In Aekyung Co., Ltd. v. Intra & Company, Inc, et al, 2008 U.S. Dist. LEXIS 96942 (SDNY Nov. 19, 2008), the federal district court considered piercing the corporate veil of corporation owned by a single shareholder. In his decision, which is applicable to single member LLCs, Judge McKenna brought some sanity to the unpredictable world of veil piercing.
A judgment had been entered against Intra & Company, Inc., a corporation with only one shareholder. Apparently, Intra did not have $1.8 million in its bank account so the plaintiff sought to pierce the corporate veil and obligate the sole shareholder to pay the judgment.
Under New York law to pierce the corporate veil there must be a showing that (1) the owner exercised complete domination of the corporation and (2) such domination was used to commit a fraud or wrong against the plaintiff resulting in injury to the plaintiff.
To show dominance of Intra by the sole shareholder the plaintiff alleged, among other things, (1) the rent on the shareholder's residence was paid from a corporate account, (2) Intra was administratively dissolved for over a year, (3) the corporation had no officers other than the sole shareholder and no minutes of shareholder or board meetings, (4) a single person was the sole shareholder, director and officer, and (5) this person was the only person who had the authority to bind the corporation or represent Intra.
Judge McKenna was dismissive of these claims noting that given the fact that this was a single shareholder corporation "it comes as no surprise that [he] was the only person with authority and the capacity to bind Intra...."
The fact that "a corporation is 'controlled or dominated by a single shareholder' cannot, by itself, cause veil piercing." (cite omitted). More importantly, domination and fraud is not enough to pierce the corporate veil unless "the corporate form was itself used to effectuate the fraud."
The court also noted that points (1) through (3) listed above were an insufficient basis to grant summary judgment. This is important because it means that sloppy bookkeeping, inattention to corporate filings and formalities should not lead to personal liability. To conclude otherwise would render the ability of a single person to own a corporation (or an LLC) for purposes of limiting liability a nullity. While not to be condoned, the conduct must be connected to the fraud alleged in order to lead to a veil piercing.
-Marc Ward
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