In granting the defendants’ motions to dismiss these claims, the Court held as follows:

“[F]indings that corporation ‘fail[ed] to observe corporate formalities…had no contracts, no employees, and no independent office space…had no separate bank account…[and] no capital or assets at the time of trial’ insufficient to warrant finding of ‘domination’ … Indeed, plaintiff makes no allegation that the individual defendants intermingled personal and corporate funds, failed to deal with NHP on an arms-length basis, or in any meaningful way abused or disregarded the corporate form.

“Moreover, even if her allegations were sufficient with respect to domination, ‘complete domination of the corporation…standing alone, is not enough … Rather ‘[t]he party seeking to pierce the corporate veil 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.’ Here, plaintiff makes no such allegation, contending solely that the corporation—as a corporation—perpetrated a fraud. Such allegations do not warrant veil piercing.”

Just another reminder why it is so difficult to pierce the corporate veil.

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The interesting part of the decision is not the particular holding in this case; it’s the Court’s succinct primer on the required elements to successfully plead the following claims in the breach of contract context:

• piercing the corporate veil;
• fraud;
• promissory estoppel; and,
• unjust enrichment.

(The latter two categories are known under their legal term, “quasi-contract”). Parenthetically, just because the judge dismissed part of the case, doesn’t mean she was wrong. To the contrary, her decision looks like it’s right on.

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The underlying, earlier decision from which this more recent decision stems is even more important, because it serves an important reminder to attorneys litigating breach of contract and breach of employment agreement cases: make sure that your causes of action are not only supported with specific factual allegations, but that they are also separately and distinctly pled.

In short, since the Court found that the plaintiff had not particularized any specific violations of the Labor Law, but had only set forth enough facts to sustain a common law (as opposed to statutory) breach of contract claim, the plaintiff was not entitled to recover statutory damages under the Labor Law, and therefore, the Court dismissed the plaintiff’s claims seeking to recover liquidated damages and attorney’s fees based upon the defendants’ alleged violations of Labor Law § 198 (1-a), stating: “Breach of contract claims do not give rise to the relief afforded under Labor Law §198 (1-a). See Gottlieb v. Kenneth D. Laub & Co., Inc., 82 NY2d 457, 464 (1993); Pachter v. Bernard Hodes Group, 10 NY3d 609 (2008).”

One final note: since the plaintiff failed to allege enough factual particulars, his attempt to pierce the defendants’ corporate veil failed as well.

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Debtor D (we’ll call him “D,” for short) owes you tens of thousands of dollars for product that you delivered months ago. When you inquire as to what the delay is in receiving payment, you get a run-around, and ultimately find out that D’s company was taken over by a small, closely held company whose priorities clearly do not include paying your bills.  By now, you’ve put them on formal notice that unless D pays the bills in full, a breach of contract suit will be brought.

Recognizing that he will have no viable defense to your claim, the principal of D does what many short-sighted executives do: he divests the company of as many assets as possible, as quickly as possible, transferring properties into the name of his wife and other family members for little or no consideration. While many people in your situation would throw up their hands at this point, that may prove to be a terrible mistake. And that is because they are likely unaware of the doctrine of constructive fraud – the cousin of the alter ego/piercing the corporate veil doctrine.

Unlike common law fraud principles, which require a showing of intent to defraud (which is difficult to prove), New York’s Uniform Fraudulent Conveyance Act (‘UFCA’), as codified in Article 10 of the Debtor and Creditor Law at §§ 270-281, has several provisions that do not require a claimant to prove that the defendant had actual intent to commit a fraud, and some of these provisions, such as section 273-a (entitled “Conveyances by
defendants”), was specifically drafted to prevent debtors from escaping their obligations in a lawsuit. This doctrine is commonly referred to as “constructive fraud.”

There is one important catch, however: in New York, as in other jurisdictions, “[A] transfer may not be challenged as fraudulent unless it prejudices the complaining creditor.” In other words, in determining whether a creditor has been prejudiced, courts consider what rights, if any, the creditor would have had to levy on the property had the challenged conveyance not occurred. And if the creditor (i.e., you) would never have been able to recover any of that money because your claim was so far back in line of the creditors, you will still be out of luck.

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In this case, the plaintiff sued to recover damages against her alarm company following a burglary.  At one point during the contract period, Firstline was acquired by ADT, a large home security alarm company. The Court’s decision which dismissed the claims against the defendants is significant for two (2) reasons:

1. The Court held that “courts applying New York law will enforce a shortened statute of limitations when it is reasonable and agreed to by contract.” (The Court also noted that reducing the claim period to one year is not unreasonable as a matter of law.) See, e.g., Cab Associates v. City of New York, 32 A.D.3d 229, 323, 820 N.Y.S.2d 21 (N.Y. 2006); and,
2. As a general rule, a party may not invoke the provisions of a contract to which it is not an original party. There are limited exceptions to this rule, however,  which include the following theories: (1) assumption;  (2) piercing the corporate veil or alter ego; (3)  incorporation by reference; (4) third-party beneficiary theories; or, (5) waiver [or] estoppel. Arthur Andersen LLP v. Carlisle, 129 S.Ct. 1896, 1902, 173 L.Ed.2d 832 (2009).

