Piercing The Corporate Veil: Business Owner Found Jointly And Severally Liable For The Company’s Fraudulent ActsPrint Article
- Posted on: May 22 2017
This Blog has previously written about the benefits of forming a limited liability corporation (“LLC”) and the perils of ignoring the corporate formalities that are attendant thereto. (Here.) In today’s post, this Blog will examine the use of the corporate entity to commit a fraud on another and a court’s willingness to pierce the corporate veil to hold the owners or members personally liable for that wrongful conduct.
When to Pierce the Corporate Veil:
In general, the 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.
There is No Daylight Between the Company and its Owner
The plaintiff must prove that the owner or member is operating the LLC as a “sham” for his/her personal benefit and the LLC is acting as the “agent,” “alter ego” or “mere instrumentality” of the owner or member.
Indicia of domination includes: (1) the failure to adhere to corporate formalities (such as, making important corporate decisions without recording them in minutes of a meeting); (2) inadequate capitalization (that is, the company never had sufficient funds to operate; it was not a separate entity that could stand on its own); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the company; and (5) use of corporate funds for personal benefit (e.g., the owner or member pays his/her personal bills from the business bank account).
The Company’s Actions Were Wrongful or Fraudulent
Those seeking to pierce the corporate veil must show that the corporation or LLC was dominated in connection with the transaction at issue and that the domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences. In New York, it is not necessary to plead or prove fraud in order to pierce the corporate veil.
Nandlal v. Al-Pros Construction, Inc.
On April 7, 2017, Justice Dufficy of the New York Supreme Court, Queens County, Commercial Division, had the opportunity to consider these principles in a bench trial of an action in which the Court pierced the corporate veil because the corporate form was used to perpetrate a fraud. Nandlal v. Al-Pros Construction, Inc., 2017 NY Slip Op. 50620(U).
On June 13, 2011, the plaintiffs, Vishnu Nandlal and Dularie Nandlal, entered into a contract with the defendant Al-Pros Construction, Inc. (“Al-Pros”) for the renovation of their home. Pursuant to the contract, Al-Pros agreed to substantially renovate the home over a compressed period of time – the contract specified that time was of the essence. Work was to commence on June 23, 2011, and to be completed within six months of the commencement of construction, on or about December 23, 2011.
Notwithstanding the agreed-upon time requirements, Al-Pros did not commence work on the project until July 7, 2011. Once work began, the quality of Al-Pros’ work proved to be substandard. For example: (a) it removed the roof of the premises, but failed to place a protective tarp over the open structure of the premises, causing the home to sustain extensive damage from rain and the elements; (b) it failed to remove construction debris from the premises; and (c) it failed to properly align the rafters and install the flitch beams. Pursuant to the contract, the plaintiffs sent letters to the defendants complaining of the poor work quality and substandard workmanship, and requesting that these conditions be corrected immediately.
The defendants refused to correct any of the issues cited, and instead ceased work on the project. When Al-Pros failed to complete the project by the deadline set forth in the contract, the plaintiffs exercised their option to terminate the contract.
At trial, the plaintiffs’ expert, a structural engineer, testified that there were serious deficiencies in the defendants’ work. In the expert’s opinion, these conditions would affect the structural integrity of the premises, and would not pass inspection by the New York City Department of Buildings. The expert also observed mold on the wood beams, as well as subflooring that was decayed and warped. He testified that the wood beams and the subflooring would have to be replaced to avoid compromising the structural integrity of the premises.
Al-Pros did not offer a rebuttal expert. Instead, it provided the testimony of the defendant Yusuf Ali (“Ali”), the president of Al-Pros. Ali admitted that he is not an engineer, and had no knowledge of how to install flitch beams or other items that were required by the contract. He also admitted that Al-Pros did not complete the contract. He failed to produce any written change orders signed by the plaintiffs to substantiate his contention that extra work was performed. In addition, Ali admitted that Al-Pros had been barred from performing work within the State of New York. As a result, he formed a new corporation with a different spelling of the corporate name, to wit, he changed the spelling of the word “Delaware” to “Deleware.” Similarly, Al-Pros’ home-improvement license expired on June 30, 2011, prior to the commencement of any work on the project. As a result, Al-Pros was barred from obtaining any permits from governmental agencies to perform renovation work.
The plaintiffs sued for breach of contract and unjust enrichment. After trial, the Court ruled in favor of the plaintiffs.
The Court’s Ruling
The Court found that the defendants performed their work in an unworkmanlike manner, failed to remediate the dangerous conditions they caused when asked, and abandoned the job. As a result, the plaintiffs had to expend significant amounts of money to rectify the conditions, and to obtain a residence to live until the work was completed. Despite being unlicensed, and barred from performing this type of work, the defendants manipulated the corporate form to allow them to engage in substandard work while insulating themselves from the consequences. This prevented Ali from using the corporate form as a shield from liability and found him to be jointly and severally liable with the company. As to the latter finding, the Court held:
Having been barred from performing home-improvement work in the State of New York, the individual defendant, Yussuf Ali a/k/a Yussuf Au, formed a new corporation with a slightly different spelling to its name. His intention was clearly to circumvent the proscription on performing home-improvement work. The corporate form will be disregarded when it has been used to achieve fraud or where the corporation has been so dominated by an individual or another corporation (usually a parent corporation), and its separate identity so disregarded, that it primarily transacted the dominator’s business, rather than its own, and can, therefore, be considered the other’s alter ego. The Court finds that the corporate entity was misused by Ali, for his own personal ends, to commit a fraud or wrongdoing or avoid his obligations. Since the new corporation was formed with a fraudulent purpose, Ali cannot avail himself of the protection of the corporate forum. Hence, the individual defendant shall be jointly and severally liable for the amount awarded in this trial. [Citations omitted.]
The concept of piercing the corporate veil is a limitation on the accepted principles that a corporation exists independently of its owners, as a separate legal entity, that the owners are not liable for the debts of the corporation, and that it is acceptable to incorporate for the purpose of limiting the liability of the corporate owners.
While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a device to further their personal interests rather than the company’s business, such domination, standing alone, is not enough; some showing of a deceitful, fraudulent or unjust act toward another party is required. The party seeking to pierce the corporate veil, therefore, 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. The plaintiffs in Nandlal were able to successfully do so.