Cuomo v Daniels

[*1] Cuomo v Daniels 2009 NY Slip Op 52304(U) [25 Misc 3d 1226(A)] Decided on October 28, 2009 Supreme Court, Sullivan County Ledina, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 28, 2009
Supreme Court, Sullivan County

Andrew M. Cuomo, Attorney General of the State of New York, on behalf of the People of the State of New York, Petitioner,

against

Dominic J. Daniels, Gillian M. Daniels and the New Breed Foundation, Respondents, The First National Bank of Jeffersonville, Necessary party.



3794-08



Andrew M. Cuomo

Attorney General of the State of New York

By: G. Nicholas Garin, Assistant Attorney General

235 Main Street

Poughkeepsie, NY 12601

Eric Jay Groper, Esq.

Attorney for Respondents

P.O. Box 980

Monticello, NY 12701

Kenneth C. Klein, Esq.

Attorney for First National Bank of JeffersonvilleP.O. Box 600

Jeffersonville, NY 12748

Burton Ledina, J.

The petition herein alleges that Respondent New Breed Foundation (hereinafter "Foundation") is a Type-B not-for-profit corporation incorporated in New York, with its principal place of business located at 443 Broadway, Monticello, New York. A certified copy of the Foundation's Certificate of Incorporation, which was filed with the Secretary of State on January 14, 2000, is annexed to the petition as Exhibit "1". The principal corporate objectives as set forth in the Certificate were to establish an art festival, to promote the film industry in Sullivan County, and to establish a year-round residential community to nurture motion picture arts. The petition alleges that respondent Dominic J. Daniels became the chairman of the board and the chief executive officer of the Foundation, and that he continues to hold these offices.

The petition further alleges that in or about February 2000, the Foundation purchased real property from the County of Sullivan for $5,000.00. The property is more particularly described as being a three-story building located at 443 Broadway in the Village of Monticello, designated on the Village Tax Map as Section 115, Block 6, lot 6, Class 483. The property became the sole or principal asset of the Foundation.

The Foundation received grants from local governments totaling from between $13,500.00 to $19,750.00 (Daniels Affidavit, Exhibit "C", Garin Affidavit, Exhibit "4") with which, at the direction of Mr. Daniels, it repaired the building's facade and made other improvements. The building was subsequently renovated for residential use, and from about September 2003 through late winter of 2007 respondents Dominic J. Daniels and Gillian M. Daniels took up residence therein, allegedly without any approval from the Foundation. They never compensated the Foundation for such use and occupancy, and never accounted for monies used for the renovation.

The petition further alleges that Dominic J. Daniels did not account to the Board of Directors of the Foundation for Foundation expenses, did not file reports with state or federal agencies, and generally acted in an ultra vires manner, with the result that several other members of the Board of Directors of the Foundation resigned (Petition, Exhibit "7"). The Attorney General' Office contacted Daniels about registering with its Office. Daniels responded, by letter dated July 31, 2008, that the Foundation never engaged in any charitable activities or solicitation in furtherance of its purposes, and that the Foundation had been dissolved (Petition, Exhibit "13"). No such dissolution was ever effected.

On or about November 23, 2005, respondent Dominic J. Daniels had caused the property to be transferred from the Foundation to himself and his wife, respondent Gillian M. Daniels, without consideration (Petition, Exhibit "8"). The conveyance was not approved by the Board of Directors. No court approval for the conveyance, as required by Sections 510 and 511 Not-For-Profit Corporation Law ("N-PCL"), was obtained, nor was the Attorney General placed on notice of the transaction. The Daniels then took out a line of credit in their names with the First National Bank of Jeffersonville (Bank) for $36,000.00, giving a mortgage on the property as security (Petition, Exhibit 10). They received the funds, and claim to have used them for repairs on the building. The Daniels have now put the property up for sale, with an asking price of $550,000.00.

Petitioner brought this proceeding against the original respondents pursuant to New York N-PCL Sections 112, 510(a)(3), 706(d), 717, 719, 720(a)(2) and (3), and 1102, and [*2]New York Estate Powers and Trusts Law Section 8-1.4, seeking the following relief:

a) voiding the transfer of the property allegedly the principal asset of respondent Foundation.

b) declaring the Foundation to be the rightful owner of the property;

c) removing Dominic J. Daniels from the board of directors of the Foundation and any office he holds therein;

d) permanently enjoining all respondents from transferring, encumbering, or otherwise disposing of the property without the prior approval of this Court;

e) for an accounting from respondent Dominic J. Daniels of all monies received and spent by the Foundation, identifying all assets of the Foundation, including the aforementioned property, and including any rents for use and occupancy thereof paid to the Foundation by Mr. Daniels.

f) dissolving the Foundation, annulling its Certificate of Incorporation, and terminating its corporate existence; and thereafter distributing its assets to a suitable charity or charities as determined by the Court

g) retaining jurisdiction in this Court for all purposes, including distribution of assets not identified herein;

h) preliminarily and permanently enjoining the individual respondents from selling, conveying, encumbering, or otherwise disposing of the property.

i) awarding petitioner statutory costs of $2,000.00, pursuant to CPLR 8303(a)(6), against respondent Dominic J. Daniels;

j) such other relief as may be just and proper.

