PIERCING THE CORPORATE VEIL

WEST HOUSTON PROP., LLC v. NEW YORK PILATES NYC, LLC, 2021 NY Slip Op 32150 - NY: Supreme Court October 21, 2021:

"The plaintiff landlord in this breach of contract action seeks to recover unpaid rent under a commercial lease agreement with defendant New York Pilates NYC, LLC (Pilates NYC). The plaintiff also seeks to recover against all other defendants on a corporate veil-piercing theory and under the New York State Debtor and Creditor Law (Debtor and Creditor Law). The defendants now move pursuant to CPLR 3211(a)(7) to dismiss the second, third, fourth, and fifth causes of action of the complaint. The plaintiff opposes the motion. For the following reasons, the motion is granted.

When assessing the adequacy of a pleading in the context of a motion to dismiss under CPLR 3211(a)(7), the court's role is "to determine whether [the] pleadings state a cause of action." 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 151-152 (2002). To determine whether a claim adequately states a cause of action, the court must "liberally construe" it, accept the facts alleged in it as true, accord it "the benefit of every possible favorable inference" (id. at 152: see Romanello v Intesa Sanpaolo, S.p.A., 22 NY3d 881 [2013]; Simkin v Blank, 19 NY3d 46 [2012]), and determine only whether the facts, as alleged, fit within any cognizable legal theory. See Hurrell-Harring v State of New York, 15 NY3d 8 (2010); Leon v Martinez, 84 NY2d 83 (1994). "The motion must be denied if from the pleading's four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law." 511 W. 232nd Owners Corp. v Jennifer Realty Co., supra, at 152 (internal quotation marks omitted); see Leon v Martinez, supra; Guggenheimer v Ginzburg, 43 NY2d 268 (1977).

The complaint avers that the plaintiff and Pilates NYC entered into a commercial lease dated March 22, 2018, for a term ending on March 31, 2028. The lease obligated Pilates NYC to pay rent, additional rent, and other fees to the plaintiff on or before the first day of each month of the lease term. However, Pilates NYC failed to make payments in the sum of $258,078.84 from March 1, 2020, through November 1, 2020. The first cause of action, sounding in breach of contract, seeks to recover unpaid rent as against Pilates NYC. The second cause of action seeks to recover unpaid rent as against all defendants other than Pilates NYC by piercing the corporate veil. The third and fourth causes of action seek to recover unpaid rent as against all defendants by voiding any conveyances and/or transfers of the assets of defendant Pilates NYC to the other defendants under Debtor and Creditor Law §§ 274, 275, and 276. The fifth cause of action, sounding in unjust enrichment, likewise seeks to recover unpaid rent as against all defendants.

Ordinarily, a corporation exists independently of its owners, as a separate legal entity, and its owners are not liable for the actions of the corporation. See Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135 (1993). The doctrine of piercing the corporate veil is a limitation to this rule, "typically employed by a third party seeking to go behind the corporate existence in order to circumvent the limited liability of the owners and to hold them liable for some underlying corporate obligation." Id. "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 plaintiff's injury." Ciavarella v Zagaglia, 132 AD3d 608, 608-609 (1st Dept. 2015) (quotation and citation omitted); see also Fantazia Int'l Corp. v CPL Furs New York, Inc., 67 AD3d 511 (1st Dept. 2009). "[U]ndercapitalization of a corporation and the corporation's owner's personal use of corporate funds, which results in the corporation's being unable to pay a judgment, constitute wrongdoing and injury sufficient to satisfy the second prong of [Matter of Morris v New York State Dept. of Taxation & Fin., supra.]" Ciavarella v Zagaglia, supra at 609. However, a simple breach of contract, without more, does not constitute a fraud or wrong warranting the piercing of the corporate veil. See Skanska USA Bldg., Inc. v Atalntic Yards B2 Owner LLC, 146 AD3d 1 (1st Dept. 2016); Bonacasa Realty Co., LLC v Salvatore, 109 AD3d 946 (2nd Dept. 2013); Treeline Mineola, LLC v. Berg, 21 AD3d 1028 (2nd Dept. 2005).

The complaint's second cause of action alleges, "[u]pon information and belief," (1) that all the other defendants dominated and controlled defendant Pilates NYC "so that Pilates NYC had no separate mind, will or existence of its own" and was the "mere alter ego of all of the other defendants." Further, the complaint states that Pilates NYC "did not comply with the standard company formalities required of a limited liability company," that the property of Pilates NYC was "used by the individual and company defendants as if it were their own," and that all defendants "shared, commingled and intermingled the same property including the name and goodwill of the business, the same employees and customers and the same offices and trade fixtures, furniture and equipment and the same website, customer lists, appointment schedules etc."

