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You are here: Home1 / Limited Liability Company Law2 / COMPLAINT STATED A CAUSE OF ACTION AGAINST THE LEGAL OWNER OF A LIMITED...
Limited Liability Company Law

COMPLAINT STATED A CAUSE OF ACTION AGAINST THE LEGAL OWNER OF A LIMITED LIABILITY COMPANY UNDER THE ALTER EGO DOCTRINE BUT NOT AGAINST AN EQUITABLE OWNER OF THE COMPANY 4TH DEPT.

The Fourth Department, reversing Supreme Court, over a concurrence, determined plaintiff had stated a cause of action against McDonald, the sole owner, officer and member of a limited liability company (Hyperion). The complaint alleged McDonald had rendered the LLC judgment proof such that it could not satisfy a debt owed to plaintiff. The court further found that the allegations against another party, who was alleged to be an “equitable owner” of the LLC, were not sufficient. Implicit in that ruling was the principle that a non-owner could be liable under a “piercing the corporate veil” or “alter ego” theory. The concurrence noted the issue whether the “piercing the corporate veil” or “alter ego” theory could apply to an “equitable” as opposed to “legal” owner of a corporate entity has not been determined in New York:

Plaintiff sufficiently alleges in the amended complaint that McDonald, “through [his] domination of [Hyperion], abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against [her]” …  Plaintiff specifically alleged that McDonald took actions calculated to make Hyperion judgment-proof by undercapitalizing the LLC … , and dissolving and thereafter diverting the assets of Hyperion to a new entity … , without reserving funds to satisfy the judgment debt … . We therefore conclude that, at this stage of the litigation, plaintiff sufficiently alleged that McDonald “engaged in acts amounting to an abuse or perversion of the LLC form to perpetrate a wrong or injustice against [her]” to survive his motion to dismiss the amended complaint … .

FROM THE CONCURRENCE:

While the principle that a nonshareholder may be liable as an equitable owner has been used by other courts in cases involving piercing the corporate veil … , the Court of Appeals has not expressly decided the issue… . The adoption of that concept by the Court of Appeals would involve wide-ranging policy considerations inasmuch as it would expand the pool of potential defendants subject to an alter ego theory to include non-owners (such as affiliated business entities, managers and employees), and could potentially reduce the protections afforded when forming a business entity. That concern may be even more significant to a limited liability company that, if the members so provide in their articles of organization, may be under the control of a manager or managers, rather than under the control of the members (see Limited Liability Company Law § 408 [a]). Grigsby v Francabandiero, 2017 NY Slip Op 05539, 4th Dept 7-7-17

CORPORATION LAW (LIMITED LIABILITY COMPANY, ALTER EGO, COMPLAINT STATED A CAUSE OF ACTION AGAINST THE LEGAL OWNER OF A LIMITED LIABILITY COMPANY UNDER THE ALTER EGO DOCTRINE BUT NOT AGAINST AN EQUITABLE OWNER OF THE COMPANY 4TH DEPT)/LIMITED LIABILITY COMPANY (ALTER EGO,  COMPLAINT STATED A CAUSE OF ACTION AGAINST THE LEGAL OWNER OF A LIMITED LIABILITY COMPANY UNDER THE ALTER EGO DOCTRINE BUT NOT AGAINST AN EQUITABLE OWNER OF THE COMPANY 4TH DEPT)/PIERCING THE CORPORATE VEIL (LIMITED LIABILITY COMPANY, COMPLAINT STATED A CAUSE OF ACTION AGAINST THE LEGAL OWNER OF A LIMITED LIABILITY COMPANY UNDER THE ALTER EGO DOCTRINE BUT NOT AGAINST AN EQUITABLE OWNER OF THE COMPANY 4TH DEPT)/ALTER EGO (LIMITED LIABILITY COMPANY, COMPLAINT STATED A CAUSE OF ACTION AGAINST THE LEGAL OWNER OF A LIMITED LIABILITY COMPANY UNDER THE ALTER EGO DOCTRINE BUT NOT AGAINST AN EQUITABLE OWNER OF THE COMPANY 4TH DEPT)

July 7, 2017
Tags: Fourth Department
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