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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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NO APPEAL LIES FROM A NONFINAL ORDER, HERE ORDERS WHICH DID NOT RESOLVE THE AWARD OF ATTORNEY’S FEES; IN A SUCCESSFUL SHAREHOLDERS’ DERIVATIVE ACTION ATTORNEY’S FEES ARE PAID BY THE CORPORATION (FOURTH DEPT).

The Fourth Department determined no appeal lies from a nonfinal order and, in a successful shareholders’ derivative action, the corporation is liable for attorney’s fees. The facts of the case are too complex to fairly summarize here. Defendant limited liability company was formed to develop a residential subdivision. The action alleged breach of contract and breach of fiduciary duty and sought dissolution of the LLC:

… “[A]lthough all of the substantive issues between the parties were resolved, the order was facially nonfinal, since it left pending the assessment of attorneys’ fees—a matter that plainly required further judicial action of a nonministerial nature” … . Further, plaintiffs’ “request for attorneys’ fees was an integral part of each of the asserted causes of action rather than a separate cause of action of its own,” and therefore that issue cannot be implicitly severed from the other issues … . Thus, the order … does not constitute a ” final order’ ” within the meaning of CPLR 5501 (a) (1) and does not bring up for our review any prior non-final order … . * * *

… [W]e agree with defendant that the court erred in determining that plaintiff is entitled to attorneys’ fees and disbursements in his status as a derivative plaintiff acting on the LLC’s behalf and in awarding such fees and disbursements … . “The basis for an award of attorneys’ fees in a shareholders’ derivative suit is to reimburse the plaintiff for expenses incurred on the corporation’s behalf . . . . Those costs should be paid by the corporation, which has benefited from the plaintiff’s efforts and which would have borne the costs had it sued in its own right” … . Thus, plaintiff’s success as a derivative plaintiff is not an acceptable basis for an award of attorneys’ fees and disbursements against defendant individually. Howard v Pooler, 2020 NY Slip Op 03347, Fourth Dept 6-12-20

 

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ACCOUNTING CAUSE OF ACTION IN THIS SHAREHOLDERS’ DERIVATIVE SUIT SHOULD NOT HAVE BEEN DISMISSED; ALTHOUGH SUA SPONTE ORDERS ARE NOT APPEALABLE, THE APPEAL WAS HEARD IN THE INTEREST OF JUSTICE; PROPER WAY TO HANDLE A SUA SPONTE ORDER IS TO MOVE TO VACATE AND THEN APPEAL (FIRST DEPT).

The First Department, reversing Supreme Court in this shareholders’ derivative action against a low-income Housing Development Fund Corporation (HDFC), determined: (1) although a sua sponte order is not appealable, the appeal of the dismissal of the cause of action for an accounting is heard in the interest of justice; (2) the proper way to handle a sua sponte order is to move to vacate it and then appeal; (3) there was no need to amend the complaint because the accounting cause of action included the right to damages for wrongdoing (here the alleged failure to account for the sale of an apartment for $90,000):

An order issued sua sponte is not appealable as of right (see CPLR 5701[a][2] …). Plaintiffs’ remedy is to move to vacate the court’s order, and, if the motion is denied, appeal from that order (CPLR 5701[a][3] …). …

… [W]e find that Supreme Court erred in dismissing the complaint because the cause of action for an equitable accounting was not moot. Supreme Court conflated the first cause of action for the inspection of the HDFC’s books and records with the second cause of action for an equitable accounting … . Defendants failed to demonstrate what happened to the $90,000 from the sale of Apartment 6A, and the funds do not appear in the HDFC’s financials. Defendants’ affidavits did not address this glaring deficiency.

… An equitable accounting involves a remedy “designed to require a person in possession of financial records to produce them, demonstrate how money was expended and return pilfered funds in his or her possession” … . Available relief includes a personal judgment against the wrongdoer … . Hall v Louis, 2020 NY Slip Op 03268, First Dept 6-11-20

 

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THE DOCTRINE OF ‘TAX ESTOPPEL’ PROHIBITED DEFENDANT FROM TAKING A POSITION ON OWNERSHIP OF A CORPORATION WHICH IS CONTRARY TO STATEMENTS MADE IN CORPORATE TAX RETURNS (FIRST DEPT).

The First Department, reversing Supreme Court and clarifying a prior ruling. determined the doctrine of “tax estoppel” applied to preclude defendant Elayan from taking a position contrary to the factual statements in corporate tax returns re: an ownership interest in the corporation, Edgewater:

The court improvidently exercised its discretion in failing to apply the doctrine of “tax estoppel.” Under that doctrine, defendants’ acts in filing corporate tax returns for the years 2010 through 2014, signed by defendant Elayan, which contained factual statements that plaintiff Jaber had a 75% ownership interest in Edgewater during that time period, and precludes defendants from taking a position contrary to that in this litigation … . To the extent our decision in Matter of Bhanji v Baluch (99 AD3d 587 [1st Dept 2012]) has been interpreted as making the doctrine generally inapplicable with respect to factual statements of ownership in tax returns, we clarify that the doctrine applies where, as here, the party seeking to contradict the factual statements as to ownership in the tax returns signed the tax returns, and has failed to assert any basis for not crediting the statements … . PH-105 Realty Corp v Elayaan, 2020 NY Slip Op 02971, First Dept 5-21-20

 