Here, the Court held that “assumption” was applicable.  Since the original Alarm Services Contract with Firstline Security Inc. specified that any lawsuit be brought within one year of the event that causing loss, damage or liability, ADT was also entitled to the benefit of that contractual provision, rendering plaintiff’s claim untimely.

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In Robles v. Copstat Security, Inc., the plaintiffs brought a proposed class action on behalf of a class of all security guards employed by Copstat Security Inc. (Copstat Inc.), Copstat Security LLC, and Andrews International Inc. after the defendants allegedly failed to pay the plaintiffs’ earned overtime pay in violation of the Fair Labor Standards Act (FLSA) and New York’s Minimum Wage Act.

Although the Court noted that the plaintiffs’ allegations in support of their claim that the corporate veil should be pierced were rather “general and vague” (suggesting that these claims may later be dismissed unless additional facts are fleshed out), the Court also refused to dismiss the claims against the individual defendant Bellistri at the initial pleading stage. The Court cited plaintiffs’ claim that the defendants’ corporate veil should be pierced because Bellistri, as the lone shareholder of Copstat, exercised complete domination and control over Copstat, and in that role, Bellistri left the company terribly undercapitalized when he unilaterally took nearly all of Copstat’s assets, and thereby left the corporate defendants unable to satisfy any adverse judgment.

From a practical standpoint, it remains to be seen what the plaintiffs gain by the denial of the individual defendant’s motion to dismiss, because unless the plaintiffs have, or later uncover, facts that support their contention that the corporate veil should be pierced, they may be merely prolonging the ultimate dismissal of these claims.

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In Interstate Foods, Inc. v. Lehmann, a decision that was recently published in the New York Law Journal, the president of wholesaler Lehmann Meats, Inc. was sued in his individual capacity for fraud because his company – which ceased doing business – issued several checks bearing his purported signature that were invalid.

In dismissing the plaintiff’s business fraud claims and rejecting the plaintiff’s attempt to pierce the veil of the defendant’s corporation, the Court noted that the plaintiff failed to adduce any competent proof that the president of the company was personally involved in the issuance of the checks. Therefore, the Court held, this case fell squarely within the ambit of the general rule that a corporate officer cannot be personally liable for alleged corporate fraud without the corporate officer’s personal involvement.

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In this case, Oltchin SA v. Zebulon Industries, et al., the defendant manufacturers failed to pay for the materials that were furnished to them by the plaintiff, a Romanian corporation. At the binding arbitration that was held before an international tribunal of the ICC, plaintiff was awarded damages of over $1.5 million. Thereafter, the plaintiff corporation had the award confirmed by a New York State court, and the award became a collectible judgment. Or so the plaintiff thought.

When the plaintiff went to enforce the judgment, it learned that the defendants had divested their corporation of all its assets. Consequently, they brought this case seeking to set aside those transactions as fraudulent and to pierce the defendants’ corporate veil(s).

Although the Court’s opinion was rendered in a very matter-of-fact manner, you can’t help but sense that the following sentiment underlies the Court’s opinion: there is absolutely no way I’m going to let these defendants get away with this charade on some procedural technicality.

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When P confronts D about all that has transpired, D looks P right in the eye, and says “Go right ahead and sue me if you like; I’m judgment-proof. Even if you win, your award will be worthless, because I’ve set up more shell corporations than you can count, and you’ll never get through them to me.” So, here’s the big question: Is D right, or is there something that can be done to effectively fight D?

As suggested by the title of this article, the answer is yes, under certain circumstances, you can pursue D individually by “piercing the corporate veil.” This is no simple task, however, for in order to prevail on such a claim, the plaintiff will be required to prove not only that D individually exercised total control over the company to the extent that he was effectively the alter ego of the company, but that he did not maintain corporate formalities. A practical example of this would be where he commingled funds, treating the company’s money as his own personal funds and vice versa, or the failure to maintain separate corporate accounts or file corporate tax returns.

Importantly, in a cautionary opinion that was handed down by New York’s Appellate Division, Second Department on Juy 28, blanket allegations that the individual defendant and his company are one and the same will not suffice; the party seeking to pierce the corporate veil must also allege specific facts demonstrating that the defendant had misused the special protections afforded by the corporate form (i.e., showing how these companies were really a sham), and thereby he should be deemed to have forfeited those privileges.

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