New York Law Review

Tag: corporate veil piercing

  • TNS Holdings, Inc. v. MKI Securities Corp., 92 N.Y.2d 335 (1998): Enforcing Arbitration Agreements Against Non-Signatories

    TNS Holdings, Inc. v. MKI Securities Corp., 92 N.Y.2d 335 (1998)

    Absent a showing of abuse of the corporate form, a corporation that is related to, but not itself a party to, an agreement containing an arbitration clause cannot be compelled to arbitrate a dispute arising from an alleged breach of that agreement.

    Summary

    TNS Holdings sued MKI Securities and its subsidiaries, MKI and Batchnotice, for breach of contract. TNS had entered into a Software Purchase Agreement with Batchnotice, which contained an arbitration clause. MKI was not a signatory. TNS argued that MKI should be compelled to arbitrate because Batchnotice was MKI’s alter ego and the agreements were inextricably interwoven. The Court of Appeals held that MKI could not be compelled to arbitrate because TNS failed to demonstrate an abuse of the corporate form or that MKI misused its control over Batchnotice to commit fraud or wrongdoing. Interrelatedness of agreements alone is insufficient to subject a non-signatory to arbitration.

    Facts

    TNS Holdings negotiated with MKI Securities to sell its software system, TradeNET. Three written agreements were executed: Hardware Purchase and Software Licensing between MKI and TNS, and a Software Purchase Agreement between TNS and Batchnotice, an MKI subsidiary, containing an arbitration clause. MAI, MKI’s parent company, provided a letter ensuring Batchnotice’s performance under the agreement. TNS claimed an oral agreement existed with MKI’s President for the employment of key TNS employees. MKI later fired Zachar and Bloukos, leading TNS to sue for breach of the alleged oral agreement and rescission of the written agreements.

    Procedural History

    The Supreme Court initially ordered arbitration for all parties. Defendants moved to stay arbitration against MAI and MKI, arguing they were not parties to the arbitration agreement. The Supreme Court denied the motion. The Appellate Division modified, staying arbitration as to MAI but compelling MKI to arbitrate based on an “alter ego” theory and the interwoven nature of the agreements. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether a non-signatory corporation (MKI) can be compelled to arbitrate based on an “alter ego” theory when one of its subsidiaries (Batchnotice) is a signatory to the arbitration agreement.

    2. Whether the interrelatedness of agreements, standing alone, is sufficient to subject a non-signatory to arbitration.

    Holding

    1. No, because TNS failed to demonstrate that MKI abused the corporate form or misused its control over Batchnotice to commit fraud, wrongdoing, or avoid its obligations.

    2. No, because interrelatedness, standing alone, is insufficient to subject a non-signatory to arbitration.

    Court’s Reasoning

    The Court of Appeals emphasized the importance of a clear indication of intent to arbitrate, especially when it comes to non-signatories. While arbitration is favored, unintentional waivers of judicial safeguards should be avoided. The Court recognized the “alter ego” exception to the rule that only signatories are bound by arbitration agreements, similar to piercing the corporate veil. However, the party seeking to invoke this exception bears a heavy burden of proving that the corporation was dominated and that such domination was used to commit fraud or result in wrongful consequences.

    In this case, TNS failed to demonstrate that MKI’s control over Batchnotice resulted in any fraud or inequity. The court noted that MAI’s guarantee of Batchnotice’s obligations negated any inference of abuse. “An inference of abuse does not arise from this record where a corporation was formed for legal purposes or is engaged in legitimate business.” 92 N.Y.2d at 339-340. The Court found no evidence that MKI misused the corporate form for its personal ends.

    The Court rejected the Appellate Division’s “inextricably interwoven” theory, holding that mere interrelatedness is insufficient to compel a non-signatory to arbitrate. Allowing this would undermine the principle that parties must clearly consent to arbitrate. The court stated: “Neither does the timing of the arrangement suggest any fraud or inequity… Nothing suggests that plaintiffs entered into the agreement involuntarily, or that they thought they were contracting with an entity other than Batchnotice.” 92 N.Y.2d at 340.

  • People v. Sakow, 45 N.Y.2d 131 (1978): Corporate Veil Piercing in Criminal Liability for Fire Code Violations

    People v. Sakow, 45 N.Y.2d 131 (1978)

    A person can be held criminally liable for conduct constituting an offense performed in the name of or on behalf of a corporation to the same extent as if the conduct were performed in their own name.

    Summary

    Walter Sakow was convicted of violating the New York City fire code for failing to correct hazards in buildings owned by corporations he controlled. Sakow argued he wasn’t liable because the buildings were owned by corporations and that he didn’t receive proper notice of the violations. The court held that Sakow could be held criminally liable for actions taken on behalf of the corporations, and that he had sufficient notice of the violations, despite technical arguments about the method of delivery. The court emphasized that the purpose of the fire code was to protect public safety, and individuals cannot hide behind corporate structures to avoid responsibility.

