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IN A JUDICIAL DISSOLUTION, IF THE PARTIES CANNOT AGREE ON THE DISPOSITION OF THE ASSETS THE ONLY OPTION IS LIQUIDATION AT A PUBLIC SALE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the court did not have the authority to order a sealed-bid auction of the corporate assents in this judicial dissolution case. Because the parties could not agree on the disposition of the assents, under the Business Corporation Law, the only option is liquidation at a public sale:

“‘Postdissolution procedures in a judicial dissolution proceeding are set forth in Business Corporation Law § 1005 through 1008′” … . Business Corporation Law § 1005(a)(2) states that after dissolution “[t]he corporation shall proceed to wind up its affairs, with power to fulfill or discharge its contracts, collect its assets, sell its assets for cash at public or private sale, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business.” “When the parties cannot reach an agreement amongst themselves with respect to the sale of the corporation’s assets either to one another or to a third party, ‘the only authorized disposition of corporate assets is liquidation at a public sale'” … . Thus, since the parties were not able to reach a full agreement as to the terms of the private sale, the Supreme Court did not have the authority to authorize the sealed-bid auction … . Matter of ANO, Inc. v Goldberg, 2023 NY Slip Op 02508, Second Dept 5-10-23

Practice Point: In a judicial dissolution of a corporation, if the parties cannot agree on the disposition of the assets, liquidation at a public sale is the only option.

 

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ALTHOUGH DEFENDANT CORPORATION WAS NOT SERVED WITH THE SUMMONS AND COMPLAINT, THE CORPORATE DEFENDANT “APPEARED INFORMALLY” THROUGH THE CEO’S AFFIDAVIT; PLAINTIFFS WERE ENTITLED TO A DEFAULT JUDGMENT AGAINST THE CORPORATION (SECOND DEPT). ​

The Second Department, reversing Supreme Court, determined that, although the defendant corporation was not served with the summons and complaint, it “appeared informally” in the action and, therefore, plaintiffs’ motion for a default judgment should have been granted. The “informal appearance” was in the form of the corporate CEO’s affidavit:

… “‘[I]n addition to the formal appearances listed in CPLR 320(a), the law continues to recognize the so-called “informal” appearance'” .. . An informal appearance “‘comes about when the defendant, although not having taken any of the steps that would officially constitute an appearance under CPLR 320(a), nevertheless participates in the case in some way relating to the merits'” … . “When a defendant participates in a lawsuit on the merits, he or she indicates an intention to submit to the court’s jurisdiction over the action, and by appearing informally in this manner, the defendant confers in personam jurisdiction on the court” … . “[A]n appearance of the defendant is equivalent to personal service of the summons upon him [or her], unless an objection to jurisdiction under [CPLR 3211(a)(8)] is asserted by motion or in the answer as provided in rule 3211” (CPLR 320[b]).

“The occasion for [an informal] appearance [is] an infrequent thing” … . However, an informal appearance may occur even where the defendant is not served with process , where an individual defendant affirmatively states that he or she is only acting in his or her capacity as an officer of a corporate defendant … . Travelon, Inc. v Maekitan, 2023 NY Slip Op 01816, Second Dept 4-5-23

Practice Point: Although infrequent, New York still recognizes an “informal appearance” in an action, here through an affidavit submitted by the CEO of a corporate defendant. Because of the informal appearance, plaintiffs were entitled to a default judgment, even though the defendant was never served with a summons and complaint.

 

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A CORPORATION (HERE A COOPERATIVE) DOES NOT OWE A FIDUCIARY DUTY TO THE SHAREHOLDERS; THE INDIVIDUAL BOARD MEMBERS MAY OWE A FIDUCIARY DUTY TO THE SHAREHOLDERS FOR INDIVIDUAL ACTIONS BUT NO ALLEGATIONS OF WRONGDOING BY BOARD MEMBERS WERE MADE (FIRST DEPT).

