Piercing of Corporate Veil Adequately Pled Where Plaintiff Alleges Fraud

On February 14, 2022, Justice Borrok of the New York County Commercial Division issued a decision in Kostyatnikov v. HFZ Capital Grp. LLC, 2022 NY Slip Op 30486(U), holding that a party properly pleads a corporate veil piercing theory when the facts allege a fraud was perpetrated against defendants, stating:

In order to pierce the corporate veil, a plaintiff must show that (i) the owners exercised complete domination of the corporation in respect to the transaction at issue, and (ii) such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury (Morris v New York State Dept. of Taxation and Finance, 82 NY2d 135, 141, 623 N.E.2d 1157, 603 N.Y.S.2d 807 [1993]). The doctrine of veil piercing is narrowly construed and the party seeking to pierce the corporate veil carries a heavy burden (Skanska USA Bldg. Inc. v Atlantic Yards B2 Owner, LLC, 146 AD3d 1, 12, 40 N.Y.S.3d 46 [1st Dept 2016]). A breach of contract, without something more, does not constitute [*16] a fraud or wrong that justifies piercing of the corporate veil (id.; see Bonacasa Realty Co., LLC v Salvatore, 109 AD3d 946, 947, 972 N.Y.S.2d 84 [2d Dept 2013]).

The Investor and the Investor Entity sufficiently plead that the Defendants disregarded the corporate structure in their dealings with the Plaintiffs. The gravamen of the complaint is that the Defendants through their various corporate entities and less than perfect paperwork strung the Plaintiffs along and committed a fraud. To wit, the Plaintiffs claim essentially that when Mr. Feldman and Mr. Mir breached their agreements with the Plaintiffs and could not deliver the units that they had originally agreed that the Plaintiffs could purchase by virtue of their $3.8 [**10] million investment, they merely allocated other units — i.e., the Designated Condominium Units, in other entities that they owned and controlled. This sleight of hand is highlighted by not having the Owner Entity execute the Third Amendment to the Side Letter and by their failure to obtain Mezz Lender's approval.

The attorneys at Schlam Stone & Dolan frequently litigate issues related to fraud and corporate veil piercing. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding the these issues.

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