement and waste of corporate assets. Defendant motions to dismiss.
Issue:
The complaint alleges that the Defendants breached their fiduciary duties to RPO and that they committed
corporate waste by failing to create a reasonable level of rent from Deepdale, and by failing to allow the
board to negotiate a possible sale of the property. The complaint also alleges of a further breach of fiduciary
duties by attempting to purchase additional shares and entrench their unlawful scheme.
Holdings:
Defendants motion to dismiss is granted in part and denied in part. Claims of the defendants breaching
their fiduciary duties are dismissed. In all other respects, Defendants motion is denied.
Reasoning:
The Defendants claims that the business judgment rule dismisses the Plaintiffs claims is dismissed because
the directors may not have an interest in a decision, such as the dues payable from members of Deepdale
which the Defendants were members themselves. Regardless of the business judgment rule, the Defendants
were not found to have breached their fiduciary duties as their rental agreement that was in question was in
place for decades and was consistence with the purpose of RPO as their only purpose was to hold the
property and reduce the rent for Deepdale. The Defendants were not directors when offers for sale were
made, and therefore no fiduciary duty was breached. No breach was made when attempting to gain more
shares as a directors attempt to increase their stake is not a breach of fiduciary duties.
Conclusion:
Defendants motion is denied in part.

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