STUTO v. KERBER III IV HD HD (2009)

Defendants William J. McNeary III, William J. McNeary IV and Jamie Jayko move pursuant to CPLR 3211(a)(7) seeking dismissal of the sole cause of action asserted against them:  a claim brought pursuant to Business Corporation Law (“BCL”) § 630, which imposes personal liability upon the ten largest shareholders of a closely held corporation for unpaid wages due to employees.   Plaintiff opposes the motion.

Wurld Media, Inc. (“Wurld Media” or “the Company”) is a defunct Delaware corporation that maintained a place of business in the County of Saratoga.   Plaintiff was both an employee and a shareholder in the Company.   In or about February 2009, plaintiff obtained a judgment against the Company for unpaid wages in the amount of $99,918.38.   In her complaint, plaintiff alleges a cause of action under BCL § 630, seeking to hold the Company's ten largest shareholders, including the three movants, personally liable for the unpaid wages that are the subject of such judgment.

In moving to dismiss this cause of action, movants argue that the foregoing statute is limited to closely held corporations formed under the laws of New York State.   Plaintiff disagrees, contending that the statute applies to foreign corporations such as Wurld Media.

BCL § 630 recites, in pertinent part:

(a) The ten largest shareholders, as determined by the fair value of their beneficial interest as of the beginning of the period during which the unpaid services referred to in this section are performed, of every corporation (other than an investment company registered as such under an act of congress entitled “Investment Company Act of 1940”), no shares of which are listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national or an affiliated securities association, shall jointly and severally be personally liable for all debts, wages or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation․

 Thus, BCL § 630 operates, in effect, to “pierce the corporate veil” and impose personal liability against corporate shareholders for the debts of their corporation (see East Hampton Union Free School Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 884 N.Y.S.2d 94, 98 [2nd Dept. 2009] ).   The statute therefore constitutes an exception to the general rule “that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability” (Bartle v. Home Owners Coop., 309 N.Y. 103, 106, 127 N.E.2d 832 [1955] ).   It has been held that a statute such as BCL § 630, “being penal in its nature, should receive a strict construction by the courts, and, if there is any reasonable doubt as to its application ․ the defendant is entitled to its benefit” (Bristor v. Smith, 158 N.Y. 157, 158-159, 53 N.E. 42 [1899] ).

In Armstrong v. Dyer, 268 N.Y. 671, 198 N.E. 551 (1935), the Court of Appeals interpreted Stock Corporation Law § 71, a precursor to BCL § 630, as applying only to New York corporations.   Subsequent judicial decisions have continued to describe BCL § 630 as imposing personal liability upon the ten largest shareholders of closely held New York corporations (see e.g. Sasso v. Vachris, 66 N.Y.2d 28, 31, 494 N.Y.S.2d 856, 484 N.E.2d 1359 [1985];  Romney v. Cai, 1996 WL 331184 [E.D.N.Y. 1996] ).   More recently, in La Vigne v. Feinbloom, 255 A.D.2d 896, 680 N.Y.S.2d 348 [4th Dept. 1998], the Fourth Department implicitly acknowledged the distinction between domestic and foreign corporations under BCL § 630 in declining to dismiss a cause of action against shareholders of a New York corporation for unpaid wages where such claim had accrued prior to the company becoming a Delaware corporation through merger.

Nonetheless, plaintiff contends that Armstrong can offer no guidance as the “former Stock Corporation Law ․ unlike the BCL did not apply to foreign corporations.”   Plaintiff further notes that the La Vigne Court relied upon Armstrong and, in any event, was not called to pass on a claim brought pursuant to BCL § 630 against a foreign corporation.

 The starting point in any question of statutory construction is, of course, the plain language of the Legislature's enactment.   The text of BCL § 630 imposes personal liability on the ten largest shareholders of “every corporation”.   From this, plaintiff argues that the statute applied to both domestic and foreign corporations, relying on BCL § 103(a), which states that “[the BCL] applies to every domestic corporation and to every foreign corporation which is authorized or does business in this state.”

