Claim Based on Alter Ego Theory Survives Motion to Dismiss

On July 2, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Aspire Music Group, LLC v. Cash Money Records, Inc., 2018 NY Slip Op. 31444(U), refusing to dismiss a claim based on an alter ego theory of equitable ownership, explaining:

Aspire has adequately alleged that Universal is the equitable owner of Cash Money such as to survive Universal's pre-answer motion to dismiss. The issue turns on whether, under New York law, Aspire has sufficiently alleged that Universal is the alter ego of Cash Money despite the fact that it is undisputed that Universal is a non-owner, non-director, and non-officer of Cash Money. The Court of Appeals found no definitive authority on the issue of whether a nonshareholder could be personally liable under a theory of piercing the corporate veil. Other New York courts have generally declined to extend alter ego liability to a non-owner defendant. Therefore, plaintiff has not adequately pied a jurisdictional basis for alter ego liability. However, New York courts have recognized for veil-piercing purposes the doctrine of equitable ownership, under which an individual who exercises sufficient control over the corporation may be deemed an equitable owner, notwithstanding the fact that the individual is not a shareholder of the corporation. Equitable ownership is determined by considering whether the defendant exercised considerable authority over the corporation and acted as though the assets were his alone to manage and distribute.

Here. Aspire alleges that Universal took advantage of Cash Money's cash flow problems by satisfying millions of dollars of Cash Money's debts in exchange for control over Cash Money's finances and agreements, including the Aspire/YME Agreement. Aspire alleges that Cash Money is a mere corporate instrument of Universal, that Universal shares offices with Cash Money, that Universal operates Cash Money's website, that the business affairs of the two entities are intermingled, that Cash Money itself remains undercapitalized in relation to its needs, and that Cash Money is entirely dependent on advances and direct payments from Universal. Allegations of this sort have been held sufficient on a pre-answer motion to dismiss.

Aspire's allegations are not wholly conclusory such that dismissal on a pre-answer motion is warranted. As discussed above, Aspire's amended complaint contains particularized examples of Cash Money ceding much of its business operation to Universal. Regardless of whether Cash Money's purported relinquishment of its business to Universal is partially the result of freely executed contracts between the parties, the inquiry into whether, and to what extent, the contractual relationship between the two parties transformed over time into that resembling an alter ego relationship is necessarily fact intensive and requires discovery. Therefore, Aspire has sufficiently alleged that Universal is the equitable owner of Cash Money for purposes of this preanswer motion to dismiss.

(Internal quotations and citations omitted).

This decision discusses an issue that is common in complex commercial litigation: whether an individual or another company can be held liable for a company's actions. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a third-party can be held liable for a company's misconduct.