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DEFENDANTS’ MOTIONS FOR SUMMARY JUDGMENT DISMISSING THE ALTER-EGO (PIERCE-THE-CORPORATE VEIL) CLAIMS SHOULD HAVE BEEN GRANTED; CRITERIA EXPLAINED (FIRST DEPT). ​

The First Department, in a full-fledged opinion by Justice Shulman, reversing Supreme Court, determined plaintiff did not raise a question of fact about whether the corporate veil should be pierced. The court explained the relevant criteria:

A party seeking to pierce the corporate veil must show “complete domination of the corporation in respect to the transaction attacked” and that “such domination was used to commit a fraud or wrong against the plaintiff” … . Because “New York law disfavors disregard of the corporate form” ,,,===… , “[m]ere conclusory allegations that the corporate structure is a sham are insufficient to warrant piercing the corporate veil” … . Instead, the party seeking to pierce the corporate veil “must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party” … . * * *

In considering domination, courts consider factors such as “the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership; officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity” … . Cortlandt St. Recovery Corp. v Bonderman, 2024 NY Slip Op 01250, First Dept 3-7-24

Practice Point: The evidentiary criteria for piercing the corporate veil were not met by the plaintiff. Defendants’ summary judgment motion should have been granted.

 

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FOLLOWING THE RE-ELECTION OF VENEZUELAN PRESIDENT NICOLAS MADURO, THE VENEZUELAN NATIONAL ASSEMBLY NAMED JUAN GUAIDO INTERIM PRESIDENT AND DECLARED THE EXCHANGE OF UNSECURED FOR SECURED NOTES OFFERED BY THE VENEZUELAN STATE-OWNED OIL COMPANY UNAUTHORIZED; VENEZUELAN LAW CONTROLS THE VALIDITY OF THE NOTES UNDER THE UCC, NEW YORK LAW CONTROLS ALL OTHER ASPECTS OF THE TRANSACTION (CT APP). ​

The Court of Appeals, in a comprehensive full-fledged opinion by Judge Troutman, answering questions posed by the Second Circuit, determined the extent to which the exchange of unsecured for secured notes offered to shareholders by the Venezuela’s state-owned oil company was controlled by the New York Uniform Commercial Code (UCC). The court concluded the validity of the notes under the UCC is governed by Venezuelan law and New York law governs the transaction in all other aspects. The opinion is far too detailed and complex to fairly summarize here. At the heart of the dispute is the 2018 re-election of Nicolas Maduro as President of Venezuela and the declaration by the Venezuelan National Assembly naming Juan Guaido as interim President, followed by the National Assembly’s declaration that the exchange of unsecured for secured notes was unauthorized:

In 2016, Venezuela’s state-owned oil company offered a bond swap through which its noteholders could exchange unsecured notes due in 2017 for new, secured notes due in 2020. The United States Court of Appeals for the Second Circuit certified three questions to this Court concerning the extent to which New York law governs this transaction. … [W]e answer that Venezuelan law governs the validity of the notes under Uniform Commercial Code § 8-110 (a) (1), which encompasses within its scope plaintiffs’ arguments concerning whether the issuance of the notes was duly authorized by the Venezuelan National Assembly under the Venezuelan Constitution—i.e., whether there is a defect in the notes occasioned by the application of a constitutional provision bearing on the procedure through which the notes were issued. … New York law governs the transaction in all other respects, including the consequences if a security was “issued with a defect going to its validity” (UCC 8-202 [b] [1]-[2]). * * *

Plaintiffs are three related entities. Petróleos de Venezuela, S.A. (PDVSA) is an oil and gas company wholly owned by the Venezuelan government (Venezuelan Const art 303 [“the State shall retain all shares of” PDVSA]). PDVSA Petróleo S.A. (Petróleo) is incorporated in Venezuela and is a wholly owned subsidiary of PDVSA. PDV Holding, Inc. (PDVH), also a wholly owned subsidiary of PDVSA, is incorporated in Delaware and has its principal place of business in Houston, Texas. PDVH wholly owns CITGO Holding, Inc., which is the sole owner of CITGO Petroleum Corporation, a refiner and marketer of petroleum products in the United States. Nonparties CITGO Holding and CITGO Petroleum Corporation are both incorporated in Delaware with a principal place of business in Houston. Petróleos de Venezuela S.A. v MUFG Union Bank, N.A., 2024 NY Slip Op 00851, CtApp 2-20-24

