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A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” Marx v. Akers , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. Auerbach v. Bennett , 47 N.Y.2d 619, 631 (1979).  As the New York Court of Appeals explained long ago: The remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights. Isaac v. Marcus , 258 N.Y. 257, 264 (1932) (citations omitted.). See also Aronson v. Lewis , 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”). Since a derivative action binds the corporation’s interest holders, courts require the plaintiff to demonstrate that he/she “will fairly and adequately represent the interests of the shareholders and the corporation, and that is free of adverse personal interest or animus.” Steinberg v. Steinberg , 106 Misc. 2d 720, 721 (Sup. Ct. N.Y. County 1980) (citation omitted); see also Gilbert v. Kalikow , 272 A.D.2d 63, 63 (1st Dept. 2000) (“ erivative causes of action were properly dismissed on the ground that plaintiff has failed to demonstrate that he will fairly and adequately represent the interests of the .”). This Blog previously addressed derivative standing in a post about Pokoik v. Norsel Realties , No. 5733, 2018 WL 4353859 (1st Dept. Sept. 13, 2018), a case involving the business breakup of two managing partners of a general partnership. ( Here .) In that case, the court found that there was no personal animus despite the plaintiff being very litigious and strategic about the use of litigation to gain an advantage over adversaries. Today, this Blog looks at D’Angelo v. Watner , 2018 N.Y. Slip Op. 32324(U) (Sup. Ct., N.Y. County Sept. 17, 2018) ( here ), a case involving the standing of a derivative plaintiff alleged to be an inadequate representative because of personal animus with the other member of the company. Broadly stated, D’Angelo involved the breakup of two limited liability companies (“LLCs”) that were equally owned by the plaintiff, James D’Angelo, and the defendant, Gregg Watner. Watner claimed that D’Angelo could not represent the interests of the LLCs because of the “high degree of hostility and animus between D’Angelo” and Watner. D’Angelo accused Watner of, among other things, inappropriate behavior, abandoning his duties, cutting Watner out of the business ( e.g. , locking him out of his e-mail account and preventing him from accessing the LLCs’ information), and distributing confidential information to Watner’s friends and associates, some of whom were competitors of the LLCs. According to Watner, D’Angelo’s accusations were “driven by personal animus.” The court rejected the challenge to D’Angelo’s standing. The Court noted that in the absence of extreme animus, alleged bad acts would disqualify virtually every derivative plaintiff from bringing a claim. This was especially true, said the Court, with regard to 50/50 LLC members: “To find otherwise would mean that no derivative claim could be brought on behalf of a two-member entity, except under the most civil of circumstances.” Indeed, alleging bad acts, noted the Court, “is common in a litigation.” Since Watner failed to show conduct “indicating any extreme degree of animus,” the Court found that Watner “failed to show is not an adequate member representative.” Accordingly, the Court denied Watner’s standing challenge. Takeaway As this Blog has noted previously, breaking up a business relationship is hard to do. It can be, and often is, acrimonious and/or emotional. D’Angelo shows, like the First Department’s decision in Pokoik , that the degree of acrimony alleged is important. It must be extreme. Without such conduct, no plaintiff could survive a standing challenge on personal animus grounds.

The Securities and Exchange Commission (“SEC” or “Commission”) ended the Government’s fiscal year with a flurry of proceedings and settled actions.  In addition to the settled actions against Tesla Inc. and Elon Musk, the SEC filed or settled matters against retail brokers and investment advisors for violations of the securities laws and the rules promulgated thereunder. In today’s post, this Blog looks at some of these actions. Disclosure violations : On September 29, 2018, the SEC announced ( here ) that Elon Musk (“Musk”), CEO and Chairman of Tesla Inc. (“Tesla”), and the company, agreed to settle a securities fraud charge that the SEC brought against each of them relating to Musk’s recent tweet about taking Tesla private.  The settlements, which are subject to court approval, require comprehensive corporate governance and other reforms — including Musk’s removal as Chairman of the Board — and the payment by Musk and Tesla of financial penalties. The action arose from an August 7, 2018 tweet that Musk sent to followers wherein he said that he could take Tesla private at $420 per share — a substantial premium to its trading price at the time — that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote. In a November 5, 2013 filing, Tesla stated that it intended to use Musk’s Twitter account as a vehicle to disseminate information about the company to the public. Since that date, Musk has repeatedly used his Twitter account to disseminate material information, such as financial guidance about the company, to the public. Over 22 million people follow Musk’s Twitter feed. The SEC alleged that, in truth, Musk knew that the potential transaction he Tweeted about was uncertain and subject to numerous contingencies.  (A copy of the SEC’s complaint can be found here .) Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.  According to the SEC, Musk’s misleading tweet caused Tesla’s stock price to increase by over six percent on August 7 and led to significant market disruption. The SEC noted that while Tesla’s Investor Relations Director responded to some inquiries about Musk’s tweet, he was not prepared to field the avalanche of questions that followed. According to the SEC, Musk “did not routinely consult with anyone at Tesla before publishing Tesla related information via his Twitter account.” In fact, the company “did not have processes in place to ensure that the information published was accurate and complete,” said the Commission. Consequently, the SEC charged Tesla with failing to maintain adequate disclosure controls and procedures. According to the SEC’s complaint against Tesla ( here ), despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings.  Nor did it have sufficient processes in place to ensure that Musk’s tweets were accurate or complete. Musk and Tesla agreed to settle the charges against them without admitting or denying the SEC’s allegations.  Among other relief, the settlements require: Musk to step down as Tesla’s Chairman and be replaced by an independent Chairman; Musk to be ineligible for re-election as Chairman for three years; Tesla to appoint two new independent directors to its board; Tesla to establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications; and Musk and Tesla to each pay a separate $20 million penalty. The SEC will distribute the $40 million in penalties to investors harmed by the Tweet. “The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms —including an obligation to oversee Musk’s communications with investors—and both will pay financial penalties,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.” < ed. note : to this blog’s knowledge, the sec action against musk marks the first enforcement action against a defendant for making false and misleading statements and omissions in a twitter account. the action sends a message to corporate officers and directors that truth, candor and accuracy of corporate communications are necessary regardless of the medium in which they are made. thus, corporate officers and directors who use social media, without the oversight, review, and scrutiny attendant to communications issued through more traditional means, risk scrutiny from the sec if their communications are alleged to be materially false and misleading. the sec’s complaint underscores this point.> ed. note: to this blog’s knowledge, the sec action against musk marks the first enforcement action against a defendant for making false and misleading statements and omissions in a twitter account. the action sends a message to corporate officers and directors that truth, candor and accuracy of corporate communications are necessary regardless of the medium in which they are made. thus, corporate officers and directors who use social media, without the oversight, review, and scrutiny attendant to communications issued through more traditional means, risk scrutiny from the sec if their communications are alleged to be materially false and misleading. the sec’s complaint underscores this point.> Trade Executions : On September 28, 2018, the SEC announced ( here ) that Credit Suisse Securities (USA) LLC (“Credit Suisse”) agreed to settle charges brought by the Commission and the New York Attorney General’s Office (“NYAG”) concerning misrepresentations and omissions made in connection with the handling of certain customer orders by the firm’s now-closed Retail Execution Services (“RES”) business.  The settlements require Credit Suisse to pay $5 million to the SEC and $5 million to the NYAG. According to the SEC ( here ), Credit Suisse created the RES desk to execute orders for other broker-dealers that handle order flow on behalf of retail investors.  Although the RES desk promoted its access to dark pool liquidity to customers, the firm executed an exceedingly minimal number of held orders – orders that must be executed immediately at the current market price – in dark pools during the period September 2011 to December 2012. The SEC found that although Credit Suisse touted “robust” and “enhanced” price improvement on orders, the RES desk’s computer code treated orders for which execution quality is required to be publicly reported differently from orders for which execution quality is not publicly reported.  