Who’s The Real Party in Interest Anyway?

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Posted on: Oct 2 2024

In Kapitus Servicing, Inc. v. MS Health, Inc., 221 A.D.3d 504, 505 (1st Dept. Nov. 21, 2023) (here), the Appellate Division, First Department addressed the issue of whether a foreign limited liability company had the capacity to sue in New York due to defects in the entity’s corporate filings. In answering the question, the Court looked at the parties involved and who was the real party in interest with regard to the allegations asserted in the action.

The plaintiff in MS Health, Kapitus Servicing, Inc. (“Kapitus”), filed suit against, among others, MS Health Inc.—a subsidiary of Epazz, Inc. (“Epazz”), which was owned by Shaun Passley (“Passley”). MS Health claimed that Kapitus could not bring suit as the agent for TVT Capital, LLC (“TVT Capital”), a foreign limited liability company, because of purported defects in TVT Capital’s corporate filings in New York. The Court rejected the argument, holding that Kapitus had standing to bring the action in its own right because it was the real party in interest in the relief sought:

MS Health failed to establish prima facia entitlement to summary judgment as Kapitus Servicing, as a contracting party, generally has a right to maintain an action in its own name (CPLR 1004). Notwithstanding its status as a servicing agent for TVT Capital, Inc., Kapitus had independent authority and its own beneficial interest in the subject agreement …. MS Health does not contest that Kapitus was a corporation registered in New York with its own independent capacity to file lawsuits. Moreover, Kapitus had a pecuniary interest in the agreement. Thus, Kapitus is a “real party in interest,” entitled to maintain this action in its own name…. Further, New York’s Limited Liability Company Law § 802 (b) (i) states that a foreign limited liability company’s failure to fully comply with the filing requirements does not impair the right of any other party to maintain an action.[1]

The same issue of capacity was before the Court in Kapitus Servicing, Inc. v. Epazz, Inc., 2024 N.Y. Slip Op. 04741 (Oct. 1, 2024) (here).

Epazz concerned a suit to enforce a settlement agreement, dated June 30, 2017, between plaintiff and defendants Epazz, Cynergy Corporation, and Passley (collectively, the “defendants”). The settlement agreement required defendants to pay to plaintiff’s predecessor in interest a sum certain in three monthly installments. In the event of default, plaintiff was entitled to enter judgment through a confession of judgment.

It was undisputed that, after making some payments, defendants ceased making the remaining payments. On December 19, 2019, plaintiff sent a notice of default. Defendants failed to cure.

Plaintiff moved for summary judgment on its claims and to strike defendants’ counterclaim and affirmative defenses. Defendants moved to dismiss the complaint or alternatively for summary judgment on their counterclaim and to dismiss plaintiff’s claims.

Defendants argued that plaintiff lacked the capacity to bring the action, claiming that the complaint was brought by Kapitus as the agent and servicing provider for TVT Capital, not in its own name, as a party to the settlement agreement, or as a third-party beneficiary of the settlement agreement. As TVT Capital’s agent, defendants argued that Kapitus was without authority to bring suit for TVT Capital because TVT Capital was without authority to commence the action. According to defendants, TVT Capital failed to publish and file its certificate of publication within 120 days of its filing (for a certificate of authority) as required under the Limited Liability Law.

Defendants also argued that plaintiff breached the settlement agreement because it failed to remove a UCC lien on certain assets of the defendants. Defendants maintained that for one year following the execution of the settlement agreement, defendants had to make all payments due under the settlement agreement or have cured any default within 21 days in order for plaintiff to remove the UCC lien it filed against defendants. Defendants contended that it was undisputed that plaintiffs never sent a 21 day notice to cure in compliance with sections 2 and 3 of the settlement agreement during this time period. Therefore, said defendants, plaintiff breached the settlement agreement because it failed to remove the UCC lien.

The motion court granted plaintiff’s motion for summary judgment and denied defendants’ motion to dismiss.

First, the motion court rejected defendants’ argument that Kapitus lacked the capacity to sue. Relying on MS Health, supra, the motion court held that “it [was] irrelevant whether TVT Capital ha[d] the capacity to bring suit in New York, because it [was] undisputed that Kapitus, who is the plaintiff, has capacity as a registered corporation with active standing to file suit.”

Second, the motion court rejected defendants’ breach of contract argument, finding that their reading of the settlement agreement “eviscerate[d]” the meaning of the clause on which they relied.

Their reading eviscerates the first clause of section 7 which allowed for lien removal if defendants made ALL payments due under this agreement. Their reading also eviscerates plaintiff’s right to receive an entire year of payments before removing the lien. If all defendants had to do for lien removal was to cure after a default notice, there would be no reason to have the clause about paying within a year or making all scheduled payments for the year.

“At bottom,” concluded the motion court, “defendants have conceded that they did not pay all amounts due under the settlement agreement and have therefore admitted their own breach.” Since plaintiff “offered sworn testimony and documentary evidence regarding its damages in a sum certain,” the motion court granted plaintiff’s motion and denied defendants’ motion.

On appeal, the Appellate Division, First Department unanimously affirmed.

The Court held that the “action was not subject to dismissal for lack of capacity, for substantially the same reasons stated in [its] recent decision” in MS Health, supra.

“Regardless of whether TVT Capital LLC, a foreign limited liability company, was barred from initiating suit in New York (see Limited Liability Company Law § 802 [b][i]),” said the Court, plaintiff was a “real party in interest” entitled to maintain the action in its own name.[2] The Court explained that “[n]otwithstanding its status as a servicing agent for TVT, Kapitus was a signatory to the subject settlement agreement and had a pecuniary interest in the underlying financing agreements.”[3] As such, concluded the Court, plaintiff was “a ‘real party in interest’ entitled to maintain th[e] action in its own name.”[4]

Additionally, the Court held that “Kapitus … indisputably had the right to bring suit on TVT’s behalf,” notwithstanding the latter’s noncompliance with Limited Liability Company Law § 802[b][i]: “a foreign limited liability company’s noncompliance with filing requirements ‘shall not limit or impair … the right of any other party to maintain any action or special proceeding on any such contract, act or omission.’”[5]

Finally, the Court held that the “motion court correctly concluded that defendants did not comply with their obligations under ¶ 7 of the settlement agreement such that plaintiff’s obligation to remove liens was triggered.”[6] “It is undisputed,” explained the Court, “that defendants did not make all payments due under the settlement agreement within the first year it was in effect, nor did they cure these defaults within this period.”[7]

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Jeffrey M. Haber 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.

[1] 221 A.D.3d at 505 (citations omitted)

[2] Slip Op. at *1

[3] Id.

[4] Id. (citing CPLR 1004; Airlines Reporting Corp. v. Pro Travel, 239 A.D.2d 233, 234 (1st Dept. 1997)).

[5] Id.

[6] Id.

[7] Id.