Practice Point: Nicolas Maduro was re-elected President of Venezuela. Juan Guaido was subsequently named interim President of Venezuela by the Venezuelan National Assembly. The question at the heart of this dispute is whether actions taken by President Maduro (issuance of notes offered by the Venezuelan state-owned oil company) are valid in the face of a subsequent declaration by the Venezuelan National Assembly that the issuance of the notes was not authorized.

 

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THE NATIONAL RIFLE ASSOCIATION’S (NRA’S) FIRST AMENDMENT RETALIATION AND SELECTIVE ENFORCEMENT COUNTERCLAIMS AGAINST THE NEW YORK ATTORNEY GENERAL (NYAD) WERE PROPERLY DISMISSED; WITH RESPECT TO THE RETALIATION COUNTERCLAIM, THE NYAD DEMONSTRATED PROBABLE CAUSE TO SUE THE NRA (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Scarpulla, determined the National Rifle Association’s (NRA’s) First Amendment retaliation and selective enforcement counterclaims against the New York Attorney General (NYAG) were properly dismissed. The First Amendment retaliation claim was properly analyzed under the “no probable cause” standard. The underlying action by the NYAD alleged improper use of NRA funds by the defendants, among other allegations:

… [T]he NRA asserted counterclaims against the NYAG for First Amendment retaliation and selective enforcement. Specifically, the NRA alleged that while the NYAG was campaigning for her current position, she displayed animus towards the NRA by promising to “take down the NRA” using her power as attorney general to regulate charities. James allegedly called the NRA a “terrorist organization” and “criminal enterprise.” The NRA further alleged that the NYAG, rather than working with the NRA to fix issues, as it has done in other cases involving not-for-profit corporations, instead sought dissolution, an extreme remedy not frequently pursued by the NYAG. * * *

On this issue of first impression, we hold that the proper legal standard applicable to First Amendment retaliation claims in civil enforcement proceedings such as this one is the no probable cause standard articulated in Hartman and Nieves (see generally DeMartini v Town of Gulf Stream, 942 F3d 1277, 1304-1306 [11th Cir 2019] …, McBeth v Himes, 598 F3d 708, 717-720 [10th Cir 2010]). …

Applying the no probable cause standard here, the NRA’s First Amendment retaliation counterclaims were properly dismissed for lack of causation … . That is, the NYAG showed as a matter of law that it had probable cause to investigate and sue the NRA … . People v National Rifle Assn. of Am., 2023 NY Slip Op 06819, Second Dept 12-27-23

Practice Point: The correct standard for analyzing a First Amendment retaliation claim is whether there was “no probable cause” to commence the underlying lawsuit. Here the First Department determined the NYAG had probable cause to sue the NRA, which defeated the NRA’ First Amendment retaliation counterclaim.

 

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PETITIONER, THE PRESIDENT AND MAJORITY STOCK HOLDER OF A CONSTRUCTION COMPANY, WAS THE “PERSON RESPONSIBLE” FOR COLLECTING AND PAYING EMPLOYEE WITHHOLDING TAXES; TWO-JUDGE DISSENT (CT APP). ​

The Court of Appeals, in a full-fledged opinion by Judge Cannataro, over a two-judge dissent, affirming the New York State Tax Tribunal and the Appellate Division, determined petitioner, the president and majority shareholder of a construction company, was the person responsible for the collection and payment of employee withholding taxes:

… [P]etitioner and the dissenters argue that the Tribunal employed an incorrect legal test in making its determination, under Tax Law § 685 (g), that petitioner was a person responsible for the collection and payment of employee withholding taxes on behalf of New England Construction Company, Inc. (NECC), a corporation of which petitioner was president and the majority shareholder, and on behalf of which petitioner had repeatedly held himself out as being responsible for payment of taxes. We conclude that the Tribunal committed no such error. Rather, in resolving the question before it, the Tribunal properly considered whether petitioner had the actual authority and effective power to pay the withholding taxes and, thus, was a “responsible person” under section 685. Moreover, substantial evidence supports the Tribunal’s determination that petitioner willfully failed to pay the withholding taxes. * * *

