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DEFENDANT’S MOTION TO CHANGE VENUE SHOULD HAVE BEEN GRANTED, CRITERIA EXPLAINED.

The Second Department determined defendant’s motion for change of venue should have been granted. The court noted that the sole residence of a domestic corporation for venue purposes is the county designated in its certificate of incorporation:

 

“[T]o prevail on a motion pursuant to CPLR 510(1) to change venue, a defendant must show that the plaintiff’s choice of venue is improper, and also that the defendant’s choice of venue is proper” … . The venue of an action is proper in the county in which any of the parties resided at the time of commencement (see CPLR 503[a]…). “[T]he sole residence of a domestic corporation for venue purposes is the county designated in its certificate of incorporation, despite its maintenance of an office or facility in another county” … . Matoszko v Kielmanowicz, 2016 NY Slip Op 00942, 2nd Dept 2-10-16

 

CIVIL PROCEDURE (MOTION TO CHANGE VENUE SHOULD HAVE BEEN GRANTED)/CORPORATION LAW (RESIDENCE OF DOMESTIC CORPORATION FOR VENUE PURPOSES IS COUNTY DESIGNATED ON CERTIFICATE OF INCORPORATION)/VENUE (MOTION TO CHANGE VENUE SHOULD HAVE BEEN GRANTED)/VENUE (RESIDENCE OF DOMESTIC CORPORATION FOR VENUE PURPOSES IS COUNTY DESIGNATED ON CERTIFICATE OF INCORPORATION)

SHAREHOLDERS’ DERIVATIVE ACTION AGAINST MORGAN STANLEY ARISING FROM THE LOSS OF $6.2 BILLION FROM HIGH RISK TRADING DISMISSED; PLAINTIFFS FAILED TO DEMONSTRATE PRE-SUIT DEMAND WOULD BE FUTILE.

The First Department, in this shareholders’ derivative action against Morgan Stanley, determined the plaintiffs did not demonstrate that a pre-suit demand upon the board of directors would have been futile.  Therefore, the action was properly dismissed (without prejudice). The lawsuit involved the so-called “London Whale” debacle where $6.2 billion was lost in high-risk trading despite public representations the group engaged in only low risk hedging. The court explained the relevant criteria for a futility demonstration:

 

Plaintiffs’ claim, based on the Board’s alleged failure to properly exercise its oversight duties, is premised on the theory of liability articulated in In re Caremark Intl. Inc. Derivative Litig. (698 A2d 959…). * * *

In Caremark cases, allegations of demand futility are analyzed under the principles set forth in Rales v Blasband (634 A2d 927, 933-934 [Del 1993]) …). Under Rales, the plaintiff must plead particularized facts raising “a reasonable doubt that, [at] the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand” … . To rebut the presumption of disinterestedness, the plaintiff must plead particularized facts that, if proved, would establish that a majority of the directors face a “substantial likelihood” of personal liability for the wrongdoing alleged in the complaint … . A “mere threat” of liability is insufficient … .

Here, plaintiffs failed to make the requisite showing that the board could not exercise independent business judgment because a majority of directors faced a substantial likelihood of liability for the challenged conduct. At the time plaintiffs filed their complaint, the board consisted of 11 directors. At most, plaintiffs showed that four of them — inside director Dimon and the three members of the Risk Policy Committee — faced a substantial likelihood of liability … . “Because a majority of the directors are independent, demand is not excused”… . Wandel v Dimon, 2016 NY Slip Op 00252, 1st Dept 1-14-16

 

CRIMINAL LAW (SEXUAL ASSAULT REFORM ACT DOES NOT VIOLATE EX POST FACTO CLAUSE)/SEXUAL ASSAULT REFORM ACT [SARA] (1000-FOOT SCHOOL-GROUNDS NO-GO ZONE IS NOT PUNITIVE IN EFFECT AND DOES NOT VIOLATE EX POST FACTO CLAUSE)/CONSTITUTIONAL LAW (1000-FOOT SCHOOL-GROUNDS NO-GO ZONE IN THE SEXUAL ASSAULT REFORM ACT IS NOT PUNITIVE IN EFFECT AND THEREFORE DOES NOT VIOLATE EX POST FACTO CLAUSE)/EX POST FACTO CLAUSE (1000-FOOT SCHOOL-GROUNDS NO-GO ZONE IN THE SEXUAL ASSAULT REFORM ACT IS NOT PUNITIVE IN EFFECT AND THEREFORE DOES NOT VIOLATE EX POST FACTO CLAUSE)

