Opinion
Case No. 98 Civ. 7038 (GBD)
January 16, 2004
MEMORANDUM OPINION AND ORDER
This is an action by Plaintiff, Favour Mind Limited ("FML"), a Hong Kong corporation which manufactures, exports, and distributes garments, against Pacific Shores, Inc. ("Pacific Shores"), Alpine Apparel Group d/b/a Cameron Roberts, Ltd. ("Alpine Apparel"), and Defendant Robert Czwartacky ("Czwartacky"). Plaintiff seeks $216,408.06 in unpaid invoices for garments that it manufactured, asserting breach of contract, fraud, and unjust enrichment. Plaintiff also seeks a declaratory judgment allowing it to pierce the corporate veil of Pacific Shores and Alpine Apparel to hold Defendant Czwartacky personally liable for the outstanding debt. On May 7, 1999 Plaintiff was granted default judgments against Pacific Shores and Alpine Apparel with respect to the breach of contract claim for $216,408.06, on the basis that neither answered Plaintiffs complaint.
Cameron Roberts, Ltd. ("Cameron Roberts") is not a party to this action. The underlying suit is against Alpine Apparel, a licensee of the label "Cameron Roberts, Ltd."
On May 26, 2000 Plaintiff voluntarily discontinued with prejudice its claims against Defendant Czwartacky for breach of contract, fraud, and unjust enrichment. Presently before this Court is Defendant Czwartacky's Rule 56 motion for summary judgment of Plaintiff's remaining cause of action seeking a declaratory judgment allowing Plaintiff to pierce the corporate veil to hold Defendant Czwartacky liable for the debts of Pacific Shores and Alpine Apparel. Fed.R.Civ.P. 56. For the following reasons, Defendant Czwartacky's motion for summary judgment is hereby GRANTED.
BACKGROUND
Pacific Shores was incorporated in New York in May 1988. The company consisted of Defendant Czwartacky, the President, and Steve Kent ("Kent"), the Vice-President and Secretary. Kent's son may also have been listed as an officer, though he was never actively involved in the operation of the business. Defendant Czwartacky and Kent were the company's sole directors and 50% shareholders, and Pat Roberts ("Roberts") participated in designs. Pacific Shores also employed temporary help which it compensated via a temporary service. Defendant Czwartacky managed Pacific Shores' day-to-day operations. Defendant's Memorandum, 3. Defendant Czwartacky invested $50,000 to start up Pacific Shores and Kent invested S100,000. Both later invested $15,000 and Defendant Czwartacky subsequently invested S5,000 or $10,000 on several occasions.
In or about mid-1991, Pacific Shores ordered sample garments from Plaintiff. The samples were billed to Pacific Shores on open credit terms. After Pacific Shores approved the sample order, it ordered production goods. Plaintiff required Pacific Shores to obtain a letter of credit to pay for the production goods, or else wire transfer funds before shipment. The production goods were paid for by letters of credit issued by Pacific Shores' factor, Finova Capital Corporation ("Finova"). Plaintiff subsequently invoiced and expected payment from Pacific Shores. As Plaintiff became Pacific Shores' sole overseas supplier, Pacific Shores gradually became slow in paying for samples. In December 1993, Pacific Shores asked Plaintiff to allow it to pay two-thirds of the invoices of production goods by letter of credit and one-third by wire transfers some time after shipment. Plaintiff agreed to this request to help Pacific Shores expand its business and enable it to pay the outstanding sample charges faster, so that Plaintiff might receive more business from Pacific Shores. Deposition of Daisy Chan, 40.
One of Plaintiff's affiliates was a Hong Kong company named Wai Tai Piece Goods ("Wai Tai"), wholly-owned by Wai Tai Enterprises Limited ("Wai Tai Enterprises"). Wai Tai and Wai Tai Enterprises shared the same office space as Plaintiff Wai Tai Enterprises and Plaintiff also had the same officers and shareholders. Deposition of Tommy Ho, 12-13. Wai Tai Enterprises obtained Dun Bradstreet's March 6, 1991 credit report ("Report") on Pacific Shores. The Report showed, among other things, that Pacific Shores had three employees, that it lost $30,365 in 1989 on gross sales of $866,294, that it lost $31,325 in retained earnings, that its initial capital investment was S10,000, and that Dun Bradstreet ascribed it a Financial Appraisal Ranking of "3." Wai Tai Enterprises shared the Report's information with Plaintiff. Id., at 26.
