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Rosplock v. Upstate Management Associates, Inc.

Supreme Court of New York, Third Department

July 3, 2013

HELEN M. ROSPLOCK, Respondent,
UPSTATE MANAGEMENT ASSOCIATES, INC., et al., Appellants, et al., Defendants.

Calendar Date: May 22, 2013

Hinman, Howard & Kattell, LLP, Binghamton (Paul T. Sheppard of counsel), for appellants.

Levene, Gouldin & Thompson, LLP, Vestal (David M. Gouldin of counsel), for respondent.

Before: Peters, P.J., Rose, Stein and Garry, JJ.


Rose, J.

Appeal from that part of an order of the Supreme Court (Mulvey, J.), entered January 31, 2012 in Broome County, which denied defendants' cross motion to, among other things, dismiss the complaint.

Plaintiff was a director, officer and shareholder of defendant Upstate Management Associates, Inc. when she loaned it $50, 000 in 2001, taking back two promissory notes payable on demand. Upstate, which did business as "The Bay Ridge Group, " sold and administered employee benefit plans, provided personal investment and financial planning services, and administered a multiple employer trust known as the "BRG Trust, " which offered employee benefit plans at reduced rates. Plaintiff sold her shares of stock back to Upstate in 2002 and resigned as director and officer pursuant to written stock redemption and consulting agreements. These agreements provided for monthly payments to plaintiff over a period of 10 years totaling approximately $1 million. The redemption agreement also included a general release of all of plaintiff's claims against Upstate as well as a provision for arbitration of disputes concerning the agreement.

At the time plaintiff left Upstate, the corporation was facing potential uninsured liability as a result of two federal court actions that had been brought against it. These lawsuits were precipitated by an error allegedly committed by 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 Advisory Services, Inc. (hereinafter BRGAS). Following a series of transactions, Sedor became the sole shareholder of Upstate, BRG and BRGAS, and each of the new corporations utilized the Bay Ridge Group name under which Upstate did business, adopted Upstate's logo and operated out of its offices. In 2007, Sedor sold BRG and BRGAS to defendant National Financial Partners Corp. (hereinafter NFP) and, with two other employees of Upstate as minority shareholders, he formed defendant The Bay Ridge Group Management Company, Inc. (hereinafter BRGM), which then signed a management agreement with NFP to manage the business of BRG and BRGAS. As one of the terms of the sale of BRG and BRGAS to NFP, Sedor agreed that Upstate would no longer transact any business and that he would dissolve it following the resolution of the two pending 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 outstanding obligations 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 under the terms of the agreements and the demand notes. She then called the demand notes. In further correspondence with plaintiff, Sedor indicated that Upstate was attempting to pursue financing to resolve her claims. In May 2009, however, Upstate ceased making the monthly payments owed to plaintiff pursuant to the redemption and consulting agreements and, in September 2009, counsel for Upstate notified plaintiff that the general release clause in the redemption agreement had discharged any claims based on the demand 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 of contract, failure to pay the demand notes and reformation of the release clause in the redemption agreement based upon mutual mistake. In addition, plaintiff asserted a theory of de facto merger as a basis for liability of BRG, BRGAS and BRGM as successors to Upstate. She also sought to impose liability on Sedor, NFP and NFP Securities for disregarding the corporate form of their ownership of Upstate and/or its alleged successor corporations. After joinder of issue, plaintiff moved for an order compelling defendants to respond to her discovery demands. Defendants then cross-moved to dismiss the complaint based on the release of the demand notes, failure to state a cause of action against Sedor, BRG, BRGAS, BRGM, NFP and NFP Securities, and to dismiss the reformation cause of action based on the statute of limitations. Defendants also sought to compel arbitration and to stay the action pending arbitration.

Supreme Court denied defendants' cross motion, concluding that the complaint adequately stated a cause of action for reformation and that the allegations sufficiently supported the de facto merger and piercing of the corporate veil theories of liability. The court also concluded that the record was insufficient to determine whether the statute of limitations defense to the reformation claim was applicable, but denied discovery and granted that part of the cross motion seeking to compel arbitration and to stay the action pending its completion. Defendants appeal.

The parties now agree that, prior to compelling or staying arbitration, Supreme Court must determine certain threshold issues, including the question of whether each of the parties made a valid agreement to arbitrate (see CPLR 7503 [a]; Matter of Smith Barney, Harris Upham & Co. v Luckie, 85 N.Y.2d 193, 201-202 [1995], cert denied 516 U.S. 811 [1995]; Matter of County of Rockland [Primiano Constr. Co.], 51 N.Y.2d 1, 6-7 [1980]). Because Sedor, BRG, BRGAS, BRGM, NFP and NFP Securities are nonsignatories to the agreement, plaintiff's theories of de facto merger and piercing the corporate veil must first be resolved in order to determine whether these defendants can be compelled to arbitrate as the alter egos of Upstate (see TNS Holdings v MKI Sec. Corp., 92 N.Y.2d 335, 339 [1998]; Matter of Pile Found. Constr. Co. [Howell Co.], 159 A.D.2d 352, 353 [1990]; Matter of Sbarro Holding [Shiaw Tien Yuan], 91 A.D.2d 613, 614 [1982]).

Plaintiff's de facto merger theory is based on her claim that Sedor improperly transferred Upstate's business and assets to BRG, BRGAS and BRGM (hereinafter collectively referred to as the Bay Ridge Group) such that the corporations should be considered to have effectively merged, making the Bay Ridge Group responsible for Upstate's obligations (see State Farm Fire & Cas. Co. v Main Bros. Oil Co., 101 A.D.3d 1575, 1578 [2012]; Holme v Global Mins. & Metals Corp., 90 A.D.3d 423, 424 [2011]; Simpson v Ithaca Gun Co. LLC, 50 A.D.3d 1475, 1476 [2008], lv denied 11 N.Y.3d 709 [2008]). Factors to be considered in determining whether a de facto merger has occurred include whether there was any continuity of ownership, management, personnel, physical location, assets or general business operations (see State Farm Fire & Cas. Co. v Main Bros. Oil Co., 101 A.D.3d at 1578). As for the theory of piercing the corporate veil in order to circumvent the limitations on the liability of the owner of a corporation, it will be applicable only if the owner completely dominated the corporation with respect to the transaction attacked and used that domination to commit a wrong against plaintiff, resulting in her injury (see Matter of Morris v New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141 [1993]; State of New York v Robin Operating Corp., 3 A.D.3d 769, 771 [2004]; Austin Powder Co. v McCullough, 216 A.D.2d 825, 826 [1995]).

In support of these two theories, plaintiff alleges that Sedor diverted the lucrative business of Upstate to his newly formed companies. Plaintiff relies on evidence reflecting Sedor's sole ownership of BRG and BRGAS, his control of BRGM and the apparent continuity of the Bay Ridge Group name, physical address, key personnel, signs, logos, website and other marketing materials between Upstate and the Bay Ridge Group. Plaintiff submitted exhibits reflecting the similar marketing materials used by Upstate and the Bay Ridge Group, and she identified clients of Upstate that now allegedly do business with the Bay Ridge Group. She also alleges that, since the 2007 sale of BRG and BRGAS to NFP, BRGM has conducted Upstate's former business, and Sedor, as the sole trustee of the BRG Trust, has moved its business from Upstate to the Bay Ridge Group. Plaintiff points to the drastic decrease in Upstate's income as compared to the significant increase in the value of the Bay Ridge Group over a short period of time, as reflected in the sale price of BRG and BRGAS to NFP in 2007, and she alleges that Sedor has ...

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