Lau v. Lazar, Index No. 651648/2013, 10/14/2014 (Kornreich, J.).

By Christine Kummer | Staff Writer

Contract; individual liability; veil piercing; NY LLC §609-10; unjust enrichment.

Individual defendant, an accountant and owner of corporate defendants negotiated a letter of intent with individual plaintiff, a doctor and owner of corporate plaintiffs to become partners and operate defendants’ medical facility. Following execution of the LOI by corporate plaintiff and corporate defendant, the corporate plaintiff entered into a membership interest purchase agreement with individual defendant to buy an interest in defendants’ medical facility. The corporate parties entered into an operating agreement naming corporate defendant managing member, multiple services agreements whereby plaintiffs would loan $750,000 to the medical facility and provide its exclusive consulting services and defendants would compensate plaintiffs for the medical facility’s operating costs and expenses, and medical equipment lease agreements granting plaintiffs a right to repossess the equipment upon defendants’ default of lease payments. Plaintiffs contend that after loaning approximately $1.4 million to the medical facility, paying approximately $1.3 million of its operating expenses, and leasing medical equipment from a third party for use at the facility, defendants used such funds to pay off defendants’ personal and corporate debts and refused to return plaintiffs’ medical equipment.

Plaintiffs’ third amended complaint alleges 28 causes of action which the court narrowed to 5 categories of claims: tortious interference, breach of contract, unjust enrichment, conversion and anticipatory breach of contract. Plaintiffs alleged the non-contracting individual defendants and corporate defendants are liable for unjust enrichment and fraud claims and seek to pierce the corporate veil for individual defendant’s personal liability. Defendants move to dismiss.

Defendants argued that as member of a limited liability company individual defendant cannot be individually liable for his corporate defendants’ contractual debts, pursuant to New York’s LLC Law §609 and §610. The court held that §610 does not offer immunity for a members’ individual wrongful conduct, including a member who causes the LLC to breach a contract, personally retain the money and become unjustly enriched.

Plaintiffs alleged individual defendant exercised complete domination and control with respect to the business arrangement and used such domination to commit a fraud or wrong causing injury to plaintiffs.  Plaintiffs recited the relevant corporate veil piercing factors: the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the allegedly dominate corporation; whether dealings between the entities are at arm’s length; whether the corporations are treated as independent profit centers; and the payment or guaranty of the corporation’s debts by the dominating entity. However, the court held merely reciting the relevant factors is insufficient. Under the heightened pleading standard for corporate veil piercing a plaintiff must allege facts that tend to prove such factors exist. Plaintiffs further alleged that individual defendant’s personal guarantee of the corporate defendants’ debt was sufficient to pierce the veil. But the court noted piercing the veil based on a personal guarantee alone would disproportionally deprive small business owners of the protection of the corporate form. Even if plaintiffs proved sufficient facts existed for domination and control with respect to the business arrangement, the court found plaintiff failed to show facts indicating that defendants abused the corporate form to defraud or cause wrongdoing to the plaintiff; therefore, the corporate veil may not be pierced.

Plaintiffs claimed non-contracting defendants were unjustly enriched at plaintiffs’ expense and that it is against equity and good conscience to permit defendants to retain the plaintiffs’ funds and medical equipment. The court held that while recovery for unjust enrichment is generally precluded against non-contracting parties for rights arising from valid existing contracts, an exception applies when a non-contracting party wrongfully obtains contractual proceeds due under the contract, provided that such recovery does not contravene the express terms of the contract.

The court dismissed plaintiffs’ corporate veil piercing claims, held the breach of contract claims may only be asserted against contracting parties, and otherwise denied the motion.

Lau v. Lazar, Index No. 651648/2013, 10/14/2014 (Kornreich, J.).

This entry was posted in Case Summary and tagged , , , , . Bookmark the permalink.