NYLJ725202457760Lambert

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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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