Opinion
483603
Decided May 12, 2005.
Citak Citak, Esqs. New York, New York, Counsel for Plaintiff.
Forchelli, Curto, Schwartz, Mineo, Carlino Cohn, LLP, Mineola, New York, Counsel for Defendant.
Defendants move for summary judgment dismissing the complaint. Third-Party Plaintiff moves for summary judgment on the issue of liability and to have the action set down for an assessment of damages against the Third-Party Defendant.
Burton Citak, Esq. counsel for Plaintiff submitted a sur-reply affirmation dated March 11, 2005 without leave of the Court. It was not read or considered by the Court in deciding this motion.
BACKGROUND
Defendant/Third Party Defendant, Nia Abstract Corporation ("Nia") is an abstract company providing title and record searches for attorneys in connection with real estate transactions.
Nia began operation in March 1999. The initial shareholders in Nia were Plaintiff/Third Party Defendant Caryn M. Danzy ("Danzy"), who was issued 170 shares, Catalyst Development Corp. ("Catalyst"), which was issued 18 shares, P. Toureon Industries, Inc., which was issued 9 shares and Robin Gray ("Gray"), who was issued 3 shares. Defendant/Third Party Plaintiff, James P. Salters ("Salters") is a principal of Catalyst.
In July 1999, the parties entered into an Amended Shareholders Agreement pursuant to which Danzy was issued 102 shares, Salters was issued 79 shares and Gray was issued 19 shares of Nia. Pursuant to the terms of the Amended Shareholders' Agreement, Danzy, Gray and Salters were elected as Nia's directors of Nia. Danzy was elected Nia's President while Gray and Salters were elected Vice President and Secretary/Treasurer, respectively.
When Danzy, Gray and Salters executed the Amended Shareholders Agreement, they also executed a Voting Trust Agreement pursuant to which the shareholders assigned their voting rights to the trustees named in the Voting Trust. Salters and Danzy were designated as the trustees of the Voting Trust and were to equally share the right to vote all of the shares of Nia. The stated purpose of the Voting Trust was to permit Salters and Danzy to manage Nia's business.
On June 24, 1999, Nia entered into a lease with James J. of Nassau County, Inc.
("James J.") to the lease premises 1717 Atherton Avenue, Elmont ("1717 Atherton") for a period of five (5) years commencing on July 1, 1999. The lease gave Nia the option to purchase the premises for the sum of $140,000.00 at the end of the term of the lease. Salters was a principal of James J.
In November 1999, James J. transferred title to 1717 Atherton to Platinum Properties, Inc. ("Platinum"). Salters, Mark Rubin and Mark Bush were the officers, directors and principals of Platinum. Nia was not advised of the transfer of 1717 Atherton from James J. to Platinum until July 2001.
Catalyst is a real estate management corporation in which Salters is also a principal. Salters uses Catalyst as the managing agent for real property which he owns, including 1717 Atherton.
During the entire term of the lease, Nia paid its monthly rent to James J., Platinum or Catalyst.
1717 Atherton was subject to a mortgage between Nancy M.C. Gales ("Gales"), as mortgagor, and Prudential Mortgage Co., Inc., as mortgagee ("Prudential"). The mortgage was dated February 8, 1989 and was recorded in the office of the Nassau County Clerk on March 1, 1989.
The record does not reflect when or from whom James J. acquired title to the property. James J. and Platinum apparently took title subject to the mortgage between Gales and Prudential.
In 2001, the mortgage on the property went into default. As a result, Prudential commenced an action to foreclose the mortgage. Platinum was named as a party to the foreclosure action as the owner of the property. The original caption of the foreclosure action also named as Defendants "John Doe" and "Jane Doe", intended to be tenants or occupants of the premises.
Platinum defaulted in appearing in the foreclosure action. In July 2002, a judgment of foreclosure and sale was entered. 1717 Atherton was sold at a foreclosure sale on October 15, 2002 to Edress Development, Inc. ("Edress").
