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Corporate Officer May Be Personally Liable for Torts Committed in the Performance of Corporate Duties/Criteria for Determining a Motion to Dismiss for Failure to State a Cause of Action (Where Documentary Evidence Is Submitted) Explained

The Second Department determined defendant’s motion to dismiss for failure to state a cause of action was properly denied.  Plaintiff alleged he tripped and fell over a hole left when a for sale sign was removed. The defendant moved to dismiss alleging the property was owned by the corporation of which defendant was the sole shareholder.  The Second Department noted that an officer of a corporation may be personally liable for torts committed in the performance of corporate duties. The court explained its role in determining a motion to dismiss for failure to state a cause of action where documentary evidence is submitted: “When a defendant submits evidence in support of a motion to dismiss pursuant to CPLR 3211(a)(7), and the motion has not been converted into one for summary judgment, the criterion is whether the plaintiff has a cause of action, not whether he or she has stated one … . “[U]nless it has been shown that a material fact as claimed by the pleader to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it, . . . dismissal should not eventuate… ‘. [quotations omitted] Orlando v New York Homes By J & J Corp., 2015 NY Slip Op 04104, 2nd Dept 5-13-15

 

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Delaware Pleading Requirements Not Met in Shareholders’ Derivative Action

The Second Department determined the shareholders’ derivative action alleging breach of a fiduciary duty was properly dismissed for failure to meet the pleading requirements of the controlling Delaware law:

As the parties agree, the laws of Delaware, the State of incorporation, govern the issues raised on this appeal … . Delaware Chancery Court Rule 23.1(a) provides that every shareholders’ derivative complaint shall “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” A plaintiff’s demand on the directors pursuant to Rule 23.1(a) will be excused “if the derivative complaint pleads particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment” … . Demand may also be excused in certain circumstances “where particularized factual allegations create a reasonable doubt that, as of 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” … . Here, the allegations of the amended complaint were insufficient to satisfy the pleading requirements of Rule 23.1(a). Walter v FalconStor Software, Inc., 2015 NY Slip Op 02112, 2nd Dept 3-18-15

 

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Corporation Is a Proper Respondent in an Article 78/Mandamus to Compel Proceeding

The Third Department determined that respondent corporation (CGFNS), which contracted with the state to provide credential verification services to the Department of Education for foreign-trained nurses, was a proper respondent in an Article 78/mandamus to compel proceeding.  The proceeding was brought by the foreign nursing school after CGFNS indicated it could not verify the school’s credentials:

CGFNS argues that it is not a “body or officer” subject to CPLR article 78 (CPLR 7802 [a]) and that it did not make a “determination” reviewable in this proceeding (CPLR 7803 [3]). CPLR 7802 (a) defines a “body or officer” against whom a CPLR article 78 proceeding may be instituted to include, as relevant here, “every court, tribunal, board, [or] corporation” (emphasis added). CGFNS is a not-for-profit corporation. Courts have recognized that corporations, both public and private, may be subject to CPLR article 78 as quasi-governmental bodies because they are “beholden to the [s]tate for their franchise or charter or the exercise of their functions” (… Siegel, NY Prac § 558 at 989; § 564 at 1001-1002 [5th ed 2011]). As a corporate entity, CGFNS is a “body or officer” subject to a writ of mandamus under CPLR article 78 (CPLR 7802 [a]; see CPLR 7803 [1], [3]…). Matter of American Univ. of Antigua v CGFNS Intl., 2015 NY Slip Op 02028, 3rd Dept 3-12-15

 

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Because the Landlord Engaged in Fraud, the Four-Year Rent-Overcharge Statute of Limitations Runs Back Four Years from When the Rent Overcharge Action Was Brought/Criteria for Collateral Estoppel Explained (Not Met Here)/Question of Fact Re: Piercing Corporate Veil

The Court of Appeals, in a full-fledged opinion by Judge Read, over a dissent, determined that the four-year statute of limitations in rent-overcharge actions, where the landlord engaged in fraud, does not begin to run when the first overcharge payment is made, but rather extends back four years from when the overcharge action is brought.  Here there was evidence the landlord used a fictitious tenant and rent to justify the rent charged the tenants.  The landlord argued the tenants’ action was time-barred because it was brought more than four years after the first overcharge payment was made. In addition to the statute-of-limitations ruling, the Court of Appeals held the collateral estoppel doctrine was not correctly applied by the courts below and there was a question of fact whether the corporate veil should be pierced due to the principal’s control over the corporate-landlord and the principal’s fraudulent acts:

