Case Title: In the Matter of Lena Hausman, Deceased

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2009-12-01T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 160  
In the Matter of Lena Hausman,  
Deceased.                       
                                
George Hausman, &c.,            
            Appellant;   
Fredda Simon, et al.,           
            Respondents.
Norman A. Olch, for appellant.
Ezra Huber, for respondents.
CIPARICK, J.:
In this probate proceeding, we are asked to decide
whether decedent's children formed a de facto limited liability
company (LLC) capable of receiving title to real property that
was the subject of a deed executed by decedent shortly before her
death.  Because no "colorable attempt" was made to file the
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No. 160
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articles of organization with the Department of State prior to
the date of the alleged transfer, we conclude that there was no
de facto entity in existence capable of receiving title to the
property and the conveyance is thus void. 
The facts are mainly undisputed.  On October 16, 2000,
decedent Lena Hausman's will was executed.  She divided her
residuary estate into four equal shares: 25% to her son, George
(the executor of her estate); 25% to her daughter, Susan; 25% to
the children of her predeceased son, Gerald; and 25% to the
children of her predeceased son, Gilbert.  Decedent's will
empowered her executor, George, to create an LLC and to transfer
ownership of her real estate located at 1373 56th Street, in
Brooklyn, which generated rental income, to the LLC for the
benefit of her heirs.  In the event that the LLC was formed and
her real property conveyed to it, the will required that the
executor "distribute the membership interests in accordance with
the directions set forth above" and "any beneficiary who refused
to cooperate in the LLC [] would be entitled to the share of the
distribution in a special payment."
On October 4, 2001, George and Susan alone executed
articles of organization to own, operate and manage the LLC. 
They also drafted an operating agreement, providing that they
would be the sole members of the company and that it would come
into existence upon the filing of the articles of incorporation
with the New York Department of State.  This would have the
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No. 160
*  The deed recites that decedent received ten dollars and
other valuable consideration for the transfer of the property to
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effect of depriving the other heirs, decedent's grandchildren,
from receiving any benefit from the rental property. 
Significantly, the articles of organization were not filed with
the Department of State until November 16, 2001.  On November 2,
2001 -- two weeks prior to the filing of the articles of
organization -- decedent, then 90 years old and residing in a
nursing home, executed a deed transferring ownership of the
property to the LLC.  The deed was recorded on December 3, 2001. 
Upon decedent's death in June 2002, her will was
admitted to probate.  A dispute arose over whether decedent's
grandchildren had rights to the real property.  They argued that
the property was not conveyed to a valid LLC, and that it should
be part of the estate subject to their distributive interests, as
stated in the will.  The executor maintained that the conveyance
of the property to the LLC was valid and does not constitute part
of the estate.  He filed the instant petition to ascertain the
validity of the conveyance of the property to the LLC. 
Surrogate's Court granted the petition, concluding that the LLC
operated as a valid de facto company prior to the filing of the
articles of organization.  The court additionally applied the
doctrine of estoppel, concluding that "decedent adopted the
corporation by express ratification and acceptance of benefits
referable to it."*
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No. 160
the LLC.  
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The Appellate Division reversed the order, denied the
petition and deemed the deed invalid.  Relying on Kiamesha Dev.
Corp. v Guild Props. (4 NY2d 378, 388 [1958]), it concluded that
the executor failed to make a "colorable attempt to comply with
the statute governing the organization of limited liability
companies" because he made no effort to file the articles of
organization with the State prior to the execution of the deed,
and as no entity existed capable of taking title to the property, 
this conveyance was void (51 AD3d 922).  We granted leave to
appeal and now affirm.  
Limited Liability Company Law (LLCL) § 203 provides
three specific requirements to form an LLC: (1) preparation of
the articles of organization; (2) execution of the articles of
organization; and (3) the filing of the articles of organization
with the State.  LLCL § 209 requires that the articles of
organization be delivered to the Department of State and a filing
fee be paid.  Here, no attempt to file articles of organization
was made before the conveyance of the property.  The executor
seeks application of the de facto doctrine and a determination
that the transfer of the property to the LLC was valid.  The
parties do not dispute, and both courts below concluded, that the
de facto corporation doctrine is applicable to limited liability
companies.  We agree.  The statutory schemes of the Business
Corporation Law and the Limited Liability Company Law are very
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No. 160
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similar, and we see no principled reason why the de facto
corporation doctrine should not apply to both corporations and
limited liability companies.   
Under very limited circumstances, courts may invoke the
de facto corporation doctrine, where there exists (1) a law under
which the corporation might be organized, (2) an attempt to
organize the corporation and (3) an exercise of corporate powers
thereafter (see Methodist Episcopal Union Church v Pickett, 19 NY
482, 485 [1859]; Von Lengerke v City of New York, 150 App Div 98,
102 [1st Dept 1912], affd 211 NY 558).  There is no question that
the first prong has been satisfied, as the Limited Liability
Company Law provides for the method of incorporation.  With
respect to the second prong, however, the formation of a de facto
company requires a "colorable attempt to comply with the statutes
governing incorporation" prior to the exercise of corporate
powers, including the filing requirement (Kiamesha, 4 NY2d at
388).  "[W]here there has been an attempt in good faith to comply
with the requirements of the law with respect to filing a
certificate of incorporation and a certificate has been filed . .
