Published on:

Court Discusses Power of Attorney Document

by

The issue on this appeal is (1) whether a power of attorney which conferred limited realty management powers upon JSF was one relating to an interest in a decedent’s estate and was therefore ineffective under EPTL 13-2.3 for failure to record it in the Surrogate’s Court, and (2) whether plaintiff LC Corporation, a corporation dissolved by proclamation of the Secretary of State for nonpayment of franchise taxes in 1978, had capacity to bring this action to enforce obligations arising out of prohibited new business conducted five years after dissolution. We conclude that the power of attorney was not ineffective for failure to record in the Surrogate’s Court, and that the plaintiff lacked the capacity to institute this action.

In this foreclosure action, instituted in September 1983 by service by publication upon the named defendants MM (deceased) and GG, the appellant JSF sought to vacate a default judgment of foreclosure and sale dated February 24, 1984, and an order of possession dated September 18, 1984, and to dismiss the action. His motion was denied without reaching the merits upon the ground that he lacked standing as a tenant to challenge the foreclosure. Further, a power of attorney, authorizing him to act in a limited capacity for a foreign citizen who alleged ownership of the subject premises through intestate succession, was declared void for failure to record it in the Surrogate’s Court.

Appellant JSF was a long-time friend of the deceased defendant MM, and has resided at 1110 Lincoln Place in Brooklyn, the subject premises, since 1978. He is the attorney in fact for FA, a citizen and resident of Haiti, who asserts an ownership interest in the subject premises by operation of law through intestate succession.

The named defendant MM is an American citizen who died in Haiti in 1979. She purchased the premises at 1110 Lincoln Place in 1960 and remained the sole owner of record until 1983, notwithstanding an intervening marriage to AA in 1971 and her death in 1979.

FA alleges that he is the brother of AA, the husband of the deceased, MM. He is JSF’s principal and claims ownership of the subject premises as of 1980, as the sole heir of his brother AA who allegedly died intestate at that time.

The defendant GG is the current owner of record who took title to the premises in January 1983 from one AM. AM was not a record owner, and, according to JSF, despite his having the same surname as MM, is not related to her.

The plaintiff LC Corporation (hereinafter LC Corp.) is a dissolved corporation which took a mortgage in the amount of $31,697.07 from GG one month after the recorded conveyance from AM, notwithstanding that there was a break in the chain of title. GG immediately defaulted on the mortgage payments, and LC Corp. claims that his whereabouts are presently unknown.

Notwithstanding the facts that MM had died more than four years prior to the commencement of this action and that no representative was appointed, LC Corp. apparently named her as a party defendant based upon the contemporaneous (November 1982 and February 1983) assignment of two recorded mortgages in the amounts of $8,660 and $1,000, respectively, executed by her approximately 22 years earlier, and allegedly remaining unsatisfied.

In sum, LC Corp.’s default judgment is based upon nonpayment of one substantial mortgage taken from a mortgagor who did not have clear record title, who immediately defaulted and disappeared, and whose ownership interest is actively challenged by JSF’s principal. It is further based upon two record mortgages executed by the only uncontested owner of record almost 22 years earlier and assigned by the mortgagees to LC Corp. five years after MM’s death. It is asserted by JSF, and he documents his claim, that he secured a satisfaction of the $8,660 mortgage in August 1980. His possession of the premises, at the very least, raises a question as to constructive notice of the satisfaction and therefore LC Corp.’s status as a bona fide assignee.

That leaves the $1,000 mortgage executed by MM in 1960 as the only, thus far, uncontroverted foundation for LC Corp.’s foreclosure action. Curiously, by its terms, final payment on this latter obligation was due in December 1963. Thus, it might be subject to discharge of record as of December 1983 as an ancient mortgage, i.e., one which has not been discharged of record within 20 years after the debt was due, and is presumed to have been paid, in the absence of proof to the contrary. Moreover, since the record is silent as to when any payment was last made on this obligation, the six-year Statute of Limitations applicable to foreclosure actions may have run as against the estate of MM and her successors in title. It is clear that any extension agreement executed by GG would bind only GG in reviving the Statute of Limitations, and, thus, only insofar as GG may have rights in the property does the action appear to have any foundation. And, as is disturbingly apparent, for all this record discloses, both GG and LC Corp. could be interlopers whose alleged title and mortgage interest have no substance.