Throughout 1994, Plaintiff continued to sell goods to Pacific Shores, while constantly pursuing Pacific Shores for payment. By December 6, 1994, Plaintiff threatened to cut off Pacific Shores' credit because of slow payment. By April 1995, due to Pacific Shores' slow payments, Plaintiff rescinded its agreement to allow Pacific Shores to wire transfer one-third of the invoiced value after shipment. It instead reverted to the original requirement that Pacific Shores provide a letter of credit for the full amount of the invoice before shipment. Plaintiff also insisted upon payment of the past due amount before it would ship any further goods. Deposition of Daisy Chan, 106. Plaintiff continued to ship samples to Pacific Shores on credit to help keep it in business. Id., 93.
By April 25, 1995, Pacific Shores had become Plaintiff's largest account debtor, owing Plaintiff over $200,000. On May 24, 1995, Pacific Shores notified Plaintiff that because of quality defects in goods that Plaintiff supplied, it was operating at a loss. On June 1, 1995 Defendant Czwartacky wrote to Plaintiff on Cameron Roberts stationery that "I [have] become cash poor." Defendant's Exhibit N.
In May 1995, Defendant Czwartacky incorporated Cameron Roberts under New York law. He was the President, sole shareholder, and managing director. There is no evidence that Defendant invested any money other than the payment of the incorporation fee. Cameron Roberts licensed its name to Alpine Apparel, an unrelated New York corporation of which Defendant Czwartacky was never a shareholder, officer, or employee. Under the terms of the License Agreement, Alpine Apparel would pay a 6% royalty to Cameron Roberts.
On September 5, 1995 Pacific Shores advised Plaintiff that Finova would no longer amend its letter of credit for payments to Plaintiff. As Pacific Shores would therefore be unable to purchase goods, it advised Plaintiff the next day that it was going out of business. On September 25, Pacific Shores informed Plaintiff that it lost $6,118 over the eight-month period ending August 31, 1995. Defendant's Memorandum, 8.
Pacific Shores advised Plaintiff that Alpine Apparel would open a letter of credit for the purchase of additional goods. In fact. Defendant Czwartacky named Cameron Roberts as the corporation that would assume Pacific Shores' debt to Plaintiff.Plaintiff's Exhibit 1, 59. On January 25, 1996, Alpine Apparel opened a letter of credit to Plaintiff. Plaintiff thereafter made two shipments of goods to Alpine Apparel amounting to $122,261.25, which were paid for by letter of credit. Czwartacky Aff., ¶ 12.
In March 1996, Pacific Shores and Cameron Roberts went out of business, though Pacific Shores was never formally dissolved. At that time, Alpine Apparel owed Plaintiff $3,486.50 for samples and Pacific Shores owed Plaintiff $100,000 to $200,000. all or most of which were for samples. Defendant Czwartacky took $700 from Cameron Roberts' bank account because "it was my money that I put in there in the first place."Plaintiffs Exhibit 1. 54. Defendant also withdrew $200 to $300 from Pacific Shores' bank account.
Defendant Czwartacky has not produced any stock certificates, record books, minutes of shareholders, officers, and/or directors meetings, or financial records except tax returns for Pacific Shores and Cameron Roberts. He claims that minutes of Pacific Shores' directors meetings were not kept after the initial meetings. He also explains that Pacific Shores' final tax return for 1996 showed its address as his own home address in South Carolina because, by the time of filing taxes, Pacific Shores was out of business and had no offices.