. and there has been use of the corporate name, the corporation
will be deemed a corporation de facto" (Stevens v Episcopal
Church History Co., 140 App Div 570, 578-579 [1910]).  However,
"the mere execution of a paper which is not filed and does not
become a public record is insufficient" (id.). 
The executor seeks support in Matter of Planz (Sees)
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No. 160
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(282 App Div 552 [3d Dept 1953]) for his argument that a de facto
entity may exist even where it has failed to make an attempt to
file statutorily required organizational papers with the State. 
There, a purported corporation executed its certificate of
incorporation, and then waited a month to file the certificate
with the Secretary of State.  During this gap, as here, there was
a conveyance of property to the corporation.  The Appellate
Division held that the entity was a de facto corporation during
this period.  Given our subsequent holding in Kiamesha, mandating 
a good faith effort to comply with mandatory state filing
requirements, however, Planz is not a correct application of the
de facto corporation doctrine.  
Here, it is undisputed that there was no bona fide
attempt to comply with the ministerial, yet essential,
requirement of filing the articles of organization prior to the
attempted conveyance.  Although challenged by defendant and the
dissenting opinion, merely executing articles of organization
along with an operating agreement and nothing more is
insufficient to meet the longstanding requirements of a de facto
entity.  Because an entity that is neither de facto nor de jure
cannot take title to real property (see Kiamesha, 4 NY2d at 388-
389), there was no entity in existence capable of receiving title
to the real property and the purported conveyance is therefore
void.  
Moreover, there is no ground for the estoppel claim 
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because there is no evidence that decedent acted inequitably or
took unfair advantage of George or Susan.  Indeed, there is no
evidence that decedent received any meaningful benefit from that
transaction.
Accordingly, the Appellate Division's order should be
affirmed, with costs to all parties appearing separately and
filing separate briefs payable out of the estate. 
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Matter of Hausman, Deceased
No. 160
PIGOTT, J.(dissenting) :
Because the majority, in my view, takes the holding in
Kiamesha too far - to the point of practically eliminating the
legal concept of a de facto corporation, I respectfully dissent.  
It is conceded that at the time the property was
conveyed from the decedent to the LLC, the articles of
organization for the LLC had not yet been filed.  But the
sequence of events preceding the filing is important.  The
articles of incorporation and operating agreement for the LLC
were executed on October 4, 2001.  The decedent conveyed the
property to the LLC on November 2.  The articles of organization
were filed on November 16 and the deed was filed on December 3,
2001.  The delay in filing is about the only misstep, if a
misstep at all, in an otherwise fairly normal series of events in
the creation of the LLC.  Five years later, only after counsel
for disinherited legatees in litigation in Surrogate Court
discovered that the filing of the articles of organization
followed the execution of the deed, rather than vice versa, did
the timing of the filing come into question.
It has long been held that courts may invoke the de
facto corporation doctrine, where there exists: (1) a law under
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No. 160
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which the corporation might be organized, (2) an attempt to
organize the corporation and (3) an exercise of corporate powers
thereafter (see Methodist Episcopal Union Church v Pickett, 19 NY
482, 485 [1859]; Von Lengerke v City of New York, 150 App Div 98
[1st Dept 1912], affd 211 NY 558).  All of these requirements
were met here.  The majority focuses on the "colorable attempt to
comply with the statutory requirement" language found in Kiamesha
Development Co. v Guild Properties (4 NY2d 378 [1958]) to state
definitively that there can be no de facto corporation here
because there was no "colorable attempt".  In my view, that case,
interesting in its facts, should be limited to them.   
In New York, it is clear that if there is no attempt to
formally organize, there will be no de facto corporation.  Here,
however, the organization of the LLC was complete.  The record
shows that the incorporators prepared and executed the articles
of organization as required under Limited Liability Company Law
(LLCL) § 203.  They also executed and adopted the required
Operating Agreement for the LLC pursuant to LLCL 417 (a).  Those
documents reveal that the LLC was organized to "solely own,
operate or manage real property and to do any and all things
necessary, convenient, or incidental to that purpose."  Pursuant
to that purpose, the LLC took title as grantee to the real
property in the name of the LLC.  And it was the decedent as
grantor who executed the deed naming the LLC the grantee.  Two
weeks after the deed was executed - a reasonable period - the
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articles of organization were filed with the Secretary of State. 
The related ancillary papers, including a New York City Real
Property Transfer Tax Return as well as city and state transfer
tax returns, which named the LLC as grantee, were executed and
filed as required.  
Under the circumstances of this case, I would find that
the incorporators acted with sufficient alacrity to comply with
the statutes, and would therefore find the conveyance to the de
facto entity that existed at that time valid.
Therefore, I would reverse the order of the Appellate
Division.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order affirmed, with costs to all parties appearing separately
and filing separate briefs payable out of the estate.  Opinion by
Judge Ciparick.  Chief Judge Lippman and Judges Graffeo, Read,
Smith and Jones concur.  Judge Pigott dissents and votes to
reverse in an opinion.
Decided December 1, 2009