Fremay, Inc. v. Modern Plastic Machinery Corp.

• Decision Date: 19 December 1961
• Citation: 222 N.Y.S.2d 694,15 A.D.2d 235
• Parties: FREMAY, INC., Plaintiff-Respondent, v. MODERN PLASTIC MACHINERY CORP., Defendant-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 694

222 N.Y.S.2d 694

15 A.D.2d 235

FREMAY, INC., Plaintiff-Respondent, v. MODERN PLASTIC MACHINERY CORP., Defendant-Appellant.

Supreme Court, Appellate Division, First Department.

Dec. 19, 1961.

Bernard Solomon, New York City, for appellant.

Jacob Cottin, New York City, for respondent.

Before BOTEIN, P. J., and BREITEL, VALENTE, McNALLY, and STEUER, JJ.

BREITEL, Justice.

Involved in this appeal is whether a Delaware corporation, which conducts a manufacturing business in New Jersey, may be sued in New York by a Massachusetts corporation for breach of a contract negotiated in New York but executed in New Jersey.

Special Term confirmed a report of the official referee, after a hearing before the referee, which, among other things, held that the Delaware corporation was doing business in New York and that, therefore, there was jurisdiction under the statutes to retain the action. Defendant appeals from the order denying its motion to dismiss the complaint for lack of jurisdiction under rule 106, subdivision 1, of the Rules of Civil Practice, following a special appearance.

For reasons to be discussed the order should be reversed, and the matter remanded for a new hearing.

Plaintiff confuses the principles governing jurisdiction of New York courts over actions between foreign corporations not doing business in New York, as limited by the applicable statute, with the conflict of laws rule for choice of substantive law in enforcing contracts, and with the due process doctrine of substantial contact sustaining suability of nonresident or foreign persons or entities. At issue in this case, ultimately, is only the question whether defendant was doing business in New York so that it might be sued in New York under subdivision 4 of section 225 of the General Corporation Law.

The salient facts are:

Plaintiff, a Massachusetts corporation not licensed to do business in New York, sues to recover $16,000 alleged damages for breach of a written agreement. Defendant, a Delaware corporation and also not licensed to do business in New York, had agreed to employ plaintiff and its president to promote and manage the affairs and business of defendant. Certain fixed sums were payable and plaintiff was to receive a percentage of defendant's gross sales. Defendant is licensed to do business in New Jersey where it has an office and factory. It has no office in New York. The agreement was negotiated in New York with at least two officers of defendant corporation who reside in New York City. Plaintiff's signature was affixed to the agreement in New York, but the signature of the defendant, the last act necessary to make the agreement binding, occurred in New Jersey.

The proof, on the hearings, showed that two of defendant's officers who reside in New York have an office for their several businesses in Long Island City in New York. There, on occasion, they have had meetings and conversations, and from there they have sent documents in connection with the affairs of defendant corporation. It also appears that these officers are investors in defendant corporation, and it is but one of a number of businesses in which they have interests. For the most part, however, their Long Island City office is devoted to businesses which have no relationship to defendant corporation or to any of the matters involved in this action. Defendant has a bank account in New York and has borrowed from the bank in which it is a depositor. It also has, however, a bank account in New Jersey in connection with which it has also made business loans. Defendant has employed a New York attorney. Under circumstances not detailed, it also appears that defendant has made a number of sales of its machinery to customers in New York. The books and records of defendant corporation are not located in New York.

Section 225 of the General Corporation Law provides the circumstances in which an action may be maintained against a foreign corporation by another foreign corporation or by a nonresident. The pertinent subdivisions read as follows:

'1. Where the action is brought to recover damages for the breach of a contract made within the state, or relating to property situated within the state, at the time of the making thereof.

* * *

* * *

'4. Where a foreign corporation is doing business within this state.'

In order, then, for the present action to lie in the courts of this State it must come within either of the above subdivisions.

Plaintiff has argued that the present action comes within both.

At Special Term, with some success, plaintiff argued that under the 'grouping of contacts' doctrine under modern conflict rules the internal law of New York applies to the present contract. In this connection it relies upon the leading case of Auten v. Auten, 308 N.Y. 155, 124 N.E.2d 99, 50 A.L.R.2d 246. Its difficulty is that the doctrine is referable only to the choice of substantive law to be applied to the contract in question (Auten v. Auten, at 160, 124 N.E.2d at 101, supra; Restatement, Second, Conflict of Laws, Tent. Draft No. 6 [April, 1960] §§ 332-334e, incl. Comments and Editorial Notes; 8 N.Y.Jur. Conflict of Laws, §§ 16-17). Also, it is not shown that the result would be any different if the law of New Jersey, Delaware, or Massachusetts were applied.

