| Rosplock v Upstate Mgt. Assoc., Inc. |
| 2013 NY Slip Op 05028 [108 AD3d 825] |
| July 3, 2013 |
| Appellate Division, Third Department |
| Helen M. Rosplock, Respondent, v Upstate ManagementAssociates, Inc., et al., Appellants, et al., Defendants. |
—[*1] Levene, Gouldin & Thompson, LLP, Vestal (David M. Gouldin of counsel), forrespondent.
Rose, J. Appeal from that part of an order of the Supreme Court (Mulvey, J.), enteredJanuary 31, 2012 in Broome County, which denied defendants' cross motion to, amongother things, dismiss the complaint.
Plaintiff was a director, officer and shareholder of defendant Upstate ManagementAssociates, Inc. when she loaned it $50,000 in 2001, taking back two promissory notespayable on demand. Upstate, which did business as "the Bay Ridge Group," sold andadministered employee benefit plans, provided personal investment and financialplanning services, and administered a multiple employer trust known as the "BRGTrust," which offered employee benefit plans at reduced rates. Plaintiff sold her shares ofstock back to Upstate in 2002 and resigned as director and officer pursuant to writtenstock redemption and consulting agreements. These agreements provided for monthlypayments to plaintiff over a period of 10 years totaling approximately $1 million. Theredemption agreement also included a general release of all of plaintiff's claims againstUpstate as well as a provision for arbitration of disputes concerning the agreement.[*2]
At the time plaintiff left Upstate, the corporationwas facing potential uninsured liability as a result of two federal court actions that hadbeen brought against it. These lawsuits were precipitated by an error allegedly committedby defendant Robert M. Sedor Jr., another director, officer and shareholder of Upstate.Thereafter, in 2003, Sedor and another formed defendant the Bay Ridge Group, Inc.(hereinafter BRG) and, in 2005, Sedor formed defendant the Bay Ridge Group AdvisoryServices, Inc. (hereinafter BRGAS). Following a series of transactions, Sedor became thesole shareholder of Upstate, BRG and BRGAS, and each of the new corporations utilizedthe Bay Ridge Group name under which Upstate did business, adopted Upstate's logoand operated out of its offices. In 2007, Sedor sold BRG and BRGAS to defendantNational Financial Partners Corp. (hereinafter NFP) and, with two other employees ofUpstate as minority shareholders, he formed defendant the Bay Ridge GroupManagement Company, Inc. (hereinafter BRGM), which then signed a managementagreement with NFP to manage the business of BRG and BRGAS. As one of the termsof the sale of BRG and BRGAS to NFP, Sedor agreed that Upstate would no longertransact any business and that he would dissolve it following the resolution of the twopending federal court actions.
In January 2008, Sedor told plaintiff that Upstate's financial position was precarious.He attributed the problem to the two lawsuits and sought to settle Upstate's outstandingobligations to her by offering to pay her a reduced lump-sum amount. Plaintiff declined,indicating in an email that the amount offered fell seriously short of what was due underthe terms of the agreements and the demand notes. She then called the demand notes. Infurther correspondence with plaintiff, Sedor indicated that Upstate was attempting topursue financing to resolve her claims. In May 2009, however, Upstate ceased makingthe monthly payments owed to plaintiff pursuant to the redemption and consultingagreements and, in September 2009, counsel for Upstate notified plaintiff that the generalrelease clause in the redemption agreement had discharged any claims based on thedemand notes.
Plaintiff thereafter commenced this action against, among others, Sedor, Upstate,BRG, BRGAS, BRGM, NFP and a subsidiary of NFP identified as NFP Securities, Inc.(hereinafter collectively referred to as defendants) asserting causes of action for breach ofcontract, failure to pay the demand notes and reformation of the release clause in theredemption agreement based upon mutual mistake. In addition, plaintiff asserted a theoryof de facto merger as a basis for liability of BRG, BRGAS and BRGM as successors toUpstate. She also sought to impose liability on Sedor, NFP and NFP Securities fordisregarding the corporate form of their ownership of Upstate and/or its allegedsuccessor corporations. After joinder of issue, plaintiff moved for an order compellingdefendants to respond to her discovery demands. Defendants then cross-moved todismiss the complaint based on the release of the demand notes, failure to state a cause ofaction against Sedor, BRG, BRGAS, BRGM, NFP and NFP Securities, and to dismissthe reformation cause of action based on the statute of limitations. Defendants alsosought to compel arbitration and to stay the action pending arbitration.