The foregoing allegations are insufficient to state a cause of action for alter ego liability. To begin, they are "wholly conclusory and consist of no more than a recitation of the elements of the claim, `upon information and belief.'" 501 Fifth Ave. Co. LLC v Alvona LLC, 110 AD3d 494, 494 (1st Dept. 2013); see Board of Managers of Gansevoort Condominium v 325 West 13th, LLC, 121 AD3d 554 (1st Dept. 2014). Moreover, the complaint, even as supplemented by the plaintiff's submissions in opposition to the instant motion, "is devoid of any allegations as to how [all other defendants] used their domination of [Pilates NYC] to commit a wrong against the plaintiff[]." TMCC, Inc. v Jennifer Convertibles, Inc., 176 AD3d 1135, 1136 (2nd Dept. 2019); see Cornwall Management Ltd. v Kambolin, 140 AD3d 507 (1st Dept. 2016). The plaintiff has offered no specific facts as to what the other defendants did and how they allegedly controlled Pilates NYC, or as to the other defendants' actual personal gain and possession of money or assets in which the plaintiff had an interest. See Suverant LLC v Brainchild, Inc., 191 AD3d 513 (1st Dept. 2021); Arben Corp. v Durastone, LLC, 186 AD3d 599 (2nd Dept. 2020). Instead, the plaintiff relies on the bare observation that the Pilates NYC website and social media platforms show it has studios in several locations and offers members the ability to use one or all of its locations. "[T]he failure to allege any fraud or unjust conduct is fatal" to the second cause of action, especially where Pilates NYC performed for two years under the subject lease and, after missing payment for nine months, has apparently continued to perform under the lease. 501 Fifth Ave. Co. LLC v Alvona LLC, supra at 494. Accordingly, the second cause of action is dismissed.

With respect to the third and fourth causes of action, the court initially notes that the complaint, though filed on December 22, 2020, cites to outdated sections of the Debtor and Creditor Law that existed prior to the enactment of amendments effective on April 4, 2020. While the plaintiff cites to Debtor and Creditor Law § 276 under the third cause of action of the complaint, it appears that the plaintiff actually intended to state a claim pursuant to current Debtor and Creditor Law § 273(a)(1), which provides that "[a] transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation ... with actual intent to hinder, delay or defraud any creditor of the debtor." Where a plaintiff seeks to void a transfer pursuant to this provision, fraudulent intent must be pleaded with particularity. See CPLR 3016(b); RTN Networks LLC v Telco Group, Inc., 126 AD3d 477 (1St Dept. 2015) (addressing analogous provision of prior version of Debtor and Creditor Law); see also Carlyle LLC v Quik Park 1633 Garage LLC, 160 AD3d 476 (1st Dept. 2018) (addressing analogous provision of prior version of Debtor and Creditor Law).

The third cause of action avers "[u]pon information and belief" that Pilates NYC "with the intent and purpose to hinder, delay and defraud its creditors and in particular the plaintiff, caused the transfer and conveyance of its assets, including but not limited to customers, the name and good will of the business, accounts receivables, membership fees, trade fixtures, equipment and furniture, without any consideration being paid or such assets," and that such transfer rendered Pilates NYC insolvent. Again, the plaintiff's allegations are wholly conclusory and merely recite the elements of an intentional fraudulent conveyance claim. They fail to plead with particularity the defendants' intent to defraud and, inasmuch as they are pleaded upon information and belief, fail to reveal the basis for the plaintiff's claims. See Brennan v 3250 Rawlins Avenue Partners, LLC, 171 AD3d 603 (1st Dept. 2019); RTN Networks LLC v Telco Group, Inc., supra. The third cause of action is dismissed.

While the plaintiff cites to Debtor and Creditor Law §§ 274 and 275 under the fourth cause of action of the complaint, it appears that the plaintiff intended to state a claim pursuant to current Debtor and Creditor Law § 273(a)(2). That statute provides that a transfer made or obligation incurred by a debtor is voidable as to a present or future creditor if the debtor made the transfer or incurred the obligation ... without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

Since Debtor and Creditor Law § 273(a)(2) is not based in actual fraud, the heightened pleading requirements of CPLR 3016(b) do not apply.

