Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 11, 2016

Court Rejects Veil Piercing Claim; Notes That Law Enforces Both Good Deals and Bad

On November 28, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in EB Ink Technologies, LLC v. Lamocu Holdings, LLC, 2016 NY Slip Op. 32339(U), dismissing a veil piercing claim, explaining:

The core issue in this case is whether the Individual Defendants may be held liable for Lamocu’s top up obligations. As noted above, EB Ink principally relies on claims of veil piercing and alleged oral admissions by the Individual Defendants.

As an initial matter, the court disregards the parties’ reliance on New York’s veil piercing standard because Lamocu is a Delaware LLC. It is well settled that the question of whether defendants’ corporate veils should be pierced will be determined by the laws of each defendant’s state of incorporation. New York courts, therefore, apply Delaware law when the plaintiff seeks to pierce the corporate veil of a Delaware LLC.
. . .

The complaint fails to properly plead a veil piercing claim because the requisite fraud allegations are not alleged. The allegations in the complaint regarding domination, control, and inadequate capitalization, as set forth above, are insufficient to pierce the corporate veil of a closely held Delaware LLC. The only bad act alleged, Lamocu’s breach of its contractual obligations, cannot be used to satisfy the fraud prong.

On an even more fundamental level, the claim that the Individual Defendants were intended to be held liable for Lamocu’s top up obligations is based on the entirely foreseeable assumption that Lamocu, an SPV, would not have the ability to top up the escrow because it did not own the shares needed to do so. Even if the court found EB Ink’s position to be sympathetic, equity is not a concern the court may consider when interpreting a contract or assessing the legitimacy of a Delaware corporation. The parties here are sophisticated and, therefore, the court must enforce their agreement, even if the court or one of the parties believes the agreement to be unwise. EB Ink admits that it knew that Lamocu did not own shares of T-Ink that could be used to top up the escrow. Obviously, entering into a contract with a judgment proof SPV that obligates the SPV to deliver shares, which it does not own nor has the means to acquire, is an extremely perilous risk. It is hard to imagine a more extreme undertaking of counterparty credit risk. Had the parties intended to obligate the Individual Defendants, instead of just Lamocu, to top up the escrow, they could have (and would have) expressly done so in one of their many agreements. They did not. The court cannot rewrite the parties’ contract to give EB Ink a better bargain than it negotiated. Rather, the court must give effect to the parties’ decision to not contract for the Individual Defendants to have the personal obligation to top up the escrow.

(Internal quotations and citations omitted).

View posts