Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc.
933 F.2d 131 (1991)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under New York law, a court may pierce the corporate veil and hold dominating shareholders or affiliated corporations liable either when the corporate form is used to perpetrate a fraud or when a corporation has been so completely dominated that it acts as an alter ego, and this control is used to commit a wrong or unjust act causing injury to a third party.
Facts:
- In 1972, William Passalacqua Builders, Inc. (Passalacqua) entered into a contract with Resnick Developers South, Inc. (Developers) to construct a hotel in Florida.
- Developers was one of numerous real estate corporations controlled by members of the Resnick family.
- Developers was severely undercapitalized, having only $10 in paid-in capital, with all other funding coming from loans made by other Resnick-controlled companies or a bank.
- The various Resnick corporations shared common office space, staff, and officers, and did not conduct business with each other at arm's length.
- Corporate formalities at Developers were frequently disregarded; it failed to issue stock timely, hold regular meetings, or elect directors as required.
- Funds were frequently transferred between Developers and other Resnick-controlled entities based on which entity had available cash, often without charging interest.
- Disputes over payment for extra work arose during construction, and Developers ultimately failed to pay the full amount owed to Passalacqua under their contract.
Procedural Posture:
- Passalacqua obtained an arbitration award against Developers for breach of contract.
- In 1981, a Florida state court entered a final judgment confirming the award against Developers.
- Passalacqua assigned its right to enforce the judgment to Safeco Insurance Co. of America (Safeco).
- After being unable to collect the full judgment from Developers, Safeco and General Insurance Co. sued Developers, affiliated Resnick corporations, and individual Resnick family members in the U.S. District Court for the Southern District of New York.
- The District Court made several pre-trial rulings, including dismissing a fraud count against the defendants.
- The case proceeded to a jury trial on the claims seeking to pierce the corporate veil.
- At the close of the plaintiffs' case, the trial judge granted a directed verdict, dismissing the case against most of the defendants.
- The jury returned a special verdict in favor of the remaining corporate defendant, Jack Resnick & Sons, Inc.
- The plaintiffs (appellants) appealed the trial court's judgment to the U.S. Court of Appeals for the Second Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does piercing the corporate veil under New York law require proof of fraud, or is it sufficient to show that a dominating entity exercised complete control over a corporation to commit a wrong that resulted in injury to a third party?
Opinions:
Majority - Cardamone, J.
No. New York law permits the corporate form to be disregarded where excessive control alone causes the complained-of loss, and does not require a showing of fraud. Liability may be predicated either upon a showing of fraud or upon complete control by the dominating corporation that leads to a wrong against third parties. The trial court erred by instructing the jury that fraud was a required element for piercing the corporate veil. Furthermore, the district court improperly granted a directed verdict because the plaintiffs presented sufficient evidence for a jury to find that Developers was dominated by the other Resnick corporations and individual family members. The evidence of undercapitalization, disregard of corporate formalities, intermingling of funds, and overlap in personnel was sufficient to allow a jury to determine whether Developers was merely an alter ego used to perpetrate an unjust loss against the plaintiffs.
Analysis:
This decision clarifies that in New York, the 'alter ego' or 'instrumentality' theory is a distinct and independent basis for piercing the corporate veil, separate from a claim based on fraud. By reinforcing a multi-factor test for determining domination, the court emphasizes that such questions are fact-intensive and generally must be decided by a jury rather than by a judge on a directed verdict. This precedent strengthens the position of creditors dealing with undercapitalized or closely-held corporations, making it more difficult for shareholders to hide behind the corporate form after blurring the lines between their personal and corporate affairs to cause an unjust loss.
