Piercing the Corporate Veil – Critical Facts That You Will Need To Prove Your Case Under New York Law August 10, 2009

The fact pattern is all too familiar:  D enters into a contract with small business P to jointly develop certain products, and then not only breaches the contract with P, but then breaches his fiduciary duty to P and uses the proprietary information that he gained during their alliance to try and poach P’s proprietary client database. Moreover, in the process of downloading P’s confidential and proprietary information, D damages the information that remained on P’s hard drive, which forces P to expend thousands of dollars on an expert IT guy to retrieve that data in usable form.

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.

Jonathan Cooper is a New York Business Litigation and New York Commercial Litigation Lawyer with a focus on New York breach of contract and New York business fraud claims before the Nassau, Queens, Brooklyn, Bronx, Westchester and Suffolk County courts of New York State. For more information, feel free to contact his Long Island office at 516-791-5700.

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