State of New York
Supreme Court : County of Monroe

This opinion is uncorrected and is subject to revision in the official Reports

ANDREW V. SIRACUSE, J.

The right to ignore the form of a corporation and hold its shareholders liable individually--"piercing the corporate veil"--is one of the court's equity powers, and as such is to be exercised with careful attention to the facts of the case. This, in itself, means that other cases are of limited assistance. The corporate structure found here is not unusual. Neither, unfortunately, is the injury alleged; but as far as the court can determine no case directly on point has ever been reported in New York, and only a few with significant parallels can be found in sister states' cases. This case must be decided, then, upon an application of general principles to the facts at hand.

The facts are these: Plaintiffs Patricia and Erin Dromgoole were severely injured in an automobile accident when a car driven by one Ryan Pickering ran through a red light. When the police arrived at the accident scene Pickering was found to have a blood alcohol level of .23, more than twice the legal limit. He claims to have consumed an excessive number of beers at T-Foots, a bar some miles from the scene of the accident. In a statement made to plaintiffs' counsel Pickering testified that he drank no place else that night, and that when he is drunk he is usually noticeably so: he is loud and obnoxious. Although Pickering remembers very little specific about the night of the accident, there is a colorable dram shop case against the bar.

Plaintiffs sued under both common law and the dram shop law. Defendant Laraby, the sole shareholder of T-Foots, has moved to dismiss the complaint in its entirety, and T-Foots has moved to dismiss the common law causes of action.

There is no doubt that the common law causes must be dismissed against both of the defendants, because the accident happened at some remove from the bar. The plaintiffs do not object to this portion of the defendants' motion. They do, however, vigorously oppose the motion to dismiss as to Laraby, arguing that the corporate veil must be pierced.

Defendant Laraby, who was not present in the bar on the night of the accident, is not only the sole shareholder of the corporation but the owner of the premises. He admits in his papers that he dominates the corporation, which exists solely to own the bar. He leases the premises to the corporation, which in turn employs him. The plaintiffs claims that the corporation carries no dram shop insurance; thus, the only asset that could satisfy a judgment is the land. In other words, the corporate structure functions to keep the assets separate from the entity that could sustain liabilities. It appears to have no other purpose.

The avoidance of personal liability is one of the advantages of the corporate form, and in itself is not necessarily an evil. A capitalist economy cannot thrive without risk-taking, and innovation in business would be stifled if individuals were inevitably drowned in the shipwreck of their business plans. However,

manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil", whenever necessary "to prevent fraud or to achieve equity" (Walkovsky v Carlton, 18 NY2d 414, 417).

The veil is sometimes pierced to prevent acts akin to actual fraud, as in Kelsey v A & A Metal Fabricating, Inc. (284 AD2d 974), where the president and sole shareholder of a corporation signed a non-competition clause with the firm that was buying the business. He then began competing in his individual capacity. The Fourth Department held that "[t]hrough his domination of A & A, plaintiff warranted to Warren that he would not compete with A & A; plaintiff now attempts to hide behind the corporate veil to shield himself from that warranty" (284 AD2d, at 975).

In a case somewhat closer to the present one, where a plaintiff was seeking satisfaction of a judgment debt that could not be paid by the undercapitalized corporate defendant, the Fourth Department wrote:

An action to pierce the corporate veil and to hold the owners liable for an underlying corporate obligation is "equitable in nature" and dependent "on the attendant facts and equities" (Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141). A plaintiff is "not required to plead or prove actual fraud in order to pierce the corporate defendant's corporate veil, but [must prove] only that the individual defendant's control of the corporate defendant was used to perpetrate a wrongful or unjust act toward plaintiff" (Lederer v King, 214 AD2d 354; see, TNS Holdings v MKI Sec. Corp., 92 NY2d 335, 339). "Although proof of fraud is relevant in such a suit[,] it is not essential" (Julien J. Studley, Inc. v Lefrak, 48 NY2d 954, 956). Where, as here, an undercapitalized corporation is unable to pay a judgment debt and there has been "disregard of corporate formalities and personal use of corporate funds, ... [there is] sufficient evidence of wrongdoing to justify piercing the corporate veil" (Rotella v Derner, 283 AD2d 1026, 1026-1027, some citations omitted).

