In Credit Suisse International v. Urbi DeSarrollos Urbanos, S.A.V. de C.V.1 the court addressed an issue that could have a broad impact upon foreign parties choosing New York law to govern a contract and choosing New York courts to adjudicate disputes concerning that contract: When General Obligations Law 5-1402 allows a New York court to hear a breach of contract claim, can Business Corporation Law §1312 be used to bar a foreign corporation from asserting that claim in a New York court? The Supreme Court (Justice Charles E. Ramos) indicated it could. That decision has been appealed.

Background

Plaintiff Credit Suisse International (CSI) entered into a derivatives transaction with defendant Urbi DeSarrollos Urbanos, S.A.V. de C.V. (Urbi). A signed trade confirmation which incorporated the terms of the 1992 International Swaps and Derivatives Association Inc. Master Agreement (Multieconomy-Cross Border) memorialized the transaction. The parties agreed that New York law would govern their agreement and that they would submit to the personal jurisdiction of the New York courts with respect to disputes concerning their agreement.

Since the transaction involved more than $1 million, a New York court could, under New York General Obligations Law §5-1402, adjudicate a dispute concerning the parties’ agreement. Section 5-1402 allows a New York court to adjudicate claims concerning a contract even though neither the parties nor their transaction has a nexus with New York provided: (i) the contract is governed by New York law; (ii) the contract is part of a transaction involving more than $1 million; and (iii) the parties have submitted to the personal jurisdiction of the New York courts.

CSI contended that Urbi breached the agreement. CSI asserted a breach of contract claim in Supreme Court, New York County, seeking some $10.9 million in damages. Urbi moved to dismiss or stay the action. It argued that under New York Business Corporation Law §1312, CSI lacked the capacity to maintain its action in a New York court. In its brief, Urbi noted that the Court of Appeals had ruled that under BCL §1312, a foreign corporation that is doing business in New York and which has not been authorized to do business in the state lacks the capacity to maintain a suit in a New York state court.2

Business Corporation Law §1312 provides that a foreign corporation “doing business in the state without authority” shall not maintain any action in a New York state court “unless and until such corporation has been authorized to do business in this state and it has paid to the state all fees and taxes imposed under the tax law or any related statute.” A claim that BCL §1312 bars a plaintiff from maintaining an action in New York is an affirmative defense that a defendant must plead and prove.3 Defendant must overcome the presumption that the business of a corporate plaintiff is limited to its place of incorporation.4

In Credit Suisse, the court believed that plaintiff CSI, a foreign corporation, was doing business in New York without authorization to do so. There was no dispute that CSI was a foreign corporation. In its complaint, CSI alleged that it was a bank domiciled in the United Kingdom with its principal place of business in London. CSI did not dispute Urbi’s contention that it did not have authority to conduct business in New York. On the issue of whether CSI was doing business in New York, Urbi argued that a foreign corporation does business in New York when it has regular, systematic and continuous activity within the state.

Urbi argued that under this standard, CSI did business in New York. To support its position, Urbi provided the court with evidence that CSI had an office in New York, had dozens of key employees permanently stationed in New York and used New York telephone numbers to conduct its business. Urbi also contended that CSI had made New York the “headquarters” of its swaps and derivative business and listed its New York address in connection with compliance with the Dodd-Frank Act. Urbi argued that CSI did not even try to dispute that CSI was doing business in New York.

The “doing business” test under BCL §1312 is different from a “doing business” analysis for determining whether a court can exercise personal jurisdiction over a non-resident. The incidents of business transacted by a foreign corporation in New York may be sufficient to subject it to the personal jurisdiction of a New York court and yet may still be insufficient to find that BCL §1312 requires the foreign corporation to be authorized to do business in New York in order to maintain an action in a New York court.5 The “doing business” standard under BCL §1312 requires a greater amount of activity in New York by a foreign corporation than the “doing business” standard applicable under the New York long arm statute (CPLR 302) relating to personal jurisdiction.6

In opposing Urbi’s motion, CSI argued that GOL §5-1402 allowed CSI to pursue its claims before a New York court notwithstanding anything said in BCL §1312. CSI noted the prerequisites to the application of §5-1402 had been met: The transaction at issue involved more than $1 million; New York law governed the contract at issue; and the parties had submitted to the personal jurisdiction of the New York courts. CSI argued that since GOL §5-1402 specifically allowed it to proceed with its suit before a New York court, BCL §1312 should be considered inapplicable.7

CSI also argued that Section 5-1402 dictates that an action may be brought in a New York court notwithstanding any other statute that limits or affects the ability to maintain an action. Section 5-1402 starts with the language that “[n]otwithstanding any act which limits or affects the right of a person to maintain an action….” Since the Legislature enacted GOL §5-1402 after BCL §1312 had been enacted, it would be logical to read the “notwithstanding” language of §5-1402 as expressing an intent that the provision take precedence over any conflicting language in BCL §1312. In addition, when it enacted §5-1402, the New York Legislature intended to promote New York as a forum for adjudicating disputes in major international financial and commercial transactions. CSI argued that to further that purpose, courts must permit a party to proceed with an action when the three requirements of §5-1402 are met.

