25% Owner Held Not to Have Dominated and Controlled Corporate Entity to Pierce the Corporate Veil

• Posted on: May 17 2023

By: Jeffrey M. Haber

This Blog has previously written about the benefits of forming a corporation or a limited liability corporation and the perils of ignoring the corporate formalities that are attendant thereto (see, e.g., here, here, here, here, and here). In today’s article, we examine the alleged use of the corporate entity to commit a wrong on another and the court’s unwillingness to pierce the corporate veil to hold the owner personally liable for that wrongful conduct. Matter of Small v. Estate of Landesman, 2023 N.Y. Slip Op. 02628 (1st Dept. May 16, 2023) (here).

Small involved an attempt to enforce a monetary judgment entered against Platinum Management (NY) LLC (“PMNY”) following confirmation of an arbitration award in favor of petitioner, finding he was owed bonus compensation for three years in which he acted as a portfolio manager responsible for a related investment fund, Platinum Partners Value Arbitrage Fund LP (“PPVA”).

PPVA was founded in 2003 by David Bodner (“Bodner”), Murray Huberfeld (“Huberfeld”) and Mark Nordlicht (“Nordlicht”). By October 2014, PPVA had over 300 investors with $801 million of assets under management invested across 10 investment strategies. Platinum Management (NY) LLC (“PMNY”) was the general partner of PPVA, with exclusive control and authority over PPVA, including the management of its assets and the hiring of employees to assist in the management of assets. Additionally, PMNY was the investment manager of PPVA pursuant to an investment management agreement. Petitioner maintained that PMNY had the exclusive authority to, among other things, cause PPVA to reimburse PMNY for its operating expenses including the compensation of its employees.

In 2010, Uri Landesman (“Landesman”)¹ joined Bodner, Huberfeld and Nordlicht as a principal and 25% percent owner of PMNY. Landesman succeeded Nordlicht as the sole designated managing member of PMNY. He served as the president of PMNY, as well as president and general managing partner of PPVA.

Petitioner, a professional investment manager hired by PMNY, claimed, that pursuant to an investment management agreement with PMNY (“employment agreement”), he was entitled to a salary, plus a bonus payable annually equal to a specified percentage of the net profits his investment account generated. Petitioner alleged that Landesman, the individual in control of PMNY and PPVA, failed to authorize the payment of his 2012, 2013 and 2014 bonuses. He further claimed that Landesman paid himself and his partners tens of millions of dollars while failing to establish any reserves for petitioner’s compensation.

According to petitioner, PMNY was a shell corporation with insufficient assets to meet its obligations. Petitioner claimed that PMNY’s assets came from PPVA, which transferred only enough money into PMNY’s bank account to meet its monthly expenses and pay management fees to Landesman and his partners. 

Petitioner filed an arbitration claim for breach of contract against PMNY. In July 2016, the arbitrator found in favor of petitioner, to wit: that PMNY owed petitioner bonus compensation. In February 2020, the court confirmed the arbitration award, and judgment was entered in favor of petitioner and against PMNY in the amount of $12,703,558.00, plus post judgment interest at nine (9%) percent per annum on the principal amount of $9,566,327.00. The judgment remains outstanding and PMNY is allegedly insolvent with no cash, securities, or income. 

Petitioner filed an order to show cause, pursuant to CPLR 5225(b) and 5227, for an order piercing the corporate veil and holding respondent Landesman’s estate jointly and severally liable for the judgment against PMNY, premised on the allegation that Landesman was an alter ego of PMNY who abused its corporate form to enrich himself to the detriment of petitioner.

In opposition, respondent argued that petitioner’s application should be denied because petitioner relied on nothing more than conclusory allegations of domination and control over PMNY, premised on Landesman’s position as president of the same. 

Respondent also argued that the equitable doctrines of in pari delcito and unclean hands precluded petitioner from collecting the judgment against the estate because he remained under indictment in the United States District Court for the Eastern District of New York for his participation in alleged frauds executed at Platinum Partners. Additionally, petitioner was named as a defendant in an brought by the Securities and Exchange Commission, also pending in the Eastern District of New York. Since a significant portion of the judgment rested on compensation for work subject to those pending cases, respondent claimed that petitioner was seeking to recover ill-gotten gains and, thus, the application should be dismissed.

Under New York law, a plaintiff who attempts to pierce the corporate veil must demonstrate 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.”² “While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business …, such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required.”³ Thus, “[t]he party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.”⁴ 

The determination whether to pierce the corporate veil is a fact-intensive one. And, because it is fact-intensive, the courts have held that it is not appropriate to make the determination “on a pre-answer, pre-discovery motion to dismiss.”⁵  

Significantly, because the analysis is so fact dependent, it “eschews mechanical interpretation.”⁶ Accordingly, the courts consider the totality of the facts and evidence, as well as the public policy of “protect[ing] those who deal with the corporation.”⁷ 

The motion court held that petitioner failed to meet “the very high standard required for piercing the corporate veil.”⁸ The court found that petitioner failed to show that Landesman, a part owner of PMNY, exercised complete domination and control over the entity such that, as a matter of law, he was liable for its debt. 

