Court Opinion

ID: 5828733
Source: CourtListenerOpinion
Date Created: 2022-01-12 21:38:51.297157+00
Date Added: 2024-06-11T08:43:22.844654
License: Public Domain

Acosta, J. (dissenting).
Because I believe that under the facts of this case, the president of the hotel corporation had the *181authority to engage counsel to defend the foreclosure action, I respectfully dissent.
In 2001, John Lucas (Lucas) and Benjamin Soleimani (Soleimani) partnered to acquire the long-term lease to real property located at 206 West 41st Street, New York, New York, for the purpose of developing, owning and operating a hotel known as “Hotel 41.” Towards this end, they formed defendant 206 West 41st Street Hotel Associates, L.E (the LP), which has two limited partners, Carroll Hotel 206 West 41st Street, LLC (Carroll), owned by Lucas, and Morgan 206 West 41st Street Corporation (Morgan), owned by Soleimani, each of which own 49.5% of the partnership interests of the LE The general partner, Clifton Place Development Corporation (General Partner), owns the remaining 1% of the limited partnership interests of the LP Lucas and Soleimani each own half the shares of the General Partner.
Plaintiff, Crane, A.G., which is owned by Lucas, provided all the financing for the LE The LP defaulted on the note by failing to pay for interest that accrued in 2007. Crane demanded payment of the interest and advised that it would commence a foreclosure proceeding if payment was not made. In response, Soleimani offered to sell his interest in the LP to Lucas, and Lucas agreed.
The parties agreed to obtain financing from the RiverSource Life Insurance Company in the amount of $2,225,000 (River-Source Loan), the proceeds of which would be used to pay Soleimani’s buyout amount, plus the interest due on the mortgage. The RiverSource Loan closed on November 14, 2008. However, as a condition of closing, RiverSource required an undertaking letter from the LP that a certificate of occupancy (CO) for Hotel 41 would be put in place in 90 days. Neither a temporary certificate of occupancy nor a CO was ever obtained, the Buy Sell Agreement was not consummated, and the proceeds of the RiverSource Loan purportedly remained in escrow. Accordingly, monies owed to Crane were never paid.
Thereafter, Crane commenced a foreclosure action against the LE The LP failed to answer the complaint or otherwise appear in the action, and Crane moved for a default judgment. Soleimani opposed, arguing that at a meeting of the two stockholders, Lucas voted against defending the action while Soleimani voted in favor of defending the action. Moreover, Soleimani argued that the default judgment motion was made prematurely. Plaintiff argues that the president of defendant’s corporate *182General Partner lacked the authority to engage counsel and defend the instant mortgage foreclosure action in disregard of a deadlocked vote of the General Partner’s two shareholders, one of whom is the president and the other of whom is affiliated with plaintiff.
While the majority is correct that any actual or presumptive authority that a president of a corporation may have to undertake or defend litigation is generally terminated by such a deadlock (see Sterling Indus. v Ball Bearing Pen Corp., 298 NY 483, 487 [1949]), the rule is inapplicable to the facts before us. “While the principles of law are clear with respect to maintenance of a suit by or on behalf of a corporation, the facts which bring those principles into play are not so evident on this record as to call for their automatic application” (see 328 E. 56 St. Rest, v Polldon Rest., 39 AD2d 689, 691 [1972]).
First, section 2.1 (“Authority of the General Partner”) of the Amended and Restated Agreement of Limited Partnership, dated as of September 2001 (the LPA), provides that the General Partner shall have the exclusive right to manage the LP including the right to defend any litigation (§ 2.1 [b] [vii]). The bylaws of the General Partner provide in article III, section 2 that the “Board of Directors shall be responsible for the control and management of the business affairs, property and interests of the Corporation, and may exercise all powers of the Corporation, except as are in the Certificate of Incorporation or as expressly conferred upon or reserved to the shareholders.” Article iy section 5 thereof provides:
“Officers of the Corporation shall, unless otherwise provided by the Board of Directors, each have such powers and duties as generally pertain to their respective offices as well as such powers and duties as may be set forth in these By-Laws, or may from time to time be specifically conferred or imposed by the Board of Directors. The President shall be the chief executive officer of the Corporation.”
