NYLJ725202457760Lambert

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n our economic and legal system, individu-

als hold the privilege of creating a corpora-

tion or limited liability company which is a

legal person. In that way individuals can

go into business under a company name,

without being personally liable for the debts

incurred by the company. If the company loses

money and is unable to pay its debts, the indi-

viduals behind the venture can walk away. That’s

the American way; it facilitates risk and enables

business. This limitation on the owners’ liability

is referred to as the corporate veil.

But what such individuals do not have the

privilege of doing is to use their control of the

company to take money or benefits out of the

company for themselves personally, without see-

ing to it that the company receives consideration

in return. In plain terms, the owners are not

allowed to loot the company. If that happens, and

as a result the company is left without sufficient

assets to meet an obligation to a third-party,

that third-party has been harmed by the owners’

abuse of the company and may pierce the cor-

porate veil, i.e. claim damages against the owner

personally. Morris v. State Dep’t of Taxation & Fin.,

82 N.Y.2d 135, 603 N.Y.S.2d 807 (1993).

The separate legal personage, the veil, of the

corporation must be respected by its owners,

even by a sole owner. If an owner disregards

the veil, an injured obligee and a court of law

may do so too, in order to correct the harm of

the offense.

The case law speaks quite vaguely and indefi-

nitely about the test(s) to be applied in determin-

ing whether to pierce the veil.

“New York law disfavors disregard of the cor-

porate form.” Id. Plaintiffs seeking to pierce the

veil“bear a heavy burden…” Sheridan Broad. Corp.

By Thomas C. Lambert and Steven Shackman

July 24, 2024

Piercing the Corporate Veil:

Finding the Common Thread

Courtesy photos.

Thomas Lambert, left, and Steven Shackman of

Lambert & Shackman.

July 24, 2024

v. Small, 19 A.D.3d 331, 798 N.Y.S.2d 45 (1st

Dep’t 2005). The cases are dependent “on the

attendant facts and circumstances” and “may

not be reduced to definitive rules….” Id.

Generally, the plaintiff must prove 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.” Morris, supra.

Such broad language appears throughout the

case law. And yet, when we read the recent

cases with a focus on the underlying attendant

facts, we discovered that there actually appears

to be one simple fact in common in nearly all the

recent cases, a critical fact which determined,

one way or the other, whether to pierce the veil.

That fact, or its absence, is the owners’ tak-

ing from the corporation, not in pursuit of the

corporation’s purpose and without return consid-

eration. If that taking results in the corporation’s

failure to pay a legitimate obligee, that obligee

has a case to pierce the veil. The other facts

appear to be secondary.

Many decisions focus on whether the for-

mal requirements applicable to the entity were

followed. Did the officers of the corporation

cause it to keep proper books and records? Did

the board of directors hold semi-annual meet-

ings as required? Were corporate and personal

assets comingled? Certainly, the failure to follow

required formalities may indicate domination of

the corporation by certain individuals.

But at the same time, there are many small

companies where the owners fail to follow for-

malities. There are many small companies, such

as family-owned corporations, where the owners

dominate the company and regularly treat it as

an alter-ego. That in and of itself does not give

rise to a claim to pierce the corporate veil. East

Hampton Union Free School Dist. v Sandpebble

Bldrs., Inc., 66 A.D.3d 122, 884 N.Y.S.2d 94 (2d

Dept. 2009) (“But, if, standing alone, domination

over corporate conduct in a particular transac-

tion were sufficient to support the imposition of

personal liability on the corporate owner, virtually

every cause of action brought against a corpora-

tion could also be asserted against that owner

personally, rendering the principle of limited

liability largely illusory.”).

A failure to hold board meetings may constitute

a “wrong” in that it violates requirements under

corporate by-laws and governing statutes, but

that wrong does not necessarily injure the corpo-

ration’s creditor. While in many cases where the

veil is pierced there is failure to follow formali-

ties, it is merely an indicator. No such single fact

controls, either by its presence or its absence.

Shisgal v. Brown, 21 A.D.3d 845 (1st Dep’t 2005).

Domination and failure to follow rules may

facilitate the looting and may constitute

evidence consistent with looting. But it is

the looting itself which is typically necessary

before the veil will be pierced. The key, the

factor present in nearly all recent cases where

the veil is pierced, is the individuals’ use of

their control to take money or benefits from

the company’s “coffers” for their own personal

benefit, while failing to see to it that the

company receives consideration in return.