Nonetheless, the fourth cause of action fails even under ordinary pleading standards. The complaint contains a perfunctory recitation of the elements of a constructive fraud claim pursuant to Debtor and Creditor Law § 273(a)(2) but does not plead a single fact identifying any conveyance from Pilates NYC to another defendant. Nor does the plaintiff identify the source of his belief that Pilates NYC transferred its assets without fair consideration. For these reasons, the fourth cause of action is subject to dismissal. See RTN Networks, LLC v Telco Group, Inc., supra (addressing analogous provisions of prior version of Debtor and Creditor Law).

Finally, the fifth cause of action, sounding in unjust enrichment, must be dismissed as against Pilates NYC because there is a valid lease governing the subject matter between the plaintiff and Pilates NYC. See Suverant LLC v Brainchild, Inc., supra. Additionally, the fifth cause of action must be dismissed as against all remaining defendants because the complaint contains no allegations of a "relationship between the parties that could have caused reliance or inducement" that is not "too attenuated." Georgia Malone & Co., Inc. v Rieder, 19 NY3d 511, 517 (2012)."

PERSONAL LIABILITY OF MANAGEMENT UNDER NYC HUMAN RIGHTS LAW

Doe v Bloomberg, L.P., 2019 NY Slip Op 06728, Decided on September 24, 2019, Appellate Division, First Department Kern, J.:

"The City HRL imposes strict liability on an "employer" for the discriminatory acts of the employer's managers and supervisors (see Administrative Code of the City of New York § 8-107[13][b][1]; Zakrzewska v New School, 14 NY3d 469, 480-481 [2010])[FN2]. Specifically, Administrative Code § 8-107(13)(b) provides:

"An employer shall be liable for an unlawful discriminatory practice based upon the conduct of an employee or agent which is in violation of subdivision 1 or 2 of this section only where:

(1) The employee or agent exercised managerial or supervisory
responsibility . . . ."

However, the statute does not provide a definition of "employer" and the legislature has not provided guidance as to how "employer" should be defined under the statute. The legislature has also not provided guidance as to when an individual, in addition to the corporate employer, may be held strictly liable under the statute.

The Court of Appeals has held that section 8-107(13)(b)(1) of the Administrative Code holds corporate employers strictly liable for the discriminatory acts of their managers and supervisors (see Zakrzewska, 14 NY3d at 469). Additionally, pursuant to the plain language of the statute, where the only employer is an individual and there is no corporate employer, the individual may be held strictly liable for the discriminatory acts of his or her managers and supervisors as such individual is the only possible employer under the statute. However, the Court of Appeals has never addressed the issue of when an individual, in addition to the corporate employer, may be held strictly liable under section 8-107(13)(b)(1) of the Administrative Code. Based on a review of the cases that have addressed the issue, we find that in order to hold an individual owner or officer of a corporate employer, in addition to the separately charged corporate employer, strictly liable under section 8-107(13)(b)(1) of the Administrative Code, a plaintiff must allege that the individual has an ownership interest or has the power to do more than carry out personnel decisions made by others and must allege that the individual encouraged, condoned or approved the specific conduct which gave rise to the claim.[FN3]
This Court has twice explicitly addressed the issue of when an individual may be held strictly liable, in addition to the corporate employer, under section 8-107(13)(b)(1) of the Administrative Code, and held that an individual will be held strictly liable under the statute if he or she encouraged, condoned or approved the specific discriminatory behavior alleged in the complaint. In Boyce v Gumley-Haft, Inc. (82 AD3d 491, 492 [1st Dept 2011]), this Court denied summary judgment to the individual owner of the corporate employer under section 8-107(13)(b)(1) of the Administrative Code because there were issues of fact as to whether he "encouraged, condoned or approved" the specific discriminatory conduct alleged by the plaintiff (82 AD3d at 492). This Court reiterated this standard in McRedmond v Sutton Place Rest. & Bar, Inc. (95 AD3d 671, 673 [1st Dept 2012]), a case in which we denied summary judgment to the individual officers of the corporate employer under section 8-107(13)(b)(1) of the Administrative Code because there were issues of fact as to whether they condoned or participated in the discriminatory conduct complained of by the plaintiff.

