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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

During the last week in August, the Securities and Exchange Commission (“SEC” or “Commission”) filed a number of actions and administrative proceedings involving, among other things, insider trading and the use of financial models and controls. Today’s installment of SEC Enforcement News looks at two of the actions/proceedings filed by the Commission: one involving insider trading allegations against former Cleveland Browns linebacker, Mychal Kendricks (“Kendricks”), and the other involving Moody’s Investors Service, Inc. for failing to implement proper controls over a) certain financial models operated by an affiliate, and b) the use of its rating symbols. SEC v. Kendricks On August 29, 2018, the Commission announced ( here ) that it had filed a complaint against Kendricks for insider trading. According to the SEC, Kendricks and Damilare Sonoiki (“Sonoiki”), a Harvard-educated former investment banker who recently served as a staff writer for the ABC television show “Black-ish”, purchased securities in companies that were soon to be acquired and then sold those positions after the deals were publicly announced. The SEC alleged that after meeting at a party, Kendricks began receiving illegal tips from Sonoiki, a former analyst at an investment bank (later disclosed to be Goldman Sachs) who had access to confidential, non-public information about upcoming corporate mergers and acquisitions. Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were about to be acquired and then selling those positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks. According to the SEC, Kendricks purchased call options in four companies that were planning to merge with another company: Compuware Corporation (“Compuware”), Move, Inc. (“Move”), Sapient Corporation (“Sapien”), and Oplink Communications, Inc. (Oplink”). When each company announced a merger or acquisition, the value of Kendricks’s options increased significantly.  For example, Kendricks purchased approximately $60,000 in Compuware call option contracts. After Compuware announced that it was being acquired by the private-equity firm, Thoma Bravo LLC in a going-private transaction, Kendricks sold those same option contracts for approximately $138,000, which was a 130% increase from the purchase price.  With respect to Move, Kendricks purchased approximately $71,000 in call options and sold those same contracts for approximately $350,000, which constituted a 393% increase from the purchase price, after it announced that News Corp. was acquiring it in an all cash tender offer. For Sapient, Kendricks purchased approximately $146,000 in call option contracts and sold them for approximately $635,000, which was a 335% increase from the purchase price, after it announced that it was being acquired by the French advertising firm Publicis Groupe PLC in a cash tender offer.  Finally, Kendricks purchased Oplink call option contracts for approximately $446,000 and sold them for approximately $798,000, which was a 79% increase from the purchase price, after it announced that it was being acquired by a subsidiary of Koch Industries, Inc. in a cash tender offer. According to the SEC, Kendricks made a profit of approximately $78,000 from his Compuware investments, approximately $279,000 from his Move investments, approximately $489,000 from his Sapient investments, and approximately $352,000 from his Oplink investments, for a total of approximately $1.2 million. The scheme ended in 2015, when Sonoiki left Goldman Sachs to work on “Black-ish.” According to the SEC’s complaint ( here ), Kendricks rewarded Sonoiki for his tips and other assistance, which included setting up an online brokerage account that both men could access, by providing cash kickbacks, free NFL tickets, and an evening on the set of a pop star’s music video in which Kendricks made a cameo appearance. “As alleged in our complaint, Kendricks paid cash and shared celebrity perks for illegal tips that enabled him to trade and profit on confidential information that the rest of the investing public didn’t have,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division. Kendricks and Sonoiki are alleged to have facilitated the trading through coded text messages and FaceTime conversations. “Kendricks and Sonoiki allegedly tried to evade detection by using a variety of communication methods to hide their misconduct, but we were able to use methodical investigative work to piece together a trail of evidence and expose their insider trading scheme,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. In a statement, Kendricks admitted wrongdoing, said he fully cooperated with investigators and promised to repay the funds that he illegally gained. I apologize. Four years ago, I participated in insider trading, and I deeply regret it. I invested money with a former friend of mine who I thought I could trust and who I greatly admired. His background as a Harvard graduate and an employee of Goldman Sachs gave me a false sense of confidence. To that point, I had worked my tail off since I was 5 years old to become the football player that I am today. I was drawn in by the allure of being more than just a football player. While I didn’t fully understand all of the details of the illegal trades, I knew it was wrong, and I wholeheartedly regret my actions. Since the beginning of the investigation, I have fully cooperated with all of the authorities and will continue to do so. I accept full responsibility for my actions. Although I did not take any of the profits for myself, I am committed to repaying all of the funds gained illegally and accept the consequences of my actions. The SEC filed its complaint in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 18-cv-03695). The complaint charges Kendricks