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Officer of Corporation Dissolved Pursuant to the Tax Law Is Personally Liable for Corporation’s Lease Obligations

The Second Department determined that defendant, an officer of the defendant dissolved corporation, was personally liable for the dissolved corporation’s lease obligations:

Pursuant to Tax Law § 203-a, the Secretary of State may dissolve a corporation by proclamation for the nonpayment of franchise taxes. Upon dissolution, the corporation’s legal existence terminates and it is prohibited from carrying on new business (see … Business Corporation Law § 1005[a][1]). It retains a limited de jure existence solely for the purpose of winding up its affairs (see … Business Corporation Law §§ 1005[a][1], 1006). A person who purports to act on behalf of a dissolved corporation is personally responsible for the obligations incurred … . Personal liability is not limited to the person who executes a contract on behalf of a dissolved corporation, but extends to the officers of the dissolved corporation … . 80-02 Leasehold LLC v CM Realty Holdings Corp, 2014 NY Slip Op 08805, 2nd Dept 12-17-14

 

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There Is No “Imminent Litigation” Requirement for the Application of the “Common-Interest Privilege”—Documents Generated During Merger Negotiations Among Two Corporations and Their Counsel May, Therefore, Be Protected by the Privilege, Which Is an Exception to the Rule that the Presence of a Third Party at a Communication Between Counsel and Client Destroys the Privilege

The First Department, in a full-fledged opinion by Justice Moskowitz, determined that the “common-interest privilege” may apply to documents created during merger negotiations among two corporations and their counsel.  The court found there is no requirement that litigation be imminent for the application of the privilege.  The underlying lawsuit was brought by a financial-guaranty insurer (Ambac) which alleged it was fraudulently induced by Countrywide to insure residential mortgage backed securities. Ambac sought discovery of documents relating to a merger between Countrywide and Bank of America Corporation (the subject of secondary claims by Ambac) which, it was alleged, would demonstrate Bank of America Corporation was on notice about Countrywide's alleged fraud. The First Department held that the merger-related documents could be protected by the common-interest privilege and sent the matter back to the motion court to determine whether particular documents are protected:

As noted above, the common-interest privilege is an exception to the rule that the presence of a third party at a communication between counsel and client will render the communication non-confidential … . The doctrine, a limited exception to waiver of the attorney-client privilege, requires that: (1) the communication qualify for protection under the attorney-client privilege, and (2) the communication be made for the purpose of furthering a legal interest or strategy common to the parties … . This Court has never squarely decided whether there is a third requirement: that the communication must affect pending or reasonably anticipated litigation. We answer that question today in the negative. Ambac Assur Corp v Countrywide Home Loans Inc, 2014 NY Slip Op 08510, 1st Dept 12-4-14

 

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Pleading Requirements for Piercing the Corporate Veil Described in Some Detail

The First Department determined questions of fact concerning whether the corporate veil should be pierced (alter-ego theory) had been raised.  The court explained the analytical criteria:

In order to state a claim for alter-ego liability plaintiff is generally required to allege “complete domination of the corporation [here PFLLC] in respect to the transaction attacked” and “that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury” … . Because a decision to pierce the corporate veil in any given instance will necessarily depend on the attendant facts and equities, there are no definitive rules governing the varying circumstances when this power may be exercised … .

If plaintiff prevails in proving that PFLLC owes it a debt …, the further allegations in the complaint are sufficiently pleaded to support plaintiff's claim that defendant is an alter-ego of PFLLC. The complaint asserts that with respect to the transaction at issue, defendant dominated and controlled the negotiations on behalf of PFLLC and actually provided the erroneous information which persuaded plaintiff to enter into the agreement. The allegations … sufficiently frame factual issues about whether defendant, as the parent company of PFLLC, commingled funds and disregarded corporate formalities … .

In addition, the allegations that defendant, through its domination of PFLLC, misrepresented the value of the assets sold and then caused PFLLC to become judgment proof, are also sufficient to support claims that defendant perpetrated a wrong or injustice against plaintiff, thus warranting intervention by a court of equity … . Wrongdoing in this context does not necessarily require allegations of actual fraud. While fraud certainly satisfies the wrongdoing requirement, other claims of inequity or malfeasance will also suffice … . Allegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory … . Baby Phat Holding Co LLC v Kellwood Co, 2014 NY Slip Op 08364, 1st Dept 12-2-14

 

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Corporation Created by Seneca Nation to Operate a Golf Course Was Not Entitled to Sovereign Immunity—Contractor Hired to Build the Course Can Sue to Foreclose a Mechanic’s Lien

The Court of Appeals, in a full-fledged opinion by Judge Pigott, over a dissent, determined that a corporation created by the Seneca Nation for the operation of a golf course (Lewiston Golf) was not entitled to sovereign immunity and, therefore, could be sued by the company with which the Seneca Nation contracted to build the golf course.  The contractor brought suit to foreclose on a mechanic’s lien:

Indian tribes possess the common law immunity from suit traditionally enjoyed by sovereign powers, unless waived. In Matter of Ransom, we set out several factors for courts to [*6]use to determine whether an entity, such as a corporation or agency, that is affiliated with an Indian tribe has the right to claim sovereign immunity against suit.

