Piercing Your Corporate Veil – Part II: An Illustrative Case is Worth a Thousand Words

Starting Up Smarter

It is remarkable to note how many major lawsuits result from a failure to attend to “minor details”—precisely, of the sort of details that many busy entrepreneurs don’t have time for.  The recent case of Moras v. Marco Polo Networks, Inc. is just one of many that illustrate this point.  

Moras, decided on May 31, 2012, by Federal Judge Paul Engelmayer of the Southern District of New York, illustrates just what can go wrong when individuals don’t attend to corporate formalities and leave themselves open to corporate veil-piercing arguments. 

Plaintiff, Moras, after he was fired, sued his employer for breach of an employment agreement, fraud and unjust enrichment.  He also sued Ramgopal, the CEO and single largest shareholder of the parent company of his employer, on a veil-piercing theory.  In defining the issue on Ramgopal’s motion for summary judgment, the Court asked, “can Ramgopal be held individually liable for the corporate defendants' non-payment of wages by piercing the corporate veil and imposing shareholder liability?” 

Notably, for Moras to reach and establish personal liability against Ramgopal, he would need to pierce the veil of two corporations, both his employer and the employer’s parent corporation.  Judge Engelmayer began his analysis by stating the applicable New York law (internal citations omitted):

New York law "allows a party to pierce the corporate veil upon showing '(i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.'"  Because of this high legal standard, "[a] party seeking to pierce the corporate veil bears a 'heavy burden' of demonstrating complete domination by the parent and that such domination . . . resulted in inequitable consequences."

The decision whether to pierce the corporate veil in any given instance "will necessarily depend on the attendant facts and equities."  Thus, determining whether veil-piercing is appropriate is a "fact specific" inquiry.  Courts consider many factors, including: (1) disregard of corporate formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors, and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the degree of discretion shown by the allegedly dominated corporation; (7) whether the dealings between the entities are at arms length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of the corporation's debts by the dominating entity; and (10) intermingling of property between the entities.

Applying these principles, Judge Engelmayer determined that a large shareholder, although not a majority shareholder of a parent company, may be held liable for the obligations of a subsidiary when the facts warrant a piercing of the dual corporate veils.

Here is the Court’s analysis (internal citations to the record omitted):

Although the Court does not prejudge the outcome of this fact-intensive inquiry, in this case there is clearly sufficient evidence upon which a reasonable jury could find veil-piercing warranted.  Ramgopal is the CEO and Chairman of the board of directors of all Marco Polo Group related companies.  Although Ramgopal is not a majority shareholder per se, Moras has adduced evidence that Ramgopal owns the largest share of the Marco Polo Group companies, with all other shareholders approximately 20, by Ramgopal's count, owning less than 5 percent each. Defendants argue that it is implausible that Ramgopal exerts complete domination over Network Inc.; the entity that initially employed Moras and was bound by the May 4, 2008 agreement; in part because he owns only 1 percent of the interest in that company.  However, such domination is plausible because although Ramgopal does not directly own a sizable share of Network Inc., he does own the largest share (28 percent) of Marco Polo Network Ltd., the holding company which in turn owns 40 percent of Network Inc.  In addition, Network Inc. owns 64 percent of Marco Polo Capital Markets, the signatory of Moras's December 8, 2009 agreement.  As to the February 1, 2010 agreement with Marco Polo Fixed Income Mexico, its parent, Marco Polo Latin America, was originally a wholly owned subsidiary of Network Inc., and later became a wholly owned subsidiary of Marco Polo Capital Markets.  A jury could reasonably conclude that Ramgopal exercised domination over Network Inc. or Marco Polo Latin America, based in part on his ownership stake.

Moras also notes that aspects of Ramgopal's own testimony support Moras's claims that Ramgopal has (1) disregarded corporate formalities, (2) intermingled his own funds with those of his companies, and (3) inadequately capitalized certain of the Marco Polo entities.  See, e.g., Ramgopal [Deposition] (testimony as to common payroll systems covering all Marco Polo Group entities[,] testimony as to undercapitalization of certain Marco Polo Group entities[, and] testimony as to unsecured loans from friends, family, and Ramgopal himself).  [Emphasis added].

The Court, therefore, comfortably finds that material questions of fact exist, and a jury could reasonably find that Ramgopal exerted "complete domination" over Network Inc. and its relevant subsidiaries so as to justify piercing the corporate veil and imposing personal liability.  Accordingly, the Court denies defendants' motion for summary judgment as to Ramgopal's individual liability.

From this opinion, it would appear that had Ramgopal (a) maintained corporate formalities, (b) not intermingled his own funds with company funds, and (c) adequately capitalized the companies, the veil-piercing claims likely would have been dismissed and Ramfogel would not now be facing a very time-consuming and expensive litigation on whether he is subject to personal liability for Moras’ claims.  All of these steps are easy to take—but also easy to ignore by entrepreneurs faced with multiple demands on their time.