Tuesday, November 1, 2016
I often complain about courts and their unwillingness to require plaintiffs to make appropriate claims about veil piercing in the context of limited liability companies (LLCs). That is, courts too often allow plaintiffs to seek to "pierce the corporate veil" of LLCs, which (of course) do not have corporate veils. They have limited liability veils, but they are decidedly not corporate. I will complain about that again, but in the process, I will note that the court does a great job of general veil piercing analysis that is worthy noting.
In Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, on Oct. 20, 2016, the Supreme Court, Appellate Division, First Department, New York, decided to dismiss a veil piercing claim based on what I see as very sound reasoning. I would have like the court to note it was not a corporation, and instead an LLC, that the plaintiff sought to pierce, but nonetheless, I think the court got the rest right. The court found that the plaintiff failed to plead a sufficient veil-piercing claim and explained, "both parties were very sophisticated, and negotiated in minute detail all aspects of their agreements to build [defendant] using innovative technology. That the project failed does not lead to a veil-piercing claim, especially since plaintiff failed to identify the alleged fraud or other wrongdoing. Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, No. 1352, 2016 WL 6106652, at *1 (N.Y. App. Div. Oct. 20, 2016) (emphasis added).
The court continued:
Far from alleging that FCRC used B2 Owner to perpetrate a fraud, plaintiff, a sophisticated party, admits that it knowingly entered into the CM Agreement with B2 Owner, an entity formed to construct the project. Nowhere in the complaint does plaintiff allege that it believed it was contracting with or had rights vis-à-vis FCRC or any entity other than B2 Owner. Indeed, plaintiff could have negotiated for such rights. Having failed to do so, plaintiff cannot now claim that it was tricked into contracting with B2 owner only and thus should be allowed to assert claims against FCRC . . . . Thus, the veil-piercing claim should be dismissed.
Id. at *7.
I think this is spot on. Far too often courts seem to give credence to veil-piercing claims that seem predicated primarily on a lack of ability to pay or the fact that there is a financially sound parent company. That is simply not the standard. This is not true only for sophisticated parties, but it is especially true of them. Although I feel badly for an entity that is not able to recover all it is owed, I do not think courts should provide what amounts to a guarantee from another entity when such resources were neither promised nor bargained for in the contracting process. Judge Acosta got this part right. Now if he would just be sure to distinguish veil piercing by entity ...