People by Abrams v. Oliver Schools, Inc.

• Citation: 206 A.D.2d 143,619 N.Y.S.2d 911
• Parties: , 96 Ed. Law Rep. 1045 PEOPLE of the State of New York, by Robert ABRAMS, Attorney General of the State of New York, Respondent, v. OLIVER SCHOOLS, INC., Appellant.
• Decision Date: 16 November 1994
• Court: New York Supreme Court Appellate Division

Page 911

619 N.Y.S.2d 911

206 A.D.2d 143, 96 Ed. Law Rep. 1045

PEOPLE of the State of New York, by Robert ABRAMS, Attorney General of the State of New York, Respondent, v. OLIVER SCHOOLS, INC., Appellant.

Supreme Court, Appellate Division,

Fourth Department.

Nov. 16, 1994.

Lee A. Albert, Buffalo, for appellant.

G. Oliver Koppell, State Atty. Gen. (Charles Steinman, of counsel), Rochester, for respondent.

Before DENMAN, P.J., and GREEN, BALIO, WESLEY and CALLAHAN, JJ.

WESLEY, Justice.

Defendant Oliver Schools, Inc. (OSI) appeals from an order that dissolved the corporation pursuant to Business Corporation Law article 11. On appeal, OSI contends that dissolution was not warranted, particularly by summary judgment without a jury trial, and that its due process rights were violated. For the reasons set forth below, the order appealed from should be affirmed.

I

OSI operated four business schools in New York State. The majority of OSI's students paid for their tuition through loans obtained from institutional lenders. Most of the student loans were acquired through the Guaranteed Student Loan program (GSL). In New York, the GSL program is administered by the Higher Education Services Corp. (HESC).

Under Federal and State regulations governing the GSL program in New York, if a student who has obtained a GSL withdraws from school, the school is required to refund a portion of the loan to the lending institution (34 C.F.R. § 682.607[c][2]; 8 NYCRR 2105.2). The refund payments must be made within 30 days of the student's withdrawal, and are used to reduce the outstanding principal the student owes his or her lender (8 NYCRR 2105.2).

In 1989 the Attorney General commenced this action to dissolve judicially OSI under Business Corporation Law article 11, because OSI's refund arrearages had grown from approximately $414,000 in January 1987 to $738,593.92 in February 1989. The Attorney General alleged that OSI had conducted its business in a persistently illegal manner and contrary to public policy, in that it had repeatedly failed to make timely refund payments.

By order dated May 10, 1993, Supreme Court granted the Attorney General summary judgment on the ground that OSI had conducted its business in a persistently illegal manner. The court concluded that the interest of the public would best be served by the judicial dissolution of OSI.

II

OSI argues that, under Business Corporation Law § 1101(b), it is entitled to a jury trial. A hearing is required, however, only when there is some contested issue. There is nothing in the nature of a corporate dissolution proceeding that distinguishes it from any other litigated proceeding (see, Matter of Garay v. Langer [No. 10], 37 A.D.2d 545, 322 N.Y.S.2d 995, affd. 30 N.Y.2d 493, 329 N.Y.S.2d 815, 280 N.E.2d 647; see also, Matter of Goodman v. Lovett, 200 A.D.2d 670, 607 N.Y.S.2d 52, appeal dismissed 84 N.Y.2d 850, 617 N.Y.S.2d 139, 641 N.E.2d 160). OSI has not contested plaintiff's figures on the number of students involved, the amount of refunds owed, or the obvious fact that the amount continued to increase during the two years that OSI said it was trying to resolve the problem. Because there were no contested material issues of fact, a hearing was unnecessary (see, Matter of Gordon & Weiss, Inc., 32 A.D.2d 279, 280, 301 N.Y.S.2d 839; Matter of Petters, 117 Misc.2d 21, 22-23, 457 N.Y.S.2d 170).

OSI also argues that the mixed question of fact and law whether a corporation's misconduct warrants dissolution is inevitably for the jury, citing People v. Abbott Maintenance Corp., 11 A.D.2d 136, 140, 201 N.Y.S.2d 895, affd. 9 N.Y.2d 810, 215 N.Y.S.2d 761, 175 N.E.2d 341. In that case, the First Department reversed an order that dismissed a dissolution action, and held that the Attorney General had made out a prima facie case for dissolution that should go to the jury. The case does not support the proposition that summary judgment granting dissolution of a corporation is at all times inappropriate.

