Defendants move for summary judgment dismissing the complaint and granting summary judgment on their counterclaim. Plaintiffs cross-move for summary judgment on their action and dismissing the counterclaim.

Plaintiff 83 Northport Corp. ("83 Northport") is a domestic corporation formed in 1990 to own commercial realty located at 83 Main Street, Northport, New York. ("Northport property"). Farrell M. Fleming ("Fleming"), Edward W. Glackin II ("Glackin"), Brian H. Madden ("Madden") and Stephen Asch ("Asch") were principals of 83 Northport with each owning a 25% interest. All of the principals of 83 Northport were directors of the corporation. Fleming was initially the President while Madden was initially the corporate Secretary. At some point, Madden became the President of 83 Northport.

Defendant Ravesh Sarva ("Sarva") is a certified public accountant. Sarva is also engaged in arranging private mortgage financing through his accounting clients.

Sarva arranged for secondary mortgage financing on the Northport property. As a condition to providing the financing, 83 Northport entered into an escrow agreement whereby it assigned to P.S.R.S. Realty Corp. ("PSRS") the leases on the Northport property. PSRS is a real estate management corporation of which Sarva is President.

Pursuant to the terms of the escrow agreement, all rent on the Northport property was to be paid the PSRS. PSRS was to use the rent money and any portion of the second mortgage proceeds not disbursed at closing to pay for asbestos remediation and construction at the premises. The rent money was then to be used to pay the interest on the first and second mortgages, the real estate taxes on the property, to pay for casualty and liability insurance premiums and all other lienable charges against the property. Any funds remaining in the escrow account after the first and second mortgages on the property had been paid in full would be paid over to 83 Northport.

In 1992, Fleming, Glackin, Madden and Asch formed a New Jersey corporation, Kennedy Blvd., Inc. ("Kennedy Blvd."), for the purposes of owning commercial real estate located at 2860-64 Kennedy Boulevard, Jersey City, New Jersey ("Jersey property"). Kennedy Blvd. obtained the financing to purchase the Jersey property through several private mortgages.

One of the mortgages was arranged through Sarva. As a condition to the financing arranged by Sarva, Sarva required that Kennedy Blvd. enter into on an escrow arrangement similar to the one for the Northport property. The escrow agreement for the Jersey property was never reduced to writing. Despite the lack of a writing, the rent on the Jersey property was supposed to be paid to PSRS which was supposed to use this money to pay the monthly mortgage payments to the four mortgagees, the real estate taxes, insurance costs and other lienable expenses on the property.

Although the rent payments on the Jersey property were supposed to be made to PSRS, the rents were generally collected by Madden. Madden did not use the rent collected on the Jersey property to pay the mortgages, taxes and other expenses on the Jersey property. In fact, Madden used the rent money received on the Jersey property to pay personal expenses or to pay expenses on other properties in which Madden had an interest.

The rent paid on the Northport property was sufficient to pay the mortgage and all of the other expenses. Over time, a substantial surplus in the escrow account accrued.

The rents on the Jersey property were also sufficient to pay the mortgages and taxes on [*2]the property. However, because of Madden's misapplication of the rent moneys, Kennedy Blvd. operated at a loss and did not have sufficient funds to pay its real estate taxes and mortgages.

Kennedy Blvd. fell significantly behind in the payment of its taxes and mortgage.

This resulted in the property being foreclosed in 1998. To prevent the property from being sold at foreclosure, Madden filed a Chapter 11 petition for Kennedy Blvd. Madden also entered into a contract to sell the Jersey property. None of the other shareholders were aware of the foreclosure until after a judgment had been entered. None of the other shareholders were aware of the bankruptcy until after the filing. The other shareholders neither consented to the filing of the bankruptcy nor Madden's attempt to sell this property.

Despite nearly a year of negotiations, Kennedy Blvd. was unable to stop the foreclosure sale of Jersey property. At or about that time, Sarva indicated to Fleming, Glackin and Asch that Madden had orally modified the 83 Northport Escrow Agreement. Pursuant to that modification, Madden had authorized PSRS to use the excess funds in the 83 Northport account to pay the expenses of Kennedy Blvd. In addition, Sarva claimed that, at Madden's request and on Madden's authority, Sarva had loaned nearly $200,000 to Kennedy Blvd which was to be repaid with interest at the rate of 14% per annum. If this loan could not be repaid by Kennedy Blvd., then the loan was to be repaid by 83 Northport.

