Crane, A.G. v. 206 West 41st Street Hotel Associates, L.P.

87 A.D.3d 174, 926 N.Y.2d 438

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: June 23, 2011
• Status: Published

Opinions

OPINION OF THE COURT

McGuire, J.

The plaintiff in this foreclosure action, Crane, A.G., is owned by John Lucas, one of the 50% owners of the defendant, 206 West 41st Street Hotel Associates, L.P. (the Hotel). Specifically, Lucas owns Carroll Hotel 206 West 41st Street, LLC (Carroll), one of the two limited partners of the Hotel. The other limited partner, Morgan 206 West 41st Street Corporation (Morgan), is owned by Benjamin Soleimani. Carroll and Morgan each own 49.5% of the limited partnership interests of the Hotel and 50% of the shares in the general partner, Clifton Place Development Corporation (Clifton), the owner of the remaining 1% interest in the Hotel. Although the stockholders agreement between Carroll and Morgan provides for a board of directors consisting of Lucas and two designees of Morgan, paragraph 3 (c) specifies that any action of the board requires unanimous approval of the directors. Paragraph 3 (c) specifies that “[a]ll action by the Stockholders shall require the unanimous approval of the Stockholders.” The Hotel acquired the real property it owns by borrowing the purchase price from Crane, executing and delivering to Crane a note and leasehold mortgage. The partnership agreement called for the loan and section 2.4, “Permitted Transactions,” broadly authorizes transactions between the partnership and a partner or an affiliate of a partner.

Sterling Indus. v Ball Bearing Pen Corp. (298 NY 483 [1949]) is controlling in this case. Under Sterling, the deadlock between Lucas and Soleimani over whether Clifton should defend the foreclosure action against the Hotel requires the conclusion that Clifton had no authority to cross-move to vacate the alleged default and seek leave to file an answer (see also Stone v Frederick, 245 AD2d 742 [1997]; L. W. Kent & Co. v Wolf, 143 AD2d 813 [1988]; Tidy House Paper Corp. of N. Y. v Adlman, 4 AD2d 619 [1957]). Any other conclusion simply vitiates paragraph 3 (c) of the stockholders agreement. 1800Post-cards, Inc. v Morel (153 F Supp 2d 359 [SD NY 2001]) is not to the contrary as the shareholders agreement granted the 50% stockholder bringing suit full control over all aspects of the corporation and specified that the other 50% stockholder had “no control whatsoever” (153 F Supp 2d at 361).

To be sure, in Sterling, one of the two disagreeing shareholder groups sought to commence rather than defend an action on behalf of the deadlocked corporation and the Court’s rationale included the “availability] to the group in favor of instituting suit . . . the more appropriate remedy of a stockholder’s derivative action” (298 NY at 491-492). The same is true in Stone v Frederick, L. W. Kent and Tidy House. However, the unavailability to a shareholder of the remedy of mounting a defense in the right of the corporation does not require a different conclusion. After all, if the Lucas/Carroll decision that the foreclosure action should not be defended constitutes a breach of fiduciary duty, an action for a breach of that duty is a remedy available to Soleimani/Morgan (Brunetti v Musallam, 11 AD3d 280, 281 [2004]). Of course, a showing that the decision is unwise or inexpedient is not sufficient to establish a breach of that duty (cf. Auerbach v Bennett, 47 NY2d 619, 629 [1979]). The inadequacy of that remedy is not thereby demonstrated. Obviously, the Hotel will be out of business if Crane succeeds in this action. But even assuming that the demise of the Hotel as a viable entity is a necessitous prospect that ordinarily would warrant disregarding shareholder deadlock even when the underlying action is not one against “outsiders” (Stone v Frederick, 245 AD2d at 745), it should be of no moment here given that Soleimani, through Morgan, agreed to the provisions of section 2.4 of the partnership agreement.¹

Defendant (through Soleimani, purporting to act on its behalf) advances a formidable argument that the power of attorney presented at the stockholders’ meeting by the attorney for Lucas was a limited one that did not authorize the attorney to vote on the resolution proposing that the foreclosure action be defended. As the deadlock between Lucas/Carroll and Soleimani/Morgan is obvious, however, any defect in the power of attorney should be disregarded (cf. Tidy House, 4 AD2d at 621; Schillinger & Albert v Myral Hats, 55 Misc 2d 178, 179 [Civ Ct, NY County 1967]).

The dissent’s arguments are unpersuasive. It devotes a paragraph to an account of efforts by Lucas and Soleimani, after Lucas threatened to commence a foreclosure proceeding, to buy out Soleimani’s interest. I do not know whether the dissent’s account is correct or whether the facts are disputed because I have not checked the record. And I have not checked because that account is plainly irrelevant to the issue of whether Soleimani has the authority to engage counsel and defend the foreclosure action.