From mid-2011 to March 2015, retail customers did not receive any price improvement from the RES desk on their non-reportable orders, which Credit Suisse failed to disclose.  The SEC further found that for the non-reportable orders, the RES desk disproportionately used a routing tactic that generally caused market impact and resulted in less favorable execution prices for customers, despite claiming to benefit Credit Suisse’s customers.  The use of this routing tactic provided the RES desk an opportunity to profit from its execution of the final portions of those customer orders internally. “Market makers that handle retail orders must be transparent with their customers about how orders will be executed and how the market maker will profit from their customers’ trades,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The settlement holds Credit Suisse accountable for failing to accurately disclose important information about the nature and quality of its execution of trades for retail investors.” The SEC’s order finds that Credit Suisse negligently violated Section 17(a)(2) of the Securities Act.  In addition to imposing the penalty, the SEC’s order censures Credit Suisse and requires that it cease and desist from further violations.  Credit Suisse consented to the SEC’s order without admitting or denying the findings. Suspicious Activities : On September 28, 2018, the SEC announced ( here ) that it had settled charges against clearing firm COR Clearing LLC (“COR”) for failing to report suspicious sales of penny stock shares totaling millions of dollars.  As part of the settlement, COR agreed to exit a key penny stock clearing business by significantly limiting the sale of penny stocks deposited at COR. Microcap securities, such as penny stocks, are susceptible to manipulation ( here ). Publicly-available information about microcap companies (which are typically less liquid than the larger companies) often is scarce, making it easier for fraudsters to spread false information and manipulate the price of microcap stocks. Consequently, broker-dealers are required to file Suspicious Activity Reports (“SARs”) for transactions suspected of having no lawful purpose or to involve fraud. In 2016, COR ranked second among all broker-dealers in the total dollar value of sub-$1 penny stock that it cleared, and from January 2015 to June 2016, COR cleared for sale a significant amount of penny stocks on behalf of customers of its introducing broker-dealers.  The SEC found ( here ) that approximately 193 customer accounts deposited large blocks of low-priced securities, quickly sold those securities into the market, and then withdrew the cash proceeds.  The SEC further found that in some instances the same customers engaged in this suspicious pattern with multiple securities.  According to the SEC, COR failed to file SARs with respect to a subset of the foregoing transactions and, as a result, violated the securities laws. “SAR filings by both introducing and clearing brokers, especially those who transact in the microcap space, are critically important to the regulatory and law enforcement communities,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The penalty imposed and the limitation placed on COR’s business reflect how seriously we take the failure to file SARs in the face of numerous red flags.” Without admitting or denying the SEC’s findings, COR agreed to a settlement that requires it to not sell penny stocks deposited at COR with certain narrow exceptions and pay an $800,000 penalty.  COR also consented to a censure and to cease and desist from similar violations in the future. Fraudulent “Cherry-Picking” Scheme : On September 28, 2018, the SEC announced ( here ) that it charged Michael A. Bressman (“Bressman”), a New Jersey-based broker, with misusing his access to customers’ brokerage accounts to enrich himself and family members at the expense of his customers, many of whom entrusted him with their retirement accounts. The SEC filed fraud charges in the United States District Court for the District of Massachusetts against Bressman, alleging that he misused his access to an omnibus or “allocation” account to obtain at least $700,000 in illicit trading profits over a six-year period ending in February. In its complaint ( here ), the SEC alleged that Bressman placed trades using the allocation account and cherry-picked profitable trades, which he then transferred to his own account and the account of two family members, while placing unprofitable trades in other customers’ accounts. Cherry-picking occurs when a broker, who buys and sells securities on behalf of his brokerage customers, defrauds those customers by purchasing stock and then waiting to see whether the price of the stock goes up, or down, before allocating the trade. If the stock goes up, the broker keeps the trade for himself/herself or a set of “favored” accounts. If the stock goes down, the broker puts the trades into other, disfavored customer accounts. In other words, the broker “cherry-picks” the profitable trades for himself/herself or certain favored accounts, while giving unprofitable trades to his/her other customers. In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced ( here ) criminal charges against Bressman. The SEC charged Bressman with violating various securities laws and rules, including Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Ruled 10b-5(a) and 10b-5(c) thereunder. The SEC is seeking return of allegedly ill-gotten gains, plus interest, penalties and a permanent injunction. False ADV and Website : On September 28, 2018, the SEC announced ( here ) that it filed charges against an Australia-based investment adviser Goldsky Asset Management, LLC (“Goldsky”) and its owner, Kenneth Grace (“Grace”), for making false and misleading statements about Goldsky’s business in filings with the Commission and on its website. According to the SEC, Goldsky’s Forms ADV filed with the Commission in 2016 and 2017, which Grace signed, stated that the firm’s hedge fund, Goldsky Global Alpha Fund, LP (the “Goldsky Fund”), had an auditor, a prime broker and custodian, and an administrator. In addition, in its Forms ADV and Forms ADV Part 2A, Goldsky stated that it had over $100 million in discretionary assets under management. Goldsky’s website also claimed that the Goldsky Fund earned: 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. In its complaint ( here ), the SEC alleged that these statements were false and misleading because Goldsky, Grace and the Goldsky Fund had no agreements with service providers, Goldsky and Grace did not manage $100 million of assets, and the Goldsky Fund did not have any investment returns as it never had any assets. The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charges Goldsky and Grace with violating the antifraud provisions of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Sections 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, or in the alternative, that Grace aided and abetted Goldsky’s violations. The SEC is seeking a judgment ordering permanent injunctive relief and civil monetary penalties against Goldsky and Grace. Rags-to-Riches Fraud : On September 27, 2018, the SEC announced ( here ) that it charged a group of internet marketers who created and disseminated elaborate rags-to-riches videos to trick retirees and other retail investors into opening brokerage accounts and trading high-risk securities known as binary options. (A discussion of binary option fraud can be found here .) According to the SEC, investors were conned out of tens of millions of dollars through these marketing campaigns, which promised that investors would make large amounts of money by opening binary options accounts and using free or secret software systems to trade in them. In its complaints, the SEC alleged that the marketers were paid for each new brokerage account that investors opened and funded. According to the SEC, the marketers’ internet video advertisements, which were disseminated through spam emails, used actors to portray ordinary people who became millionaires by trading binary options. The videos staged fake demonstrations of supposed software users watching their account balances grow in real time. The SEC alleged that the software was simply a ruse to persuade investors to open accounts with the brokers. “As alleged in our complaints, thousands of retail investors were swindled out of tens of millions of dollars by watching elaborately produced rags-to-riches stories that falsely promised wealth at the push of a button,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “Those who use phony tactics to dupe investors out of their savings will be held accountable for false and misleading statements on the internet.” “Before you provide any of your valuable personal information to anyone, make sure you do your research and know exactly who it’s going to,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Be aware before you share, and protect yourself from professional fraudsters who may target you and your money for life.” The SEC’s complaints charge 10 individuals and two companies involved in the fraudulent marketing campaigns. The SEC is seeking penalties, disgorgement of ill-gotten gains, and permanent injunctions. Without admitting or denying the charges, seven of the settling defendants agreed to pay a combined total of $4.1 million in disgorgement and prejudgment interest. The Commission did not assess a penalty on the other settling parties as a result of their cooperation.

