Collective Alter Ego Liability Theory Rejected By First Department

• Posted on: Mar 11 2024

By: Jeffrey M. Haber

In commercial and business litigation, it is common for plaintiffs to assert claims against a business entity for wrongs committed by a corporate entity. Often, plaintiffs will try to “pierce the corporate veil,” or get behind the corporate form, to hold the entity’s officers or members liable for the alleged wrongdoing. 

“Generally, a plaintiff seeking to pierce the corporate veil must show 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.”¹ 

Importantly, it is not enough for the plaintiff to demonstrate that the officer, director or shareholder dominated and controlled the corporate entity.² The plaintiff must show that the officer, director or member used the corporation for his/her personal benefit and the corporation was nothing more than an “alter ego” or instrumentality of the officer or member.³ Because “New York law disfavors disregard of the corporate form,”⁴ conclusory allegations of domination and control are insufficient.⁵ The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable.

While application of the doctrine depends on the facts and circumstances of each case,⁶ several factors have emerged in determining whether the plaintiff has made the requisite showing. These factors include, among others: (1) the failure to adhere to corporate formalities; (2) inadequate capitalization (that is, the corporation or LLC does not have sufficient funds to operate); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the corporation or LLC; and (5) use of corporate funds for personal benefit.⁷ No one factor controls the consideration.⁸ 

The alter ego liability doctrine has also been applied to pierce the veil between corporations when affiliate or subsidiary corporations are used by a dominating parent corporation to engage in fraudulent or wrongful conduct. Under New York law, a corporation is considered to be a “mere alter ego when it ‘has been so dominated by … another corporation … and its separate identity so disregarded, that it primarily transacted the dominator’s business rather than its own.’”⁹ When that occurs, “the dominating corporation will be held liable for the actions of its subsidiary.…”¹⁰ 

As with veil piercing, control is an important factor. The factors considered for veil piercing are also used to determine alter ego liability.¹¹ Again, no one factor is dispositive and “all need not be present to support a finding of alter ego status.”¹² 

Finally, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of.¹³ 

[Eds. Note: 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, here, and here.]

In today’s article, we examine the alleged use of multiple corporate entities to commit a wrong and the court’s unwillingness to find alter ego liability based on their alleged collective actions in committing the wrongs complained of. Cortlandt St. Recovery Corp. v. Bonderman, 2024 N.Y. Slip Op. 01250 (1st Dept. Mar. 7, 2024) (here).

[Eds. Note: the factual discussion below comes from the parties’ briefing on appeal.]

Cortlandt Street arose from a 2006 corporate recapitalization involving TIM Hellas, a Greek telecommunications company, and certain of its affiliates (the “Hellas Group”). In early 2005, funds separately advised by two private equity firms agreed to invest indirectly in the Hellas Group. The TPG-advised funds and an Apax-advised fund each acquired a 41% indirect minority interest. Approximately eighteen months later, as part of a recapitalization (the “Recap”), Hellas Telecommunications Finance S.C.A. (“Hellas Finance”), a Luxembourg partnership, issued, and Hellas Telecommunications I, S.à.r.l. (“Hellas I”), a Luxembourg limited liability company, guaranteed, €200 million in payment-in-kind notes (the “Notes”) that were sold to European institutional investors. 

In 2009, the Notes went into default. Plaintiff Wilmington Trust Company (“WTC”), the successor Trustee on the Indenture and representative for all noteholders, contended that the Hellas Group was rendered insolvent as a result of the Recap payments. 

In 2014, WTC obtained a judgment (the “Judgment”) against Hellas Finance and Hellas I (the “Judgment Debtors”). The Judgment was based on the failure of the Judgment Debtors to pay the amounts due under the Notes. 

In April 2019, WTC filed an amended complaint, which asserted ten causes of action against the TPG defendants, various Apax-related entities, and two individuals. WTC alleged claims for breach of contract, unjust enrichment and imposition of a constructive trust, fraudulent conveyance (five counts), conversion, the payment of unlawful dividends, and judgment enforcement. Only one of those claims survived against nine of the original defendants: the third cause of action, seeking enforcement of the Judgment on an alter ego theory against the TPG defendants.

Following discovery, defendants moved for summary judgment dismissing the action. The motion court denied the motion of the TPG defendants and granted the motion of defendants Giancarlo Aliberti, Matthias Calice, and Apax Partners, L.P. 