The present case is, like most corporate veil cases, sui generis. The plaintiffs have shown no evidence of actual commingling of assets, a disregard of formalities, or any personal use of corporate funds. On the other hand, the court can find no genuine distinction between the two defendants that would justify maintaining the legal fiction of the corporation's separate identity. As noted above, Laraby has admitted that he completely dominates T-Foots; for example, it would be no more likely to fire him from his status as a corporate employee than he would be to fire himself. He is the sole shareholder the only effective officer, and undoubtedly the "employee" with power to control the actions of all others. He owns the premises in his individual capacity and runs the business in those premises in his corporate capacity, but these actions are essentially indistinguishable.

In the other cases the blurring of lines between corporate and individual undertakings is often viewed from the corporate end: is the corporation carrying on activities that are not truly part of its business program? In the present case, though, it might be better viewed from the individual defendant's perspective. In reality, Laraby is the person who is engaged in the bar business. Although he was not present on the night that Ryan Pickering injured the Dromgooles, he participates in the bar's day-to-day operations instead of being, for example, a passive investor. There is no meaningful difference between Laraby's personal business and that of T-Foots.

Laraby has argued that the alleged sale of alcohol to Pickering, which neither he nor T-Foots admits at this stage, is a legal act within the normal business of the bar. But what is alleged here is indeed a "wrongdoing", one which is a statutory violation: the sale of alcoholic beverages to a patron who is already intoxicated. The court is not called upon to resolve the dram shop question at the present time, and should the plaintiffs fail to show that the law was violated neither defendant would face liability. The question here presented is essentially hypothetical, because it is addressed to the pleadings: should the plaintiffs establish a dram shop cause of action, will Laraby be individually liable? In considering this question Laraby's claim that his corporation's other employees committed no wrong is immaterial, even though it is open to him to argue this as the case progresses and it may conceivably prove dispositive.

At this stage the court must accept the plaintiffs' allegations as proved. Should the corporate veil be pierced? The equities of the facts as alleged are strongly balanced in favor of so doing. If Laraby is let out of the case and the plaintiffs were to succeed at trial against T-Foots, they would be left with a judgment against a corporation with no assets. No doubt T-Foots would go out of business. But unless the Liquor Authority intervenes, Laraby would then be able to incorporate under another name, lease the property to the new corporation--one which differs from T-Foots only in name--and hire himself as a paid employee.

If this case resembles any of the ones cited above, it is closest to the Court of Appeals's view of Mangan, for here, too, the corporate form is merely a tool "for carrying on the business of the defendant without imposing upon it financial and other liabilities incident to the actual ownership and operation of the [business]" (18 NY2d, supra, at 418). The plaintiffs have adequately alleged a wrongdoing on the part of the corporation. That corporation was admittedly dominated by the individual defendant. While the corporate form was not maintained in order to do wrong, intentional or fraudulent use of incorporation is not the only ground for disregarding it. It is sufficient if, as here, the totality of circumstances shows that the incorporator has set up the structure exclusively or primarily to avoid responsibility for wrongs that might be committed in the course of his business and for which he would otherwise be liable.

The common law claims against both defendants are dismissed upon stipulation. Defendant Laraby's motion for dismissal of the dram shop cause of action is denied, with costs. Plaintiffs' counsel may prepare the order.

DATED: Rochester, New York

December 12, 2002

Andrew V. Siracuse, J.S.C.

This opinion is not available for publication in any official or unofficial reports, except the New York Law Journal, without the approval of the State Reporter or the Committee on Opinions (22 NYCRR 7300.1)

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