    Facts

    The buildings at 154-160 East 91st Street, Manhattan, owned by a series of corporations controlled by Sakow, were in a dilapidated and dangerous condition, with multiple fires and fatalities. The Fire Department issued violation orders to correct the hazards. Sakow, the active manager and dominant controlling force behind these corporations, failed to comply with the orders. Sakow had previously pleaded guilty to similar charges, but a corporation was substituted as the pleading defendant.

    Procedural History

    The Criminal Court of the City of New York convicted Sakow of violating the fire code. The Appellate Term, First Department, upheld the judgment. Sakow appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether Sakow could be held criminally liable for fire code violations on properties owned by corporations he controlled, but not held in his name directly?
    2. Whether the delivery of the violation orders was sufficient to establish notice to Sakow, considering the requirements of the Administrative Code?

    Holding

    1. Yes, because Penal Law § 20.25 states that a person is criminally liable for conduct constituting an offense which he performs or causes to be performed in the name of or on behalf of a corporation to the same extent as if such conduct were performed in his own name or behalf.
    2. Yes, because the purpose of the violation orders is to ensure prompt correction of fire hazards, and Sakow had actual notice of the violations through his attorney, Edwin Frederick.

    Court’s Reasoning

    The court reasoned that Sakow’s control over the corporations made him responsible for the violations. It cited Penal Law § 20.25, emphasizing that corporate structures cannot shield individuals from criminal liability when they act on behalf of a corporation. The court stated, “[a] person is criminally liable for conduct constituting an offense which he performs or causes to be performed in the name of or in behalf of a corporation to the same extent as if such conduct were performed in his own name or behalf.” The court also noted that the purpose of the fire code was to protect public safety. Regarding notice, the court found that Sakow’s attorney, Edwin Frederick, received the violation orders and communicated their contents to Sakow. The court highlighted the fact that Frederick stated that Sakow wished to clear up the fire department’s complaints but that he did not have a current list of the violations. Travis thereupon had one of his subordinates compile such a list; these were embodied in the three violation orders on which the present prosecution was predicated. The court concluded that, regardless of strict compliance with the service requirements of the Administrative Code, Sakow had actual knowledge of the violations, satisfying the requirement for willfulness. The Court further explained that the code’s concern for the specification of the address rather than the identity of the individuals involved supports the purpose of the code as prompt prevention of conflagrations, thus the enumerated forms of service are not necessarily exclusive. The court also noted that criminal liability is imposed only on one “who shall wilfully, violate, or neglect, or refuse to comply”.

  • Wechsler v. Bowman, 285 N.Y. 284 (1935): Disregarding the Corporate Fiction to Revive an Ancient Debt

    Wechsler v. Bowman, 285 N.Y. 284 (1935)

    Courts will not disregard the corporate entity of a family-owned corporation to revive a time-barred debt against the shareholders, absent evidence of fraud or wrongdoing.

    Summary

    This case addresses whether payments made by a corporation formed by the legatees of a deceased mortgagor constitute payments by the legatees themselves, thus preventing the Statute of Limitations from barring a foreclosure action against them. The Court of Appeals held that the corporate entity should be respected, and payments made by the corporation, even though it was a family-owned entity, did not constitute payments by the individual legatees. Thus, the Statute of Limitations barred the action against the legatees.

    Facts

    Joseph Wechsler executed a bond and mortgage in 1894, due in 1895. He died in 1896, leaving his estate to his widow and children. After the widow’s death in 1906, the estate was distributed. In 1906, the Wechsler children formed a corporation, “The Joseph Wechsler Estate,” and transferred the mortgaged property to it in exchange for stock. The corporation, wholly owned and managed by the Wechsler children, made interest payments on the mortgage until April 1, 1928. A foreclosure action was commenced in February 1930, more than 20 years after the last payment by Wechsler’s executors.

    Procedural History

    The trial court (Special Term) ruled in favor of the defendants, finding that the statute of limitations barred the action. The Appellate Division reversed, holding that the payments made by the corporation constituted payments by the legatees, thus tolling the statute. The case then went to the New York Court of Appeals.

    Issue(s)

    Whether payments made by a corporation wholly owned and controlled by the legatees of a deceased mortgagor constitute payments by the legatees themselves for the purpose of the Statute of Limitations on a debt of the mortgagor.

    Holding

    No, because the corporation is a separate legal entity, and its actions are not automatically attributable to its shareholders, even in a family-owned corporation, absent evidence of fraud or wrongdoing to justify piercing the corporate veil.

    Court’s Reasoning

    The court emphasized the importance of respecting the corporate entity. It acknowledged that courts will disregard the corporate fiction in cases of fraud, evasion of obligations, or other wrongdoing. However, in this case, there was no evidence of such misconduct. The corporation was legitimately formed to limit personal liability, a purpose the law allows. The court stated, “It leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction created by law with intent that it should be acted on as if true. The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members.” The court reasoned that allowing the Statute of Limitations to be circumvented merely because the corporation was family-owned would undermine the purpose of incorporating and create uncertainty for those relying on the protection of the corporate form. The court explicitly rejected the argument that they could consider the corporation as merely an agent of the legatees. To revive an old debt by “piercing the armor of corporate entity” without a showing of actual wrongdoing would be improper.