East Hampton Union Free School District v. Sandpebble Builders, Inc.

OPINION OF THE COURT

The individual defendant, Victor Canseco, is the principal owner and president of the corporate defendant, Sandpebble Builders, Inc. (hereinafter Sandpebble). The primary issue on this appeal is whether the complaint is sufficient to state a cause of action against Canseco personally for the wrongs of the corporation under the doctrine of piercing the corporate veil.

The complaint names as defendants both Sandpebble and Canseco, as Sandpebble’s president and principal owner. It asserts causes of action jointly against them, referring to them, for the most part, as “the defendants.” The complaint alleges that in April 2002 the plaintiff, East Hampton Union Free School District (hereinafter the district), entered into an agreement with the defendants, subject to an $18 million municipal bond offering, whereby the defendants would provide construction services to the district in consideration of, inter alia, five percent of the total project cost. In 2004, however, after the Board of Education of the district failed to ratify the agreement, the district abandoned it. Thereafter, in 2005, in anticipation of a new project, the district entered into an estimating services contract with the defendants whereby the defendants would provide certain estimates for use by the district’s architects in connection with the new project. The complaint alleges that, although the district paid the defendants the sum of $200,000, the defendants never performed under the agreement, thereby delaying the project. Despite the defendants’ failure to perform,

The complaint alleges that, notwithstanding this agreement in principle, the defendants refused to execute the contract. The parties reopened negotiations and agreed to a change in the terms, but, again, the defendants refused to execute the contract. According to the complaint, this sequence of renegotiation, agreement in principle, and refusal to execute was repeated twice more until, by letter dated September 15, 2006, the defendants “rejected the contract . . . terminated negotiations with the school district, and stated that [they] were ‘ready, willing and able’ to perform,” but only under the terms of the 2002 agreement. Ultimately, the district contracted with a different provider.

In the complaint, the district alleges that the defendants never intended to perform in connection with the new project, and that their repeated demands for new terms constituted bad faith and unfair negotiating tactics designed to delay progress of the project in order to pressure the district to offer them the more advantageous terms of the 2002 agreement. The complaint alleges throughout that the wrongful conduct was engaged in by “the defendants.” With respect to Canseco specifically, the complaint alleges only that he is “the President and principal owner of Sandpebble,” that he “exercised and exercises complete dominion and control over Sandpebble,” that he “exercised complete dominion and control over Sandpebble, including, but not limited to, all the acts and omissions of Sand-pebble as alleged herein,” that he “used such dominion and control to direct the acts and omissions of Sandpebble as alleged herein, and to commit a wrong against the School District which resulted in injury, harm and damages to the School District,” that he “exercised such dominion and control over Sandpebble while [he] and Sandpebble were engaging in the bad faith and unfair negotiating tactics alleged herein,” and that therefore he is “liable herein, jointly and severally with Sandpebble, for all the acts, omissions, debts, obligations and liabilities of Sand-pebble.”

The defendants moved pursuant to CPLR 3211 (a) (1) and (7) to dismiss the complaint insofar as asserted against Canseco individually. The Supreme Court denied the motion ( 2007 NY Slip Op 34427 [U]), and the defendants appeal.

With respect to that branch of the defendants’ motion which was pursuant to CPLR 3211 (a) (7), the principles governing this appeal are familiar.

“On a motion to dismiss the complaint pursuant to CPLR 3211 (a) (7) for failure to state a cause of action, the court must afford the pleading a liberal construction, accept all facts as alleged in the pleading to be true, accord the plaintiff the benefit of every possible inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (Breytman v Olinville Realty, LLC, 54 AD3d 703 , 703-704 [2008]; see Leon v Martinez, 84 NY2d 83 , 87 [1994]; Smith v Meridian Tech., Inc., 52 AD3d 685 , 686 [2008]).

Thus, “a motion to dismiss made pursuant to CPLR 3211 (a) (7) will fail if, taking all facts alleged as true and according them every possible inference favorable to the plaintiff, the complaint states in some recognizable form any cause of action known to our law” (Shaya B. Pac., LLC v Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, 38 AD3d 34 , 38 [2006]; see Leon v Martinez, 84 NY2d at 87-88 ; Fisher v DiPietro, 54 AD3d 892 , 894 [2008]; Clement v Delaney Realty Corp., 45 AD3d 519 , 521 [2007]). Moreover, the sufficiency of a complaint must be measured against what the law requires of pleadings in the particular case. As our dissenting colleagues correctly point out, the complaint here is not required to meet any heightened level of particularity in its allegations (cf. CPLR 3016). Instead, it need only contain “[statements . . . sufficiently particular to give the court and parties notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved and the material elements of each cause of action” (CPLR 3013). The issue that now divides the court is whether, under the doctrine of piercing the corporate veil, the complaint contains allegations sufficient to state a cause of action holding