After the foreclosure sale but before the deed transferring title was delivered to Edress, Platinum moved by Order to Show Cause to set aside the sale. By order of the Hon. Burton S. Joseph, Justice of this Court, dated November 26, 2002, Platinum's motion to vacate the foreclosure sale was denied. By referee's deed dated December 18, 2002, title to 1717 Atherton was conveyed by Edress.
Upon taking title to the premises, Edress commenced a landlord-tenant holdover, summary proceeding in the Nassau County District Court seeking to recover possession of the property. The respondents in the holdover proceeding were Platinum and "John Doe" and "Jane Doe", who were alleged to be tenants of the former owner, Platinum. Nia appeared and answered in the summary proceeding.
In April 2003, Platinum moved for renewal of the order of Justice Joseph and to stay the summary proceedings on the grounds that a necessary party, Nia, had not been named as a party in the foreclosure action. At the same time, Nia cross-moved before Justice Joseph for an order finding that the Supreme Court had not obtained jurisdiction over Nia in the foreclosure action and thereby its lease and its rights under the lease were not terminated by the foreclosure.
By order dated June 27, 2003, Justice Joseph denied Platinum's motion to renew and granted Nia's motion to the extent of setting the matter down for a traverse hearing to determine whether service had been effectuated upon Nia.
After additional motion practice, pursuant to the order of Justice Joseph dated October 8, 2003, a traverse hearing was held before the Hon. Geoffrey J. O'Connell, a Justice of this Court, on December 3, 2003. After hearing testimony of the process server and representatives of Nia, Justice O'Connell determined that Nia had, in fact, been served in the foreclosure action and, thus, was subject to the jurisdiction of this Court in that action.
After the traverse, Nia entered into a stipulation settling the District Court holdover proceeding by which Nia agreed to the entry of an immediate final judgment of possession and the issuance of a warrant of eviction with enforcement stayed until February 28, 2004. In consideration of the stipulation, Edress agreed to waive any claim for rent and use and occupancy and Nia agreed to waive any claim it had to purchase the property in accordance with the terms of its lease with James J.
In this action, Nia claims that, as a result of the foreclosure, its option to purchase the property at the end of the lease was lost. This was a significant right since 1717 Atherton was sold at foreclosure for significantly more than the amount outstanding on the foreclosed mortgage which sum was more than Nia's $140,000.00 option to purchase at the end of the lease.
Nia asserts that Salters, as a director and officer of Nia, owed it a duty of good faith and honesty which he breached when he permitted 1717 Atherton to be foreclosed. More specifically, the amended complaint alleges that Salters induced Nia to enter into the lease; that he misrepresented the existing liens and mortgages against the property; that he failed to disclose to Nia that his business, James J. and/or Platinum had failed to make the mortgage payments; and that he failed to advise Nia of the pendency of the foreclosure action and later misrepresented to Nia the status of that action. As a result of Salters' failure to disclose this information to Nia, Nia lost the valuable right of being able to purchase 1717 Atherton at the end of the term of the lease for a below market price.
The second cause of action is against Catalyst, as the managing agent of the property. The third cause of action is against Platinum. Each cause of action alleges that each owed a duty to Nia. Both the second and third causes of action allege that, as a result of the negligence of Catalyst and/or Platinum in failing to pay the mortgage and in failing to advise Nia of the commencement and status of the foreclosure action, Nia lost its option to purchase 1717 Atherton at the end of the lease.
The third party action alleges that Danzy breached her duty to Nia by failing to failing to devote her time and effort to the Nia's business; by using corporate funds for personal expenses; by taking salary in excess of that approved by the corporation; and in failing to adequately and properly account for Nia's financial affairs.
Defendants/Third-Party Plaintiffs have moved for summary judgment dismissing the action. With regard to the third party action, they seek summary judgment on the issue of liability and to set the matter down for an assessment of damages against Third-Party Defendant Danzy.