DISCUSSION
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Nebraska v. Wyoming, 507 U.S. 584,590, 113 Sect. 1689, 1694 (1993). A dispute regarding a material fact is genuine if a verdict at trial could reasonably be returned for the non-moving party. See Weinstock v. Columbia University, 224 F.3d 33, 41 (2d Cir. 2000). The burden of demonstrating that no factual dispute exists is on the moving party.Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has met this burden, the nonmoving party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). `The non-moving party may not rely on conclusory allegations or unsubstantiated speculation." Scotto v. Alemas, 143 F.3d 105, 114 (2d Cir. 1998). In deciding a motion for summary judgment, a court must resolve all ambiguities and draw all reasonable inferences in favor of the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.3d.2d 202 (1986). Summary judgment should be granted only when no reasonable trier of fact could find in favor of the nonmoving party. Gallo v. Prudential Residential Services, Ltd., 22 F.3d 1219, 1224 (2d Cir. 1994). The burden in demonstrating that summary judgment should be granted is significant in that summary judgment is a "drastic devise, since its prophylactic function, when exercised, cuts off a party's right to present his case to the jury." Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc., 182 F.3d 157, 160 (2d Cir. 1999), quoting Eastway Construction Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir. 1985).
Defendant Czwartacky argues that he is entitled to summary judgment dismissing Plaintiff's cause of action seeking a declaratory judgment piercing the corporate veil to hold him liable for the debts of Pacific Shores and Alpine Apparel. Defendant Czwartacky argues that Plaintiff cannot show that he committed a fraud or wrong against Plaintiff, this being a required showing in order to pierce the corporate veil.
New York courts disregard the corporate form where it is necessary to do so in order "to prevent fraud or to achieve equity." Walkovsky v. Carlton, 276 N.Y.S.2d 585, 587 (1966) (quoting International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292, 79 N.E.2d 249, 252 (1948)). Under New York law, a company's corporate form may be disregarded and the corporate veil may be pierced where the party seeking to do so makes a two-part showing: "(i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil." American Fuel Corporation v. Utah Energy Development Company, Inc., 122 F.3d 130, 134 (2d Cir. 1997) (citing Morris v. New York State Dep't of Taxation Fin., 623 N.E.2d 1157, 1160-61 (1993)); See also MAG Portfolio Consult,GMBH v. Merlin Biomed Group. LLC, et al., 268 F.3d 58, 63 (2d Cir. 2001). An employee/shareholder who uses his control of the corporation to further his own personal business rather than that of the corporation may be held liable for the corporation's acts. Id. For example, an employee may be deemed liable where he exercises complete domination and control over the corporation. Austin Powder Co. v. McCullough, 216 A.D.2d 825, 826, 628 N.Y.S.2d 855 (1995).
While control or complete domination of the corporation is an essential factor in determining whether to pierce the corporate veil, it is not enough to only show such domination, standing alone-there must also be "some showing of a wrongful or unjust act toward [the party seeking piercing]." Id., (citing Morris, at 161). Further, the test for piercing the corporate veil is not disjunctive in that piercing the corporate veil does not depend upon a showing of either domination or a fraud or wrong.Id. The test is instead conjunctive-in order to pierce the corporate veil, a showing of both domination and fraud or wrong is required. Id., (citing Morris, at 1160-61).
1. Control/Domination
In determining corporate domination, a court may consider several factors, including:
(1) whether corporate formalities are observed, (2) whether the capitalization is adequate, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) whether there is overlap in ownership, officers, directors, and personnel, (5) whether the corporate entities share common office space, address and telephone numbers, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the alleged dominator deals with the dominated corporation at arms length, (8) whether the corporation is treated as an independent profit center, (9) whether others pay or guarantee debts of the dominated corporation, and (10) whether the corporation in question had property that was used by the alleged dominator as if it were the dominator's own.William Passalaqua Builders, et al. v. Resnick Developers South, Inc., et al., 933 F.2d 131, 139 (2d Cir. 1990); See also American Fuel Corporation, 122 F.3d at 134.