Supreme Court denied defendants' cross motion, concluding that the complaintadequately stated a cause of action for reformation and that the allegations sufficientlysupported the de facto merger and piercing of the corporate veil theories of liability. Thecourt also concluded that the record was insufficient to determine whether the statute oflimitations defense to the reformation claim was applicable, but denied discovery andgranted that part of the cross motion seeking to compel arbitration and to stay the actionpending its completion. Defendants appeal.[*3]
The parties now agree that, prior to compelling orstaying arbitration, Supreme Court must determine certain threshold issues, including thequestion of whether each of the parties made a valid agreement to arbitrate (seeCPLR 7503 [a]; Matter of Smith Barney, Harris Upham & Co. v Luckie, 85NY2d 193, 201-202 [1995], cert denied sub nom. Manhard v Smith Barney, HarrisUpham & Co., Inc., 516 US 811 [1995]; Matter of County of Rockland[Primiano Constr. Co.], 51 NY2d 1, 6-7 [1980]). Because Sedor, BRG, BRGAS,BRGM, NFP and NFP Securities are nonsignatories to the agreement, plaintiff's theoriesof de facto merger and piercing the corporate veil must first be resolved in order todetermine whether these defendants can be compelled to arbitrate as the alter egos ofUpstate (see TNS Holdings v MKI Sec. Corp., 92 NY2d 335, 339 [1998];Matter of Pile Found. Constr. Co. [Howell Co.], 159 AD2d 352, 353 [1990];Matter of Sbarro Holding [Shiaw Tien Yuan], 91 AD2d 613, 614 [1982]).
Plaintiff's de facto merger theory is based on her claim that Sedor improperlytransferred Upstate's business and assets to BRG, BRGAS and BRGM (hereinaftercollectively referred to as the Bay Ridge Group) such that the corporations should beconsidered to have effectively merged, making the Bay Ridge Group responsible forUpstate's obligations (see StateFarm Fire & Cas. Co. v Main Bros. Oil Co., 101 AD3d 1575, 1578 [2012]; Holme v Global Mins. & MetalsCorp., 90 AD3d 423, 424 [2011]; Simpson v Ithaca Gun Co. LLC, 50 AD3d 1475, 1476[2008], lv denied 11 NY3d 709 [2008]). Factors to be considered in determiningwhether a de facto merger has occurred include whether there was any continuity ofownership, management, personnel, physical location, assets or general businessoperations (see State Farm Fire & Cas. Co. v Main Bros. Oil Co., 101 AD3d at1578). As for the theory of piercing the corporate veil in order to circumvent thelimitations on the liability of the owner of a corporation, it will be applicable only if theowner completely dominated the corporation with respect to the transaction attacked andused that domination to commit a wrong against plaintiff, resulting in her injury (seeMatter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141[1993]; State of New York vRobin Operating Corp., 3 AD3d 769, 771 [2004]; Austin Powder Co. vMcCullough, 216 AD2d 825, 826 [1995]).
In support of these two theories, plaintiff alleges that Sedor diverted the lucrativebusiness of Upstate to his newly formed companies. Plaintiff relies on evidencereflecting Sedor's sole ownership of BRG and BRGAS, his control of BRGM and theapparent continuity of the Bay Ridge Group name, physical address, key personnel,signs, logos, website and other marketing materials between Upstate and the Bay RidgeGroup. Plaintiff submitted exhibits reflecting the similar marketing materials used byUpstate and the Bay Ridge Group, and she identified clients of Upstate that nowallegedly do business with the Bay Ridge Group. She also alleges that, since the 2007sale of BRG and BRGAS to NFP, BRGM has conducted Upstate's former business, andSedor, as the sole trustee of the BRG Trust, has moved its business from Upstate to theBay Ridge Group. Plaintiff points to the drastic decrease in Upstate's income ascompared to the significant increase in the value of the Bay Ridge Group over a shortperiod of time, as reflected in the sale price of BRG and BRGAS to NFP in 2007, andshe alleges that Sedor has committed a wrong against her, resulting in her injury, bydiverting Upstate's business and reducing its capital so as to make it unable to meet itsobligations to her (see e.g. Matter of Glenn [Redford], 233 AD2d 248, 251[1996]; Austin Powder Co. v McCullough, 216 AD2d at 827).
