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Home > 2016 > January > 14 > New York’s Corporate Standing or the Lack of Legal Capacity to Sue in Transportation Sector
Published January 14, 2016 by Yuri Starikov

New York’s Corporate Standing or the Lack of Legal Capacity to Sue in Transportation Sector

Maher_TerminalIt is not uncommon for corporate players to form multiple legal entities.  Multiple legal formations can be useful in limitation of business liability or can be used as tool for improvement of business efficiencies.  When business problems arise to a level that requires attention of the court, understanding of legal entity structure is important.  In a breach of contract or tort action, filing commencement papers with wrong entity as a plaintiff can result in the dismissal pursuant to CPLR 3211(a)(3).

Rule 3211. Motion to dismiss.

(a) Motion to dismiss cause of action. A party may move for judgment dismissing one or more causes of action asserted against him on the ground that: * * *

3. the party asserting the cause of action has not legal capacity to sue; or * * *

The basis for CPLR 3211(a)(3) are rooted in CPLR 1004.  To have standing in the breach of contract claim, the party must be a part of contractual agreement. Generally, if the party is listed on the contractual document, that party has a right to maintain an action in its own name. CPLR 1004 also permits “real parties in interest” to have standing to sue or be sued. CPLR 1004 states:

Except where otherwise prescribed by order of the court, an executor, administrator, guardian of the property of an infant, committee of the property of a judicially declared incompetent, conservator of the property of a conservatee, trustee of an express trust, insured person who has executed to his insurer either a loan or subrogation receipt, trust agreement, or other similar agreement, or person with whom or in whose name a contract has been made for the benefit of another, may sue or be sued without joining with him the person for or against whose interest the action is brought. (emphasis added).

The “real party in interest” doctrine generally arises in the principal-agent arrangement, where an agent is a “person with whom or in whose name a contract has been made” is acting “for the benefit of another” party, a principal.  In order to be recognized as a “real party in interest,” an agent must be possessing such a general agency as authorizing that agent to act in all matters affecting the contract for and on behalf of the principal, and even to bring and maintain an action in agents own name for the benefit of the principal. Watts v. Phillips-Jones Corp., 211 A.D. 523, 529, 207 N.Y.S. 493, 498 (2d Dept. 1925), aff’d, 242 N.Y. 557, 152 N.E. 425 (1926) (emphasis supplied).

The rule can apply to a multiple entity structure, where related companies – A Corp. and B Ltd. – are agents of one another.  Yet, some sectors, such as transportation sector, can place limits on A Corp. to fully act as an agent of B Ltd.  One reason stems from regulatory requirements.  For example, A Corp. may not conduct “customs business” (e.g. conducting customs clearance of goods, subject to “corporate compliance activity” exception) for B Ltd. without having a license from U.S. Customs and Border Protection.  Another reason can appear in the contractual language.  For example, freight forwarders participating in Uniform Intermodal Interchange & Facilities Access Agreement must have a Standard Carriers Alpha Code (SCAC) issued National Motor Freight Traffic Association.  If A Corp. has a SCAC code and B Ltd. does not, then B Ltd. is likely to have difficult time maintaining standing to sue for A Corp.’s breach of contract.  The contract must reflect the agent-principal arrangement where principal is the beneficiary in order for the agent to be able to commence the action in its own name. Airlines Reporting Corp. v. S & N Travel, Inc., 238 A.D.2d 292, 293, 656 N.Y.S.2d 299, 300 (2d Dept. 1997) (As between a principal and agent, an agent may bring the action: ‘(1) when the contract was made in the agent’s name * * * or (3) when the defendant has acknowledged that the plaintiff possesses a general agency authorizing him to act in all matters’).  Accordingly, if the agreement itself limits agent-principal arrangement (e.g. possession of SCAC code), then CPLR 1004 can bar standing of B Ltd., notwithstanding its close relationship to A Corp.

An entity’s “affiliate” status is not in itself sufficient in order for that “affiliate” to maintain an action in its own name. CPLR 1004 requires that affiliate acts as an agent pursuant to the validly executed contractual instrument for the benefit of the principal. Further, CPLR 1004 requires that the agency relationship to be so broad and general, such that the principal authorizes agent to act in all matters.  Airlines Reporting Corp., 238 A.D.2d at 293, Watts, 211 A.D. at 529.  Counsel representing corporate clients that operates multiple legal entity structure, must make inquiry into the structure prior to commencing the lawsuit.

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