A word of caution is in order here: this doctrine is only available in limited circumstances, such as where the parties never achieved a “meeting of the minds,” i.e., where both sides understood their respective obligations under the contract, or where one party was fraudulently induced into entering into the contract.

That said, here are some more grounds rules:

(1)               Rescission “is to be invoked only when there is lacking complete and adequate remedy at law and where the status quo may be substantially restored.” (Rudman v. Cowles Communications, Inc., 30 N.Y.2d 1, 13, 330 N.Y.S.2d 33, 280 N.E.2d 867);

(2)              If the other party to the agreement substantially changed their position in reliance on the agreement, and it would prove impractical – if not impossible to restore the other party to the position they were in pre-contract (such as where two companies were merged). (see, e.g., Gravenhorst v. Zimmerman, 236 N.Y. 22, 34-35, 139 N.E. 766; Kamerman v. Curtis, 285 N.Y. 221, 226, 33 N.E.2d 530).

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The facts of this case were – and are – rather fascinating.

In this case, the plaintiff, a Hong Kong garment manufacturer, sold the defendant several large containers of clothing.  But here’s the interesting part:  instead of standard invoicing for the shipments, both parties to the deal used a “double invoicing” method in order to avoid United States customs duties. The first invoice, which understated the amount and value of the clothing, was presented to customs officials for purposes of calculating the amount of customs duties that were owed;  a second invoice which set forth the actual value of the goods seeking payment was then sent by plaintiff to the defendants.

When the defendants failed to pay on these invoices, leaving an outstanding balance totaling nearly $2 million, this lawsuit seeking recovery in breach of contract, business fraud, unjust enrichment, tortious interference and conversion followed.

The defendants in this case definitely merit the “chutzpah” award: they sought to dismiss the claim – and thereby avoid having to pay for the goods that they ordered, received, and presumably profited from – on the grounds that the contract between the parties was illegal, and therefore, unenforceable.

The Court articulated the general rule as follows:

“In New York ‘[i]llegal contracts are, as a general rule, unenforceable.’ Lloyd Capital Corp. v. Henchar, Inc., 80 N.Y.2d 124, 127 (1992) … An agreement which is lawful on its face and which does not contemplate or necessarily entail unlawful conduct in its performance is enforceable by the promisee even though he engages in unlawful activity in the agreement’s performance.”

Applying these rules to reject the defendants’ argument, the Court stated as follows:

“It appears that the double invoicing was only indirectly related to the contract, rather than being “central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract … Defendants’ invocation of the illegality doctrine is unpersuasive in that they seek to use the doctrine “as a sword for personal gain rather than a shield for the public good.”

I have no doubt that justice was achieved by this decision.

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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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Venting his frustration at the prospects for his case (like many small businesses, he made the “mistake” of taking the defendant-vendor at his word, and in hindsight, didn’t memorialize all of their understandings in writing as well as he could have) and the anticipated cost of litigating the breach of contract case in New York, the man responded as follows:

“This really, really sucks. Even more depressing is that this is the “American Way.” You know how it is done in the rest of the world? Well, for example, my mother in law in [Europe]  bit into a hard candy that she bought at a department store and chipped her front tooth, just last week. She complained about it to the manager and he said ‘Not to worry. Just you get that fixed and we’ll pay for it, whatever the cost…we take care of our customers here.’  Here they would first deny that the candy came from them, then deny that the candy caused the damage, then refer you to their legal department before even listening to whether the claim had any merit.”

It’s people like this gentleman that motivate me to do what I do. And he is precisely the type of person that the legal system (should be) designed to help.

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In Grimaldi v. Guinn, the plaintiff sued the Pennsylvania-based defendants for breach of contract, business fraud, and under New York’s deceptive advertising statute, General Business Law § 349, because he handed over his vintage 1969 Camaro to the defendants to add a specialized manifold and carburetor assembly.

Months later, his Camaro, which was valued at over $100,000 beforehand, was returned to him in bags.

