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WITH THE EXCEPTION OF THE FRAUD CAUSE OF ACTION, THE NONRECOURSE CLAUSE PRECLUDED THIS LAWSUIT AGAINST THE PRINCIPALS OF DEFENDANT CORPORATION; PLAINTIFF HAD WON AN ARBITRATION AWARD AGAINST DEFENDANT FOR OVER $200 MILLION AND BROUGHT THIS ACTION AFTER DEFENDANT FILED FOR BANKRUPTCY (FIRST DEPT). ​

The First Department, in a full-fledged opinion by Justice Higgitt, determined the nonrecourse clause in the contract between two sophisticated, commercial parties precluded plaintiff’s action. Plaintiff had won an arbitration award for over $200 million against defendant (Footprint) and this suit against Footprint’s principals was brought after Footprint filed for bankruptcy:

Plaintiff, a sophisticated commercial actor, knew that it was entering into a significant contractual undertaking with a special-purpose entity, and the contract provided for a specific dispute-resolution mechanism — arbitration — that carried with it a risk that the special-purpose entity would not be able to satisfy an ensuing award. Plaintiff could have bargained for protections to avoid or mitigate losses occasioned by the conduct of a judgment-proof special-purpose entity (e.g., conditions on Footprint’s ability to draw on the letter of credit, a payment guaranty from one or more of defendants, a narrow nonrecourse provision), but it chose to enter into the contract as written … . We cannot provide rough justice to plaintiff by dint of distorting the plain meaning of the contract to relieve plaintiff of the consequences of its contractual arrangement … . Similarly, we cannot, under the guise of contractual interpretation, disturb the clear, detailed allocation-of-risk-of-economic-loss scheme agreed upon by the parties … . Ultimately, plaintiff got the benefit of its bargain: arbitration on its cognizable claims against Footprint, which proceeding yielded a sizable award that was converted to a judgment. Iberdrola Energy Projects v Oaktree Capital Mgt. L.P., 2024 NY Slip Op 03798, First Dept 7-11-24

Practice Point: Sophisticated corporate commercial parties will be held to an unambiguous nonrecourse provision in their contract.​

 

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DISPUTES INVOLVING THE INTERNAL AFFAIRS OF FOREIGN CORPORATIONS ARE RESOLVED UNDER THE LAW OF THE PLACE OF INCORPORATION (SCOTS LAW HERE); COURTS CAN TAKE JUDICIAL NOTICE OF THE FOREIGN LAW; HERE PLAINTIFFS STATED A CAUSE OF ACTION FOR BREACH OF FIDUCIARY DUTY UNDER SCOTS LAW (CT APP).

The Court of Appeals, reversing the Appellate Division, in a full-fledged opinion by Judge Singas, determined (1) in international business disputes involving the internal affairs of foreign corporations, the law of the place of incorporation (Scots law here) applies; (2) the court can take judicial of the foreign law; and (3) plaintiffs stated a cause of action for breach of fiduciary duty under Scots law:

Consistent with our precedent, we clarify that the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from its internal affairs. Moreover, because of the important interests that the internal affairs doctrine represents, we decline to create any broad exceptions to that presumption. Rather, in order to overcome this presumption and establish the applicability of New York law, a party must demonstrate both that (1) the interest of the place of incorporation is minimal—i.e., that the company has virtually no contact with the place of incorporation other than the fact of its incorporation, and (2) New York has a dominant interest in applying its own substantive law … . * * *

CPLR 4511 gives courts “substantial flexibility in determining whether to take judicial notice of foreign law and ascertaining its content” … . As the statutory language notes, a court must take judicial notice of foreign law upon request and if the court is furnished with sufficient information to do so; otherwise, a court may take judicial notice of foreign law in its discretion … . * * *

Plaintiffs’ allegations—viewed in their most favorable light and according them every possible favorable inference—are sufficient to state a claim that the director defendants at least owed limited fiduciary duties to plaintiffs. Eccles v Shamrock Capital Advisors, LLC, 2024 NY Slip Op 02841, CtApp 5-23-24

Practice Point: Disputes involving the internal affairs of foreign corporation are resolved under the law of the place of incorporation (Scots law here).

