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The Doctrine Of “Corporation By Estoppel” Is Alive And Well In New York

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  • Posted on: Dec 14 2018

Generally, a business entity must be formed in order to conduct business.  For example, “a nonexistent entity cannot acquire rights or assume liabilities, a corporation which has not yet been formed normally lacks capacity to enter into a contract.”  Rubenstein v. Mayor, 41 A.D.3d 826, 828 (2nd Dep’t 2007).  Frequently, a new business entity is formed for the specific purpose of entering into a business transaction.  What happens, though, if the entity is not properly or timely formed at the time that the parties enter into their transaction?  The doctrine of “Corporation by Estoppel” can be used to prevent a defendant from avoiding its obligations under a contract by arguing that the entity was not formed at the time a contract was made.

Such was the case in Boslow Family Ltd. Partnership v. Glickenhaus & Co., 7 N.Y.3d 664 (2006).  In 1997, the Boslow family signed its initial certificate of limited partnership to form the plaintiff entity and delivered same to its counsel for filing, but counsel failed to do so.  Later in 1997, believing that the initial certificate had been filed, the Boslow plaintiff opened a discretionary investment account with defendant.  After three years, and after paying defendant $31,000.00 in advisory fees, plaintiff decided to close the investment account.  Thereafter, in 2002, plaintiff commenced an action against defendant for improper management of plaintiff’s account.  Almost a year later, plaintiff filed its initial certificate upon realizing that it had not previously been filed.  Defendant moved to dismiss the complaint arguing, inter alia, that plaintiff did not have the capacity to sue because the initial certificate was not filed and, therefore, lacked capacity to bring suit and enter into the underlying investment management agreement.  The motion court dismissed the complaint and the Appellate Division affirmed.  The Court of Appeals reversed.

The Boslow Court of Appeals recognized that plaintiff failed to comply with §§ 121-201(b) (a limited partnership is formed at the time that the initial certificate is filed with the department of state) and 121-206 (providing that a “signed certificate of limited partnership … shall be delivered to the department of state”) of New York’s Partnership Law.  Nonetheless, the Court, in applying the doctrine of “corporation by estoppel,” held that:

Defendant is estopped from contending that plaintiff was not a limited partnership because defendant is using that sword to escape liability after it benefitted from its contract with plaintiff.  Defendant has conceded that the services it provided plaintiff were not dependent on plaintiff’s limited partnership status, or lack thereof.

 Boslow, 7 N.Y.3d at 668-69 (citations omitted).

On December 5, 2018, the Supreme Court of the State of New York, Second Department, applied the “corporation by estoppel” doctrine in TY Builders II v. 55 Day Spa.  In 2010, the TY defendant entered into a three-year lease with “TY Builders LLC.”  The lease rider was between “TY Builders II LLC” and plaintiff and was signed by the managing member of “TY Builder LLC.”  The personal guaranty of plaintiff’s president, which guaranteed plaintiff’s payment obligations under the Lease, was given to “TY Builder II.”

Shortly after the lease was signed, plaintiff advised that it was vacating the premises.  “TY Builders II, Inc.” commenced the action to recover damages for breaching the lease.  Thereafter, an amended summons and complaint were filed with the same named plaintiff but listing the names of various entities named in the lease, rider and guaranty as d/b/as.  The TY plaintiff moved for summary judgment on the amended complaint and the defendant cross-moved  for summary judgment dismissing the amended complaint “on the principal ground that the plaintiff, undisputably not a party to any of the relevant signed lease documents, lacked standing to enforce the terms of those documents, and that the entities named on those documents did not legally exist at the time the documents were signed.”  Supreme Court granted plaintiff’s motion and denied defendant’s cross-motion.

Relying primarily on the Court of Appeals decision in Boslow and its own decision in Rubenstein, the TY Court recognized that “a corporation may be deemed to exist and possess the capacity to contract pursuant to the doctrine of incorporation by estoppel” and, therefore, “agree[d] with the Supreme Court’s determination to deny the defendants’ cross motion, in effect, for summary judgment dismissing the amended complaint on [corporation by estoppel] ground[s]” and, in applying the doctrine, the TY Court stated:

There is no question that the defendants, regardless of the technical status of TY Builders, LLC, or TY Builders II, LLC, at the time the lease documents were signed, agreed to enter into a lease for certain premises owned by Weiss, the principal of those later-formed entities, and were granted legal access and possession of those premises in exchange for the promise of the payment of rent. The defendants do not dispute that 55 Day Spa failed to pay rent as directed under the lease or that Peterson had personally guaranteed the monthly lease payments. The evidence demonstrates that the parties engaged in the subject business transactions and the defendants received the benefit of possession of the property. Consequently, the defendants are estopped from using the plaintiff’s lack of proper incorporation to escape liability under the lease (citations omitted).

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