 While plaintiff correctly observes that the BCL applies to foreign corporations doing business in the State, this argument fails to take into account the effect of BCL § 102(a)(4), which defines the term “[c]orporation” as “a corporation for profit formed under [the BCL]․” This is to be distinguished from a “foreign corporation”, which is defined as “a corporation for profit formed under laws other than the statutes of this state ․” (id. [7] ).  Thus, while the BCL applies to both domestic and foreign corporations, the use of the term “corporation” in BCL § 630 plainly limits its ambit to domestic corporations.

Further support for this conclusion is apparent from the text and structure of Article 13 of the BCL (“Article 13”).   In addition to establishing the process by which a foreign corporation may become authorized to do business within the State, Article 13 establishes certain specific powers, duties and liabilities of foreign corporations.  Section 1319 of Article 13 then goes on to provide as follows:

§ 1319.   Applicability of other provisions.

(a) In addition to articles 1 (Short title;  definitions;  application;  certificates;  miscellaneous) and 3 (Corporate name and service of process) and the other sections of article 13, the following provisions, to the extent provided therein, shall apply to a foreign corporation doing business in this state, its directors, officers and shareholders:

(1) Section 623 (Procedure to enforce shareholder's right to receive payment for shares).

(2) Section 626 (Shareholders' derivative action brought in the right of the corporation to procure a judgment in its favor).

(3) Section 627 (Security for expenses in shareholders' derivative action brought in the right of the corporation to procure a judgment in its favor).

(4) Sections 721 (Exclusivity of statutory provisions for indemnification of directors and officers) through 727 (Insurance for indemnification of directors and officers), inclusive.

(5) Section 808 (Reorganization under act of congress).

(6) Section 907 (Merger or consolidation of domestic and foreign corporations).

Thus, Section 1319 expressly enumerates the provisions of the BCL, other than Article 13, that are applicable to foreign corporations.   To similar effect is Section 1318, which makes certain disclosure provisions of Article 5 of the BCL applicable to foreign corporations.   Under plaintiff's reading of the BCL, these sections would be mere surplusage.   And noticeably absent from these statutes is any reference to BCL § 630.   Indeed, Section 1319 makes other provisions of Article 6 applicable to foreign corporations, but not BCL § 630.   All of this strongly confirms that BCL § 630, read in light of the definition of “corporation” set forth in BCL § 102(a)(4), applies only to domestic corporations.

And contrary to plaintiff's contention, nothing in BCL § 1320 alters this conclusion.   That statute exempts nationally listed foreign corporations and foreign corporations that do only a small percentage of their business within the State from certain provisions of Article 13 that would otherwise be applicable to foreign corporations.   Since Section 1320 merely limits the operation of other provisions of Article 13, there is no reason why BCL § 630, a statute applicable only to domestic corporations, would be included therein.

Thus, the text and structure of the BCL confirm the continuing vitality of the Court of Appeals' decision almost seventy-five (75) years ago in Armstrong.   As the Court is satisfied that BCL § 630 does not apply to foreign corporations, defendants' motion to dismiss the claims brought pursuant to that statute must be granted.

Accordingly,¹ it is

ORDERED that the motion to dismiss is granted;  and it is further

ORDERED that the complaint is hereby dismissed against defendants William J. McNeary III, William J. McNeary IV and Jamie Jayko;  and it is further

ORDERED that movants' counsel shall serve a copy of this Decision & Order with notice of entry upon all parties to this action with ten (10) days;  and it is further

ORDERED that all remaining parties in this action are directed to appear for a conference at the Chambers of the undersigned (150 State Street, Albany, New York) on November 9, 2009 at 11:00 a.m.

This constitutes the Decision and Order of the Court.   The original Decision and Order is being returned to counsel for the movants.   All other papers are being transmitted to the County Clerk.   The signing of this Decision and Order shall not constitute entry or filing under CPLR Rule 2220, and counsel is not relieved from the applicable provisions of that Rule.

FOOTNOTES

1.   The Court has examined plaintiff's remaining arguments and finds them unavailing or unnecessary to the disposition of the instant application.

RICHARD M. PLATKIN, J.