In response to the plaintiff’s lawsuit, the defendants moved to dismiss on the grounds that the New York court lacked personal jurisdiction over them because they had no meaningful contacts with New York State. In affirming the trial court’s denial of the defendants’ motion, New York’s Appellate Division, Second Department reiterated the standard for conferring jurisdiction on a foreign (i.e., non-New York-based) defendant based on contacts that were made via the internet:

“The purposeful creation of a continuing relationship has been a contributing factor in finding sufficient contacts to justify the exercise of long-arm jurisdiction … If the foreign company maintains an informational Web site accessible to the general public but which cannot be used for purchasing services or goods, then most courts would find it unreasonable to assert personal jurisdiction over that company …

“However, passive Web sites, when combined with other business activity, may provide a reasonable basis for the assertion of personal jurisdiction … If a Web site provides information, permits access to e-mail communication, describes the goods or services offered, downloads a printed order form, or allows online sales with the use of a credit card, and sales are, in fact, made … then the assertion of personal jurisdiction may be reasonable.”

From the litany of cases from other jurisdictions cited by this opinion, it seems rather clear that this standard is equally applicable in other states as well. Therefore, when establishing your web presence and/or contacts with prospective clients or customers, it is critical that you remain cognizant of the jurisdictional implications of your communications.

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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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As predicted in my July 23 blog post entitled “Why Many (If Not Most) Business Fraud Claims Are Dismissed,” in a ruling handed down earlier today New York’s Appellate Division, First Department unanimously reversed the trial court’s ruling, and dismissed in its entirety Dan Rather’s lawsuit against his former employer, CBS, and its parent company, Viacom (among others), finding that his claims for business fraud lacked the requisite specificity. (For additional information on this topic, please see “How to Prove a Successful Business Fraud Claim.”)

The Court’s treatment of the breach of contract and fiduciary duty claims is unusually detailed, and therefore, informative. In dismissing the breach of contract claim, the Court noted that a close reading of Rather’s employment contract when viewed through the prism of his complaint indicated that the defendants had not, in fact breached the agreement, and his contention that CBS’s failure to release him from his contract to seek alternative employment was unduly speculative.

The appellate court also rejected Rather’s claim that CBS and the other defendants owed him a special fiduciary duty above and beyond that which was called for under the contract due to his long tenure with CBS, stating that the length of his employment with CBS was “irrelevant” for purposes of creating a fiduciary relationship.

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Earlier today, New York Federal Judge Jed Rakoff issued a lengthy decision detailing why, despite the traditional deference granted to parties in determining the terms of their own settlements, he would not sign off on the S.E.C.’s willingness to accept a $33 million penalty from Bank of America for its alleged breach of fiduciary duty and fraud perpetrated against its investors – in other words, lying – in order to award over $3.5 billion in bonuses to the outgoing Merrill employees – the ones who nearly bankrupted Merrill to begin with.

As Judge Rakoff cynically observed, the proposed settlement reeks from top to bottom: the S.E.C. gets to showcase their supposed toughness on wrongdoing (even though the proposed settlement would amount to an infinitesimal penalty compared to the false and fraudulent statements that led to the multi-billion dollar merger), the Bank gets to claim that it is paying all too much as a result of being over-regulated, and, adding insult to injury, the ones who supposedly perpetrated this entire fraud – the executives – walk off scot-free, with the shareholders (their fiduciaries) picking up their tab for the executives’ lies.

For those outraged by the banks’ behavior (like me), this decision is a welcome breath of fresh air.

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If the reported cases on fraud are used as a barometer, his optimism should be short-lived.

Simply put, as noted in our article “How to Prove a Successful Business Fraud Claim,” the specificity with which the fraud allegations must be made – broad-based, general or blunderbuss claims will not suffice – combined with the plaintiff’s significantly heightened burden of proof on a fraud claim, i.e., the assertions must be proved through “clear and convincing evidence,” makes it most likely that his claims (at least insofar as the fraud aspect is concerned) will be dismissed.

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