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Libel Action Based Upon Allegedly False Impressions Created by an Article in an Online News Publication, Including the Allegedly False Context of a Quotation of Plaintiff’s Own Words, Allowed to Go Forward; Pleading Requirements for Piercing the Corporate Veil Not Met.

The First Department, in a full-fledged opinion by Justice Kapnick, determined: (1) the complaint did not state a cause of action for libel per se (because extrinsic facts were necessary for a defamatory interpretation of the statement); (2) the libel cause action failed to sufficiently plead special damages (leave to replead granted); (3) the fact that one of the allegedly defamatory statements was in plaintiff’s “own words” did not warrant dismissal; and (4) the complaint did not adequately allege that the publisher of the statements (Daily Holdings) was the alter ego of Rupert Murdoch’s News Corporation. The opinion includes substantive discussions (which cannot be fairly summarized here) of defamation, falsity, libel per se, libel, special damages, the so-called “own words” defense, and the requirements for piercing the corporate veil. With respect to the plaintiff’s twitter post which allegedly was used in a false context, the court discussed the so-called “own words defense:”

It is true that courts across the country have extended the “truth defense” to include an “own words” defense (see e.g., Thomas v Pearl, 998 F2d 447, 452 [7th Cir 1993] [holding that “(a) party’s accurate quoting of another’s statement cannot defame the speaker’s reputation since the speaker is himself responsible for whatever harm the words might cause. . . . The fact that a statement is true, or in this case accurately quoted, is an absolute defense to a defamation action.”]; Van Buskirk v Cable News Network, Inc., 284 F3d 977, 981-982 [9th Cir 2002] [applying the “own words” defense despite “contextual discrepancies” between the plaintiff’s own words and the defendants’ quotation of those words]; Johnson v Overnite Transp. Co., 19 F3d 392, 392 n1 [8th Cir 1994] [recognizing the “general rule that a defamation claim arises only from a communication by someone other than the person defamed”]; Smith v School Dist. of Philadelphia, 112 F Supp 2d 417, 429 [ED Pa 2000] [noting that “(g)enerally, a plaintiff can not (sic) be defamed by the use of his own words”]). Although defendants cite to Thomas v Pearl (998 F2d 447) in their brief, the parties failed to specifically address whether the “own words” defense should be adopted by this Court; and we are aware of no authority, in either New York State jurisprudence or in the Second Circuit, which either expressly accepts or rejects the “own words” defense. We are aware of only one case in the State, albeit a federal district court case, that even mentions the defense: Fine v ESPN (11 F Supp 3d 209, 224 [ND NY 2014]), in a section titled ” Own Words’ Defense,” states that it cannot reach the issue because the records needed to compare the plaintiff’s and the defendant’s words were not properly before the court on a motion to dismiss. This highlights, however, the importance of a court’s need to compare the two statements as they appear in the actual writings before applying the “own words” defense to dismiss a defamation claim. This is also evident from the fact that the “own words” defense derives from the “truth defense.” Even if we were to adopt the “own words” defense, we find that it would not apply here where a comparison of the two statements reveals the potential for them to have different effects on the mind of the reader. Franklin v Daily Holdings, Inc., 2015 NY Slip Op 08139, 1st Dept 11-12-15

 

Complaint Did Not Sufficiently Allege Demand for Board’s Action Would Be Futile, Criteria Described

The Second Department determined Supreme Court properly granted defendants’ motion to dismiss the complaint for failure to state a cause of action. The complaint did not sufficiently allege efforts to have the board initiate the action or the reasons for not making that demand:

Such “[d]emand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit” … . Demand is excused because of futility when a complaint alleges with particularity (1) “that a majority of the board of directors is interested in the challenged transaction,” which may be based on self-interest in the transaction or a loss of independence because a director with no direct interest in the transaction is “controlled” by a self-interested director, (2) “that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances,” or (3) “that the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors” … . However, “[t]o justify failure to make a demand, it is not sufficient to name a majority of the directors as defendants with conclusory allegations of wrongdoing or control by wrongdoers” … .