“Although no set formula is dispositive, in determining whether a particular tribal organization is an ‘arm’ of the tribe entitled to share the tribe’s immunity from suit, courts generally consider such factors as whether: [1] the entity is organized under the tribe’s laws or constitution rather than Federal law; [2] the organization’s purposes are similar to or serve those of the tribal government; [3] the organization’s governing body is comprised mainly of tribal officials; [4] the tribe has legal title or ownership of property used by the organization; [5] tribal officials exercise control over the administration or accounting activities of the organization; and [6] the tribe’s governing body has power to dismiss members of the organization’s governing body. More importantly, courts will consider whether [7] the corporate entity generates its own revenue, whether [8] a suit against the corporation will impact the tribe’s fiscal resources, and whether [9] the subentity has the power to bind or obligate the funds of the tribe. The vulnerability of the tribe’s coffers in defending a suit against the subentity indicates that the real party in interest is the tribe.” (Ransom, 86 NY2d at 559-560 [internal quotation marks, citations, and square brackets omitted; numbering added].) * * *

…[T]he primary purpose of creating the golf course in Lewiston was to act as a regional economic engine and thereby serve the profit-making interests of the Seneca Nation’s casino operations in the area. While this may result in more funds for government projects on the Seneca Nation’s reservations and elsewhere that benefit members of the tribe, … the purposes of Lewiston Golf were sufficiently different from tribal goals that they militate against Lewiston Golf’s claim of sovereign immunity. However, the purposes factor of Ransom is not determinative… . While some of the remaining Ransom factors favor the conclusion that Lewiston Golf is protected by sovereign immunity, the most important ones strongly support the opposite conclusion. Sue/Perior Concrete & Paving Inc v Corporation, 2014 NY Slip Op 08218, CtApp 11-25-14

 

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Re: Breach of Fiduciary Duty Claims Against the Directors of a Corporation, the Plaintiffs Failed to Rebut the Presumptions of Loyalty, Prudence and Good Faith Under the Business Judgment Rule

In finding that the breach of fiduciary duty claims against the directors of a corporation were properly dismissed, the First Department explained the relevant analysis:

The court, after citing and applying the correct standard of review …, properly dismissed the breach of fiduciary duty claims against [defendant-directors of the corporation] …, due to plaintiffs’ failure to rebut the presumptions of loyalty, prudence and good faith under the business judgment rule … . In particular, plaintiffs failed to allege facts that support a finding of interest or lack of independence by a majority of the board members … . Giuliano v Gawrylewski, 2014 NY Slip Op 07941, 1st Dept 11-18-14

 

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Individual Defendants’ Ties to New York, Including Business Activities in New York, Were Not Sufficient to Afford New York Jurisdiction, Pursuant to CPLR 302, Over a Lawsuit Stemming from a Personal Injury in New Jersey—CPLR 301, Which Affords New York Courts Jurisdiction Over Corporations Doing Business in New York, Does Not Extend to Individuals Doing Business in New York

The Second Department reversed Supreme Court’s finding that New York courts had jurisdiction over plaintiff’s personal injury action.  Plaintiff was injured by an allegedly defective saw provided by the defendants while doing work for defendants at the defendants’ home in New Jersey.  Jurisdiction pursuant to CPLR 302 was lacking because there was no real connection between the the defendants’ activities in New York (they ran a church in New York) and the personal injury action.  Jurisdiction pursuant to CPLR 301 was lacking because CPLR 301 does not apply to individuals, as opposed to corporations, doing business in New York:

In order to determine whether personal jurisdiction exists under CPLR 302(a)(1), a court must determine (1) whether the defendant transacted business in New York and, if so, (2) whether the cause of action asserted arose from that transaction … .

