Bona Fide Purchaser Avoids Rescission of Minority Shareholder’s Unauthorized Sale of Corporation’s Realty
June 04, 2018
The Lowbet Realty saga, featuring the dissolution court’s rarely used authority to rescind an unauthorized sale of the corporation’s realty under Business Corporation Law § 1114, has finally ended after six years with a decision by the Appellate Division, Second Department, affirming the lower court’s order letting stand the realty’s sale to a bona fide purchaser for value. Matter of Hu (Lowbet Realty Corp.), 2018 NY Slip Op 03529 [1st Dept May 16, 2018].
Title companies across the city undoubtedly breathed a sigh of relief.
Lowbet Realty involves one of the most brazen, contemptuous heists of corporate assets amidst a dissolution proceeding you’ll ever encounter. The shorter version — click here and here for more detailed accounts in my two prior posts about the case — is the story of an estranged husband and wife who co-owned a single-asset realty holding company known as Lowbet Realty Corp. formed in 1980 and managed solely by the 25% shareholder-wife as the titular president after the 75% shareholder-husband in 1995 returned to live in China permanently.
In 2006, the husband removed his wife as president and named himself and his son as sole officers, even while his wife continued for years afterward to control the property consisting of a 19-unit residential apartment building. In 2011, after the corporation was administratively dissolved for failure to file franchise reports, the husband filed a petition for judicial supervision of the corporation’s winding up and liquidation, at which time the court issued an order prohibiting both husband and wife from participating in the management of the realty or removing corporate assets absent court approval.
In April 2012, the husband discovered that, notwithstanding the court’s order, two months earlier the wife conveyed the corporation’s realty by deed to an unrelated buyer (973 Realty) for $1.6 million — and promptly fled the country with all of the sale proceeds, never to return or participate further in the court proceedings.
The deed and transfer tax report both were signed for Lowbet Realty by the wife without identifying her as an officer or otherwise.
In a November 2012 order, the court permitted the husband to amend his petition to name 973 Realty and the building’s managing agent as additional respondents, asserting claims against them under BCL § 1114 to rescind the sale and for damages.
As you would expect, the amended petition triggered cross claims for indemnification and contribution by 973 Realty against the property manager, whose motion to dismiss the cross claims was denied by the court in a February 2014 order. In my post about the ruling, I queried whether the purchaser knew or had reason to know of the wife’s lack of authority to sell the property, and in particular whether the purchaser’s title company uncovered or should have uncovered the court’s restraining order as part of its standard diligence.
Last Month’s Appellate Ruling
In a subsequent, unpublished decision on cross motions for summary judgment, the lower court granted judgment in 973 Realty’s favor dismissing the claims against it by the husband, who appealed the decision to the Appellate Division, Second Department.
His appeal failed. In its decision last month, the panel first found that the deed of conveyance signed by the wife was only voidable, not void from the beginning, since the husband alleged that the wife’s signature and authority to convey were acquired by fraudulent means, but did not allege that the wife’s signature was forged.
Next, after noting that (1) the husband did not record the 2006 change in officers in filings with the Department of State Division of Corporations and (2) the wife was listed as president, chairperson, or CEO of Lowbet with various state and city agencies at the time of the disputed sale, the court held that 973 Realty established that the wife “was cloaked with apparent authority to sign the deed on behalf of Lowbet,” adding:
The petitioner had condoned [the wife’s] unfettered control and operation of the day-to-day business of Lowbet, which gave rise to the appearance that [the wife] possessed authority to enter into a real estate transaction on behalf of Lowbet. Under the circumstances, 44th Street Realty’s reliance upon the appearance of Liu’s authority was reasonable. [Citations omitted.]
Lastly, the court held that 973 Realty also established that it was a bona fide purchaser by demonstrating that “it paid valuable consideration for the property, in good faith and without knowledge of any alleged fraud by [the wife],” and that “it had no knowledge of facts that would lead a reasonably prudent purchaser to inquire about possible fraud.”
Unmentioned in the court’s opinion is whether the parties presented any evidence or argument in the lower court proceedings as to whether 973 Realty’s title company discovered or should have discovered the pending court proceeding. It’s probably safe to presume that the title company had no actual knowledge of the court proceedings or the court’s restraining order which, otherwise, undoubtedly would have brought the sale transaction to a screeching halt.
The question whether the purchaser’s title company ought to have discovered the court proceedings and the restraining order perhaps was indirectly answered in the court’s decision, where it noted that the husband “did not file a notice of pendency or the temporary restraining order with the Office of the City Register at that time”.
And that, in the end, may be the best advice for any lawyers whose clients find themselves in a position similar to the husband in Lowbet Realty: make sure the world is on notice of any legal restraint on any sale or mortgaging of the realty by filing with the appropriate municipal agency.