Typically, a mortgage on real property is delivered to stand as security for the repayment of an obligation evidenced by a promissory note.  A mortgage is an encumbrance on real property.  If there is an opportunity to remove such an encumbrance, it makes sense to do so.  For example, when a home mortgage is fully paid, a homeowner typically sees to it that a satisfaction of mortgage is obtained from the lender and promptly recorded. In situations where a mortgage appears as a lien of record on real property, but the statute of limitations has expired for the mortgagee to commence an action to foreclose the mortgage, RPAPL 1501(4) permits the mortgagor (or any other “person having an estate or interest in the real property”) to commence an action to have the encumbrance removed of record.  RPAPL 1501(4) provides: Where the period allowed by the applicable statute of limitation for the commencement of an action to foreclose a mortgage, or to enforce a vendor's lien, has expired, any person having an estate or interest in the real property subject to such encumbrance may maintain an action against any other person or persons, known or unknown, including one under disability as hereinafter specified, to secure the cancellation and discharge of record of such encumbrance, and to adjudge the estate or interest of the plaintiff in such real property to be free therefrom; provided, however, that no such action shall be maintainable in any case where the mortgagee, holder of the vendor's lien, or the successor of either of them shall be in possession of the affected real property at the time of the commencement of the action. In any action brought under this section it shall be immaterial whether the debt upon which the mortgage or lien was based has, or has not, been paid; and also whether the mortgage in question was, or was not, given to secure a part of the purchase price. Thus, a mortgagor need not wait for the mortgagee to commence foreclosure proceedings and defend by asserting a statute of limitations defense to have the lien of the mortgage extinguished of record. “ n action upon a bond or note, the payment of which is secured by a mortgage upon real property, or upon a bond or note and mortgage so secured, or upon a mortgage of real property, or any interest therein” is subject to a six-year statute of limitations.  See CPLR 213(4) .  In mortgage foreclosure actions, the statute of limitations begins to run from each unpaid installment, from the time that the mortgagee is entitled to receive full payment or the time the debt is accelerated.  See Bank of New York Mellon v. Celestin , 164 A.D.3d 733 (2 nd Dep’t 2018).  “The law is well settled that, even if a mortgage is payable in installments, once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt… …once a mortgage debt is accelerated, the borrowers' right and obligation to make monthly installments ceased and all sums become immediately due and payable, and the six-year Statute of Limitations begins to run on the entire mortgage debt.”   EMC Mortgage Corp. v. Patella , 279 A.d.2d at 604 (2 nd Dep’t 2001) (citations, internal quotation marks and internal brackets omitted.) In 21 st Mortgage Corp. v. Nweke (2 nd Dep’t October 3, 2018), the Court decided issues related to RPAPL 1501(4).  There, lender commenced an action to foreclose a mortgage obtained in 1999.  A foreclosure action was commenced in April of 2006 after defendant defaulted but was discontinued after a traverse hearing determination that defendant was not properly served with process.  A second foreclosure action commenced in 2007, was discontinued in January of 2013 by order of the court on lender’s motion.  In September of 2014, plaintiff (a subsequent assignee of the original lender) commenced an action to foreclose the mortgage.  The defendant borrower answered the complaint, asserted several affirmative defenses (including a statute of limitations defense) and counterclaims (among others, to cancel and discharge the mortgage pursuant to RPAPL 1501(4)). Thereafter, plaintiff moved for summary judgment.  In response, defendant borrower cross-moved for summary judgment dismissing the complaint on statute of limitations grounds as well on her counterclaim pursuant to RPAPL 1501(4).  Among other things, supreme court denied plaintiff’s motion for summary judgment, granted defendant borrower’s motion for summary judgment on statute of limitation grounds and, sua sponte , imposed an equitable mortgage, in plaintiff’s favor, on the subject property. In reversing supreme court, the Second Department held that defendant borrower “established her prima facie entitlement to judgment as a matter of law on her counterclaim pursuant to RPAPL 1501(4) to cancel and discharge the mortgage by demonstrating that more than six years had passed since the mortgage was accelerated and therefore this foreclosure action was time-barred.” Further, the Court vacated that portion of supreme court’s order imposing an equitable mortgage on the property because “plaintiff never requested this relief, and the defendant was not afforded any notice nor an opportunity to be heard on this issue which amounted to a denial of the defendant’s due process rights.”  Further, the Court recognized that the doctrine of equitable mortgage does not apply “where a legal written mortgage existed” and, thus, was not applicable to the case being decided.

The date on which parties to a real estate contract must close is frequently subject to litigation.  Sometimes real estate contracts provide for a closing date that is “time of the essence” and, in such cases, the parties must close on that date or risk default.  In the event that a buyer fails to close on a “time of the essence” closing date, he risks being declared in default by the seller and losing his down payment (and being a party to any related litigation that may result therefrom).  Similarly, if a seller fails to close on a time of the essence closing date she risks being declared in default by the buyer and being exposed to the possibility of litigation for specific performance of the contract and related monetary damages. If, however, there is a closing date in the contract, but it is not “time of the essence,” “either party is entitled to a reasonable adjournment” and, “ n granting the adjournment, the other party may unilaterally impose a condition that time be of the essence as to the rescheduled date.”   Miller v. Almquist , 241 A.D.2d 181, 185 (1 st Dep’t 1998) (citations omitted).   Whether the “time of the essence” condition is effective, “is contingent on the specificity of the notice and on the reasonableness of the time period. Id.  To effectively make a closing “time of the essence,” a party to a real estate contract must set a new date and give the other party “clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act and by informing the other party that if he or she does not perform by that date, he or she will be considered in default.”  Cave v. Kollar , 296 A.D.2d 370, 371 (2 nd Dep’t 2002) (citations and internal quotation marks omitted).  Thus, where a letter “merely demand that fix a closing date inadequate to make time of the essence because it not clearly and distinctly set a new date and time for closing….” Id. (citations omitted).  Finally, if the party receiving the “time of the essence” letter fails to object to the chosen closing date prior thereto, that date could be deemed “reasonable as a matter of law.”  Shimuro v. Preston Taylor Products, LLC , 146 A.D.3d 729, 730 (1 st Dep’t 2017). The law related to “time of the essence” letters in real estate transactions was addressed by the Second Department in Rodrigues NBA, LLC. v. Allied XV, LLC (September 19, 2018).  The parties in Rodrigues , entered into a contract for the sale of real property in Queens County, New York and the purchaser made a $375,000 down payment.  The parties agreed to adjourn the closing date in the contract.  Thereafter, seller sent a “time of the essence letter” dated June 21, 2016 that set June 30, 2016 as the closing date.  After buyer rejected the June 30 closing date and did not appear at the closing, seller commenced an action to recover damages and sought to retain the down payment as liquidated damages pursuant to the contract.  Buyer, in turn, sought the return of the down payment, alleging that seller breached the contract as a result of ongoing administrative proceedings affecting the property. The Second Department affirmed the denial of seller’s motion for summary judgment on the complaint and dismissing purchaser’s counterclaims.  In so doing, the Court recognized that the motion court “concluded that the time of the essence letter was a nullity because it did not provide the buyer with a reasonable amount of time in which to act….”  The Court also noted that where “there is an indefinite adjournment of the closing date specified in the contract of sale, some affirmative act has to be taken by one party before it can claim the other party is in default; that is, one party has to fix a time by which the other must perform, and it must inform the other that if it does not perform by that date, it will be considered in default.”  Rodrigues (citations, brackets and internal quotation marks omitted). Reasonable time to act is critical in order to make time of the essence and: hat constitutes a reasonable time for performance depends upon the facts and circumstances of the particular case.  Included within the court’s determination of reasonableness are the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance.  The determination of reasonableness must by its very nature be determined on a case-by-case basis.  The question of what constitutes a reasonable time is usually a question of fact. Rodrigues (citations, brackets and internal quotation marks omitted). Among other things, the Second Department in Rodrigues, found that the seller failed to make a prima facie showing that the “time of the essence” letter “provided the buyer with a reasonable time within which to close.”