​The First Department, reversing (modifying) Supreme Court, noted that a corporation (or, in this case a cooperative) does not owe a fiduciary duty to its shareholders:

… [T]he second cause of action for breach of fiduciary duty as against the cooperative and the board member defendants also does not state a claim upon which relief may be granted. The cause of action cannot be sustained as against the cooperative “because a corporation owes no fiduciary duty to its shareholders” … . Furthermore, even assuming that the cause of action was addressed to the actions taken by the individual board member defendants, it “does not allege any individual wrongdoing by the members of the board separate and apart from their collective actions” taken in their capacity as board members … . Tahari v 860 Fifth Ave. Corp, 2023 NY Slip Op 01269, First Dept 3-14-23

Practice Point: A corporation does not owe a fiduciary duty to shareholders. Individual board members may owe a duty which would be breached by wrongdoing, not alleged here.

 

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EVEN THOUGH THE DEFENDANT CORPORATION DID NOT HAVE AN OFFICE IN NEW YORK COUNTY AND THE TRAFFIC ACCIDENT OCCURRED IN NASSAU COUNTY WHERE THE CORPORATION DID HAVE AN OFFICE, VENUE WAS APPROPRIATELY PLACED IN NEW YORK COUNTY BASED ON DEFENDANT’S CERTIFICATE OF INCORPORATION (FIRST DEPT).

The First Department, reversing Supreme Court, determined the defendants’ motion to change venue in this traffic accident case should not have been granted. Even though the accident didn’t occur in New York County and defendant corporation did not have an office in New York County, the certificate of incorporation designated New York County as the location of its principal office and the certificate controls:

Plaintiff properly placed venue in New York County based upon the corporate defendant’s initial certificate of incorporation designating New York County as the location of its principal office although the company has no office there (see CPLR 503 [c] …).

While defendants annexed to their moving papers the police report for the subject motor vehicle accident indicating that defendants’ vehicle was registered to a Nassau County address on the day of the accident and an affidavit from the corporate defendant’s Vice President averring that its office was in Nassau County when the action was commenced, the corporate residence designated in the initial certificate of incorporation controls for venue purposes … . There was no evidence of an amended certificate of incorporation that changed the principal place of business to Nassau County.

The general rule is that a transitory action, such as the subject motor vehicle accident, when other things are equal, should be tried in the county where the cause of action arose … . This rule, however, is predicated on the convenience of material nonparty witnesses who are to be present at trial … . While the situs of the accident provides a basis to change venue to Nassau County, defendants failed to sustain their burden, as the party moving for a discretionary change of venue pursuant to CPLR 510 (3), that there are material witnesses who would be inconvenienced by a trial in New York County … . Marte v Lampert, 2023 NY Slip Op 00375, First Dept 1-26-23

Practice Point: Here the traffic accident happened in Nassau County where defendant corporation had an office. But defendant’s certificate of incorporation indicated defendant’s principal office was in New York County. The certificate controls, even though the defendant corporation did not actually have an office in New York County.

 

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TOWNHOUSES PURCHASED BY A NOT-FOR-PROFIT SCHOOL TO HOUSE FACULTY ARE TAX EXEMPT (SECOND DEPT),

The Second Department, reversing the city board of assessment review (BAR) determined that townhouses purchased by the Rye County Day School (RCDS), a not-for-profit school, to house faculty were tax exempt:

RPTL 420-a(1)(a) provides that “[r]eal property owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes, and used exclusively for carrying out thereupon one or more of such purposes either by the owning corporation or association or by another such corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.” The word “exclusively” in the statute has been broadly defined as “principally” or “primarily” … , such that “purposes and uses merely auxiliary or incidental to the main and exempt purpose and use will not defeat the exemption” … . Thus, the two-part test for determining entitlement to a property tax exemption under RPTL 420-a is “(1) whether the owner of the property is organized or conducted exclusively, or primarily, for an exempt purpose; and (2) whether the particular property for which the exemption is sought is itself primarily used for an exempt purpose” … .

RCDS demonstrated that the “primary use” of the faculty-occupied townhouses furthered its “primary purpose” of operating as a school.

… RCDS demonstrated that the “primary use” of the faculty-occupied townhouses furthered its “primary purpose” of operating as a school … . Matter of Rye Country Day Sch. v Whitty, 2023 NY Slip Op 00323, Second Dept 1-25-23

Practice Pont: Faculty housing for a not-for-profit school is tax exempt.