Even after the Jersey property had been sold at foreclosure, PSRS made payments on the subordinate mortgages held on that property by Sarva's accounting clients from the surplus in the 83 Northport account.

In 2000, PSRS and Sarva charged the entire surplus in the 83 Northport escrow account against the deficit in the Kennedy Blvd. account. In addition, PSRS stopped making the payments on 83 Northport's mortgage. This resulted in the Northport Property being foreclosed. To prevent the property from being sold at foreclosure, 83 Northport filed for bankruptcy protection.

The Bankruptcy Court terminated the escrow agreement and directed Sarva to turn over all post bankruptcy rents to the Bankruptcy Trustee. The order of the Bankruptcy Court further directed that these funds be used to pay all pre and post bankruptcy arrears on the first mortgage. Ultimately, the Northport property was sold in the bankruptcy proceedings and all of the mortgages were satisfied.

The Bankruptcy Court entered an order by which Sarva and PSRS withdrew any claims against 83 Northport regarding payments made in connection with the Jersey property and 83 Northport withdrew its claims against PSRS and Sarva. All of these claims were withdrawn without prejudice and are now the subject of this action.

Plaintiff commenced this action seeking to recover the amount that Sarva and PSRS had applied from the 83 Northport escrow account to cover the obligations of Kennedy Blvd.

PSRS counterclaimed seeking to recover the amount that it advanced to Kennedy Blvd. to cover the operating deficit.

Plaintiffs move for summary judgment on the complaint and for an order dismissing the counterclaim. Defendants move for summary judgment on the counterclaim and for an order dismissing the complaint.

A. Summary Judgment - Standard

Summary judgment is a drastic remedy which will be granted only when the movant [*3]establishes that there are no triable issues of fact. Andre v. Pomeroy, 35 NY2d 361 (1974). See, Mosheyev v. Polevsky, 283 AD2d 469 (2nd Dept., 2001); and Aksezeir v. Kramer, 265 AD2d 356 (2nd Dept., 1999).

The party seeking summary judgment must make a prima facie showing of entitlement for judgment as a matter of law. Wengenroth v. Formula Equipment Leasing, Inc., AD3d , 2004 WL 2389833 (2nd Dept., 2004); Alvarez v. Prospect Hosp., 68 NY2d 320 (1968); and Zuckerman v. City of New York 49 NY2d 557 (1980).

Once the party seeking summary judgment has made a prima facie showing of entitlement to judgment as a matter of law, the party opposing the motion must come forward with proof in evidentiary form establishing the existence of triable issues of fact or must demonstrate an acceptable excuse for its failure to do so. Wenegrad v. New York Univ. Med. Ctr., 64 NY2d 851 (1985); and Zuckerman v. City of New York, supra. See, Davenport v. County of Nassau, 279 AD2d 497 (2nd Dept., 2001); and Bras v. Atlas Construction Corp., 166 AD2d 401 (2nd Dept., 1991).

When deciding a motion for summary judgment, the court's function is to determine if triable issues of fact exist. Matter of Suffolk County Dept. of Social Services v. James M., 83 NY2d 178 (1994); and Sillman v. Twentieth Century-Fox Film Corp., 3 NY2d 395 (1957). Summary judgment should be denied if the court has any doubt regarding the existence of triable issues of fact. Freese v. Schwartz, 203 AD2d 513 (2nd Dept., 1994); and Miceli v. Purex Corp., 84 AD2d 562 (2nd Dept., 1984).

When considering a motion for summary judgment, the court must view the evidence in a light most favorable to the non-moving party and must give the non-moving party all of the reasonable inferences which can be drawn from the evidence.

Negri v. Stop & Shop, Inc., 65 NY2d 625 (1985); and Louniakov v. M.R.O.D. Realty Corp., 282 AD2d 657 (2nd Dept., 2001)

B. Plaintiffs' Cross-Motion for Summary Judgment

Plaintiffs' cross-motion is premised PSRS' violation of the provisions of the escrow agreement by using 83 Northport funds to pay obligations of Kennedy Blvd. Defendants assert that this use of 83 Northport funds was authorized by Madden who was an officer and manager of 83 Northport.

An escrowee has a contractual obligation to comply with the terms of the escrow agreement. Takayama v. Schaefer, 240 AD2d 21 (2nd Dept., 1998). Additionally, the escrow agent is a trustee for the benefit of the parties to the escrow agreement or anyone with a beneficial interest in the escrow. Farago v. Burke, 262 NY 229 (1933).

