BlogLitigationFAQs About Piercing the Corporate Veil

February 15, 2022by Jeffrey Davis

Let me propose a common scenario: your company, ABC Corp. enters into an agreement with another company, XYZ Inc. John Smith, the owner and president of XYZ Inc. negotiates with your company, and represents XYZ Inc. in entering into this fictional agreement. Some time passes, and XYZ Inc. breaches their agreement with ABC Corp. by failing to make payments as agreed upon, and now you want to sue XYZ Inc. to recover money.

So far, pretty straight forward.

Many clients however want to find a way to sue “John Smith” the owner and president of this fictional XYZ Inc.  They want to “pierce the corporate veil” (as it is commonly called), the fictional veil that shields principals of a corporation (or LLC) from the debts and liabilities of their company. The main reason clients want to pierce the corporate veil is to put pressure on the parties to settle and in some cases XYZ Inc. may not have the money or assets to satisfy a potential judgment.

Broadly speaking, New York courts will disregard the corporate form and pierce the corporate veil when necessary either to prevent fraud or “achieve equity”.  While that may appear to be pretty broad and forgiving standard,  veilpiercing is a narrowly construed doctrine. It is a remedy that varies based very much on the specific circumstances of each case and New York courts are extremely reluctant to apply it.

To properly state a claim for piercing the corporate veil,  there are generally three requirements  – domination and control, resultant damages, and abuse of the privilege of doing business in corporate form – all of which must be pleaded for a complaint to be deemed adequate under CPLR. 3013. The Plaintiff cannot rely upon mere “buzz words” or vague or conclusory allegations.

To put it another way, 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.’” See Mike Bldg. & Contracting, Inc. v. Just Homes, LLC, 27 Misc.3d 833, 901 N.Y.S.2d 458, 474 (Sup.Ct. Kings Cty. 2010)

As already stated, in New York, to justify piercing the corporate veil, the plaintiffs must establish that the corporation’s principals completely dominated the corporation. Complete domination may be shown by:
  • Absence of corporate formalities (for example, issuing shares, electing directors, and keeping corporate records).
  • Inadequate capitalization
  • Funds being deposited and withdrawn from the corporation for personal rather than corporate purposes.
  • Overlap in principals, officers, directors, and employees.
  • Shared offices, addresses, and telephone numbers of corporate entities.
  • The amount of business discretion displayed by the allegedly dominated corporation.
  • Whether the corporations deal with each other at arm’s length.
  • Whether the corporations are treated as independent profit centers.
  • Payment or guarantee of the dominated corporation’s debts by the other corporations in the group.
  • Use of the dominated corporation’s property by the other corporations as if it were their own.
Other factors that may show an owner’s domination of a corporation are:
  • Intermingling of corporate and personal funds.
  • Failure to maintain separate books and records.
  • Failure to pay dividends
  • Insolvency at the time of a transaction.
  • Dominant shareholder siphoning off funds.
  • Inactivity of other officers and directors.
The following allegations, without more, do not constitute a fraud or wrong warranting piercing the corporate veil in New York:
  • Breach of contract.
  • While representing the corporation, the defendant:
    • engaged in improper acts; or
    • acted in bad faith.

Finally, in case it was clear from the above, New York is one of the hardest jurisdictions in which to pierce the corporate veil. New York law disfavors disregarding the corporate form (Cobalt Partners, L.P. v. GSC Capital Corp., 944 N.Y.S.2d 30, 33 (1st Dep’t 2012)). Therefore, piercing the corporate veil might have to wait until you have actual evidence in hand supporting your claims i.e. you may have to wait until discovery or post-judgment discovery.

 

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