 

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THE ALLEGATIONS IN THE COMPLAINT WERE NOT SUFFICIENT TO SUPPORT LIABILITY ON A PIERCING-THE-CORPORATE-VEIL THEORY AND THE HOPE THAT DISCOVERY WOULD REVEAL SOMETHING WAS NOT A BASIS FOR DENIAL OF THE MOTION TO DISMISS (FIRST DEPT).

The First Department, reversing Supreme Court, determined the complaint did not allege sufficient facts to hold defendant MMC liable on a piercing-the-corporate veil theory in this medical malpractice case:

… [T]he complaint does not contain allegations sufficient to support holding MMC liable on a theory of piercing the corporate veil, since it does not allege facts supporting a finding that MMC completely dominated and controlled Nyack Hospital or abused the privilege of doing business in the corporate form (CPLR 3211[a][7] … ). Moreover, the lack of discovery does not excuse plaintiff’s failure to plead any facts that would support piercing the corporate veil …, and the hope that something will turn up in discovery is an insufficient basis to deny the motion to dismiss … . Yovich v Montefiore Nyack Hosp., 2023 NY Slip Op 00047, First Dept 1-5-23

Practice Point: If a complaint doesn’t allege facts demonstrating complete domination and control or abuse of the privilege of doing business in the corporate form the cause of action relying on the piercing-the-corporate-veil theory will be dismissed. The hope that discovery will reveal something relevant is not enough to prevent dismissal.

 

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WHETHER THE CORPORATE VEIL SHOULD BE PIERCED IS A FACT-BASED DETERMINATION GENERALLY NOT SUITED FOR SUMMARY JUDGMENT; THE FINDINGS BY THE MOTION COURT WERE NOT SUPPORTED BY UNDISPUTED FACTS; SUMMARY JUDGMENT ALLOWING THE CORPORTE VEIL TO BE PIERCED REVERSED (FIRST DEPT).

The First Department, reversing Supreme Court, determined the motion court should not have granted summary judgment allowing the corporate veil to be pierced and holding the defendants liable for a judgment against the corporation (DJJMS). The appellate division noted that a determination the corporate veil should be pierced is a fact-based analysis not suited to summary judgment:

The elements of veil piercing are that (1) the owners exercised complete domination and control of the corporation with respect to the transaction attacked; and (2) such domination was used to commit a fraud or wrong against the plaintiff, resulting in the plaintiff’s injury … . Plaintiffs who seek to pierce the corporate veil bear a heavy burden … .

“[C]omplete domination of the corporation is the key to piercing the corporate veil” … , but the motion court did not cite sufficient, undisputed facts to show that defendants exercised complete domination of DJJMS. It noted that veil piercing occurs “when the principals are using the corporation ‘as their personal piggy-bank'” but cited no facts to support its apparent determination that defendants so used DJJMS … . The motion court did not adequately detail relevant, undisputed facts to show that defendants have “abused the privilege of doing business in the corporate form,” including facts showing that, as a matter of law “there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use” … . … The motion court apparently presumed that the transfer at issue …  caused DJJMS to be judgment proof, but the court does not cite any undisputed fact, other than the fact of the transfer itself, to support its conclusion. Etage Real Estate LLC v Stern, 2022 NY Slip Op 07499, First Dept 12-29-22

Practice Point: Whether the corporate veil should be pierced is a fact-laden inquiry which is not suited for summary judgment.

 

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THE ADDITIONAL NOTICE REQUIREMENT IN CPLR 3215(G)(4) DOES NOT APPLY TO SERVICE UPON A LIMITED LIABILITY COMPANY, AS OPPOSED TO A CORPORATION (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the plaintiff was not required to comply with the additional notice requirement in CPLR 3215(g)(4) which does not apply to service upon a limited liability company (the defendant here), as opposed to corporations:

The court [in denying plaintiff’s motion for a default judgment] determined that the plaintiff had failed to comply with CPLR 3215(g)(4) and that the respondent had a reasonable excuse for failing to answer the complaint in that it had not been served with process. …

Contrary to the Supreme Court’s determination, the plaintiff was not required to demonstrate compliance with the additional notice requirement of CPLR 3215(g)(4) … . “By its express terms, the notice requirement is limited to situations where a default judgment is sought against a ‘domestic or authorized foreign corporation’ which has been served pursuant to Business Corporation Law § 306(b), and does not pertain to a limited liability company” … . Mitchell v Kingsbrook Jewish Med. Ctr., 2022 NY Slip Op 06477, Second Dept 11-16-22

Practice Point: The additional notice requirement for a default judgment pursuant to CPLR 3215(g)(4) does not apply to service on a limited liability company, as opposed to a corporation.