While Sedor denies that he diverted Upstate's business, plaintiff has set forthsufficient factual allegations to warrant a hearing to determine whether Sedor and/or anyof the Bay Ridge Group are bound by Upstate's agreement to arbitrate (see State FarmFire & Cas. Co. v Main [*4]Bros. Oil Co., 101 AD3dat 1579; Beesmer v BesicorpDev., Inc., 72 AD3d 1460, 1462 [2010]; Matter of Pile Found. Constr. Co.[Howell Co.], 159 AD2d at 353). Accordingly, there should be additional disclosureas may be determined to be material and necessary by Supreme Court, and the alter egotheories of de facto merger and piercing the corporate veil should then be resolved bySupreme Court in an evidentiary hearing in order to determine whether any of theseparties can be compelled to arbitrate (see CPLR 7503 [a]; Matter of Schreiber v K-SeaTransp. Corp., 9 NY3d 331, 340-341 [2007]; see also Matter of Local 832 Term.Empls. of City of N.Y. v Department of Educ. of City of N.Y., 60 AD3d 567,569-570 [2009]; Madison Hill Corp. v Continental Baking Co., 21 AD2d 538,542-543 [1964]).
Plaintiff does not, however, offer any factual allegations suggesting that NFP causedher any injury as part of its alleged domination and control of Upstate or the Bay RidgeGroup after the 2007 transaction with Sedor. Nor does plaintiff identify any similarallegations regarding NFP Securities. Absent specific factual allegations suggesting abasis to pierce the corporate veil against NFP or NFP Securities, the cross motion todismiss the claim against them should have been granted (see Beesmer v BesicorpDev., Inc., 72 AD3d at 1462; see also State of New York v Robin OperatingCorp., 3 AD3d at 771).
Next, while we agree with Supreme Court that the question of whether the generalrelease in the redemption agreement applies to the demand notes is for the arbitrator todecide, defendants correctly argue that the threshold issue of whether the cause of actionto reform the release is barred by the statute of limitations must first be resolved by thecourt. Based upon Sedor's alleged acknowledgment of the debt as recently as 2008,plaintiff argues that General Obligations Law § 17-101 voids any statute oflimitations defense against the reformation cause of action and, relatedly, that defendantsmay not equitably raise the statute of limitations as a defense. Although plaintiff did notexpressly cite "equitable estoppel" as an argument in opposition to defendants' crossmotion, we are persuaded that she nevertheless squarely presented the issue to SupremeCourt by arguing that Sedor's alleged acknowledgment of the debt precluded defendants'claim that the reformation cause of action was time-barred (see generally Geraci v Probst,15 NY3d 336, 342 [2010]).
Inasmuch as plaintiff argues that the alleged acknowledgment of the debt within sixyears of the commencement of the action supports her claim of mutual mistake uponwhich she bases her reformation cause of action, and she does not—as defendantsassert—seek to revive released claims, we do not read General Obligations Law§ 17-101 to be inapplicable. Nor do we find any authority precluding GeneralObligations Law § 17-101 from being applied in breach of contract actions thatinclude claims for reformation such as this. Thus, we conclude that defendants' readingof the statute is much too narrow, and we remit for a hearing to determine whether thestatute of limitations applies to bar the claim for reformation (see CPLR 7502[b]; Matter of Smith Barney, Harris Upham & Co. v Luckie, 85 NY2d at 202;Matter of Paver & Wildfoerster [Catholic High School Assn.], 38 NY2d 669,673-674 [1976]).
Peters, P.J., Stein and Garry, JJ., concur. Ordered that the order is modified, on thelaw, without costs, by reversing so much thereof as (1) denied that part of the crossmotion seeking dismissal of the complaint against defendants National Financial PartnersCorp. and NFP Securities, Inc., and (2) compelled [*5]arbitration and stayed the action; cross motion granted tosaid extent, complaint dismissed against said defendants, matter remitted to the SupremeCourt for an evidentiary hearing to determine the proper parties to the arbitrationagreement and the timeliness of the claim for reformation, and Supreme Court to thenstay the action pending arbitration regarding the remaining claims and parties; and, as somodified, affirmed.