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Veil Piercing Rejected By Second Department in Judgment Enforcement Action

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  • Posted on: Nov 13 2023

By: Jeffrey M. Haber

It is well-settled that a corporation (or limited liability company) acts through its officers, directors and owners. As a result, these individuals are normally not liable for the debts incurred by the corporation (or limited liability company). However, when an officer, director or shareholder abuses the corporate form to perpetrate a wrong or injustice against a third party, courts will intervene on behalf of the third party to hold the corporate actor personally liable.1 

“The concept of piercing the corporate veil is an exception to [the foregoing] general rule.”2 Courts will invoke this exception only where “necessary to prevent fraud or to achieve equity.”3 

“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.”4 For example, the plaintiff must show that the officer, director or member used the corporation (or company) for his/her personal benefit and the corporation (or company) was nothing more than an “alter ego” or instrumentality of the officer or member.5 Conclusory allegations of domination and control are insufficient.6 The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable.

Factors to consider in determining whether an individual has abused the corporate form include failure to adhere to corporate formalities, inadequate capitalization, commingling of assets and personal use of corporate funds for personal benefit.7 No one factor controls the consideration.8 

In addition to the foregoing factors, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of.9 

Notably, courts recognize “that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’”10

In Groth v. Ferrante, 2023 N.Y Slip Op. 05592 (2d Dept. Nov. 8, 2023) (here), the Appellate Division, Second Department affirmed the dismissal of veil piercing claims against the individuals of a corporate judgment debtor.

Groth arose from a $150,000 loan that plaintiffs extended to defendant Everest Merchant Funding, Inc. (“EMF”) in March 2013. The loan was secured by a note. Richard Ferrante and Stuart Schoeman (together, the “Individual Defendants”), as shareholders of EMF, did not personally guarantee the debt. EMF ultimately defaulted on the note, and in a prior action commenced by plaintiffs against EMF to recover on the note, plaintiffs obtained a default judgment against EMF in the total sum of $235,354.60.

In December 2018, plaintiffs commenced an action against EMF, Ferrante, and Schoeman pursuant to CPLR article 52 to, among other things, enforce the judgment entered against EMF. Plaintiffs sought to pierce EMF’s corporate veil and enforce the default judgment against Ferrante and Schoeman personally. Plaintiffs further sought to set aside certain cash transfers by EMF, which were made primarily to pay salaries, on the ground that those transfers were fraudulent conveyances pursuant to Debtor and Creditor Law §§ 273-275.

The Individual Defendants moved for summary judgment dismissing the complaint insofar as asserted against them. The motion court granted the motion on the grounds that the transfers of funds by EMF were not without consideration and that plaintiffs’ allegations of fraudulent inducement were not properly before the court, since no cause of action sounding in fraudulent inducement was alleged in the pleadings.

On appeal, the Second Department affirmed.

The Court found that there were “some corporate formalities [that] were observed” by EMF sufficient to withstand plaintiffs’ veil piercing efforts.11 For example, said the Court, “EMF filed tax returns and held an annual shareholders’ meeting in 2014” and “had a functioning board of directors” that “plaintiff Stephen F. Groth served on … pursuant to a corporate resolution dated January 6, 2014.”12 

The Court also held plaintiffs’ allegation of commingling of personal and corporate assets insufficient to support veil piercing. The Court found that “Ferrante’s infusion of $70,500 of his personal funds into EMF to increase EMF’s value,” negated the claim that he improperly took corporate funds for his personal benefit.13 Accordingly, the Court concluded that “the individual defendants established, prima facie, that the circumstances present here do not warrant piercing the corporate veil ….”14

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.

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