 

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PLAINTIFF ALLEGED DEFENDANT CORPORATION’S REGISTRATION STATEMENT CONTAINED FALSE AND MISLEADING CLAIMS WHICH INDUCED PLAINTIFF TO BUY STOCK IN DEFENDANT’S CORPORATION; THE CLAIMS IN DEFENDANT’S REGISTRATION STATEMENT WERE MERE PUFFERY AND WERE NOT ACTIONABLE VIOLATIONS OF THE SECURITES ACT OF 1933 (FIRST DEPT).

he First Department, reversing Supreme Court, determined the complaint alleging several violations of the Securities Act of 1933 should have been dismissed. The complaint alleged that it was induced to buy stock by defendant’s registration statement. The First Department concluded the statements not false or misleading and therefore were not actionable:

The … registration statement … includes the following statements: “We believe we have created a financially strong company built upon a foundation of three thriving, independent brands with significant global growth potential.” “New product development is a key driver of the long-term success of our brands. We believe the development of new products can drive traffic by expanding our customer base.” “We face intense competition in our markets, which could negatively impact our business. . . Our ability to compete will depend on the success of our plans to improve existing products, to develop and roll-out new products, [and] to effectively respond to consumer preferences.” * * *

… [T]he statements were nonactionable immaterial puffery and/or nonactionable opinion … .

The statements did not become misleading by omission as a result of a failure to disclose a slight decline in “same-store sales” for a single quarter’s sales … . City of Warwick Mun. Empls. Pension Fund v Restaurant Brands Intl. Inc., 2022 NY Slip Op 06315, First Dept 11-10-22

Practice Point: Statements which are mere puffery are not actionable violations of the Securities Act of 1933. Here plaintiff alleged false and misleading claims in defendant corporation’s registration statement induced plaintiff to buy defendant corporation’s stock. Supreme Court should have granted defendant’s motion to dismiss the complaint.

 

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THE COMPLAINT ADEQUATELY ALLEGED FACTS SUPPORTING PIERCING THE CORPORATE VEIL; THE CAUSES OF ACTION FOR UNJUST ENRICHMENT AND BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING SHOULD NOT HAVE BEEN DISMISSED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined (1) the complaint sufficiently alleged the corporate veil should be pierced, and (2) the unjust enrichment and breach of the implied covenant of good faith and fair dealing causes of action should not have been dismissed:

… [A] plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury” … . “The decision whether to pierce the corporate veil in a given instance depends on the particular facts and circumstances” … . “Factors to be considered in determining whether the owner has abused the privilege of doing business in the corporate form include whether there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use” … . A cause of action under the doctrine of piercing the corporate veil is not required to meet any heightened level of particularity in its allegations … .

… [T]he plaintiffs adequately pleaded allegations that [the individual defendants] dominated [the corporations], and that they engaged in acts amounting to an abuse of the corporate form to perpetrate a wrong or injustice against the plaintiffs … . …

Where, as here, the existence of a contract, in this case, the alleged agreements [are] in dispute, a plaintiff may allege a cause of action to recover damages for unjust enrichment as an alternative to a cause of action alleging breach of contract (see CPLR 3014 …). Consequently, the cause of action alleging unjust enrichment was not duplicative of the breach of contract cause of action … . Furthermore, the cause of action alleging breach of the implied covenant of good faith and fair dealing was not duplicative of the breach of contract cause of action since it alleged that the defendants engaged in additional conduct to realize gains from the plaintiffs, while depriving the plaintiffs of the benefits of the parties’ agreements … . F&R Goldfish Corp. v Furleiter, 2022 NY Slip Op 06112. Second Dept 11-2-22

Practice Point: The facts alleged in the complaint supported piercing the corporate veil, criteria explained.

Practice Point: Because the existence of the agreements was in dispute, the unjust enrichment cause of action should not have been dismissed as duplicative of the breach of contract cause of action.

Practice Point: The facts alleged supported a cause of action for breach of the implied covenant of good faith and fair dealing.

 

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