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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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MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM IN THIS BREACH OF CONTRACT ACTION, BASED UPON DOCUMENTARY EVIDENCE, SHOULD NOT HAVE BEEN GRANTED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Manzanet-Daniels, reversing Supreme Court, determined the motion to dismiss based on documentary evidence should not have been granted in this breach of contract action. Plaintiff and defendant had entered a Share Purchase Agreement (SPA) in which plaintiff agreed to purchase defendant, Symbio, for between $100 and $110 million. The opinion is fact specific and cannot be fairly summarized here:

Plaintiff’s claims are not definitively contradicted by the documentary evidence. The record (to the extent there is one on this motion pursuant to CPLR 3211) demonstrates the existence of issues of fact concerning when plaintiff determined that there was a matter that might give rise to a right of indemnification so that it was required to give notice pursuant to section 8.03(a) of the parties’ contract. …

Further, defendants’ defense of a condition precedent is not conclusively established. Even if section 8.03(a) might be construed as a condition precedent (which is highly doubtful), there has been no showing regarding the materiality of the provision as would be necessary given that nonoccurrence of the condition would lead to a draconian forfeiture.  XI Lux Holdco S.A.R.L. v SIC Holdings, LLC, 2019 NY Slip Op 02437, First Dept 3-28-19

 

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DEFENDANT WAS NOT AN ALTER EGO OF PLAINTIFF’S EMPLOYER, PLAINTIFF WAS NOT DEFENDANT’S SPECIAL EMPLOYEE, PLAINTIFF WAS ENTITLED TO SUMMARY JUDGMENT ON HIS LABOR LAW 240 (1) CAUSE OF ACTION BASED UPON THE ALLEGATION THE LADDER MOVED FOR NO APPARENT REASON, NOTWITHSTANDING EVIDENCE PLAINTIFF MAY HAVE SAID HE PLACED THE LADDER ON A DROP CLOTH (SECOND DEPT).

The Second Department, modifying Supreme Court, determined defendant’s affirmative defenses alleging it was an alter ego of plaintiff’s employer and plaintiff was its special employee, thereby insulating defendant from anything other than liability under the Workers’ Compensation Law, should have been dismissed. Summary judgment was properly awarded to plaintiff on his Labor Law 240 (1) cause of action. Plaintiff alleged the ladder he was on moved for no apparent reason. The fact that plaintiff apparently told a co-worker that he set the ladder on a drop cloth merely raised a question of his contributory negligence, which is not a defense to a Labor Law 240 (1) action:

“Labor Law § 240(1) imposes a nondelegable duty upon owners and general contractors to provide safety devices to protect workers from elevation-related risks” … . The sole proximate cause defense applies where the plaintiff, acting as a “recalcitrant worker,” misused an otherwise proper safety device, chose to use an inadequate safety device when proper devices were readily available, or failed to use any device when proper devices were available … . Contributory negligence on the part of the worker is not a defense to a Labor Law § 240(1) cause of action … .

Here, the plaintiff made a prima facie showing of entitlement to  … judgment as a matter of law on the issue of liability on the Labor Law § 240(1) cause of action, by submitting evidence that the ladder on which he was standing moved for no apparent reason, causing him to fall … . In opposition to the plaintiff’s prima facie showing, the defendant failed to raise a triable issue of fact as to whether the plaintiff’s own acts or omissions were the sole proximate cause of his injuries … . Contrary to the defendant’s contention, the deposition testimony of the plaintiff’s coworker implying that, after the accident, the plaintiff might have told the coworker that the plaintiff had set the ladder up on top of a drop cloth, even if true, would render the plaintiff only contributorily negligent, a defense not available under Labor Law § 240(1) … . Salinas v 64 Jefferson Apts., LLC, 2019 NY Slip Op 02370, Second Dept 3-27-19

 

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JUDGE SHOULD NOT HAVE, SUA SPONTE, GRANTED A PRELIMINARY INJUNCTION IN THIS TRADEMARK INFRINGEMENT CASE, CORPORATE OFFICERS PROPERLY SUED IN THEIR INDIVIDUAL CAPACITIES (SECOND DEPT).