In denying the TPG defendants’ motion, the motion court treated the TPG defendants and numerous non-parties as a collective entity. The motion court did not identify the role played by any of the TPG defendants in dominating the Hellas Group to commit the wrongs complained of. Instead, the motion court allowed the TPG defendants to “be considered collectively for alter ego purposes” with each other and with other non-parties. 

On appeal, the Appellate Division, First Department modified the motion court’s order to grant the motion as to the TPG defendants, and otherwise affirmed the order as to the other moving defendants.

The Court held that Plaintiff failed to raise an issue of fact precluding summary judgment in favor of the TPG defendants. The Court found that plaintiff failed to identify any evidence demonstrating the actions taken by each TPG defendant in the wrongs alleged by WTC. Instead, said the Court, “Plaintiff points to tangential relations of each of the TPG Defendants to the transaction at issue and contends that when the actions of each of the nine TPG Defendants are taken as a collective whole, the evidence supports an alter ego claim.”¹⁴ However, explained the Court, the case authority upon which plaintiff relied did not support the collective approach advance by plaintiff.¹⁵ Rather, said the Court, the cases required “each defendant” to be “the alter ego of another.”¹⁶ 

The Court noted that even if it accepted plaintiff’s view of collective alter ego liability, plaintiff nonetheless failed to proffer “proof sufficient to raise an issue of fact as to how each of the TPG Defendants, … , exercised ‘complete domination’ over the purportedly dominated companies (the Hellas entities), let alone how ‘such domination was used to commit a fraud or wrong against the plaintiff.’”¹⁷ 

Plaintiff offers no evidence sufficient to demonstrate how the individual TPG Defendants satisfy the alter ego factors. Notably, plaintiff has offered no particularized proof that the TPG Defendants: owned any stock in any Hellas entity; played any role in the issuance of the offering memorandum and eventual 2006 corporate recapitalization; disregarded any of the corporate formalities (as plaintiff’s expert concedes); intermingled its funds with those of any Hellas entity; shared its officers, directors and corporate personnel or even common office space and telephone numbers with any Hellas entity; interfered with the ability of any Hellas entity to make independent business decisions; or failed to treat the Hellas entities as independent profit centers.¹⁸

The Court, therefore, held that the motion court “erred in assessing [the] factors [showing domination] under a collective liability theory by treating the TPG Defendants as a single entity.”¹⁹

The Court also held that the “alter ego claim was properly dismissed as against individual defendants Giancarlo Aliberti and Matthias Calice, as there [was] no evidence that they were ‘actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations without regard to formality and to suit their immediate convenience.’”²⁰ 

Finally, the Court held that the “alter ego claim was also properly dismissed as against defendant Apax Partners, L.P., which had no involvement in the transaction at issue.”²¹ 

Takeaway

Cortlandt Street is notable because of its rejection of a collective alter ego theory of liability, which lumps together for alter ego purposes distinct corporate entities and/or non-parties without requiring the plaintiff to present evidence as to each defendant’s conduct and involvement in the transaction at issue.

As noted by the Court, this theory of collective liability conflicts with case authority requiring a plaintiff to show particularized facts of improper domination and control, and the use of that improper domination and control, to perpetrate a fraud or other wrong as to each entity to be held liable as an alter ego. 

In effect, the collective theory of alter ego liability conflicts with the prohibition of group pleading. Group pleading occurs when the plaintiff lumps all defendants together without any specification of the conduct charged to a particular defendant. 

[Eds. Note: this Blog has written on group pleading and its prohibition here, here, and here.]

Under New York law, group pleading is insufficient to defeat a motion to dismiss, let alone summary judgment, in the veil piercing context.²² As the First Department explained in another case, a plaintiff who “simply states that everyone who was involved in any way with the … transaction participated in fraudulent activity,” and fails to “allege exactly which defendant engaged in what activity and when, in furtherance of the alleged fraud,” cannot survive a motion to dismiss, and therefore, such collective evidence is “[a] fortiori . . . insufficient to defeat a motion for summary judgment.”²³ 

Finally, Cortlandt Street serves as a reminder that the plaintiff who seeks to impose alter ego liability must proffer facts and evidence. When the plaintiff fails to provide factual support for the allegations, as the Court found, the alter ego liability claim will fail.

