On July 12, 2024, Justice Chan of the New York County Commercial Division issued a decision in Agarwal v. Jain, 2024 NY Slip Op. 32492(U), holding that allegations of bad faith barred dismissal of breach of fiduciary duty claims based on the business judgment rule, explaining:
Citing to In re Kenneth Cole Prods., Inc., 27 NY3d 268 (2016), defendants argue that their actions are protected by the business judgment rule because absent allegations of fraud or bad faith courts will respect such business determinations and refrain from any further judicial inquiry. Plaintiff, on the other hand, citing Higgins v New York Stock Exch., Inc., 10 Misc 3d 257 [Sup Ct, NY County 2005], contends that, because defendants did not act in good faith, they are not protected by the business judgment rule.
Despite the parties’ arguments, New York courts are of the position that pre-discovery dismissal of pleadings in the name of the business judgment rule is inappropriate where those pleadings suggests that the directors did not act in good faith. At this early stage of litigation, the issue of whether the business judgment rule protects the actions of the members presents only questions of fact, and thus premature for adjudication on this question. In other words, if the allegations in the pleadings smack of bad faith, then that is sufficient to overcome any protections afforded by the business judgment rule in a pre-discovery dismissal of pleadings. Here, since defendants are alleged to have conspired to gut Szul’s revenue by providing sweetheart arrangements to competitors and by covertly working for these competitors, such actions smack of bad faith (Pltfs MOL at 4). And the complaint is not dismissed on this Business Judgment Rule argument.
(Internal quotations and citations omitted).