New York Law Review

Tag: shareholder liability

  • Sasso v. Vachris, 66 N.Y.2d 26 (1985): State Law Imposing Shareholder Liability is Not Preempted by ERISA

    66 N.Y.2d 26 (1985)

    A state law that imposes personal liability on shareholders for a corporation’s failure to make required contributions to employee benefit plans is not preempted by the Employee Retirement Income Security Act (ERISA) because it provides a remedial enforcement mechanism rather than regulating the terms and conditions of the benefit plan itself.

    Summary

    The trustees of a union welfare and pension fund sued the shareholders of a construction company to recover unpaid contributions to the fund, pursuant to New York Business Corporation Law § 630, which allows employees to recover unpaid wages and benefits from the ten largest shareholders of a closely held corporation. The New York Court of Appeals held that ERISA did not preempt this state law. The court reasoned that § 630 provides a mechanism to enforce existing obligations, not to dictate the terms of the employee benefit plan, and therefore only has a “tenuous, remote, or peripheral” effect on the plan, which is insufficient for preemption.

    Facts

    Local Union 282 established a welfare and pension trust fund. Vacar Construction Company was obligated under collective bargaining and trust agreements to contribute to this fund for its Local 282 employees. Vacar failed to make the required contributions between May 1978 and February 1979. Vacar then filed for bankruptcy, thwarting the fund’s initial attempts to recover the unpaid amounts.

    Procedural History

    The trustees sued Vacar’s shareholders under Business Corporation Law § 630 and Vacar’s officers under Labor Law § 198-c. Special Term granted summary judgment for the plaintiffs on the Labor Law claim but dismissed the claim against Helen Vachris (not an officer) and dismissed the Business Corporation Law claim as preempted by ERISA. The Appellate Division modified, dismissing the Labor Law claim entirely, finding no private right of action under that statute. The plaintiffs appealed the dismissal of the Business Corporation Law claim.

    Issue(s)

    Whether Business Corporation Law § 630, which imposes personal liability on the ten largest shareholders of a closely held corporation for wages and salaries (including benefit contributions) owed to the corporation’s employees, is preempted by ERISA.

    Holding

    No, because Business Corporation Law § 630 is a remedial statute that provides an additional enforcement mechanism for collecting delinquent contributions and does not regulate the terms and conditions of employee benefit plans.

    Court’s Reasoning

    The court began by noting the broad preemption clause in ERISA, which supersedes state laws that “relate to” any employee benefit plan. However, the court also acknowledged that this clause is not unlimited, and only state laws that “regulate, directly or indirectly, the terms and conditions of employee benefit plans” are preempted. State laws with only a “tenuous, remote, or peripheral” effect are not preempted.

    The court found that Business Corporation Law § 630 is remedial, providing an additional enforcement mechanism for collecting delinquent contributions that are already owed under existing collective bargaining and trust agreements. It does not dictate what benefits must be provided or how they are calculated. The court distinguished § 630 from state laws that the Supreme Court had previously found to be preempted, such as those requiring specific benefits or practices in employee benefit plans.

    The court likened § 630 to a garnishment statute or a law imposing liability on corporate officers, which have been found not to be preempted because their effect on employee benefit plans is only indirect. The court also noted that the 1980 amendments to ERISA, which added specific provisions dealing with delinquent contributions, were intended to supplement, rather than supersede, existing state remedies like § 630.

    “Under ERISA [as originally enacted] delinquent contributions were enforced by an action founded either on state law, the collective bargaining agreement between the parties or the trust agreement.”

    Ultimately, the court concluded that Congress intended ERISA’s civil remedies to merely supplement, rather than supersede, existing state remedies for collecting delinquent employer contributions to employee benefit plans.

  • We’re Associates Co. v. Cohen, Stracher & Bloom, P.C., 65 N.Y.2d 148 (1985): Shareholder Liability for Professional Corporation Debt

    We’re Associates Co. v. Cohen, Stracher & Bloom, P.C., 65 N.Y.2d 148 (1985)

    Shareholders of a professional service corporation are generally not personally liable for the corporation’s ordinary business debts, such as rent, unless there is a specific statutory provision or evidence of abuse of the corporate form.

    Summary

    We’re Associates Co. sued Cohen, Stracher & Bloom, P.C. (CS&B), a professional legal corporation, and its individual shareholders for unpaid rent. The plaintiff argued that the shareholders should be personally liable for the corporation’s debt. The New York Court of Appeals held that shareholders of a professional service corporation are not personally liable for the corporation’s ordinary business debts unless a statute specifically provides otherwise or there is evidence of corporate abuse. The court emphasized that Business Corporation Law § 1505(a) only imposes personal liability for negligent or wrongful acts committed while rendering professional services.

    Facts

    We’re Associates Co. (plaintiff) leased commercial premises to Cohen, Stracher & Bloom, P.C. (CS&B), a professional legal corporation. The lease agreement named CS&B as the tenant. The individual defendants were the sole officers, directors, and shareholders of CS&B. CS&B defaulted on the lease by failing to pay rent. We’re Associates Co. sued CS&B and its individual shareholders to recover the unpaid rent.

    Procedural History

    The individual defendants moved to have their names struck from the lawsuit, arguing that CS&B was the sole tenant and they acted only as corporate officers/directors. Special Term granted the motion, and the Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the shareholders of a professional service corporation organized under Article 15 of the Business Corporation Law may be held liable in their individual capacities for rents due under a lease naming only the professional service corporation as tenant.

    Holding

    No, because Business Corporation Law § 1505(a) limits shareholder liability to instances involving the direct rendition of professional services and does not extend to ordinary business debts like rent, absent abuse of the corporate form.

    Court’s Reasoning

    The Court of Appeals relied on the principle of limited liability afforded to corporate shareholders, a key incentive for incorporating. Business Corporation Law § 1513 states that all articles of the Business Corporation Law apply to domestic professional service corporations unless Article 15 provides otherwise. Section 1505(a) specifically addresses shareholder liability, stating: “Each shareholder, employee or agent of a professional service corporation shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or by any person under his direct supervision and control while rendering professional services on behalf of such corporation.” The court interpreted this section to limit personal liability to situations involving the direct rendering of professional services, not ordinary business debts. The court stated, “The plain words of the statute, imposing personal liability only in connection with the rendition of professional services on behalf of the professional service corporation, cannot be defeated by a liberal construction which would include ordinary business debts within the definition of professional services.”

    The court distinguished the Ohio case of South High Dev. v Weiner, Lippe & Cromley Co. L.P.A., which held shareholders liable for a corporate lease, because the Ohio decision was based on a specific court rule imposing such liability. New York has no such rule. The court emphasized that even single-person businesses can incorporate to limit liability, provided no fraud is committed and the corporate form is respected. The court noted, “Our decision should work no injustice on those who enter into leases or any other contracts with professional service corporations, who are free to seek the personal assurances of the shareholders that the commitments of the professional service corporation will be honored.” The Court cautioned that abuse of the corporate form could lead to a different result, citing Walkovszky v. Carlton.