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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

 

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

 

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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

 

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DEFENDANT’S MOTION TO DISMISS THE COMPLAINT FOR LACK OF PERSONAL JURISDICTION SHOULD HAVE BEEN GRANTED, DEFENDANT’S ONLY CONNECTION TO THE CORPORATION WHICH HAD CONTACTS WITH NEW YORK WAS HIS SALARY; THEREFORE THE CORPORATION’S NEW YORK CONTACTS COULD NOT BE IMPUTED TO DEFENDANT (FIRST DEPT).

The First Department, reversing Supreme Court, determined defendant’s (Sprinkle’s) motion to dismiss the complaint for lack of personal jurisdiction should have been granted, noting that Sprinkle’s only connection with the corporation alleged to have breached the contract was his salary. The corporation’s contacts with New York could not, therefore, be imputed to Sprinkle:

The complaint fails to state a cause of action as against Sprinkle for tortious interference with contract, because there is no allegation that Sprinkle personally benefitted from the corporations’ alleged breach of contract; the only benefit he is alleged to have received is his salary from the corporations … .

Plaintiff failed to make a sufficient start on a showing of jurisdiction over Sprinkle to entitle it to jurisdictional discovery … . Because the conduct complained of involved the diversion of funds from outside New York to recipients outside New York, the “critical events,” and thus the situs of injury, were not in New York … . Moreover, plaintiff does not allege that Sprinkle received substantial revenue from interstate or international commerce (see CPLR 302[a][3][ii]). Because Sprinkle did not personally benefit from the breach of contract, the corporations’ contacts with New York cannot be imputed to him … .

Nor can Sprinkle be said to have “reasonably expected” his actions to have consequences in New York … as he neither did anything to avail himself of New York nor took any steps to project himself into New York. Given that Sprinkle had no contact with New York and did not purposefully avail himself of New York, the constitutional guarantee of due process bars New York courts from exercising personal jurisdiction over him. Greenbacker Residential Solar LLC v OneRoof Energy, Inc., 2019 NY Slip Op 05487, First Dept 7-9-19

 

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INSURERS MAY PROPERLY REFUSE NO-FAULT INSURANCE PAYMENTS TO A PROFESSIONAL MEDICAL SERVICE CORPORATION WHICH IS EFFECTIVELY OWNED AND CONTROLLED BY NONPHYSICIANS, THERE IS NO NEED TO DEMONSTRATE FRAUDULENT INTENT OR CONDUCT TANTAMOUNT TO FRAUD ON THE PART OF THE PROFESSIONAL CORPORATION; ANY ERROR IN ALLOWING THE JURY TO HEAR NONPARTY DEPOSITION TESTIMONY IN WHICH THE NONPARTIES REPEATEDLY ASSERTED THE FIFTH AMENDMENT PRIVILEGE AGAINST SELF-INCRIMINATION WAS HARMLESS (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Fahey, determined that the defendant insurers properly refused to make no-fault insurance payments to plaintiff professional corporation because the corporation was owned and controlled by nonphysicians. The court specifically held that fraudulent intent or conduct “tantamount to fraud” need not be demonstrated. The court noted that allowing in evidence the deposition testimony of two nonparties (nonphysicians who allegedly controlled the professional corporation), in which the Fifth Amendment privilege against self-incrimination was repeatedly asserted, if it was error (not determined), was harmless:

… [A]n insurance carrier, seeking to demonstrate that a professional service corporation engaged in corporate practices that violate Business Corporation Law § 1507, Business Corporation Law § 1508, or Education Law § 6507 (4) (c), [need not] show that the professional service corporation or its managers engaged in common-law fraud. … A corporate practice that shows “willful and material failure to abide by” licensing and incorporation statutes … may support a finding that the provider is not an eligible recipient of reimbursement under 11 NYCRR 65-3.16 (a) (12) without meeting the traditional elements of common-law fraud. * * *

While the Fifth Amendment accords an individual the privilege not to answer questions in a civil proceeding if the answers might incriminate the person in future criminal proceedings … , a witness who asserts this Fifth Amendment privilege in a civil trial is not necessarily protected from consequences in the same manner as in a criminal trial. This Court has held that, in a civil case, failure to answer questions by a witness who is a party “may be considered by a jury in assessing the strength of evidence offered by the opposite party on the issue which the witness was in a position to controvert” … . In a civil trial, “an unfavorable inference may be drawn against a party from the exercise of the privilege against self-incrimination” … . We have not previously decided whether a nonparty’s invocation of the Fifth Amendment may trigger an adverse inference instruction against a party in a civil case, and we have no occasion to do so here because any error by the trial court was harmless … . Andrew Carothers, M.D., P.C. v Progressive Ins. Co., 2019 NY Slip Op 04643, CtApp 6-11-19

 

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THE PRESUMPTION OF PROPER SERVICE CREATED BY THE PROCESS SERVER’S AFFIDAVIT WAS REBUTTED BY DEFENDANT’S AFFIDAVIT CLAIMING THAT THE PLACE WHERE SERVICE WAS MADE HAD NO CONNECTION WITH HIM OR HIS BUSINESS, SUPREME COURT SHOULD HAVE HELD A HEARING ON DEFENDANT’S MOTION TO VACATE A DEFAULT JUDGMENT (SECOND DEPT).