The Second Department, modifying Supreme Court, determined that defendants’ motion to dismiss the trademark infringement, trademark dilution and unfair competition causes of action was properly denied. The court noted that the complaint properly alleged torts by defendants in their individual capacities without alleging facts supporting piercing the corporate veil. The Second Department held that the judge, sua sponte, should not have granted the preliminary injunction:

” [P]reliminary injunctive relief is a drastic remedy which will not be granted unless a clear right thereto is established under the law and the undisputed facts upon the moving papers, and the burden of showing an undisputed right rests upon the movant'” … . “As a general rule, the decision to grant or deny a preliminary injunction lies within the sound discretion of the Supreme Court” … . “In exercising that discretion, the Supreme Court must determine if the moving party has established: (1) a likelihood of success on the merits, (2) irreparable harm in the absence of an injunction, and (3) a balance of the equities in favor of the injunction” … . ” [A]bsent extraordinary circumstances, a preliminary injunction will not issue where to do so would grant the movant the ultimate relief to which he or she would be entitled in a final judgment'” … .

The plaintiff did not request a preliminary injunction  … [T]he record in this case lacks evidence establishing, among other things, irreparable harm or extraordinary circumstances warranting a preliminary injunction that would, in effect, depart from the status quo and grant the plaintiff its ultimate relief … . The evidence at this stage further fails to demonstrate that the plaintiff possesses a likelihood of success on the merits … . The court therefore improvidently exercised its discretion in sua sponte awarding preliminary injunctive relief to the plaintiff. Emanuel Mizrahi, DDS, P.C. v Angela Andretta, DMD, P.C., 2019 NY Slip Op 02315, Second Dept 3-27-19

 

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PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT SHOULD HAVE BEEN GRANTED, A DE FACTO MERGER OF THE JUDGMENT DEBTOR WITH THE CURRENT DEFENDANT WAS DEMONSTRATED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined plaintiff judgment-creditor’s motion for summary judgment should have been granted. Plaintiff alleged a de facto merger between defendant Luigi’s Bakery Corp and its predecessor Luigi’s Family Bakery, making the Bakery Corp. liable for the Family Bakery’s debt:

Factors courts consider in determining whether a de facto merger has occurred include “continuity of ownership; . . . a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; . . . assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and . . . a continuity of management, personnel, physical location, assets, and general business operation” … . Not all of these factors are required to demonstrate a merger; ” rather, these factors are only indicators that tend to show a de facto merger’ ” … .

Here, defendants admitted to continuity of ownership between Family Bakery and Bakery Corp., and to two of the other factors of a de facto merger: cessation of ordinary business operations, and continuity of management, personnel, physical location, and general business operation. In both their answer and their bill of particulars, defendants admitted that the successor corporation, Bakery Corp., was formed in the same month that the predecessor corporation, Family Bakery, ceased operations. They also admitted that the successor corporation used the same address and phone number as the predecessor corporation. We therefore conclude that the court erred in determining that there are issues of fact with respect to the date of incorporation of the successor corporation or the date of dissolution of the predecessor corporation. A case for de facto merger can be made without a legal dissolution where, as here, the predecessor company “has become, in essence, a shell” … . Energy Coop. of Am., Inc. v Luigi’s Family Bakery, Inc., 2019 NY Slip Op 02211, Fourth Dept 3-22-19

 

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DEFENDANT’S MOTION TO VACATE A DEFAULT JUDGMENT SHOULD HAVE BEEN GRANTED DESPITE FAILURE TO UPDATE THE ADDRESS ON FILE WITH THE SECRETARY OF STATE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant’s motion to vacate a default judgment should have been granted, despite defendant’s failure to update its address with the Secretary of State:

There was no evidence that the defendant received actual notice of the summons delivered to the Secretary of State, which does not constitute personal delivery, in time to defend this action ). Although the defendant did not explain why it failed to update its address with the Secretary of State, “there is no necessity for a defendant moving pursuant to CPLR 317 to show a reasonable excuse for its delay” … . Furthermore, there is no basis in the record to conclude that the defendant deliberately attempted to avoid service, especially since the plaintiff had actual knowledge of the defendant’s Westchester County… business address at least two months before the summons and complaint were filed in this action and, thus, could have attempted to serve the defendant personally pursuant to CPLR 311 … . Nor is there any evidence that the defendant was placed on notice that the address on file with the Secretary of State was incorrect … . Moreover, the defendant met its burden of demonstrating the existence of a potentially meritorious defense … . Berardi Stone Setting, Inc. v Stonewall Contr. Corp., 2019 NY Slip Op 02053, Second Dept 3-20-19

 

PLAINTIFF IN THIS DERIVATIVE STOCKHOLDER ACTION DID NOT SUFFICIENTLY ALLEGE THAT A DEMAND FOR RELIEF ON THE BOARD COULD BE EXCUSED, COMPLAINT PROPERLY DISMISSED (FIRST DEPT).

The First Department determined the complaint in this shareholder derivative action was properly dismissed for failure to first make a demand for relief on the board. The Rales criteria were not met:

Under Rales, “a court must determine whether . . . the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand” … . The ” mere threat of personal liability . . . is insufficient to challenge either the independence or disinterestedness of directors'” … . However, “a substantial likelihood” of liability “disables [a director] from impartially considering a response to a demand by” a stockholder … .

“Where, as here, directors are exculpated from liability except for claims based on fraudulent, illegal or bad faith conduct, a plaintiff must . . . plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had actual or constructive knowledge that their conduct was legally improper” … .

Even though the complaint alleges that BMS’ audit committee and senior management knew about gaps in the company’s internal controls, it fails to establish bad faith or scienter … .

Plaintiff’s contention that defendants face a substantial likelihood of liability because they signed 10-K’s that contained false statements is also unavailing. It is true that “when directors communicate publicly . . . about corporate matters[,] the sine qua non of directors’ fiduciary duty to shareholders is honesty” … . However, “to establish liability for misstatements when the board is not seeking shareholder action, shareholder plaintiffs must show that the misstatement was made knowingly or in bad faith” … . Deckter v Andreotti, 2019 NY Slip Op 01717, First Dept 3-12-19

 

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DEFENDANT SOLE SHAREHOLDER OF DEFENDANT CORPORATION WAS NOT ENTITLED TO SUMMARY JUDGMENT ON THE ACTION AGAINST HIM PREMISED UPON PIERCING THE CORPORATE VEIL, THERE WERE QUESTIONS OF FACT WHETHER THE WARRANTY PROVISIONS OF THE CONTRACT WERE VIOLATED AND WHETHER DEFENDANT CORPORATION WAS STRIPPED OF ASSETS SUCH THAT IT COULD NOT MEET ITS CONTRACTUAL OBLIGATIONS (SECOND DEPT).

The Second Department, over a partial dissent, reversing (modifying) Supreme Court, determined that defendant Brookstein, the sole shareholder of corporate defendant DKM, was not entitled to summary judgment in the action against him based upon piercing the corporate veil:

“The general rule, of course, is that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability… . The concept of piercing the corporate veil is an exception to this general rule, permitting, in certain circumstances, the imposition of personal liability on owners for the obligations of their corporation … . A plaintiff seeking to pierce the corporate veil must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over [the corporation] in the transaction at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff … .

A plaintiff seeking to pierce the corporate veil bears a heavy burden… . “Veil-piercing is a fact-laden claim that is not well suited for summary judgment resolution” … .

Here, Brookstein did not establish his prima facie entitlement to judgment as a matter of law dismissing the complaint insofar as asserted against him. It is undisputed that Brookstein dissolved DKM without making any reserves for contingent liabilities, despite the existence of a provision in the contract of sale pursuant to which DKM agreed to indemnify [plaintiff] for any breach of warranty for a period of 7½ years after the closing of the sale. This factor was sufficient to raise a triable issue of fact as to whether Brookstein stripped the corporation of assets, leaving DKM without sufficient funds to pay its contractual contingent liabilities … . Town-Line Car Wash, Inc. v Don’s Kleen Mach. Kar Wash, Inc., 2019 NY Slip Op 01443, Second Dept 2-27-19

 

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