Protection for shareholders has been significantly reduced
One of the most long-standing and sacrosanct reasons for incorporating is to protect shareholders from liability in lawsuits against the corporate entity. Owners of corporations, large and small, rely upon this protection as a legal given.
Courts throughout the country have traditionally only allowed the “piercing of the corporate veil” in cases where defendants have egregiously abused this protection to engage in fraud or other criminal activity.
This was not the case in a recent ruling by the Appellate Division, First Department of New York. In re 91st St. Crane Collapse Litig., Sept. 12, 2017
An article in Construction Law Now by Carol A. Sigmond and Thomas E. Raccuia outlines the Court’s decision.
A crane owned by N.Y. Crane & Equipment Corp. collapsed “at a construction site on Manhattan’s Upper East Side in May 2008. The collapse resulted in injuries, deaths, and a wrongful death lawsuit…”
NY Crane was “owned by…J.F. Lomma” who also owned another company, J.F. Lomma, Inc. “At trial, the jury found that NY Crane’s negligence was a cause of the accident, and ‘pierced the veil,’ finding that Lomma and J.F. Lomma were liable for NY Crane’s negligence because Mr. Lomma operated the two businesses as a single entity.”
The Appellate Division upheld this decision, ruling that the overlapping nature of NY Crane’s and JF Lomma’s operations were sufficient reason to pierce the corporate veil. As Ms. Sigmond and Mr. Raccuia note, the Court did not address whether there was intent to commit fraud or other wrongdoing.
There was ample evidence to show that the operations of the two companies did, in fact, overlap. What was surprising, shocking to some observers, was that the Court ignored the long-standing second element, criminal intent, heretofore required to justify piercing the corporate veil.
The authors offer this cautionary advice to contractors in New York—“As a consequence, business owners who own and operate multiple entities in New York must take care to strictly observe the formalities of incorporation in their day-to-day operations.”
Source—
First Department of New York Loosens the Standard for “Piercing the Corporate Veil”, Carol A. Sigmond and Thomas E. Raccuia, Construction Law Now, Nov. 6, 2107.