Practice Point: Courts can take judicial notice of foreign law.

Practice Point: Here plaintiffs stated a cause of action for breach of fiduciary duty under Scots law.

 

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AN UNAMBIGUOUS CONTRACT PROVISION CONSTITUTES “DOCUMENTARY EVIDENCE” WHICH WILL SUPPORT A MOTION TO DISMISS PURSUANT TO CPLR 3211 (CT APP).

The Court of Appeals determined the provision of the contract which prohibited plaintiffs from bringing a breach of contract suit was unambiguous. An unambiguous contract constitutes “documentary evidence” which supports a motion to dismiss:

On a motion to dismiss based on documentary evidence pursuant to CPLR 3211 (a) (1), dismissal is warranted only if the documentary evidence conclusively establishes a defense as a matter of law … . A motion to dismiss based on a written agreement that contains a material ambiguity must be denied because such an agreement does not conclusively establish the asserted defense as a matter of law … . Ambiguity exists if the agreement, “read as a whole, fails to disclose its purpose and the parties’ intent . . ., or when specific language is ‘susceptible of two reasonable interpretations’ ” … . On the other hand, the agreement is unambiguous and should be enforced on its plain terms “if the language it uses has ‘a definite and precise meaning, unattended by danger of misconception . . ., and concerning which there is no reasonable basis for a difference of opinion’ ” … .

Contrary to plaintiffs’ contention, Section 8.05 unambiguously bars them from commencing an action on their own behalf to enforce their third-party beneficiary rights under the Agreement. Section 8.05 negates any right of the Holders except as “expressly set forth” therein, and it expressly sets forth the right of the Required Holders or the Holder Committee to commence certain types of actions or proceedings. Nothing in Section 8.05 expressly sets forth a right of the Holders to commence an action on their own behalf or otherwise. Mulacek v ExxonMobil Corp., 2024 NY Slip Op 02724, CtApp 5-16-24

Practice Point: Here the contract unambiguously limited the authority to bring a breach of contract action to a certain class of shareholders which did not include plaintiffs. The contract constituted “documentary evidence” which supported dismissal of the complaint pursuant to CPLR 3211(a)(1).

 

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AN ACTION AGAINST A CORPORATION AND AN ACTION AGAINST INDIVIDUAL PRINCIPALS OF THE CORPORATION DO NOT HAVE AN “IDENTITY OF PARTIES” WHICH WOULD ALLOW DISMISSAL OF ONE OF THE COMPLAINTS; TEXT MESSAGES DO NOT SUPPORT DISMISSAL OF A COMPLAINT BASED ON “DOCUMENTARY EVIDENCE;” THE COMPLAINT STATED A CAUSE OF ACTION FOR CONVERSION; THE COMPLAINT DID NOT STATE A CAUSE OF ACTION FOR FRAUD (FOURTH DEPT). ​

The Fourth Department, reversing (modifying) Supreme Court, determined certain causes of action should not have been dismissed. Dismissal of two causes action on the ground there existed identical causes of action in another lawsuit was error because the parties in the two lawsuits were not the same. It was error to dismiss a cause of action based on documentary evidence because text messages do not fit the definition of “documentary evidence.” It was also error to dismiss the action for conversion for failure to state a cause of action:

It is well settled that ” ‘[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 . . . that such a result is warranted’ ” … . * * *

… [T]he court erred in using text message excerpts to justify dismissal of the fourth cause of action or, indeed, any cause of action. Documents such as text messages “do not meet the requirements for documentary evidence” to support a CPLR 3211 (a) (4) motion … . To be considered documentary, evidence must be unambiguous and of undisputed authenticity, that is, it must be essentially unassailable” … . Here, the text messages do not even identify the person who is communicating with plaintiff. The names and numbers are redacted. Moreover, the text messages do not “conclusively establish[ ] a defense as a matter of law” with respect to the fourth cause of action … . * * *