Under Tax Law § 685 (g), a person may be held liable for the withholding taxes of a corporation if the person is “required to collect, truthfully account for, and pay over the tax imposed” and “willfully fails to collect such tax or . . . willfully attempts in any manner to evade or defeat the tax or the payment thereof.” … [S]ection 685 (g) essentially provides that “a person responsible for collecting and paying taxes withheld from employees’ wages is liable for a 100% civil penalty if [that person] willfully fails to collect and pay over the tax” … . Such a responsible person includes “an officer or employee of a corporation . . . who . . . is under a duty to perform the act in respect of which the violation occurs” … . Under the broad terms of this definition, more than one person can be a responsible person under Tax Law § 685 … . Because section 685 (g) was modeled after 26 USC § 6672 (a) … , the terms in the former are to be interpreted in conformity with the latter unless a different meaning is clearly required … . Matter of Black v New York State Tax Appeals Trib., 2023 NY Slip Op 05961, CtApp, 11-20-23

Practice Point: Tax Law 685 makes the “person responsible” for the collection and payment of employee withholding taxes civilly liable for failure to pay the tax.

 

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THE DIRECT BENEFITS THEORY OF ESTOPPEL WAS NOT APPLICABLE TO PLAINTIFF, A NONSIGNATORY TO THE AGREEMENT WITH THE ARBITRATION CLAUSE; THE PLAINTIFF, THERFORE, COULD NOT BE COMPELLED TO ARBITRATE (FIRST DEPT).

The First Department, reversing Supreme Court, determined a nonsignatory, the plaintiff Rosh, Inc., could not be compelled to arbitrate pursuant to the direct benefits theory of estoppel:

The court should have denied the motion to compel arbitration of Rosh’s claims because Rosh is a nonsignatory to the agreement that contains the arbitration clause and defendants failed to show that the direct benefits theory of estoppel applies …  Under that theory, a nonsignatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement” … .

Here, the arbitration clause was contained in a partnership agreement. However, Rosh was not a party to that agreement nor a partner in the partnership. Rather, Rosh was a ten percent owner in a limited liability company that was the general partner of the partnership. This did not constitute a direct benefit to Rosh from the partnership agreement … .

Moreover, before Rosh could be compelled to arbitrate, it had to invoke or attempt to enforce the terms of the partnership agreement … . To the contrary, all of Rosh’s claims were asserted under the operating agreement of the limited liability company or based on its status as a member of that company. Gilat v Sutton, 2023 NY Slip Op 05363, First Dept 10-24-23

Practice Point: Plaintiff was a nonsignatory to the agreement with the arbitration clause. Because plaintiff did not directly benefit from or exploit the agreement, plaintiff could not be compelled to arbitrate pursuant to the direct benefits theory of estoppel.

 

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THE STRUCTURED ACQUISITION OF A LIMITED LIABILITY COMPANY DID NOT CONSTITUTE A DISSOLUTION OF THE COMPANY UNDER THE TERMS OF THE OPERATING AGREEMENT (SECOND DEPT).

The First Department, in a full-fledged opinion by Justice Friedman, reversing (modifying) Supreme Court, determined the operating agreement was not breached. The facts and issues are too complex to fairly summarize here:

The primary question on this appeal is whether an acquisition of a limited liability company, which transaction was structured as a sale of 100 percent of the membership interests in the target company, may be characterized as a dissolution of the company under the terms of its operating agreement. A former preferred shareholder of the target company, seeking to recover the preferred return to which it would be entitled upon a dissolution, argues that the sale of the company’s equity should qualify as a dissolution under the operating agreement because the transaction necessarily involved the transfer of control of all of the company’s assets and the operating agreement provides that dissolution must occur “upon the disposition by the Company of substantially all of its assets.” We are not persuaded by this argument, and therefore modify the order under review to grant defendants summary judgment dismissing the former preferred shareholder’s cause of action for breach of contract. Southern Advanced Materials, LLC v Abrams, 2023 NY Slip Op 04704, First Dept 9-20-23

Practice Point: This factually complex opinion in a breach-of-contract action grapples with what constitutes a dissolution of a company under the terms of the operating agreement.

