Requirement That Plaintiff Show That Domination Was Used to Commit a Fraud or Wrong

By Goldberg Segalla

Sep 19, 2012

James v. Loran Realty V Corp., 85 AD3d 619 (1st Dept. 2011) (Motion for leave to appeal granted May 24, 2012)

This appeal arose out of an action for personal injuries allegedly suffered by an infant plaintiff due to lead paint exposure in a building owned by the corporate defendant. The corporate defendant is now judgment-proof, and the plaintiff’s second cause of action sought to hold the former individual owners of the corporate defendant personally liable under a piercing the corporate veil theory.

Although the decision does not provide many facts, the appellate court re-stated the applicable standard that “piercing the corporate veil requires a showing that:

1. the owners exercised complete domination of the corporation in respect to the transaction attacked; and

2. that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury,” citing matter of Morris v. New York State Sept. of Taxation & Fin., 82 NY2d 135, 141 (1993).

The appellate court held that even though the plaintiffs probably succeeded in showing complete domination by the individual defendant, they did not satisfy the second prong because they failed to show that the individual defendant’s actions “were for the purpose of leaving the corporation judgment proof or that his actions amounted to a wrong against them.” The court noted that the corporation was not judgment-proof at the time the individual defendants turned over control of it, and plaintiffs produced no evidence that the individual defendants were still involved in the management of the realty corporation at the time it became judgment proof.

It is unclear what issue the court granted leave on, but presumably the argument made by the plaintiffs seeking leave is that, given the judgment-proof status of the realty corporation, it may at least be inferred that such status is primarily the result of the actions of the individuals who completely dominated it a short time earlier.