and Sonoiki with two counts of securities fraud and is seeking the return of their ill-gotten trading profits plus interest and penalties. Also, on August 29, the U.S. Attorney’s Office for the Eastern District of Pennsylvania announced parallel criminal charges against Kendricks and Sonoiki. ( Here .) If convicted, each defendant faces a maximum possible sentence of 25 years’ imprisonment, a three-year period of supervised release, $5,250,000 fine, and a $200 special assessment. Forfeiture of all proceeds from the offenses also may be ordered. In the Matter of Moody’s Investors Service, Inc. On August 28, 2018, the SEC announced ( here ) that Moody’s Investors Service Inc. (“Moody’s”), one of the nation’s largest credit ratings agencies, agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols. (Adm. Proc. File No. 3-18688 (August 28, 2018).) According to the SEC, this was “the first time the SEC has filed an enforcement action involving rating symbol deficiencies.” Moody’s agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (“RMBS”) and will retain an independent consultant to assess and improve its internal controls. Moody’s separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit or deny the SEC’s charges. According to the SEC’s order in the internal controls proceeding ( here ), Moody’s failed to establish and document an effective internal control structure as to models that Moody’s had outsourced from a corporate affiliate (Moody’s Analytics) and used in rating RMBS from 2010 through 2013. Moreover, Moody’s failed to maintain and enforce existing internal controls that should have been applied to the models. Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models. Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings. “Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “As our order notes, the SEC put Moody’s on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.” In the SEC’s order relating to rating symbols ( here ), the Commission found that Moody’s assigned ratings to securities known as combo notes in a manner that was inconsistent with other types of securities that used the same rating symbols. These securities had a total notional value of about $2 billion. “Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied,” said Reid Muoio, Deputy Chief of the Enforcement Division’s Complex Financial Instruments Unit. “Today’s proceeding is the SEC’s first enforcing the Universal Ratings Symbol requirement and we will continue to pursue failures that render rating symbols unclear or inconsistent.”

It’s official. New York City has passed a law, 45-0 in a city council vote, which is designed to help enforce existing rules that ban short-term rentals. The new law will require that Airbnb share the names and addresses of hosts in New York City. here.=">here."> Not Everyone Agrees The law has been met with mixed feelings. While people such as Mayor Bill de Blasio support the bill, others like Chris Lehane, head of global policy at Airbnb, find the new policy to be unnecessary, potentially subjecting hosts to violations of their privacy. “This is a bill that really is designed to benefit the hotel industry,” he said in a conference call with reporters. An Airbnb host who has been financially backed by the company itself has accused city officials of retaliation after he spoke out in support of rental homes. He has filed a lawsuit against New York City. A catalyst for Gentrification or a Homeowner’s Ace? These opposing views have long existed in the City. New York housing advocates have said that short-term rentals are a major contributor to gentrification and rising rental costs, while Airbnb argues that access to short-term rentals allows homeowners to make additional income and afford their mortgages. Housing Advocacy Councilwoman, Carlina Rivera, was responsible for introducing the bill. Prior to becoming a politician, Rivera was a housing advocate, who helped tenants forced out of their apartments due to rising rents. She often heard stories of landlords hoarding apartments and running illegal hotels. She remains focused on creating a fair real estate market. “This is about preserving as much affordable housing and housing stock as possible,” she said. Rivera has not been the only vocal council member to criticize the company. Council Speaker Corey Johnson has been outspoken about his opposition to Airbnb for years, accusing it of establishing a method for property managers to make money without paying taxes or abiding by safety regulations. Even the City of New York has worked to tighten the rules surrounding Airbnb and similar sites for a while. Under Mayor de Blasio, the City has strengthened a ban on rentals lasting for less than thirty days. What Does this Mean for the Future of Airbnb in NYC? New York City has asked a judge to order Airbnb to comply with a subpoena for information, in line with the recent decision. The City claims that the company has “largely refus to cooperate,” failing to provide “any records whatsoever.” Airbnb explains that they have yet to comply because the subpoena was too broad, requesting information not relative to the investigation. The company has continued to fight for its customer’s privacy and “will not stand by silently while OSE attempts to game the legal system in order to continue to harass responsible New Yorkers who share their home,” said Airbnb spokesman, Christopher Nulty. If the decision sticks, only time will tell just how much it influences the landscape of the business . The San Francisco-based company, valued at $31 million, does not believe that this new policy will have much of an effect on its business. “Most of our revenue is really coming for a much, much larger group of cities," said Lehane, a former adviser to President Bill Clinton. “This is not going to have an impact on us from a broader business perspective.”