 

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THE ALLEGATIONS WERE SUFFICIENT TO SUPPORT PIERCING THE CORPORATE VEIL TO REACH DEFENDANT LLC MEMBER PERSONALLY FOR BREACH OF THE HOUSING MERCHANT IMPLIED WARRANTY OBLIGATIONS; AND DEFENDANT COULD BE HELD PERSONALLY LIABLE FOR NEGLIGENT REPAIRS UNDER A HOME RENOVATION CONTRACT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the plaintiffs in this home-renovation-contract dispute sufficiently alleged the corporate veil should be pierced to reach the defendant Assaf, member of the LLC, personally for failing to comply with the implied warrant requirements. Defendant could also be held personally liable for negligent repairs:

Among the plaintiffs’ allegations were that Assaf wound down the LLC’s business following the closing of title in an effort to keep the LLC undercapitalized and judgment proof and that, following the closing, he distributed sale proceeds without reserving sufficient assets needed to satisfy the LLC’s obligations under New York State’s housing merchant implied warranty and any contingent liability.

… “Although [c]orporate officers may not be held personally liable on contracts of their corporations, provided they did not purport to bind themselves individually under such contracts, corporate officers may be held personally liable for torts committed in the performance of their corporate duties” … . Here, the plaintiffs adequately alleged that Assaf personally engaged in acts of negligence in performing repairs at the home … . Gold v 22 St. Felix, LLC, 2023 NY Slip Op 04194, Second Dept 8-9-23

Practice Point: Here the allegation that defendant LLC member undercapitalized the LLC supported piercing the corporate veil for breach of the home merchant implied warranty obligations.

Practice Point: A member of an LLC may be personally liable for negligent repairs pursuant to a home-renovation contract.

 

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THE DEFENDANT’S AFFIDAVIT SUBMITTED IN SUPPORT OF THE MOTION TO DISMISS WAS NOT “DOCUMENTARY EVIDENCE” WHICH UTTERLY REFUTED THE ALLEGATIONS IN THE COMPLAINT; EVEN THOUGH DEFENDANT MIGHT WIN AT THE SUMMARY JUDGMENT STAGE, THE PROOF REQUIREMENTS FOR DISMSSAL ARE DIFFERENT AND WERE NOT MET (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant contractor’s motion to dismiss the complaint against him individually should not have been granted. Defendant, Gabbay, executed the subject home renovation contract on behalf of “Dansha Corp.,” an entity which does not exist. Defendant asserted in an affidavit submitted to support the motion to dismiss, that “Dansh Corp.” is a trade name for “Dansha Realty Corp.,” which does exist. Therefore, defendant argued, he can not be individually liable on the contract. However, irrespective of what might be determined in a motion for summary judgment, a motion to dismiss which relies on evidence must be supported by “documentary evidence.” Defendant’s affidavit does not constitute “documentary evidence:”

Where a party offers evidentiary proof on a motion pursuant to CPLR 3211(a)(7), and such proof is considered but the motion has not been converted to one for summary judgment, ‘the criterion is whether the proponent of the pleading has a cause of action, not whether [the proponent] has stated one, and, unless 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'” … . “‘Whether the complaint will later survive a motion for summary judgment, or whether the plaintiff will ultimately be able to prove its claims, of course, plays no part in the determination of a prediscovery CPLR 3211 motion to dismiss'” … . “A motion to dismiss a complaint pursuant to CPLR 3211(a)(1) may be granted only if the documentary evidence submitted by the moving party utterly refutes the factual allegations of the complaint and conclusively establishes a defense to the claims as a matter of law” … . …

