Corporation Law – Page 10 – New York Appellate Digest

AN ATTORNEY, A PRINCIPAL IN THE CORPORATIONS OWNING SEVERAL BUILDINGS, WAS PROPERLY FOUND TO BE IN THE “OUTDOOR ADVERTISING BUSINESS” WITHOUT A LICENSE BECAUSE HE ADVERTISED HIS LAW PRACTICE IN SIGNS ON THE BUILDINGS (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Wilson, determined the corporations which owned the buildings were separate from the attorney, a principal in the corporations, who advertised his law office in signs on the buildings. Therefore the attorney was making space available for outdoor advertising to “others” within the meaning of the NYC Administrative Code regulating outdoor advertising. The code requires “outdoor advertising companies” engaged in the :outdoor advertising business” to be licensed. The attorney (Ciafone) was fined for outdoor advertising without a license:

Contrary to the position of the Appellate Division dissent, preserving the distinction between the corporate entities and Mr. Ciafone does not “penalize him for forming corporate entities to own the buildings for tax and liability purposes”… . Myriad statutes and regulations apply to corporations, but not natural persons; those are not “penalties” for creating a corporate legal entity, but consequences of choosing that form of ownership. The New York City Council could rationally conclude that a corporation engaged in the provision of advertising to others, even others who have an ownership interest in the corporation, should be subjected to greater financial disincentives for violating signage laws than natural persons who are advertising themselves. Matter of Franklin St. Realty Corp. v NYC Envtl. Control Bd., 2019 NY Slip Op 08976, CtApp 12-17-19

December 17, 2019

Attorneys, Civil Procedure, Corporation Law, Privilege, Replevin

THE ATTORNEY-CLIENT PRIVILEGE DID NOT PASS TO THE FOREIGN (DELAWARE) CORPORATION AFTER A MERGER AND ACQUISITION OF NEW YORK BUSINESS ENTITIES; THEREFORE THE NEW YORK PARTIES, IN THEIR CLAIMS AGAINST THE ATTORNEYS WHO REPRESENTED THEM IN THE TRANSACTION, CAN SEEK ACCESS TO THE ATTORNEYS’ PRIVILEGED COMMUNICATIONS CONCERNING THE TRANSACTION (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Austin, reversing Supreme Court, determined that New York law applied to a party’s assertion of the attorney-client privilege for documents associated with a corporate acquisition and merger involving New York and Delaware business entities. The opinion is fact-based and far too complex and comprehensive to summarize here. The Second Department, disagreeing with Supreme Court, held that the choice of law was governed by public policy, and the proper theory for access to the privileged documents is New York’s law of replevin. In a nutshell, the Second Department held that the attorney-client privilege did not pass to the foreign corporation after the merger and acquisition, but rather remained with the the New York parties (Sina and Askari) and allowed the New York parties to pursue claims against the attorneys (McDermott) who represented them in the transaction:

In a situation where documents are sought, New York will apply the law of the forum where the evidence will be introduced at trial or the location of the proceeding seeking discovery of those documents … . Here, the privileged communications being sought by the plaintiffs in this New York replevin action were made in New York between New York-based attorneys at McDermott and Sina, a New York corporation, involving its then-majority shareholder and president, Askari, a New York resident. The sole nexus that Delaware has to this action is that Specialty is a limited liability company formed under the laws of that state. Consequently, New York law applies in this action sounding in replevin seeking the disclosure of McDermott’s files … . …

It would indeed be incongruous to enforce a law which effectively forecloses New York corporations merging with foreign corporations from having the ability to pursue their claims against their counsel or the newly formed, post-merger entities based on the post-merger entities’ control of the documents needed by the former entities to prosecute potential claims. Here, Delaware law gives the new corporation, a putative defendant, sole access to and control of the merger-related documents by the exercise of the attorney-client privilege. This is contrary to New York public policy … . * * *

Here, Business Corporation Law § 1006 specifically provides that a dissolved corporation, like Sina, may commence an action in any court under its corporate name. Sina’s dissolution does not affect Sina’s right or capacity to maintain this replevin action since the claim arose from McDermott’s representation of Sina which began before Sina’s dissolution. … Thus, the plaintiffs demonstrated their prima facie entitlement to judgment as a matter of law in this action for replevin since the plaintiffs submitted evidence, through Askari’s affidavit, that McDermott represented Sina and Askari during the “transactions.” As a result, the plaintiffs demonstrated, prima facie, their superior possessory right to McDermott’s files. Askari v McDermott, Will & Emery, LLP, 2019 NY Slip Op 08547, Second Dept 11-27-19

November 27, 2019

Civil Procedure, Corporation Law, Evidence

FORMAL ADMISSIONS, INFORMAL ADMISSIONS AND JUDICIAL ESTOPPEL EXPLAINED (SECOND DEPT).

