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The Pitfalls of the Informal Appearances and the Benefit of the Corporate Veil

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  • Posted on: Apr 7 2023

By Jonathan H. Freiberger

This Blog has previously discussed informal appearances in an article aptly titled: “Informal Appearances,” from which the introductory information related to informal appearances is taken.

Informal Appearances

It makes sense that a “plaintiff appears in an action merely by bringing it.”  Deutsche Bank Nat. Trust Co. v. Hall, 185 N.Y.S.3d 1006, 1007 (2nd Dep’t 2020) (citation and internal quotation marks omitted).  Once served with process, a defendant must appear in an action to avoid a default.  Section 320(a) of New York’s Civil Practice Law and Rules (the “CPLR”), which sets forth, inter alia, the way a defendant can appear in an action, provides that “[t]he defendant appears by serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer.”  An appearance pursuant to CPLR §320(a) is a formal appearance in the action.  New York courts also recognize “informal appearances.”  An appearance, whether formal or informal, can have a significant impact on litigation.  Among other things, an appearance could: preclude the entry of a default judgment by plaintiff; operate to preclude a defendant from interposing a defense of lack personal jurisdiction; and, preclude a defendant from having a complaint dismissed pursuant to CPLR 3215(c) based on a plaintiff’s failure to seek a default judgment within a year of default.  [This BLOG has addressed CPLR 3215(c) [here], [here], [here], [here].]  Depending on the circumstances, a plaintiff or a defendant may argue that a defendant has “informally appeared” in an action.  To constitute an informal appearance, a defendant must have engaged in “meaningful participation in the merits of the case.”  Kurlander v. Willie, 45 A.D.3d 1006, 1007 (3rd Dep’t 2007) (citation omitted).  See also Deutsche Bank, 185 N.Y.S.3d at 1009.

Corporate Veil

One of the reasons why individuals form corporations and limited liability companies is to shield themselves from personal liability as a consequence of their business dealings.  “The general rule, of course, is that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability.”  Town-Line Car Wash, Inc. v. Don’s Kleen Machine Kar Wash, Inc., 169 A.D.3d 1084, 1085 (2nd Dep’t 2019) (citations and internal quotation marks omitted); see also E. Hampton Union Free School Dist. v Sandpebble Builders, Inc., 66 A.D.3d 122 (2d Dep’t 2009), aff’d, 16 N.Y.3d 775 (2011).  However, the corporate veil may be pierced in certain circumstances.  The East Hampton Court recognized the “exception to [the] general rule, permitting, in certain circumstances, the imposition of personal liability on owners for the obligations of their corporation.”  East Hampton, 66 A.D.3d at 126 (citations omitted).  “A plaintiff seeking to pierce the corporate veil must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over it in the transaction at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff”.  Id.  [Eds. Note: this blog has addressed corporate veil piercing numerous times.  See, e.g., [here], [here], [here], [here], [here], [here], [here], [here] and [here].

Travelon, Inc. v. Maekitan

Against this backdrop, we can discuss Travelon, Inc. v. Maekitan, a case decided on April 5, 2023, by the Appellate Division, Second Department, and in which the Court addresses informal appearances and corporate veil issues.  [Eds. Note: the facts herein are edited for ease of discussion.]  Plaintiff commenced a breach of contract action against, inter alia, Individual and Corporation.  Thereafter, plaintiff moved for a default judgment (for failure to respond to the complaint) against Individual and Corporation and:

[in] support of the motion, the plaintiff[] did not submit any affidavits of service of process upon [Individual] or [Corporation]. Instead, the plaintiff[] contended that an affidavit from [Individual] [(the “Affidavit”)]…, which was submitted by [Affiliated Corporation] in opposition to the plaintiff’s prior motion for a preliminary injunction, constituted an informal appearance on behalf of both [Individual] and [Corporation], that [Individual] and [Corporation] had submitted to personal jurisdiction of the Supreme Court despite not having been served with process, that their time to file an answer had passed, and therefore, the court could enter a default judgment against them.

