Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 18, 2020

Veil Piercing Claim Against Parent Fails Because Plaintiff Was Aware of Subsidiary’s Financial Condition

On January 22, 2020, Justice Borrok of the New York County Commercial Division issued a decision in 165 E. 72nd Apt. Corp. v. Invite Health Stores, Inc., 2020 NY Slip Op. 30266(U), dismissing veil-piercing claims because the plaintiff knew of the defendant subsidiary’s financial condition, explaining:

For its remaining claims, the Landlord seeks to pierce the corporate veil to hold the Parent and Invite at 72na liable for the Tenant’s breach of the Lease. To pierce the corporate veil, a plaintiff must establish that the dominant corporation exercised complete domination and control with respect to the transaction attacked, and that such domination was used to commit a fraud or wrong causing injury to the plaintiff. A plaintiff seeking to pierce the corporate veil bears a heavy burden of showing that the corporation was dominated as to the transaction attacked and that such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences.

Pursuant to the Second Amended Complaint, the Landlord asserts that the Defendants are really all one entity and should be disregarded and that the corporate veils should be pierced to permit recovery against the Parent and Invite at 72na.

For their part, the Defendants argue that the Landlord in this case received exactly what it bargained for and that there has been no wrongdoing here as it relates to the Landlord. Put another way, the Defendants argue that having rejected the Parent’s offer to have the Parent stand behind the Lease obligations, and having released the Parent pursuant to the 2007 Release, it is patently absurd to now permit the Landlord to recover against the very entity that it did not want to have guaranty the Lease and which it expressly released from all liability. The court agrees.

The Defendants have established that they did not abuse the corporate form to perpetrate a fraud or similar wrongdoing. Quite the contrary. The evidence shows that the Defendants openly and honestly disclosed the fact that Tenant was a single-purpose, wholly-owned subsidiary of the Parent and that the Plaintiff was provided with consolidated financials for the Parent and the Tenant showing all of the assets being held by the Parent and only listing the Tenant as a wholly-owned subsidiary on such financials. To wit, the Defendants’ emails show that, before agreeing to the 2007 Extension, John Newhouse, counsel for the Landlord, sent an email to Geoffrey Bass, counsel for the Defendants, and Steven Kornblatt, seeking information regarding the Parent. In his email, dated, August 23, 2006, Mr. Newhouse inquired as to the corporate structure of the Parent, the identity of its principals, and whether it would be the operating entity or a shell. Mr. Newhouse also requested the Parent’s financials for the last several years or from its inception. In response to Mr. Newhouse’s email, Mr. Bass replied on behalf of the Parent, clarifying that: Mariposa Acquisition Corp. changed its name to Invite Health Stores, Inc., and remains the tenant. Invite Health Stores, Inc. is a wholly owned subsidiary of Invite Health, Inc. We will arrange for financial statements of Invite Health, Inc. to be provided to you.

The evidence also shows that Mr. Newhouse inquired as to whether Mr. Hickey and Mr. Benjamin were still actively involved in the operation of the company and whether they were to continue to be guarantors under the 2007 Extension. Mr. Bass replied that Messrs. Hickey and Benjamin are no longer involved in management. We would suggest that the good guy guarantee be provided by Invite Health, Inc., the parent company with assets. Mr. Bass subsequently provided consolidated financials for the Parent’s business as a whole to Mr. Newhouse. Significantly, the Landlord could have requested the separate financials of the Tenant or made appropriate further due diligence requests in connection with the 2007 Modification. It did not. And, notwithstanding Mr. Kornblatt’s offer to have the Parent be liable as a guarantor, the Landlord rejected that offer. In other words, the documentary evidence establishes that the Landlord is a sophisticated party, was represented by counsel at all relevant times, was aware of the corporate structure of the Parent and the Tenant, received and reviewed the Parent’s consolidated financials, had ample opportunity to seek additional information and conduct further due diligence, and declined the offer to have the Parent be the guarantor. There is simply no evidence to suggest that the Parent or Invite at 72na used their domination and control of the Tenant to mislead or defraud the Landlord with respect to the transactions at issue, or that they abused the corporate form to intentionally render the Tenant insolvent and leave the Landlord without recourse.

In addition, and equally significantly, the documentary evidence shows that the Parent and Invite at 72na were released from all liability pursuant to the 2007 Release. The 2007 Release expressly bars any claims by the Landlord against Mr. Hickey and Mr. Benjamin as guarantors and against their affiliates. It is undisputed that Mr. Hickey was, at the time of the execution of the 2007 Release, one of the principals and an employee of the Parent, and Mr. Benjamin is the founder of the Parent and is a former shareholder and Chief Science Officer of the Parent. Under a plain reading of the 2007 Release, Mr. Hickey and Mr. Benjamin were affiliates of the Parent and its subsidiaries. Notably, the 2007 Release expressly carves out claims against Mr. Kornblatt and the Tenant, but does not carve out claims against the Parent or Invite at 72nd. All claims against the Parent and Invite at 72nd are, therefore, barred by the 2007 Release.

Relying on Austin Powder Co. v McCullough, the Landlord argues that the 2007 Release does not extinguish the Parent’s liability because the Parent dominated and controlled the Tenant as its alter ego. The Landlord’s reliance is misplaced. In Austin Powder Co., the plaintiff sought to pierce the corporate veil to hold the defendant liable for the debts of two corporations that were controlled by the defendant. The Court in Austin Powder Co. stated that the defendant operated the corporations as one entity by commingling assets, conducting operations from the same office and paying management fees” from one corporation to the other in order to divert funds from creditors (id. at 827). Concluding that the two corporations were inextricably intertwined and were so dominated and controlled by the defendant as to be considered his alter egos, the Court held that it was appropriate to disregard the corporate form to achieve an equitable result.

Importantly, Austin Powder Co. did not involve a release of the party that the plaintiff sought to hold liable, and therefore lends no support to the Landlord’s argument. Indeed, the Landlord cites no authority for the proposition that a party may assert a claim seeking to pierce the corporate veil to hold a party liable that was expressly released from all claims and liabilities pursuant to a written release.

(Internal quotations and citations omitted).

An issue that is not uncommon in commercial litigation is how do you collect on a judgment when the counter-party to your contract has no assets. In certain circumstances, discussed in this decision, you can attempt to pierce the corporate veil and recover from a business’s owner or operators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether you can seek to hold a business’s owner or operators liable for the business’s debts.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

View posts