The Court of Appeals has interpreted the second prong of the jurisdictional inquiry to require that, in light of all the circumstances, there must be an “articulable nexus” … , between a defendant’s in-state activity and the claim asserted … . Although “causation is not required,” the Court of Appeals has stated that “at a minimum [there must be] a relatedness between the transaction and the legal claim such that the latter is not completely unmoored from the former” … . “[W]here at least one element arises from the New York contacts, the relationship between the business transaction and the claim asserted supports specific jurisdiction under the statute” … .

Here, the relationship between the causes of action asserted in the complaint and the [defendants’] activities within New York were too insubstantial to warrant a New York court’s exercise of personal jurisdiction over them pursuant to CPLR 302(a)(1). * * *

In contrast to the common-law approach to corporations, the common law, as developed through case law predating the enactment of CPLR 301, did not include any recognition of general jurisdiction over an individual based upon that individual’s cumulative business activities within the State … . Since the enactment of CPLR 301 did not expand the scope of the existing jurisdictional authority of the courts of the State of New York, that section does not permit the application of the “doing business” test to individual defendants … . Accordingly, contrary to the plaintiff’s contention, since the [defendants] were served with process in New Jersey, the Supreme Court was not authorized to exercise personal jurisdiction over them pursuant to CPLR 301, based on their cumulative individual business activities within the State. Pichardo v Zayas, 2014 NY Slip Op 07639, 2nd Dept 11-12-14

 

To Maintain Standing to Bring a Derivative Action Against a Not-for-Profit Corporation At Least Five Percent of the Members Must Be Plaintiffs at All Times As the Suit Progresses

The Third Department determined that in order to maintain standing for a derivative action against a not-for-profit corporation the plaintiffs must constitute five percent of the members at all times. In this case, the five percent requirement was met when lawsuit began but subsequently a member left and the five percent requirement was thereby no longer met:

N-PCL 623 is derived from the Business Corporation Law, but it is different in that it does not require ownership at the time of the transaction and does not allow plaintiffs to post security for expenses if they do not meet the five percent requirement (compare N-PCL 623, with Business Corporation Law §§ 626, 627). The requirement that plaintiffs in a derivative action against a not-for-profit corporation consist of at least five percent of any class of members was “necessitated by the elimination from the new law of the ‘security for expenses’ provision embodied in [Business Corporation Law § 627]” (Mem of Joint Legislative Committee to Study Revision of Corporation Laws, 1969 McKinney’s Session Laws of NY at 2485; see L 1969, ch 1066; see also E. Lisk Wyckoff, Jr., Practice Commentaries, McKinney’s Cons Laws of NY, Book 37, N-PCL 623). Because the N-PCL specifically eliminated the ability of less than five percent of shareholders to continue an action by posting security for expenses, we conclude that the ownership requirement of N-PCL 623 (a) must continue throughout the action in order to maintain standing … . Pall v McKenzie Homeowners’ Assn Inc, 2014 NY Slip Op 07392, 3rd Dept 10-3014

 

Failure to Allege “Demand Futility” as Required Under Delaware Law Required Dismissal of the Derivative Causes of Action

The First Department determined the derivative claims in the complaint against a Delaware corporation were properly dismissed for failure to allege demand futility, as required under Delaware law:

Under Delaware law, where, as here, no demand has been made on corporate directors to bring a lawsuit, a derivative action may be brought on the corporation’s behalf only where the complaint alleged particularized facts that such a demand would have been futile … . To allege demand futility, the complaint must set forth particularized facts sufficient to raise a reasonable doubt that either (1) the directors are disinterested and independent, or (2) the challenged transaction was the result of a protected business judgment … . Whitecap (US) Fund I, LP v Siemens First Capital Commercial Fin LLC, 2014 NY Slip Op 07297, 1st Dept 10-28-14

 

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Corporations Owned by the Individual Operating the Businesses Were Not the “Alter Ego” of the Individual Owner—Criteria for Piercing the Corporate Veil Not Met—Corporation Which Leased the Property from the Corporation Which Owned the Property Was Entitled to Compensation for Fixtures

The Second Department determined there was insufficient evidence to support piercing the corporate veil with respect to corporations owned by the individual operating the relevant businesses.  The corporations were formed for legitimate purposes, including owning and leasing back the subject property, and there was no evidence of any fraud.  The relevant criteria were explained.  In addition, the Second Department determined the tenant corporation was entitled to compensation for the fixtures on the condemned property and explained the relevant criteria:

In general, “a corporation has a separate legal existence from its shareholders even where the corporation is wholly owned by a single individual” … . Although “[o]ne of the primary legitimate purposes of incorporating is to limit or eliminate the personal liability of corporate principals” …, “the doctrine of piercing the corporate veil allows a corporation's separate legal existence to be disregarded to prevent fraud and 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” … .