DISCUSSION
A. Business Corporation Law § 626(c)
Salters asserts that this shareholder derivative action should be dismissed because Plaintiff has failed to comply with Business Corporation Law ("BCL") § 626(c) which requires that a Plaintiff to allege with particularity the efforts Plaintiff made to have the board of directors commence the action or the reason why Plaintiff did not seek action of the board before commencing the suit. That is, the party commencing a shareholder derivative claim must allege with specificity the actions it took to secure board action before bringing the action or that making demand on the board before bringing the action would be futile. Bansbach v. Zinn, 1 NY3d 1 (2003), rearg. den., 1 NY3d 593 (2004); and Marx v. Akers, 88 NY2d 189 (1996).
The Court will find a demand futile and excuse demand when the directors are incapable of making an impartial decision on whether to commence the action. Id.
This occurs in three circumstances; to wit: (1) when the board of directors is controlled by directors who are interested in the challenged transaction; (2) when the board of directors did not educate itself about the challenged transaction and merely rubber stamped the decisions of those who run the corporate business; or (3) the challenged transaction is so egregious that it cannot be the product of sound business judgment and corporate management. Id.
When a Plaintiff alleges that demanding action from the board of directors is excused, then Plaintiff must allege with specificity the reasons why demanding the board to take action would be futile. The failure to allege either the effort to get the board to take action and the board's refusal to act or to allege specific facts why requesting the board take action would be futile renders the complaint defective as a matter of law and requires dismissal. Marx v. Akers, supra. See also, Teachers' Retirement System of Louisiana v. Welch, 244 AD2d 231 (1st Dept. 1997); and Bildstein v. Atwater, 222 AD2d 545 (2nd Dept. 1995).
The amended complaint in this action fails to make any allegations whatsoever that Danzy made the requisite demand upon the board to take action before commencing this action and that the board failed to take action. Likewise, the amended complaint fails to make a single factual allegation that would support a claim that making a request to Nia's board to take action would be futile. Thus, for this reason, the amended complaint is defective as a matter of law and should be dismissed. See, Marx v. Akers, supra.
Danzy seeks to overcome this deficiency in the amended complaint by asserting that seeking board approval would be futile because of the Voting Trust. This argument is without merit. The Voting Trust assigns to the trustees, Danzy and Salters, the right to vote the shares of the corporation as they deem appropriate in their discretion. However, the Voting Trust does not effect or restrict the votes of the members of the Board of Directors.
The Voting Trust also provides that Danzy, Gray and Salters would be elected as Directors of Nia pending a formal shareholders meeting which was to be held no later than September 20, 1999. The record does not reflect that a shareholders meeting was ever held or that anyone other than Danzy, Gray and Salters were, and still are, the Niia corporate directors.
Furthermore, a special meeting of Nia's directors meeting was held on February 20, 2004. Danzy and Gray attended the meeting. Salters did not. At that meeting, Danzy and Gray, as directors of Nia, voted to consult with an attorney regarding commencing an action to recover damages sustained by Nia as a result of Salters alleged violation of his duty of loyalty.
Unless the Certificate of Incorporation states otherwise, a majority of the entire board constitutes a quorum for the transaction of business. BCL § 707. Except as otherwise provided for by statute, the board of directors may act by majority vote of the directors present at a meeting at which a quorum is present. BCL § 708(d).
Nia's board of directors consisted of three people Danzy, Gray and Salters. Neither party has placed before the Court provisions of the Certification of Incorporation which would require either unanimous consent or a super majority to conduct business. Thus, a decision to bring suit against Salters for his alleged breaches of fiduciary duty to Nia could have been made by a majority vote of the board at the February 20, 2004 meeting since a quorum was present. Translated to the facts of this case, Danzy and Gray, as a quorum of Nia's board and a majority of its board of directors could have voted to commence this action at a duly called regular or special meeting of the board. They failed to do this.
Danzy could not have commenced this action as a shareholder derivative claim nor, under the facts of this case, could she successfully plead the jurisdictional allegations required to satisfy BCL § 626(c). On this procedural ground, the amended complaint is defective and should be dismissed.
B. Salters Motion for Summary Judgment
Salters Concede that he was an officer and director of Nia and that in such capacities he had a fiduciary duty to Nia. See, Lindner Fund, Inc. V. Waldbaums, Inc., 82 NY2d 219 (1993); and Alpert v. 28 William St. Corp., 63 NY2d 557 (1984); and Busino v. Meachem, 270 AD2d 606 (3rd Dept. 2000).