Jonathan H. Freiberger recently co-authored an article appearing in the August 26, 2018 edition of 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.  Please see the article < HERE =">HERE"> .

This Blog has previously written about the enforceability of informal agreements. ( Here , here , here , and here .) In that regard, we have noted that an exchange of term sheets, memoranda of understanding, emails or correspondence may constitute an enforceable agreement if the writings include all the essential terms of an agreement. Sullivan v. Ruvoldt , 16 Civ. 583, 2017 WL 1157150 at *6 (S.D.N.Y. Mar. 27, 2017). Thus, if the informal writings contain the necessary elements of an enforceable contract, e.g. , an offer, acceptance, consideration, mutual assent and intent to be bound, courts will enforce the writings as if they were a formal, written agreement. On August 10, 2018, Justice Richard M. Platkin of the Supreme Court, Albany County, Commercial Division enforced a letter agreement notwithstanding the fact that the parties envisioned a more formal writing in the future. Vincent Crisafulli Testamentary Trust v. AAI Acquisition, LLC , 2018 N.Y. Slip Op. 51219(U) (Sup. Ct., Albany County Aug. 10, 2018). As discussed below, the decision turned on whether there was a meeting of the minds, or mutual assent, between the parties. Background Vincent Crisafulli concerned an alleged breach of contract involving a commercial lease of warehouse and distribution space (“Premises”). In 2009, about 40,000 square feet of the Premises were leased to Auburn Armature, Inc. (“AAI”). On May 19, 2017, AAI filed for Chapter 11 bankruptcy protection. Within one week of its bankruptcy filing, AAI moved to sell all of its assets to the defendant, AAI Acquisition, LLC (“Acquisition”) and to have certain executory contracts, including AAI’s lease with the plaintiff, Vincent Crisafulli Testamentary Trust (“Trust”), assumed by, and assigned to, Acquisition (“Lease”). On June 26, 2017, the Bankruptcy Court granted the motion and entered an order approving the asset purchase agreement. Shortly thereafter, Acquisition’s principal, Gerald J. DiCunzolo (“DiCunzolo”), sought to negotiate a more permanent arrangement with respect to the assumed leases, including the Lease with the Trust. Negotiations ensued between DiCunzolo and Frank J. Crisafulli, the Trustee of the Trust (“Crisafulli”). The Trust and Acquisition entered into a letter agreement on July 11, 2017, which replaced the Lease with a new agreement (the “Letter Agreement”). The Letter Agreement, among other things, added two years to the lease term, modified the rental stream, and gave Acquisition a purchase option on the Premises. The Letter Agreement further provided that Acquisition’s lease obligations were to be “guaranteed by affiliate United Electric Power, Inc.” The Letter Agreement stated that it was intended to “set forth the binding business terms of the agreement which will be supplemented by an appropriate set of legal documents approved by counsel for both parties to be fully executed within 30 days.” The Letter Agreement was signed by Crisafulli, as trustee of the Trust, and DiCunzolo, as president of Acquisition. Acquisition then entered into possession of the Premises, and it made rent payments for July and August. However, on August 28, 2017, Acquisition advised the Trust that it intended to abandon the Premises, and it ultimately vacated the Premises in September 2017. Acquisition paid the September rent, but has not made any payments thereafter pursuant to either the Lease or the Letter Agreement. In an attempt to mitigate damages, the Trust found a replacement tenant who began paying rent effective November 1, 2017. Based on the differential in rent, however, the