All of the federal cases cited by the parties which have addressed the specific issue before us now have also held that an individual will only be held strictly liable under section 8-107(13)(b)(1) of the Administrative Code if he or she participated, in some way, in the specific discriminatory conduct alleged in the complaint (see Marchuk v Faruqi & Faruqi, LLP, 100 F Supp 3d 302, 309 [SD NY 2015] [a plaintiff must establish "at least some minimal culpability on the part of (the company's individual shareholders)" in order to hold them liable as employers under the City HRL]; Zach v East Coast Restoration & Constr. Consulting Corp., 2015 WL 5916687, *1, 2015 US Dist LEXIS 138334, *1 [SD NY 2015] [denying plaintiff's motion to add the president of the corporate employer as an individual defendant under the City HRL because the proposed amended complaint failed to "allege any knowledge, participation, or involvement whatsoever" in the discriminatory conduct detailed in the complaint]; Burhans v Lopez, 24 F Supp 3d 375, 385 [SD NY 2014] [allowing plaintiffs' claims to proceed against the individual defendant as an employer under the City HRL on the ground that plaintiffs "sufficiently allege that (the individual defendant) was personally involved in the conduct in question"]).[FN4]

We note that the legislative history of section 8-107(13)(b)(1) does not address whether an individual owner or officer of a corporate employer may be held strictly liable, in addition to the corporate employer, absent a finding of culpability on the part of the individual. However, holding an individual owner or officer of a corporate employer liable under the City HRL as an [*3]employer, without even an allegation that the individual participated, in some way, in the specific conduct that gave rise to the claim, would have the effect of imposing strict liability on every individual owner or high-ranking executive of any business in New York City. The City HRL is not so broad that it imposes strict liability on an individual for simply holding an ownership stake or a leadership position in a liable corporate employer.

Moreover, interpreting section 8-107(13)(b)(1) of the Administrative Code to impose liability on an owner or officer of a corporate employer in his or her individual capacity without any inquiry into his or her personal participation in the conduct giving rise to the claim would be inconsistent with the principles underlying this State's corporate law (see Marchuk, 100 F Supp 3d at 309). "The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability" (Walkovszky v Carlton, 18 NY2d 414, 417 [1966]). Indeed, a corporate owner or officer may be held individually liable for a tort committed by the corporation but only if the corporate officer or owner "participates in the commission of [the] tort" (American Express Travel Related Servs. Co. v North Atl. Resources, Inc., 261 AD2d 310, 311 [1st Dept 1999]). Moreover, a plaintiff who attempts to pierce the corporate veil and hold a corporate officer or owner liable for an obligation of, or a wrong committed by, the corporation must show complete domination of the corporation and that "the [individual], through [his] domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against [the plaintiff]" (Matter of Morris v New York State Dept. of Taxation and Fin., 82 NY2d 135, 142 [1993]). Thus, some participation in the specific conduct committed against the plaintiff is required in order to hold an individual owner or officer of a corporate employer personally liable in his or her capacity as an employer.

Based on the foregoing, we find that plaintiff's City HRL claims must be dismissed as against Mr. Bloomberg because plaintiff has failed to sufficiently allege that Mr. Bloomberg is her employer for purposes of the City HRL. She has failed to allege that Mr. Bloomberg encouraged, condoned or approved the specific discriminatory conduct allegedly committed by Mr. Ferris."

NEW YORK UNEMPLOYMENT INSURANCE - PERSONAL LIABILITY OF EMPLOYER

This is an interesting question presented - when is a corporate officer/owner individually responsible for wages, payments of UI benefits, etc.

The DOL's opinion letter as to when an individual shall be deemed an employer is set forth at this link:

http://www.labor.ny.gov/legal/counsel/pdf/opinions/ro-11-0002%20definition%20of%20employer.pdf

The most recent case I found on this issue is PICARD v. BIGSBEE ENTERPRISES, INC., 1984-13 (9-12-2013), 2013 NY SLIP Op 51495 (U) where the court noted:

"The second branch of defendants' motion seeks dismissal of the complaint
as against the two individual defendants, Joseph Mallozzi and John Mallozzi
(collectively "Individual Defendants"), on the ground that officers and
shareholders of a corporation are not subject to civil liability. In
opposition, plaintiff argues that corporate officers, agents and
shareholders may be held liable under article 6 of the Labor Law as
"employers" and that the complaint alleges sufficient facts for the
Individual Defendants to be deemed plaintiff's employer.

  Settled law holds that an individual does not bear civil liability for
unpaid wages under Labor Law article 6 ("Article 6") merely by serving as an
officer, shareholder or agent of a corporation (see Stoganovic v Dinolfo,
92 AD2d 729 [4th Dept 1983], aff'd 61 NY2d 812; Andux v Woodbury Auto Park,
Inc., 30 AD3d 362 [2d Dept 2006]). However, Article 6 does impose liability
upon "employers" (Labor Law § 190 [3]), and an officer, shareholder or agent
of a corporation who qualifies as an "employer" may be subject to a civil
suit on that basis (Bonito v Avalon Partners, Inc., 106 AD3d 625, 625-626
[1st Dept 2013] [officer]; Wing Wong v King Sun Yee, 262 AD2d 254, 255 [1st
Dept 1999] [shareholder]).

