Fraud and The Alleged Failure to Register Under BCL § 1312(a)

• Posted on: Dec 14 2020

In New York, foreign entities – that is, corporations, limited liability companies and partnerships authorized to do business in another jurisdiction or country – are required to register to business with the Secretary of State. See BCL § 1312(a). The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. See United Envtl. Techniques, Inc. v. State Dep’t of Health, 88 N.Y.2d 824, 825 (1996) (finding that foreign corporation was not registered to do business in New York and therefore lacked capacity to sue).

When applying BCL § 1312(a), the relevant inquiry is whether the foreign entity is “doing business” in the State. Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” Von Arx, A.G. v. Breitenstein, 52 A.D.2d 1049, 1050 (4th Dept. 1976).

Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” Netherlands Shipmortgage Corp. v. Madias, 717 F.2d 731, 735-36 (2d Cir. 1983). A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. Globaltex Group, Ltd. v. Trends Sportswear, Ltd., No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel, 242 N.Y. 224, 229 (1926)). 

In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation [must] be permanent, continuous, and regular.” Manney v. Intergroove Tontrager Vertriebs GMBH, No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage, 717 F.2d at 736) (alteration in original). The entity’s activities cannot be “merely casual or occasional.…” United Arab Shipping Co. (S.A.G.) v. Al-Hashim, 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas, 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994) (“where a corporation’s activities within New York are merely incidental to its business in interstate and international commerce, BCL § 1312(a) is not applicable.”); Schwarz Supply Source v. Redi Bag USA, LLC, 64 A.D.3d 696, 696-97 (2d Dept. 2009) (same); Paper Mfrs. Co. v. Ris Paper Co., Inc., 86 Misc. 2d 95, 98 (Civ. Ct., N.Y. Cty. 1976) (noting that if a “foreign corporation is engaged in local business on more than an isolated or accidental basis, it must comply with the statute” and obtain authorization before bringing suit).

New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. Netherlands Shipmortgage, 717 F.2d at 738. Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State (Uribe v. Merchants Bank of New York, 266 A.D.2d 21, 21 (1st Dept. 1999) (Plaintiff was not doing business where it maintained no office or telephone listing, owned no real property and had no employees in the State)); (b) the frequency and regularity of activities within the State (G.P. Exports v. Tribeca Design, 147 A.D.3d 655, 656 (1st Dept. 2017) (a single business transaction within the State did not warrant the application of BCL § 1312(a)); and (c) the volume and nature of the activities within the State (United Arab Shipping Company v. Al-Hashim, 176 A.D.2d 569 (1st Dept. 1991) (Plaintiff was doing business within the State where its New York office employed approximately 17 full-time employees, actively solicited business, conducted sales activities, negotiated and executed contracts, and generated substantial in-state revenue)). 

Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. Netherlands Shipmortgage, 717 F.2d at 738; Von Arx, 52 A.D.2d at 1049 (the shipment of goods into New York from a foreign country for further shipment within or without the state is considered incidental to interstate and international commerce); Airline Exch., Inc. v. Bag, 266 A.D.2d 414, 415 (2d Dept. 1999) (having a bank account, occasionally using an office in the State, and engaging in three transactions in the State, did not support a finding that the business activity was so systematic and regular and essential to its corporate activities as to constitute doing business in New York); 8430985 Canada Inc. v. United Realty Advisors LP, 148 A.D.3d 428 (1st Dept. 2017) (an investment vehicle not subject to the registration requirements of BCL § 1312(a)). Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” Digital Ctr., S.L. v. Apple Indus., Inc., 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. Highfill, Inc. v. Bruce & Iris, Inc., 50 A.D.3d 742, 744 (2d Dept. 2008) (corporation was doing business where its regional vice president regularly sent employees to New York to manage “special sales,” and made approximately $6,600,000 in New York sales over several years).

The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. Maro Leather, 161 Misc. 2d at 923). Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation … and not in New York.” Cadle Co. v. Hoffman, 237 A.D.2d 555 (2d Dept. 1997); see also Highfill, 50 A.D.3d at 744. 

“[W]hether [the business entity] was doing business in New York” is determined by looking “at the time the action was commenced.” Remsen Partners, Ltd. v. Southern Mgmt. Corp., No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original).

Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. Tri-Term. Corp. v. CITC Indus., Inc., 78 A.D.2d 609 (1st Dept. 1980). Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. E.g., Showcase Limousine, Inc. v. Carey, 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part, 273 A.D.2d 20 (1st Dept. 2000); Uribe, 266 A.D.2d at 22 (noting that the failure of the plaintiff to register with the State may be cured prior to the resolution of the action); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V., 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint).

On November 25, 2020, Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Diviion issued a decision in Excelsia Leatheware Co. v. Horowitz, 2020 N.Y. Slip Op. 34048(U) (Sup. Ct., N.Y. County Nov. 25, 2020) (here), in which the Court denied a motion to dismiss under BCL § 1312(a) on the grounds that plaintiff was not doing business in New York, even though it had “maintained a systematic and continuous business relationship with [defendants] in New York”. Once the Court determined that the action could go forward under BCL § 1312(a), the Court denied the branch of the motion seeking dismissal of Plaintiff’s fraud claim. 

Excelsia Leatheware Co. v. Horowitz

Background

Excelsia arose out of Defendants’ alleged conduct in inducing Plaintiff, Excelsia Leatherware Company (“Excelsia”), a leather goods producer based in Hong Kong, China, to produce and ship goods to Defendants (Kenneth Horowitz and Bag Studio, LLC) for resale without paying for the goods.

