Opinion ID: 855471
Heading Depth: 2
Heading Rank: 1

Heading: Piercing of the Corporate Veil

Text: New Jersey law 8 adheres to “the fundamental propositions that a corporation is a separate entity from its shareholders, and that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.” Richard A. Pulaski Const. Co. v. Air Frame Hangars, Inc., 950 A.2d 868, 877 (N.J. 2008) (quoting State Dept. of Envtl. Prot. v. Ventron Corp., 468 A.2d 150, 164 (N.J. 1983) (internal quotation marks omitted)). In order for a court to “pierce the corporate veil” and hold a shareholder personally liable for a corporation’s liabilities, two conditions must be met: first, “there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist,” and second, “adherence to the fiction individual liability” is that his involvement in the intermingling of Watson’s and WCP’s funds is “sufficient to constitute equitable fraud on his part”), that claim fails because NASCO does not seek any equitable remedies. See Jewish Ctr. of Sussex County v. Whale, 432 A.2d 521, 524 (N.J. 1981) (allowing plaintiff to meet the “lesser burden” of equitable fraud because it sought “only equitable remedies”); see also Foont-Freedenfeld Corp. v. Electro-Protective Corp., 314 A.2d 69, 71 (N.J. Super. Ct. App. Div. 1973) (“[I]n an action in which plaintiff relies upon equitable fraud, the only relief that may be sought is equitable relief, such as rescission or reformation of an agreement, and not monetary damages only.”). 8 Both parties seem to agree that New Jersey law governs their dispute, as that is the only law they cite to in their briefing. That approach comports with New Jersey choice-of-law principles, which instruct courts to apply the law of the state that has the “most significant relationship” to the occurrence giving rise to the dispute. Fu v. Fu, 733 A.2d 1133, 1138 (N.J. 1999) (applying the Second Restatement of Conflict of Laws approach to choice-of-law questions); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941) (holding that in diversity cases, federal courts must apply the forum state’s choice-of-law rules). Here, Watson’s principal place of business is New Jersey and Ostermueller is a New Jersey resident, and so presumably their alleged contract violations and tortious conduct occurred in that state, and that state’s law should apply. 6 of separate corporate existence would sanction a fraud or promote injustice.” 9 State Capital Title & Abstract Co. v. Pappas Bus. Servs., 646 F. Supp. 2d 668, 679 (D.N.J. 2009) (internal quotation marks omitted). In other words, the corporation must be the “alter ego” of the shareholder, such that the corporate form is effectively a legal fiction, and enforcing that legal fiction must result in some fundamental unfairness. Verni ex rel. Burstein v. Harry M. Stevens, Inc., 903 A.2d 475, 497-99 (N.J. Super. Ct. App. Div. 2006). The party seeking to pierce the veil bears the burden of proving that those 9 NASCO tries to focus our attention solely on the second prong of that two-part test, arguing that a finding of “equitable fraud” is sufficient to pierce the corporate veil. (Appellant’s Opening Br. at 11.) As the District Court correctly noted, however, that contention is based on a single line, taken out of context, in Walensky v. Jonathan Royce International, Inc., 624 A.2d 613, 617 (N.J. Super. Ct. App. Div. 1993), which reads, “in a court of equity, all that is required to justify the piercing of a corporate veil is ‘equitable fraud.’” When read in light of the rest of the opinion, that statement seems to suggest that equitable fraud, as opposed to legal fraud, can satisfy the second prong of the test, not that the first prong can be disregarded whenever there is an allegation of equitable fraud. See Walensky, 624 A.2d at 617 (recognizing at the outset of the analysis that the shareholder “was using [the corporation] as his ‘alter ego’ and thus, was abusing the corporate form in order to advance his own personal interests”). Moreover, the New Jersey Supreme Court is the final authority on the state’s substantive law, see Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145, 149 (3d Cir. 1988) (“A federal court sitting in diversity must apply the state substantive law as pronounced by the state’s highest court … .”), and it has clearly and repeatedly required a finding of “corporate dominance” by a parent corporation or other dominant shareholder, prior to piercing the corporate veil, id. at 150 (concluding that New Jersey Supreme Court precedent “makes clear that piercing the corporate veil depends on a finding of dominance” and “[o]nly after there has been such a finding does one reach the fraud or injustice issue” (internal quotation marks omitted)); see also Richard A. Pulaski Const. Co., 950 A.2d at 877-78; Ventron, 468 A.2d at 164. NASCO’s claim that we need not engage in the “corporate dominance” or “alter ego” analysis is therefore without merit. Equally unavailing is NASCO’s argument that the corporate veil should be pierced because, due to Watson’s bankrupt status, NASCO will otherwise be deprived of a remedy. There is no authority suggesting that we can disregard New Jersey’s requirements for piercing the corporate veil whenever a plaintiff might otherwise be unable to recover for an alleged wrong. 