Commercial Division Blog
Posted: July 14, 2019 / Categories Commercial, Contracts
Shareholders and Directors Not Liable for Breach of Company's Contractual Obligations
On June 28, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Town & Country Adult Living, Inc. v. Hearth at Mount Kisco, LLC, 2019 NY Slip Op. 31862(U), holding that a company's shareholders and directors could not be held liable for the company's breach of its contractual obligations, explaining:
Plaintiffs' breach of contract claims against HSC, FMK, and the Fortus Companies fail because they seek to impose liability against the Company's stakeholders for contractual obligations borne solely by the Company. Corporations are legal entities distinct from their managers and shareholders and have an independent legal existence.
The Formation Agreement recognized the Company as a distinct legal entity capable of amassing its own powers, obligations, and assets separate from those of HSC, FMK, and the Fortus Companies.
The specific contractual violations alleged by Plaintiffs under the Formation Agreement go directly to the Company's rights and responsibilities. For example, Plaintiffs allege that Defendants breached Section 2.5 of the Formation Agreement by interfering with TCAL's repurchase rights. But the repurchase right provides that TCAL may purchase the TCAL Property and the Lease, if not expired or terminated, and all Project Contracts and Project Approvals from the Company. Similarly, Plaintiffs allege that Defendants breached Section 4.3 of the Formation Agreement because having decided to acquire the Property, they failed to fulfill the obligations of the Lessee under the Ground Lease, including, but not limited to, the pursuit of site plan approval. But again, that part of the Formation Agreement concerns the obligations of the Company under the Lease, providing that if the Company makes the decision to acquire the Property, the Company agrees to fulfill the obligations of the Lessee as defined and set forth in the Lease.
Plaintiffs' contract claims under the Fifth Amendment to the Ground Lease suffer from the same legal infirmity. In their Amended Complaint, Plaintiffs assert that Defendants breached Paragraph 7 of the Fifth Amendment because they failed to pay all real sic taxes that became due on 270 Kisco Ave even though it was Defendants' responsibility to do so. That paragraph from the Fifth Amendment requires, among other things, that Tenant shall be responsible for payment of all outstanding real taxes for both the 53 Mountain Avenue and 270 Kisco Avenue properties to the date of closing. The key word there is Tenant, because under the Fifth Amendment, The Hearth at Mount Kisco, LLC assumed all obligations of Tenant hereunder and was the Tenant under the Lease. Thus, the Company-not HSC, FMK, or the Fortus Companies-agreed to accept the responsibilities that were allegedly flouted here.
In addition, HSC, FMK, and the Fortus Companies cannot be held liable for the company's obligations by virtue of their status as a member thereof. Nor can these entities be held liable by virtue of their status as managers of the Company under New York Limited Liability Law §609: Neither a member of a limited liability company, nor a manager of a limited liability company managed by a manager or managers is liable for any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely by reason of being such member, manager or agent or acting (or omitting to act) in such capacities.
Broadly speaking, the law will disregard the corporate form in certain circumstances to prevent fraud or to achieve inequity. But to pierce the corporate veil or to establish an alter ego relationship, Plaintiffs must carry a heavy burden. In this case, Plaintiffs have not pleaded facts sufficient to show that the privilege of conducting business in the corporate form was abused so as to warrant piercing the corporate veil to impose personal liability on the corporate officers.
Therefore, Plaintiffs' first, second, and third causes of action are dismissed as against HSC, FMK, and the Fortus Companies, but not as against the Company (which has not moved to dismiss those claims).
(Internal quotations and citations omitted).
Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.