BCL § 630(a): The 10 Largest Shareholders and Suing for Compensation

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Posted on: May 1 2023

New York’s Business Corporation Law (“BCL”) § 630(a) provides that “[t]he ten largest shareholders,” of a corporation are “personally liable”, “jointly and severally”, “for all debts, wages or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation.” For purposes of BCL § 630(a), “wages or salaries … mean[s] all compensation and benefits payable by an employer to or for the account of the employee for personal services rendered by such employee.” BCL § 630(b). Such compensation and benefits include, but are not limited to, “salaries, overtime, vacation, holiday and severance pay; employer contributions to or payments of insurance or welfare benefits; employer contributions to pension or annuity funds; and any other moneys properly due or payable for services rendered by such employee.” Id.

To avail oneself of BCL § 630(a), a laborer, servant or employee must “give notice in writing to such shareholder that he intends to hold him liable” before such laborer, servant or employee charges the shareholder for services. BCL § 630(a). BCL § 630(a) requires that “[s]uch notice … be given within one hundred and eighty [180] days after termination of such services,” unless the laborer, servant or employee makes a books and records demand under BCL § 624(b), in which case “such notice may be given within sixty days [60] after he has been given the opportunity to examine the record of shareholders.”

If the laborer, servant or employee files an “action to enforce such liability”, then the action must “be commenced within ninety [90] days after the return of an execution unsatisfied against the corporation upon a judgment recovered against it for such services.”¹ An action under BCL § 630(a) does not contemplate litigation of the merits of a plaintiff’s claim for wages, but contemplates litigation to determine whether an employer’s shareholder is liable for a judgment against the employer. It follows a judgment in which the employee is entitled to its wages from their employer, even though it may not possess the assets to satisfy the employee’s claim.

BCL § 630(a) is the subject of today’s article and this Blog’s examination of Attarian v. Sagard Capital Partners, L.P., 2023 N.Y. Slip Op. 31367(U) (Sup. Ct., N.Y. County Apr. 14, 2023) (here).

Plaintiffs are former employees of nonparty IntegraMed America, Inc. Each plaintiff entered an employment contract with IntegraMed America that guaranteed bonuses and severance payments to induce plaintiffs to continue working for IntegraMed America while the corporation sought a buyer.

The corporation was never sold. Instead, it filed for bankruptcy protection in May 2020. Plaintiffs were simultaneously terminated from their employment and were not paid their earned wages, including the contractual bonuses and severance payments.

During the pendency of IntegraMed America’s bankruptcy, plaintiffs sued Sagard Capital Partners, L.P., as the largest beneficial shareholder of IntegraMed America, alleging a single claim for their wages under BCL § 630.

Defendant moved to dismiss the complaint based on its failure to state a viable claim. Defendant maintained that plaintiffs failed to allege (let alone satisfy) the conditions precedent to a BCL § 630 claim and that it is not IntegraMed America’s direct shareholder.

The Court granted the motion on both grounds.

Regarding the prematurity argument, the Court held that there was no judgment necessary to satisfy the statute: “plaintiffs still await a determination of the merits of plaintiffs’ claims that their employer owes wages, severance payments, and benefits to plaintiffs, which will occur in their employer’s bankruptcy proceeding….”²

The Court rejected plaintiffs’ argument that “waiting for a judgment against their former employer in the bankruptcy proceeding would be futile” and therefore, “pursing their claim there [would be] unnecessary”.³ The Court explained that, unlike the situation in Grossman v. Sendor, 64 A.D.2d 561, 561 (1st Dept. 1978), on which plaintiffs’ relied, there was no bankruptcy plan or confirmation of such a plan in the case before the Court. Had there been a confirmed plan, which, according to the Court is the equivalent of a judgment, then plaintiffs would have satisfied BCL § 630 because plaintiffs would simply be waiting for the return of the unsatisfied execution.⁴

Regarding whether defendant was a shareholder of IntegraMed America, the Court held that it was not a direct shareholder. The Court explained that plaintiffs conceded that defendant owned IntegraMed America through one of three shell companies.:

Although plaintiffs allege that defendant publicly has admitted it is a shareholder owning more than a 98% interest in IntegraMed America, plaintiffs negate that allegation by repeatedly … admitting defendant actually owns three “shell” entities, one of which owns the vast majority of the shares of IntegraMed America.⁵

Therefore, said the Court, it could not be a direct shareholder of the company.

The Court also explained that such allegations, and the related argument that such ownership made “defendant the holder of a ‘beneficial interest’ … in IntegraMed America and[, therefore,] a shareholder for BCL § 630’s purposes,” did “not render defendant a shareholder of IntegraMed America.”⁶ The ownership, held the Court, must be direct.⁷

The Court rejected plaintiffs’ argument that under a veil piercing, alter ego, or joint employer theory, defendant was a direct shareholder of IntegraMed America.⁸ The Court explained that “BCL § 630 already effectively pierce[d] the corporate veil between employers and their shareholder and create[d] an exception to the rule that ‘a corporation exists independently of its owners, and that it is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners’”.⁹ Accordingly, the Court held that “[p]laintiffs may use the statute only once; either to connect the shell entity to the employer or to connect the defendant to the shell entity, and then may use a piercing the corporate veil theory to make the second connection.”¹⁰

The Court rejected plaintiffs’ effort to pierce the corporate veil. Under Delaware law, which applied, the Court held that plaintiffs could not demonstrate that the shell entity was established “‘for no other purpose than as a vehicle for fraud.’”¹¹ In fact, noted the Court, plaintiffs did not allege that “the shell entities dominated anyone or anything”, or “that any shell entity or even defendant wielded influence over IntegraMed America to commit a fraud or wrong, let alone was established solely as a means for fraud”.¹² Similarly, said the Court, the complaint did not include any allegations that the “shell entity and the employer … had completely ignored corporate formalities and separation and had mixed their financial reporting and borrowed funds together.”¹³

Finally, the Court found that plaintiffs did not allege that “defendant committed a fraud or wrong against them by offering the payments to which plaintiffs claimed they were entitled when their employer was on the brink of filing the bankruptcy petition, which would have been preferential payments in violation of 11 U.S.C. § 547(b) and thus subject to clawback by the bankruptcy estate”.¹⁴ “More importantly,” said the Court, “plaintiffs do not show how this offer harmed plaintiffs or would have harmed them even had they accepted the offer and payments were clawed back, leaving them in the same position as they were before the offer”.¹⁵

“In sum,” concluded the Court, “plaintiffs fail to allege facts about any of these three shell entities to support a veil piercing theory that would allow plaintiffs to reach the shell entity that owns their employer and then use BCL § 630 to reach between the shell entity and defendant”.¹⁶

Footnotes

BCL § 630(a).
Slip Op. at *4.
Id. at *5.
Id.
Id. at *6-*7.
Id. at *7.
Id. (citing, Local 1181-1061 v. Wayzata Opportunities Fund, LLC, 2016 WL 3646988, at *3 (Sup. Ct., N.Y. County June 30, 2016)).
Id. at *8.
Id. (quoting, Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC, 146 A.D.3d 1, 12 (1st Dept. 2016), aff’d, 31 N.Y.3d 1002 (2018)).
Id.
Id. at *9 (quoting, Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999)).
Id. at *9-*10.
Id. at *10 (distinguishing the facts of the case with Local 2110 v. Getter, 2019 WL 2929549, at *4 (Sup. Ct., N.Y. County July 8, 2019), on which plaintiffs relied).
Id.
Id. at *11.
Id.

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.