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IN THE CONTEXT OF A LAWSUIT BY THE BOARD MEMBERS OF AN UNINCORPORATED CONDOMINIUM ASSOCIATION AGAINST THE FORMER PRESIDENT OF THE BOARD, NEITHER THE REAL PROPERTY LAW (RPL) NOR THE BUSINESS CORPORATION LAW (BCL) APPLIES TO THE FORMER PRESIDENT’S DEMAND FOR ATTORNEY’S FEES ASSOCIATED WITH DEFENDING THE ACTION; THE BY-LAWS AND THE COMMON LAW RULE THAT THE PARTIES ARE RESPONSIBLE FOR THEIR OWN ATTORNEY’S FEES CONTROL (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Gische, reversing Supreme Court, in a matter of first impression, determined the defendant, the former president of the condominium board, is not entitled to indemnification (attorney’s fees) for her costs in defending a lawsuit brought by the board of managers of the unincorporated condominium association. The lawsuit alleged defendant misappropriated the insurance proceeds paid after a fire in the condominium building. The First Department held the by-laws and the common law rule that the parties are responsible for their own attorney’s fees control. The court rejected the application of provisions of the Real Property Law (RPL) and the Business Corporation Law (BCL) with respect to indemnification in the context of an unincorporated condominium association:

Neither the common law, nor BCL § 624(e) by analogy, provide the right to recoup attorney’s fees to a board member successfully defending against a derivative action. BCL § 626(e) is not an indemnification provision. Rather, it permits legal fees to be paid to an owner who successfully asserts the interest of an entity “when the management of the entity fails to act to protect that interest” … . Consequently, “an award of attorneys’ fees in a shareholders’ derivative suit is to reimburse the plaintiff for expenses incurred on the corporation’s behalf” … . The corporation is responsible for paying the legal fees, but only where the corporation benefits from the litigation … . Neither the BCL nor the common law provide a board member with a reciprocal right to recover legal fees for defending against an unsuccessful derivative action, at least not in the absence of such authorization in the bylaws or some other statutory authority. In this respect, …

In the absence of any authority permitting [defendant] to recoup her legal fees, the general common law rule applies, that “attorney’s fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule” … . [Defendant], alone, is responsible for her legal fees. Board of Mgrs. of the 28 Cliff St. Condominium v Maguire, 2020 NY Slip Op 06844, First Dept 11-19-20

 

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PIERCING THE CORPORATE VEIL AND AGENCY ALLEGATIONS SUFFICIENTLY PLED VICARIOUS LIABILTY FOR NEGLIGENCE ON THE PART OF THE NURSING HOME DEFENDANTS FOR AN ASSAULT BY A RESIDENT ON PLAINTIFF’S DECEDENT; THE COMPLAINT ALSO SUFFICIENTLY ALLEGED PUBLIC HEALTH LAW VIOLATIONS; PLAINTIFF’S MOTION TO SERVE AN AMENDED COMPLAINT SHOULD HAVE BEEN GRANTED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined the complaint adequately stated negligence and Public Health Law causes of action against a nursing home facility stemming from an assault on plaintiff’s decedent by another resident. The Fourth Department found the complaint adequately alleged the criteria for piercing the corporate veil, the criteria for an agency relationship among the defendants, and for a Public Health Law cause of action. The court further found plaintiff’s motion to serve an amended complaint should have been granted:

… Plaintiff alleges that the … defendants were operated in such a way “as if they were one by commingling them on an interchangeable basis or convoluted separate properties, records or control.” Significantly, plaintiff alleged that the corporate formalities were conduits to avoid obligations to the facility’s residents, and thus the allegations are sufficient to state a cause of action for negligence under a theory of piercing the corporate veil or alter ego … . …

… [P]laintiff’s claims in the negligence cause of action that defendants are vicariously liable under theories of agency and joint venture are … sufficiently stated. “The elements of a joint venture are an agreement of the parties manifesting their intent to associate as joint venturers, mutual contributions to the joint undertaking, some degree of joint control over the enterprise, and a mechanism for the sharing of profits and losses” … . “Agency . . . is a fiduciary relationship which results from the manifestation of consent of one person to allow another to act on his or her behalf and subject to his or her control, and consent by the other so to act” … . Plaintiff alleges in the first amended complaint that defendants acted as agents for one another and, as relevant here, that they ratified the acts of one another regarding, inter alia, operation of the facility, allocation of resources, and mismanagement of the facility. …

