In Torricelli v. VB Asset Management, LLC, 23-CV-9176 (VEC), 2024 WL 1718820 (S.D.N.Y. Apr. 22, 2024), the court applied two seemingly contradictory doctrines when dismissing an alter-ego based breach of contract claim under Delaware law and a claim for tortious interference with contract under New York law, each brought against an investment company concerning a contract with its wholly-owned subsidiary. The court’s decision highlights the fact that courts will respect the twin realities of corporate separateness and a parent company’s role in overseeing its subsidiary.
Robert Torricelli, a former United States Senator, and Elise Lelon (“Plaintiffs”) brought claims against VB Asset Management, LLC (“VBAM”) and its parent, Viscogliosi Brothers, LLC (“VB LLC”), an investment company operating in the medical device industry.
Plaintiffs joined the VBAM board and signed compensation agreements with VBAM providing them with quarterly compensation and other incentives. In response to a 2022 payment inquiry from Plaintiffs, a principal of VB LLC “unilaterally determined” that the board compensation would be “accrued” rather than paid each quarter. Plaintiffs then sent VBAM and VB LLC a demand letter in July 2023. In response, that same principal informed Plaintiffs, for the first time, that the VBAM board had been disbanded in 2022. Plaintiffs thereafter sued VBAM and VL LLC alleging a host of claims, including claims against VB LLC for breach of contract and tortious interference with contract. VB LLC moved to dismiss all claims brought against it. The court granted VB LLC’s motion in its entirety.
Plaintiffs premised their breach claim against VB LLC upon the theory that VBAM was its alter ego. Applying Delaware law, the court considered whether VBAM: (1) was adequately capitalized and solvent; (2) observed corporate formalities; and (3) functioned simply as a facade for VB LLC.
On the first, and most important, factor, Plaintiffs alleged only the conclusion that VBAM did not have the funds to pay Plaintiffs and pleaded so only “upon information and belief.” The court was unpersuaded by the fact that a principal of VB LLC was the one who disbanded the VBAM board because that same person was also VBAM’s CEO and had acted within the scope of his authority as CEO. The court also found that the overlap between the companies, including shared office space, resources, personnel, and business mission, fell “comfortably” within the norms of a parent-subsidiary relationship. On the third factor, the court found that this same overlap and the failure of the companies to distinguish themselves when recruiting and paying benefits and expenses to Plaintiffs was insufficient to show a mere facade.
Turning to the tortious interference claim under New York law, the court began with the proposition that only a non- party or a “stranger to the contract” can be liable for tortious interference. Because VB LLC wholly owned VBAM and had “complete control” over it, the court held that VB LLC was not a stranger to the contract and therefore could not be liable for tortious interference.
On first glance, the court’s reasoning appears contradictory: it dismissed the breach claim where Plaintiffs did not show VBAM to be VB LLC’s alter ego; it then dismissed the tort claim because VB LLC was not sufficiently distinct from VBAM. But the “stranger to a contract” rule is based on the reality that companies make decisions through the individuals that operate and own them.
As other cases outside the Torricelli opinion have discussed, the rule first appeared in cases where a plaintiff would sue a company for breach of contract and its officers and directors for tortiously interfering with that contract. In re KG Winddown, LLC, 632 B.R. 448, 491 (Bankr. S.D.N.Y. 2021) (collecting cases). As early as the 1950’s, New York’s courts recognized that an officer or director is not personally liable for causing his company’s breach of contract if the alleged inducement arose from the defendant acting in his corporate capacity. Application of Brookside Mills, 276 AD 357, 367 (1st Dept 1950). Courts then extended this principle to the managers of LLCs and owners of wholly-owned subsidiaries because they, too, make decisions and take steps on behalf of a contracting entity. In re KG Winddown, LLC, 632 B.R. at 491; see Koret, Inc. v Christian Dior, S.A., 161 AD2d 156, 157 (1st Dept 1990) (“Dior–Paris, as the corporate parent, had a right to interfere with the contract of its subsidiary, in orpder to protect its economic interests.”).
Today, courts readily accept that a parent company overseeing and controlling its wholly-owned subsidiary does not qualify as a “stranger” to its subsidiary’s contract, a recognition that precludes a claim against the parent for tortious interference with contract. Envy Branding, LLC v William Gerard Group, LLC, 20-CV-03182 (JLR), 2024 WL 869156, at *18 (S.D.N.Y. Feb. 29, 2024). Of course, as the court in Torricelli recognized, in the exceptional circumstance that a parent interfered with its subsidiary’s contract out of malice or through fraudulent or illegal means, the parent company can be liable.
Torricelli serves as a reminder that a parent company will not be liable for protecting its interests through a subsidiary so long as its actions do not cross the threshold into abusing the corporate form and rendering the subsidiary a mere alter ego of itself.
If you have questions about breach of contract, tortious interference, or the liability of parent companies in relation to their subsidiaries, please contact Michael C. Rakower or Daniel F. Gilpin.
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