Trust claimed damages of $193,350 through July 2022, which is the extended lease term prescribed in the Letter Agreement. The Trust commenced the action on October 17, 2017, alleging three contractual causes of action: (1) breach of the Letter Agreement; (2) breach of the guarantee provision of the Letter Agreement; and (3) breach of the assumed Lease. Following some paper discovery, the Trust moved for summary judgment. Acquisition opposed the motion. Applicable Law Under New York law, the existence of a binding contract is not dependent on the subjective intent of the parties to the agreement. Brown Bros. Elec. Contrs. v Beam Constr. Corp. , 41 N.Y.2d 397, 399 (1977) (citations omitted). Instead, courts look to the “objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” Id . (citations omitted). “In doing so, disproportionate emphasis is not to be put on any single act, phrase or other expression, but, instead, on the totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain.” Id . at 399-400 (citations omitted). Courts will not enforce “a mere agreement to agree, in which a material term is left for future negotiations….” Joseph Martin, Jr., Delicatessen v. Schumacher , 52 N.Y.2d 105, 109 (1981). Moreover, courts will not enforce an agreement containing an “express reservation by either party of the right not to be bound until a more formal agreement is signed.” E.g. , Bed Bath & Beyond Inc. v. IBEX Constr., LLC , 52 A.D.3d 413, 414 (1st Dept. 2008). Thus, to demonstrate the formation of a valid contract, a party must demonstrate, through objective evidence, the parties’ mutual assent to the alleged agreement and their intention to be bound thereby. Kowalchuck v. Stroup , 61 A.D.3d 118, 121 (1st Dept. 2009). The Court’s Holding The Court granted the Trust’s motion, finding that the Letter Agreement was a valid and binding contract that was sufficiently definite in its material terms. The Court found that “the plain language of the Letter Agreement evinces the parties’ intention that the writing sets forth ‘the binding business terms of the agreement.’” The Court noted that “ hile the parties did contemplate that these ‘binding business terms’ would ‘be supplemented by an appropriate set of legal documents approved by counsel for both parties to be fully executed within 30 days,’ there was no ‘express reservation by either party of the right not to be bound until a more formal agreement is signed.’” (Citations omitted.) Thus, the language of the Letter Agreement itself “expressed the parties’ intention to be bound thereby.” (Citation and internal quotation marks omitted.) The Court also found that the Letter Agreement contained all the material terms of an enforceable agreement: The Letter Agreement describes the demised Premises, states that the new lease would be on the same terms and conditions as the prior Lease, except as otherwise modified therein, and then sets forth the modified terms and conditions of the new lease. And while the parties contemplated supplementation of the Letter Agreement via formalized “legal documents approved by counsel”, the Letter Agreement sets forth all of the essential terms of a lease agreement, and defendants have not identified any missing terms that were material to the transaction. That the Letter Agreement “stated that a more formal contract was to be signed does not render unenforceable.” Takeaway Courts have repeatedly held that letters, faxes and other less formal written documents, such as emails and texts, can serve as an enforceable agreement. Documents containing words that evince an agreement, along with language demonstrating contract formation, will suffice to create an enforceable agreement.  Vincent Crisafulli illustrates these points.