The motion court rejected petitioner’s allegations that Landesman engaged in activities that rendered PMNY insolvent and unable to satisfy its debts: 

To the extent plaintiff maintains Landesman failed to establish any reserve for petitioner’s unpaid bonus compensation; undercapitalized PMNY; paid himself and his partners millions of dollars in distributions rather than paying petitioner’s unpaid compensation; and entered into the self-dealing Fraudulent Employee Liability Transaction to enrich himself and his partners, leaving PMNY insolvent and defrauding its creditors, there is no competent proof that Landesman actually directed and controlled the alleged transfer of funds between PMNY, PPVA and any other related entities. 

The motion court noted that “petitioner’s own proof suggest[ed] that other partners, i.e., Nordlicht, exercised at least some degree of discretion with respect to compensation,” thereby “belying petitioner’s claim that Landesman exercised complete control over PMNY.”

On appeal, the Appellate Division, First Department affirmed.

The Court held that the motion court “properly found that, … , petitioner failed to present sufficient facts to raise a triable issue that warrants invoking the equitable doctrine of piercing the corporate veil to allow petitioner to recover his judgment against PMNY from respondent estate.”⁹ Referencing the motion court’s decision, the Court noted that “the evidence submitted by petitioner indicate[d] that decedent by himself did not dominate and control PMNY in that, at a minimum, he consulted with others, including Nordlicht, on financial and employee matters, notwithstanding the provisions of PMNY’s operating agreement.”¹⁰ “Notably,” observed the Court, “decedent owned only 25% of PMNY, while Nordlicht and his grantor trust owned the other 75% and had the power to remove decedent at any time.”¹¹ 

The Court also found that “[p]etitioner … provided scant evidence of disregard of the corporate form, overlapping officers, managers and employees with PPVA, or common offices and telephone numbers.”¹² Additionally, said the Court, “[i]nsufficient evidence was … presented to raise a triable issue of fact as to whether either was a sham entity …, or whether the challenged transfers from PMNY or PPVA to decedent, Nordlicht and others were part of a fraud directed at petitioner.”¹³

Finally, the Court noted that “respondent’s invocation of the doctrines of in pari delicto and unclean hands, which are implicated by the broader fraud charges surrounding the Platinum entities, [was] not persuasive, as the criminal charges against petitioner [had] not been finally resolved.”¹⁴

Takeaway

As noted, courts will pierce the corporate veil and impose liability on the company’s owners or members when: (1) they exercise complete domination over the corporation or LLC; and (2) their domination of the corporation or LLC is used to commit a fraud or wrong that injured another. Merely tracking the elements of veil piercing is not enough to withstand a motion to dismiss. A plaintiff must do more; he/she must proffer facts. When the plaintiff fails to provide factual support for the allegations, as both courts found in Small, the veil piercing claim will fail.

Footnotes

1. Landesman died on September 14, 2018.
2. Morris v. State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141 (1993); see also Doe v. Bloomberg, L.P., 178 A.D.3d 44, 50 (1st Dept. 2019).
3. Morris, 82 N.Y.2d at 141-142.
4. Id. at 142. See also Sutton 58 Assocs. LLC v. Pilevsky, 189 A.D.3d 726, 729 (1st Dept. 2020).
5. BT Ams. Inc. v. ProntoCom Mktg. Inc., 859 N.Y.S.2d 893 (Sup. Ct., N.Y. County 2008) (holding that veil piercing “is not well suited for resolution on a pre-answer, pre-discovery motion to dismiss”).
6. LiquidX v. Brooklawn Capital, LLC, 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017) (quoting, Morris, 82 N.Y.2d at 141).
7. Wm. Passalacqua Builders Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir. 1991).
8. A copy of the motion court’s decision and order can be found here.
9. Slip Op. at *1 (citing, Matter of Gonzalez v. City of New York, 127 A.D.3d 632, 633 (1st Dept. 2015)).
10. Id.
11. Id.
12. Id.
13. Id. (citations omitted).
14. Slip Op. at *1-*2. As a general matter, the doctrine of in pari delicto prevents a plaintiff who participated in an alleged wrongdoing from recovering damages from that very same wrongdoing. The doctrine mandates that in such circumstances the courts will not intercede to resolve a dispute between two wrongdoers. Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464 (2010). This Blog wrote about the in pari delicto doctrine here.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.