Plaintiff contends that Defendant Czwartacky is personally liable for Pacific Shores' and Alpine Apparel's corporate debt because Defendant Czwartacky as shareholder used the corporation for his own personal business and exercised complete domination. A defendant may be held liable only where he has used the corporation "to perpetrate a fraud or ha[s] so dominated and disregarded [the corporation's] corporate form that [the corporation] primarily transacted [his] personal business rather than its own corporate business." Kirno Hill Corp. v. Holt, 618 F.2d 982, 985 (2nd Cir. 1980). However, the Second Circuit has denied personal liability for the shareholder even where the corporation is thinly capitalized, kept no separate books or files, and had no offices distinct from the shareholder's other corporations. Garter v. Snyder, 607 F.2d 582 (2nd Cir. 1979). The Garter court also refused to render dispositive the fact that the corporation paid some of the shareholder's personal expenses, noting that the payment was petty. Id. at 587. More was needed to evince control. The corporate form could be disregarded only where a corporation's "separate identity [is] so disregarded, that it primarily transacted the dominator's business rather than its own and can be called the other's alter ego."Id., at 586.
With respect to Pacific Shores, there is no evidence that corporate formalities were generally observed as no meetings or records have been produced. Pacific Shores did not appear to display much business discretion independent of Defendant Czwartacky's will. With regard to the exchange of personal and corporate funds, although Plaintiffs employee concluded that Pacific Shores' payments came from Defendant Czwartacky personally, this employee's testimony does not evince an appreciation of the difference between Defendant Czwartacky's payments in his personal capacity and those that he made as "the boss" of Pacific Shores.Deposition of Daisy Chan. Also, as in Garter, supra, the $200 to $300 that Defendant used for personal or showroom expenses was petty. Though Pacific Shores' initial capital investment was only $10,000, at least $170,000 was additionally invested. Also, Pacific Shores existed as a profit center independent of Defendant Czwartacky, and Finova issued Pacific Shores' letters of credit. There is no evidence that Defendant Czwartacky used Pacific Shores' property as his own personal property.
The Second Circuit in American Fuel Corporation, supra, found that the defendant shareholder did not dominate the subject corporation because he was only a 50% owner, the other shareholder was active in the business, and the defendant had not taken corporate funds for his own use. It did so despite the fact that the corporation had no contracts, no employees, no independent office space, it used the defendant shareholder's home address on the corporation letterhead, it had no separate bank account, capital, or assets at the time of trial, and the shareholder had personally paid corporate expenses and kept no records of the expenditures.
Defendant Czwartacky does not substantially address the issue of his alleged domination or control of Pacific Shores or Alpine Apparel beyond denying such allegations of domination or control. Defendant's Memorandum, 14. Defendant Czwartacky instead focuses on the second prong of the test for piercing the corporate veil, arguing that Plaintiff cannot show that he committed any fraud or wrong, and that therefore, his motion for summary judgment should be granted.
2. Fraud/Wrong
The second part of the piercing inquiry concerns whether domination was used to commit a wrongful, fraudulent, or unjust act towards the Plaintiff. In the present case, it cannot be shown that Defendant Czwartacky committed any such fraud or wrong against Plaintiff Therefore, Plaintiff has not satisfied the required showing in order to pierce the corporate veil.
Since early in Plaintiff's relationship with Pacific Shores, Plaintiff perceived signs of and was informed of the credit risks that Pacific Shores posed. As early as the start of the parties' relationship, Plaintiff was significantly aware of the corporate structure and financial condition of the entity with which it sought to do business. The Dun Bradstreet's March 6, 1991 credit report on Pacific Shores showed that Pacific Shores had three employees, that it lost 530,365 in 1989 on gross sales of S866,294, that it lost S31,325 in retained earnings, that its initial capital investment was $10,000, and that it earned a Financial Appraisal Ranking of "3." Plaintiff knew of these risks. Nonetheless, just two-and-a-half years into Plaintiff's relationship with Pacific Shores, even after Pacific Shores was slow in making payments to Plaintiff, Plaintiff agreed to accept only one-third of Pacific Shores' production goods payment via wire transfer and two-thirds by letter of credit.