Nevertheless, assuming, as plaintiff would have it, that the internal law of New York is to be applied to the contract, then the question is whether under such internal law the contract was made in New York. The answer is simply that under New York law (as well as under the law of virtually all, if not all, the Anglo-American jurisdictions) the time and place of making of the contract is established 'when the last act necessary for its formulation is done, and at the place where that final act is done' (e. g. Hyde v. Goodnow, 3 N.Y. 266; Ohl & Co. v. Standard Steel Sections, Inc., 179 App.Div. 637, 639, 167 N.Y.S. 184, 185, involving a formal contract negotiated between offices in New York and Newark, New Jersey and finally signed in New Jersey; Restatement, Contracts § 74). ¹

Consequently, applying New York's internal law (and it is noted again that it would make no difference, as the internal law of New York, New Jersey and Massachusetts are undoubtedly the same in this respect) the contract in suit was made in New Jersey when it was signed by the last signatory. Hence, on this ground the action does not fall within subdivision 1 of section 225.

Plaintiff also argued that under the substantial contact doctrine in the due process area, recognized and developed by the Supreme Court of the United States in recent years it is entitled to sue defendant in this State (International Shoe Co. v. Washington, Office of Unemployment Compensation and Replacement, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95; McGee v. International Life Ins. Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223; Travelers Health Ass'n v. Virginia, 339 U.S. 643, 70 S.Ct. 927, 94 L.Ed. 1154; Perkins v. Benguet Consol. Mining Co., 342 U.S. 437, 72 S.Ct. 413, 96 L.Ed. 485; Hanson v. Denckla, 357 U.S. 235, 250-255, 78 S.Ct. 1228, 2 L.Ed.2d 1283; Zacharakis v. Bunker Hill Mut. Ins. Co., 281 App.Div. 487, 120 N.Y.S.2d 418). Because of the similarity in terminology, there is here a confusion between the substantiality of contacts required to justify an action against a nonresident, based on due process principles, with the substantiality of contacts invoked in applying the conflict rule earlier discussed (see Hanson v. Denckla, supra, 357 U.S. at 254, 78 S.Ct. 1228).

The International Shoe case, and those which have followed in its wake, have merely developed the doctrine that a state may extend the jurisdiction of its courts to encompass actions against a nonresident with respect to matters arising from significant acts of a nonresident in the State. Thus, in the International Shoe case it was held that the State of Washington could prosecute a claim for unemployment insurance liability against a foreign corporation, not 'doing business' within the State, with respect to its employees in the State of Washington. So, again, in the McGee case, it was held that a state could impose liability to suit within it upon an out-of-state insurance company with respect to a particular insurance policy delivered within the state (cf. Zacharakis v. Bunker Hill Mut. Ins. Co., supra). On similar principles a statute, such as section 229-b of the Civil Practice Act, reflects a modern reach of constitutional power in subjecting nonresidents to suit within the state. But, unfortunately for plaintiff, there is no statute in this State which extends the jurisdiction of the courts of this State to an action based upon any contract which may have significant contacts within the State (see Restatement, Second, Conflict of Laws, Tent. Draft No. 3 [April, 1956] § 84, Comment e 'Necessity for statute', § 85 Comment d 'Necessity for statute'). On the contrary, the relevant statute is limited, as above set forth, to confer jurisdiction only with regard to contracts made in this State or, of course, with respect to foreign corporations doing business within this State.

So, too, on this ground the action does not fall within subdivision 1 of section 225.

It is also argued that defendant corporation is doing business within the state and therefore it is suable under subdivision 4 of section 225. In this connection plaintiff argues that because of the development of the grouping of contacts doctrine as taught in the Auten case and the substantial contacts doctrine as laid down in the International Shoe case the extent of 'doing business' should be correspondingly broadened. The fallacy is that plaintiff is mixing his categories. Nor is this the first time that the question has been raised in this Court. On a similar occasion a plaintiff urged that because the constitutional reach of State power had been extended under the International Shoe case, the limitations of...