Notably, even under the liberal “notice pleading” requirements of CPLR 3013, a complaint still must allege, inter alia, “the material elements of each cause of action” asserted. Conduct constituting an abuse of the privilege of doing business in the corporate form is a material element of any cause of action seeking to hold an owner personally liable for the actions of his or her corporation under the doctrine of piercing the corporate veil. Here, nothing in the complaint asserts or suggests that Canseco, in his dealings with the district, acted other than in his capacity as president and principal owner of Sand-pebble, or that he failed to respect the separate legal existence of the corporation, or that he treated its corporate assets as his own, or that he undercapitalized the corporation, or that he did not respect corporate formalities, or that he, in any other way, abused the privilege of doing business in the corporate form (see AHA Sales, Inc. v Creative Bath Prods., Inc., 58 AD3d at 24 ; cf. Gateway I Group, Inc. v Park Ave. Physicians, P.C., 62 AD3d 141 [2009]). Without any allegation that Canseco’s conduct constituted an abuse of the privilege of doing business in the corporate form, the complaint fails to allege a material element of a cause of action against Canseco under the theory of piercing the corporate veil (see Lawlor v Hoffman, 59 AD3d 499 [2009]).

We respectfully disagree with our dissenting colleagues that the complaint’s use of the words “bad faith” sufficiently spells out the element of abusing the privilege of doing business in the corporate form. The requirement of bad faith generally applies not to the doctrine of piercing the corporate veil, but to a cause of action against a corporate officer for inducing the breach of a contract. Thus, in the principal case cited by the dissent in support of its view, the Court of Appeals held that

“[a] corporate officer who is charged with inducing the breach of a contract between the corporation

and a third party is immune from liability if it appears that he is acting in good faith as an officer . . . [and did not commit] independent torts or predatory acts directed at another” (Murtha v Yonkers Child Care Assn., 45 NY2d at 915; see Buckley v 112 Cent. Park S., Inc., 285 App Div 331 , 334 [1954]).

Here, the complaint does not assert a cause of action against Canseco for inducing the breach of a contract between Sand-pebble and the district, nor does it allege that, independent of his actions on behalf of the corporation, he committed “torts or predatory acts” directed at the district. Thus, we cannot join the dissenters in affording talismanic effect to the words “bad faith.”

It is true that, in opposition to the motion to dismiss, the district offered the affidavits of its counsel and of its Superintendent of Schools. Where a party offers evidentiary proof on a CPLR 3211 (a) (7) motion, the focus of the inquiry turns from whether the complaint states a cause of action to whether the plaintiff actually has one (see Guggenheimer v Ginzburg, 43 NY2d 268 , 275 [1977]; Steve Elliot, LLC v Teplitsky, 59 AD3d 523 , 524 [2009]; Fishberger v Voss, 51 AD3d 627 , 628 [2008]). Here, however, the affidavits submitted by the district do little more than restate the alleged unfair and bad faith negotiating tactics described in the complaint, and then aver that Canseco was Sandpebble’s “sole officer, sole director and sole shareholder” who “dominated and controlled Sandpebble for his own benefit.” The affidavits allege further that “Canseco was the School District’s sole point of contact” who was the only one who dealt with the district on behalf of Sandpebble and who “was the only individual at Sandpebble that made any executive decisions regarding any actual or contemplated construction projects for the School District.” Again, these allegations, although clearly sufficient to demonstrate Canseco’s domination over the corporation in its dealings with the district, do not assert or suggest that he abused the privilege of doing business in the corporate form so as to implicate the equitable doctrine of piercing the corporate veil.

Finally, we reject the district’s argument that dismissal of the complaint against Canseco is inappropriate at this stage inasmuch as evidence may eventually be discovered that would justify piercing the corporate veil. The policy inherent in allowing individuals to conduct business in the corporate form so as to shield themselves from personal liability would be seriously

Accordingly, because the complaint fails to state a cause of action as against Canseco personally under the doctrine of piercing the corporate veil, and because the district has not offered any evidence to establish or suggest that it actually has such a cause of action against him, the order is modified, on the law, by deleting the provision thereof denying that branch of the defendants’ motion which was pursuant to CPLR 3211 (a) (7) to dismiss the complaint insofar as asserted against the defendant Victor Canseco individually, and substituting therefor a provision granting that branch of the motion; as so modified, the order is affirmed.