Further, throughout 1994, Plaintiff continued to sell goods to Pacific Shores even though Plaintiff had to "chase" after Pacific Shores for payment of these goods and at times, was worried about being paid.Deposition of Daisy Chan. By April 25, 1995, Pacific Shores had become-Plaintiffs largest account debtor, owing Plaintiff in excess of $200,000. Plaintiff continued to sell to Pacific Shores on open credit terms. Id. On May 24, 1995, Pacific Shores informed Plaintiff that it was operating at a loss due to quality defects in the goods. Defendant's Exhibit L. On June 1, 1995, Pacific Shores informed Plaintiff of its deteriorating financial condition due to returns of defective merchandise. Defendant's Exhibit N. On September 5, 1995 Pacific Shores advised Plaintiff that Finova would no longer amend its letter of credit for payments to Plaintiff. Defendant's Exhibit 0. As Pacific Shores would therefore be unable to purchase goods, it advised Plaintiff the next day that it was going out of business. Czwartacky Aff. ¶ 10. On September 25, 1995, this time enclosing a copy of Pacific Shores' Profit and Loss Statement for the eight month period ending on August 31, 1995, showing a loss of $6,118, Pacific Shores again apprised Plaintiff of its financial situation. Defendant's Exhibit R.
Pacific Shores then advised Plaintiff that Alpine Apparel would open a letter of credit for the purchase of additional goods. Defendant's Exhibit I. Alpine Apparel was a company that had licensed the name of Cameron Roberts, Ltd, which Defendant Czwartacky had incorporated in May 1995 and of which he was the President and sole shareholder. Despite previous warning signs. Plaintiff thereafter agreed to do business with Alpine Apparel. Deposition of Daisy Chan. On January 25, 1996, Alpine Apparel opened a letter of credit to Plaintiff. Czwartacky Aff. ¶ 12. Plaintiff thereafter made two shipments of goods to Alpine Apparel amounting to $122,261.25, which were paid for by letter of credit. Id.
Where a party is aware of the risks of dealing with a corporation, that party has assumed the risk of such dealings. In Brunswick Corp. v. Waxman, 599 F.2d 34 (2nd Cir. 1979), for example, the Second Circuit held that Plaintiff was precluded from piercing the corporate veil of the defendant's shell corporation because it had
knowingly entered into the conditional sales contracts . . . with a no-asset corporation which was created for the sole purpose of taking title to the equipment which Brunswick sold. Brunswick knew or should be charged with the knowledge that the Waxmans wished to avoid personal liability and that the sole obligor on the sales contract was to be the corporate dummy created for that purpose.
In the present case, Plaintiff knew of Pacific Shores' poor 1991 Dun Bradstreet ranking, its losses, and its 510,000 initial capital investment. Plaintiffs decision to do business with Pacific Shores in light of this knowledge indicates an informed decision. After Plaintiff was alerted to signs that Pacific Shores needed help in paying its bills, Plaintiffs unabated business with Pacific Shores indicates a ratification of its previous decision and evinces a deeper appreciation of the risks involved. Plaintiffs decision to accept one-third of the payment for production goods after shipment most notably evidences Plaintiffs assumed responsibility.
There is no evidence that Plaintiff ever had any reasonable expectation that Defendant Czwartacky would be personally liable for payment. Nor did he conceal the nature of his personal relationship and involvement with either Pacific Shores or Alpine Apparel. Plaintiffs employee indicated Plaintiffs assumption of the risk when it indicated that it made no sense to inquire of Defendant Czwartacky as to whether he had any money.Deposition of Daisy Chan. This employee concluded that "[w]e make a wrong decision, we have to bear the result." Defendant's Exhibit 0. In light of this knowledge of risk and assumption of responsibility, it cannot be said that Defendant Czwartacky committed a fraud or wrong against Plaintiff.
Therefore, though Plaintiff ultimately did lose $216,408.06, this loss cannot be attributed to a fraud or wrong that Defendant Czwartacky visited upon Plaintiff.
CONCLUSION
Pacific Shores and Alpine Apparel have been held liable for their debts to Plaintiff. Defendant Czwartacky's involvement in Pacific Shores does not rise to the level of domination used to inflict a fraud or wrong upon Plaintiff. Defendant Czwartacky's summary judgment motion to dismiss Plaintiff's claim for declaratory judgment piercing the corporate veil with respect to Pacific Shores is therefore GRANTED. Defendant's summary judgment motion to dismiss Plaintiff's claim for declaratory judgment piercing the corporate veil with respect to Alpine Apparel is also GRANTED.