The order to show cause initiating the proceeding, dated September 24, 2008, contained a temporary restraining order enjoining the respondents from attempting to further sell, convey, encumber or otherwise dispose of the property. The People also filed a notice of pendency covering the premises on September 23, 2008. By order dated June 3, 2009, the Court directed that the mortgagee Bank be made a party to the action. Accordingly, the petitioner served a supplemental notice of petition and petition including the Bank as a party.

Turning first to the People's petition against the Daniels and the Foundation, for the reasons that follow, the People are entitled to the relief sought. The respondents did not serve or file an answer as provided for in CPLR 402, denying or admitting the allegations of the petition. Instead, they served an affidavit of Dominic Daniels and the affirmation of their attorney, Eric Groper. The People served a reply to these papers to which Daniels submitted a sur-reply affidavit. The Court will consider the responses to be an answer.

Allegations which are not contravened are deemed admitted. Kuehne & Nagel, Inc. v. Baiden, 36 NY2d 539, 544. Applied to the People's allegations here, the facts, as recited at the beginning of this decision, have been established. Mr. Daniels and his attorney do not deny the allegations of the petition with respect to the basic facts of the establishment of the corporation, the acquisition, occupation and transfer of the property without approval of the corporation or the courts as required by N-PCL §§510, 511, or notice to the Attorney General as required in the latter statute, and the subsequent mortgaging of the property. Indeed, in his sur-reply affidavit (¶ Sixteenth), Mr. [*3]Daniels specifically "agrees" with statements in Assistant Attorney General Garin's affirmation in support of the petition except for those in paragraph 6 thereof.[FN1] He further admits there (¶ Twenty-Sixth), that the conveyance from the Foundation was made without court approval or notice to the Attorney General, excusing the failure to follow requirements of the N-PCL due to ignorance rather than any malicious intent; and admits (¶ Fifteenth) that he and his wife resided in the building, but paid the Foundation no rent for this occupancy.Eric Groper, the respondents' attorney, has submitted an affirmation in opposition to the petition. This is based on his conversations with Mr. Daniels and his analysis of Daniels' affidavit. To that extent his observations are not based on his personal knowledge, they are not admissible evidence in this proceeding. To the extent that they represent admissions of Daniels' or derive from an examination of the evidence they will be considered. The Court notes that Groper states that the transfer of the property was certainly made without approval of the Court or the Attorney General (¶Seventh).

The Daniels argue that they improved the property at their own expense, and request that the Court approve the conveyance from the Foundation to them nunc pro tunc, or that they be credited with the improvements that they made in the property.

It is well settled that conveyance of all or substantially all of the property of a not-for-profit corporation without approval of the corporate directors or the court, and without notice to the Attorney General is void ab initio. Rose Ocko Foundation, Inc. v. Lebovits, 259 AD2d 685 (affirming the lower Court's holding the conveyance by the corporation without approvals to be null and void). See also discussion in Nuevo El Barrio Rehabilitation De Vivienda Y Economia, Inc. v. Moreight Realty Corp., 2007 WL 3165068 (NY Sup.). (Note that the N-PCL does not contain a provision similar to Religious Corporations Law §12(9), providing for subsequent court approval of a conveyance made without such approval.)

The conveyance by the Foundation to the Daniels is thus void. The questions presented then become whether nunc pro tunc approval of that transaction is available, and, if not, whether the Daniels' investment in the property gives rise to an equitable interest therein. Under basic common law, a person improves another's real or personal property at his own risk, and is not entitled to compensation for his efforts. In Village of St. Johnsville v. Smith, 184 NY 341, 347-48, the Court, quoting Mills, Law of Eminent Domain, set out the doctrine: " [a] trespasser is not entitled to any benefit for improvements made on the land during the time of his occupation. . . .except where Legislatures have granted relief to those who have made improvements on land in good [*4]faith, believing they had good title.' "

In an analogous situation, RPAPL §601, dealing with the measure of damages in actions for recovery of possession of real property sets forth the rights of those who have made improvements to property without having title thereto. It provides that the owner seeking possession of real property may recover damages including the rents and profits or value of the use and occupation thereof. The damages shall not include the value of any improvements made by the occupier. It further provides: "Where permanent improvements have been made in good faith by the defendant . . . while holding, under color of title, adversely to the plaintiff, the value thereof must be allowed to the defendant in reduction of the damages of the plaintiff, but not beyond the amount of those damages."