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THE BANKRUPTCY EXCEPTION TO THE INSURED VS INSURED EXCLUSION IN THE DIRECTORS AND OFFICERS LIABILITY POLICY APPLIED TO THE CREDITOR TRUST WHICH WAS SET UP TO PURSUE THE BANKRUPTCY ESTATE’S LEGAL CLAIMS ON BEHALF OF UNSECURED CREDITORS; THE CREDIT TRUST SUED THE DIRECTORS AND OFFICERS OF THE INSURED ALLEGING BREACH OF FIDUCIARY DUTY (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Renwick, in a matter of first impression, determined that the bankruptcy exception to the insured vs. insured exclusion of a Directors and Officers (D & O) liability insurance policy applied to a Creditor Trust. The Creditor Trust was formed pursuant to a Chapter 11 bankruptcy reorganization plan for the insured, RCS Capital Corporation (RCAP), to pursue the bankruptcy estate’s legal claims on behalf of unsecured creditors of the insured:

… [T]he Creditor Trust sued RCAP’s directors and officers alleging they had breached their fiduciary duties to the company. The directors and officers sought coverage under RCAP’s D & O liability policy with Westchester (the insurer). Westchester commenced this action in response, seeking a declaratory judgment that it has no coverage obligations.

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 02895, First Dept 5-14-20

 

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A CORPORATION DOES NOT OWE A FIDUCIARY DUTY TO ITS MEMBERS OR SHAREHOLDERS (FIRST DEPT).

The First Department, dismissing the complaint, noted that the breach-of-a-fiduciary-duty action was brought solely against the corporation, which does not owe its members or shareholders a fiduciary duty:

“[I]t is well settled that a corporation does not owe fiduciary duties to its members or shareholders” … . Here, while the complaint alleges that defendant’s board of directors breached its fiduciary duty to plaintiff in refusing to approve the sale of certain units in the cooperative market to plaintiff, plaintiff brought this action solely against the cooperative corporation and thus, the complaint is dismissed. C & J Bros., Inc. v Hunts Point Term. Produce Coop. Assn., Inc., 2020 NY Slip Op 01454, First Dept 3-3-20

 

THERE WAS A DE FACTO MERGER SUCH THAT THE SUCCESSOR CORPORATION WAS LIABLE FOR THE TORTS OF ITS PREDECESSOR; THE CORPORATE VEIL WAS PROPERLY PIERCED TO FIND THE OWNER OF THE CORPORATION LIABLE (SECOND DEPT).

The Second Department determined Supreme Court properly found there was a de factor merger such that the successor corporation is liable for the torts of its predecessor, and further found that Supreme Court properly found the owner of the corporation was personally liable for damages awarded against the corporation. The facts are too complex to fairly summarize here:

“Generally, a corporation which acquires the assets of another is not liable for the torts of its predecessor'” … . “However, such liability may arise if the successor corporation expressly or impliedly assumed the predecessor’s tort liability, there was a consolidation or merger of seller and purchaser, the purchaser corporation was a mere continuation of the seller corporation, or the transaction was entered into fraudulently to escape such obligations” … . Accordingly, “[a] transaction structured as a purchase of assets may be deemed to fall within this exception as a de facto merger” … .

“The hallmarks of a de facto merger are the continuity of ownership; cessation of ordinary business and dissolution of the [predecessor] as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets, and general business operation'” … . Where the acquired corporation is “shorn of its assets” and becomes a “shell,” legal dissolution is not required to support a finding of de facto merger … . “[I]n non-tort actions, continuity of ownership is the essence of a merger'” … . * * *

[Re: piercing the corporate veil:] It is the plaintiff’s burden to demonstrate ” that the corporation was dominated as to the transaction attacked and that such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences'” … . 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” … . Bonanni v Horizons Invs. Corp., 2020 NY Slip Op 00563, Second Dept 1-29-20

 

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PLAINTIFF STATED A CAUSE OF ACTION FOR VIOLATION OF LABOR LAW 196-d AGAINST A CORPORATE OFFICER AND A SHAREHOLDER INDIVIDUALLY FOR FAILING TO REMIT SERVICE CHARGES AND GRATUITIES TO THEIR WAITSTAFF EMPLOYEES; REQUEST FOR AN EXTENSION TO SEEK CLASS CERTIFICATION SHOULD HAVE BEEN GRANTED; MOTION TO AMEND THE COMPLAINT SHOULD HAVE BEEN GRANTED; PLAINTIFF’S DISCOVERY DEMANDS WERE PALPABLY IMPROPER (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determined: (1) plaintiff banquet server had stated a cause of action against the Cortses (an officer and a shareholder in the corporation, Falkirk Management, sued by plaintiff) individually alleging the Cortses were plaintiff’s employers within the meaning of Labor Law 196-d and did not remit service charges and gratuities to the waitstaff; (2) corporate shareholders and officers like the Cortes can be liable for corporate violations of the Labor Law; plaintiff’s discovery demands were burdensome or immaterial and therefore improper (CPLR 3101(a)); (3) plaintiff’s request for an extension to move for class certification should have been granted (CPLR 901(a); 902); and (4) plaintiff’s motion to amend the complaint should have been granted:

… [T]he complaint alleged that the Cortses exercised control over the “day-to-day operations” of “[the Country Club],” including “authority regarding the pay practices” of Falkirk Management. * * *

… [T]he information sought by the plaintiff in her first set of interrogatories and first request for the production of documents was largely burdensome or immaterial, and consequently, palpably improper … . * * *

A plaintiff’s need to conduct pre-class certification discovery to determine whether the prerequisites of a class action set forth in CPLR 901(a) can be satisfied constitutes good cause for the extension of the 60-day time period fixed by CPLR 902 … . * * *

[Re: the motion to amend the complaint:] the defendants alleged no surprise or prejudice … . Moreover, the proposed amendments are not palpably insufficient or patently devoid of merit … . Lomeli v Falkirk Mgt. Corp., 2020 NY Slip Op 00115, Second Dept 1-8-20

 

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