See, Takayama v. Schaefer, supra; and Matter of Akivis; 128 Misc 2d 965 (Sup.Ct., Kings Co., 1985)

An escrow agent has a duty to not deliver the escrow to anyone except upon strict compliance with the terms of the escrow agreement. Farago v. Burke, supra. See, Iannizzi v. Seckin, 5 AD3d 555 (2nd Dept., 2004); and Takayama v. Schaefer, supra; and 55 NY Jur2d Escrows § 22.

Delivering the escrow to anyone except upon strict compliance with the terms of the escrow agreement constitutes a breach of contract, a breach of the escrow agent's fiduciary duty and conversion. See, Levit v. Allstate Ins. Co., 308 AD2d 475 (2nd Dept., 2003); and Miller v. J.A. Keeffe, P.C., 276 AD2d 757 (2nd Dept., 2000); and Takayama v. Schaefer, supra.

The 83 Northport escrow agreement clearly provides that escrow agent may disburse up [*4]to $98,750.00 towards the cost of construction and asbestos remediation at the Northport property. All other funds were to be used to pay interest on the first and second mortgages, real estate taxes, all lienable charges against the property, to pay casualty and liability insurance premiums and to pay any other obligations of 83 Northport. The escrow agent was obligated to pay any balance on hand in the escrow account, upon payment in full of the first and second mortgages, to 83 Northport. The escrow agreement did not permit the use of these funds to pay the obligations of Kennedy Blvd.

83 Northport has established a prima facie violation of the escrow agreement. Therefore, the burden shifts to Defendants to establish the existence of triable issues of fact.

Defendants insist that triable issues of fact exist because Madden, as president and manager of 83 Northport, authorized the use of 83 Northport funds to pay Kennedy Blvd. expenses. Further, Sarva asserts that, even if the 83 Northport escrow funds were misused, he cannot be held personally liable for this loss.

The president of a corporation has the apparent authority to make contracts on behalf of the corporation that are within the usual scope of the corporation's business. Odell v. 704 Broadway Condominium, 284 AD2d 52 (1st Dept., 2001); and Spitzer v. Born, Inc., 194 App.Div. 739 (1st Dept., 1921). Apparent authority exhists even though the president did not have actual authority to perform such acts. Odell v. 704 Broadway Condominium, supra; and Wishnow v. Kingsway Estates, Inc., 26 AD2d 61 (1st Dept., 1966). A contract entered into by the corporate president while acting within the scope of his or her apparent authority is binding upon the corporation unless the other party was aware of or had actual knowledge of the limitation on the

president's authority. Odell v. 704 Broadway Condominium, supra; Traitel Marble Co. v. Brown Brothers, Inc., 159 App.Div. 485 (1st Dept., 1913).

However, the apparent authority of the corporate president does not extend to acts which are beyond statutory limitations on his authority. Bouton v. Rhomas Bros. Sales Corp., 179 AD2d 612 (2nd Dept., 1992); and Vig v. Deka Realty Corp., 143 AD2d 185 (2nd Dept., 1988). A corporate president does not have actual or apparent authority to enter into unusual and extraordinary transactions. Id. The test is whether the president's actions are in the furtherance of the corporation's business. Hastings v. Brooklyn Life Ins. Co., 138 NY 473 (1893); and Odell v. 704 Broadway Condominium, supra. The corporate president's authority extends only to those acts that could be ratified by the directors. Hastings v. Brooklyn Life Ins. Co., supra; Odell v. 704 Broadway Condominium: and Best-Site Associates, Inc. v. Ventrice, 245 App.Div. 758 (2nd Dept., 1935).

A corporation is a separate entity whose existence is dependent upon state law.

See, 14 NY Jur2d Business Relationships §2. 83 Northport and Kenndey Blvd. are separate entities. The fact that the shareholders of each corporation are identical does not make one corporation liable for the obligations of the other. See, Walkovszky v. Carlton, 18 NY2d 414 (1966).

In this case, Sarva and PSRS had actual knowledge of the limitations on Madden's authority as the manager of 83 Northport. When 83 Northport was incorporated, the shareholders entered into a Management Agreement which designated Fleming and Madden as managers of the corporation. The Management Agreement limited the authority of the corporate managers. The limitation on the authority of the managers contained in the 83 Northport [*5]Management Agreement prevented Madden or Fleming from authorizing the use of corporate property or the escrow funds for non-corporate purposes.