7 circumstances are present, Richard A. Pulaski Const. Co., 950 A.2d at 877-78, a burden that “is notoriously difficult for plaintiffs to meet,” Pearson v. Component Tech. Corp., 247 F.3d 471, 485 (3d Cir. 2001). In Craig v. Lake Asbestos of Quebec, Ltd., we discussed at length the factors New Jersey courts use to determine whether corporate separateness is effectively a “legal fiction.” 843 F.2d 145, 150 (3d Cir. 1988). Emphasizing that simply being a majority stockholder or having “the potential to exercise control” is insufficient, we concluded that satisfying the first prong of the veil-piercing analysis requires “complete domination, not only of finances but of policy and business practice,” such that the corporate entity has “no separate mind, will or existence of its own.” Id. (internal quotation marks omitted). Factors demonstrating that level of dominance include: gross undercapitalization … failure to observe corporate formalities, non-payment of dividends, the insolvency of the debtor corporation at the time, siphoning of funds of the corporation by the dominant stockholder, non-functioning of other officers or directors, absence of corporate records, and the fact that the corporation is merely a facade for the operations of the dominant stockholder or stockholders. Id. (internal quotation marks omitted). As those factors indicate, the veil-piercing inquiry is focused not simply on an individual shareholder’s level of personal involvement with a corporation, but rather on whether the corporate form itself is a sham. Cf. Pappas, 646 F. Supp. 2d at 680 (explaining that in a closely held corporation “one member must dominate the corporate entity if the business is to function and be profitable,” but that fact does not mean the corporation is “a sham corporate entity set up to … evade personal liability”). 8 NASCO points to only one piece of evidence that it argues indicates that Ostermueller and Watson lacked “separate personalities” (Appellant’s Opening Br. at 17): a personal loan that Ostermueller obtained to help satisfy Watson’s corporate debt. 10 According to NASCO, “Ostermueller’s willingness to combine personal and corporate assets [is] an indication that he saw no difference between the two,” and such an inference could support a jury finding that his and Watson’s separate identities had “blurr[ed].” (Appellant’s Opening Br. at 17-18.) As the case law makes clear, however, even if we were to agree that Ostermueller’s personal loan constituted a “blurring” of his and Watson’s identities (id. at 17), that fact is insufficient to justify piercing the corporate veil; rather, Ostermueller must have dominated Watson to such a degree that the corporation had “no separate mind, will or existence of its own.” Craig, 843 F.2d at 150. NASCO has not provided any evidence of such dominance. It does not allege that Watson failed to observe the corporate formalities, much less that Ostermueller was using the corporation as a façade for his personal operations. See id. (identifying those factors as indications of corporate dominance). In fact, taking out a personal loan for the benefit of the corporation is the opposite of “siphoning of funds of the corporation by the 10 NASCO referenced two more items in its argument before the District Court: Ostermueller’s request “to pledge joint venture inventory as collateral for a Watson line of credit” and his “use[] [of] personal pronouns” when referring to his role in the joint venture. (App. at 22.) It does not mention that evidence in its argument on appeal, however, and thus has waived any claim that those facts demonstrate corporate dominance. See United States v. DeMichael, 461 F.3d 414, 417 (3d Cir. 2006) (“An issue is waived unless a party raises it in its opening brief … .”). In any event, the District Court correctly concluded that that evidence “is not enough to show that [Ostermueller] was using Watson as his alter ego.” (App. at 23.) 9 dominant stockholder,” which is the type of evidence typically used to justify disregarding the corporate form. Id. Because there is no evidence that Watson’s corporate form was a sham, no reasonable jury could find a basis for piercing the corporate veil, 11 and the District Court was correct to resolve that claim as a matter of law. 12