Piercing the Corporate Veil

Sometimes when a corporation is being sued, the creditor that eventually wants to collect money from that defendant is concerned that the defendant will be out of business by the time a judgment is obtained. It’s very easy under the laws of the State of New York, and of the United States, to incorporate businesses, close those businesses down, and start new corporations with different names. This can lead to claims against defendants regarding the fraudulent conveyance of assets from the old corporation to the new corporation.

One means of protecting the creditor, when the creditor is starting a lawsuit, is to attempt to pierce the corporate veil and obtain a judgment against the individual principal of the corporate defendant. Piercing the corporate veil is not a simple result to achieve because the whole objective of forming corporations is to provide individuals with protection against personal liability. Therefore, an important justification must be demonstrated to the court to allow the corporate veil to be pierced and impose liability on the individuals who ran the corporation.

I recently was successful on a motion for summary judgment in a case where my client was suing a corporation and its corporate officer. The court was convinced that the veil of the corporation should be pierced when it was proved that when the defendant corporation was conducting business with my client corporation, the business was being conducted using fictitious names.

So, for example, in this case the defendant principal, whose legal name was not a traditional American name, held himself out online and seemed to be doing business under very Americanized names, in this case.  My client, who was a foreign corporation, was convinced that it was dealing with Americans with common sounding American names and it was part of the allegation of fraudulent inducement, which was part of my client’s claim that he had been lied to in order to convince him to enter into a business transaction with the corporate defendant.

In the facts of the case, in the underlying transaction, the corporate defendant committed fraud.  They sold my client a product that was completely different than the product that my client had ordered.  My client ordered a large quantity of white paper, and my client received a large quantity of multi-colored paper.  So, it was obvious that a misrepresentation was made by showing the court the photographs of the multi-colored paper that was eventually shipped to my client, as compared to the white paper that was ordered at the outset of the transaction.

The court, in its decision, granted a judgment against the individual.  The Judge stated that she relied upon the following grounds: that the names utilized by the defendant, through months of emails with the plaintiff and the plaintiff’s middle man, were utilized to aid him in business, and that neither of these persons existed.  The court found that the plaintiff relied on these representations and suffered damages as a result. The court also found that evidence presented demonstrated that the individual had both dominion and control over the corporate defendants, such that he was able to utilize them to make misrepresentations to the plaintiff. Based upon those circumstances, the court believed that individual liability should be imposed.

The courts want to enable a party to pierce the corporate veil under principles of equity, to try to prevent a miscarriage of justice when one party has committed a wrong against another. One principle from a case that is of important precedential value in NY states that where a corporation is dominated by an individual and it uses that domination to commit a wrong, piercing the corporate veil will be permitted.  The objective is to allow piercing the corporate veil in order to disregard the corporate form and hold individual shareholders responsible for corporate obligations in order to prevent fraud or to achieve equity.  So courts have some power to intervene in situations that they find outrageous and enable a corporation or individual who has been damaged to obtain liability against the individual who committed the fraud or impropriety on behalf of the corporation or the individual itself.  Corporations can come and go, but individuals remain after the corporations have come and gone.  Hopefully, for the plaintiff’s sake, the individual who’s been held liable will have personal assets to collect from after the corporation has gone out of business.

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