Defendant Dissolves Mid-Lawsuit: What’s the Creditor’s Remedy?
January 31, 2022
Generally speaking, New York courts respect the corporate form, regarding the liabilities of the entity as separate from and inapplicable to the entity’s principals. Under this principle, a plaintiff may litigate a difficult matter to a successful conclusion only to learn that the business against whom it obtained a judgment dissolved, either formally or informally, often leading to a whole new phase of litigation against the entity’s principals in an attempt, more often than not ill-fated, to find a pocket from which to collect the entity’s debt.
In a recent decision, Prime 135 NYC, LLC v Major Constr. Co., Inc., 2022 NY Slip Op 30192(U) [Sup Ct, NY County Jan. 12, 2022], Manhattan Supreme Court Justice Sabrina B. Kraus considered a relatively uncommon procedural move by a plaintiff to convert a pending plenary action to a special proceeding under Section 1008 of the Business Corporation Law (the “BCL”) for the purpose of holding a corporate principal liable personally for not-yet-adjudicated claims against a corporate defendant which voluntarily dissolved mid-litigation.
Prime 135 NY, LLC (“Prime”) was formed to own and operate a high-end Italian restaurant. Prime hired Major Construction Co., Inc. (“Major”), a New York corporation, to perform the build-out and conversion of a vacant space in Manhattan into the restaurant. The construction project was a failure, the job extensively delayed and wildly over budget. The restaurant never opened. Litigation ensued.
In an amended complaint, Prime named as defendants Major and its alleged owner / officer, Joseph Mendler (“Mendler”), alleging liability against him based on an “alter ego” / veil piercing theory.
The Veil Piercing Claim
To pierce the corporate veil and hold an entity’s owners liable for the entity’s contracts or torts, a plaintiff “must establish that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff’s injury” (Americore Drilling & Cutting, Inc. v EMB Contr. Corp., 198 AD3d 941 [2d Dept 2021]).
Piercing the corporate veil can be difficult because “domination alone does not suffice without an additional showing that it led to inequity, fraud, or malfeasance” (TMCC, Inc. v Jennifer Convertibles, Inc., 176 AD3d 1135 [2d Dept 2019]). Under this standard, “a simple breach of contract” or tort, “without more, does not constitute a fraud or wrong warranting the piercing of the corporate veil” (Bonacasa Realty Co. v Salvatore, 109 AD3d 946 [2d Dept 2013]).
Mendler moved to dismiss the veil piercing claim, arguing that Prime’s “conclusory allegations of domination” were “insufficient to adequately plead a basis for piercing the corporate veil” in the “absence of specific factual allegations demonstrating fraud or other corporate misconduct.”
In a decision from the bench, the originally assigned Justice, Manhattan Commercial Division Justice Robert R. Reed, dismissed the amended complaint as to Mendler, ruling that Prime’s “mere allegation of domination and control” was insufficient to pierce the corporate veil.
The Certificate of Dissolution
Shortly after Justice Reed dismissed the amended complaint as to Mendler, Mendler personally executed and filed a Certificate of Dissolution dissolving Major under BCL 1003.
The Motion to Convert to a Special Proceeding
Upon learning of Major’s dissolution, Prime filed a motion to re-name Mendler as a defendant and convert the lawsuit to a special proceeding under CPLR 103 (c) and BCL 1008. You can read the parties’ legal positions here, here, and here.
In her Decision, Justice Kraus acknowledged CPLR 103 (c), which provides that if the court “finds it appropriate in the interests of justice, it may convert a motion into a special proceeding, or vice-versa, upon such terms as may be just . . .”
But, the Court concluded, “This provision is not applicable to the case at bar.” The Court wrote:
This action was not mistakenly commenced by plaintiff in the wrong form, which is the remedy CPLR 103 (c) seeks to address. Rather, over two years after this action was commenced, defendant dissolved. A corporation that has dissolved does not cease to exist and may take steps necessary to wind up its affairs. Such a corporation may sue and be sued.
Turning to BCL 1008, the statute provides:
At any time after the filing of a certificate of dissolution . . . the supreme court . . . in a special proceeding . . . upon the petition of a creditor . . . may make all such orders as it may deem proper in all matters in connection with the dissolution or the winding up of the affairs of the corporation [including]:
(5) The determination and enforcement of the liability of any director, officer, [or] shareholder . . . for the liabilities of the corporation (emphasis added).
Applying the statute, the Court held:
Plaintiff’s true interest in seeking this relief is reflected in the proposed ninth cause of action for an accounting. However, as defendant points out, BCL 1008 does not provide for an accounting, and the appellate authority does not support the courts issuing rulings pursuant to that section to conduct a valuation of corporate assets upon dissolution . . .
As a result, the Court denied Prime’s motion to join Mendler as defendant and to pursue a BCL 1008 claim against him in a special proceeding.
Commentary on Prime
A few comments about the Court’s decision.
First, the relief Prime requested was not unprecedented. In Town of Amherst v Hilger (106 AD3d 120 [4th Dept 2013]), the Court remitted a judgment creditor’s plenary action to the lower court with instructions to convert it to a special proceeding under CPLR 103 (c) and BCL 1008 to join the corporation’s officers as parties for purposes of enforcing the judgment. Query whether Prime is consistent with the outcome of Amherst.
Second, the one case upon which the Court relied for its assertion that a dissolved corporation “may sue and be sued,” Rodgers v Logan (121 AD2d 250 [1st Dept 1986]), held that a corporation’s creditor may in certain cases sue a corporate principal directly in lieu of suing the corporation “where it is impossible or futile” to first obtain judgment against the entity. It could be argued that pursuing a money judgment against a corporation dissolved mid-lawsuit voluntarily by the entity’s sole shareholder would be a “futile” endeavor.
Third, the Court’s decision in Prime did not address BCL 1008’s language that a creditor undeniably has a statutory right to petition the court for “[t]he determination and enforcement of the liability of any director, officer, [or] shareholder . . . for the liabilities of the corporation.” Perhaps Prime may consider commencing a separate BCL 1008 summary proceeding against Mendler.
Finally, BCL 1117 (a) provides that in a judicial dissolution proceeding under Article 11, the provisions of BCL 1005 through 1008 “shall apply.” Subsection (b) provides that the Court may even “retain jurisdiction” post-dissolution to enter “[a]ny orders provided for in section 1008.”
Though I have never seen it done, a plaintiff in a separate lawsuit pending against the corporation could conceivably rely upon BCL 1008 to intervene in a judicial dissolution proceeding under BCL 1102, 1103, 1104, or 1104-a to ask the Court with jurisdiction over the dissolution proceeding to decide the liability of entity’s shareholders, officers, or directors for the plaintiff’s claims. The unhappy alternative for the plaintiff is to attempt to enforce a judgment separately against a judicially dissolved entity.