NY Federal Court Highlights the Difficulty in Piercing the Corporate Veil

In a decision that was handed down just last week in Ningbo Products Import & Export Co., Ltd. v. Eliau, et al., a Federal Court in New York sent a clear reminder why claims seeking to pierce a company's corporate veil, and allowing the claimants to pursue the company's officers individually is no small feat.

This case arose out of a breach of contract by XES, which accepted textiles and apparel for re-sale, but failed to make payment for the goods. After XES entered into a settlement agreement that it subsequently failed to honor, the plaintiff eventually secured a default judgment against XES in an amount just under $600,000.

When seeking to enforce the judgment, however, the plaintiff learned that XES had essentially divested its assets by transferring them to a series of different corporate entities.

And although these transfers certainly smelled "fishy," the Court held that this alone was insufficient to warant piercing the corporate veil.

Here's why:

"Under New York law, individuals generally are not liable for their corporation's debts or obligations. See Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) (citing We're Assocs. Co. v. Cohen, Stratcher & Bloom, P.C., 65 N.Y.2d 148, 151 (N.Y. 1985)). However, *13 officers, directors, or other individuals acting on behalf of a corporation may be held personally liable for fraud "if they participate in [the fraud] or have actual knowledge of it." Id. (quoting People v. Apple Health & Sports Clubs, Ltd., 80 N.Y.2d 803, 807 (N.Y. 1992))  ...

"[P]laintiff may not rely on defendants' purported misrepresentations of future intent to perform; plaintiff must identify misrepresentations of presently existing facts made to induce plaintiff to enter the Settlement Agreement. See Cohen, 25 F.3d at 1172 ... Plaintiff's claim fails for the same reasons as does its claim for fraudulent inducement ... [T]he complaint baldly asserts that "XES, Eliau, and Hedaya did not uphold their terms" of the Settlement Agreement, but contains no other reference to Eliau or Hedaya's role in XES's failure to pay the settlement amount."

In short, in order to prevail on a claim seeking to pierce the corporate veil, you will need some solid evidence that the defendants abused the corporate form, and used it to perpetrate a fraud.

Indeed, this is far from a simple task.