Freeman v. Complex Computing Co.
119 F.3d 1044 (1997)
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Rule of Law:
Under New York law, piercing the corporate veil to hold an individual liable requires a two-part showing: (1) that the individual exercised complete domination over the corporation, and (2) that this domination was used to commit a fraud or wrong that resulted in an unjust loss or injury to the plaintiff. Complete domination alone is insufficient to pierce the corporate veil.
Facts:
- To circumvent a licensing restriction from Columbia University, Jason Glazier arranged for the creation of Complex Computing Company, Inc. (C3) with an acquaintance as the sole shareholder and an attorney as president.
- Glazier, through his own company, entered a consulting agreement with C3, but he was the sole signatory on C3's bank account and held a written option to purchase all of C3's stock for $2,000.
- In 1993, C3 entered into a five-year sales agreement with Daniel Freeman, promising him long-term commissions on revenues from clients he developed. Glazier personally signed amendments to this agreement.
- In 1994, C3 sold most of its assets to Thomson Trading Services, Inc. (Thomson), an account Freeman had developed.
- As part of the asset sale, Thomson hired Glazier, paid him a $450,000 'signing bonus,' and paid C3 $300,000. The asset purchase agreement expressly excluded Thomson's assumption of the C3-Freeman Agreement.
- Following the sale, C3 terminated its agreement with Freeman via a letter signed by Glazier, stating the action was taken 'to combat the overly generous termination clause we committed to, and to force a renegotiation of your sales contract.'
- After payments were made from C3 to Glazier's company and for other expenses following the asset sale, C3 was left with only about $10,000 in its bank account.
Procedural Posture:
- Daniel Freeman filed a lawsuit against Complex Computing Co. (C3), Jason Glazier, and Thomson Trading Services, Inc. in the U.S. District Court for the Southern District of New York.
- Defendants moved for a stay of the action pending arbitration as required by the C3-Freeman agreement.
- Freeman then moved to compel all three defendants to participate in the arbitration.
- The district court granted the motion to compel arbitration against C3 and Glazier, finding Glazier was C3's alter ego and piercing the corporate veil.
- The district court denied Freeman's motion to compel arbitration against Thomson and stayed the claims against it pending the outcome of the arbitration with C3 and Glazier.
- Glazier appealed the district court's order compelling him to arbitrate, and Freeman cross-appealed the order denying his motion against Thomson.
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Issue:
Under New York law, may a court pierce the corporate veil to compel a non-shareholder to arbitrate based on a corporation's contract, solely upon a finding that the non-shareholder completely dominated the corporation, without also finding that this domination was used to commit a fraud or wrong?
Opinions:
Majority - Miner, J.
No. A court may not pierce the corporate veil based solely on a finding of complete domination; there must also be a finding that the domination was used to perpetrate a fraud or wrong against the plaintiff. The court first recognized that a non-shareholder like Glazier could be deemed an 'equitable owner' for veil-piercing purposes due to his extensive control over C3—acting as the sole bank signatory, holding a stock option, receiving the vast majority of revenues, and representing himself as the owner. However, New York law requires a two-pronged test: 1) complete domination, and 2) the use of that domination to commit a wrong or fraud causing injury. The district court correctly found the first prong (domination) but erred by piercing the veil without making a specific finding on the second prong (wrongful use of control). Therefore, the case must be remanded for the district court to determine whether Glazier used his control over C3 to wrong Freeman.
Concurring-in-part-and-dissenting-in-part - Godbold, J.
No, domination alone is insufficient, but this court should find that the second prong of the test has been met without a remand. The record is clear and unambiguous that Glazier used his complete control over C3 to commit a wrong against Freeman. Glazier orchestrated a deal with Thomson that enriched himself personally, rendered C3 a shell corporation incapable of meeting its obligations, and then terminated Freeman's contract under the explicit pretext that its terms were 'overly generous.' The judge characterized this sequence of events as a 'fully revealed rip off' that constitutes the necessary fraud or wrong. Remanding for the district court to make a finding that is already obvious from the record is an unnecessary step.
Analysis:
This decision clarifies the application of New York's veil-piercing doctrine, particularly in the context of a non-shareholder who is an 'equitable owner.' It strongly reaffirms the two-part test, establishing that mere domination of a corporation, no matter how complete, is not enough to impose personal liability. A plaintiff must also prove a causal link between that control and a specific fraud or wrong that caused their injury. The case serves as a precedent for holding dominant individuals accountable even when they avoid formal ownership titles, but it also reinforces the high bar plaintiffs must clear by requiring proof of wrongdoing beyond just control.
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