New York Law Review

Tag: Massachusetts Law

  • Rosner v. United States Trustee, 41 N.Y.2d 965 (1977): Choice of Law in Trust Agreements

    41 N.Y.2d 965 (1977)

    When a trust agreement specifies that the laws of a particular state govern the agreement, that choice of law will be upheld unless there are overriding policy considerations or a lack of significant contacts with the chosen state.

    Summary

    This case concerns a dispute over a trust agreement where the plaintiff argued that New York law should apply due to the trust’s significant contacts with New York. The Court of Appeals affirmed the dismissal of the complaint, holding that Massachusetts law, as explicitly chosen in the trust agreement, should govern. The court reasoned that the plaintiff failed to demonstrate any overriding policy considerations under New York law or a lack of contacts with Massachusetts that would justify disregarding the parties’ express agreement. The court also noted the plaintiff’s failure to establish personal jurisdiction over one of the defendants.

    Facts

    In 1968, a trust acquired its original core of shareholders through a reorganization agreement with a New York-based corporation. The trust continued to have a significant number of shareholders and conducted a considerable amount of business in New York. The trust agreement contained an express provision stating that the laws of Massachusetts, where the trust was created, should govern the agreement.

    Procedural History

    The plaintiff brought suit, presumably in New York, arguing that New York law should apply to the trust agreement. The Appellate Division held that the complaint should be dismissed because the plaintiff failed to give the shareholders notice of the suit as required by Massachusetts law. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether the express choice of law provision in a trust agreement, specifying that Massachusetts law governs, should be disregarded in favor of New York law due to the trust’s significant contacts with New York.

    Holding

    No, because the plaintiff failed to demonstrate any overriding policy considerations under New York law or a lack of contacts with Massachusetts that would justify disregarding the parties’ express agreement.

    Court’s Reasoning

    The Court of Appeals relied on the principle of honoring parties’ express agreements in contract law, particularly choice-of-law provisions. The court distinguished the case from situations where the chosen state lacked any significant connection to the agreement. The court emphasized that the trust was created in Massachusetts, and the plaintiff did not argue that Massachusetts lacked contacts with the trust. While acknowledging the trust’s contacts with New York, the court found that these contacts did not create any overriding policy considerations that would necessitate disregarding the parties’ chosen law. The court stated, “In our view the factors alleged do not invoke any overriding policy consideration under the laws of New York and do not provide a compelling reason or justification for disregarding the express agreement of the parties that their rights under the trust should be governed by the laws of Massachusetts, the State where the trust was founded.” The court also briefly noted the plaintiff’s failure to establish personal jurisdiction over the defendant Prickett, further supporting the dismissal of the complaint.

  • Kaufman v. Mony Mortgage Investors, 392 N.Y.S.2d 475 (1977): Demand Requirement for Derivative Actions Against REIT Trustees

    Kaufman v. Mony Mortgage Investors, 392 N.Y.S.2d 475 (1977)

    Holders of beneficial shares in a real estate investment trust (REIT) must first make a demand on the trustees before commencing a derivative action against them for alleged mismanagement or breach of fiduciary duty.

    Summary

    This case addresses whether shareholders of a Massachusetts-based real estate investment trust (REIT) must demand action from the trustees before bringing a derivative suit alleging mismanagement and excessive fees. The New York Court of Appeals held that Massachusetts law applies, requiring such a demand unless it would be futile. The court found the plaintiff’s allegations of trustee subservience to the management company insufficient to excuse the demand requirement, emphasizing the need for particularized factual allegations of wrongdoing or control. This decision underscores the importance of respecting the internal governance structures of business entities and the need for shareholders to exhaust internal remedies before resorting to litigation.

    Facts

    Mony Mortgage Investors was organized as a business trust under Massachusetts law, operating as a real estate investment trust (REIT). Shares of beneficial interest were sold to the public, resulting in approximately 12,300 shareholders. The declaration of trust stipulated between 3 and 15 trustees, with a majority being unaffiliated with the REIT’s manager. The Mutual Life Insurance Company of New York (MONY) was contracted as the manager. The plaintiff, a shareholder, alleged that the trustees, influenced by MONY, were paying excessive management fees to MONY and making unsuitable investment decisions that benefitted MONY to the detriment of the REIT.

    Procedural History

    The plaintiff brought a derivative action against the trustees, MONY, and the REIT in New York Supreme Court. The defendants moved to dismiss for failure to demand action from the trustees or other shareholders before filing suit. The Supreme Court initially denied the motion, allowing discovery. The Appellate Division reversed, granting the motion to dismiss. The New York Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    1. Whether the law of Massachusetts or New York governs the conditions precedent to a shareholder derivative action against the trustees of a Massachusetts business trust operating as a REIT?

    2. Whether, under Massachusetts law, a shareholder of a business trust must demand action from the trustees before commencing a derivative action alleging breach of fiduciary duty?

    3. Whether the plaintiff’s allegations were sufficient to excuse the demand requirement under Massachusetts law based on futility?

    Holding

    1. Yes, the law of Massachusetts governs, because the REIT was organized under Massachusetts law, the declaration of trust specifies Massachusetts law governs the rights of all parties, and there was insufficient evidence to establish the trust’s presence in New York.

    2. Yes, under Massachusetts law, a shareholder of a business trust must generally demand action from the trustees before commencing a derivative action, because Massachusetts courts would likely apply the same rule to business trusts as they do to business corporations in derivative suits.

    3. No, the plaintiff’s allegations were insufficient to excuse the demand requirement, because the allegations lacked particularized factual support demonstrating that a majority of the trustees were active wrongdoers, under the control of wrongdoers, or knowingly colluded in the alleged wrongful transactions.

    Court’s Reasoning

    The court reasoned that Massachusetts law applied due to the REIT’s organization in Massachusetts and the declaration of trust’s choice-of-law provision. The court emphasized the absence of significant contacts with New York to justify applying New York law, stating, “[T]his record is barren of proof of a significant association or cluster of significant contacts on the part of the investment trust with the State of New York.”

    The court analogized the shareholders of a Massachusetts business trust to the shareholders of a Massachusetts business corporation regarding derivative actions. Citing Datz v. Keller and Bartlett v. New York, New Haven & Hartford R. R. Co., the court noted that Massachusetts requires shareholders of a corporation to make a demand on the directors prior to bringing a derivative action. The court found no reason to differentiate between business trusts and business corporations in this context.

    The court addressed the circumstances under which demand would be excused, stating that excuse in Massachusetts requires “particularized factual allegations that a majority of the directors of the corporation (and correspondingly a majority of the trustees of a business trust) were active wrongdoers or under the control of such wrongdoers…or that the other directors or trustees knowingly, willfully and fraudulently colluded with the faithless directors or shared in personal gain as the result of the alleged wrongful transactions.” The court found the plaintiff’s allegations of trustee subservience to MONY to be conclusory and lacking in specific factual support. The court cited Bartlett v. New York, New Haven & Hartford R. R. Co. in support of the presumption that directors act in good faith.

    The court implicitly rejected the plaintiff’s request for further discovery, finding no sufficient predicate to disturb the Appellate Division’s exercise of discretion.