On October 24, 2023, Justice Masley of the New York County Commercial Division issued a decision in Citibank, N.A. v. East 65th St. Owners LLC, 2023 NY Slip Op. 33778(U), holding that an alter ego claim cannot be based on a breach of contract, explaining:
The doctrine of piercing the corporate veil is typically employed by a third party seeking to go behind the corporate existence in order to circumvent the limited liability of the owners and to hold them liable for some underlying corporate obligation. The concept is equitable in nature. Historically, incorporation is designed to limit liability of owners of the corporation – not to limit a corporation’s liability for acts of its officers; the whole concept of piercing’ involves going beyond the corporate form to reach the normally insulated-from liability owners rather than, pursuing the corporation itself for claims or judgments against its officers. However, reverse piercing involves holding a corporation liable for the debts of its owners. Traditional piercing requires a showing of fraud that injured plaintiff, while alter ego piercing requires a showing of domination of the corporation that injured plaintiff.
When a corporation has been so dominated by an individual or another corporation and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s alter ego, the corporate form may be disregarded to achieve an equitable result. To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court in equity will intervene.
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. 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.
(Internal quotations and citations omitted).