The Second Department Department explained the nature of an admission and the doctrine of judicial estoppel in this action to determine whether defendant, Weber, was a shareholder of plaintiff RMNY:

Weber’s prior admissions made in other actions that he was not a shareholder of RMNY did not constitute formal judicial admissions entitling RMNY to summary judgment. Formal judicial admissions are facts admitted by a party’s pleadings … , and are conclusive of the facts admitted in the action in which they are made … . The admissions relied upon here were not made in this action.

Furthermore, RMNY failed to establish that the doctrine of judicial estoppel applies. Under the doctrine of judicial estoppel, also known as estoppel against inconsistent positions, a party may not take a position in a legal proceeding that is contrary to a position he or she took in a prior proceeding, simply because his or her interests have changed … . The doctrine applies only where the party secured a judgment in his or her favor in the prior proceeding … . This doctrine “rests upon the principle that a litigant should not be permitted . . . to lead a court to find a fact one way and then contend in another judicial proceeding that the same fact should be found otherwise'” … . “The doctrine is invoked to estop parties from adopting such contrary positions because the judicial system cannot tolerate this playing fast and loose with the courts” … .Here, since RMNY failed to show that Weber secured any formal grant of relief in the other actions based upon his prior statements, they do not implicate the doctrine of inconsistent positions … . Rather, the statements constitute informal judicial admissions that are not conclusive but are “merely evidence of the fact or facts admitted” … , “the circumstances of which may be explained at trial” … . Re/Max of N.Y., Inc. v Weber, 2019 NY Slip Op 08432, Second Dept 11-20-19

November 20, 2019

Corporation Law, Employment Law, False Arrest, Malicious Prosecution

FALSE ARREST AND MALICIOUS PROSECUTION ACTIONS AGAINST THE RESTAURANT FRANCHISOR PROPERLY DISMISSED IN THE ABSENCE OF EVIDENCE OF CONTROL OVER THE DAY TO DAY OPERATION OF THE RESTAURANT (FOURTH DEPT).

The Fourth Department, reversing Supreme Court in this false arrest and malicious prosecution action, determined plaintiff’s motion for summary judgment should not have been granted because the video evidence raised questions of fact. The court noted that the action against the franchisor, Denny’s, where the confrontation between plaintiff and the restaurant security guards took place, was properly dismissed:

… [T]he court properly granted that part of the cross motion seeking summary judgment dismissing the complaint against Denny’s. ” The mere existence of a franchise agreement is insufficient to impose vicarious liability on the franchisor for the acts of its franchisee; there must be a showing that the franchisor exercised control over the day-to-day operations of its franchisee’ ” … . Defendants established that Denny’s did not exercise control over the day-to-day operations of its franchisee or specifically maintain control over the security of the restaurant, and plaintiff failed to raise a triable issue of fact with respect thereto … . Hernandez v Denny’s Corp., 2019 NY Slip Op 08302, Fourth Dept 11-15-19

November 15, 2019

Accountant Malpractice, Corporation Law, Fraud

QUESTIONS OF FACT WHETHER THE ADVERSE INTEREST EXCEPTION TO THE IN PARI DELICTO DEFENSE APPLIES IN THIS ACCOUNTANT MALPRACTICE CASE (FIRST DEPT).

The First Department, reversing Supreme Court, determined questions of fact were raised about whether the adverse interest exception bars the in pari delicto defense in this accountant malpractice case:

In this accounting malpractice action, plaintiffs, the liquidators of several hedge funds, allege that defendants failed to uncover fraudulent activity by the funds’ investment managers. The issue before us is whether the adverse interest exception to the equitable defense of in pari delicto bars the defense in this case (see Kirschner v KPMG LLP, 15 NY3d 446 [2010]). We find that plaintiffs raised issues of fact as to the adverse nature of their interests vis-a-vis those of their agents, the funds’ investment managers, that preclude summary dismissal of the complaint on the ground of the in pari delicto defense.