Julie Conason (Conason) and Geoffrey Bryant (Bryant) (collectively, tenants) are the rent-stabilized tenants of an apartment in a residential building in Manhattan. Megan Holding LLC (Megan) is the building’s owner and tenants’ landlord. … Conason asserted an overcharge claim against Megan in April 2009, almost five and one-half years after she occupied the apartment under a vacancy lease. The principal issue on this appeal is whether CPLR 213-a’s four-year statute of limitations completely bars this claim. Because of the unrefuted proof of fraud in the record, we conclude that section 213-a merely limits tenants’ recovery to those overcharges occurring during the four-year period immediately preceding Conason’s rent challenge, and that the lawful rent on the base date must be determined by using the default formula devised by the New York State Division of Housing and Community Renewal (DHCR or the agency) … . * * *

CPLR 213-a fixes a four-year statute of limitations for claims of residential rent overcharge; specifically, this provision states that

“[a]n action on a residential rent overcharge shall be commenced within four years of the first overcharge alleged and no determination of an overcharge and no award or calculation of an award of the amount of any overcharge may be based upon an overcharge having occurred more than four years before the action is commenced. This section shall preclude examination of the rental history of the housing accommodation prior to the four-year period immediately preceding the commencement of the action” (emphasis added) (CPLR 213-a; see also Rent Stabilization Law [Administrative Code of City of NY] § 26-516 [a] [2]; Rent Stabilization Code [9 NYCRR 2520.6 [f]; 2526.1 [a] [2]). * * *

Collateral estoppel comes into play when four conditions are fulfilled:

“(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and decided, (3) there was a full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits” … . … . …

Civil Court’s findings of fraud are not entitled to preclusive effect because two of the four prerequisites for collateral estoppel are unmet: the issues in Civil Court (breach of the warranty of habitability) and Supreme Court (evidence of fraud sufficient to render the rent on the base date unreliable) are not identical (the first condition), and findings of fraud were not necessary to support the judgment entered on the April 8th order, which awarded tenants rent abatement on account of Megan’s breach of the warranty of habitability and directed Megan to remedy code violations (the fourth condition). Conason v Megan Holding LLC, 2015 NY Slip Op 01553, CtApp 2-24-15

 

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Elements of Civil Antitrust Action Under the General Business Law (Donnelly Act) Explained; Corporate Officers Can Be Individually Liable

The Fourth Department determined there were questions of fact re: the civil antitrust action and the related individual liability of corporate officers:

… [T]he court erred in granting those parts of defendants’ motions for summary judgment dismissing the fourth cause of action against them, alleging unfair competition and restraint of trade in violation of General Business Law § 340 (1) (hereafter, Donnelly Act), and we therefore modify the judgment accordingly. … “A party asserting a violation of the Donnelly Act is required to (1) identify the relevant product market; (2) describe the nature and effects of the purported conspiracy; (3) allege how the economic impact of that conspiracy is to restrain trade in the market in question; and (4) show a conspiracy or reciprocal relationship between two or more entities” … . The Court of Appeals has recognized, however, “that neither the Donnelly Act nor the Sherman Act, after which it was modeled, has been interpreted as prohibiting every agreement that has the effect of restraining trade, no matter how minimal. Instead, as construed by State and Federal courts, the antitrust laws prohibit only unreasonable’ restraints on trade” … . * * *

“[C]orporate officer[s] can also be held liable in civil antitrust actions” under the Donnelly Act, and there are triable issues of fact regarding their participation in the alleged corporate antitrust violations … . Radon Corp of Am Inc v National Radon Safety Bd. 2015 NY Slip Op 01365, 4th Dept 2-13-15

 

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“Local Authority,” Within the Meaning of the Public Authorities Law, Defined

The Fourth Department determined petitioner, Operation Oswego County, was a “local authority” subject to reporting and oversight requirements of respondent, the New York Authorities Budget Office.  The court defined what a “local authority” is:

A “local authority” under the Public Authorities Law includes “a not-for-profit corporation affiliated with, sponsored by, or created by a county, city, town or village government” (§ 2 [2] [b]). Petitioner is a not-for-profit corporation that acts as a local development corporation by establishing and implementing economic development strategies for Oswego County (County). We agree with respondent that petitioner is a local authority inasmuch as it is affiliated with and/or sponsored by the County … . The record establishes that the County regularly gives grants to petitioner, which comprise the majority of its budget. …[T]he term “sponsor” means, inter alia, ” a person or an organization that pays for or plans and carries out a project or activity’ ” (id. at 1404, quoting Merriam-Webster On-line Dictionary [emphasis added]). The County has also given interest-free loans to petitioner. Furthermore, a County official serves as a voting member of petitioner’s board, and several County officials serve as ex-officio, non-voting members of petitioner’s board. Considering the totality of the circumstances …, we conclude that petitioner is a local authority as defined in the Public Authorities Law. Matter of Operation Oswego County Inc v State of New York Auths Budget Off, 2015 NY Slip Op 01358, 4th Dept 2-13-15