In Etage Real Estate LLC v. Stern, 211 A.D.3d

632, 182 N.Y.S.3d 47 (1st Dep’t 2022) the First

Department, quoting Morris, stated, “complete

domination of the corporation is the key to pierc-

ing the corporate veil.” But quite often there is

“complete domination” without there being aba-

sis to pierce the veil. Many small corporations

have a single shareholder and officer; each and

July 24, 2024

every one of them is completely dominated by

that individual. Likewise, small family-owned

corporations are typically “completely domi-

nated” by a small group of individuals. The key,

the distinguishing factor, the wrong perpetrated

in most cases where the veil is pierced, is the

owners taking from the company, without giving

consideration back to the company. When that

happens, and it renders the company unable to

pay a creditor, the creditor has been harmed by

the wrong and may pierce the veil. Morris, supra.;

TNS Holdings v. MKI Sec. Corp., 92 N.Y.2d 335,

340 (1998) (veil will be pierced to impose liability

upon persons who have “misused the corporate

form for [their] personal ends.”).

A review of recent New York State case law

supports this conclusion.

Unsuccessfully Asserted Claims

In East Hampton Union Free School Dist. v

Sandpebble Bldrs., Inc., 66 A.D.3d 122, 884

N.Y.S.2d 94 (2d Dep’t 2009), the Complaint

alleged that the principal shareholder and presi-

dent used his domination and control of the cor-

poration to cause the corporation to act in bad

faith and breach its contract with the plaintiff.

The Appellate Division, Second Department dis-

missed the cause of action against the individual

defendant.

Notably, the allegations in East Hampton met

the broadly stated test under Morris, supra: the

Complaint alleged that the individual (i) exer-

cised complete domination of the corporation

with respect to the specific transaction and (ii)

used such domination to commit a wrong which

resulted in injury to the plaintiff. In that way,

East Hampton demonstrates the limitations of

that broad test. Domination and control were

allegedly used to commit a wrong which injured

the plaintiff; but the wrong was done in the

business interest of the corporation, not the

personal interest of the owner. The critical ele-

ment, the owners taking from the corporation for

themselves, was absent.

In Matter of Goldman v. Chapman, 44 A.D.3d

938, 844 N.Y.S.2d 126 (2d Dep’t 2007) a small

corporation was dominated by a few individu-

als, lost money and was unable to pay its debts.

The plaintiff obtained a money judgment against

the corporation and, unable to collect, sought to

pierce the veil against its owners. The Supreme

Court denied the defendant’s motion to dismiss.

The Appellate Division, Second Department

reversed and dismissed the Complaint. The

Second Department held that the facts of domi-

nation, of the corporation acting as the owner’s

alter ego, and the corporation’s inability to pay its

debts, did not establish that the owners commit-

ted a wrong against the judgment debtor. Again,

the critical element, the owners taking from the

corporation for themselves, was absent.

In Matter of DePetris v. Traina, 211 A.D.3d 939,

181 N.Y.S.3d 298 (2d Dep’t 2022), the limited

liability company was founded for the sole pur-

pose of operating a bar. The defendant was the

sole member. The plaintiff obtained a default

judgment against the company and then com-

menced an action against the sole member to

enforce the judgment. After a bench trial the

Supreme Court granted judgment in favor of the

plaintiff, holding that the company was under the

total domination and control of the member, that

corporate formalities had not been followed, that

the company was undercapitalized, and that the

company “was a virtual sham for [the member’s]

individual activities.”

The Appellate Division, Second Department

reversed. The Second Department recognized

that domination and control and failure to follow

July 24, 2024

formalities are not enough. The plaintiff did not

prove that this control had been utilized by the

owner to commit a wrong against the plaintiff.

The Second Department found that there was no

evidence that the owner used corporate funds

for personal use. In other words, the plaintiff did

not prove that the owner looted the company.

Successfully Asserted Claims

In Cortland St. Recovery Corp. v. Bonderman, 31

N.Y.3d 30, 73 N.Y.S.3d 95 (2018), the Complaint

alleged that the owners engaged in a complex

series of transactions which would not have

been possible but for their domination and con-

trol of the company. In affirming denial of a

motion to dismiss, the critical allegation the

Court of Appeals referred to was that the own-

ers used this domination and control to siphon

off assets of the corporation for their own

benefit, leaving the corporation unable to pay

creditors. That is the type of “looting” referred

to above. (Subsequently, on summary judg-

ment, as affirmed by the Appellate Division, First

Department, the case was dismissed as against

certain defendants based on a lack of evidence

to support certain allegations in the Complaint.

2024 N.Y. App. Div. Lexis 1201, 2024 NY Slip Op

01250 (1st Dep’t 2024)).

In Webmediabrands, Inc. v. Latinvision, Inc., 46

Misc. 3d 929, 3 N.Y.S.3d 262 (Sup. Ct. NY County

2014), the corporation’s sole shareholder, offi-

cer and director took the corporation’s money

for his personal use, by making extensive cash

withdrawals and using the corporate credit card.