Plaintiff alleged that in addition to residential care, the facility provided “health-related services,” including specialized dementia care, dietary supervision, hygiene and on-site medical and psychological care. Accepting those facts as alleged in the first amended complaint as true, and affording every possible favorable inference to plaintiff, we conclude plaintiff sufficiently alleged facts to overcome defendants’ argument that the facility is an assisted living facility and not subject to those sections of the Public Health Law … . Cunningham v Mary Agnes Manor Mgt., L.L.C., 2020 NY Slip Op 06582, Fourth Dept 11-13-20

 

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ACTION TO ENFORCE A FOREIGN JUDGMENT AGAINST A DELAWARE DISSOLVED LIMITED LIABILITY COMPANY COULD NOT BE MAINTAINED BECAUSE THE CERTIFICATE OF CANCELLATION HAS NOT BEEN NULLIFIED (FIRST DEPT).

The First Department, reversing Supreme Court, determined the action to domesticate and enforce a foreign judgment after defendant corporation had been dissolved could not be maintained:

Plaintiff commenced this action against defendant, a Delaware limited liability company, to domesticate and enforce a foreign judgment in its favor several months after defendant had been dissolved and a certificate of cancellation filed (see 6 Del C § 18-203[a]). As the certificate of cancellation has not been nullified and plaintiff does not seek nullification, plaintiff cannot maintain this action (6 Del C § 18-803[b]) … . Epie v Herakles Farms, LLC, 2020 NY Slip Op 05283, First Dept 10-1-20

 

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THE FAILURE TO COMPLY WITH THE SERVICE OF PROCESS REQUIREMENTS OF BUSINESS CORPORATION LAW 307 IS A JURISDICTIONAL DEFECT AND THE FAILURE TO MAKE DILIGENT EFFORTS TO COMPLY WARRANTED DENIAL OF A MOTION TO EXTEND THE TIME FOR SERVICE PURSUANT TO BUSINESS CORPORATION LAW 306-b (THIRD DEPT).

The Third Department, reversing Supreme Court, determined plaintiffs’ failure to make diligent efforts to serve defendant in accordance with Business Corporation Law 307 required dismissal of the complaint:

… [B]ecause the failure to strictly comply with the procedures of Business Corporation Law § 307 constitutes a jurisdictional defect, rather than a mere irregularity, the 30-day time period in Business Corporation Law § 307 (c) (2) is not subject to extension under CPLR 2004 … . * * *

… [P]laintiffs did not make reasonably diligent efforts to comply with the procedures of Business Corporation Law § 307. Although plaintiffs personally delivered the summons with notice to an authorized agent of the Secretary of State and sent a copy of the summons with notice by registered mail, return receipt requested, to the address that PLS had registered with the Bureau of Corporations and Charitable Organizations within Pennsylvania’s Department of State … , they made absolutely no effort to thereafter file the affidavit of compliance and the requisite accompanying documents … . Moreover, the excuse provided for plaintiffs’ failure to timely serve PLS in accordance with Business Corporation Law § 307 amounts to law office failure, an excuse that has been held to be insufficient to constitute good cause … . Thus, as plaintiffs did not make the requisite showing, they are not entitled to an extension “upon good cause” under CPLR 306-b. Garrow v Pittsburgh Logistics Sys., Inc., 2020 NY Slip Op 05010, Third Dept 9-17-20

 

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CAUSES OF ACTION FOR UNJUST ENRICHMENT, BREACH OF FIDUCIARY DUTY AND AN ACCOUNTING SHOULD NOT HAVE BEEN DISMISSED; FAILURE TO TRANSFER ASSETS ALLEGED A CONTINUING WRONG AND PAYMENTS WHICH ALLEGEDLY SHOULD HAVE BEEN MADE DURING THE STATUTE OF LIMITATIONS PERIOD WERE ACTIONABLE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff stated causes of action for unjust enrichment, breach of fiduciary duty and an accounting against her sister (Weisel), the sole manager of A & Z, of which plaintiff is also a member. The court noted that the allegation that Weisel did not transfer assets to A & Z alleged a continuing wrong, so payments allegedly owed to A & Z within the statute of limitations period were actionable:

To state a cause of action for unjust enrichment, the plaintiff must allege that (1) the other party was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered … . …

“[A] fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect . . . barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty” … . Here, the plaintiff has alleged that Wiesel is the sole manager of A & Z—which, if true, would impose a fiduciary duty on Wiesel arising out of her position as the sole manager of A & Z … . The amended complaint sufficiently alleges that Wiesel is in a fiduciary relationship with the plaintiff, arising out of both her position as sole manager of A & Z and her familial relationship with the plaintiff … .  …

A cause of action for accounting requires “the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest” … . Greenberg v Wiesel, 2020 NY Slip Op 04927, Second Dept 9-16-20

 

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PLEADING REQUIREMENTS FOR A BREACH OF FIDUCIARY DUTY CAUSE OF ACTION WERE NOT MET; ATTORNEY REPRESENTING A CORPORATION DOES NOT OWE A FIDUCIARY DUTY TO SHAREHOLDERS OR EMPLOYEES (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the pleading requirements for a breach of fiduciary duty cause of action were not met and defendant attorneys, who represented the corporation, not the decedent, did not owe a fiduciary duty to decedent:

We disagree with the Supreme Court’s determination denying that branch of the Berger defendants’ [attorneys’] motion which was pursuant to CPLR 3211(a)(7) to dismiss the sixth cause of action, alleging breach of fiduciary duty against them. ” [T]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendants misconduct'” … . A cause of action to recover damages for breach of fiduciary duty must be pleaded with the particularity required under CPLR 3016(b) … . Here, the sixth cause of action, alleging breach of fiduciary duty against the Berger defendants, contained only bare and conclusory allegations related to damages, without any supporting detail, and failed to satisfy the requirements of CPLR 3016(b) … .

Additionally, the complaint alleges that the Berger defendants represented Rockland Inc., and owed a fiduciary duty to the decedent based upon that representation. However, a corporation’s attorney represents the corporate entity, not its shareholders or employees … . Mann v Sasson, 2020 NY Slip Op , 04737, Second Dept 8-26-20

 

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BANKRUPTCY EXCEPTION TO THE INSURED VS INSURED EXCLUSION IN THIS DIRECTORS & OFFICERS LIABILITY INSURANCE POLICY APPLIED TO THE CREDITOR TRUST FORMED TO PURSUE THE BANKRUPTCY ESTATE’S LEGAL CLAIMS ON BEHALF OF UNSECURED CREDITORS (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Renwick, in a matter of first impression, determined the bankruptcy exception to the insured vs. insured exclusion applied to the Directors & Officers (D & O) liability insurance policy:

Plaintiff Westchester Fire Insurance Co. … commenced this action seeking a declaration that it has no coverage obligations to defendants insureds, arguing primarily that the “insured versus insured” exclusion of a Directors and Officers (D & O) liability insurance policy, procured by RCS Capital Corporation (RCAP), bars coverage of claims asserted against defendants, … RCAP’s former directors and officers. Defendants insureds contend, among other things, that coverage exists under the bankruptcy exception to the insured vs. insured exclusion. The claims, herein, arose after RCAP’s bankruptcy.

The Creditor Trust was formed, pursuant to the reorganization plan, to pursue the bankruptcy estate’s legal claims on behalf of the unsecured creditors … . …

This appeal raises an issue of apparent first impression of whether a D & O liability policy’s bankruptcy exception, which allows claims asserted by the “bankruptcy trustee” or “comparable authority,” applies to claims raised by a Creditor Trust, as a post-confirmation litigation trust, to restore D & O coverage removed by the insured vs. insured exclusion. For the reasons that follow, we find that the bankruptcy exception to the insured vs. insured exclusion, applies to restore coverage. Specifically, we interpret the broad language “comparable authority” to encompass a Creditor Trust that functions as a post-confirmation litigation trust, given that such a Creditor Trust is an authority comparable to a “bankruptcy trustee” or other bankruptcy-related or “comparable authority” listed in the bankruptcy exception. Westchester Fire Ins. Co. v Schorsch, 2020 NY Slip Op 04627, First Dept 8-20-20

 

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QUESTION OF FACT WHETHER THE CORPORATE VEIL SHOULD BE PIERCED IN THIS BREACH OF CONTRACT ACTION (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff had raised questions of fact about whether the corporate veil should be pierced in this breach of contract action:

The plaintiff alleged that it contracted with the defendant China Perfect Construction Corp. (hereinafter China Perfect) to perform certain construction work, and that China Perfect breached that contract by performing the work in a substandard manner. The plaintiff alleged that the defendants Rushang Zhao and May Lu … exercised complete dominion and control over the operations of China Perfect and used such dominion and control to commit a fraud or wrong against the plaintiff. In this regard, the plaintiff alleged that the individual defendants created the defendant New Empire Builder Corp. …  solely to avoid the debts and liabilities of China Perfect, and that they transferred the assets of China Perfect to New Empire in order to render China Perfect “judgment-proof.” * * *

… [T]he defendants failed to affirmatively establish, prima facie, that the individual defendants did not exercise dominion and control over China Perfect to commit a wrong or injustice against the plaintiff, such that the doctrine of piercing the corporate veil is inapplicable … . Sterling Park Developers, LLC v China Perfect Constr. Corp., 2020 NY Slip Op 04340, Second Dept 7-29-20

 

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DEFENDANT DID NOT DEMONSTRATE THE FOREIGN CORPORATION WAS DOING BUSINESS IN NEW YORK WITHOUT AUTHORIZATION; DEFENDANT’S MOTION TO DISMISS THE COMPLAINT IN THIS FORECLOSURE ACTION ON THAT GROUND SHOULD NOT HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined a defendant in this foreclosure action brought by a foreign corporation did not demonstrate the corporation was doing business in New York without authorization. Therefore defendant’s motion to dismiss the complaint on that ground should not have been granted:

“Business Corporation Law § 1312(a) constitutes a bar to the maintenance of an action by a foreign corporation found to be doing business in New York without . . . the required authorization to do business there” … . “The purpose of that section is to regulate foreign corporations which are doing business’ within the State, not . . . to enable the avoidance of contractual obligations” … . “[T]he party relying upon this statutory barrier bears the burden of proving that the corporation’s business activities in New York were not just casual or occasional, but so systematic and regular as to manifest continuity of activity in the jurisdiction”… . “[A]bsent proof establishing that the [subject corporation] is doing business in New York, it is presumed that [it] is doing business in [the] State of incorporation, and not in New York” … .

The defendant failed to establish, prima facie, that “[the appellant] conducted continuous activities in [New York] essential to its corporate business” … . Therefore, “the presumption that [the appellant] does business, not in New York but in its State of incorporation has not been overcome” … . JPMorgan Chase Bank, N.A. v Didato, 2020 NY Slip Op 03903, Second Dept 7-15-20

 

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DEFENDANT’S MOTION TO VACATE ITS DEFAULT BECAUSE IT WAS NEVER SERVED WITH THE SUMMONS AND COMPLAINT SHOULD HAVE BEEN GRANTED; THE ADDRESS ON FILE WITH THE SECRETARY OF STATE WAS INCORRECT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant’s motion to vacate its default because it was never served with the summons and complaint should have been granted. The defendant demonstrated the address on file with the Secretary of State was incorrect and the failure to update the address was not a deliberate attempt to avoid service:

” CPLR 317 provides, generally, that a defendant is entitled to vacatur of a default judgment if it is established that he [or she] did not receive personal notice of the summons in time to defend and that he [or she] has a meritorious defense'”… . “It is also well established that service on a corporation through delivery of process to the Secretary of State is not personal delivery’ to the corporation or to an agent designated under CPLR 318” … . While it is not necessary for a defendant moving pursuant to CPLR 317 to show a reasonable excuse for its delay … , a defendant is not entitled to relief under that statute where its failure to receive notice of the summons “was a result of a deliberate attempt to avoid such notice” … .

Here, the defendant established its entitlement to relief from its default under CPLR 317 by demonstrating that the address on file with the Secretary of State at the time the summons and complaint were served was incorrect, and that it did not receive actual notice of the summons and complaint in time to defend itself against this action … . Contrary to the plaintiff’s contention, an order dated August 21, 2013, issued in connection with the 2009 action, which was mailed to the defendant at the subject property, did not place the defendant on notice that the address on file with the Secretary of State was incorrect  … . In addition, the evidence does not suggest that the defendant’s failure to update its address with the Secretary of State constituted a deliberate attempt to avoid service of process … . Moreover, the defendant met its burden of demonstrating the existence of a potentially meritorious defense … . Golden Eagle Capital Corp. v Paramount Mgt. Corp., 2020 NY Slip Op 03770, Second Dept 7-8-20

 

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