Footnotes

1. Conason v. Megan Holding, LLC, 25 N.Y.3d 1, 18 (2015) (internal quotation marks omitted); TNS Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998).
2. Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141-142 (1993); TNS Holdings, 92 N.Y.2d at 339.
3. TNS Holdings, 92 N.Y.2d at 339.
4. Sutton 58 Assoc. LLC v. Pilevsky, 189 A.D.3d 726, 729 (1st Dept. 2020) (internal quotation marks omitted).
5. East Hampton Union Free School Dist. v. Sandpebble Bldrs., Inc., 16 N.Y.3d 775, 776 (2011) (noting that at the pleading stage, “a plaintiff must do more than merely allege that [the defendant] engaged in improper acts or acted in ‘bad faith’ while representing the corporation”), aff’d, 16 N.Y.3d 775 (2011); Metropolitan Transp. Auth. v. Triumph Adv. Prods., 116 A.D.2d 526, 528 (1st Dept. 1986).
6. Ledy v. Wilson, 38 A.D.3d 214, 214 (1st Dept. 2007).
7. Shisgal v. Brown, 21 A.D.3d 845, 848 (1st Dept. 2005) (internal citation omitted).
8. Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 174 (1st Dept. 2013) (citation omitted).
9. Trabucco v. Intesa Sanpaolo, S.p.A, 695 F. Supp. 2d 98, 107 (S.D.N.Y. 2010). See also Austin Powder Co. v. McCullough, 216 A.D.2d 825, 827 (3d Dept. 1995) (commingling assets and operating corporations “as one entity”).
10. Trabucco, 695 F. Supp. 2d at 107.
11. Id.
12. N.Y. Dist. Council of Carpenters Pension Fund v. Perimeter Interiors, Inc., 657 F. Supp. 2d 410, 421 (S.D.N.Y. 2009). See also Tap Holdings, 109 A.D.3d at 174.
13. Matter of Morris, 82 N.Y.2d at 141; Guptill Holding Corp. v. State of N.Y., 33 A.D.2d 362, 365 (3d Dept. 1970) (noting that an element of veil piercing is “an injury proximately caused by said wrong”) (citation omitted); East Hampton Union Free School Dist., 66 A.D.3d at 132 (noting that the plaintiff must articulate conduct by the individual that creates a nexus between it and the “transactions or occurrences” alleged in the complaint).
14. Slip Op. at *1.
15. Id.
16. Id. at *1-*2 (citing Perez v. Masonry Servs., Inc., 189 A.D.3d 703, 704 (1st Dept. 2020), lv. denied, 37 N.Y.3d 903 (2021) (specifically finding that the defendants treated two corporate entities “as a single entity,” and thus “abused the privilege of doing business in the corporate form”); Wm. Passalacqua Bldrs., Inc. v Resnick Devs. S., Inc., 933 F.2d at 139-141 (specifically detailing the evidence demonstrating the “blurred” “lines of corporate control and responsibility” and “high degree of intermingling” among various entities “all controlled either directly or indirectly by family members”)).
17. Id. at *2 (citing Matter of Morris, 82 N.Y.2d at 141).
18. Id.
19. Id.
20. Id. at *2-*3 (quoting Walkovszky v. Carlton, 18 N.Y.2d 414, 420 (1966) (internal quotation marks omitted)).
21. Id. at *3.
22. E.g., Principia Partners LLC v. Swap Fin. Grp., LLC, 194 A.D.3d 584, 584 (1st Dept. 2021) (dismissing veil piercing claim where the “complaint failed to distinguish between the entities” it sought to pierce); Art Cap. Bermuda Ltd. v. Bank of N.T. Butterfield & Son Ltd., 169 A.D.3d 426, 427 (1st Dept. 2019) (dismissal of veil piercing claim for failure to “allege particularized facts”); Ferro Fabricators, Inc. v. 1807-1811 Park Ave. Dev. Corp., 127 A.D.3d 479, 480 (1st Dept. 2015) (dismissal of veil piercing claim where complaint failed to “plead any particularized facts” and was not specific “as to when and by whom” wrongful statements were made).
23. 3 E. 54th St. N.Y., LLC v. Patriarch Partners, LLC, 90 A.D.3d 418, 419 (1st Dept. 2011).

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.