“To come within the exception, the agent must have totally abandoned his principal’s interests and be acting entirely for his own or another’s purposes” ,,, . The exception is applied only where the fraud is committed “against a corporation rather than on its behalf” … . “So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive — to attract investors and customers and raise funds for corporate purposes — this test is not met” … . Thus, we conclude that the mere continuation of a corporate entity does not per se constitute a benefit that precludes application of the adverse interest exception. …

… [R]eliance on speculation about the benefits to be derived from the continued existence of an entity is inconsistent with the analysis of the adverse interest exception in Kirschner. It may be possible in every case to construct a hypothetical scenario where the company teetering on the brink of insolvency because of its agent’s fraud meets with an opportune circumstance that allows it to resume legitimate business operations. Permitting such speculation would render the adverse interest exception meaningless. Further, an ongoing fraud and a continued corporate existence may harm a corporate entity: The agent may prolong the company’s legal existence so that he can continue to loot from it, as appears to have been the case here. Conway v Marcum & Kliegman LLP, 2019 NY Slip Op 07338, First Dept 10-10-19

October 10, 2019

Arbitration, Corporation Law, Insurance Law

MASTER ARBITRATOR’S AWARD SHOULD NOT HAVE BEEN VACATED, REVIEW POWERS OF MASTER ARBITRATOR AND COURT EXPLAINED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined that the master arbitrator’s award in this no-fault insurance, fraudulent incorporation case should not have been vacated:

“[A]n arbitrator’s rulings, unlike a trial court’s, are largely unreviewable” … . A court reviewing the award of a master arbitrator is limited to the grounds set forth in CPLR article 75, which include, in this compulsory arbitration, the question of whether the determination had evidentiary support, was rational, or had a plausible basis … . Notably, the master arbitrator’s review power is broader than that of the courts’ because it includes the power to review for errors of law … . In contrast, the courts “generally will not vacate an arbitrator’s award where the error claimed is the incorrect application of a rule of substantive law, unless it is so irrational as to require vacatur” … .

Here, since Country-Wide submitted evidence tending to support its fraudulent incorporation defense, it cannot be said that the determination of the master arbitrator affirming the original arbitrator’s award lacked evidentiary support. Nor can it be said that the determination to affirm the original arbitrator, who supported her determination with reasons based on the evidence, lacked a rational basis. Thus, even if it was an error of law to conclude that Country-Wide proved its defense as a matter of law … . Matter of Acuhealth Acupuncture, P.C. v Country-Wide Ins. Co., 2019 NY Slip Op 07246, Second Dept 10-9-19

October 9, 2019

Civil Procedure, Corporation Law, Negligence, Products Liability

GOODYEAR DEMONSTRATED IT DID NOT HAVE SUFFICIENT AFFILIATIONS WITH NEW YORK TO CONFER JURISDICTION IN THIS TIRE-MALFUNCTION OUT-OF-STATE ACCIDENT CASE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined that Goodyear’s motion to dismiss the products liability complaint for lack of jurisdiction should have been granted. Plaintiff, a New York resident, was injured when a tire manufactured by Goodyear allegedly malfunctioned causing the car to overturn in Virginia. The Second Department held that plaintiff did not rebut Goodyear’s argument that it did not have significant affiliations with New York and noted that a corporation’s registration with the New York State Department of State does not confer jurisdiction on New York:

“While the ultimate burden of proof rests with the party asserting jurisdiction, the plaintiffs, in opposition to a motion to dismiss pursuant to CPLR 3211(a)(8), need only make a prima facie showing that the defendant was subject to the personal jurisdiction of the Supreme Court” … . “General jurisdiction in New York is provided for in CPLR 301, which allows a court to exercise such jurisdiction over persons, property, or status as might have been exercised heretofore'”… . A court may exercise general jurisdiction over foreign corporations “when their affiliations with the State are so continuous and systematic as to render them essentially at home in the forum State” … .

Here, in opposition to Goodyear’s motion, the plaintiff failed to make a prima facie showing that personal jurisdiction over Goodyear existed under CPLR 301. The plaintiff did not rebut the evidence submitted by Goodyear showing that Goodyear’s affiliations with New York are not so continuous and systematic as to render it essentially at home here … . Furthermore, contrary to the Supreme Court’s determination, “a corporate defendant’s registration to do business in New York and designation of the Secretary of State to accept service of process in New York does not constitute consent by the corporation to submit to the general jurisdiction of New York for causes of action that are unrelated to the corporation’s affiliations with New York” … . Aybar v Goodyear Tire & Rubber Co., 2019 NY Slip Op 06584, Second Dept 9-18-19

September 18, 2019

Corporation Law, Judges

SUPREME COURT SHOULD NOT HAVE IGNORED THE NOTICE REQUIREMENTS IN THE BUSINESS CORPORATION LAW AND SHOULD NOT HAVE DISSOLVED THE CLOSELY HELD CORPORATION WITHOUT A HEARING (SECOND DEPT).