III

The record supports the court's determination that OSI conducted its business in a persistently illegal manner warranting dissolution under Business Corporation Law § 1101(a)(2). Section 1101(a)(2) provides in pertinent part that the Attorney General may bring an action for dissolution of a corporation upon the ground that the corporation has carried on, conducted or transacted its business in a persistently fraudulent or illegal manner. The statute provides a procedural remedy to the State for the abuse of power entrusted to its "creature", a corporate body; the statute does not, by itself, create any new liability, penalty or forfeiture (State of New York v. Cortelle Corp., 38 N.Y.2d 83, 87-88, 378 N.Y.S.2d 654, 341 N.E.2d 223).

The remedy of dissolution has been described as "a 'judgment * * * of corporate death,' which 'represent[ed] the extreme rigor of the law' " (California v. American Stores Co., 495 U.S. 271, 289, 110 S.Ct. 1853, 1863, 109 L.Ed.2d 240, quoting People v. North River Sugar Refining Co., 121 N.Y. 582, 608, 24 N.E. 834). "Its infliction must rest upon grave cause, and be warranted by material misconduct" (People v. North River Sugar Refining Co., supra, at 608, 24 N.E. 834). "[T]he State as prosecutor must show on the part of the corporation accused some sin against the law of its being which has produced, or tends to produce, injury to the public. The transgression must not be merely formal or incidental, but material and serious; and such as to harm or menace the public welfare" (People v. North River Sugar Refining Co., supra, at 608-609, 24 N.E. 834; see also, People ex rel. Attorney General v. Utica Ins. Co., 15 Johns 358, 389).

In North River, the corporation was dissolved because of anti-competitive activity, i.e., the formation of the "sugar trust". At the end of the last century, prior to the enactment of Federal antitrust laws, forfeiture of a corporation's charter was a remedy employed by many states to combat anti-competitive conduct (see, e.g., State ex rel. Attorney General v. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279; State v. Nebraska Distilling Co., 29 Neb. 700, 46 N.W. 155; see also, Hovenkamp, Regulatory Conflict in the Gilded Age: Federalism and the Railroad Problem, 97 Yale L.J. 1017, 1034 n. 87 [1988]. Under existing statutes, a corporation could also be dissolved for such seemingly trivial violations as failure to file an annual report (see, People v. Buffalo Stone & Cement Co., 131 N.Y. 140, 29 N.E. 947). In the 1950s, a union insurance fund that was shown to be a Communist front was dissolved on the theory that its officers not only violated Federal law, but placed the interests of the former Soviet Union ahead of those of the policyholders (see, Matter of People [International Workers Order], 199 Misc. 941, 972-976, 106 N.Y.S.2d 953, affd. 280 A.D. 517, 113 N.Y.S.2d 755, affd. 305 N.Y. 258, 112 N.E.2d 280, cert. denied 346 U.S. 857, 74 S.Ct. 68, 98 L.Ed. 371).

Dissolution was held not to be the proper remedy, however, in other early cases. In Lorillard v. Clyde, 142 N.Y. 456, 37 N.E. 489, the Court of Appeals held that the public interest did not require dissolution of a corporation that from time to time had employed its ships on routes other than the one identified in its certificate of incorporation. In People v. Ulster & Del. R.R. Co., 128 N.Y. 240, 28 N.E. 635, dissolution of a railroad for failure to extend its tracks to the limits set forth in its franchise was not required, when the State's railroad commissioners had determined that the public interest did not require the extension (see also, People v. Hudson River Connecting R.R. Corp., 228 N.Y. 203, 126 N.E. 801, cert. denied 254 U.S. 631, 41 S.Ct. 7, 65 L.Ed. 447). In People v. Atlantic Ave. R.R. Co., 125 N.Y. 513, 26 N.E. 622, dissolution of a railroad was likewise not required because the railroad had not run its trains for five days. In Village of Fredonia v. Fredonia Natural Gas Light Co., 169 A.D. 690, 155 N.Y.S. 212, a gas distribution franchise was not forfeited by its non-use for 2 1/2 years.

Although some of the grounds for dissolution of a corporation by the Attorney General were omitted in the enactment of the Business Corporation Law (see, Joint Legislative Committee to Study Revision of Corporation Laws, Explanatory Memorandum on Business Corporation Law [Mar. 13, 1961],...