 

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Criteria for Deceptive Business Practices Explained

The Fourth Department determined that the defendant's (One Source's) violation of General Business Law 349 had been proven. Defendant had misled car-purchasers by informing them they were required to purchase an extended service contract or warranty as a condition of a loan.  Only at the closing of loan were the purchasers informed they could waive the warranty.  The court explained the elements of a section 349 violation:

Pursuant to section 349, deceptive business acts or practices are unlawful, and a ” [petitioner] under section 349 must prove three elements: first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the [consumer] suffered injury as a result of the deceptive act' ” … . With respect to the second element, an act or practice that is deceptive or misleading in a material way is defined as a representation or omission “likely to mislead a reasonable consumer acting reasonably under the circumstances” … . Contrary to respondents' contention, we conclude that petitioner established that second element, i.e., that One Source's actions were likely to mislead a reasonable consumer. One Source's actions were misleading in a material way in light of the fact that the consumers at issue were dependent on One Source to find them the financing to purchase their vehicles, and they were willing to pay for a warranty in order to obtain their loans. People v One Source Networking Inc, 2015 NY Slip Op 01068, 4th Dept 2-4-15


Shareholder Should Not Have Been Awarded Damages Individually Re: a Derivative Cause of Action

The Second Department determined Supreme Court erred in awarding damages to a shareholder individually because the shareholder had sued on behalf of the closely held corporation:

A shareholder of a corporation, even of a closely held corporation, may not recover in his or her individual capacity for wrongs committed against the corporation, and any recovery obtained pursuant to a derivative cause of action asserted by a shareholder is obtained for the benefit of the injured corporation … . Sakow v Waldman, 2015 NY Slip Op 00742, 2nd Dept 1-28-15

 

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Criteria for Piercing the Corporate Veil Explained/Appellate Review Powers Re: a Bench Trial Described

The Second Department determined Supreme Court (in a bench trial) had properly pierced the corporate veil to find the owner personally liable.  The court described the criteria for piercing the corporate veil and noted that, in reviewing a bench trial, the appellate court has the same fact-finding powers as the trial court:

“In reviewing a determination made after a nonjury trial, the power of this Court is as broad as that of the trial court, and we may render a judgment we find warranted by the facts, bearing in mind that in a close case, the trial court had the advantage of seeing and hearing the witnesses” … .

“The general rule . . . 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 doctrine of piercing the corporate veil is an exception to this general rule, allowing the imposition of individual liability on owners for the obligations of their corporation “to prevent fraud or to achieve equity” … . “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 it 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” … . AZTE Inc v Auto Collection Inc, 2015 NY Slip Op 00711, 2nd Dept 1–28-15

 

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Petitioners, Who Did Not Represent a Majority of the Elected Board of Directors, Did Not Have Standing the Seek Dissolution of the Corporation Under Business Corporation Law 1102/Criteria for Common-Law Dissolution Not Met

The Second Department determined Supreme Court correctly found that the petitioners did not have standing to seek dissolution of the corporation pursuant to Business Corporation Law 1102.  However, the Second Department found Supreme Court erred when it granted the petition under a common-law dissolution theory, a ground not raised by the parties and not applicable under the facts:

…[T]he Supreme Court properly determined that [petitioners] lacked standing to seek dissolution of Candlewood pursuant to Business Law § 1102, since they do not represent a majority of the corporation’s duly elected board of directors … . However, as the appellants correctly contend, the court should have dismissed the petition rather than grant the petition for dissolution on a ground that was not raised by the petitioners and was inapplicable to the circumstances. “[T]he remedy of common-law dissolution is available only to minority shareholders who accuse the majority shareholders and/or the corporate officers or directors of looting the corporation and violating their fiduciary duty” … . The petitioners did not allege that a majority of shareholders, the directors, or the officers looted the corporation or breached a fiduciary duty to … a minority shareholder. Matter of Candlewood Holdings Inc …, 2015 NY Slip Op 00533, 2nd Dept 1-21-15

 

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