Sarva and PSRS were provided with a copy of the 83 Northport Management Agreement. Therefore, they had actual knowledge of the restrictions placed upon Madden's authority as a manager of 83 Northport and cannot rely upon Madden's apparent authority.

Madden, as President of 83 Northport, lacked actual and apparent authority to direct the use of 83 Northport funds to pay Kennedy Blvd. expenses. This is clearly an unusual and extraordinary transaction which is beyond the scope of the usual and customary business of 83 Northport.

Madden, as a corporate officer and director, had a fiduciary duty to 83 Northport and its shareholders. See, Lindner Fund, Inc. v. Waldbaum's, Inc., 82 NY2d 219 (1993); and Busino v. Meachem, 270 AD2d 606 (3rd Dept., 2000). The use of 83 Northport assets to pay the obligations of Kennedy Blvd. constituted a transfer of corporate assets without consideration and was not in furtherance of 83 Northport's corporate business. Such a transfer is either a gift or a waste of corporate assets. See, Aronoff v. Albanese, 85 AD2d 3 (2nd Dept., 1982); and Meredith v. Camp Hill Estates, 77 AD2d 649 (2nd Dept., 1980); and Shapiro v. Rockville Country Club, Inc., 2 Misc 3d 1002(A), (Sup.Ct., Nassau Co., 2004). The direction by Madden to use 83 Northport funds to pay Kennedy Blvd. obligations constitute a breach of Madden's fiduciary duty to 83 Northport. The directors of a corporation cannot ratify an officer's breach of fiduciary duty. Aronoff v. Albanese, supra; and Meredith v. Camp Hill Estates, supra. Thus, PSRS and Sarva cannot rely upon Madden's apparent authority since Madden did not have and could never have apparent authority to breach the fiduciary duty he had to 83 Northport.

Sarva asserts that he cannot be held personally liable for the action of PSRS since he was acting in his capacity as corporate president. However, the misapplication of the escrow funds constitutes a conversion of those funds. Miller v. J.A. Keeffe, P.C., supra. A corporate officer who participates in the commission of a tort may be held personally liable even if the tort was committed in the course of the corporate officer's official duties while acting on behalf of the corporation. American Express Travel Related Services Co., Inc. v. North Atlantic Resources, Inc., 261 AD2d 310 (1st Dept., 1999); and Key Bank of New York v. Grossi, 227 AD2d 841 (3rd Dept.,

1996). Conversion is a tort. Spodek v. Liberty Mutual Insurance Co., 155 AD2d 439 (2nd Dept., 1989). Therefore, Sarva can be held personally liable for the conversion of the funds in the 83 Northport's escrow account.

Plaintiffs have established a prima facie entitlement to judgment as a matter of law on the issue of liability. Defendants have not raised any issues of fact requiring a trial. Therefore, Plaintiffs are entitled to summary judgment on the issue of damages.

Plaintiffs are entitled, as a matter of law, to the entire amount that was in the 83 Northport account that was used to pay Kennedy Blvd. expenses $147,488.66.

Plaintiffs also seek consequential damages for those expenses which Plaintiffs incurred as a result of PSRS not using 83 Northport funds to pay its expenses. This includes $20,557.44 for legal fees and expenses incurred in connection with 83 Northport's Chapter 11 proceeding, $4,079.25 paid as legal fees to Cullen and Dykman in connection with the foreclosure, $5,250.00 paid to the bankruptcy trustee and $1,287.40 paid to Pieper, Hoban & Royce, P.C. for legal services rendered in connection with events arising from Defendants' default on its obligations under the escrow agreement. [*6]

Plaintiffs offer no explanation at law or in fact as to why these are consequential damages for which the escrowee is liable. Thus, a hearing is required to determine to what extent these additional sums are recoverable.

83 Northport is entitled to interest on the money awarded herein from the date that it was improperly applied to the obligations of Kennedy Blvd. The date upon which occurred cannot be determined from the papers submitted herein. Therefore, a hearing is required to determine the date from which interest should be assessed.

The matter is respectfully referred to a special referee to hear and determine Plaintiff's damages beyond $137,566.47 and to determine the date from which interest should be assessed on those damages.