The Second Department determined Supreme Court should not have ignored the statutory notice requirements in this action to dissolve a closely held corporation (VJN) and should not have dissolved the corporation without a hearing:

Business Corporation Law § 1106(a) provides, inter alia, that, upon the filing of a petition for dissolution of a corporation, “the court shall make an order requiring the corporation and all persons interested in the corporation to show cause before it . . . why the corporation should not be dissolved.” The statute further provides, in relevant part, that “[a] copy of the order to show cause shall be published as prescribed therein, at least once in each of the three weeks before the time appointed for the hearing thereon, in one or more newspapers, specified in the order,” and that a copy of the order be served upon the New York State Tax Commission (hereinafter the Tax Commission) … . Here, it is undisputed that the petitioner’s order to show cause contained a provision providing for its publication; however, that provision was stricken, and therefore, the order to show cause ultimately was not published. It is also undisputed that the order to show cause was never served on the Tax Commission. …

… [W]e disagree with the Supreme Court’s determination that the petitioner established his entitlement to the dissolution of VJN. The affidavit submitted by the respondent in opposition to the petition raised questions of fact regarding the merits of the petition and the appropriate remedy … . Indeed, there is no indication that the court gave any consideration as to whether a remedy other than dissolution would have been appropriate … . Under these circumstances, the court should not have ordered the dissolution of VJN and the sale of the subject property without conducting a hearing … . Matter of Nicastro v VJN Real Estate Corp., 2019 NY Slip Op 06495, Second Dept 9-11-19

September 11, 2019

Corporation Law

CELLINO’S PETITION FOR DISSOLUTION OF CELLINO & BARNES PC PROPERLY SURVIVED A MOTION FOR SUMMARY DISMISSAL (FOURTH DEPT).

The Fourth Department determined petitioner’s (Cellino’s) petition for dissolution of the professional corporation (Cellino & Barnes, PC) properly survived a motion for summary dismissal:

… [W]e reject respondents’ [Barnes’] contention that the court erred in denying their motion insofar as it sought summary dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC has continued to function effectively and prosperously. The determination whether a corporation should be dissolved is within the discretion of the court (see Business Corporation Law § 1111 [a] … ), and “the benefit to the shareholders of a dissolution is of paramount importance” in making that determination … . Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit … or because the dissension has not yet had an appreciable impact on the profitability of the corporation … .

Here, the record contains ample evidence of dissension and deadlock between petitioner and Barnes, and we conclude that … petitioner raised issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders. In a close corporation like the PC, “the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation” … . When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders … , and we agree with the court’s determination that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue … . Matter of Cellino v Cellino & Barnes, P.C., 2019 NY Slip Op 06365, Fourth Dept 8-22-19

August 22, 2019

Civil Procedure, Corporation Law

DISPUTE INVOLVING MALAYSIAN BANKS, INCLUDING GOLDMAN SACHS SINGAPORE, PROPERLY DISMISSED ON FORUM NON CONVENIENS GROUNDS (FIRST DEPT).

The First Department determined a dispute involving Goldman Sachs Singapore (GSS) was properly dismiss on forum non conveniens grounds:

The action was properly dismissed on forum non conveniens grounds, given the unduly burdensome inquiry involved in determining personal jurisdiction in these circumstances and the balance of the forum non conveniens considerations … . The decision whether the court had jurisdiction over GSS because GSS was a mere department of New-York-based Goldman Sachs Group, Inc. (GSG) would involve an “arduous inquiry”… into whether GSG controlled GSS’s finances, interfered with the selection and assignment of executive personnel, and failed to observe corporate formalities, and whether defendant Tim Leissner had sufficient contacts with New York.

Plaintiff’s causes of action for fraud and breach of fiduciary duty lack a substantial nexus with New York … . Furthermore, plaintiff is a Cayman Islands partnership, not a New York resident … . Finally, Malaysia has a greater interest than New York in whether one Malaysian bank (nonparty Hong Leong Bank) corruptly took over another Malaysian bank (EON) … . Primus Pac. Partners 1, LP v Goldman Sachs Group, Inc., 2019 NY Slip Op 06052, First Dept 8-6-19

August 6, 2019