When Is a Business Owner Liable For Her Corporation’s Debts? Piercing the Corporate Veil (II)
In our last entry we discussed how piercing the corporate veil can result in the owner of a New York corporation being personally responsible for the corporation’s debts and obligations. We also set out the test for piercing the corporate veil: A Plaintiff must show that the owner of the corporation exercised complete domination of the corporation in the transaction the Plaintiff has complained about; that the owner’s domination was used to commit a fraud or wrong against the Plaintiff which resulted in the Plaintiff’s injury, and that the owner, through her domination, abused the privilege of doing business in the corporate form to perpetrate the wrong against the Plaintiff. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141-42, 623 N.E.2d 1157, 1160-61 (1993); E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011); Love v. Rebecca Dev., Inc., 56 A.D.3d 733, 868 N.Y.S.2d 125 (2nd Dept. 2008).
There are some interesting cases that illustrate just how difficult it is to pierce the corporate veil. One is E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011). There, the Plaintiff was a Long Island school district that sued not only a construction company, Sandpebble Builders, Inc., but also its president and principal owner, for breach of contract. The School District alleged that the construction company had negotiated the terms of a construction services contract in bad faith. According to the School District, the company came to an agreement in principal with it on the terms of the contract numerous times only for the company to try to negotiate better terms, and, when it could not, the company would refuse to execute the contract. The company, according to the School District, was trying to delay the project on which it was supposed to work, by prolonging the negotiations, and using that as leverage to negotiate a better deal, one closer to a previous contract which the School District evidently canceled. That, without more, would make the dispute nothing more than another example of why it is important to spell out all of the terms of the contract in writing and to make it clear that the parties involved in a transaction do not wish to be bound unless and until there is a written, executed agreement.