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Trial Court Properly Pierced the Corporate Veil/Criteria for Review of a Bench Trial and for Piercing the Corporate Veil Explained

The Fourth Department determined the trial court had properly pierced the corporate veil to find the defendant physician personally liable to the plaintiff landlord.  The defendant ceased paying rent when he joined another urology practice.  The court noted that the defendant (Roehmholdt) made no effort to continue his business (Northtown Urology) at plaintiff’s location, but rather took more lucrative employment, encouraged his patients to follow him, and used corporate funds to satisfy a personal debt.  In the course of upholding the piercing of the corporate veil, the Fourth Department explained how it reviews determinations made in a bench trial:

As a preliminary matter, we note that, “[o]n an appeal from a judgment rendered after a nonjury trial, our scope of review is as broad as that of the trial court … . Upon such a review, the record should be‘viewed in the light most favorable to sustain the judgment’ …, and this Court should evaluate ‘the weight of the evidence presented and grant judgment warranted by the record, giving due deference to the trial court’s determinations regarding witness credibility, so long as those findings could have been reached upon a fair interpretation of the evidence’ …. ‘[T]he decision of the fact-finding court should not be disturbed upon appeal unless it is obvious that the court’s conclusions could not be reached under any fair interpretation of the evidence, especially when the findings of fact rest in large measure on considerations relating to the credibility of witnesses’ … .

With respect to piercing the corporate veil, we note that it is not “ ‘a cause of action independent of that against the corporation; rather it is an assertion of facts and circumstances which will persuade the court to impose the corporate obligation on its owners’ ” … . “ ‘A plaintiff seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff . . . Factors to be considered in determining whether [a corporation] has abused [that] privilege . . . include whether there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use’ ” … .

The burden of establishing that the corporate veil should be pierced is a heavy one … but “ ‘[b]roadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, pierce the corporate veil, whenever necessary to prevent fraud or to achieve equity’ ” … . “A decision to pierce the corporate veil is a fact-laden [determination]” …, and “[n]o one factor is dispositive” … . A & M Global Management Corp v Northtown Urology Associates PC, 124, 4th Dept 3-28-14

 

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Corporate Officer Not Liable in Lead Paint Exposure Case Under “Commission of a Tort” Doctrine for Nonfeasance/No Evidence of Malfeasance or Misfeasance

The Fourt Department determined summary judgment should have been granted to a corporate officer in a lead paint exposure case. The court explained when the “commission of a tort” doctrine applies to corporate officers:

“The ‘commission of a tort’ doctrine permits personal liability to be imposed on a corporate officer for misfeasance or malfeasance, i.e., an affirmative tortious act; personal liability cannot be imposed on a corporate officer for nonfeasance, i.e., a failure to act” … . Such misfeasance may include exacerbating a hazardous lead paint condition by negligently attempting to correct it … . Here, defendant met his initial burden by presenting “evidence that, if uncontroverted, would have established that [he] did not personally participate in malfeasance or misfeasance constituting an affirmative tortious act” … . Plaintiff failed to raise an issue of fact in response, inasmuch as he submitted no evidence that defendant affirmatively created the dangerous lead condition at the property or did anything to make it worse; at most, defendant merely failed to remedy the condition. We thus conclude that he cannot be held individually liable to plaintiff in this action. Lloyd v Moore…, 200, 4th Dept 3-28-14

 

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Answer Submitted Pro Se by Corporation Is a Nullity

The Second Department noted that a corporation must be represented by counsel and an answer submitted by a corporation pro se was a nullity:

…[T]he Supreme Court erred in accepting an untimely, pro se answer from the defendant corporation, and in thereby denying that branch of the plaintiff’s motion which was for leave to enter a default judgment on the complaint. The proffered answer was a nullity, since a corporation must be represented by an attorney and cannot proceed pro se (see CPLR 321[a]…). Boente v Peter C Kurth Off of Architecture & Planning PC, 2014 NY Slip Op 00473, 2nd Dept 1-29-14

