Pursuant to Bus. Corp. v. Lowbet Realty Corp. (In re Petition to Appoint for Lowbet Realty Corp.)
| Decision Date | 18 February 2014 |
| Parties | In the Matter of the Petition to appoint a wind-up person for LOWBET REALTY CORP., pursuant to Business Corporation Law § 1108, or to dissolve Lowbet Realty Corp. pursuant to Business Corporation Law § 1104–a or 1104 and appoint a wind-up person, and for ancillary relief including appointment for a receiver for the sale of the property owned by Lowbet Realty Corp. Shau Chung Hu, Individually and derivatively on behalf of Lowbet Realty Corp., Petitioner, Lowbet Realty Corp., Margaret Liu, and All Persons Interested in Lowbet Realty Corp., 973 44th Street Realty LLC, Bay Shine Management Company and Ray Chen, Respondents. |
| Court | New York Supreme Court |
OPINION TEXT STARTS HERE
Kenneth M. Moltner, Bressler, Amery & Ross, P.C., New York, for Plaintiff.
Neil Torczyner, Friedman, Harfenist, Kraut & Perlstein, Lake Success, for Defendants Bay Shine Management and Ray Chen.
David K. Fiveson, Butler, Fitzgerald, Fiveson & McCarthy, New York, for Defendant 973 44th Street Realty LLC.
Respondents Bay Shine Management Company (Bay Shine) and Ray Chen (Chen) move for an order, pursuant to CPLR 3211(a)(7), dismissing the cross-claims of respondent 973 44th Street Realty LLC (973 44th Street) as against Bay Shine and Chen.
973 44th Street cross-claims against Bay Shine and Chen for indemnification/contribution arise in this special proceeding commenced by petitioner Shau Chung Hu to wind-up the affairs of respondent Lowbet Realty Corp. (Lowbet) and to determine if the assets of Lowbet had been dissipated by respondent Margaret Liu, and if they had, the extent of the dissipation. 1 Lowbet is a corporation that petitioner purchased in January 1980 whose sole asset was a residential apartment building with 19 rental units (referred to as the property or the premises hereafter). In 1985, petitioner married Liu and Liu thereafter obtained a 25 percent interest in Lowbet, with petitioner retaining the remaining 75 percent interest. Upon the commencement of this special proceeding, the court granted a temporary restraining order that required, among other things, that Bay Shine, which was the management company for the property owned by Lowbet, continue to act as the management company. The temporary restraining order also barred petitioner and Liu from participating in the management of the realty and barred them from removing assets of Lowbet without further court order. It is not clear whether the temporary restraining order was served upon Bay Shine by petitioner.
As alleged in the amended petition, despite the temporary restraining order, by way of a February 16, 2012 document signed by Liu and signed on behalf of Bay Shine by Chen, Bay Shine resigned as managing agent of Lowbet and provided Liu with corporate items, including Lowbet's checkbook and keys. Petitioner alleges that these acts were done without notifying petitioner. Thereafter, Liu, by way of a deed dated February 22, 2012, sold the property to 973 44th Street for $1,600,000 without petitioner's knowledge or consent and without court approval.2 Petitioner alleges three causes of action against 973 44th Street: (1) seeking rescission of the sale of the property pursuant to Business Corporation Law § 1114; 3 (2) seeking an accounting, pursuant to Business Corporation Law § 1114, of 973 44th Street's rents, income and profits since its purchase of the property; and (3) seeking rescission of the sale of the property as a fraudulent conveyance on the ground that 973 44th Street knew or should have known that petitioner had an interest in the property and that Liu was not authorized to conduct the transaction. With respect to Bay Shine and Chen, petitioner alleges a cause of action premised on breach of fiduciary duty, aiding or abetting a breach of fiduciary duty and/or negligence, based on Bay Shine's resigning as managing agent and turning over corporate documents and keys to Liu, and by such acts, done without informing petitioner, Bay Shine and Chen facilitated the “fraudulent” sale of the property.
973 44th Street alleges in its cross-claim against Bay Shine and Chen that, “in the event that the Court rescinds the sale of the Premises to [973 44th Street] ... [973 44th Street] would sustain damages in the minimum amount of $1,600,000 with interest ... costs and counsel fees ... and would be entitled to indemnification and/or contribution from Bay Shine and Ray Chen to the extent that their negligence, breach of contract, violation of this Court's October 5, 2011 order, willful conduct, or their aiding and abetting Liu caused or contributed to” the damages suffered by 973 44th Street. In moving to dismiss 973 44th Street's cross-claim as against Bay Shine and Chen, Bay Shine and Chen assert that 973 44th Street has no legal basis for its indemnification and contribution claims.