The dissent’s effort to distinguish Sterling begins with a paragraph reciting provisions of the limited partnership agreement and bylaws of Clifton. As the dissent appears to acknowledge, these provisions do not distinguish this case from Sterling. The dissent then plays its trump card, paragraph 3 (b) of the stockholders agreement between Carroll and Morgan. It states as follows: “Notwithstanding anything 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).²

This is an unremarkable provision in a stockholders agreement. Absent such a provision, the day-to-day management of Clifton would be a nightmare; to do anything would require the unanimous approval of the board. But because Soleimani can act without the approval of the board, it scarcely follows that he can act against the wishes of the other co-owner so as to override the immediately ensuing provision, paragraph 3 (c), stating that “[a]ll action by the Stockholders shall require the unanimous approval of the Stockholders.” To the contrary, the dissent’s trump card is easily overruffed for the reason given in Sterling. That is, just as “[a]ny actual or implied authority [the president of the corporation] may have had as president to commence this action was terminated when a majority of the board of directors . . . refused to sanction it” (Sterling, 298 NY at 490), so, too, Soleimani’s actual authority to defend the foreclosure action was terminated when the stockholders refused unanimously to sanction it. The Court underscored this point at the end of its opinion when, quoting the dissenting opinion in the Appellate Division, it wrote that “ o]ne side should not be entitled to maintain an action in the name and at the expense of the corporation simply because the president happens to be allied with its interests’ ” (id. at 493, quoting 273 App Div 460, 469 [1948]).

The dissent’s next argument is based on the obvious fact that Lucas’s authority to exercise his veto power as one of the two owners is not unlimited but is circumscribed by fiduciary duties. After a paragraph that makes this point, the dissent writes as follows:

“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 the [Hotel] from defending the foreclosure to serve his own interests, rather than the [Hotel’s] . . . 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 [Hotel].”

One fatal problem with the argument is that no argument based on these ostensible issues of fact is raised on appeal by respondent (i.e., Soleimani, purporting to act on behalf of the Hotel).³ Thus, the dissent improperly relies on an argument of its own invention (see Misicki v Caradonna, 12 NY3d 511, 519 [2009] [“(w)e are not in the business of blindsiding litigants, who expect us to decide their appeals on rationales advanced by the parties, not arguments their adversaries never made”]).

A second fatal problem with this argument emerges more clearly when the dissent builds on it, stressing that the broad authority conferred by section 2.4 is not so unlimited as to license Lucas to breach his fiduciary duties. The dissent then writes that section 2.4 “does not permit [Lucas] ... 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 [Hotel].”⁴ Lucas, of course, is seeking to advance his own interests in refusing to authorize Clifton to defend the foreclosure. It does not follow, however, that he is for that reason breaching his fiduciary duties. But the precise parameters of his fiduciary duties need not detain us. As we maintain — the dissent has no response — if he is breaching his fiduciary duties, Soleimani/Morgan have a remedy.

Furthermore, the dissent ignores the possibility that Soleimani is breaching his fiduciary duties in seeking to defend the foreclosure action, inexplicably focusing only on the possibility that Lucas is breaching his fiduciary duties by refusing to authorize a defense. For all the dissent knows, Soleimani might know that the Hotel does not have a viable or even a nonfrivolous defense to the foreclosure action. If so, the assets of the Hotel, Clifton or both will be wasted by defending against the action.

The dissent’s final argument — that Soleimani is authorized to defend the foreclosure action to protect the existence of the Hotel — finds some support in Sterling. The Court both rejected the argument that maintaining the action was proper because “the litigation presents an emergency or a critical situation” (298 NY at 492) and went on to note that the complaint alleged no facts “to indicate that its corporate existence is threatened or that its business will not continue normally” (id. at 493). But the Court did no more than suggest that, despite a disagreement between co-owners of an entity about whether an action should be commenced or defended, one owner’s views might prevail in the event of “an emergency or a critical situation” in which the entity’s existence is threatened. Even assuming there are cases in which it might be sensible to conclude that such an owner’s views should prevail, this is not one of them.

Here, two sophisticated parties formed the Hotel pursuant to agreements that called for Lucas to provide all the financing and expressly authorized the financing to be provided by an affiliate (i.e., Crane) of a Lucas-controlled entity. Obviously, these sophisticated parties knew that there was a risk that the Hotel would not be a success and they agreed that “[a]ll action by the Stockholders [of Clifton] shall require the unanimous approval of the Stockholders.” As the Court of Appeals has stated, “[fjreedom of contract prevails in an arm’s length transaction between sophisticated parties . . . , and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain” (Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 695 [1995]). Neither Soleimani nor the dissent point to any such countervailing public policy concern and none exists.

For these reasons, the cross motion should have been denied in its entirety. With respect to the motion for a default judgment, it properly was denied. Even when the motion is unopposed, the motion court must satisfy itself that the movant has satisfied the requirements of CPLR 3215. Here, the moving papers were defective (see Beltre v Babu, 32 AD3d 722 [2006]).

Accordingly, the order of the Supreme Court, New York County (Eileen A. Rakower, J.), entered February 23, 2010, which, insofar as appealed from, denied plaintiffs motion for a default judgment and granted defendant’s cross motion for leave to interpose an answer, should be modified, on the law, the cross motion denied, and otherwise affirmed, without costs.

1 . As the dissent relies on an ostensible need to protect the existence of the Hotel, I will return to this subject below.

2 . In the immediately following sentence the dissent quotes a plainly irrelevant provision of the bylaws.

3 . Unquestionably, Crane, the plaintiff, is the lender, and Lucas unquestionably owns both Crane and Carroll. Thus, it is unclear why the dissent wonders, sua sponte, whether Crane is an affiliate or alter ego of Lucas.

4 . To the extent the dissent believes the analogous provisions it quotes from the corporate charter in Sterling purported to authorize the directors of the corporation to breach their fiduciary duties to the corporation, we disagree.