The second cause of action alleges that defendants converted plaintiff’s personal property, including dental equipment, to their own use. “Two key elements of conversion are (1) plaintiff’s possessory right or interest in the property . . . and (2) [a] defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights” … . … [W]e conclude that the pleading includes sufficient allegations to support a cause of action for conversion. Plaintiff alleged that each defendant exerted dominion and control over property to which she had a possessory right or interest … . Nosegbe v Charles, 2024 NY Slip Op 02406, Fourth Dept 5-3-24

Practice Point: An action against a corporation and an action against individual principals of that corporation do not have “an identity of parties” which would subject one of the actions to dismissal.

Practice Point: Text messages are not “documentary evidence” which can be the basis for dismissal of a complaint.

 

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APPELLANTS IMPROPERLY DEDUCTED ROYALTY PAYMENTS RECEIVED FROM FOREIGN AFFILIATE CORPORATIONS WHICH WERE NOT SUBJECT TO NEW YORK FRANCHISE TAXES (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Cannataro, over a two-judge concurrence, determined the appellant corporations improperly deducted royalty payments received from foreign affiliates not subject to New York’s franchise taxes:

Under a taxation scheme in effect from 2003 through 2013, New York allowed corporations that paid franchise taxes in New York to deduct income received as royalty payments from members of the same corporate group, or family, in calculating their taxable income. The deduction was allowed only if the royalty payment came from a related entity that had already paid a New York tax on the same income through operation of another provision in the Tax Law that required companies to add back royalty payments made to related entities for the purposes of calculating their own taxable income.

In these cases, the state Department of Taxation and Finance determined that appellants improperly deducted royalty payments they received from affiliates in foreign countries that were not subject to New York franchise taxes and, so, were not required to add those payments back on a New York tax return. Appellants challenge the Tribunal’s denial of the deduction as being contrary to the clear language of the statute and as violating the Commerce Clause’s prohibition on discrimination against foreign commerce. Because the Appellate Division correctly interpreted the statutes as permitting a tax deduction only where a related subsidiary was subject to the add back requirement, and because any burden on interstate or foreign commerce created by this tax scheme was incidental and did not violate the dormant Commerce Clause, we affirm. Matter of Matter of Walt Disney Co. & Consol. Subsidiaries v Tax Appeals Trib. of the State of New York, 2024 NY Slip Op 02127, CtApp 4-23-24

Practice Point: Corporations may not deduct royalties received from foreign affiliate corporations which are not subject to New York’s franchise taxes.

 

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A CORPORATION WHICH ACQUIRES THE ASSETS AND LIABILITIES OF, BUT DOES NOT MERGE WITH, A PREDECESSOR CORPORATION, “INHERITS” THE CONTACTS THE PREDECESSOR CORPORATION HAD WITH NEW YORK STATE FOR PURPOSES OF NEW YORK’S PERSONAL JURISDICTION OVER THE SUCCESSOR CORPORATION (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Halligan, answering a certified question from the Second Circuit, determined that a corporation which acquires all the liabilities and assets of another corporation, but does not merge with the predecessor corporation, acquires the predecessor’s contacts with New York for purposes of New York’s personal jurisdiction over the successor corporation:

[The relevant] factors tip in favor of allowing successor jurisdiction where a successor purchases all assets and liabilities. … Sophisticated corporate entities such as SGBL [defendant] will undoubtedly engage in robust due diligence before agreeing to acquire all assets and liabilities of another entity. In doing so, they should understand where jurisdiction over such liabilities may lie and the potential cost if ultimately found liable, and will presumably negotiate a purchase price that is discounted by that prospect … .Lelchook v Société Générale de Banque au Liban SAL, 2024 NY Slip Op 02081, CtApp 4-18-24

Practice Point: A corporation which acquires the assets and liabilities of a predecessor corporation but does not merge with the predecessor corporation “inherits” the contacts the predecessor corporation had with New York for purposes of New York’s personal jurisdiction over the successor corporation.