C. Defendants' Motion for Summary Judgment

Sarva asserts that, at Madden's request, PSRS advanced the sums of money to cover the Kennedy Blvd. shortfall. Defendants' assert that Madden authorized this transaction and further indicated that if Kennedy Blvd. did not repay the money that 83 Northport would.

Fleming has no liability on the counterclaim. The counterclaim alleges, "...Madden requested Defendant P.S.R.S. Realty Corp. to use its own funds to cover the deficit of the New Jersey Property upon a promise of repayment from the Long Island Property and Plaintiff 83 Northport Corp." (Answer ¶ 20.) Thus, by its own terms, the counterclaim does not allege a cause of action against Fleming. Further, there is no allegation in the counterclaim or the papers submitted in support of Defendants' motion that Fleming ever agreed to pay or guarantee Kennedy Blvd.'s obligations.

To the extent that the motion papers assert that Fleming has personal liability, such a claim would be barred by the Statute of Frauds. See, General Obligations Law §5-701(2) which provides that a promise to answer for the debt of another must be in writing. See, Bart and Schwartz v. Teller, 228 AD2d 630 (2nd Dept., 1996).

Thus, Defendants' motion for summary judgment should be granted as to Fleming's claim. The parties to the escrow agreement that gives rise to this litigation are 83 Northport and PSRS. Fleming signed the escrow agreement as President of 83 Northport and as a guarantor of 83 Northport's obligations under the escrow agreement.

The escrow agreement provides that upon payment in full of the 83 Northport mortgages that any amount remaining was to be paid over to 83 Northport. The money being recovered is on account of PSRS' breach of the escrow agreement. Therefore, the recovery will be on behalf of 83 Northport; not Fleming.

The counterclaim must also be dismissed against 83 Northport. Madden acted beyond the scope of his actual and apparent authority when he permitted Sarva and RSPS to use the surplus in the 83 Northport escrow to pay Kennedy Blvd. expenses.

A corporation may not gratuitously obligate itself to pay a debt or obligation unrelated to the corporate business. Collision Plan Unlimited, Inc. v. Bankers Trust Co., 63 NY2d 827 (1984); and C.F. Harms Co. v. Leonhard Michel Brewing Co., 228 NY 263 (1920). An agreement to pay or guarantee obligations that are not in the corporation's regular or ordinary course of business must be approved by a vote of two thirds of the shareholders of the corporation. Business Corporation Law §908; and Lindenbaum v. Albany Post Property Assocs., Inc., 297 AD2d 661 (2nd Dept., 2002). [*7]

The money paid and advanced by PSRS were paid and advanced to cover the financial obligations and liabilities of Kennedy Blvd. The primary obligation to repay this money was that of Kennedy Blvd. 83 Northport had no obligation to pay the obligations of Kennedy Blvd. 83 Northport payment of the obligations of Kennedy Blvd. were beyond the regular or ordinary course of 83 Northport's business. The shareholders of 83 Northport never voted to approve this transaction. Therefore, Madden's promise that

83 Northport would pay this obligation is beyond the scope of his authority and, thereby, unenforceable. Therefore, the counterclaim must be dismissed.

Accordingly, it is,

ORDERED, that Defendants' motion is granted to the extent that the action brought by Farrell M. Fleming is hereby dismissed and is in all other respects denied; and it is further,

ORDERED, that Plaintiffs' motion is granted to the extent that Plaintiff 83 Northport Corp. is granted summary judgment on the issue of liability and dismissing Defendants' counterclaim; and it is further,

ORDERED, that the matter is respectfully referred to Special Referee Frank Schellace on December 15, 2004 at 9:30 a.m. to hear and determine all issues relating to the calculation of 83 Northport Corp.'s damages including the date from which interest is to be calculated; and it is further,

ORDERED, the Plaintiff is directed to serve on the attorney for the Defendants and file with the Clerk of the Court a Note of Issue and pay all appropriate fees for the filing thereof on or before December 1, 2004; and it is further,

ORDERED, that upon the Special Referee determining the damages that Plaintiff sustained, the County Clerk is directed to enter a judgment in favor of the Plaintiff 83 Northport Corp. and against the Defendants in the sum of $147,688.56 plus the

additional damages as determined by the Special Referee together with interest from the date as fixed by the Special Referee together with costs and disbursements as taxed by the Clerk.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY _____________________________

November 15, 2004 Hon. LEONARD B. AUSTIN, J.S.C.