Goldman Sachs Group, Inc. (“Goldman Sachs” or the “Company”) is requesting that wrongful termination claims brought by a former executive alleging whistleblower retaliation by the Company should be heard in arbitration or dismissed all together. In early August, former Goldman Sachs executive, Chris Rollins (“Rollins”), brought suit against the Company, asserting that its leaders wrongfully blamed him for failures with the Company’s anti-money laundering procedures, ruined his reputation, and fired him in retaliation after 16 years of service. The case arose in connection with a series of transactions involving an unnamed financier.  Rollins is seeking $50 million in damages. Gold Claims Employee Fired for Unauthorized Trading The complaint names Jim Esposito (“Esposito”), now-co-head of Goldman’s securities division, as a defendant. It also identifies bankers Michael Daffey (“Daffey”) and John Storey (“Storey”), among other company leaders, as participants in the subject matter of the lawsuit. Daffey and Storey are among the most senior members of the Company’s equities business. According to the complaint, beginning in 2015, Daffey and Storey met with the financier for the purpose of finding ways to bring him on as a client. Rollins alleges that the financier told them that he had $1 billion to invest. Goldman Sachs maintains that Rollins was fired for executing certain trades, which involved a previously restricted party, without first obtaining authorization. However, according to the complaint, between September 2015 and August 2016, Daffey, Storey, and former-Vice Chairman Michael Sherwood, “used their influence within the firm” to arrange for the transactions, working around the firm’s compliance controls. Pressured to “Confess” After the series of issues occurred, Rollins contends that the Company began pressuring him to confess to violating compliance restrictions related to the financier, though it never identified any of the restrictions. He says that Daffey and Storey told him that they had arranged for Esposito to be the decision-maker, and the “friendly arbitrator.” Finally, the complaint alleges that Daffey told Rollins that if he “didn’t fight the charges, and was ‘contrite,’ he’d receive no more than a slap on the wrist.” Rollins maintains that he didn’t do anything wrong. A Previous Agreement to Arbitration Goldman Sachs argues that when Rollins became a managing director in January 2011, he agreed to arbitrate all disputes with the Company.  Goldman Sachs has asked U.S. District Judge Edgardo Ramos to stay the lawsuit while the parties arbitrate Rollins’ claims, or dismiss the suit completely. Goldman Sachs contends that the lawsuit is a “misplaced attempt” to involve U.S. courts in a matter based upon events outside of the country. In February 2017, after an internal investigation had found that Rollins had engaged in “misconduct warranting termination,” he was discharged. The Company went on to contend that only after an investigation of his potential misconduct (conducted in the United Kingdom) began, did he report concerns with the Company that he had been a whistleblower. Goldman spokesman, Michael DuVally, said that “the suit is without merit, and intend to vigorously contest it.” The case is ongoing. , U.S. District Court for the Southern District of New York (Manhattan)

This Blog has addressed numerous issues relating to mortgage foreclosure actions.  < HERE =">HERE"> < HERE =">HERE"> < HERE =">HERE"> < HERE =">HERE"> < HERE =">HERE"> < HERE =">HERE"> .  “ The Second Department Denies Summary Judgment To Another Foreclosing Mortgagee Due To The Insufficiency Of Evidence Presented On The Motion ” addressed the sufficiency of evidence necessary for a lender to demonstrate that it is the holder of the underlying note and mortgage and, thus, has standing to prosecute the foreclosure action. On September 19, 2018, the Supreme Court of the State of New York, Appellate Division, Second Department issued an Opinion and Order in OneWest Bank, N.A. v. FMCDH Realty, Inc. , in which it addressed a unique standing/holder in due course issue.  Put simply, the Court was tasked with deciding whether a certain line of credit agreement “constitutes a negotiable instrument as defined in section 3-104 of the Uniform Commercial Code,” as such a determination related directly to plaintiff’s standing to prosecute a mortgage foreclosure action and the required proof to demonstrate standing. In OneWes t, borrower entered into a reverse mortgage transaction with lender evidenced by a “Cash Account Adjustable Rate Reverse Mortgage Loan Account Disclosure Statement and Agreement” (the “Agreement”) and an “Adjustable Rate Home Equity Conversion Deed” (the “Mortgage”), “which created a security interest in the borrower’s home…to guaranty the payment of up to twice the stated advance limit under the…Agreement, i.e., a maximum principal sum of $1,612,304.”  Subsequently, through one or more assignments, the Mortgage was assigned to plaintiff. An action was commenced to foreclose the Mortgage and, in its answer, defendant raised the issue of lack of standing.  Supreme court granted plaintiff’s motion for summary judgment and denied defendant’s cross-motion for summary judgment dismissing the action for lack of standing.  Generally, a foreclosing mortgagee makes out its prima facie case by producing the “mortgage, the unpaid note, and evidence of default.”  Deutsche Bank Nat. Trust Co. v. Abdan , 131 A.D.3d 1001, 1002 (2 nd Dep’t 2015).  When standing is raised as a defense, plaintiff must also prove its standing to obtain relief from the court.  Nationstar Mortgage, LLC v. LaPorte , 162 A.D.3d 784, 785 (2 nd Dep’t 2018).  Standing is established by the plaintiff by demonstrating that it “is the holder or assignee of the underlying note at the time the action is commenced.”  Nationstar , 162 A.D.3d at 785.  A “holder” is “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.”  N.Y.U.C.C 1-201 <21> .  Where a note is indorsed in blank, the holder establishes standing to maintain an action by demonstrating that it “was in physical possession of the note endorsed in blank prior to commencement of the action.”  Deutsche Bank Nat. Trust Co. v. Brewton , 142 A.D.3d 683, 685 (2 nd Dep’t 2016). In the trial court, the OneWest plaintiff based its standing on the 14-page Agreement and the affidavit of bank representative averring that the indorsed in blank Agreement was in plaintiff’s possession prior to the commencement of the foreclosure action.  In opposition, defendant argued that in a prior action by plaintiff’s assignor, an attempt was made to prove standing “based on the physical delivery of the…Agreement, to which an undated allonge, indorsed in blank by an unidentified representative of and referring specifically to the borrower and the address of the subject premises, was affixed.”  The proof submitted on the prior motion differed from the proof submitted on the subject motion.  Supreme court granted plaintiff’s motion for summary judgment notwithstanding the differences in proof. “Because the plaintiff is seeking to establish standing on the basis that it is a valid holder in due course of the…Agreement, requested postargument submission on the threshold question of whether the…Agreement falls within the definition of a negotiable instrument as contemplated by section 3-104 of the Uniform Commercial Code.”  Pursuant to N.Y.U.C.C. 3-104 , in order for a writing to be a negotiable instrument, it must “be signed by the maker or drawer,” “contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this Article,” “be payable on demand or at a definite time,” and “be payable to order or to bearer.” The Second Department determined that the Agreement was not a negotiable instrument under the UCC.  In so doing, the Court determined that the Agreement contained provisions “that go well beyond what is permitted under the UCC.”  For example, the Agreement created a $800,000 revolving line of credit, of which borrower could have drawn an additional $440,000.  The Court noted that it found no New York case law determining that similar line of credit agreements were negotiable instruments, although other jurisdictions have held similar agreements “to be distinct from an agreement to pay a sum certain.”  The Court also noted, among other things, that the Agreement: provides for periodic adjustment of advance limits; and, allows the lender to suspend, terminate or reduce borrower’s right to future advances. Simply stated, the Court determined that the Agreement did much more than “memorialize the borrower’s unconditional promise to pay a sum of money” and, accordingly, the “specific language of several provisions of the … Agreement, read in context of the agreement as a whole, provides compelling evidence that the … Agreement is not, and was never intended to be, a negotiable instrument.” Based in its determination, and in denying summary judgment to the plaintiff, the Court determined that plaintiff’s standing could not be established simply by “showing that it possessed the original … Agreement, indorsed in blank, on the date action was commenced….”  Similarly, defendant’s cross-motion was denied because it “failed to eliminate triable issues of fact as to whether the plaintiff had standing.”