We disagree with the conclusion of the majority that the complaint fails to state a cause of action against the defendant Victor Canseco for the alleged wrong committed by the defendant Sandpebble Builders, Inc., under a “piercing the corporate veil theory” as to the 2006 construction services contract. For reasons set forth below, we agree with the Supreme Court’s denial of that branch of the defendants’ motion which was to dismiss as to that cause of action, but disagree with the Supreme Court’s denial of that branch of the defendants’ motion which was to dismiss the cause of action against the defendant Victor Canseco for the alleged wrong committed by the defendant Sandpebble Builders, Inc., under a “piercing the corporate veil theory” as to the 2005 estimating services contract.

This appeal illustrates the tension that sometimes exists between the requirement of CPLR 3013 that pleadings provide sufficient detail of the plaintiffs grievances to enable the defendant to prepare a defense, and the liberal “notice pleading” requirements of CPLR 3026.

Complaints, including those which seek to pierce corporate veils, are subject to the “notice pleading” requirements of CPLR 3013, which are to be liberally construed (see CPLR 104, 3026; Severino v Salisbury Point Co-ops., 21 AD2d 813 [1964]; Foley v D’Agostino, 21 AD2d 60 , 63 [1964]). Notice pleading is satisfied so long as the pleading provides notice to an adversary of the transactions or occurrences giving rise to a claim (see CPLR 3013; Rapoport v Schneider, 29 NY2d 396 , 403 [1972]; Foley v D’Agostino, 21 AD2d at 68 ; Siegel, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C3013:2) and the material elements of each cause of action or defense (see CPLR 3013; see generally Leitner v Jasa Hous. Mgt. Servs. for Aged, 6 AD3d 667 [2004]). Pleadings are deemed to allege whatever can be implied from their statements by fair and reasonable intendment (see Cohn v Lionel Corp., 21 NY2d 559 , 562 [1968]; Kober v Kober, 16 NY2d 191 , 193 [1965]; Components Direct v European Am. Bank & Trust Co., 175 AD2d 227 , 232 [1991]).

We agree with the majority that each of the three requirements for piercing the corporate veil—domination and control,

In actions where a piercing of the corporate veil is at issue, the required element of “domination and control” must be alleged (see CPLR 3013). A determination as to domination and control necessarily depends upon the attendant facts and equities of an action (see Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d at 141 ). Factors that help determine a party’s domination and control of a corporate entity include the absence of corporate formalities, inadequate capitalization of the corporation, the personal use of corporate funds, the commingling of personal and corporate accounts, the overlap of officers, directors and personnel, and, when applicable in an action, the use of common office space, addresses, and phone numbers with other commonly-owned corporate entities (see Wm. Passalacqua Bldrs., Inc. v Resnick Devs. S., Inc., 933 F2d 131 139 [2d Cir 1991]; Millennium Constr., LLC v Loupolover, 44 AD3d at 1016-1017 ). Almost by definition, these factors are fact-laden and often do not lend themselves to resolution by means of a prediscovery motion to dismiss (see CPLR 3211 [d]; Kralic v Helmsley, 294 AD2d 234 , 236 [2002]; see also Ledy v Wilson, 38 AD3d 214 [2007]; Berry Packing Corp. v Atlantic Veal Corp., 302 AD2d 417 , 418 [2003]; First Bank of Ams. v Motor Car Funding, 257 AD2d 287 , 294 [1999]). Accordingly, given the liberal notice pleading standards of CPLR 104 and 3026 and the discovery-intensive nature of evidence relating to the element of “domination and control,” a plaintiff’s complaint should be deemed sufficient, as to that element, by the allegation of domination and control that rests upon at least some facts that are tied to defined transactions and occurrences underlying the plaintiffs claim (see CPLR 3013).

However, an allegation of domination and control is not, standing alone, sufficient to state a cause of action for personal

With the foregoing as backdrop, the Supreme Court properly found that the complaint adequately pleaded a cause of action against Canseco for the alleged wrong committed by the corporate defendant under a “piercing of the corporate veil” theory as to the 2006 construction services contract (see Ventresca Realty Corp. v Houlihan, 28 AD3d 537 , 538 [2006]; Board of Mgrs. of Regal Walk Condominium I v Community Mgt. Servs. of Staten Is., 226 AD2d 414 , 415 [1996]). The complaint alleges in paragraphs 89 and 90, as to the first requirement for piercing the corporate veil, that Canseco exercised complete dominion and control over the corporate defendant. Indeed, the complaint alleges that Canseco was the principal owner of the

The complaint alleges in paragraph 91, as to the second requirement, that Canseco’s dominion and control was used to commit a wrong against the plaintiff which resulted in injury.