In order to be successful in this action, Nia and/or Danzy would have to be establish that Salters breached his fiduciary duty to Nia when he failed to advise Nia that the mortgage on 1717 Atherton was in default and that an action to foreclose on the mortgage had been commenced which resulted in Nia losing its interest in the property including its option to purchase the property at the end of the lease.
Salters asserts that Nia lost its interest in 1717 Atherton not because he breached his fiduciary duty to Nia, but because Nia was served and defaulted in the foreclosure action. Since this issue has already been determined by the Court, Nia cannot re-litigate that issue in this case. Kaufman v. Village of Mamaronek, ___ AD3d ___, 2005 WL 1107009 (2nd Dept. 2005). Since Nia cannot establish an essential element of its claim, the complaint must be dismissed.
In the foreclosure action, Nia moved for an order holding that this court had not obtained jurisdiction over it in the foreclosure action and that it's interest and rights in 1717 Atherton had not been terminated by the judgment of foreclosure and sale. That motion resulted in an order of Justice Joseph setting the matter down for a traverse hearing.
The traverse hearing was held before Justice O'Connell on December 3, 2003. After hearing testimony, Justice O'Connell held that Nia had been properly served in the foreclosure action. Since Nia had been served and defaulted in the foreclosure action, its interest in 1717 Atherton including its option to purchase the property at the end of the lease had been terminated by the judgment of foreclosure and sale. See, 6820 Ridge Realty LLC v. Goldman, 263 AD2d 22 (2nd Dept. 1999); and Polish National Alliance of Brooklyn, U.S.A. v. White Eagle Hall Co., 98 AD2d 400 (2nd Dept. 1983).
Collateral estoppel prevents a party from re-litigating in a subsequent action issues which have been decided against that party in a prior action in which the party had a full and fair opportunity to litigate the issue. Kaufman v. Village of Mamaronek supra; Kaufman v. Eli Lilly and Co., 65 NY2d 449 (1985); Gilberg v. Barbieri, 53 NY2d 285 (1981); and Schwartz v. Public Administrator of County of Bronx, 24 NY2d 65 (1969). The party seeking the benefit of collateral estoppel must establish that the issue was decided in the prior action while the party opposing the application of collateral estoppel must establish that it did not have a full and fair opportunity to litigate the issue in the prior action. Kaufman v. Eli Lilly and Co., supra.
The decision of Justice O'Connell collaterally estops Nia from re-litigating in this action the issue of why and how its interest in 1717 Atherton was terminated. Since Nia will be unable to establish that its interest in 1717 Atherton was lost as a result of Salters breach of a fiduciary duty to Nia, the complaint must be dismissed.
C. Summary Judgment — Catalyst and Platinum
The second and third causes of action seeks damages against Catalyst and Platinum respectively. These causes of action are premised upon allegations that Platinum and Catalyst respectively had a duty to pay the mortgage on 1717 Atherton and breached that duty when the mortgage was not paid. Plaintiff further alleges that Platinum and/or Catalyst had a duty to inform or advise Nia of the commencement of the foreclosure action and breached that duty. As a result of the breach of these duties, Nia sustained damages.
This theory of recovery is faulty for two reasons. Neither Catalyst not Platinum had a duty to advise Nia of the commencement of the foreclosure action. The duty to advise Nia of the commencement of the foreclosure action was with the mortgagee seeking to foreclose its mortgage.
Real Property Actions and Procedure Law ("RPAPL") § 1311 requires the Plaintiff to join as Defendants in a foreclosure action ". . . persons, whose interest is subject and subordinate to Plaintiff's lien." Within the category of persons who interest is subject to and subordinate to the mortgagee's lien are persons who have an interest in the property for a term of years; i.e. tenants. RPAPL § 1311(1); and 6820 Ridge Realty LLC v. Goldman, supra. See also, 79 NY Jur2d Mortgages § 734.
