NYLJ725202457760Lambert

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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

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