Last month, this Blog examined the common interest exception to the attorney-client privilege. ( Here .)  As discussed in that post, the presence of a third party will not destroy a claim of privilege where two or more clients separately retain counsel to advise them on matters of common legal interest. In New York, the “common interest” exception will apply to such communications when they are shared in connection with “pending or anticipated litigation.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 628 (2016). What if, however, the communications at issue predate the litigation or were made when litigation was not anticipated?  Does the common interest exception apply? In PMC Aviation 2012-1 LLC v. Jet Midwest Group LLC , 2018 N.Y. Slip Op. 32142(U) (Sup. Ct., N.Y. County Aug. 30, 2018) ( here ), Justice Jennifer G. Schecter of the Supreme Court, New York County, Commercial Division, answered the question in the affirmative, holding that the common interest exception protects the exchange of privileged documents created before the common interest relationship existed. PMC Aviation arose from a discovery dispute over the assertion of the attorney-client privilege. The defendants moved to compel the production of documents exchanged by one of the plaintiffs, Amur Finance IV LLC (“Amur”), through its then-in-house counsel, Elliott Klass, with PMC Aviation 2012-1 LLC (the “Company”). The defendants argued that Amur’s disclosure of the documents to the Company - which is represented by independent counsel in the action - constituted a waiver of the attorney-client privilege. Amur countered, arguing that it shared the documents with the Company’s counsel during the case to further their joint legal interest against the defendants and, therefore, no waiver occurred. The Court agreed with Amur. The Court noted that “Amur shared the subject documents with the Company during this litigation while united in interest against the .” Slip op. at 3 (orig’l emphasis). The “wrinkle”, however, had to do with whether the communications, which predated the pending litigation, were made when litigation was anticipated. Id . Noting that the motion did not involve the “ordinary situation in which the common interest exception is invoked,” the Court nonetheless held that the common interest exception applied. Id . In that regard, the Court explained that “it makes sense that co-litigants in an active litigation who share a common interest should be able to share their own prelitigation privileged communications if that disclosure furthers their common interest in the litigation without any fear of waiver.” Id . at 3-4. Takeaway As this Blog previously noted, it is not uncommon for co-litigants to enter into agreements that shield their privileged communications from adverse parties. Under the common interest doctrine, the attorney-client privilege is not waived when such communications are made between litigants (or parties who reasonably anticipate they will be litigants) sharing a common legal interest. Although PMC Aviation involved an unusual situation – the exchange of privileged documents predating the litigation – it nonetheless fit within the contours of the exception.  As the Court emphasized, the documents at issue were “share … during this litigation while united in interest….” Slip op. at 3 (orig’l emphasis). Therefore, despite the uniqueness of the circumstance, it made sense to shield privileged, pre-litigation communications by co-litigants in an active litigation who share a common interest. This practical application of Ambac Assurance comports with the rationale of the exception – to limit the exception to “situations where the benefit and the necessity of shared communications are at their highest, and the potential for misuse is minimal.” 27 N.Y.3d at 628.  And, as the Court observed, this approach was not contradicted by the defendants in PMC Aviation . Slip op. at 4 (noting that “ he JMG Parties have not cited any authority to the contrary.”).

As a general matter, business entities ( e.g. , for-profit and not-for-profit corporations, limited liability companies, and limited partnerships) formed outside the State of New York (whether in another state or a foreign country) may not do business within the state unless they receive authority to do so. See generally , Business Corporation Law (“BCL”) §§ 1301-1320 (corporations), Limited Liability Company Law (“LLCL”) §§ 801-809 (limited liability companies), Not-for-Profit Corporation Law §§ 1301-1321 (not-for-profit corporations), and Partnership Law § 121-901 - 121-908 (limited partnerships). Business entities that do business in New York without authority may not affirmatively use the courts of the State until they obtain authority to do so. BCL §1312(a). Whether an entity is “doing business” in New York is an issue of fact. Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 743 (2d Dept. 2008). In order for a foreign corporation to be “doing business” within the meaning of BCL § 1312(a), “the corporation must be engaged in a regular and continuous course of conduct in the State.” Commodity Ocean Transp. Corp. of N.Y. v Royce , 221 A.D.2d 406, 407 (2d Dept. 1995). If the entity’s activity is essential to its business, it will be deemed to be doing business within the State. If the activity is merely incidental to the business, it will not. Highfill , 50 A.D.3d at 744. A defendant relying upon BCL § 1312(a) as a statutory bar to a plaintiff’s lawsuit “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.’” S & T Bank v. Spectrum Cabinet Sales , 247 A.D.2d 373, 373 (2d Dept. 1998), quoting Peter Matthews, Ltd. v. Robert Mabey, Inc. , 117 A.D.2d 943, 944 (3d Dept. 1986). Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation ... and not in New York.” Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997). On August 14, 2018, Justice Sylvia G. Ash of the Supreme Court, Kings County, Commercial Division, issued a decision in Radiance Capital Receivables Twelve LLC v. JPMorgan Chase Bank, N.A. , 2018 N.Y. Slip Op. 32092(U) ( here ), in which the Court denied a motion to dismiss under BCL § 1312(a) on the grounds that the plaintiff was not “doing business” in New York. Radiance Capital involved a special proceeding to enforce a judgment that Radiance Capital Receivables Twelve LLC (“Radiance Capital” or “Petitioner”) obtained against Alexander Klein (“Alexander”). In connection with Radiance Capital’s collection efforts, it served a restraining notice and information subpoena on the Respondent JPMorgan Chase Bank, N.A. (“Chase”). In response to the information subpoena, Chase advised Radiance Capital that it had in its possession a safe deposit box that was jointly owned by Alexander and Respondents, Joseph Klein (“Joseph”) and Betty Klein (“Betty”), and that the box had been restrained pursuant to the restraining notice. Radiance Capital commenced the proceeding pursuant to CPLR 5225(b) against Respondents seeking a turnover of the contents in the safe deposit box. By Decision and Order dated June 6, 2018 (“Denial Order”), the Court denied Radiance Capital’s application for a turnover on the basis that it lacked standing to maintain the application as it was not licensed or authorized to do business in New York pursuant to the BCL or the LLCL. Radiance Capital sought reargument of the Denial Order contending that it had standing because it qualified as a “foreign investment corporation” under New York Banking Law Article l §2(10), which allows it to perform the same functions and enjoy the same privileges as a banking corporation in the State. Joseph opposed the application arguing, among other things, that Radiance Capital had not shown that it is a foreign investment corporation or that a foreign investment corporation is the equivalent a bank. In response, Radiance Capital maintained, among other things, that it met the definition of a “foreign investment company” because it is a limited liability company organized under the laws of the state of Washington and that its principal business is the purchase of mortgages on distressed real property and the notes attributable thereto in the secondary market. Radiance Capital argued that its business activities in New York were limited to the underlying action and enforcing its judgment – that is, its activities primarily involved interstate commerce. The Court granted the motion to reargue, and upon reargument denied the motion to dismiss on BCL §1312(a) grounds. The Court found that Joseph failed to show that Radiance Capital’s activities in New York were “systematic and regular as to manifest continuity of activity in the jurisdiction.” Moreover, the Court accepted Radiance Capital’s representation that “at the present time, its only activity in New York relates to the enforcement of the judgment at issue here.” The Court noted that “Joseph fail to present any fact to the contrary.” Takeaway Under New York law, a foreign business entity – that is, a business entity formed under the laws of another state or foreign government – may not do business in New York until it has been authorized to do so.  BCL § 1301 (“A foreign corporation shall not do business in this state until it has been authorized to do so as provided in this article.”). Business entities that do business in New York without authority may not affirmatively use the State’s courts until they obtain authority to do so. BCL §1312(a). As a result, the entity’s action is subject to dismissal. In that regard, some courts have conditioned dismissal upon the continued failure of the foreign entity to comply with Section 1312, while other courts have unconditionally dismissed claims for failure to comply with the BCL. Nasso v. Seagal , 263 F. Supp. 2d 596,607 (E.D.N.Y. 2003) (collecting cases). Motions to dismiss on BCL §1312(a) grounds are fact intensive. As Radiance Capital shows, courts will examine the facts and circumstances to determine whether the business activities of a foreign business entity in New York are “systematic and regular,” intrastate in nature, and essential to the plaintiff’s business. A finding that the entity is not “doing business” in New York, as in Radiance Capital , or if its activities qualify as purely interstate commerce, may save the case from dismissal under BCL § 1312(a). However, if the entity is “doing business” in New York, and dismissal ensues, then the entity may face a statute of limitations issue.  In that event, the entity should obtain authority to do business in the State and, if possible, file a new lawsuit.