This Blog has written about cases involving disputes between members of a limited liability company (“LLC”) in which resolution of the matter would be governed by an operating agreement if one were in place. These cases illustrate the importance of having an operating agreement that addresses the myriad issues an LLC may encounter throughout its existence. Yet, despite the fact that the New York Limited Liability Company Law (“LLCL”) requires members of an LLC to “adopt a written operating agreement” (LLCL § 417), many LLCs fail to do so, whether at the formation stage or during the life of the company. Even LLCs that have an operating agreement are often subject to the application of the LLCL because those agreements typically do not contain language addressing the issues that can affect an LLC during its lifetime. In the absence of an operating agreement, the rights, duties and obligations of an LLC member are governed by the default provisions of the LLCL. See , e.g. , Matter of Eight of Swords, LLC , 96 A.D.3d 839 (2d Dept. 2012); Matter of 1545 Ocean Ave., LLC , 72 A.D.3d 121 (2d Dept. 2010). As one would expect, the default provisions of the LLCL do not address every circumstance that might arise during the life of an LLC. For example, as discussed in a recent Blog post, the LLCL does not specifically address the removal of LLC members. ( Here .) Since the LLCL is silent on the issue, unless expressly provided in an operating agreement, there are no statutory grounds on which a member may be removed. See Man Choi Chiu v. Chiu , 71 A.D.3d 646 (2d Dept. 2010) (dismissing claim where neither the articles of organization nor the operating agreement provided for removal of a member); Matter of Goyal v. Vintage India NYC, LLC , 2018 N.Y. Slip Op. 31926(U) (Sup. Ct., N.Y. County Aug. 7, 2018) (looking to annotations to statute for guidance as to how to rule in the absence of an operating agreement) ( here ). Dissolution of the LLC is another area in which the default provisions of the LLCL do not address every circumstance that may arise. As this Blog has noted on numerous occasions, breaking up is hard to do, especially in the absence of an operating agreement.   Under Section 702 of the LLCL, a court may dissolve a company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” When there are no articles or operating agreement, courts look to the stated purposes for which the LLC was formed to determine if they are being achieved and whether the company’s finances remain feasible. E.g. , Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). It is in the court’s discretion whether to grant the request for dissolution. See Molina v. Hong (In re Extreme Wireless, LLC) , 299 A.D.2d 549 (2d Dept. 2002). As such, even if the court determines that dissolution is appropriate, it may order a buyout of the member seeking dissolution as an alternative remedy. See Matter of Superior Vending, LLC , 71 A.D.3d 1153, 1154 (2d Dept. 2010). Just as LLCL § 702 offers dissolution to a member of an LLC, Business Corporation Law (“BCL”) §§ 1104 and 1104-a offer dissolution to a shareholder of a close corporation. Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that a corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz , 233 A.D.2d 149, 150 (1st Dept. 1996), lv dismissed , 89 N.Y.2d 1029 (1997); Neville v. Martin , 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming, 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104: (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. BCL § l 104(a). Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution. BCL § 1111(a). Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation ( see generally Hayes v. Festa , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp. , 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” Matter of Klein Law Group, P.C. , 134 A.D.3d 450 (1st Dept. (2015) (quoting Matter of the Dissolution of 168½ Delancey Corp. , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). As noted, the threshold requirement for seeking dissolution under BCL § 1104 is ownership of 50% of the shares entitled to vote for directors. BCL § 1104(a) (the party seeking dissolution must hold “shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors ….”). This requirement is strictly construed by the courts. Thus, where a party owns less than 50% of the voting shares, dissolution will be denied. See In re Sakow , 297 A.D.2d 229, 230 (1st Dept. 2002) (“The IAS court properly found, however, that one share of the stock claimed by petitioner had been sold, leaving petitioner short of the 50% stock ownership required, depriving her of standing to bring this action and requiring dismissal.”). Under BCL § 1104-a, the court has the power to order the dissolution of a corporation where “ he directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders” (BCL § 1104-a, subd. (a), par (1)) or where “the property or assets of the corporation are being looted, wasted or diverted for non-corporate purposes by its directors, officers or those in control.” BCL § 1104-a, subd. (a), par (2). Dissolution under this section is discretionary. Gimpel v. Bolstein , 125 Misc. 2d 45, 49 (Sup. Ct., Queens County May 30, 1984) (citing