In considering a motion to dismiss for failing to state a cause of action under CPLR 3211(a)(7), the pleading is to be afforded a liberal construction (CPLR 3026), and the court should accept as true the facts alleged in the complaint, accord the pleading the benefit of every possible inference, and only determine whether the facts, as alleged, fit within any cognizable legal theory ( see Hurrell–Harring v. State of New York, 15 N.Y.3d 8, 20, 904 N.Y.S.2d 296, 930 N.E.2d 217 [2010];Leon v. Martinez, 84 N.Y.2d 83, 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1995] ). In applying these principals, 973 44th Street's cross claim for contribution and/or indemnification from Bay Shine and Chen must be considered in conjunction with the petitioner's claims against 973 44th Street alleged in the petition ( Musco v. Conte, 22 A.D.2d 121, 122, 254 N.Y.S.2d 589 [1964];see also Board of Educ. of Hudson City School Dist. v. Sargent, Webster, Crenshaw & Folley, 71 N.Y.2d 21, 29, 523 N.Y.S.2d 475, 517 N.E.2d 1360 [1987] ).
The right to contribution is codified in CPLR article 14. CPLR 14014 governs who may obtain contribution and under what circumstances it may be obtained, and CPLR 14025 addresses how the amount of contribution is to be determined. Under section 1402, a party may not obtain contribution unless it has paid more than its equitable share of the judgment ( Edgewater Apts. v. Flynn, 268 A.D.2d 227, 228, 701 N.Y.S.2d 357 [1st Dept. 2000]; Schlimmeyer v. Yurkiw, 50 A.D.2d 616, 617, 374 N.Y.S.2d 427 [3d Dept. 1975]; CPLR 1402). As the right to contribution had its genesis in tort law, some form of tort liability is a prerequisite for obtaining contribution under CPLR 1401( Board of Educ. of Hudson City School Dist., 71 N.Y.2d at 27–28, 523 N.Y.S.2d 475, 517 N.E.2d 1360).6 The Court of Appeals has held that CPLR 1401 does not apply where the liability to the plaintiff is based solely on a breach of a contractual obligation ( id. at 28, 523 N.Y.S.2d 475, 517 N.E.2d 1360). However, the touchstone for determining the right to contribution is the nature of the damages sought, not the nature of the claim alleged in the complaint . Even if an action sounds in tort, if the damages sought are in the nature of contract-based economic damages, contribution is not available ( Children's Corner Learning Ctr., 64 A.D.3d at 324, 879 N.Y.S.2d 418).
Petitioner seeks rescission of the sale to 973 44th Street, pursuant to BCL § 1114, and a declaration that the transfer is void based upon the fraudulent sale, without court approval, during the pendency of this proceeding. Petitioner further alleges that 973 44th Street was a knowing, or presumptively knowing, participant in the fraud perpetrated by defendant Liu, with the assistance and complicity of defendants Bay Shine and Chen, and that all three defendants are, therefore, liable to petitioner for damages under a tort theory of fraud or aiding and abetting a breach of fiduciary duty by Liu. Thus, unless refunded the price of the property, 973 44th Street will sustain an actual loss by virtue of having paid $1,600,000 for the property, which it seeks to recover from Bay Shine and Chen, either in indemnification or in contribution if Bay Shine and Chen are also determined to be liable to petitioner. While 973 44th Street's loss is predicated upon its contract with Lowbet transferring title to the property, its claims against Bay Shine and Chen are based upon its actual out of pocket loss of property as a result of tortious acts; 973 44th Street does not seek consequential damages or exclusively economic loss based upon an anticipated benefit of the bargain. The damage to 973 44th Street therefore qualifies under CPLR 1401 as “injury to property” ( see Masterwear Corp. v. Bernard, 3 A.D.3d 305, 307, 771 N.Y.S.2d 72 [1st Dept. 2004]; contrast Children's Corner Learning Ctr. v. A. Miranda Contr. Corp., 64 A.D.3d 318, 323, 879 N.Y.S.2d 418 [1st Dept. 2009] ).
Petitioner's claims for rescission and an accounting are statutory claims based on Business Corporation Law § 1114, which empowers a court to exercise its inherent equitable power, in the context of a proceeding for judicial dissolution, to set aside an unauthorized transfer of a corporate asset (Matter of Schramm, 107 Misc.2d 393, 396–397, 434 N.Y.S.2d 333 [Sup. Ct., New York County 1980] ). Although not tort-based, per se, the court is authorized to determine the extent to which such transfer shall be void, suggesting a standard analogous to that for a fraudulent conveyance.
The fraudulent conveyance claim is a tort-based claim in which 973 44th Street's liability would be based on its acting knowingly with respect to Liu's lack of authority, or negligently in failing to ascertain her authority, given that the sale...
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