 

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No Fiduciary Duty Re: Purchase of One Shareholder’s Stock by Another in a Close Corporation

In affirming Supreme Court’s dismissal of a cause of action for breach of fiduciary duty based on one shareholder’s purchase of another shareholder’s stock in a close corporation, the Second Department noted that the status of an officer, director or shareholder of a close corporation does not, without more, create a fiduciary relationship:

“The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct” … . “A fiduciary relationship exists between two persons when one of them is under a duty to act for . . . the benefit of another upon matters within the scope of the relation” …

Contrary to the plaintiff’s contention, [the purchaser’s] status as an officer, director, or shareholder of a close corporation “does not, by itself, create a fiduciary relationship as to his individual purchase of [another shareholder’s] stock” … .  Varveris v Zacharakos, 2013 NY Slip Op 07028, 2nd Dept 10-30-13

 

Plaintiffs Not Entitled to Attorneys Fees in Shareholder Derivative Action Because They Did Not Go to the Board Before Going to Court

In a full-fledged opinion by Justice Friedman, the First Department determined the plaintiffs in a (putative) shareholder derivative action were not entitled to an award of legal fees pursuant to Business Corporation Law 626 because the plaintiffs went straight to court without first making a pre-suit demand upon the board for the desired action.  The plaintiffs sued the Goldman Sachs Group (GPS) to demand a reduction in employee compensation based on the prediction GPS would announce excessive employee compensation. When GPS announced a lower level of compensation, plaintiffs, claiming that the action had attained its objective, moved for a voluntary dismissal and for an award of legal fees.  In affirming Supreme Court’s denial of legal fees, the court wrote:

Plaintiffs argue that Business Corporation Law § 626(e) (quoted in pertinent part at footnote 5, supra) does not expressly require a showing that the demand requirement was complied with or excused as a prerequisite to an award of attorneys’ fees for bringing an action that brought a substantial benefit to the corporation (as plaintiffs claim—and defendants deny—that this action did). Plaintiffs further argue that there is no reason to construe the statute to imply such a requirement. We disagree. * * *

The demand requirement, far from being a meaningless formality, “rests on basic principles of corporate control–that the management of the corporation is entrusted to its board of directors, who have primary responsibility for acting in the name of the corporation and who are often in a position to correct alleged abuses without resort to the courts. The demand requirement thus relieves the courts of unduly intruding into matters of corporate governance by first allowing the directors themselves to address the alleged abuses. The requirement also provides boards with reasonable protection from harassment on matters clearly within their discretion, and it discourages strike suits commenced by shareholders for personal rather than corporate benefit” … . Central Laborers’ Pension Fund v Blankfein, 2013 NY Slip Op 05857, 1st Dept 9-17-13

 

 

Criteria for Shareholder’s Derivative Action and Shareholder’s Action to Inspect Corporate Books Explained

The Second Department explained the pleading criteria for a shareholder’s derivative action for inspection of corporation records.  Here the court determined the shareholders failed to first demand that the corporation initiate an action before bringing the derivative action, and the shareholders’ speculative and conclusory allegations were not sufficient to demonstrate a “proper purpose” for the inspection of corporate records:

A plaintiff in a shareholders’ derivative action must demand that the corporation initiate an action before commencing an action on the corporation’s behalf, and the complaint must “set forth with particularity” his or her efforts “to secure the initiation of such action by the board or the reasons for not making such effort” … . Demand may be excused because of futility where the complaint alleges with particularity, inter alia, that a majority of the board of directors is interested in the challenged transaction[s] … . However, “[i]t is not sufficient . . . merely to name a majority of the directors as parties defendant with conclusory allegations of wrongdoing or control by wrongdoers to justify failure to make a demand” … . Here, the plaintiffs’ submissions failed to allege specific facts supporting their contention that the defendant directors were interested, such that demand was not required, and the Supreme Court … properly granted that branch of the defendants’ motion which was to dismiss [the relevant] causes of action on that ground… . * * *