By order entered January 14, 1985, Special Term held that JSF was a mere tenant in the subject premises with no right to raise defenses to the underlying foreclosure action based upon his failure to record his power of attorney with the Surrogate’s Court pursuant to EPTL 13-2.3. We reverse.

We hold that the power of attorney held by JSF was not governed by EPTL 13-2.3, and therefore was not ineffective for failure to record in the Surrogate’s Court.

The statute further provides that the Surrogate may determine the validity of any such instrument and require proof of the amount of compensation to be charged by an attorney in fact, may determine the reasonableness of such compensation or fix such compensation, and may exact a bond or undertaking to assure the payment of funds to the principa.

On its face, EPTL 13-2.3 appears to apply only to proceedings in the Surrogate’s Court and the distribution of estates through powers of attorney, as it confers upon the Surrogate the power and jurisdiction to closely supervise and regulate the conduct of attorneys in fact who represent principals with an interest in an estate. It also appears to operate as a notice statute with regard to conveyances or assignments of an interest in an estate. Since we are not concerned with a conveyance or assignment in this case, the notice purpose of the statute is not implicated here. However, the recording requirement for powers of attorney appears to have no application except in proceedings in the Surrogate’s Court, as that court has proper jurisdiction over the distribution of estates.

A review of the legislative history and source of EPTL 13-2.3 and the purposes sought to be achieved confirms these conclusions. Personal Property Law § 32-a repealed in 1966 and reenacted as part of the 1966 revision of the Estates Powers & Trusts Law (EPTL 14-1.1[a] ), is the source of EPTL 13-2.3. The revisor’s notes indicate that it was reenacted without substantive change. The original bill was introduced in 1935 to address notorious conditions then existing. A measure was necessary to curb abuses by persons securing powers of attorney from foreign heirs of decedents for exhorbitant fees and without rendering proper service

Thus, the legislative history and decisional law support a conclusion that EPTL 13-2.3 was intended to protect distributees in the Surrogate’s Court from practices which unduly diminished their undistributed interests in estates. Accordingly, the recording requirement would serve no purpose in any but the Surrogate’s Court, and the phrase every power of attorney relating to an interest in a decedent’s estate in EPTL 13-2.3(a) cannot be read so broadly that it encompasses the power of attorney at bar, because in this case there never was any Surrogate’s Court proceeding and the property passed by operation of law to the distributee or distributees subject only to estate transfer tax and such other encumbrances as may lawfully be asserted.

In analyzing the nature and scope of a power of attorney, the courts should look to the nature of the powers conferred and the purposes of the agency relationship. In our opinion, the power of attorney at bar was limited to the performance of realty management functions which would reasonably include the payment of mortgage debts and, necessarily, defense against unjust or satisfied claims against the property on behalf of an absentee owner who could not do so for himself. The power does not relate to an interest in a decedent’s estate within the meaning of EPTL 13-2.3, as the exercise of the power could not take, alter or alienate such an interest. Therefore, JSF did have standing to challenge the judgment of foreclosure. Furthermore, the record reveals that he proffered a reasonable excuse for delay and a prima facie showing of a meritorious defense to foreclosure. Moreover, by JSF’s possession of the premises LC Corp. had constructive notice of any right he could establish to the premises.

Having determined that JSF’s power of attorney was not void for failure to record it in the Surrogate’s Court, we now turn to his unaddressed claim at Special Term that LC Corp. lacked capacity to sue.

Upon dissolution, a corporation’s legal existence terminates. This rule is qualified by statute to provide that a corporation retains a limited de jure existence for the purpose of winding up. LC Corp. acknowledges that it was dissolved in September 1978 pursuant to Tax Law § 203-a by a proclamation of the Secretary of State for nonpayment of franchise taxes. Its complaint alleged that in 1983 it first acquired rights to the mortgages in suit, four years and five months after its statutory dissolution. At Special Term, LC Corp. maintained that it acquired those mortgages in the course of winding up its corporate affairs. It has abandoned that argument on appeal. Accordingly, we consider whether a corporation, dissolved pursuant to Tax Law § 203-a, has capacity to bring suit on a claim arising out of the conduct of prohibited new business.