The catch, of course, is the requirement that the improvements be made in good faith, which means that the actions were taken with honesty of purpose, without intention to defraud. In the instant case, Mr. Daniels avers that he had no intent to defraud the Foundation, and the property was transferred without court permission due to ignorance of the law. He contends that from the inception of the Foundation he invested his own money and labor into the refurbishing of the property. However, these contributions of time and expense, made while the Foundation had title to the property, were made without formal approval of the Foundation. They were not made in the form of loans or repayable advances to the Foundation. The Court finds that they constituted contributions to the Foundation, and the Daniels are not now entitled to reimbursement therefor. Further, public funds were invested in the improvement of the building, and Daniels is not entitled to effectively convert this investment into his own property.

Daniels alleges that there came a time when the roof was damaged, and the Bank would not advance enough money for the repairs, because of the uncreditworthiness of the Foundation. He avers, as set forth in the purported minutes of a meeting of the Foundation Board of Directors dated November 8, 2005, that at the suggestion of Kathy Beseth of the Bank, since the Foundation was virtually inactive, that to secure the loan the property be placed in Daniels' name (Daniels' Affidavit, Exhibit "H"). The minutes state that in view of his contributions to the Foundation the property would be transferred to Daniels without consideration; that Daniels would assume the Foundation's debts, and bring about its dissolution. These minutes are not signed or verified, and do not list the directors present or their votes, but they do indicate that the Board was aware that the conveyance of the major corporate asset was connected with a dissolution of the corporation.

The Daniels request that the Court grant permission for the Foundation to file a petition approving the conveyance of the property to them nunc pro tunc on the basis of their having contributed significant labor and monies in the upkeep and restoration of the property, including having taken a loan for the purpose of repairs secured by a mortgage on the property. Interestingly, the People first suggested that the Foundation should proceed in this fashion, i.e, in a letter to the Daniels, dated August 27, 2008, Mr. Garin stated that the defect in the conveyance could be cured by the Foundation formally petitioning the Court for nunc pro tunc permission for the sale of the property, including giving the required notice to the Attorney General (Petition, Exhibit "13").

The transfer of the sole asset of the Foundation to its founder, the chairman of its Board of Directors, without consideration, without the required court [*5]approval or notice to the Attorney General, and apparently without a formal approval of the Board, is not excusable on the ground of ignorance of the law, and the Daniels are not entitled to a nunc pro tunc approval of the conveyance. It appears clear that the Attorney General would not approve of such transfer. Nor would the Court approve such a conveyance under these admitted circumstances, where public funds were invested in the property, the Daniels occupied the premises rent free for a significant time prior to the conveyance,[FN2] and had put the property on the market in their own names seeking a substantial windfall profit (the first asking price for the property bought by the Foundation for $5,000.00 having been $600,000.00).

While the Daniels contributed time and money (including taking the mortgage in their own names) for the repair and refurbishing of the property, it was the Foundation property that was being refurbished prior to the conveyance, and the roof repairs, financed by the mortgage, were made on property not properly conveyed.

The Court notes that there were originally eight directors of the Foundation (Affidavit of Dominic J. Daniels, Exhibits "1" and "2"). As set forth in Exhibit "7" annexed to the petition, Foundation directors Bernard Roth, Ann Prusinski, Neil Gilberg, and Linda Gilberg resigned on November 15, 2002, claiming that they had not been supplied with financial reports and other information requested. In recent affidavits, Exhibits "F" and "G" annexed to the Affirmation of Dominic J. Daniels, Jon Sweet and Alexandra Levinsohn aver that they are no longer directors of the Foundation, although no other evidence has been submitted of their resignations. Gary Sommers states (Petition Exhibit "2") that he remains a director. If the foregoing is accurate, only he and Daniels remain as directors of the Foundation.

The Court also notes that an amendment to the Foundation's Certificate of Incorporation, dated July 26, 2001, adds an Article to comply with IRS provisions. It provides in part that upon dissolution of the corporation its assets shall be distributed for one or more exempt purposes, or to organizations operated for such purposes as a Court shall determine.

With respect to the proceeding by the petitioner against respondents Dominic J. Daniels, Gillian M. Daniels and the New Breed Foundation, it is

ORDERED, that there being no issues of fact requiring a trial, the Attorney General's petition is granted to the following extent:

1. The deed conveying the premises located at 443 Broadway in the Village of Monticello, designated on the Village Tax Map as Section 115, Block 6, lot 6, Class 483, from The New Breed Foundation (Foundation) to Dominick J. Daniels and Gillian M. Daniels, dated November 23, 2005, and recorded in the Sullivan County Clerk's Office on that date in Liber [*6]3068, Page 548, is hereby declared to be null and void ab initio, and the Sullivan County Clerk is directed to mark his records accordingly.

