Piercing the Corporate Veil
The corporate veil: the legal concept that separates an individual from the business he or she owns providing that business owner with the benefit of limited liability. It’s that mystical legal wall that stands between the business owner and third parties, protecting the business owner from being held personally liable in certain transactions or circumstances. To put it another way, it is a legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations. The same concept applies to limited liability companies as well.
Often times an opponent in a litigation will attempt to “pierce the corporate veil” which means they may try to sue you personally as the owner of the business, rather than your business itself. More often than not, this is a complete shakedown especially in straightforward breach of contract matters. In order to pierce the corporate veil, or even attempt to pierce the corporate veil you have to meet a rather strict legal standard.
A “party seeking to pierce the corporate veil must establish that ‘(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff’s injury.’ ” Mike Bldg. & Contracting, Inc. v. Just Homes, LLC, 27 Misc.3d 833, 901 N.Y.S.2d 458, 474 (Sup.Ct. Kings Cty. 2010) (quoting Matter of Morris v. New York State Dept. of Taxation & Fin., 82 NY.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993)).
“[P]recedent is clear that courts will pierce the corporate veil only to prevent fraud, illegality or to achieve equity. This is true even in situations” such as “where the corporation is controlled or dominated by a single shareholder.” Id (citing Treeline Mineola. LLC v. Berg, 21 A.D.3d 1028, 1029, 801 N.Y.S.2d 407 (2005) [internal citation omitted]).
To satisfy the pleading requirements sufficient to even make a case for piercing the corporate veil one must set forth the specific facts that address the underlying transaction and those facts must show that the individual being sued exercised domination and control over the company, and abused the privilege of doing business in the corporate form.
You cannot rely upon mere “buzz words” or vague or conclusory allegations, but must instead set forth facts that truly address the underlying transactions and occurrences and the material elements of the claim (see CPLR 3013; Walkovszky v. Carlton, 18 N.Y.2d 414, 420, 276 N.Y.S.2d 585, 223 N.E.2d 6; Sheinberg v. 177 E. 77, 248 A.D.2d 176,177, 670 N.Y.S.2d 19; Cooperstein v. Patrician Estates, 97 A.D.2d 426, 427, 465 N.Y.S.2d 53; accord, EED Holdings v. Palmer Johnson Acquisition Corp., 387 F.Supp.2d 265, 274 [applying analogous F.R.C.P.8(a) and New York substantive law]).” East Hampton Union Free School Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 131, 884 N.Y.S.2d 94, 102 (2d Dept. 2009) (Dillon, J., concurring in part, dissenting in part)
You cannot simply make allegations that are general, conclusory and unsupported by detailed facts. See Victoria T. Enterprises, Inc. v. Charmer Industries, Inc., 63 A.D.3d 1698, 881 N.Y.S.2d 570 (4th Dept. 2009) (where “the majority of the allegations in the amended complaint contain no more than a vague and conclusory repetition” of the governing law, dismissal is warranted pursuant to CPLR 3013).
A slew of “buzz words” and unsubstantiated allegations which fall well short of the requisite bar necessary to sustain a cause of action against someone in their personal capacity, rather than the entity that they own which is privy to the transactions at issue. See Capricorn Investors III. L.P. v. Coolbrands Intern., Inc., 24 Misc.3d 1224(A) 897 N.Y.S.2d 668, 2208339, *6 (Sup. Ct. N.Y. Cty. 2009) (plaintiffs seeking to pierce corporate veil must set forth “particularized” allegations) (citing Albstein v. Elany Constr. Corp., 30 A.D.3d 210 (1st Dept. 2006); Sheridan Broadcasting Corp., 19 A.D.3d at 332; Sheinberg v. 177 E. 77, 248 A.D.2d 176, 177 (1st Dept. 1998); Feigen v. Advance Capital Mgt. Corp., 150 A.D.2d 281 (1st Dept. 1989)).
To simply rehash the legal standards necessary to state a claim will also not suffice. See Gorman v. Gorman, 88 A.D.2d 677, 678, 451 N.Y.S.2d 455, 456 (3d Dept. 1982) (“bare allegations of fraud, which merely list the material elements of fraud without any supporting detail, are insufficient to satisfy the pleading requirements”).
The Second Department’s opinion in East Hampton Union Free School Dist., supra exemplifies how courts assess whether or not piercing the corporate veil is warranted. There, plaintiff’s complaint alleged that the principal owner and president of a single shareholder corporate defendant should be held personally liable for the wrongs of the corporation. Notwithstanding plaintiff’s allegations (not unlike plaintiffs’ allegations here) that the president exercised “complete ‘dominion and control’ over the corporation in its dealings with the [plaintiff]” and the “liberal ‘notice pleading’ requirements of CPLR 3013,” the court declined to pierce the corporate veil and dismissed the personal action against the president defendant. In reaching its conclusion, the court expected plaintiffs to allege, “the material elements of each cause of action;” namely the specific “[c]onduct constituting an abuse of the privilege of doing business in the corporate form.” Id. (such allegations constitute “a material element of any cause of action seeking to hold an owner personally liable for the actions of his or her corporation under the doctrine of piercing the corporate veil”). See also Capricorn Investors, supra (“[g]enerally domination alone does not suffice for veil piercing”).