The failure to name a party whose interest is subordinate to the mortgagee bringing a foreclosure action leaves that party's interest in the property unaffected by the judgment of foreclosure and sale. 6820 Ridge Realty LLC v. Goldman, supra; and Polish National Alliance of Brooklyn U.S.A. v. White Eagle Hall Co., Inc., supra. More specifically, the failure to name and serve a tenant in a foreclosure action results in the lease not being terminated by the foreclosure and precludes the purchaser at the foreclosure sale from dispossessing the tenant. 6820 Ridge Realty LLC v. Goldman, supra; and Scheidt v. Supreme Woodworking Co., Inc., 212 App.Div. 179 (2nd Dept. 1925); and 3 Bergman, New York Mortgage Foreclosures § 33.04(2).
Nia's lease specifically states that it is subject and subordinate to all existing and future mortgages. Nia's rights in the property were extinguished as a result of it having been named and served as a party in the foreclosure action and as a result of its having not exercised its right of redemption. Since Nia was properly served in the foreclosure action and did not exercise its right of redemption, its interest in the property its lease was terminated along with its option to purchase the property. Thus, Nia's lost its option to purchase the property not as a result of Catalyst or Platinum's failure to advise Nia of the commencement and status of the foreclosure action but rather as a result of Nia's failure to exercise its right of redemption in the foreclosure action in which it was named and served.
Secondly, Catalyst and Platinum did not have an obligation to make payment of the mortgage. The mortgage which was foreclosed was between Gales, as mortgagor, and Prudential, as mortgagee. Title to the subject premises was transferred by Gales to James J. and then by James J. to Platinum subject to the mortgage. From the allegations in the complaint in the foreclosure action, the Court must infer that first James J. and then Platinum took title to the premises subject to the mortgage and never assumed Gales obligations under the terms of the mortgage. The complaint alleges that Gales was the mortgagor and that title was conveyed to Platinum subsequent to the making of the mortgage. The complaint does not allege that either James J. or Platinum assumed Gales' obligations under the mortgage.
A mortgage is a lien to secure a debt. See, Bank of New York v. Cerasaro, 98 AD2d 902 (3rd Dept. 1983). A mortgaged property may be conveyed subject to the mortgage lien. When property that is subject to a mortgage is conveyed, the grantee does not assume the obligation to pay the mortgage debt. See, Matter of Oakes, 248 NY 280 (1928); and Greenfield v. Kaplan, 15 Misc 2d 718 (Sup.Ct., Kings Co. 1958); and 78 NY Jur2d Mortgages § 300.
In most instances, one who takes title subject to a mortgage will pay the mortgage in order to avoid foreclosure. In this case, the property was conveyed to James J and then to Platinum subject to the existing mortgage. There is no evidence in the record to reflect that the either James J. or Platinum assumed Gales' obligation under the mortgage or took steps to assure its payment. The complaint in the foreclosure action specifically alleges the existence of the mortgage between Prudential and Gales. James J. and Platinum, as grantees of the property subject to the mortgage, did not incur a direct obligation to make payment of the mortgage unless they specifically assumed that debt and obligation. See, Kings County Trust Co. v. Derx, 237 App.Div. 548 (2nd Dept. 1933); and 78 NY Jur2d Mortgages § 320.
Since Platinum did not assume the obligation to pay the mortgage, it cannot be held liable to Nia for its failure to make such payments.
The same holds true for Catalyst. Catalyst is alleged to be Platinum's managing agent. Catalyst never had an interest in 1717 Atherton nor did it undertake the obligation to pay the mortgage. Catalyst was not a party to the foreclosure action. Most certainly, Catalyst cannot be held liable for the failure to advise Nia of the pendency of an action to which it was not a party and for failure to pay a mortgage as to which it had no obligation to pay.