 

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A FORUM SELECTION CLAUSE IN AN INSURANCE POLICY WHICH VIOLATES NEW YORK LAW IS NOT ENFORCEABLE (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Miller, determined that the forum selection clause in an insurance policy which violates New York law is not enforceable. The opinion is comprehensive and discusses several substantive civil procedure, contract law, corporation law, insurance law, workers’ compensation law and public policy issues which cannot fairly be summarized here:

This action is just one of many such actions commenced across the country alleging that the defendant Applied Underwriters, Inc. (hereinafter Applied Underwriters), and affiliated entities, all subsidiaries of Berkshire Hathaway, Inc., deceptively circumvented state laws and regulations in the marketing and sale of an unlawful workers’ compensation insurance program. Here, the defendants seek to enforce a forum selection clause, in favor of Nebraska, contained in an insurance policy that New York State regulators have found violates New York law. While parties are generally free to select a forum in which to resolve their contractual disputes, here, where it is alleged by the plaintiff, and found by New York State regulators, that New York law has been violated, a foreign corporation may not profit from such violation to the detriment of New York employers and workers. The forum selection clause contained in an illegal insurance policy is not enforceable. As a matter of public policy, New York companies shall not be compelled to litigate in Nebraska to vindicate their rights. Air-Sea Packing Group, Inc. v Applied Underwriters, Inc., 2024 NY Slip Op 02032, Second Dept 4-17-24

Practice Point: A forum selection clause (designating Nebraska as the forum) in an insurance policy which violates New York law is not enforceable.

 

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THE ELECTRICAL-CONTRACTOR CORP WAS NOT LICENSED TO DO ELECTRICAL WORK IN NYC; THE FACT THAT THE CORPORATION’S VICE PRESIDENT WAS LICENSED AND THE VICE PRESIDENT’S COMPANY, WHICH DID THE ELECTRICAL WORK AS A SUBCONTRACTOR, WAS LICENSED DOESN’T MATTER; THE CORPORATION CAN NOT SUE FOR BREACH OF CONTRACT (SECOND DEPT). ​

The Second Department, reversing Supreme Court, determined plaintiff electrical-contractor corporation could not sue for breach of contract because the corporation was not licensed in NYC to do electrical work, even though plaintiff’s vice president was licensed and the vice president’s company (QNCC) which did the work as plaintiff corporation’s subcontractor was licensed:

Administrative Code § 27-3017(a) states that it shall be unlawful for any person to, inter alia, perform electrical work in the City of New York unless that person is a licensed master electrician or special electrician. Licensing statutes are to be strictly construed … . …

The plaintiff’s contention that recovery should not be denied because QNCC was a duly licensed subcontractor which performed the electrical work is without merit. This Court has previously held that such a relationship is insufficient to permit an unlicensed contractor to recover for work performed in the City … . “‘So strict has been judicial construction of the statutory requirement through concern for the public health and welfare that the requirement may not be satisfied by employing or subletting’ the work to an appropriately licensed person” … . Moreover, that the plaintiff’s vice president had a master electrician’s license, and that the defendant’s architect knew that the electrical work permits were issued to an entity other than the plaintiff, does not bar the application of the above rule … . Electrical Contr. Solutions Corp. v Trump Vil. Section 4, Inc., 2024 NY Slip Op 01907, Second Dept 4-10-24

Practice Point: The NYC Administrative Code requirement that electrical work must be done by licensed entities or persons is strictly construed. Here the electrical-contractor corporation’s vice president was licensed and the vice president’s company which did the work as a subcontractor was licensed, but the corporation was not. The corporation could not sue for breach of contract.

