No Reverse Veil Piercing When Plaintiff Fails to Show Injury Caused To It

On October 24, 2023, Justice Andrea Masley of the New York County Commercial Division issued a decision in Citibank, N.A. v. East 65th Street Owners LLC, et al., Index No. 651089/2019, rejecting a reverse alter-ego theory of liability because of plaintiff's failure to show injury caused to it, explaining:

Citibank's reverse alter ego theory is rejected. "The party seeking to pierce the corporate veil bears the heavy burden of showing 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 plaintiff's injury." (Skanska USA Bldg. Inc. v At/. Yards B2 Owner, LLC, 146 AD3d 1, 12 [1st Dept 2016] [internal quotation marks and citations omitted] affd 31 NY3d 1002 [2018].) Accordingly, Citibank must prove: (1) Freidman exercised complete domination over each REE and (2) Freidman's domination caused injury to Citibank. Breach of contract is not a wrong that supports veil piercing of any kind. (Id. at 12 [holding that "a simple breach of contract, without more, does not constitute a fraud or wrong warranting the piercing of the corporate veil"]; Kahan Jewelry Corp. v Coin Dealer of 47th St., Inc. 173 AD3d 568 [1st Dept 2019].)

Even if the court accepts that Freidman dominated each REE, the domination must have caused injury to Citibank. ( See Morris, 82 NY2d at 141-42.) However, Citibank fails to identify such a wrongful transaction by any of the RE Es. Citibank cannot rely on the creation of the Foreign Trusts and wrongful transfer of the REEs to the Foreign Trusts. While it is apparent that the Foreign Trusts were created to avoid Citibank's judgment, the transfers were not the acts of the REEs, which were instead the victims of the Foreign Trusts' wrongful acts. Indeed, in response to Sterling's interrogatories, Citibank responded that it "has not alleged that Freidman intended that any particular action or transaction by which he controlled each Real Estate Entity caused loss to or injure Citibank specifically." (NYSCEF 190, Citibank's Interrogatory Answers at 10.) Citibank's failure to identify a wrong by each REE against Citibank is fatal to this action and its alter ego theory.

Unlike the Foreign Trusts, the REEs were not created to avoid Citibank's judgment and Citibank does not assert otherwise. (Id. at 11.) In fact, the REEs continued to pay Citibank's loans in 2015 and 2016. (NYSCEF 212, Banco Popular Cancelled Checks.)

To the extent that Citibank asserts that incorporation of the RE Es was wrongful, the act of incorporation is not sufficient as corporations may incorporate to escape liability. (See Morris, 82 NY2d at 140.) In any case the corporations here were incorporated long before Citibank's loans. For example, Amethyst Realty LLC was incorporated in 2008.

New York courts are reluctant to disregard the corporate form, though may do so if the requirements for veil piercing (or reverse veil piercing) are met--which they weren't here. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning veil-piercing claims.