If a domestic or authorized foreign corporation is named as a defendant in a lawsuit pending in New York, section 306 of New York’s Business Corporation Law permits service of process on that corporation through the New York secretary of state.  Pursuant to BCL § 306, “ ervice of process on search corporation shall be complete when the secretary of state is so served.” ( See BCL § 306.)  Once served, the “secretary of state shall promptly send one of such copies by certified mail, return receipt requested, to such corporation, at the post office address, on file in the department of state, specified for that purpose.”  ( See BCL § 306.)  The same procedure is available for service upon a limited liability company.  ( See § 303 of New York’s Limited Liability Company Law ) Due to the relative ease of service of process, business entities are frequently served pursuant to BCL § 306 and LLC § 303.  Accordingly, it is important that business entities maintain up-to-date addresses with the secretary of state so that they will be promptly notified when they are served with process.  Frequently, however, corporations are not diligent in this regard and, therefore, default in responding to legal process. Under such circumstances, the defaulting business entity may be afforded some relief under CPLR § 317 , which provides: A person served with a summons other than by personal delivery to him … within or without the state, who does not appear may be allowed to defend the action within one year after he obtains knowledge of entry of the judgment, but in no event more than five years after such entry, upon a finding of the court that he did not personally receive notice of the summons in time to defend and has a meritorious defense.  If the defense is successful, the court may direct and enforce restitution in the same manner and subject to the same conditions as where a judgment is reversed or modified on appeal…. Similarly, relief may also be available under CPLR 5015 (a), which provides that, on motion: he court which rendered a judgment or order may relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct, upon the ground of: 1. excusable default, if such motion is made within one year after service of a copy of the judgment or order with written notice of its entry upon the moving party, or, if the moving party has entered the judgment or order, within one year after such entry…. The New York Court of Appeals, in Eugene DiLorenzo, Inc. v. A. C. Dutton Lumber Corp. , 67 N.Y.2d 138 (1986), addressed CPLR §§ 317 and 5015.  There, defendant was served with process through the New York Secretary of State.  The process mailed to the defendant was returned to the Secretary of State with the notation “moved, not forwardable,” because defendant did not update its address after relocating.  As is typically the case, defendant moved to vacate a default judgment after a restraining notice was served on defendant’s bank.  In its motion papers, defendant argued: that plaintiff knew defendant’s new address and made no effort to serve defendant personally; and, offered a defense to plaintiff’s claim.  On the other hand, plaintiff argued that defendant “deliberately failed to update its address with the Department of State in an attempt to defraud creditors, and that its default was therefore willful.” The Eugene Di Lorenzo Court also noted that defendant’s order to show cause failed to indicate the statutory provision upon which it relied in seeking to vacate the default judgment, but that the attorney’s supporting affidavit “set forth entitlement to relief under CPLR 5015(a).”  A defendant seeking relief under CPLR 5015, the Eugene Di Lorenzo Court stated, “must demonstrate a reasonable excuse for its delay in appearing and answering the complaint and a meritorious defense to the action.”  The Court then discussed that “ second provision for obtaining relief from a default judgment is found in CPLR 317” and that “there is no necessity for a defendant moving pursuant to CPLR 317 to show a ‘reasonable excuse’ for its delay.”  Although the Eugene Di Lorenzo defendant failed to move under CPLR 317, the Court of Appeals held that “a court has the discretion to treat a CPLR 5015(a) motion as having been made as well pursuant to CPLR 317,”  and determined that “the decision by Special Term to consider CPLR 317 was not an abuse of discretion, and reversal by the Appellate Division ‘on the law’ was improper.” The Court noted that “ defendant who meets the requirements of that section normally will be entitled to relief, although relief is not automatic, as the section states that a person meeting its requirements ‘ may be allowed to defend the action.’”  (Emphasis in original.)   Thus, the Court suggested that relief under CPLR 317 may be unavailable where the defendant made a deliberate attempt to avoid notice of the summons.  The Court also noted that there is no per se rule under CPLR 5015 that a corporation served through the Secretary of State, that failed to update its address, cannot demonstrate “excusable default”. On September 12, 2018, the Supreme Court of the State of New York, Appellate Division, Second Department, issued two decisions applying CPLR 317.  In Acqua Capital, LLC v. 510 West Boston Post Road, LLC , an action to foreclose a tax lien, the Acqua court affirmed an order vacating a judgment of foreclosure and sale pursuant to CPLR 317 “on the condition that pay all amounts owed within 30 days of the date of the order.” In Acqua , the defendant moved to vacate its default “on the ground that it never received notice of the delinquency, of its right to redeem, or of the foreclosure action, and that it had paid other municipal taxes of which it received notice and was ready, willing, and able to pay the Village taxes at issue and all of the plaintiff’s expenses in acquiring and enforcing the lien.” In granting relief to the defendant, the Acqua court found that a meritorious defense to the foreclosure action was articulated and that the “evidence does not suggest that failure to update its service address with the Secretary of State while its principal offices were undergoing renovations constituted a deliberate attempt to evade notice….” Dwyer Agency of Mahopac, LLC v. Dring Holding Corp. , is a breach of contract action in which the defendant was served through the Secretary of the State.  After the defendant failed to appear in the action, the Dwyer court entered judgment against it for in excess of $17,000.  Four months after the default order and one month after the entry of judgment, defendant move to vacate the default pursuant to CPLR 317 and 5015(a)(1).  In determining under CPLR 317 that the “defendant failed to establish that it did not personally receive notice of the summons in time to defend the action,” the Dwyer court stated that: owever, the “mere denial of receipt of the summons and complaint is not sufficient to establish lack of actual notice of the action in time to defend for the purpose of CPLR 317.”  Here, the defendant failed to establish that it did not personally receive notice of the summons in time to defend the action. The affidavit of the defendant’s representative, who appears to be an attorney, stated that the complaint was not delivered “personally” to the defendant, but rather, “to an inaccurate address through the Secretary of the State,” which address had not been valid “for several years.”  This representative’s affidavit does not appear to be based on personal knowledge.  Furthermore, there is no allegation contained in the affidavit that the defendant, in fact, never received a summons and complaint, nor is there any detail as to where the defendant moved to and when, nor whether defendant made any efforts to update its address on file with the Secretary of State.  Under these circumstances, the defendant did not demonstrate lack of actual notice of the action. The Dwyer court also found that defendant failed to establish a reasonable excuse for the default under CPLR 5015(a)(1) because the court should consider, among other factors, the length of time for which the address that had not been kept current and “ ere, no evidence was presented as to how long the address was not updated.” TAKEAWAY Make every effort to keep a business entity’s mailing address current with the Secretary of State to avoid default judgments and/or the cost, expenses and uncertainty of seeking to have a default judgment vacated.

