Contributed by Yvanna Custodio
As our loyal readers might recall, just last fall, we published on a decision in which the United States Bankruptcy Court for the Northern District of Illinois ruled that “inside reverse veil piercing,” where a corporate insider, shareholder, or subsidiary seeks to be considered the alter ego of the corporation in order to assert a corporate claim against a third party, would not be recognized under Delaware law. A more recent decision from the New York Supreme Court demonstrates, however, that plain vanilla veil piercing is still alive and well in New York. In Agai v. Diontech Consulting, Inc., the court allowed a non-bankruptcy, plain vanilla corporate veil piercing of Diontech Consulting, Inc., a general contractor. The decision originated from the plaintiff’s motion for summary judgment seeking to pierce the corporate veil. The plaintiff alleged that Diontech’s three principals disregarded corporate formalities “for their own unjust enrichment” and to avoid the judgments rendered in plaintiff’s favor after a trial. Two of the three principals opposed plaintiff’s motion and cross-moved for summary judgment, which the court denied. The remaining defendants, including the corporation and the third principal, did not oppose the motion; as a result, the court entered a default judgment against them.
The New York Supreme Court began its veil-piercing analysis with the general rule that “a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability.” In order to pierce the corporate veil and impose personal liability on the owners for the obligations of the corporation, the plaintiff “must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over it in the transactions at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff.” The court identified the “failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use” as factors to be considered when determining whether the corporate veil should be pierced. Absent fraud, the court would also allow piercing of the corporate veil “when a corporation has been so dominated by an individual [. . .] and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s alter ego.” In order to succeed on a veil-piercing claim, the plaintiff need not specifically plead fraud, but must show that “the individual defendant’s control of the corporate defendant was used to perpetrate a wrongful or unjust act toward plaintiff.”
Ruling in the plaintiff’s favor, the court found that the principals failed to adhere to corporate formalities and cited the lack of books and records, board meeting minutes, pay stubs, or bank statements. The court also observed that two of the principals used corporate accounts for personal expenses and commingled their assets with the corporation’s, while all three repeatedly used payments received from the plaintiff and materials purchased for the plaintiff for other purposes. Moreover, two of the principals continued receiving payments from the corporation, which was “supposedly insolvent,” although other creditors remained unpaid. In light of the evidence, the court ultimately held that Diontech “was a sham entity which never kept accurate records or minutes of meetings, did not observe any traditional corporate formalities, and diverted funds for the principals’ own personal gains.”
Agai v. Diontech illustrates a plain vanilla veil piercing and sets forth the standard under New York law for cases in which courts will look beyond the corporate form to impose liability upon shareholders. (Although the decision is plain vanilla, query whether it is unusual for summary judgment to be granted, given that veil piercing turns on a factual analysis of the individual defendants’ acts.) Bankruptcy practitioners may face complicated veil-piercing issues in different flavors, but when analyzing the legal principles, a serving (or survey) of plain vanilla corporate veil piercing—as set forth in Agai—is one place to start.