Here, the plaintiffs failed to adequately plead that they made a sufficient demand, or that any demand would have been futile … . Taylor v Wynkoop, 2015 NY Slip Op 07643, 2nd Dept 10-21-15

 

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Guilty Plea to Possession of a Weapon Charge in One County Precluded Prosecution for the Same Offense in Another County (Double Jeopardy)

The Fourth Department determined charges stemming from the possession of a weapon in two counties triggered the protection against double jeopardy:

Defendant was convicted, following a jury trial, of reckless endangerment in the first degree (Penal Law § 120.25) and criminal possession of a weapon in the second degree (§ 265.03 [3]). The charges arose from an incident in which defendant discharged a firearm into the bedroom window of an occupied, residential home in Oswego County during the early morning hours of March 5, 2012. Defendant was apprehended by the police later that day at a motel in Onondaga County, where a handgun was found in his vehicle. Prior to his trial in Oswego County Court, defendant was charged with and pleaded guilty to, in Onondaga County Court, criminal possession of a weapon in the second degree for the handgun recovered from his vehicle. * * *

It is well settled that a defendant has “the right not to be punished more than once for the same crime” … . “When successive prosecutions are involved, the guarantee serves a constitutional policy of finality for the defendant’s benefit . . . and protects the accused from attempts to secure additional punishment after a prior conviction and sentence” … . This case presents a prototypical instance of a constitutional double jeopardy violation inasmuch as defendant was prosecuted and convicted of a crime in Oswego County to which he had pleaded guilty in Onondaga County. In both instances, the charge was the same: criminal possession of a weapon in the second degree pursuant to Penal Law § 265.03 (3).

We reject the People’s contention that double jeopardy did not attach because defendant was convicted in Oswego County before he was sentenced on his guilty plea in Onondaga County. “[T]ermination of a criminal action by entry of a guilty plea constitutes a previous prosecution for double jeopardy purposes” … . People v Gardner, 2015 NY Slip Op 07363, 4th Dept 10-9-15

 

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Criteria for the “Fiduciary Exception” to the Attorney-Client Privilege in the Context of a Derivative Action Explained

The First Department, in a full-fledged opinion by Justice Acosta, in a matter of first impression, developed analytical criteria for determining whether documents sought by the plaintiff major investor (NAMA) in defendant limited liability company (Alliance) (formed for a major real estate development project) were protected by the attorney-client privilege. The documents at issue are communications between the managers of defendant Alliance and their attorneys, defendant Greenberg.  Supreme Court held that the 3000 communications were not protected by attorney-client privilege pursuant to the “fiduciary exception” to the privilege (re: derivative actions) because the interests of the plaintiff were not adverse to Alliance. However, that finding was not based upon a review of the communications. The First Department determined each individual communication must be reviewed to find whether it evinces an adversarial relationship. If so, such “adversity” would be only one factor to weigh in concluding whether “good cause” exists to invoke the “fiduciary exception” to the privilege. The First Department adopted the reasoning of a Fifth Circuit case, Garner v Wolfinbarger, 430 Fed 1093, which sets out a list of factors to be applied in finding good cause to apply the fiduciary exception to the privilege. “Adversity” is but one of those factors:

In the corporate context, where a shareholder (or, as here, an investor in a company) brings suit against corporate management for breach of fiduciary duty or similar wrongdoing, courts have carved out a “fiduciary exception” to the privilege that otherwise attaches to communications between management and corporate counsel. * * *

In 1970, the U.S. Court of Appeals for the Fifth Circuit extended the fiduciary exception to the corporate environment in Garner v Wolfinbarger (430 F2d 1093 [5th Cir 1970], cert denied 401 US 974 [1971]), for the first time allowing shareholders to use the exception to pierce the corporate attorney-client privilege. The Garner court was persuaded by two English cases that “treat[ed] the relationship between shareholder and company as analogous to that between beneficiaries and trustees” (id. at 1102). Relying on those cases and the traditional crime-fraud and joint-representation exceptions for the proposition that the corporate attorney-client privilege is not absolute, the court summarized its reasoning in the following way:

“[W]here the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance” (id. at 1103-1104). * * *

While some factors in the Garner test are relevant to a determination of adversity, Garner did not create a categorical adversity limitation. Thus, adversity is not a threshold inquiry but a component of the broader good-cause inquiry. Moreover, of the Garner factors that pertain to adversity, some will indicate whether the parties are generally adverse, while others will require a review of the communications in dispute; the relevant factors may weigh against finding good cause to apply the fiduciary exception with respect to those communications that reveal adversity. Accordingly, a court may find that the party seeking disclosure has shown good cause to be given access to some communications but not others. NAMA Holdings, LLC v Greenberg Traurig LLP, 2015 NY Slip Op 07346, 1st Dept 10-8-15

 

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Business Connections to New York Insufficient to Confer Jurisdiction Under CPLR 301 or 302, Criteria Explained

The Second Department determined the defendants-respondents were properly granted summary judgment dismissing the complaint based upon the court’s lack of jurisdiction over a foreign corporation and individual non-domiciliary (insufficient business connection with New York). The court explained the business-related jurisdiction requirements under CPLR 301 and 302:

“Jurisdiction under CPLR 301 may be acquired over a foreign corporation only if that corporation does business here not occasionally or casually, but with a fair measure of permanence and continuity’ so as to warrant a finding of its presence’ in this jurisdiction” … . Furthermore, “[a]n individual cannot be subject to jurisdiction under CPLR 301 unless he [or she] is doing business in New York as an individual rather than on behalf of a corporation” … . Here, the respondents were not doing business in this State … .

Pursuant to CPLR 302(a)(1), “a court may exercise personal jurisdiction over any non-domiciliary . . . who in person or through an agent . . . transacts any business within the state or contracts anywhere to supply goods or services in the state” (CPLR 302[a][1]). “Whether a defendant has transacted business within New York is determined under the totality of the circumstances, and rests on whether the defendant, by some act or acts, has purposefully avail[ed] itself of the privilege of conducting activities within [New York]”‘ … . “Purposeful activities are those with which a defendant, through volitional acts, avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws'” … . “CPLR 302(a)(1) jurisdiction is proper even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted'” … .

Here, the respondents established, prima facie, that they did not conduct any purposeful activities in New York which bore a substantial relationship to the subject matter of this action, so as to avail themselves of the benefits and protections of this State’s laws. Okeke v Momah, 2015 NY Slip Op 07252, 2nd Dept 10-7-15

 

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Fees Owed by Seller to “Financial Advisor” Hired by Seller to Facilitate the Sale Were Excluded from the Asset Purchase Agreement (APA)—Doctrine of “De Facto Merger” Did Not Apply in Absence of “Continuity of Ownership”

The First Department, in a full-fledged opinion by Justice Friedman, over a full-fledged dissenting opinion by Justice Manzanet-Daniels, determined that the buyer of a business (TBA Buyer) did not assume the seller’s (TBA Seller’s) obligation to pay a financial advisor (Fidus) hired by TBA Seller to find a buyer and facilitate a sale. The opinion focused on the precise language of the asset purchase agreement (APA) and held that any monies owed by TBA Seller to Fidus were excluded, by the terms of the APA, from the assets and liabilities TBA Buyer purchased. Much of the opinion addresses the arguments made by the dissent. With respect to the dissent’s argument that TBA Buyer assumed TBA Seller’s obligation to pay Fidus under the “de facto merger” doctrine, the majority wrote:

While the general rule is that, absent a merger or consolidation, an entity purchasing the assets of another entity does not thereby acquire liabilities of the seller not expressly transferred in the sale …, a purchase-of-assets transaction may be deemed to constitute a de facto merger between seller and buyer, even if not formally structured as such, under certain conditions … . We have recognized, however, that “the essence of a merger” … is the element of continuity of ownership, which

“exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor’s purchase of the predecessor’s assets, as occurs in a stock-for-assets transaction. Stated otherwise, continuity of ownership describes a situation where the parties to the transaction become owners together of what formerly belonged to each'” … . * * *

… [U]nder New York law, continuity of ownership is “the touchstone of the [de facto merger] concept” and “thus a necessary predicate to a finding of de facto merger” … . The purpose of requiring continuity of ownership is “to identify situations where the shareholders of a seller corporation retain some ownership interest in their assets after cleansing those assets of liability” … . Stated otherwise, “[t]he fact that the seller’s owners retain their interest in the supposedly sold assets (through their ownership interest in the purchaser) is the substance’ which makes the transaction inequitable” … . By contrast, where a “buyer pays a bona fide, arms-length price for the assets, there is no unfairness to creditors in . . . limiting recovery to the proceeds of the sale — cash or other consideration roughly equal to the value of the purchased assets would take the place of the purchased assets as a resource for satisfying the seller’s debts” … . Thus, “allowing creditors to collect against the purchasers of insolvent debtors’ assets would give the creditors a windfall by increasing the funds available compared to what would have been available if no sale had taken place” … .

In this case, there is no continuity of ownership between TBA Seller and TBA Buyer because, as the record establishes (and Fidus does not dispute), none of TBA Seller’s owners acquired a direct or indirect interest in TBA Buyer (and thus in the transferred assets) as a result of the asset purchase transaction … .  Matter of TBA Global, LLC v Fidus Partners, LLC, 2015 NY Slip Op 06698, 1st Dept 9-1-15

 

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Doctrine of Equitable Estoppel as Applied to Public Corporations Explained

In affirming the denial of the petition to file a late notice of claim against a public corporation, the Second Department explained the doctrine of equitable estoppel as it applies to public corporations:

Estoppel against a public corporation will lie only when the public corporation’s conduct was calculated to, or negligently did, mislead or discourage a party from serving a timely notice of claim and when that conduct was justifiably relied upon by that party … . Here, the petitioner failed to demonstrate that the respondents engaged in any misleading conduct that would support a finding of equitable estoppel … . In addition, there was no evidence that the respondents made any settlement representations upon which the petitioner justifiably relied prior to the expiration of the statutory periods for serving a notice of claim or seeking leave to serve a late notice of claim and, therefore, the petitioner could not have relied on any conduct by the respondents in discouraging him from serving a notice of claim or seeking leave … .  Attallah v Nassau Univ. Med. Ctr., 2015 NY Slip Op 06587, 2nd Dept 8-19-15

 

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Although Plaintiff Limited Liability Company’s Articles of Incorporation Were Not Filed When It Took Title to Real Property—It May Have Validly Taken Title Pursuant to the “De Facto Corporation Doctrine”

The Second Department determined the defense motion to dismiss based upon documentary evidence was properly denied. Plaintiff limited liability company was able to demonstrate that it may be entitled to a declaration that it was the fee simple owner of property under the “de facto corporation doctrine.” When plaintiff limited liability company took title, the company was not yet “in legal existence” because all the necessary documents had not been filed. Under the “de facto corporation doctrine” the limited liability company could be deemed to have taken title if (1) a law existed under which it might be organized, (2) there was an attempt to organize, and (3) there was an exercise of corporate powers thereafter:

Here, the documentary evidence submitted by [defendants] in support of their motion demonstrated that the plaintiff’s articles of organization had not been filed with the New York State Department of State prior to the conveyance to the plaintiff of the subject property. However, in opposition to the motion, the plaintiff submitted the affidavit of its sole member, which demonstrated the applicability of the de facto corporation doctrine … . Specifically, the affidavit of the plaintiff’s sole member demonstrated that there was a law under which the LLC might be organized (see Limited Liability Law §§ 203, 209), that the plaintiff made a “colorable attempt” to comply with the statutes governing the formation of an LLC, including the filing requirement, and that the plaintiff exercised its powers as an LLC thereafter… . Lehlev Betar, LLC v Soto Dev. Group, Inc., 2015 NY Slip Op 06496, 2nd Dept 8-12-15

 

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