The Second Department determined Supreme Court should have held a hearing to determine whether the defendant corporation, Advanced, and its principal, Trimarco, were properly served with the summons and complaint. The presumption of proper service created by the process server’s affidavit was rebutted by Trimarco’s affidavit stating that the place where service was made, and any person at that location, had no connection to him or the business:

Trimarco submitted an affidavit in which he claimed that both he and Advanced were improperly served at a residence that he had “sold to an unrelated third party three years ago.” He further averred that, on the date service was purportedly made, he had no relationship with any person at [the residence], and no person at that address was authorized to accept service on behalf of Advanced. …

The Supreme Court should not have, in effect, denied that branch of the defendants’ motion which was pursuant to CPLR 5015(a)(4) to vacate the judgment and dismiss the complaint without first conducting a hearing. “Ordinarily, a process server’s affidavit of service establishes a prima facie case as to the method of service and, therefore, gives rise to a presumption of proper service” … . “[W]here there is a sworn denial that a defendant was served with process, the affidavit of service is rebutted, and the plaintiff must establish jurisdiction at a hearing by a preponderance of the evidence” … .

With respect to service on Advanced, CPLR 311(a)(1) provides that personal service upon a corporation shall be made, among other ways, “to an officer, director, managing or general agent, or cashier or assistant cashier or to any other agent authorized by appointment or by law to receive service.” Personal service on a corporation must be made to one of the persons authorized by the statute to accept service, and an attempt to serve such person by substitute service pursuant to CPLR 308(2) or (4) will be insufficient to acquire jurisdiction over the corporation … . …

With respect to service on Trimarco, CPLR 308(2) provides, in relevant part, that service may be made upon a natural person “by delivering the summons within the state to a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served.” Here, Trimarco’s detailed affidavit, in which he claimed that the address where service was made was not his actual place of business, dwelling place, or usual place of abode, was sufficient to rebut the presumption of proper service created by the plaintiff’s affidavit of service … . Finnegan v Trimarco, 2019 NY Slip Op 04361, Second Dept 6-5-19

 

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QUEENS COUNTY ACTION SHOULD NOT HAVE BEEN DISMISSED ON THE GROUND IT WAS SUBSTANTIALLY THE SAME AS THE NASSAU COUNTY ACTION, A CORPORATION IS NOT THE SAME PARTY AS A PRINCIPAL OF THE CORPORATION WITHOUT A SHOWING THE CORPORATE VEIL SHOULD BE PIERCED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the Queens County action did not involve the same parties as the Nassau County action and therefore should not have been dismissed pursuant to CPLR 3211(a)(4). A corporation is not the same party as an individual principal of the corporation and should not be so considered in the absence of a demonstration the corporate veil should be pierced:

” Pursuant to CPLR 3211(a)(4), a court has broad discretion in determining whether an action should be dismissed based upon another pending action where there is a substantial identity of the parties, the two actions are sufficiently similar, and the relief sought is substantially the same'” … . “[W]hile a complete identity of parties is not a necessity for dismissal under CPLR 3211(a)(4), there must be a substantial’ identity of parties, which generally is present when at least one plaintiff and one defendant is common in each action'” … .

Here, there is no common plaintiff in the Nassau County action and the instant action. Although Queens NY Realty and the plaintiff share the same owner, who was added as a third-party plaintiff in the Nassau County action, ” [i]ndividual principals of a corporation are legally distinguishable from the corporation itself’ and a court may not find an identity of parties by, in effect, piercing the corporate veil without a request that this be done and, even more importantly, any demonstration by defendant that such a result is warranted'” … . Furthermore, the relief sought by the plaintiff in this action is not substantially the same as the relief sought by Queens NY Realty in the Nassau County action … . Mason ESC, LLC v Michael Anthony Contr. Corp., 2019 NY Slip Op 03962, Second Dept 5-22-19

 

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RES JUDICATA APPLIES TO ISSUES WHICH COULD HAVE BEEN RAISED IN A SMALL CLAIMS ACTION, NO NEED TO PIERCE THE CORPORATE VEIL TO BRING A BREACH OF FIDUCIARY DUTY ACTION AGAINST A FORMER PARTNER IN A PROFESSIONAL CORPORATION, JUDGE SHOULD NOT HAVE SEARCHED THE RECORD AND RENDERED SUMMARY JUDGMENT WHERE NEITHER PARTY REQUESTED THAT RELIEF (SECOND DEPT).