2. The title to the property shall remain in The New Breed Foundation.3. All the respondents are hereby permanently enjoined from transferring, encumbering or otherwise disposing of the property in question or any other Foundation real or personal property without prior approval of this Court.

4. Dominic J. Daniels is hereby directed to file with the Court and the Attorney General within thirty (30) days of the date of this order an accounting of the monies received by the Foundation and the Foundation's expenditures, setting forth the Foundation's assets, including the property in question, its liabilities, and details of the use and occupation of the property. The Attorney General shall have the right to bring further proceedings, including an application for payment of rent for the occupation of the property, based upon said accounting and this decision. In defense of any proceeding for rent, the Daniels may raise the defense of a set off for having made permanent improvements to the property pursuant to RPAPL §601.

5. Good cause having been established by the Attorney General pursuant to N-PCL §§ 112(a)(4) and 706(d), Dominic J. Daniels is hereby suspended from all activities as a director of the Foundation and any office he holds therein, except for the filing of the accounting mentioned above. Upon such filing and/or any further proceedings in connection therewith the Court will make a determination of the Attorney General's application to dismiss Mr. Daniels as a Foundation director.

6. That pursuant to N-PCL §§112(a)(1) and 1101, the Foundation, with no activity, and possibly only several remaining directors, will be dissolved by further order of this Court. The order for such dissolution shall be made following the submission of the accounting and/or hearing necessary to establish the method of such dissolution.

7. Pursuant to CPLR 8303(a)(6), the petitioner is hereby awarded costs of $1,000.00 against respondent Dominic J. Daniels.

With respect to the effect of the proceeding on the First National Bank of Jeffersonville, the Bank first argues that the proceeding does not directly seek any relief against it. It further contends that even if the Court finds that the deed into the Daniels is void ab initio, and by reason thereof the mortgage is invalid, the proceeds of the loan were used by the Daniels to improve the property. Accordingly, the value of the property has been benefitted at the expense of the Bank, and the owner thereof will have thus been unjustly enriched. It argues that, therefore, either the mortgage should remain in force against the property, or the Bank should have an equitable lien thereon.

"Only a person having valid legal title to the property designated as security can mortgage it." Bergman on New York Mortgage Foreclosures §1.20, and cases cited in footnote 14 thereof; Crespino v. Greenpoint Mortgage Corp, 304 AD2d 608; GMAC Mortgage Corporation v. Chan, 56 AD3d 521; Miceli v. Riley, 79 AD2d 165, 170.)The mortgage here is thus invalid, as being incidental to the finding that the deed was void, and no further proceeding is required to establish that point. Nor does the Bank have any equitable claim on the property by reason of the fact that the money that it advanced may have gone into property improvements. That is, if a bank makes an unsecured loan, the proceeds of which are used to improve property, the [*7]bank has no resultant claim to a lien on that property.

The Bank's argument that it made a search of the title to the property is unavailing. It did not make a complete search, but, rather obtained what is designated as a "Last Owner Certificate," (Sur-Reply Affirmation of Kenneth Klein, Exhibit "A"). This showed only the deed into the Daniels, and did not establish the legitimacy of their title. Indeed, the Foundation was listed as the grantor, so that the Bank should have been on notice to check to see whether that conveyance had been properly made. The Bank's remedy is against the individuals who took out the loan. It is accordingly

ORDERED, that the mortgage made by Dominic J. Daniels and Gillian M. Daniels to The First National Bank of Jeffersonville, dated February 3, 2006, and recorded in the Office of the Sullivan County Clerk on February 17, 2006, in Liber 3114, page 400 is hereby declared to be null and void, and the Sullivan County Clerk is directed to mark his records accordingly.

The foregoing constitutes the decision and order of this Court.

Dated: Monticello, New York

October 28, 2009

E N T E R:

s/ Burton LedinaBURTON LEDINA, A.J.S.C. Footnotes

Footnote 1: In paragraph Sixteenth, Mr. Daniels states that he disagrees with Mr. Garin's statements that public grants or private contributions were used for anything other than restoration of the facade of the building, maintaining that funds for rehabilitation of the building came from the loan secured by the mortgage obtained by him and his wife not from those other sources. However, this does not refer to the allegations of paragraph 6 of Garin's affirmation, which deal with the incorporation of the Foundation. They more likely apply to paragraph 9 of the affirmation.

Footnote 2: The petitioner argues that the rent on the premises should be set at some $1,900.00 per month (Reply Affirmation, ¶6), which at five and one-half year's occupancy (66 months) could be as much as $125,000.00, and which amount would more than cancel any equitable claim of the Daniels for reimbursement for moneys invested in improvements. Mr. Daniels disagrees that the property could have been rented for that amount (Sur-reply affidavit ¶15), but the rent owed is, in any case, significant.