 

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HERE PLAINTIFF CORPORATION, RC, DID NOT EXIST WHEN THE REAL ESTATE CONTRACT WAS ENTERED AND WAS NOT FORMED FOR SEVERAL YEARS UNTIL JUST BEFORE THE INSTANT LITIGATION; BECAUSE DEFENDANT DEALT WITH RC AS A CORPORATION FOR YEARS AND RECEIVED SOME BENEFIT FROM THE CONTRACT, THE DOCTRINE OF “CORPORATION BY ESTOPPEL” PROHIBITED DEFENDANT FROM AVOIDING ITS OBLIGATIONS UNDER THE CONTRACT BY ARGUING A NONEXISTENT CORPORATION CANNOT ENTER A CONTRACT (SECOND DEPT).

The Second Department, modifying Supreme Court, determined the “corporation by estoppel” doctrine prevented defendant from arguing the real estate purchase agreement was invalid because the corporate plaintiff (RC) did not exist at the time the contract was executed. RC was eventually formed years later just before this action commenced. The defendant had dealt with RC as an incorporated entity for several years. Therefore defendant was estopped from denying RC’s validity to avoid their obligations under the contract:

Generally, it is true that “‘[s]ince a nonexistent entity cannot acquire rights or assume liabilities, a corporation which has not yet been formed normally lacks capacity to enter into a contract'” … . However, under the doctrine of corporation by estoppel, “one who has recognized [an] organization as a corporation in business dealings should not be allowed to quibble or raise immaterial issues which do not concern him or her in the slightest degree or affect his or her substantial rights” …. Thus, “parties who deal with an entity holding itself out as a corporation and who receive performance from such entity are estopped from avoiding their obligations to it” … . Teva Realty, LLC v Cornaga Holding Corp., 2024 NY Slip Op 01833, Second Dept 4-3-24

Practice Point: Here plaintiff corporation did not exist when the real estate contract was entered but was formed years later just before the instant litigation was commenced. Defendant dealt with plaintiff as a corporation for years and received a benefit from the contract. The doctrine of “corporation by estoppel” prohibited defendant from arguing the contract was not valid because the corporation was not formed at the time the contract was entered.

 

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PLAINTIFF, A NEW YORK RESIDENT AND A SHAREHOLDER IN DEFENDANT LONDON CORPORATION, ALLEGED DEFENDANT WRONGFULLY FAILED TO PAY DIVIDENDS; THE LONDON DEFENDANT’S MOTION TO DISMISS ON FORUM NON CONVENIENS GROUNDS SHOULD HAVE BEEN GRANTED (FIRST DEPT).

The First Department, reversing Supreme Court, determined defendant’s motion to dismiss on “forum non conveniens” grounds should have been granted. Plaintiff is a New York resident and the defendant is a London corporation (Anderson). Plaintiff, a shareholder of Anderson, alleged Anderson failed to pay dividends to shareholders:

The doctrine of forum non conveniens permits a court to dismiss an action when it finds that “in the interest of substantial justice the action should be heard in another forum” (CPLR 327[a]). In reviewing the motion court’s exercise of discretion, this Court, however, may exercise such discretion independently … . The factors to be considered on a forum non conveniens motion include: “the burden on the New York courts, the potential hardship to the defendant, and the unavailability of an alternative forum in which plaintiff may bring suit. The court may also consider that both parties to the action are nonresidents and that the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction. No one factor is controlling” … . New York courts “need not entertain causes of action lacking a substantial nexus with New York” … .

… Although plaintiff is a resident of New York, Anderson, its documents, and the witnesses are all located in the United Kingdom. The dispute involves an accounting of a British private company and will likely involve the application of British law to determine what duty, if any, is owed to plaintiff. Furthermore, the United Kingdom has a stronger interest than New York in the actions, duties, and governance of its companies … . Hayes v Anderson & Sheppard Ltd., 2024 NY Slip Op 01344, First Dept 3-14-24

Practice Point: Here plaintiff, a New York resident and a shareholder in defendant London corporation, alleged defendant wrongfully failed to pay dividends. The London defendant’s motion to dismiss on forum non conveniens grounds should have been granted, criteria explained.

 

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