…”[A] shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose” (…Business Corporation Law § 624[f]). However, the plaintiffs failed to allege that their demand for an inspection of [the] books and records met the requirements for such relief under the Business Corporation Law (see Business Corporation Law § 624[b]). The plaintiffs also failed to state a cause of action for an inspection of [the] corporate books and records at common law, since a plaintiff asserting his or her common-law right must plead a “proper purpose” for the inspection …. Apart from the claim concerning the nonpayment of profit distributions …, the plaintiffs’ asserted purposes for the inspection were speculative, vague, and conclusory. As such, they were insufficient to establish a proper purpose for the inspection… . JAS Family Trust v Oceana Holding Corp, 2013 NY Slip Op 05734, 2nd Dept 8-28-13

 

Complaint Sufficiently Alleged Facts to Support Piercing the Corporate Veil

In a full-fledged opinion by Justice Mazzarelli (which dealt with many corporation law issues not mentioned here), the First Department determined the complaint alleged sufficient facts to meet the criteria for piercing the corporate veil:

To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court in equity will intervene … . Piercing of the corporate veil is not a cause of action independent of that against the corporation; it is established when the facts and circumstances compel a court to impose the corporate obligation on its owners, who are otherwise shielded from liability… . “Because a decision whether to pierce the corporate veil in a given instance will necessarily depend on the attendant facts and equities, the New York cases may not be reduced to definitive rules governing the varying circumstances when the power may be exercised” … . Indeed, this Court has observed:  “In determining the question of control, courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity . . . [n]o one factor is dispositive”… .   Tap Holdings LLC v Orix Fin Corp, 2013 NY Slip Op 05293, 1st Dept 7-16-13

 

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Only Attorney Can Represent Voluntary Association—Appeals Dismissed

In dismissing the appeals, the First Department held that only an attorney can represent a voluntary association

Petitioner is a voluntary association comprised of rent-regulated tenants in the subject building. Patricia Pillette is a member of the association and appears pro se purportedly on behalf of the association. However, Pillette is not an attorney, and a voluntary association may only be represented by an attorney and not by one of its members who is not an attorney admitted to practice in the state of New York (see CPLR 321[a]). Accordingly, petitioner’s failure to appear by attorney requires dismissal of the appeals… .  Matter of Tenants Comm of 36 Gramercy Park v NYS Div of Hous & Community Renewal, 2013 NY Slip Op 04984, 1st Dept 7-2-13

 

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Breach of Fiduciary Duty Allegations Not Specific Enough

The First Department determined plaintiff’s allegations in support of a breach of fiduciary duty cause of action were not specific enough to survive a motion to dismiss:

Because the underlying allegations of wrongdoing were inadequately pleaded, the fiduciary breach and injunction causes of action were not sustainable. Although plaintiff alleges, among other things, that defendant tried to prevent her from having any meaningful participation in the companies’ operation, her allegations are vague and conclusory, made without any specific instances of the alleged misconduct…. The lack of particularity with respect to plaintiff’s allegations of breach of fiduciary duty (CPLR 3016[b]) is not excused by the individual defendant’s alleged refusal to provide information or by the lack of discovery, as information regarding the alleged denial of participation in corporate management was not solely in the individual defendant’s possession…. Moreover, plaintiff failed to assert specific dates that she had requested information, or to specify the information she had requested….  Berardi v Beradi, 2013 NY Slip Op 04976, 1st Dept 7-2-13

 

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Elements of Breach of Fiduciary Duty

The Second Department explained the elements of a cause of action for breach of fiduciary duty in the context of the board of directors of a corporation and the business judgment rule:

A cause of action sounding in breach of fiduciary duty must be pleaded with the particularity required by CPLR 3016(b)”…. “The elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct”… . Members of a board of directors of a corporation “owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly”….

The business judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes”… .   Deblinger v Sani-Pine Prods Co, Inc, 2013 NY Slip Op 03963, 2nd Dept, 6-5-13

 

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