Platinum and Catalyst have established a prima facie entitlement to judgment as a matter of law. Lescovich v. 180 Madison Avenue Corp., 81 NY2d 982 (1993); and Zuckerman v. City of New York, 49 NY2d 557 (1980). Plaintiff has failed to come forward with proof in evidentiary form that indicates that there are disputed material issues of fact necessitating a trial. Zuckerman v. City of New York, supra; and Davenport v. County of Nassau, 279 NY2d 497 (2nd Dept. 2001); and Bras v. Atlas Construction Corp., 166 AD2d 401 (2nd Dept. 1991). Therefore, a trial of these causes of action is not required. Summary judgment should be granted dismissing the second and third causes of action.
D. Third Party Plaintiff's Motion for Summary Judgment
The third party action is a shareholder derivative suit brought by Salters on behalf of Nia alleging that Danzy failed to devote her full time and effort to corporate business; that she took salary in excess of the approved amount; paid personal expenses with corporate funds; opened and closed corporate bank accounts without proper corporate resolutions; failed to reconcile the corporate escrow account; failed to act as directed by the corporate shareholders at the January 18, 2001 annual meeting and the July 25, 2001 special meeting; hired and fired accountants without board approval; hired employees without board approval; failed to make proper lease payments causing the corporation to become a month-to-month tenant thereby causing termination of the corporation's option to purchase its business premises.
Third-Party Plaintiff seeks summary judgment on the issue of liability and seeks to have the action set down for an assessment of damages against Danzy. The motion is based exclusively on Danzy's deposition testimony. Danzy testified at her deposition that several checks written to her from Nia's bank account were for attendance fees at closings. One check was written to Danzy for consulting services. Another check written to Danzy was for "Commissions and Extra Work." Third-Party Plaintiff alleges that Danzy was not entitled to receive as additional compensation attendance fees for closing, consulting fees or fees for extra work. Third-Party Plaintiff claims that any money Danzy paid to herself for these items should be returned to Nia.
Nia was a title abstract company. When title on one of the properties on which Nia did the title search would close, Nia would send a title closer to the closing. In addition to collecting the charges for items such at title insurance, recording fees, mortgage tax and taxes, Nia would charge and collect an appearance fee for the title closer. When Danzy was the title closer, she would pay herself the title closer appearance fee.
Danzy implies that the title closer appearance fee was collected at all closings and paid to the title closer who attended the closing. Had Danzy not appeared as the title closer, Nia would have had to retain an outside title closer who would have been paid this fee. Therefore, Nia would have paid this fee under any circumstances.
With regard to the consulting services and extra work, Danzy could not identify from the checks the reason she paid herself this compensation.
It is undisputed the Danzy had an obligation to work at all time for the best interests of Nia. Western Electric Co. v. Brenner, 41 NY2d 291 (1977); and Maritime Fish Products Inc. v. World-Wide Fish Products, Inc., 100 AD2d 81 (1st Dept. 1981).
The record is unclear as to whether Danzy was entitled to received the title closer appearance fee as additional compensation when she appeared at the closing. The record is also unclear as to why Danzy was paid a consulting fee and additional compensation. Furthermore, Danzy asserts that she never paid herself compensation above and beyond the amount she was entitled to receive.
In this circumstance, liability and damages are intertwined. Danzy breached her duty of loyalty if she paid herself compensation which should have been paid to Nia or if she paid herself compensation above and beyond the amount that was due under the terms of her employment. Id. In this case, the Court cannot determine liability without determining damages.
Additionally, when arguing for summary judgment, Third-Party Plaintiff did not address any of the other bases alleged in the third-party complaint as grounds for finding that Danzy breached her duty of good faith and loyalty to Nia. The papers submitted in support of the motion do not indicate whether these allegations have been abandoned as unprovable or if they are going to be pursued at trial.
Since there are clearly questions of fact, summary judgment on the issue of liability on the third-party complaint is inappropriate. See, Zuckerman v. City of New York, supra.
Accordingly, it is,
ORDERED, that Defendants' motion for summary judgment dismissing the complaint is granted; and it is further,
ORDERED, that Third Party Plaintiff's motion for summary judgment on the issue of liability and setting the matter down for an assessment of damages on the third party complaint is denied; and it is further,
ORDERED, that counsel for the parties are directed to appear for a conference on June 15, 2005 at 9:30 a.m.
This constitutes the decision and Order of the Court.