From a policy standpoint as well, if: “domination over corporate conduct in a particular transaction were sufficient to support the imposition of personal liability on the corporate owner, virtually every cause of action brought against a corporation either wholly or principally owned by an individual who conducts corporate affairs could also be asserted against that owner personally, rendering the principle of limited liability largely illusory. Thus, the party seeking to pierce the corporate veil must also establish ‘that the owners, through their domination, abused the privilege of doing business in the corporate form.” East Hampton, at 126-27 (internal citations omitted). “[D]omination, standing alone, is not enough.” Morris v. Dept. of Taxation & Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 811 (1993). Defendants must show that the domination was used to commit a fraud or wrong against plaintiffs which resulted in plaintiffs’ injury. Id.
Breach of Contract and Tort Claims – Some Additional Ammo for Dismissing Cases Against You Personally
Often when you’re being faced with a lawsuit where someone is suing based on breach of a written contract, the plaintiff attempts to pierce the corporate veil to include you personally as a defendant, rather than just your company which was a party to that written contract.
In attempting to pierce the corporate veil, the Complaint may also include tort claims and quasi-contract claims in an attempt to make a case that you as the business owner should be named as a defendant in this lawsuit. Such claims probably include allegations such as fraud, interference with contractual relations, unjust enrichment, unfair business practices, civil conspiracy, and so on. The argument is that those claims (tort claims, fraud, negligence, unjust enrichment etc.) fall outside the written contract and form a basis for holding you personally accountable.
Generally speaking, those tort claims (fraud, unjust enrichment, negligence) often fail especially when there is a written contract addressing the specific claims in the case. Courts in New York reason that “a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated.” Clark-Fitzpatrick, Inc. v. Long Island Rail Road Co., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 656 (1987). Accordingly, “it is incumbent upon the Plaintiff to establish that the tortious conduct alleged in the pleading is separate and distinct from any breach of the governing contract”, an extremely difficult standard to meet. See Non-Linear Trading Co. v. Braddis Assocs., Inc., 243 A.D.2d 107, 115, 675 N.Y.S.2d 5, 11 (1st Dep’t 1998); Sanyo Elec., Inc. v. Pinros & Gar Corp., 174 A.D.2d 452, 453, 571 N.Y.S.2d 237, 238 (1st Dep’t 1991) (“A cause of action for fraud is legally insufficient if, as here, the only fraud charged relates to a breach of contract.”); Tesoro Petroleum Corp. v. Holborn Oil Co. Ltd., 108 A.D.2d 607, 607, 484 N.Y.S.2d 834, 835 (1st Dep’t) (“A cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.”), appeal dismissed, 65 N.Y.2d 637 (1986); Orix Credit Alliance, Inc. v. R.E. Hable Co., 256 A.D.2d 114, 115, 682 N.Y.S.2d 160, 161 (1st Dep’t 1998)); Wendorf v. MCI Communications Corp., No. 92 Civ. 1836 (KTD), 1993 WL 119785 (S.D.N.Y.), (holding that misrepresentation of existing fact can support fraudulent inducement claim only if “the Defendant’s alleged misrepresentations … [are] collateral or extraneous to the parties’ agreement”); J.E. Morgan Knitting Mills, Inc. v. Reeves Brothers, Inc., 243 A.D.2d 422, 663 N.Y.S.2d 211 (1st Dep’t 1997), (holding that dismissal of a fraud claim was proper where fraud was “based on the same facts as underlie the contract claim and is not collateral to the contract and no damages are alleged that would not be recoverable under a contract measure of damages.” ); Suzy Phillips Originals, Inc. v. Coville, Inc., 939 F. Supp. 1012 (E.D.N.Y. 1996), aff’d, 125 F.3d 845 (2d Cir. 1997), (the Court held that “[p]laintiff has not alleged the existence or breach of any legal duty that it was owed by the Defendant independent of Defendant’s contractual obligations.”); Varo, Inc. v. Alvis PLC, 261 A.D.2d 262, 269, 691 N.Y.S.2d 51, 58 (1st Dep’t 1999) (affirming dismissal of fraud claim based on allegedly false representations made in stock purchase agreement because “no matter how it is designated, it is a contract claim” and therefore subject to the contract claim’s statute of limitations bar).
The take-away from this is that if you are being sued personally, you should consult with an attorney to determine if the facts and circumstances warrant immediately filing a motion to dismiss the case against you personally. This has been my strategy in many cases where I’ve represented defendants, and it has been a very successful approach.
