New York Law Review

Tag: Corporate Control

  • Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135 (1993): Piercing the Corporate Veil Requires Wrongful Conduct

    Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135 (1993)

    To pierce the corporate veil and hold an individual liable for a corporation’s obligations, there must be a showing that the individual exercised complete domination of the corporation and used that domination to commit a fraud or wrong against the plaintiff.

    Summary

    The New York State Department of Taxation and Finance assessed a use tax against Joseph Morris, the president of Sunshine Developers, Inc., for cabin cruisers purchased by the corporation. The Department sought to pierce the corporate veil, arguing that Morris controlled Sunshine and used it to avoid taxes. The New York Court of Appeals reversed the lower court’s decision to hold Morris personally liable, holding that while Morris may have dominated the corporation, the Department failed to demonstrate that Morris used his control to commit a fraud or wrong against the state. The Court emphasized that the corporation itself was entitled to a nonresident exemption, negating any corporate tax liability that could be imputed to Morris.

    Facts

    Joseph Morris was the president of Sunshine Developers, Inc., a corporation owned by his brother and nephew. Sunshine purchased two boats outside of New York and moored them in Montauk, New York during the summer. The Department assessed use taxes against Morris, claiming he controlled the corporation and used it to avoid New York taxes. Morris rented an apartment in New York City, which the Department argued disqualified him from claiming a nonresident exemption.

    Procedural History

    The Department initially assessed taxes against Sunshine, Joseph Morris, and Robert Morris. An Administrative Law Judge (ALJ) determined that Sunshine was entitled to a nonresident exemption and that the corporate veil should not be pierced. The Tax Appeals Tribunal reversed the ALJ’s decision regarding Joseph Morris, holding him personally liable. The Appellate Division sustained the Tribunal’s conclusions. The New York Court of Appeals granted leave to appeal and reversed the Appellate Division’s judgment.

    Issue(s)

    Whether the Tax Appeals Tribunal and Appellate Division properly sustained the assessment against Joseph Morris by piercing the corporate veil, thereby holding him personally liable for the corporation’s use tax obligations.

    Holding

    No, because while Morris may have dominated the corporation, the Department failed to demonstrate that Morris used his control to commit a fraud or wrong against the taxing authorities of New York State.

    Court’s Reasoning

    The Court of Appeals emphasized that piercing the corporate veil requires a showing of both complete domination of the corporation and that such domination was used to commit a fraud or wrong against the plaintiff. The Court acknowledged that Morris likely controlled Sunshine, even though he was not a shareholder. However, the Court found no evidence of fraud or wrongdoing. The Court noted the ALJ’s finding of no fraud or wrongdoing was not disturbed on review. “While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business (see, Walkovszky, supra, at 417), such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required.” The Court distinguished this case from typical veil-piercing scenarios where a third party seeks to hold owners liable for corporate obligations. Here, the corporation was determined to be exempt from the use tax, meaning there was no underlying corporate obligation to transfer to Morris. Imposing liability on Morris when the corporation owed nothing would be inconsistent with the doctrine’s essential theory. The Court also rejected arguments based on federal tax law, stating that Sunshine had a legitimate business purpose. The Court concluded, to pierce the corporate veil, there must be evidence the corporation was used to pervert the benefits of incorporation and commit a wrong against the party seeking to pierce the veil. Here, the corporation’s non-resident status eliminated its debt, therefore there was nothing to transfer to the owner personally.

  • Cross Properties, Inc. v. Brook Realty Co., 41 N.Y.2d 492 (1977): Excuses for Non-Performance and Brokerage Commissions

    Cross Properties, Inc. v. Brook Realty Co., 41 N.Y.2d 492 (1977)

    A corporate seller cannot use an injunction obtained by dissident stockholders as an excuse for non-performance of a real estate contract and avoid paying brokerage commissions when those stockholders later gain control of the corporation and fail to diligently dissolve the injunction, instead repudiating the contract.

    Summary

    Dollar Land Holdings Limited indirectly owned County Dollar Corporation and Dollar Land Corporation Limited (US). These entities contracted with Brook Realty to sell real estate. Dissident shareholders of Dollar Land Holdings obtained an injunction preventing the sale. Later, the dissidents gained control of Dollar Land Holdings and, by extension, the selling corporations. They then repudiated the sale contract instead of dissolving the injunction to allow the sale. Brook Realty sued for brokerage commissions. The New York Court of Appeals held that the corporate sellers were liable for the commissions because they failed to diligently dissolve the injunction after the dissident shareholders gained control.

    Facts

    County Dollar Corporation and Dollar Land Corporation Limited (US) entered into a sales agreement with Brook Realty Co. to sell real estate holdings. Before the scheduled closing, dissident shareholders of the ultimate parent company, Dollar Land Holdings Limited, obtained a temporary restraining order and then a preliminary injunction preventing the closing. Subsequently, the dissident shareholders gained management control of the Dollar corporations. The new management then adopted resolutions to rescind prior authorizations for the sales agreement and moved to vacate the injunction on the grounds of mootness because they no longer intended to sell. They did not attempt to dissolve the injunction to allow the sale. After their attempts to invalidate the sales agreement failed, the corporate sellers tendered performance, which Brook rejected while still asserting its right to specific performance.

    Procedural History

    Brook Realty sued Cross Properties, Inc. (formerly County Dollar Corporation) to recover broker’s commissions. Special Term denied Brook’s motion for summary judgment. The Appellate Division reversed and granted summary judgment for Brook. The Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether corporate sellers can be excused from paying real estate brokerage commissions when a closing is prevented by an injunction initially obtained by dissident stockholders, but those stockholders subsequently gain control of the corporate sellers and fail to diligently dissolve the injunction, instead repudiating the sales contract.

    Holding

    Yes, because when the dissident shareholders obtained control and failed to diligently dissolve the injunction, the failure to perform the contract became attributable to the corporation’s own refusal to do so, not to the outside judicial interference. The corporation ratified the earlier action of the dissidents in obtaining the injunction.

    Court’s Reasoning

    The court reasoned that while an injunction preventing performance can excuse a party’s contractual obligations, that excuse evaporates when the parties who obtained the injunction gain control of the obligated party and fail to make diligent efforts to dissolve the injunction. The court highlighted that the new management of the Dollar corporations, controlled by the former dissidents, moved to vacate the injunction only on the grounds of mootness, not to allow the sale to proceed. The court stated, “At that point the failure of the selling corporation to perform its contract of obligations can no longer be ascribed to outside judicial interference but must rather be attributed to the refusal of the corporation on its own (now under the management control of the dissenters) to do so.” By repudiating the Sales Agreement, the corporate sellers effectively ratified the actions of the dissenting shareholders in obtaining the injunction. The court also noted that the belated tender of performance after the sellers failed to escape their obligations did not constitute a defense to the action for brokerage commissions, citing determinations made in the Westchester action that bound the parties.