The doctrine of “piercing the corporate veil” is an exception to the general rule that a corporation exists independently of its owners, who are not personally liable for its obligations. This doctrine permits, in limited circumstances, the imposition of personal liability on owners for the obligations of their corporation. Sterling Park Developers, LLC v. China Perfect Constr. Corp., 185 A.D.3d 1082 (2nd Dep’t 2020). It is equitable relief which is generally applied when the owners of a corporation exercise complete domination over the corporation and use that domination to commit a fraud or wrong against the plaintiff that results in the plaintiff’s injury. O'Grady v. Thompson, 2021 N.Y. Misc. LEXIS 40496 (Bronx Co. 2021).
To pierce the corporate veil, a plaintiff must show 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 plaintiff's injury. Id. In determining whether to pierce the corporate veil, courts consider factors such as adherence to corporate formalities, capitalization, commingling of assets, and use of corporate funds for personal use. Americore Drilling & Cutting, Inc. v. EMB Contr. Corp., 198 A.D.3d 941 (2nd Dep’t 2021).
It is not enough for a plaintiff to demonstrate that the officer, director or shareholder dominated and controlled the corporate entity. Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d at 141-142 (1993); TNS Holdings, Inc. v. MKI Sec. Corp. 92 N.Y.2d at 339 (1998). A plaintiff must show that the officer, director or member used the corporation for his/her personal benefit and the corporation was nothing more than an “alter ego” or instrumentality of the officer or member. TNS Holdings, 92 N.Y.2d at 339. Conclusory allegations of domination and control are insufficient. East Hampton Union Free School Dist. v. Sandpebble Bldrs., Inc., 16 N.Y.3d 775, 776 (2011). The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable.
At the pleading stage, the plaintiff must allege particularized facts detailing fraud or other corporate misconduct to avoid dismissal. Prosky v Peter Scalera Constr. Serv., LLC, 2013 N.Y. Misc. LEXIS 1444 (New York Co. 2013). Important facts to include in a pleading are those which demonstrate that the defendant's domination and control over the corporation was so complete that the corporation had no separate mind, will, or existence of its own. Merely asserting that veil piercing is warranted and parroting the relevant factors in the complaint is not sufficient. Lau v Lazar, 2014 N.Y. Misc. LEXIS 5306 (New York Co. 2014). Specifically, the mere claim that the entity was completely dominated by the owners, or conclusory assertions that the corporation acted as their “alter ego,” without more, will not suffice to support the equitable relief of piercing the corporate veil. Inner Harbor Phase I L.P. v. Cor Inner Harbor Co. LLC, 211 A.D.3d 1475, 182 N.Y.S.3d 821 (4th Dept. 2022). However, allegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing. Baby Phat Holding Co., LLC v Kellwood Co., 123 A.D.3d 405 (1st Dep’t 2014).
Most attempts to pierce the corporate veil are unsuccessful. However, if the primary defendant lacks assets and grounds exist for veil piercing, the doctrine may provide the only avenue for recovery against a solvent defendant. If you are uncertain whether all the necessary elements for a veil-piercing claim are present, it may be challenging to sufficiently assert a basis for veil piercing in your initial pleading. However, a fact-laden claim to pierce the corporate veil is unsuited for resolution on a pre-answer, pre-discovery motion to dismiss. Emigrant Bus. Credit Corp. v. Hanratty, 2023 N.Y. Misc. LEXIS 3207 (NY Co. 2023) see also 334-340 Hotel Mgt. LLC v. PCCM Supply, Inc., 2021 N.Y. Misc. LEXIS 6765 (New York Co. 2021). If you can cite specific facts in support of veil piercing prior to obtaining discovery, it may be possible to allege veil piercing in an initial pleading and further develop your claim during the discovery process.
Even if grounds do not exist to pierce the corporate veil, it may be possible to recover against affiliates of the primary defendant under NY Debtor and Creditor Law Art. 10 where a fraudulent conveyance of the primary defendant’s assets renders it insolvent. However, the requirements for such a recovery are complex and claims must be asserted in a timely manner. If you wish to evaluate the viability of a claim for corporate veil piercing or fraudulent conveyance, you can contact Brandon Maxwell or any of the attorneys at Muchmore & Associates PLLC for an initial consultation.
About Author
Brandon Maxwell graduated from the University of Texas School of Law in 2021, where he served as an Editor of the Journal of Law and Technology and as a Member of the Texas Business Law Society. Read more.
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