Matter of Topper v. Park Sheraton Pharmacy , 107 Misc. 2d 25, 28 (Sup. Ct., N.Y. County Oct. 24, 1980)). It is a “drastic” remedy, and before ordering dissolution the court must consider whether it is the only means by which the complaining shareholders can reasonably expect to receive a fair return on their investment or whether it is reasonably necessary to protect their rights and interests. Id . (citing BCL § 1104-a, subd. (b); Muller v. Silverstein , 92 A.D.2d 455 (1st Dept. 1983)). The corporation or any of its shareholders may avoid the proceeding by electing to purchase the petitioner’s shares at their fair value. Id . (citing BCL § 1118). Recently, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, dismissed a deadlock dissolution petition filed under BCL § 1104 because the petitioner owned only 49% of the voting shares despite having 50% control over the corporation. Balkind v. Nickel , 2018 N.Y. Slip Op. 31703(U) (Sup. Ct. N.Y. County July 16, 2018) ( here ). Balkind v. Nickel Background The petitioner, Aubrey Balkind (“Balkind”), sought to dissolve Lanson Properties, Inc. (“Corporation”) on the grounds of deadlock. The respondent, Edith Nickel (“Nickel”), opposed the petition. Balkind and Nickel entered into a shareholder agreement in November 2005 (“Shareholder Agreement”). Balkind owns 49 percent of the Corporation’s common stock, and Nickel owns the remaining 51 percent of the Corporation’s shares. The Corporation’s sole asset is property located at on East 58th Street in New York City (the “Property”). As the only two directors of the Corporation, Balkind and Nickel agreed to sell the Property in early 2016. In mid-2017, an investor offered to purchase the Property for $15 million (which was $5 million below the asking price); the Corporation rejected the offer. Since that time, both parties have been unable to agree upon a purchase price for the Property. Balkind petitioned the Court for dissolution pursuant to BCL § 1104 because the Corporation was unable to sell the Property at an agreed upon price. Balkind claimed that the parties were deadlocked, as the Shareholder Agreement effectively required unanimous agreement between the shareholders. Balkind further noted that: (1) no one manages the Property because the agreement with the previous property manager expired; and (2) the Property remains largely vacant and unable to generate income. Balkind also alleged that Nickel was preventing the Corporation from selling the Property at fair market value to pressure him into waiving reimbursements to which he is entitled. Balkind said that he loaned the Corporation $2.8 million and continued to loan the Corporation money to meet the Corporation’s monthly obligations, including its mortgage payments. Nickel opposed dissolution and separately moved to dismiss the petition, arguing that Balkind did not have standing pursuant to BCL § 1104 because Balkind owned less than 50 percent of the Corporation’s total voting stock. Nickel denied any improper conduct and instead alleged that Balkind was attempting to coerce Nickel into selling the Property below fair market value to achieve his personal goals at her expense. The Court’s Decision The Court dismissed the petition to dissolve the Corporation and granted the motion to dismiss. The Court found that Balkind did not meet the threshold requirement of 50% ownership of the shares entitled to vote for directors of the Corporation. The Court rejected Balkind’s argument that the focus of BCL § 1104 is on equal power not equal ownership and concluded that the Shareholder Agreement, which merely designated Balkind and Nickel as the Corporation’s two directors “irrespective of voting stock ownership,” was not “the same as equal voting power to elect directors in the context of BCL § 1104’s standing requirement.” Contrary to Balkind’s position, BCL § 1104 is clear — to petition for judicial dissolution, petitioners must be “the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors. . . .” Under the plain meaning of the statute, Balkind, as the holder of 49% of the voting stock, does not have standing, and New York courts strictly interpret and apply the statute. Neither does reference to the Shareholder Agreement confer standing under BCL § 1104. That agreement merely designates Aubrey Balkind and Nickel as the Corporation’s two directors irrespective of voting stock ownership, which is not the same as equal voting power to elect directors in the context of BCL § 1104’s standing requirement. Under these circumstances, Balkind is unable to invoke BCL § 1104 as a deadlock breaking device. Takeaway Balkind highlights the importance of meeting the standing requirements for deadlock dissolution under BCL § 1104. And, in that context, Balkind illustrates the difference between a shareholder seeking dissolution of a corporation and a member of an LLC seeking dissolution of his/her company. In the latter situation, an LLC member who holds co-equal management rights, but possesses a minority ownership interest, would have standing to seek judicial dissolution under the LLCL – i.e. , under the LLCL, any member of the LLC has standing to seek dissolution. As Balkind learned, the same is not true under the BCL.