Affiliated Corporation’s counsel opposed the default judgment motion by submitting an affidavit in which he argued that he was only retained by, and appeared for, Affiliated Corporation and that “[Affiliated Corporation] opposes the motion for default judgments against [Corporation] and [Individual] because the motion, based entirely upon [Affiliated Corporation]’s filings in this proceeding, incorrectly charges that [Affiliated Corporation]’s participation constitutes an informal appearance on behalf of [Corporation] and/or [Individual].”  Plaintiff appealed the denial of its motion for leave to enter a default judgment against [Corporation] and [Individual].

On appeal the Second Department modified supreme court’s order granting that portion of plaintiff’s motion seeking a default judgment against Corporation.  The Court recognized that “[o]n a motion for leave to enter a default judgment against a defendant based on the failure to answer or appear, a plaintiff must submit proof of service of the summons and complaint, proof of the facts constituting the cause of action, and proof of the defendant’s default.”  (Citations and internal quotation marks omitted; emphasis added.)  Plaintiff, however, did not submit an affidavit of service of the summons and complaint on [Individual] and [Corporation], nor did [Individual] or [Corporation] make a formal appearance in the action pursuant to CPLR 320(a).

The Court then discussed informal appearances; noting that “[w]hen a defendant participates in a lawsuit on the merits, he or she indicates an intention to submit to the court’s jurisdiction over the action, and by appearing informally in this manner, the defendant confers in personam jurisdiction on the court.”  (Citations and internal quotation marks omitted.)  Also, “[a]n appearance of the defendant is equivalent to personal service of the summons…, unless an objection to jurisdiction under CPLR 3211(a)(8) is asserted by motion or in the answer as provided in rule 3211 (CPLR 320[b])”.  (Internal quotation marks and brackets omitted; hyperlink added.)  Although it is an “infrequent thing,” informal appearances may occur “even when the defendant is not served with process, where an individual defendant affirmatively states that he or she is only acting in his or her capacity as an officer of a corporate defendant, and where a party opposes a motion for a preliminary injunction.  (Citations omitted.)

As to the Individual, the Court found that the Affidavit (submitted in opposition to the preliminary injunction motion) made clear that he was speaking in a representative capacity, on behalf of Corporation and Affiliated Corporation, and not in an individual one.  Recognizing the corporate veil cloaked the Individual with immunity from personal liability, the Court determined that, on the record presented, the Individual did not “participat[] on the merits in his individual capacity” by submitting the Affidavit on behalf of Corporation and Affiliated Corporation.  Accordingly, supreme court properly denied that portion of plaintiff’s motion seeking a default judgment against the Individual.

Conversely, the Court determined that the Affidavit constituted an informal appearance on behalf of Corporation.  In the Affidavit, Individual indicated he was the CEO of both Corporation and Affiliated Corporation.  Further, in the Affidavit, Individual collectively defined the Corporation and Affiliated Corporation and made other averments and stated facts involving Corporation.  “Thus, even though counsel for [Affiliated Corporation] repeatedly denied that he was ever retained to represent [Corporation] in this action, the Affidavit advanced contentions that might constitute either affirmative defenses or counterclaims on behalf of [Corporation]. Thus, as to the Corporation, the Court held:

Since the [A]ffidavit constituted an informal appearance on behalf of [Corporation], and since [Corporation] failed to serve and file an answer within 20 days of its informal appearance (see CPLR 320[a], [b]) or move pursuant to CPLR 3211(a)(8) to dismiss the complaint insofar as asserted against it on the ground that the Supreme Court did not have personal jurisdiction over it (see id. § 320[b]), the court should have granted that branch of the plaintiffs’ motion which was for leave to enter a default judgment against [Corporation].

Jonathan H. Freiberger 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.

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