However, in contrast to Sterling, where the “circumstances of the organization of plaintiff corporation indicate[d] that the parties intended that the corporation should be managed by its board of directors and that the board should take no affirmative action if not sanctioned by a majority” (298 NY at 491), the Stockholders Agreement among Carroll, Morgan and the General Partner dated as the 6th day of September 2001 provides in paragraph 3 (b) in relevant part that “[notwithstanding *183anything to the contrary contained in the By-Laws of the Corporation, the officers of the corporation, other than Ben Soleimani, shall not take any action except as approved by the Board of Directors” (emphasis added). Paragraph 10 (“Certificate of Incorporation: By-Laws”) thereof provides that
“[e]ach of the Stockholder [sic] agrees to consent to and approve any amendment of the Certificate of Incorporation or By-Laws of the Corporation which may from time to time be necessary or advisable in order to make any of the provisions of this Agreement, or any of the amendments thereto, valid and enforceable under the applicable laws of the State of New York
Accordingly, unlike Sterling, where there was nothing to confer any authority on the part of the president to institute litigation without the consent of the board of directors, here, under the express provisions of the Stockholders Agreement, Soleimani had the power to act in his capacity as president without a resolution from the board of directors. Thus, the LPA, when táken together with the Stockholders Agreement and bylaws, gives Soleimani, as president of the General Partner, the right and authority to engage counsel to defend the foreclosure action. Second, even were I to accept the majority’s position that Soleimani’s authority, as president, to sue could have been rebutted by the board of directors or stockholders pursuant to the provisions of the Stockholders Agreement requiring unanimous consent for actions taken by either, that power must be used to serve the corporation’s interests, not that of the individual stockholders. The “relationship between shareholders in a close corporation, vis-á-vis each other, is akin to that between partners and imposes a high degree of fidelity and good faith” which “may not be so easily circumvented” (Brunetti v Musallam, 11 AD3d 280, 281 [2004] [internal quotation marks and citation omitted]; see also Sager Spuck Statewide Supply Co. v Meyer, 273 AD2d 745, 748 [2000]). Similarly, “neither the board of directors nor any individual member or members thereof may exercise such authority in violation of, inter alia, fiduciary duties owed the corporation” (TJI Realty v Harris, 250 AD2d 596, 598 [1998]; see also Business Corporation Law §§ 717, 720).
Here, issues of fact exist as to the exact nature of the affiliation between plaintiff and Lucas, the shareholder opposed to defending the action, i.e., whether plaintiff is an affiliate of Lucas or simply his alter ego, and whether Lucas seeks to block *184the LP from defending the foreclosure to serve his own interests, rather than the LP’s. I find it curious that the majority asserts that I am inventing arguments not advanced by the parties while unabashedly proclaiming that a derivative action can be instituted, an argument never put forth by the parties. Unlike the majority, my arguments are in fact based on the record. The majority asserts that the issue of whether plaintiff is an affiliate of Lucas or simply his alter ego is an argument of my own invention, never advanced by respondent. This is incorrect. In respondent’s affirmation in support of its cross motion for leave to file an answer, the LP specifically asserts that plaintiff Crane is Lucas’ alter ego. Issues also exist as to the use made of loan proceeds that had been obtained to satisfy arrears on the subject mortgage and to buy out Soleimani’s interest in the LP
The majority believes that Lucas’ potential conflict of interest is of no moment because Soleimani agreed to the provisions of section 2.4 (“Permitted Transactions”) of the LPA. True, section 2.4 (b) provides that
“[t]he fact that a Partner ... is directly . . . interested in or connected with, any firm or corporation employed by the Partnership . . . from which the Partnership may borrow . . . shall not prohibit the Partnership from engaging in any transaction with such person, firm or corporation, and neither the Partnership nor the other Partner shall have any rights in or to any income or profits derived from such transaction by the Partner, person, firm or corporation . . . .”
However, the majority ignores that this authority is limited, requiring that “the terms of such transaction are not less advantageous to the Partnership than those obtainable from non-affiliated third parties.” Thus, it is clear that while the LPA permits a partner to have a conflict of interest, it does not permit the partner, as a stockholder or director, to breach his fiduciary duty to the partnership by taking an action in favor of the entity in which he holds an interest, to the detriment of the LP In contrast, the agreement in Sterling provided:
“ ‘No contract or other transaction between the corporation and any other corporation shall be affected or invalidated by the fact that one or more of the Directors of this corporation is or are interested in or is a Director or officer or are Directors or offi*185cers of such other corporations, and any Director or Directors, individually or jointly may be a party to or parties to, or may be interested in any contract or transaction of this corporation, or in which this corporation is interested, and no contract, act or transaction of this corporation with any person or persons, firms or corporations, shall be affected or invalidated by the fact that any director or directors of the corporation is a party to or are parties to, or interested in such contract, act or transaction, or in any way connected with such person or persons, firm or association; and each and every person who may become a director of this corporation is hereby relieved from any liability that may otherwise exist from contracting with the corporation for the benefit of himself or any firm, association, or corporation in which he may be in any wise interested’ ” (298 NY at 487-488 [emphasis added]).
Lastly, I believe the motion court properly allowed Soleimani, as president of the General Partner, to interpose an answer on behalf of the LP to protect its existence and interest. That is, the facts allege that the corporate existence of the subject hotel is threatened and that its business will not continue normally. In contrast, in Sterling, the court held that “[n]o evidentiary facts are alleged to indicate that a crisis is at hand or that immediate or vital injury threatens plaintiff” {id. at 492) in that the complaint stated that plaintiff “ was and still is engaged in the business of selling and distributing articles of general merchandise,’ ” and that “while it allege[d] an exclusive agency to sell the pens of the corporate defendant, and that the contract has been breached, no facts [were] alleged to indicate that its corporate existence [was] threatened or that its business [would] not continue normally” {id. at 493).
These same issues of fact show a meritorious defense warranting denial of plaintiffs motion for a default judgment, and I would affirm Supreme Court’s order denying plaintiffs motion for a default judgment and granting defendant’s motion for leave to interpose an answer.
Friedman and DeGrasse, JJ., concur with McGuire, J.; Andrias, J.P., and Acosta, J., dissent in a separate opinion by Acosta, J.
*186Order, Supreme Court, New York County, entered February 23, 2010, modified, on the law, the cross motion denied, and otherwise affirmed, without costs.
Motion to dismiss appeal and for related relief denied.