Statutory dissolution by proclamation of the Secretary of State pursuant to Tax Law § 203-a is intended to encourage voluntary payment of franchise taxes. After dissolution, a delinquent corporation retains a limited de jure existence solely for the purpose of winding up its affairs, and retains capacity to bring suit for that purpose. All new business is prohibited.

Accordingly, a corporation is encouraged to pay franchise taxes, as delinquency for a period of two years in either filing a franchise tax report or paying the taxes due will result in dissolution and forfeiture of the corporate charter. The statutory scheme is further designed to encourage voluntary compliance by providing that a delinquent corporation may be reinstated nunc pro tunc upon the filing of a certificate of the tax commission stating that all franchise taxes, penalties and interest charges have been paid. Payment of such preproclamation indebtedness by a corporation which has failed to cease its business activities may not be avoided by an attempt to reincorporate. It is apparent from the statutory scheme that the Legislature did not intend a delinquent corporation which has not sought reinstatement to enjoy the privileges of corporate existence, which include the right to acquire a mortgage interest and the right to bring suit in the courts of this State. LC Corp. advances several theories to avoid that result and dismissal of its case, including the doctrine of de facto corporations, estoppel theory, and the unavailability under Business Corporation Law § 203 of the ultra vires defense. We find none of LC Corp.’s arguments persuasive.

First, a delinquent corporation may not avail itself of the de facto doctrine to preclude third parties from challenging its capacity to sue. De facto recognition requires both a good faith exercise of corporate powers and colorable compliance with the enabling statute. A delinquent corporation lacks both prerequisites. There is neither a good faith exercise of corporate duties, nor compliance with statutes requiring the payment of franchise taxes for the privilege of conducting business in the corporate form (Tax Law § 209). Moreover, a corporation’s de jure existence is removed for the very purpose of securing compliance with the tax statute. Recognition of de facto status would directly subvert the effectiveness of the sanctions for franchise tax delinquency, removing all incentive for a dissolved corporation to seek reinstatement.

We agree. We further acknowledge that there is some question regarding the First Department’s position on this issue, and to the extent that de facto status may be recognized in that department as enabling delinquent corporations to sue or contract, we decline to follow.

We further find that LC Corp. may not assert any estoppel theory against JSF. Although one dealing with a delinquent corporation should be permitted to avoid wholly executory contracts that relate to prohibited new business activity, other considerations arise where the contract is fully or partially executed. The statute was not designed to permit parties to avoid a contract after receiving the benefits of performance. Such avoidance might result in financial detriment to the delinquent corporation, thus, impairing its ability to pay both its taxes and creditors. In such case, one who has received the benefits of performance should be estopped from instituting suit to avoid the contract. However, if the delinquent corporation is permitted to institute suit to enforce such contracts before its taxes are paid, the statute’s effectiveness will be impaired. Although LC Corp. never dealt with JSF and thus could not claim that he was estopped from raising its incapacity to sue, a different matter is presented concerning another named defendant–GG. Having dealt with GG, and GG allegedly having received full performance from LC Corp., LC Corp. might argue that this action is still viable as against GG, as he would be estopped from raising LC Corp.’s incapacity to sue. As we have noted, a third party should not be able to avoid its obligations after receiving performance from a delinquent corporation. On the other hand, if a delinquent corporation, as a plaintiff, could assert an estoppel theory against such a defaulting party, the purposes of the tax statute would be subverted as no incentive for payment of taxes and reinstatement would remain. Our preferred resolution adequately addresses both concerns, as it requires the delinquent corporation to seek reinstatement before it can institute suit to prevent those with whom it has contracted from avoiding their obligations.

