The Real Deal New York

This appeals court ruling could have a big impact on sellers who break contract. Or not.

Court ruled that it would not void contract despite absence of “corporate formalities”
By Eddie Small | January 11, 2019 07:00AM

(Credit: iStock)

A recent appeals court ruling on whether a company can void property contracts that were not formally approved by the seller’s corporate leaders has left real estate attorneys divided over how far-reaching its impact will be.

The case concerned the sale of 28-34 St. Mark’s Place from the closely held corporation St. Marks Assets to investor Elliot Sohayegh. Sohayegh went under contract in 2016 to buy the properties for $44 million, but St. Marks then wanted to declare the contracts void because they were not formally approved by a shareholder vote.

A panel of justices on the Appellate Division, First Department ruled against St. Marks Assets, noting that they “regularly dispensed with corporate formalities” like shareholder meetings.

“If corporate formalities are customarily dispensed with and the affairs of a close corporation are carried on through informal conferences, decisions reached by all the directors and shareholders at informal conferences [are binding],” the justices wrote.

Josh Price, the attorney for Sohayegh, said the family behind St. Marks was only trying to renege on the sale because one member had personal issues with the buyer, and he was happy with the victory.

“This in some ways is a situation where the truth sets you free,” he said. “The seller was trying to do something dishonest, and telling the truth won out.”

He was uncertain about the broader impact of the case, noting that the situation St. Marks and Sohayegh found themselves in was pretty rare. However, he said he could see it being applied in the more common occurrence of family members in New York inheriting a building and getting in a dispute over its sale.

Adam Leitman Bailey framed the ruling as having a larger impact for small businesses in general, saying it would give them more freedom to work without having corporate formalities get in the way.

“It allows small businesses more room to do business without being limited by technicalities,” he said, adding that “What’s not answered is how far can small businesses go. How far can they go in not following strict rules?”

The main statute at issue in the case was Business Corporation Law §909(a), which governs how a corporation can sell all or most of its assets if doing so is not part of its regular course of business. The court effectively ruled that a company may not need to abide by 909 regulations if it was already not abiding by corporate formalities.

Adam Swanson, a partner at McCarter & English, said this could cast doubt on several New York property sales from real estate companies with only one asset.

“When a single-asset real estate holding company sells its property without following sec. 909 formalities, nobody can know for sure if it is valid,” he said. “Naturally, people with ulterior motives may use this uncertainty as leverage to back out of and/or cancel deals.”

Other attorneys maintained that the ruling would not be particularly impactful. Stuart Saft, a partner at Holland & Knight, said the decision did not change the law and would not matter very much to the city’s real estate community.

“It really has nothing to do with real estate,” he said. “It really has to do with the corporate law and whether or not when you have large corporations everything is done according to the business corporation law.”

Anne Marie Bowler, co-founder of the law firm Gabay & Bowler, said the ruling should make people think twice about whether setting up a corporation on paper means they are entitled to the protections that come with it.

“Beware setting up corporations in name only,” she said, “People are setting up corporations and automatically thinking they have the shields of a corporation, and the court is saying, look, for a closely held corporation, we’re going to look deeper into the law.”

The decision could be beneficial for brokers as well, as more deals getting approved means more brokers receiving their commissions. Eric Anton of Marcus & Millichap called it a “common sense ruling” but did not see it impacting more than a few deals a year given the unique circumstances surrounding it.

Robert Khodadadian of Skyline Properties, who brokered the initial deal between St. Marks Assets and Sohayegh, said he was pleased with the ruling as well and thought it should give brokers a little more security when doing their jobs.

“We’re happy,” he said of the decision. “Hopefully everyone is happy, and everything works out the right way.”