New York Law Review

Tag: Stock Sale

  • 5303 Realty Corp. v. O & Y Equity Corp., 64 N.Y.2d 313 (1984): Lis Pendens Inapplicable to Stock Sale for Realty Ownership

    64 N.Y.2d 313 (1984)

    A notice of pendency (lis pendens) is not properly filed in an action seeking specific performance of a contract for the sale of stock representing beneficial ownership of real estate; the action must directly affect the title, possession, use, or enjoyment of the real property itself.

    Summary

    5303 Realty Corp. sought to purchase a building. Instead of a direct transfer, the transaction was structured as a stock sale of the entities owning the building, allegedly to avoid taxes. When the deal fell apart, 5303 Realty sued for specific performance and filed a notice of pendency (lis pendens) against the property. The New York Court of Appeals held that the lis pendens was improper because the action was fundamentally about the sale of stock, not a direct claim to the real property itself. The court emphasized the need for strict interpretation of lis pendens statutes due to their potential impact on property alienability.

    Facts

    Plaintiff 5303 Realty Corp. sought to purchase an office building. The building was owned by 41 Fifth Ave. Associates, a limited partnership. The general partner, 41 Fifth Ave. Realty Corp., was wholly owned by O & Y Equity Corp. An agreement was reached where O & Y Equity would sell its shares in Realty Corporation and cause the limited partners to convey their interests, structured this way to avoid real property transfer taxes. The contract linked the stock sale to the property, providing for title warranties, insurance, and representations about the building’s status. After disputes arose, the closing failed, and 5303 Realty sued for specific performance, seeking an order compelling defendants to comply with the contract and deliver title. It simultaneously filed a notice of pendency against the property.

    Procedural History

    The defendants moved to cancel the notice of pendency. The Supreme Court denied the motion, finding the original complaint sufficient to sustain the notice. The Appellate Division affirmed. The New York Court of Appeals reversed the lower courts’ decisions, holding that the notice of pendency should be canceled.

    Issue(s)

    Whether an action to enforce a contract for the sale of ownership interests in a realty-owning entity (structured as a stock sale) may be accompanied by a notice of pendency pursuant to CPLR 6501.

    Holding

    No, because the action, in essence, concerns the sale of stock and does not directly affect the title to, or the possession, use or enjoyment of, the real property itself, as required by CPLR 6501.

    Court’s Reasoning

    The Court of Appeals emphasized that a notice of pendency is a powerful tool that clouds title and restricts alienability, requiring strict compliance with statutory requirements and a narrow interpretation of CPLR 6501. The court traced the history of lis pendens from common law to the present statute, noting its potential harsh impact on innocent purchasers. It stated that courts must review the pleadings to determine if the action falls within the scope of CPLR 6501, focusing on whether the relief requested directly affects title to, or possession, use, or enjoyment of, real property. The court distinguished between actions that directly affect real property and those that merely refer to it. It found that the present action was essentially a suit to enforce a contract to sell stock, even though the corporation’s primary asset was real estate. Quoting Brock v. Poor, 216 N.Y. 387, 401, the court reiterated the principle that “the corporation in respect of corporate property and rights is entirely distinct from the stockholders…even complete ownership of capital stock does not operate to transfer the title to corporate property.” The court rejected the argument that the court should elevate substance over form, stating that permitting a notice of pendency in such cases would create uncertainty and be difficult to apply in diverse corporate structures. The court noted alternative remedies such as attachment or injunction are available to protect the plaintiff’s interests without improperly hindering the alienability of real property. The dissent argued that the economic reality of the transaction was a transfer of real property and that the notice of pendency should be allowed. The dissent also expressed concern that the majority’s decision could create uncertainty regarding the applicability of title insurance, recording acts, and the Statute of Frauds to similar transactions.

  • Kaminsky v. Kahn, 23 N.Y.2d 516 (1969): Availability of Accounting in Contract Disputes

    Kaminsky v. Kahn, 23 N.Y.2d 516 (1969)

    An accounting is not warranted in a contract dispute where the relationship between the parties is solely that of seller and buyer, and no fiduciary duty exists, even if profits and dividends are to be shared as part of the consideration.

    Summary

    Kaminsky and Kahn were parties to a contract involving the sale of stock. A dispute arose, and Kaminsky sought an accounting from Kahn. The Court of Appeals held that an accounting was not warranted because the relationship between Kaminsky and Kahn was solely contractual, lacking the fiduciary duty necessary to justify equitable relief. While the contract provided for profit and dividend sharing, the court construed these provisions as relating to the final consideration Kahn would pay, rather than establishing a joint venture or fiduciary relationship. The court reversed the lower court’s order and remanded the case to allow for a jury trial on the legal issues.

    Facts

    Kaminsky, Kahn, Cowen, and Golding jointly purchased shares of Spear & Company. Kahn and Kaminsky agreed to indemnify Golding for a portion of his investment. Cowen transferred his interest to Kaminsky. Kahn then transferred his interest to Kaminsky, with Kaminsky agreeing to indemnify Kahn against certain obligations, including the amount owed to Southern Bedding Accessories, Inc. Kahn later purchased the controlling shares of Spear stock from Kaminsky via a contract. The agreement stipulated Kahn would satisfy the Southern Bedding judgment and release Kaminsky from obligations. Kaminsky was granted a first option to purchase the shares if Kahn decided to sell, and was entitled to one-third of the net proceeds after Kahn recouped expenses, and one-third of the dividends. Kahn later merged Spear with Acme-Hamilton Manufacturing Corp. A dispute arose regarding the sale of shares, leading Kaminsky to seek an accounting.

    Procedural History

    The initial complaint was dismissed by Special Term, a decision affirmed by the Appellate Division and Court of Appeals. Kaminsky then amended his complaint, which survived a motion to dismiss, with the Appellate Division affirming. After a non-jury trial, the Supreme Court ruled in favor of Kaminsky and directed an accounting. This interlocutory judgment was affirmed (with modifications) by the Appellate Division. The Appellate Division then modified the judgment, reducing the award, leading to cross-appeals to the Court of Appeals.

    Issue(s)

    Whether an accounting is warranted in a contract dispute where the relationship between the parties is solely that of seller and buyer, and no fiduciary duty exists, despite provisions for sharing profits and dividends.

    Holding

    No, because the transaction was a contract of sale, not a joint venture, and the agreement to share profits and dividends related only to the final consideration Kahn would pay, not to creating a fiduciary duty.

    Court’s Reasoning

    The Court of Appeals found that the Appellate Division erred in maintaining the amended complaint. The key determination was that the relationship between the parties was purely contractual and did not establish a fiduciary duty. The court emphasized that the provision for sharing profits and dividends was part of the final consideration Kahn agreed to pay, not an indication of a joint venture or a fiduciary relationship. The court stated, “The transaction here involved was exclusively a contract of sale between the parties… The provision providing that the parties share any profits and split any dividends is to be construed, it seems clear, as relating solely to the final consideration that Kahn would pay, not as criteria for establishing a joint venture or a fiduciary relationship. Under such circumstances an accounting is not available.” The court recognized that under CPLR 103(a) the distinctions between law and equity have been abolished, and instead of dismissing the complaint, it allowed the plaintiff to pursue legal relief in the form of a breach of contract claim. Because the defendant has a right to a jury trial in legal actions under CPLR 4103, the case was remanded to allow the defendant the opportunity to demand a trial by jury. The court also determined that Kahn was only liable to the extent that he disposed of Spear Equity shares without giving Kaminsky a right of first refusal. The Court also ruled that the damages should reflect the actual sales price of the unregistered shares since there was nothing in the contract that said they should be registered first.