The Doctrine of Corporation by Estoppel
Print Article- Posted on: Apr 5 2024
Whether a non-existent corporation can enter into a contract is an interesting question. The interesting answer is that sometimes it can. Pursuant to BCL § 403, a corporation’s existence begins “[u]pon the filing of the certificate of incorporation by the department of state.” Generally, “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); see also TY Builders II v. 55 Day Spa, Inc., 167 A.D.3d 679, 680 (2nd Dep’t 2018) (quoting Rubenstein).
Under certain circumstances, despite not having been formed prior to entering into a contract, “a corporation may be deemed to exist and possess the capacity to contract pursuant to the doctrine of incorporation by estoppel.” TY Builders, 167 A.D.3d at 681 (citation omitted). The doctrine of corporation (or incorporation) by estoppel “is based on the principle that “one who has recognized the organization as a corporation in business dealings should not be allowed to quibble or raise immaterial issues on matters which do not concern him in the slightest degree or affect his substantial rights.” Rubenstein, 41 A.D.3d at 828; see also TY Builders, 167 A.D.3d at 681.
One of the leading, and often cited, cases on this subject is Boslow Family Ltd. Partnership v. Glickenhouse & Co., 7 N.Y.3d 664 (2006). Boslow, involved a limited partnership, and not a corporation, but nonetheless the Court applied the doctrine of corporation by estoppel. The plaintiff in Boslow signed an initial certificate of limited partnership, but its counsel “failed to file the initial certificate with the Department of State. Id. at 666.1 The plaintiff opened a discretionary investment account with the defendant investment advisory firm. The account was active for three years, during which time the defendant earned $31,000 in fees. The plaintiff closed the account due to displeasure with the defendant’s investments choices. Thereafter, the plaintiff brought suit alleging breach of contract and negligence in the management of the investment account. “Defendant moved to dismiss the complaint pursuant to CPLR 3211 (a) (1), (3) and (7), asserting, among other things, that plaintiff had failed to file its initial certificate prior to the commencement of the action and therefore lacked the capacity to enter into the agreement and bring suit.” The Court of Appeals reversed the Appellate Division’s affirmance of the motion court’s grant of the motion to dismiss.
The Boslow Court found that while it “is undisputed that plaintiff had not complied with the Partnership Law’s mandatory formation requirements at the time it entered into the agreement and commenced this suit … [d]efendant … does not dispute that it derived a benefit from the agreement and that the investment services provided were not dependent in any way on the nature of the plaintiff as a limited partnership.” Boslow, 7 N.Y.3d at 667. Accordingly, the Court held that the defendant was “estopped from denying the partnership’s validity.” Id. at 667-68 (citations omitted). The Court reasoned that should not be able to “us[e] that sword to escape liability after it benefitted from its contract with plaintiff.”
On April 3, 2024, the Appellate Division, Second Department, decided Teva Realty, LLC v. Comega Holding Corp.,2 a case decided under the doctrine of corporation by estoppel. Teva Realty is an action for, inter alia, specific performance and anticipatory breach with respect to a contract for the purchase of three parcels of real estate.3 In 2016, a plaintiff, Rockaway Cornaga LLC (“RC”) entered into a contract for the purchase of the real property. At or about the time the contract was executed, a related, non-party, entity delivered to the defendant seller a $100,000.00 down payment. The contract provides, inter alia, that the purchaser is RC or “an entity to be formed”. At the time the contract was executed, RC had not been formed. In fact, RC was not formed until 2019 – just prior to commencing its action. In addition, the other two plaintiffs were formed for the purpose of acquiring the lots and were not parties to the contract.
When the defendant failed to close, the plaintiffs commenced their action. The motion court granted the seller’s motion for summary judgment dismissing the specific performance and anticipatory breach causes of action because RC did not exist at the time the contract was executed and could not acquire contract rights.
Relying on the corporation by estoppel doctrine, the Second Department modified the motion court’s order by denying summary judgment on the anticipatory breach cause of action. The Court sustained the dismissal of the specific performance cause of action; albeit on different grounds. In so doing, the Court stated:
The defendants failed to make a prima facie showing that RC lacked capacity to enter into a contract and, thus, that they were entitled to summary judgment dismissing the causes of action for specific performance of the contract … and alleging anticipatory breach of contract on that basis. Generally, it is true that since 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. However, under the doctrine of corporation by estoppel, one who has recognized an organization as a corporation in business dealings should not be allowed to quibble or raise immaterial issues which do not concern him or her in the slightest degree or affect his or her substantial rights. Thus, parties who deal with an entity holding itself out as a corporation and who receive performance from such entity are estopped from avoiding their obligations to it.
Here, the defendants dealt with RC as an incorporated entity for several years, from the execution of the contract in 2016 until the commencement of this action in 2019. Contrary to their contentions, the defendants failed to establish that they received no benefit from the contract, as they admit to having received the contract deposit, which was held in escrow by their attorney. Accordingly, the defendants are estopped from denying RC’s validity for the purposes of avoiding their obligations to it….
However, the Supreme Court properly granted those branches of the defendants’ renewed motion which were for summary judgment dismissing the causes of action for specific performance of the contract … on the alternate ground that those remedies are unavailable pursuant to the contract. … The contract provides that RC “agrees that after July 31, 2017, it shall not have the right to compel specific performance of this Agreement.” As this action was not commenced until 2019, the defendants established, prima facie, that RC cannot seek specific performance of the contract…. [Citations, internal quotation marks and brackets omitted.]
Footnotes
- Like BCL § 403, Partnership Law § 121-201(b) provides that a limited partnership is formed when the initial certificate of limited partnership is filed with the department of state.
- Eds. Note: some of the facts recited herein came from the supreme court file available on NYSCEF.
- Eds. Note: this BLOG discussed specific performance of real estate contracts [here], [here], [here], [here], [here] and [here].
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
