Creditors Find Piercing the Corporate Veil is Not So Easy

Creditors of judgment-proof corporate entities often seek to “pierce the corporate veil” between the entities and their principals in hopes of finding a solvent defendant. Yet, veil piercing is an equitable remedy only rarely allowed by courts and is limited to situations in which the corporation’s principals (or parent company) (i) so dominated the corporation that they can be said to be the “alter-ego” of the corporation; and (ii) misused the corporate entity to perpetrate a fraud or crime or otherwise work an injustice. A number of factors have been found relevant to a veil piercing analysis, including whether the corporation is undercapitalized, whether the corporation failed to observe corporate formalities or failed to maintain corporate records; whether the debtor corporation was insolvent; whether the corporation’s funds were siphoned off by the dominant shareholder; and whether the corporation served merely as a façade for the operations of the dominant shareholder or shareholders.

Three recent decisions show how hard these standards are to meet. In Ossa v. Kalyana Mitra LLC, A-3915-14T1 (N.J App. Div., Oct. 7, 2016), an executive of Kalyana Mitra sued the company for compensation for work he had performed, reimbursement of expenses he had incurred, and repayment of a loan he made to the company. Ossa also sued the two principals of the company, Miller and Noble, who also served as the CEO and Chief Marketing Officer. The trial court granted summary judgment in favor for the two principals and entered a default judgment against the company (which had not defended the lawsuit). Ossa then appealed.

The Appellate Division affirmed in an unpublished decision, finding that Ossa could not avoid summary judgment on his veil piercing theory. The court noted that Ossa had provided nothing more than “bald assertions that Miller treated [the company] as her ‘alter ego,’ committed fraud by transferring money to her other company [, and] did not follow corporate formalities.” Slip op. at 5. The court noted that “sufficient corporate formalities were followed.” Ibid. Apparently, the record showed that at least some regular corporate practices had not been observed but the court did not find them troubling, given the “documentation of minutes of meetings, notes, and agendas, and tax and bank records indicating that company funds were not siphoned for personal use.” Ibid. The documents, in fact, showed that Miller was using the money to repay her husband’s company, which was one of Kalyana Mitra’s creditors. While Ossa had also loaned money to Kalyana Mitra, there was no proof that Miller had guaranteed the loan to support the claim against her, nor did the court find any evidence of injustice to warrant the equitable remedy of veil piercing because it noted that Miller and Noble had loaned substantially more money to the company than Ossa and would not be repaid.

The federal district court for the District of New Jersey reached the same conclusion in Hanjin Shipping Co., Ltd. v. Port Transport Inc. Civ. No. 2:16-02547 (D.N.J. Jan. 21, 2017), in which the plaintiff sought to recover for $255,295 in unpaid freight charges by asserting fraud and breach of contract counts against the individual owners of the defendant. The court granted the individuals’ motion to dismiss the alter ego allegations, concluding that the facts that the individual owners of the closely held defendant “drove its business dealings, and appeared as signatories to its bank accounts” “do not distinguish Port Transport from most other small, family–owned businesses” and were not a basis to disregard the corporate entity. Slip op. at 2. Furthermore, Port Transport’s failure to register under the New Jersey business authorization statute was not evidence that the company had failed to observe corporate formalities to the degree that alter ego liability would follow.

In FDASmart, Inc. v. Dishman Pharmaceuticals and Chemicals Ltd., A-2800-15T3 (N.J. App. Div., Dec. 29, 2016) (approved for publication), the court showed that reluctance to “pierce the corporate veil” extends to a parent corporation as well. The plaintiff in Dishman had contracted with DPCL, an Indian corporation, regarding the sale of its Chinese subsidiary. When the sale was canceled, the disappointed buyer brought a lawsuit in New Jersey against DPCL and its U.S. subsidiary, Dishman USA, Inc., a New Jersey corporation, claiming that the Indian parent was the alter ego of the American company. The plaintiff hoped that, even though the Indian corporation had no contacts with New Jersey, the presence of a U.S. alter ego could confer jurisdiction over the parent. The trial court allowed discovery to proceed on the issue of jurisdiction, and then granted plaintiff’s motion for partial summary judgment finding jurisdiction over the Indian parent.

On appeal the Appellate Division reversed, holding that the elements for an alter ego claim had not been established. The discovery had not shown either the necessary domination by the Indian parent or the “injustice or fraud” prong required for veil piercing. Although an officer of Dishman USA had testified that “the company barely meets its expenses,” the court found this was not enough to show “domination” when the U.S. subsidiary was able to pay all other obligations without contributions from its parent. Slip op. at 10. Domination was not established merely by a parent-subsidiary relationship, where there was no dispute that the parent and subsidiary were “distinct equal entities that engage in arm’s-length transactions in accordance with applicable tax laws.” Ibid. Plaintiff had not shown that the parent “directly interfered” with the subsidiary’s selection of its personnel or “controls its subsidiary’s marketing and operational policies.” Slip op. at 10-11. Having found no support for “domination,” the court saw no need to address the “injustice or fraud” prong. Thus, there was no alter ego basis to assert jurisdiction over the Indian parent corporation.

Ossa, Port Transport and Dishman indicate that, while creditors will continue to assert veil piercing theories to reach “deeper pocket” defendants, the elements required for such claims will remain difficult to prove. Additionally, in cases like Ossa and Port Transport that involve smaller entities, courts seem willing to excuse some non-compliance with basic corporate formalities, rather than accepting it as evidence of “misuse” of the corporate form.