The Second Department, modifying Supreme Court, determined: (1) although the Small Claims Act provides that collateral estoppel (issue preclusion) does not apply to fact-findings made in a small claims action, the doctrine of res judicata does apply to any issue which could have been, but was not, raised in the small claims action; (2) a breach of fiduciary duty cause of action does not entail piercing the corporate veil in a proceeding against a former partner in a professional corporation; (3) the judge should not have searched the record to render summary judgment when neither party requested that relief:

… “[T]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct” … . Contrary to the Supreme Court’s finding, it is not necessary to pierce the corporate veil in order to maintain a cause of action alleging breach of fiduciary duty against former partners in a professional corporation. …

Since … neither party moved for summary judgment with respect to the counterclaims and none of the issues raised in the first, second, or third counterclaims were litigated in the summary judgment motion, or the small claims action, the Supreme Court should not have, in effect, searched the record and awarded the plaintiff summary judgment dismissing those counterclaims … . Weinberg v Picker, 2019 NY Slip Op 03400, Second Dept 5-1-19

 

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PLAINTIFF DID NOT SUBMIT EVIDENCE SUFFICIENT TO PIERCE THE CORPORATE VEIL AND HOLD A MEMBER OF DEFENDANT LLC PERSONALLY LIABLE, PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AGAINST THE LLC MEMBER PERSONALLY SHOULD HAVE BEEN DENIED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined that the motion for summary judgment in this construction accident case against a member of defendant LLC should not have been granted. The motion papers did not support piercing the corporate veil to reach the LLC member (Albaliya) personally:

As a limited liability company, Nadlan is a separate legal entity from its members (see Limited Liability Company Law § 609). “A member of a limited liability company cannot be held liable for the company’s obligations by virtue of his [or her] status as a member thereof'” … .

“However, a party may seek to hold a member of an LLC individually liable despite this statutory proscription by application of the doctrine of piercing the corporate veil” … . “Generally, . . . piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury” … . Singh v Nadlan, LLC, 2019 NY Slip Op 03100, Second Dept 4-24-19

 

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RECORDS KEPT BY A VOLUNTEER AMBULANCE NOT-FOR-PROFIT CORPORATION NOT SUBJECT TO DISCLOSURE PURSUANT TO THE FREEDOM OF INFORMATION LAW (FOIL) BECAUSE THE CORPORATION IS NOT A GOVERNMENTAL ENTITY (SECOND DEPT).

The Second Department, reversing Supreme Court, determined that, Volunteer Ambulance, a not-for-profit corporation, was not a government agency, and therefore was not subject to the Freedom of Information Law (FOIL) (Public Officers Law 86). “The petitioner, an emergency medical technician, made requests under the Freedom of Information Law (Public Officers Law art 6; hereinafter FOIL) for the production of certain records pertaining to the rejection of her application to be reinstated as a member of the Cortlandt Community Volunteer Ambulance Corps, Inc. (hereinafter Volunteer Ambulance):”

Volunteer Ambulance was formed and incorporated without any participation or assistance of public officials in the Town. Neither the Town nor the District has the authority to select or appoint directors, officers, or members of Volunteer Ambulance. Volunteer Ambulance is not required to submit its budget to the Town or District for review, and neither the Town nor the District has authority to approve Volunteer Ambulance’s budget. Neither the Town nor the District has any authority to review or audit Volunteer Ambulance’s financial books and records. Volunteer Ambulance receives the majority of its funding from sources other than the payment it receives from the District pursuant to the contract, and purchases all of its equipment, supplies, and services from its own assets. Volunteer Ambulance receives no funding from the Town or District apart from the contract payment. Volunteer Ambulance is solely responsible for the maintenance and expenses related to its buildings. Volunteer Ambulance has the authority to hire staff, who are employees of Volunteer Ambulance, not of the District or Town, and it obtains its own workers’ compensation policy for coverage of its employees and members; these persons are not covered by the workers’ compensation policy maintained by the District or the Town for its employees or volunteers. Neither the District nor the Town has authority to review or approve contracts entered into by Volunteer Ambulance for professional or other services necessary for its operation.

Under these circumstances, it cannot be said that Volunteer Ambulance is a “governmental entity performing a governmental . . . function” so as to render it an agency subject to the mandates of FOIL (Public Officers Law § 86[3] … . Matter of Outhouse v Cortlandt Community Volunteer Ambulance Corps, Inc., 2019 NY Slip Op 02881, Second Dept 4-17-19

 

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