In Aaron Richard Golub, Esquire, P.C. v. Blum, 23-cv-10102 (S.D.N.Y. Apr. 1, 2024), the court dismissed a claim for quantum meruit asserted against an owner of the co-defendant corporation because the complaint failed to plead sufficiently that the owner’s alleged dominion over the defendant corporation caused the plaintiff’s alleged injury.
It is well known that corporate principals generally cannot be held personally liable for the obligations of their enterprise. However, in certain circumstances, a court may “pierce the corporate veil” and impute corporate liabilities to the principals. Discussions of piercing the corporate veil often focus on whether the principal exercised dominion and control over the corporation such that the corporation can be said to be the principal’s “alter ego.” But there is more to it than that.
The Blum decision underscores that states employ differing analytical frameworks to determine whether to pierce the corporate veil. Importantly, under New York’s choice-of-law principles, the law of the corporation’s state of incorporation governs whether to pierce the corporate veil.
Under New York law, a corporate principal may be held liable under an alter-ego theory if: (1) the principal exercised complete control and domination over the company and (2) that domination was used to perpetrate a fraud or wrong on the plaintiff. In Blum, the plaintiff law firm sought to hold its client’s principal personally liable for the entity’s failure to pay its legal fees. The complaint alleged that the principal exerted dominion and control over the entity, specifically by commingling funds. Those allegations were conclusory and failed to plead dominion and control sufficiently. But even if the court were to credit those allegations, the complaint failed to allege that the principal’s misuse of corporate funds had caused plaintiff’s injury. Thus, the complaint in Blum failed to articulate a basis for the court to pierce the corporate veil under New York law.
The court, however, relegated its conclusion under New York law to a mere footnote because the defendant entity was incorporated in California, so California law governed whether the court could pierce its corporate veil. California, like Delaware, does not require the plaintiff to plead that the principal’s dominion and control over the corporation was used to perpetrate a fraud or wrong on the plaintiff. Instead, those states consider whether it would be “inequitable” under the circumstances to enforce a legal distinction between the corporation and the principal who exercised dominion and control over it. See Blum, at 7 (applying California law); Tommy Lee Handbags Mfg. Ltd. V. 1948 Corp., 971 F. Supp. 2d 368, 377 (S.D.N.Y. 2013) (applying Delaware law). The court found no inequity based on the allegations pled, and thus dismissed the quantum meruit claim brought against the individual defendant based upon an alter ego theory.
Blum offers important guidance about the state-specific analysis that must be employed when considering a veil-piercing theory and provides a valuable reminder of the narrow circumstances in which New York law permits the obligations of a corporation to be imputed to its owner or principal. If you have questions about “piercing the corporate veil,” please contact Michael C. Rakower or Travis J. Mock.
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