In recent weeks the New York Commercial Division has issued some interesting cases on tort claims.
In the first, on July 7, 2014, Justice Ramos of the New York County Commercial Division issued a decision in 135 E. 57th St., LLC v. 57th St. Day Spa, LLC, 2014 NY Slip Op. 31802(U), examining multiple alleged fraudulent conveyances. In that case, the plaintiff building owner and landlord brought an action to collect a judgment “for rent” obtained “against its former tenant, defendant 57th Street Day Spa, LLC (the Tenant),” “from the owners of the Tenant on theories of piercing the corporate veil, successor liability, civil conspiracy, and pursuant to Debtor and Creditor Law (DCL) § 270, et seq.” In deciding a motion for summary judgment brought by several defendants, Justice Ramos analyzed the plaintiff’s fraudulent conveyance claims as follows:
Constructive fraud occurs when a conveyance is made without fair consideration by one who: 1) is insolvent or who is rendered insolvent by the conveyance; 2) is engaged or is about to engage in a business or transaction for which the property remaining after the conveyance is unreasonably small; or 3) intends or believes that it will incur debts beyond its ability to pay as they mature.
A creditor attempting to set aside a fraudulent conveyance is limited to setting aside the conveyance of the property which would have been available to satisfy the debt had there been no conveyance. The creditor can recover from the party who made the transfer or the party who received the transfer. A claim of fraudulent conveyance cannot be sustained against a nontransferee on the ground that it assisted in the transfer.
(Internal quotations and citations omitted) (emphasis added). The court went on to examine the five fraudulent conveyances alleged by the plaintiff. The first conveyance failed to support a claim because the transfer was not made by its debtor. Justice Ramos denied summary judgment with respect to second and fourth conveyances, which involved payments that were due to the debtor being made to one of the defendants instead. Because “the monies belonged to and should have been paid to the Tenant, if the Tenant was bypassed and the monies paid directly to transferees, the transferees could have received a fraudulent conveyance.” Looking at the standard for whether a conveyance is fraudulent, the court explained:
In order for a conveyance not to be fraudulent, good faith is required of both the transferor and the transferee. A transfer without good faith is deemed to lack fair consideration. Transfers to controlling shareholders, officers, or directors of an insolvent corporation are deemed to be lacking in good faith and are presumptively fraudulent. Insolvency is presumed if fair consideration is lacking.
(Internal quotations and citations omitted) (emphasis added). The court found that there were questions of fact regarding whether the alleged transfer left the debtor insolvent.
The third conveyance failed to support a claim because the plaintiff failed to present evidence showing that the defendant did not receive fair consideration when it sold its 49% ownership interest in the Tenant.
The fifth conveyance
consists of the Tenant’s failure to insist on payment of the rent starting in January 2009, thereby benefitting the Lather companies and leaving the Tenant without any money. The Tenant did not demand the rent or sue the Lather entities, according to plaintiff. A waiver or release of an obligation can be a conveyance under DCL.
(Internal quotations and citations omitted) (emphasis added).
In a second case, on July 9, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in USHA SOHA Terrace, LLC v. Robinson Brog Leinwand Greene Genovese & Gluck, P.C., 2014 NY Slip Op. 31813(U), dismissing derivative claims for lack of standing.
In USHA SOHA Terrace, the plaintiff “assert[ed] both direct and derivative claims against legal counsel for the owner and the developer with regard to a construction project in which plaintiff . . . was a minority investor in the developer.” The court granted the defendants’ motion to dismiss, holding that the plaintiff lacked standing to bring either direct or derivative claims. With respect to the plaintiff’s double derivative claim, the court explained:
Plaintiff also cannot maintain this as a double derivative action in the name of 2280 FOB. A double derivative action is one brought by a shareholder not only for wrongs inflicted directly on the corporation in which he holds stock, but for wrongs done to that corporation’s subsidiaries, which make indirect, but nonetheless real, impact upon the parent corporation and its stockholders. In order for a plaintiff to pursue a double derivative claim, it must allege that the company in which it owned shares controlled the subsidiary corporation that owned the claim. It cannot be maintained by the shareholder of a corporation which merely owns stock in the wronged corporation, or which is merely a creditor of the second corporation by virtue of preferred stock ownership. The key consideration is control at the time of the supposed harm.
(Internal quotations and citations omitted) (emphasis added). The court, after analyzing the 2280 FOB operating agreement, concluded that the defendant developer lacked the necessary control to support a double derivative claim.