The greatest potential for prejudice to the delinquent corporation, as a result of its incapacity to sue, lies in the possibility that the applicable Statute of Limitations may pass in the period between the dismissal of its initial action for lack of capacity and the renewal of that action after payment of its unpaid taxes. Yet since the dismissal is not due to a voluntary discontinuance, a failure to prosecute or a final judgment on the merits, the six-month grace period of CPLR 205 is applicab to this situation and mitigates this potential for prejudice. Consequently, allowing a litigant to assert this affirmative defense against a delinquent corporation will advance the purposes of Tax Law § 203-a with minimal prejudice to the corporate plaintiff.

We note that should LC Corp. pay its back taxes as it offered to do in its papers at Special Term, and, thus, be reinstated to de jure status nunc pro tunc, its contracts entered into during the period of delinquency would be retroactively validated. By statute, the corporate powers, rights, duties and obligations are reinstated nunc pro tunc, as if such proclamation of dissolution had not been made or published. Moreover, once the delinquent corporation has paid its taxes and penalties, it serves no revenue purpose to permit avoidance of corporate contracts executed during delinquency. As noted, the fact that LC Corp. may be reinstated to viable corporate status, and thereby secure retroactive validation of its contracts, will not resolve the issues in this foreclosure action, but merely initiate consideration of the multifaceted problems that appear from the record to constitute a deficiency in its interest in the property.

We now turn our attention to the third theory offered to sustain LC Corp.’s capacity. One commentator has relied upon Business Corporation Law § 203 to advance the view that a claim arising out of the conduct of prohibited new business by a delinquent corporation should be enforceable, as the delinquent corporation enjoys a de facto status and, under Business Corporation Law § 203, the defense of ultra vires conduct is available only in specifically enumerated circumstances to shareholders and the Attorney General. First, the defense of ultra vires conduct goes to the validity of an action taken by a de jure corporation which is beyond the powers granted in its corporate charter. As such it is a substantive determination, unlike a determination of incapacity to sue which is procedural only. Moreover, a delinquent corporation has forfeited its charter, and is prohibited from conducting any new business

Finding each of LC Corp.’s arguments unpersuasive, we hold that it lacks capacity to use the courts of this State to enforce obligations arising out of the conduct of prohibited new business during the period of delinquency until it has secured retroactive de jure status by payment of delinquent franchise taxes.

In recognition that LC Corp. may wish to avail itself of retroactive reinstatement, and in order to conserve judicial resources by eliminating the need to reinstitute this suit, should LC Corp. wish to do so, the foreclosure action should be dismissed unless within 45 days after service upon it of the order to be made herein, with notice of entry, LC Corp. has paid its preproclamation franchise taxes, penalties and interest, and has secured reinstatement. Should this period of time prove insufficient to complete the necessary procedures with the tax commission and Secretary of State, LC Corp. may seek an extension from this court upon proof of payment.

Accordingly the order appealed from should be reversed, those branches of the appellant’s motion which sought to vacate the default judgment of foreclosure and sale dated February 24, 1984, and the order of possession dated September 18, 1984, should be granted, the branch of the appellant’s motion which sought to dismiss the action should be deemed one under CPLR 3211(a)(3) to dismiss upon the ground of the plaintiff’s lack of capacity to sue, and should be granted unless within 45 days after service upon it of a copy of the order to be made hereon, with notice of entry, the plaintiff shall have secured reinstatement of its corporate status. Order of the Supreme Court, Kings County, entered January 14, 1985, reversed, on the law, with costs, those branches of the appellant’s motion which sought to vacate a default judgment of foreclosure and sale of the same court, dated February 24, 1984, and an order of possession of the same court, dated September 18, 1984, granted, judgment and order vacated, and that branch of the appellant’s motion which was to dismiss the action as against him granted unless within 45 days after service upon it of a copy of the order to be made hereon, with notice of entry, the plaintiff shall have secured reinstatement of its corporate status.

If you’re in a similar situation similar to the above, contact Stephen Bilkis and Associates for legal help. They will provide you with legal guidance and a free consultation. They have offices to serve you throughout the New York area, including locations in Manhattan, the Bronx, Brooklyn, Queens, Staten Island, Nassau County, Suffolk County and Westchester County.

by
Posted in:
Published on:
Updated:

Comments are closed.

Contact Information