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Current Developments in the Commercial Divisions of the
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Posted: December 21, 2014

Plaintiff Cannot Bring Veil Piercing Claim Without Claim Against Entity Whose Veil is Being Pierced

On December 4, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Intelligent Product Solutions, Inc. v. Morstan General Agency, Inc., 2014 NY Slip Op. 51708(U), holding that a plaintiff could not bring a veil piercing claim without also bringing a claim against the entity whose veil was being pierced.

In Intelligent Product Solutions, the plaintiff brought claims against “the defendant with being the alter ego of a company known as Single Entry Systems, Inc., [hereinafter SES] with whom the plaintiff contractually agreed to work with in the development, testing and upgrading of certain computer software applications known as Expert Insure and Expert Inspect and to retain the plaintiff to provide program management services to SES.” Among the grounds on which the defendant moved to dismiss was “that the plaintiff failed to join a necessary party.” The court agreed, explaining:

It is well settled law that claims for the imposition of liability against a defendant that rest upon allegations that such defendant is liable to the plaintiff because it is an alter ego of another entity who has not been joined as a defendant, renders the non-joined entity a necessary party. Indeed, a stand alone claim for recovery from a purportedly dominant alter ego entity is considered legally insufficient since New York does not recognize a separate cause of action to pierce the corporate veil. Instead, corporate veil piercing is an equitable doctrine which allows a corporation’s separate legal existence to be disregarded so as to attach liability to its operatives ordinarily insulated therefrom by the corporate form, so to prevent fraud and achieve equity.

By this motion, the defendant seeks dismissal of the complaint, not on legal insufficiency grounds, but upon grounds that the plaintiff’s failure to join as a party defendant, SES, warrants dismissal of this action pursuant to CPLR 3211(a)(10) which provides for dismissal whenever the court should not proceed in the absence of a person who should be a party. The defendant contends that dismissal of the complaint is warranted since SES is a necessary party under controlling case authorities such as those cited above and the plaintiff failed to join it.

However, dismissal for failure to join a necessary party is proper only in very limited circumstances as a motion for such dismissal necessarily invokes application of the joinder provisions set forth in CPLR 1003 and 1001. These rules authorize a court to dismiss a complaint where a necessary party has not been joined only after it has determined that such party is indeed necessary and that is not subject to the jurisdiction of the court except upon its voluntary submission thereto or consent. If jurisdiction can be obtained only by the entity’s consent or voluntary appearance the court, when justice requires, may allow the action to proceed without the entity being made a party. Any such determination to proceed must be based upon the court’s consideration of five numerated statutory factors set forth in CPLR 1001(b).

Here, the defendant established that SES, which is the allegedly dominated dummy corporation and the party in purported breach of its obligations under its contract with the plaintiff, is a necessary party under the theories advanced against its alter ego, defendant Morstan. However, the record is devoid of any evidence tending to establish that the non-joined entity, SES, is beyond the jurisdiction of this court due to the filing of a bankruptcy petition or otherwise. Pursuant to the mandates of CPLR 1001, this court is required to declare that SES is a necessary party defendant and to summon it to appear before the court. It hereby does so by directing the plaintiff to effect its joinder by service of its initiatory process papers and pleading, together with a copy of this order within, forty-five days of the date of this order.

(Internal quotations and citations omitted) (emphasis added).

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