An interesting point that CSI did not raise is whether BCL §1312 could preclude a suit brought for breach of a contract concerning international commerce. The Court of Appeals has indicated that such a contract may be “beyond state interference” such that BCL §1312 could not limit a party’s rights.8 One hornbook has stated that a statutory prohibition like BCL §1312 “may not be applied to transactions that are part of or incidental to…foreign commerce.”9

The Decision

The court found as an “undisputed fact that CSI actively does business in the State of New York.” The court viewed CSI as arguing that GOL §5-1402 superseded BCL §1312 and allowed CSI to prosecute its claim even though BCL §1312 would bar it. The court gave §5-1402 a narrow reading stating that its operative effect is to preclude a New York court from declining jurisdiction where the only nexus with the state is the choice of law/choice of forum clauses in a contract. The court did not view §5-1402 as mandating access to New York courts when its requirements were met.

The court found merit in, and ample support for, Urbi’s argument that BCL §1312 could preclude CSI from maintaining its action before a New York state court. The court, however, believed that Urbi’s arguments under §1312 did not require dismissal of the action. Rather, CSI would be given a period (60 days) to satisfy the requirements of §1312 and, if it did not, Urbi could renew its motion seeking dismissal of the action.

CSI has appealed. Its pre-argument statement, dated Aug. 29, 2013, states it is seeking modification of the Supreme Court’s order because GOL §5-1402 permits CSI to maintain its breach of contract action in a New York state court regardless of CSI’s registration status in New York.

The above discussion illustrates a tension in the law between GOL §5-1402 and BCL §1312. When a defendant asserting a BCL §1312 defense comes forward with evidence that plaintiff is doing business in New York without authorization, a “framed issue” hearing may be necessary to determine the threshold question of whether BCL §1312 bars plaintiff’s claim.10 There is no precise measure of the nature or extent of activities necessary for a finding that a foreign corporation is “doing business” in New York without authorization and determination of this issue must be done on a case-by-case basis with inquiry into the particular facts and type of business.11

Allowing a BCL §1312 defense to an action where GOL §5-1402 applies frustrates the purpose of §5-1402. When it enacted §5-1402, the Legislature clearly intended to open the doors of New York courts to disputes concerning contracts governed by New York law concerning a transaction involving at least $1 million so long as the parties submitted to the personal jurisdiction of the New York courts. Section 5-1402 clearly stated it would apply “notwithstanding any act which limits or affects the right of any person to maintain an action….”

The Legislature intended to enhance New York’s position as one of the world’s major financial and commercial centers by making New York courts available to foreign parties even though neither the parties nor their agreement had a nexus with New York. It is doubtful that the Legislature also intended that when a foreign corporation that had various connections with New York wanted to take advantage of the access to New York courts that GOL §5-1402 provided, the foreign corporation could be confronted by a BCL §1312 defense. That defense may burden the foreign corporation with a fact-intensive hearing to determine the issue of whether it is doing business in New York. To avoid such a hearing, and the cost and delay associated with it, a foreign corporate plaintiff may have no choice but to register as a foreign corporation in New York and subject itself to possible tax and regulatory burdens.

Glen Banks is a partner at Norton Rose Fulbright (Fulbright & Jaworski) and is the author of “New York Contract Law,” a Thomson Reuters publication.

Endnotes:

1. 2013 WL 4752861 (Sup. Ct. N.Y. Co. Aug. 21, 2013).

2. See United Env. Techniques v. State of N.Y. Dept. of Health, 88 N.Y.2d 824, 643 N.Y.S.2d 959 (1996).

3. McKenzie Banking v. Billinson, 79 A.D.3d 1728, 914 N.Y.S.2d 843 (4th Dept. 2010).

4. Alicanto, S.A. v. Woolverton, 129 A.D.2d 601, 514 N.Y.S.2d 96 (2d Dept. 1987).

5. Colonial Mortg. v. First Federal Sav. & Loan Ass’n of Rochester, 57 A.D.2d 1046, 395 N.Y.S.2d 798 (4th Dept. 1977).

6. Maro Leather v. Aerolineas Argentinas, 161 Misc.2d 920, 617 N.Y.S.2d 617 (Sup. Ct. App. Term 1945).

7. Citing Commonwealth Bank & Trust v. Tioga Mills, 78 A.D.2d 953, 433 N.Y.S.2d 519 (3d Dept. 1980).

8. Von Arx, AG v. Breitenstein, 41 N.Y.2d 958, 394 N.Y.S.2d 876 (1977).

9. 20 Carmody-Wait 2d §121:6 (2013).

10. Establissemet Mollet & Dupont Freres v. Karp Family, 2009 WL 6769737 (Sup. Ct. West. Co. Nov. 17, 2009).

11. Alicanto, S.A. v. Woolverton, 129 A.D.2d 601, 514 N.Y.S.2d 96 (2d Dept. 1987).