Although there is “no individual liability for principals of a corporation for actions taken in furtherance of the corporation’s business” … , “‘a person entering into a contract on behalf of a nonexistent corporate entity may be held personally liable on the contract'” … . Here, accepting the allegations in the complaint as true and giving the plaintiff the benefit of every possible favorable inference, the complaint states causes of action against Gabbay to recover damages for breach of contract … and money had and received … . There is no dispute that “Dansha Corp.,” the entity named as the general contractor in the contract, does not exist. Furthermore, the evidence submitted by Gabbay failed to conclusively establish that “Dansha Realty Corp.” was the intended party to the contract for purposes of a prediscovery CPLR 3211 motion to dismiss … . The affidavit submitted by Gabbay in support of the motion was not “documentary” within the meaning of CPLR 3211(a)(1) … , and the remainder of the evidence, including invoices sent to the plaintiff from “Dansha Corp.,” do not prove that “Dansha Corp.” is a trade name for “Dansha Realty Corp.” … . Churong Liu v Gabbay, 2023 NY Slip Op 04108, Second Dept 8-2-23

Practice Point: This decision illustrates the different proof requirements for a motion to dismiss based on documentary evidence and a motion for summary judgment. Irrespective of whether a party may win a summary judgment motion, a motion to dismiss supported by an affidavit which is not “documentary evidence” will not win.

 

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HERE THE CLOSE RELATIONSHIP BETWEEN THE NON-SIGNATORY AND THE PARTY TO THE AGREEMENT WARRANTED FINDING THAT THE NON-SIGNATORY WAS BOUND BY THE FORUM SELECTION CLAUSE IN THE AGREEMENT (FIRST DEPT).

The First Department, after reinstating the tortious interference with contract cause of action, determined a non-signatory can be bound by a forum selection clause under the “closely related” doctrine. where the non-signatory and the party to the agreement have such a close relationship that it is foreseeable the forum selection clause will be enforced against the non-signatory:

We find that plaintiff alleged a sufficiently close relationship between Vivendi and the Editis Defendants to justify subjecting it to personal jurisdiction in New York … .  Plaintiff alleged that Editis … was a wholly-owned subsidiary of Vivendi, that Vivendi’s CEO was also the Chairman of Editis, and that Vivendi managed the Editis Defendants’ performance of the subject agreement …. . EPAC Tech. Ltd. v Interforum S.A., 2023 NY Slip Op 03543, First Dept 6-29-23

Practice Point: Here the “close relationship” doctrine warranted finding the non-signatory was bound by the forum selection clause in the agreement. The non-signatory was a wholly-owned subsidiary of the party to the agreement and the non-signatory’s CEO was the chairman of the party to the agreement.

 

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THE FRANCHISOR, TOYOTA, DID NOT EXERCISE CONTROL OVER THE FRANCHISEE’S, PLAZA TOYOTA’S, DAILY OPERATIONS; THEREFORE TOYOTA COULD NOT BE HELD VICARIOUSLY LIABLE FOR PLAZA TOYOTA’S NEGLIGENCE; HERE A WHEEL FELL OFF PLAINTIFF’S CAR AFTER IT WAS SERVICED AT PLAZA TOYOTA (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the complaint against the franchisor, here Toyota, for the negligence of the franchisee car dealership, Plaza Toyota, should have been dismissed. After the plaintiff’s car was worked on at Plaza Toyota, a front wheel fell off:

Supreme Court erred in denying the Toyota defendants’ cross-motion for summary judgment dismissing the complaint and all cross-claims insofar as asserted against them. “In determining whether a defendant, as a franchisor, may be held vicariously liable for the acts of its franchisee, the most significant factor is the degree of control that the franchisor maintains over the daily operations of the franchisee or, more specifically, the manner of performing the very work in the course of which the accident occurred” … .

Here, affidavits submitted by the Toyota defendants in support of their motion established, prima facie, that they lacked the requisite control over the manner in which Plaza Toyota serviced vehicles … . Caceres v Toyota Motor N. Am., Inc., 2023 NY Slip Op 02492, Second Dept 5-10-23

Practice Point: A franchisor can be held vicariously liable for the negligence of a franchisee only if the franchisor exercises control over the franchisee’s daily operations, not the case here.

 

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