While he characterized these transactions as

“loans”, he admitted the “loans” were open-

ended and subject to his unilateral right to cancel

them. This is about as clear cut a case of “loot-

ing” as could exist, and the Court granted sum-

mary judgment in favor of the creditors. While

the decision discusses the failure to hold meet-

ings and keep books and records, none of these

failures was the wrong which resulted in liability.

The wrong was the looting; the failure to follow

formalities were facts which facilitated commis-

sion of the wrong.

In Inner Harbor Phase I L.P. v. COR Inner Harbor

Co. LLC, 211 A.D.3d 1475, 182 N.Y.S.3d 821

(4th Dep’t 2022), the Complaint alleged that the

owners caused the company to transfer assets

to another company they controlled without

receiving any consideration in return, leaving

the company without sufficient assets to meet

its obligations to the plaintiff. In other words,

the owners looted the company. The Appellate

Division, Fourth Department affirmed the lower

Court’s denial of a motion to dismiss.

In Goodwill Toys MFG, Ltd. v. I-Star Entertainment,

LLC, 214 A.D.3d 628, 184 N.Y.S.3d 827 (2d Dep’t

2023), the plaintiff submitted evidence showing

that the company’s principals operated several

related companies out of the same address and

that the other companies had expanded their

operations while the subject company became

insolvent. That supported the inference that

the owners were taking value out of the com-

pany without seeing to it that the company

received consideration in return, rendering the

company unable to pay the plaintiff. The Second

Department found that allegation to be enough

to sustain the Complaint.

In Gold v. 22 St. Felix, LLC, 219 A.D.3d 588,

195 N.Y.S.3d 207 (2d Dep’t 2023), the Appellate

Division, Second Department reversed the lower

court’s dismissal of a claim to pierce the veil

where the defendant used his domination and

control to distribute the company’s money to the

owners and thereby render the company judg-

ment proof. While there is no specific mention

July 24, 2024

in the decision, it is implicit in that holding that

the defendant was alleged to have caused the

company to make those distributions not from

profits and without receiving adequate consider-

ation in return; otherwise, the distributions would

not have rendered the company judgment proof.

In Town-Line Car Wash, Inc. v Don’s Kleen Mach.

Kar Wash, Inc., 169 A.D.3d 1084, 95 N.Y.S.3d

227 (2d Dep’t 2019), the plaintiff purchased a

car wash business from a corporation. In the

sales agreement the seller-corporation agreed

to indemnify the buyer-plaintiff for any breach

of warranty for 7½ years after the closing of

the sale. Shortly after the sale, the sole share-

holder dissolved the seller-corporation without

leaving reserves for this contingent liability. The

Supreme Court granted the shareholder’s motion

for summary judgment dismissing the case. The

Appellate Division, Second Department reversed,

holding that the undisputed fact that the share-

holder dissolved the corporation without leaving

sufficient assets in place “was sufficient to raise

a triable issue of fact as to whether [the share-

holder] stripped the corporation of assets, leav-

ing [the corporation] without sufficient funds to

pay its contractual contingent liabilities.”

Notably,

the

undisputed

fact

that

the

shareholder dissolved the corporation without

leaving sufficient assets to cover its contingent

liability was not sufficient to grant summary

judgment piercing the veil. If the shareholder

had used the corporation’s pre-dissolution funds

to pay legitimate corporate debts, pay dividends

from profits, or pay himself a salary for services

rendered, that would not have given rise to a

claim. If on the other hand he looted the company

(as the Court wrote, “stripped the corporation of

assets”) by taking funds for himself without

consideration, he would be personally liable.

That was the triable issue of fact precluding

summary judgment.

Conclusion

Despite all the references in the case law to

books and records and other corporate for-

malities, it appears from the cases that a cor-

poration could keep perfect books and records,

hold all required meetings, and comply with

all the other formal requirements of opera-

tion, and yet a court may pierce the veil if the

owners took money out of the corporation for

themselves without consideration.

At the same time, a corporation may utterly

fail to comply with required formalities and be

dominated by individuals who cause it to commit

a wrong which injures a third-party, and yet the

veil will not be pierced unless the corporation’s

inability to pay its debts was caused by the own-

ers having looted the corporation.

The key, the fact present in nearly all recent

cases where the veil was pierced, is the owners’

use of their domination and control to take from

the company for their own personal benefit, not

from profit, while failing to see to it that the com-

pany receives consideration in return. Where that

happens, and the company is left without suffi-

cient assets to meet its obligations, a wrong has

been committed against the company’s obligee,

who may pierce the veil.

Thomas C. Lambert and Steven Shackman are

partners at Lambert & Shackman.

prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com. # NYLJ-7252024-57760

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