On December 20, 2016, Excelsia exported goods valued at $42,479 to Bag Studio, which Bag Studio paid for on or about February 18, 2017. Thereafter, Excelsia continued to manufacture and ship goods to Bag Studio, which promptly paid for the goods within 60 days until February 2018, when it stopped paying for goods that were shipped by Excelsia. 

By November 30, 2018, Defendants owed Excelsia at least $2,761,213.55 for goods shipped by Excelsia between November 2017 and November 2018. 

According to Plaintiff, to induce it to continue providing goods to Bag Studio, Defendants promised to make payment. As a result of such statements, including that they had the ability and willingness and to make the payments that were past due, Plaintiff shipped additional goods that had been manufactured to Bag Studio’s specifications. However, alleged Plaintiff, Defendants repeatedly failed to keep their word, failing to pay as promised.

In addition, Plaintiff alleged that Horowitz demanded that Excelsia pay a 6% administrative fee to pay for Bag Studio’s Chinese operations. That fee, however, was, according to Plaintiff, a kickback that was designed to enrich Horowitz and defraud Excelsia. Plaintiff claimed that Horowitz hid the kickback from other Bag Studio affiliated individuals, provided receipts for the kickback, and asked Excelsia to conceal the scheme. 

On June 5, 2019, Plaintiff filed the complaint. Excelsia alleged (1) fraud in the inducement, (2) fraud (against Horowitz), (3) conversion, (4) account stated, (5) breach of contract, (6) unjust enrichment and (7) prima facie tort. 

Defendants moved to dismiss. Relevant to this article, Defendants sought dismissal of the complaint in its entirety because Excelsia was not authorized to conduct business in New York pursuant to BCL § 1312(a) and, specifically, the fraud claim because Excelsia failed to plead certain elements of the claim with particularity.

The Court denied the motion.

The Court’s Decision

The Court found that although “Defendants have shown that Excelsia ha[d] maintained a systematic and continuous business relationship with them in New York since 2016,” Defendants failed to show that their “business relationship was anything more than merely facilitating the sale and delivery of Excelsia’s merchandise into New York.” Slip Op. at *3. The Court explained that the entities with which Excelsia was alleged to have done business along with Bag Studio (e.g., Nine West Company LLC, Mackage Soho, and Camuto Group LLC) were “Delaware entities with offices in New York.” Id. When Excelsia did business with them, they merely acted as a conduit of the merchandise. Id. (“[P]laintiff only had title to the merchandise until the merchandise arrived in Shenzen, China. At that point, title would pass to Bag Studio, and Bag Studio “would thereafter be responsible for risk of loss and transportation from there to the U.S.” under NY UCC 2-401) (citation to record omitted). “Accordingly,” concluded the Court, “Defendants’ claim that plaintiff is unauthorized to maintain this action in New York fails.” Id.

The Court also held that Plaintiff stated a claim for fraud.

Defendants argued that both fraud claims lacked particularity as required under CPLR § 30l6(b) and did not meet the standard for alleging scienter and damages. They also claimed that the fraud claim against Horowitz should fail because the claim was pleaded “upon information and belief” and because Plaintiff lacked actual knowledge of the allegations. 

The Court found that Plaintiff satisfied the falsity and reliance elements of the fraud claim against Horowitz. 

Here, plaintiff asserts the 6% kickback scheme as a misrepresentation known to be false by defendant Horowitz. Plaintiff alleges Horowitz intentionally created the scheme to induce plaintiff to rely upon it and unnecessarily pay money to him. Plaintiff alleges it relied on this misrepresentation and paid him money. 

Id. at *5 (citations to the record omitted).

[Ed.Note: because Plaintiff also alleged a breach of contract claim against Bag Studio, the Court dismissed the fraud claim against Bag Studio under the duplication of claims doctrine.]

The Court also held that Plaintiff pleaded scienter with the requisite particularity, thereby rejecting Defendants’ contention that Plaintiff failed to satisfy this element because it was based “upon information and belief”:

The complaint plainly states “Horowitz’s actions were wanton, willful, and malicious,” and that there was no “legitimate or business purpose for the kickbacks.” The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme. These claims do not contradict plaintiff’s allegations that it was defrauded out of money. The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession. 

Id. (citations to the record omitted). 

Takeaway

Motions to dismiss on BCL § 1312(a) grounds are fact intensive. As Excelsia shows, courts will examine the facts and circumstances to determine whether the business activities of a foreign business entity in New York are “systematic and regular,” intrastate in nature, and essential to the plaintiff’s business. A finding that the entity’s business activities are not essential to intrastate or interstate commerce, even if the entity is “doing business” in New York, as in Excelsia, can save the case from dismissal under BCL § 1312(a).

Excelsia also highlights that not all allegations on information and belief will spell the end of a fraud claim. As we have note in prior articles, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559-60 (2009). Allegations based on information and belief generally do not suffice. See Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). The reason, without stating the basis for the information and belief, the court has no factual basis upon which to consider the allegations of fraud. Thus, where the belief is based on factual information that makes the inference of culpability plausible, or where the facts are peculiarly within the possession and control of the defendant, a complaint will withstand a motion to dismiss. Pludeman v. Northern Leasing, Sys., Inc., 10 N.Y.3d 486, 491-92 (2008) (internal quotation marks and citations omitted). 

In Excelsia, Plaintiff alleged that it used the phrase “upon information and belief” only as to whether Horowitz actually sent the kickback fees to Bag Studio, which only Defendants would know. Slip Op. at *4. Plaintiff further argued that it was “able to detail every other aspect of the kickback scheme, including how Horowitz requested that plaintiff keep the kickback scheme secret from Bag Studio.” Id. at *5. Such allegations, held the Court, satisfied both of the foregoing prongs of pleading on information and belief. Id. (“The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme.… The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.”)