One of the general and principal benefits of incorporating a business entity is limited liability; the owners of a corporation are not liable for the corporation’s actions or debts. There are, however, exceptions. One of the exceptions is the doctrine of “piercing the corporate veil,” under which courts may cast aside the “veil” of incorporation and hold a corporation’s shareholders personally liable for the corporation’s actions.
In most states, including New York, courts are especially reluctant to pierce the corporate veil because it is considered an extreme remedy that runs counter to the general rule of limited liability. Businesses operating in New York should take note of a recent decision of the Appellate Division, First Department, which appears to have made it easier for plaintiffs to “pierce the veil” and hold shareholders personally liable. The case, In re 91st St. Crane Collapse Litig., involved the collapse of a tower crane at a construction site on Manhattan’s Upper East Side in May 2008. The collapse resulted in injuries, deaths, and a wrongful death lawsuit followed.
The crane owner was a company called N.Y. Crane & Equipment Corp. (“NY Crane”), which was owned by an individual named James F. Lomma (“Lomma”). Lomma owned several additional companies, including J.F. Lomma, Inc. (“JF Lomma”). At trial, the jury found that NY Crane’s negligence was a cause of the accident, and “pierced the veil,” finding that Lomma and JF Lomma were liable for NY Crane’s negligence because Mr. Lomma operated the two businesses as a single entity.
The Appellate Division upheld the jury’s corporate veil findings, and its reasoning should give the corporate world—particularly small business owners—pause. Historically, New York courts have applied a “clear abuse of the corporate form” standard, which generally required proof that (1) the owner exercised complete domination of the corporation, and (2) that such domination was used to commit a fraud or wrong.
Here, the Appellate Division never discussed or applied the second prong (the “fraud or wrong” inquiry). Rather, its decision was based solely upon the overlapping operations of the Lomma entities that included the following conduct that does not normally rise to the level of “fraud or wrongdoing” that litigants are typically required to show before a court will pierce the corporate veil of a defendant:
- Commonly owned companies renting out each other’s equipment at will;
- Shifting profits between commonly owned companies;
- Signing blank crane/derrick forms so that the general manager could identify which company rented a crane on any particular job;
- Storing equipment rent free at property owned personally by common owner;
- Shared offices and email system among commonly owned companies; and
- Overlap of management and administrative personnel.
While Mr. Lomma and his companies could have done a much better job observing corporate formalities, many of the examples listed above are not uncommon to small, closely held companies and are not intrinsically fraudulent or unlawful. As a consequence, business owners who own and operate multiple entities in New York must take care to strictly observe the formalities of incorporation in their day-to-day operations. Based upon the In re 91st St. decision, it appears that New York courts may be willing to pierce the corporate veil even in the absence of fraudulent intent.