The History of Common Law Dissolution Judicial dissolution of a corporation at the request of a minority shareholder “is a remedy of relatively recent vintage in New York.” Matter of Kemp & Beatley (Gardstein) , 64 N.Y.2d 63, 69 (1984).  Historically, New York courts were prevented from exercising their equity powers to order dissolution, as statutory prescriptions were deemed exclusive. Id . (citation omitted). Statutory dissolution was either limited by the types of corporations seeking such relief or restricted to certain parties, such as the Attorney-General, or the directors, trustees, or majority shareholders of the corporation. Id . (citations omitted). Minority shareholders were granted standing in the absence of statutory authority to seek dissolution of corporations when controlling shareholders engaged in certain egregious conduct. Id . (citations omitted). In that regard, courts invoked their equitable powers when “the directors and majority shareholders … so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.” Id . at 69-70 (internal quotation marks and citations omitted). See also Leibert v. Clapp , 13 N.Y.2d 313 (1963) (holding, “ lthough there is no explicit statutory authority for the relief of dissolution sought in this action, the entire court is agreed that it is available as a matter of judicial sponsorship.”). This common-law right of dissolution of minority shareholders was supplemented by the New York Legislature in 1979, when it enacted Business Corporation Law § 1104-a, which provided the holders of 20% or more of the outstanding shares of a close corporation with the right to petition for judicial dissolution under certain “special circumstances.” BCL § 1104-a(a). Fedele v. Seybert , 250 A.D.2d 519, 521 (1st Dept. 1998). The circumstances that give rise to dissolution fall into two general categories: mistreatment of complaining shareholders ( e.g. , through fraud and oppression) (subd. (a), par. (1)), or misappropriation of corporate assets (subd. (a), par (2)) by controlling shareholders, directors or officers. Minority Oppression Explained In Kemp & Beatley , the Court of Appeals held that oppression occurs “when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the decision to join the venture.” 64 N.Y.2d at 73. In doing so, the Court explained: It is widely understood that, in addition to supplying capital to a contemplated or ongoing enterprise and expecting a fair and equal return, parties comprising the ownership of a close corporation may expect to be actively involved in its management and operation. Shareholders enjoy flexibility in memorializing these expectations through agreements setting forth each party's rights and obligations in corporate governance. In the absence of such an agreement, however, ultimate decision-making power respecting corporate policy will be reposed in the holders of a majority interest in the corporation. A wielding of this power by any group controlling a corporation may serve to destroy a stockholder's vital interests and expectations. A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment. Id . at 71-73 (citations omitted). Thus, oppressive conduct may be found where “a minority shareholder has been excluded from participation in corporate affairs or management for no legitimate business reason or personal animus,” or “corporate policies are changed by the majority to prevent the minority shareholder from receiving a reasonable return on investment.” Petition for Dissolution of Affiliated Agency, Inc. v. Duggan , 2011 N.Y. Slip Op. 33667 , *4 (Sup. Ct., Nassau County 2011). See also In the Matter of Charleston Square, Inc. , 295 A.D.2d 425, 426 (2d Dept. 2002). The Court of Appeals has cautioned the lower courts that the standard to be used in determining oppression is an objection one: A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the particular enterprise. Majority conduct should not be deemed oppressive simply because the petitioner’s subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not necessarily be equated with oppression. Id . at 73. The Court made “ ne further observation” when it comes to defining oppression: courts should be vigilant in ensuring that minority shareholders do not use involuntary dissolution “as merely a coercive tool.” Id . at 74.  Therefore, whether the minority shareholder’s “own acts, made in bad faith and undertaken with a view toward forcing an involuntary dissolution, give rise to the complained-of oppression,” the courts “should be given no quarter” to the allegedly aggrieved shareholder. Id . (citation omitted). The foregoing principles were at play in Feldmeier v. Feldmeier Equipment, Inc. , 2018 N.Y. Slip Op. 05893 (4th Dept. Aug. 22, 2018) ( here ), where the court affirmed the dismissal of an application for common law dissolution because the plaintiff failed to demonstrate oppression and waste of corporate assets. Feldmeier v. Feldmeier Equipment, Inc. Background Plaintiff, John B. Feldmeier (“Plaintiff”), a former employee, officer, and director and a minority shareholder of Defendant, Feldmeier Equipment, Inc. (“Corporation”), a closely-held corporation, commenced the action against Robert E. Feldmeier, Jeanne C. Jackson and Lisa F. Clark (collectively, the “Individual Defendants” and with the Corporation, the “Defendants”), also officers and directors of the Corporation. Plaintiff alleged that the Individual Defendants breached their fiduciary duties to him. As a result of the alleged “egregious breach of the fiduciary duties,” Plaintiff sought damages as well as common-law dissolution of the Corporation. Defendants answered the complaint with general denials and asserted counterclaims for, inter alia , unfair competition , misappropriation of trade secrets and breach of fiduciary duty. Approximately three years after the action was commenced, Defendants jointly moved for, inter alia , summary judgment dismissing the complaint. Plaintiff cross-moved for summary judgment seeking, inter alia , an order “directing that be dissolved under the common law,” an order advancing him certain amounts and reimbursing him for his expenses in defending against the counterclaims, and an order restraining the Individual Defendants from using the Corporation’s funds “to pay for attorneys’ fees and other professional service fees related to this action.” The motion court granted Defendants’ motion and denied Plaintiff’s cross motion. The appeal ensued. The Fourth Department’s Decision The Fourth Department found that the motion court properly granted Defendants’ motion but erred in denying those parts of Plaintiff’s cross motion seeking reimbursement and an advance of funds related to defending against the counterclaims and seeking to restrain the Individual Defendants from using the Corporation’s funds to defend against dissolution of the Corporation. With regard to the application to dissolve the Corporation, the Court affirmed the motion court’s ruling. The Court rejected Plaintiff’s argument that Defendants had looted the Corporation “by awarding themselves excessive compensation, which had the effect of oppressing him and depriving him of a fair return on his stock in the Corporation.” The Court found that “the individual defendants were paid less after plaintiff resigned and the money was, instead, reinvested in the Corporation, which grew substantially.” Thus, it could not be said that “the challenged compensation bore no relationship to the value received by the company,” thereby “rendering it unjustifiably excessive.” Takeaway Common law dissolution cases are relatively rare in New York. They will be sustained only where “the directors and majority shareholders ‘have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.” Lieb , 13 N.Y.2d at 317. Since the enactment of BCL § 1104-a, such claims have been sustained only under the most egregious circumstances, such as looting the corporate assets or minority oppression. E.g. , Fedele , 250 A.D.2d at 521 (noting that minority shareholder could seek dissolution prior to the enactment of BCL § 110-4-a “only where the controlling shareholder engaged in certain egregious conduct”); Lemle v. Lemle , 92 A.D.3d 494, 500 (1st Dept. 2012) (“egregious conduct necessary to sustain” common law dissolution); Matter of Sternberg , 181 A.D.2d 897, 897-898 (2d Dept. 1992) (common law dissolution available “only to minority shareholders who accuse the majority shareholders and/or corporate officers or directors of looting the corporation”); Ferolito v. Vultaggio , 99 A.D.3d 19, 28 (1st Dept. 2012) (allegations of breaches of fiduciary by corporate officer sufficient to sustain a claim for common law dissolution). The burden to demonstrate egregious conduct is high. The cases show that egregious conduct involves circumstances that “go far beyond charges of waste, misappropriation and illegal accumulations of surplus, which might be cured by a derivative action for injunctive relief and an accounting.” Liebert v. Clapp , 13 N.Y.2d 313, 316 (1963). The conduct involves the diversion of corporate assets for personal gain or oppression such that the minority shareholder’s expectations that were central to his/her decision to invest in the corporation are objectively thwarted by the majority. In Feldmeier , the Court found that the conduct at issue was not sufficiently egregious to warrant common law dissolution.

