Veil Piercing Claim Rejected; Alleged Domination and Control Unrelated to Basis of Claim

On December 18, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Lam Pearl St. Hotel, LLC v. Golden Pearl Constr., LLC, 2019 NY Slip Op. 33750(U), rejecting a veil piercing claim because the alleged domination and control were unrelated to the basis for the plaintiff's claim, explaining:

Plaintiff Lam asserts that the Colao Defendants are liable for reimbursement of the insurance premium paid by Lam to GPC based solely on the theory of piercing the corporate veil. In other words, Lam asserts no direct claim for unjust enrichment against the Colao Defendants because it is undisputed that Lam paid the money for the insurance premium directly to defendant GPC, and not to the Colao Defendants. It is also undisputed that the construction Contract for the Project, the Settlement Agreement, and the Termination Agreement were all signed by Walter Beal as President of GPC and not by either of the individual Colao defendants or by a representative of defendant CNY Group.

The question is therefore whether the Amended Complaint alleges non-conclusory facts sufficient to support a veil-piercing theory related to plaintiffs claim for unjust enrichment against GPC. The answer to that question is no. As explained by the Court of Appeals in Matter of Morris v New York State Dept. a/Taxation & Fin., 82 NY2d 135, 141-42 (1993) (citations omitted):

piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury. While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business, such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required. The party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.

Lam argues that its Amended Complaint alleges facts demonstrating domination and control of GPC by the Colao defendants, such as undercapitalization of GPC. But those allegations are for the most part asserted only on information and belief in a conclusory manner. The only specific allegation relates to the involvement of Kenneth Colao, and to a lesser degree Steven Colao, in the negotiations that led to the execution of the Settlement Agreement and the Termination Agreement by Lam and GPC. But neither those negotiations, nor those Agreements, addressed the insurance issue which is the "transaction attacked" in this case. Therefore, even if the Court were to decide that Lam had alleged sufficient facts for domination and control, Lam has not alleged sufficient facts to tie that domination and control to the insurance issue or to satisfy the second alter ego criterion that the domination was used to accomplish the specific wrongful or unjust act about which Lam complains; that is, GPC's failure to obtain the proper insurance despite its acceptance of the premium monies from Lam.

(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 or the business that defrauded you 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.