The complaint further alleges in paragraph 92, relative to the third requirement for piercing the corporate veil, that the individual defendant exercised his dominion and control over the corporate defendant to engage in acts of bad faith and unfair negotiating tactics. Specifically, the “exercise” of dominion and control as alleged in paragraph 90 of the complaint, and the affirmative “use” of dominion and control as alleged in paragraphs 91 and 92 to commit wrongs and engage in bad faith and unfair negotiating tactics, reasonably speak, within the broader context of corporate veil allegations, to the perpetration of alleged wrongs through the corporate form. In other words, the reasonable intendment of paragraphs 91 and 92 is the abuse of the privilege of doing business in corporate form.

Additionally, while corporate officers cannot be held personally liable for the corporation’s breach of contract simply because the officer undertook the challenged actions on the corporation’s behalf (see Murtha v Yonkers Child Care Assn., 45 NY2d 913 , 915 [1978]; Lawlor v Hoffman, 59 AD3d 499 , 500 [2009]), the limit on personal liability only exists when the corporate officer acts in good faith (see Murtha v Yonkers Child Care Assn., 45 NY2d at 915 ; First Bank of Ams. v Motor Car Funding, 257 AD2d 287 , 294 [1999]). Here, the plaintiff’s complaint alleges, in paragraph 92, that Canseco’s conduct was undertaken in “bad faith” toward the school district. Canseco’s alleged bad faith is the predicate by which the plaintiff seeks to pierce the corporate veil. The bad faith conduct is specifically alleged in the complaint as consisting of his repeated negotiation of contract terms with the school district, to which he would orally agree on multiple occasions while never intending to execute written contract documents, all in a deliberate effort to delay the construction project as a means of leveraging a greater percentage of compensation from the school district. Whether the plaintiffs theory for piercing the corporate veil proves to be successful or unsuccessful is beside the point. We part company with our colleagues in the majority to the extent that their opinion fails to qualify the complaint’s alleged “bad faith” conduct as an abuse of corporate form, and which provides the plaintiff with a procedural and alleged predicate for piercing the

Whereas the plaintiffs complaint alleged that Canseco used his dominion and control over Sandpebble to engage in bad faith and unfair negotiating tactics relative to the 2006 construction services contract, and thereby to commit a wrong against the school district, no such allegations of personal wrongdoing are present in the cause of action that seeks damages for the alleged breach of the parties’ 2005 estimating services contract. Instead, the complaint’s allegations regarding the 2005 estimating services contract read as a standard corporate breach of contract, with no reference to bad faith, unfair negotiating tactics, fraud, or other behavior that could arguably expand liability beyond the corporate veil. The affidavit of Dr. Raymond D. Gualtieri, submitted in opposition to the defendants’ motion to dismiss, focuses upon the circumstances of a 2006 construction management services contract, but makes no reference to the 2005 estimating services contract and thereby fails to cure the corporate veil inadequacies regarding the earlier contract (see generally Leon v Martinez, 84 NY2d 83 , 88 [1994]). Dismissal of the cause of action against Canseco to recover damages for the alleged wrong committed by the corporate defendant under a “piercing the corporate veil theory” as to the 2005 estimating services contract therefore should have been granted under CPLR 3211 (a) (7).

With respect to the branch of the defendants’ motion which was for dismissal of the plaintiffs complaint pursuant to CPLR 3211 (a) (1), the court properly determined that the documentary evidence which the defendants submitted in support of their motion failed to resolve all factual issues as a matter of law and failed to disprove the school district’s allegations (see Fleming v Kamden Props., LLC, 41 AD3d 781 , 781 [2007], citing Berger v Temple Beth-El of Great Neck, 303 AD2d 346 , 347 [2003]).

In our view, the remaining contentions are without merit or have been rendered academic.

Spolzino, J.P, and Miller, J., concur with Fisher, J.; Dillon, J., and Eng, JJ., concur in part and dissent in part, and vote to modify the order by deleting the provision thereof denying that

Ordered that the order is modified, on the law, by deleting the provision thereof denying that branch of the defendants’ motion which was pursuant to CPLR 3211 (a) (7) to dismiss the complaint insofar as asserted against the defendant Victor Canseco individually, and substituting therefor a provision granting that branch of the motion; as so modified, the order is affirmed, with costs to the defendants.