This Blog has written about judicial dissolution under Limited Liability Company Law (“LLCL”) § 702 many times over the past year or so. ( E.g. , here ,  here  and  here .) A common theme that runs through these posts (and the cases on which they are based) is the difficulties litigants encounter when seeking judicial dissolution.   Yu v. Guard Hill Estates, LLC , 2018 N.Y. Slip Op. 32008(U) (Sup. Ct., N.Y. County Aug. 15, 2018) ( here ), a recent decision issued by Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, is another a case that reinforces the high burden a plaintiff must overcome to dissolve an LLC. A Brief Primer on Dissolution Under LLCL § 702   Under LLCL § 702, a court may dissolve a limited liability company (“LLC”) “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702. To successfully petition for the dissolution under LLCL § 702, the petitioning member must demonstrate the following: 1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; or 2) continuing the company is financially unfeasible. Matter of 1545 Ocean Avenue, LLC v. Crown Royal Ventures, LLC , 72 A.D.3d 121 (2d Dept. 2010); Doyle v. Icon, LLC , 103 A.D.3d 440 (1st Dept. 2013). Therefore, where the purposes for which the LLC was formed are being achieved and its finances remain feasible, dissolution pursuant to LLCL § 702 will be denied. Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). Disputes between members, by themselves, are generally insufficient to dissolve an LLC that operates within the contemplation of its purposes and objectives as defined in its articles of organization and/or operating agreement. See , e.g. , Matter of Natanel v. Cohen , 43 Misc. 3d 1217(A) (Sup. Ct. Kings Co. 2014). It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution be considered an available remedy to the petitioner. Matter of 1545 Ocean , 72 A.D.3d at 130-132. Yu v. Guard Hill Estates, LLC Plaintiff, Patrick K. Yu (“Patrick”), commenced the action against his siblings, Raymond Yu (“Raymond”) and Catherine Yu (“Catherine”), seeking judicial dissolution of Guard Hill Estates, LLC (“Guard Hill”) and 33 East 38th Street, LLC (“33 East”), two LLCs owned by the Yu family. Patrick owns 33 1/3% of Guard Hill, and Raymond and Catherine own the remaining 66 2/3%. Patrick owns 20% of 33 East, and Raymond and Catherine own the remaining 80%. According to the complaint, Guard Hill and 33 East were formed to be holding companies, to create a transition of family property from the Yu parents to their children. Guard Hill was created to hold the remainder interest in the Yu family’s property in Bedford, New York, and 33 East was created to hold title to the Yu family’s apartment building in Manhattan. Prior to the events alleged in the complaint, there had been no changes to the LLC operating agreements. In 2013, a dispute arose between Patrick and his parents, Bong and May Yu. Following the dispute, Patrick alleged that his parents and siblings engaged in conduct designed to oppress and “divest him of his ownership interest in the LLCs.” Among the actions alleged to have been taken against Patrick are: 1) amendment of the operating agreements by Raymond and Catherine to remove Patrick as the managing member of both LLCs, without notice or explanation; 2) amendment of the operating agreements to add a provision stating that managers ( i.e. , Raymond and Catherine) could demand capital contributions from all members, including Patrick, if they determine that such contributions are required, and if such demand is not met, the members’ interest in the LLCs may be foreclosed; and 3) a capital call and demand for $590,887 with respect to Guard Hill, knowing that Patrick was financially unable and could not afford to make the payment. The capital call was purportedly exercised to reimburse Bong and May Yu for renovations made to the Guard Hill property, and to pay off the mortgage on the property. Patrick alleged that no explanation was given as to why that demand was made at that time, when no action had been taken for many years. In October 2016, Patrick was notified by letter that he was in default on the capital call and that his siblings had submitted their portions of the capital call. About two months later, Patrick was notified by letter that his siblings had advanced his portion of the capital call to Guard Hill and had executed two promissory notes for the loans given to Patrick. Annexed to the letter were two pledge and security agreements, each pledging half of Patrick’s stake in Guard Hill as security for notes. Subsequently, Guard Hill paid off the mortgage owed on the property and reimbursed Bong and May for the cost of the renovations. Regarding 33 East, Patrick claimed that between 2013-2015, the company recorded a number of expenses, as reflected in its tax returns, which were not consistent with its stated purpose. Patrick alleged that, as a result of his siblings’ actions, the stated purpose of Guard Hill and 33 East was not being realized or achieved, and instead, they were using the LLCs as “weapons” to oppress him. He maintained that the LLCs were not carrying on their business in accordance with their operating agreements and the continued operation of the LLCs had become financially unfeasible. Defendants moved to dismiss the complaint on the grounds that Patrick did not allege a sufficient factual basis to support dissolution of the LLCs. The Court agreed. The Court’s Decision The Court found that the language in the operating agreements was broad, thereby making it difficult for Patrick to demonstrate that the LLCs were not “operating in a manner within the contemplation of their purposes and objectives”: Given the broad language in the operating agreements, Patrick has failed sufficiently to plead the requisite grounds for dissolution of the LLCs in his complaint. He does not adequately allege that the LLCs are not operating in a manner within the contemplation of their purposes and objectives as defined in their respective operating agreements, or that continuing their operation would be financially unfeasible. He provides no factual support or basis which would support an allegation that the individual defendants are unable or unwilling to promote the purpose of the LLCs or that it is not reasonably practicable to carry on the business of the LLCs in conformity with the operating agreements. The Court also rejected the argument that the discord between Patrick and his siblings was severe enough to warrant dissolution: While Patrick complains that his family members have been engaged in certain activities to further their personal “vendetta” against him, his unflattering characterization of his family’s actions is not sufficient to support a cause of action that his family has abandoned the purpose of the LLCs and/or rendered the operation of the LLCs financially unfeasible Takeaway Yu is instructive for three reasons. First, it highlights the importance of an operating agreement in the court’s analysis of whether dissolution under LLCL § 702 is appropriate. Second, it underscores the point that the discord necessary to dissolve an LLC must be extreme – that is, the discord must be such that it frustrates the economic viability of the LLC or the ability of the members to carry out the purpose of the entity. Finally, it exemplifies the high burden a plaintiff must overcome in obtaining judicial dissolution.

Melville, NY ( Law Firm Newswire ) September 5, 2018 -  Freiberger Haber LLP is pleased to announce that Jonathan H. Freiberger, one of the firm’s founding partners, has co-authored an article with Ms. Leora Halpern Lanz, principle of LHL Communications, a hospitality focused marketing communications advisory and full-time faculty of Boston University's School of Hospitality Administration, and Ms. Elise Borkan, Learning Assistant in the digital marketing class at Boston University's School of Hospitality Administration. The article is entitled: “Hospitality Websites: The ADA’s Impact on Impaired Individuals’ World Wide Web Access.” The article was published on August 31, 2018 in  Hotel Executive Magazine The article addresses new areas of Americans with Disabilities Act (ADA) compliance. Traditionally, discussions about ADA compliance have focused on physical barriers to, or within, brick-and-mortar locations. Developing areas of the law, and advances in technology, have resulted in some changes in the way barriers to access are analyzed. While the article specifically addresses the legal and practical issues related to access of visually impaired individuals to the world wide web, ongoing discussions about the expanded views of ADA compliance should not be so limited. The article is available to  read here. About Freiberger Haber LLP Located in Melville, Long Island and New York City, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, securities, real estate, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber LLP leverages more than 50 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2018 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 105 Maxess Road, Suite S-124, Melville, New York 11747 (631) 282-8985 and 708 Third Avenue, 5th Floor, New York, New York 10017 (212) 209-1005. Prior results do not guarantee or predict a similar outcome with respect to any future matter. For more information, please contact Jonathan H. Freiberger at (631) 282-8985. Freiberger Haber LLP 105 Maxess Road, Suite S-124 Melville, N.Y. 11747 Tel: (631) 282-8985 Fax: (631) 390-6944 Email: info@fhnylaw.com Website:  www.fhnylaw.com