Here, the petitioner points to Botur's sole ownership of Tennisport and his acknowledged day-to-day control over Nixbot, and argues that, on this basis, the Supreme Court properly determined that Tennisport and Nixbot were essentially Botur's alter egos. However, as this Court has observed, “if, standing alone, domination over corporate conduct in a particular transaction were sufficient to support the imposition of personal liability on the corporate owner, virtually every cause of action brought against a corporation either wholly or principally owned by an individual who conducts corporate affairs could also be asserted against that owner personally, rendering the principle of limited liability largely illusory. Thus, the party seeking to pierce the corporate veil must also establish that the owners, through their domination, abused the privilege of doing business in the corporate form'” … . Thus, in determining whether an owner has “abused the privilege of doing business in the corporate form,” a court may consider, inter alia, whether there was a “failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use” … . * * *

Where the condemnor appropriates land to which a tenant has annexed fixtures, the tenant is entitled to compensation “for his [or her] interest in any annexations to the real property which but for the fact that the real property has been taken, he [or she] would have had the right to remove at the end of his [or her] lease” … . This is true even where the condemnor has no use for the fixtures attached, because “condemnation is a forced sale that places the State and the claimant in the position of vendee and vendor” … . As the Court of Appeals has observed, “[t]he law of fixtures was evolved by the judiciary in order to ameliorate the harsh result to those who substantially improved property but who had less than a fee interest. These rules, when applied in an eminent domain proceeding, protect the owner of this type of property from being deprived of compensation when the land upon which they are situated is condemned” … . Thus, an award for the taking of fixtures is properly seen as “just compensation to the claimant, not a windfall” … . Matter of Queens W Dev Corp…, 2014 NY Slip OP 06983, 2nd Dept 10-15-14

 

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Derivative-Shareholder-Claim Versus Direct-Individual-Claim Explained/Out-of-Pocket Damages Rule for Fraud and Negligent Misrepresentation Claims Briefly Discussed

The First Department, in a full-fledged opinion by Justice Gische, with one exception, affirmed Supreme Court’s dismissal of defendant’s (Lipper’s) cross-claims because the cross-claims were deemed derivative claims by a shareholder, not direct, individual claims.  Lipper alleged damages stemming from the overvaluation of Lipper’s hedge fund assets by defendant Pricewaterhouse Coopers. In addition to the “derivative versus direct claim” issue, the court briefly discussed the “out of pocket” damages rule re: the fraud and negligent misrepresentation claims stemming from Lipper’s payment of gift taxes based upon the overvalued assets given to his daughters:

It is black letter law that a stockholder has no individual cause of action against a person or entity that has injured the corporation. This is true notwithstanding that the wrongful acts may have diminished the value of the shares of the corporation, or that the shareholder incurs personal liability in an effort to maintain the solvency of the corporation …, or that the wrongdoer may ultimately share in the recovery in a derivative action if the wrongdoer owns shares in the corporation … . An exception exists, however, where the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation … . This is a narrow exception, and Lipper’s cross claim must be factually supportable by more than complaints that conflate his derivative and individual rights … . In addition, Lipper may not obtain a recovery that otherwise duplicates or belongs to the corporation … .

Recognizing the difficulty in determining whether a claim is direct or derivative in the recent case of Yudell v Gilbert (99 AD3d 108 1st Dept [2012]), this court adopted the test developed by the Supreme Court of Delaware in Tooley v Donaldson, Lufkin & Jenrette, Inc. (845 A2d 1031, 1039 [Del 2004]) as a common sense approach to resolving such issues. We held that the Delaware test is consistent with existing New York State law. In order to distinguish a derivative claim from a direct one, the court considers “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually)” … . If there is any harm caused to the individual, as opposed to the corporation, then the individual may proceed with a direct action … . On the other hand, even where an individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot separately stand… . * * *

…[W]e find that recoupment of [gift] taxes paid violates New York’s out-of-pocket damages rule applicable to both the fraud and negligent misrepresentation cross claims Lipper has asserted … . Pursuant to the New York rule, recovery is denied where it leaves the claimant in a better position than the claimant would have been in the absence of wrongdoing … . Lipper contends that he would not have made the gifts to his daughters if he had known the true value of his holdings. The payment of taxes was a consequence of making that gift. The relief he seeks would put him in a better financial position than had the claimed wrongdoing not occurred … . Serino v Lipper,2014 NY Slip Op 06551, 1st Dept 9-30-14

 

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