  The term "employer" is broadly defined in Article 6 to include "any
person, corporation, limited liability company, or association employing any
individual in any occupation, industry, trade, business or service." In
determining whether an individual may be subject to civil liability as an
"employer" under Article 6, courts consider factors such as whether the
individual exercises control of the day-to-day operations of the business,
including determination of the rate and method of payment of employees (see
Bonito, 106 AD3d at 625). Here, the complaint alleges that each of the
Individual Defendants "exercises sufficient control of each catering
location's day to day operations to be considered an employer of Plaintiff
and those similarly situated under New York Labor Law" (Complaint ¶¶ 30-31).
Accepting the truth of these allegations and according plaintiff the benefit
of all reasonable inferences, the Individual Defendants have failed to
demonstrate their entitlement to dismissal of the complaint at this early
stage of the litigation."




 

CHARITIES - PERSONAL LIABILITY OF DIRECTORS

My first legal job was as a summer intern with the Attorney General's Charities Bureau, which is responsible for supervising charitable organizations to protect donors and beneficiaries of those charities from unscrupulous practices in the solicitation and management of charitable assets. My work involved, in part, investigating the improper activities of executors, administrators, trustees and personal representatives responsible for honoring gifts or bequests to a charity, even though those executors, etc. served without pay. So volunteers beware. Even an individual can attempt to take action against the charity, and the volunteer executors, etc., as illustrated in the recent case of JOHNSON v. BLACK EQUITY ALLIANCE, 106797/09 2010 NY Slip Op 50178(U) (Supreme Court of the State of New York, New York County, Decided January 21, 2010) but here the attempt to get personal liability failed:

"Unpaid directors are immune from suit under the New York Not-For-Profit Corporation Law (N-PCL) § 720-a and CPLR (a) (11), absent allegations of their gross negligence or intention to cause harm. Thus, as to plaintiff's causes of action alleged against the individual directors, they are properly dismissed (see Pontarelli v Shapero, , [1st Dept 1996]). "On a CPLR (a) (11) motion, Supreme Court is obligated to determine whether the defendant is entitled to the benefits conferred by N-PCL and, if it so finds, then it must ascertain whether there is a reasonable probability that the specific conduct of the defendant fell outside the protective shield afforded by N-PCL [citation1 omitted]" (see Martin v Columbia Greene Humane Society, Inc., , [3d Dept 2005]). The Individual Defendants all serve as directors of Black Equity without compensation for their directorial services, and it is undisputed that Black Equity is a charitable organization that is tax exempt pursuant to section (c) (3) of the Internal Revenue Code. In her opposition, plaintiff asserts that defendant Cheryle A. Wills (Wills) receives compensation from Black Equity; however, Wills' compensation is not based on her service as a director, but is paid pursuant to a separate consulting contract with Black Equity, by which she is engaged to develop a business plan for potential funding sources. Plaintiff does not allege that any of the other directors receive compensation, but contends that since they receive certain perquisites, such as Black Equity paying for their attendance at various events, they should not be considered to fall within the protective umbrella of N-PCL § . The legislative intent of section of the N-PCL is "to curtail litigation against persons engaged in nonpaid charitable activities . . ." (see Rabushka v Marks, , [3d Dept 1996]). Here, the complaint alleges wrongdoing against Wills perpetrated in her capacity as a nonpaid director of Black Equity, not in her role as a compensated consultant. Moreover, plaintiff did not cite any case or statutory reference that the perquisites stated by plaintiff constitute the type of compensation that would take the Individual Defendants out of section of the N-PCL. Therefore, with respect to the Individual Defendants, the court finds that they are entitled to N-PCL § protection, provided that the actions complained of do not constitute gross negligence or intentional harm. In order to prevail against an assertion of immunity, the plaintiff must demonstrate a "reasonable probability" that the Individual Defendants' conduct constitutes either gross negligence or was intended to cause harm. Thome v The Alexander & Louisa Calder Foundation, ___ AD3d ___, 890 NYS2d 16 (1st Dept 2009). The conclusory averments of plaintiff appearing in her complaint and opposition papers fall far short of satisfying this burden (see Pontarelli v Shapero, 231 AD2d 407, supra )."

So in order for personal liability to be found against the unpaid volunteer directors, the court must find that the actions complained of constitute gross negligence or intentional harm.