Opinion ID: 470297
Heading Depth: 2
Heading Rank: 3

Heading: piercing exporting's corporate veil

Text: 28 In count two, plaintiffs seek to pierce the corporate veil of Exporting. New Jersey law permits a court to ignore a corporation's separate entity in order to prevent it from being used to defeat the ends of justice, to perpetuate fraud, to accomplish a crime, or otherwise evade the law. New Jersey State Department of Environmental Protection v. Ventron, 94 N.J. 473, 468 A.2d 150, 164 (1983). 6 The subsidiary need not have been created with the intent to defraud, but if it is used to perpetuate a fraud, then the doctrine may apply. Fortugno v. Hudson Manure Company, 51 N.J.Super. 482, 144 A.2d 207 (App.Div.1958). 29 Plaintiffs make the following allegations, among others, in support of their second count: 30 (1) Coppersmith, Bernstein and Corradetti are the beneficial owners of and control Anthony Associates, Inc. (Associates), Corradetti Enterprises, Inc. (Corradetti, Inc.), Exporting, Memco Trading Co., Inc. (Memco), and R.A.M. Packaging (R.A.M.), all of which are located at the same address. 31 (2) There is a pervasive commingling of the assets of these entities and they are run as a single economic enterprise. 32 (3) Associates organized Exporting with capitalization of $2,500 and remains its sole stockholder. 33 (4) Coppersmith, Bernstein and Corradetti are the officers and directors of both Associates and Exporting and the managing partners of R.A.M. 34 (5) Exporting has never had any substantial business since its inception, except for the single wrongful transaction with the plaintiffs, and no significant assets were conveyed to it by the parent corporation. 35 (6) Exporting was grossly undercapitalized from its inception and has been insolvent since the beginning. 36 (7) Exporting maintains no inventory, no books, no business records and no viable bank checking account. 37 (8) R.A.M. paid for the payroll and benefits of Exporting and the other corporations as well as for their legal fees. 38 (9) Corradetti, Inc. was billed for all of the telephone and telex expenses of Exporting. 39 (10) The directors and executives of ... [Exporting] did not act independently in the interest of the subsidiary but took their orders from the parent corporation. 40 (11) Exporting was used by this single economic enterprise as an instrument of fraud. 41 These allegations must be read in the context of the further allegation that Exporting, with less than $500 in total assets, entered into a $44,000,000 transaction with plaintiffs and of the fraud claims raised in count one against Corradetti, Coppersmith and Bernstein. When so read, we believe count two cannot be dismissed as failing to state a claim. Plaintiffs' complaint expressly alleges that Coppersmith, Bernstein and Corradetti, through their single economic enterprise, used the corporate form of Exporting to defraud the plaintiffs. It then goes on to provide sufficient supporting details to prevent one from disregarding this allegation as merely conclusory pleading. Under these circumstances it was error to grant the defendants' motion to dismiss. 42 The district court's contrary conclusion was based largely on its willingness to overlook Exporting's allegedly inadequate capitalization. Because Exporting, a Domestic International Sales Corporation (DISC) organized pursuant to 26 U.S.C. Secs. 992-97, met the requirements for capitalization and organization set forth in 26 U.S.C. Sec. 992(a)(1)(C), the district court believed that its capitalization was necessarily adequate. We are unwilling to hold, however, that Congress, when it established the minimum capitalization of a DISC, intended to immunize from liability anyone who utilized a minimally capitalized DISC to perpetrate a fraud. If it turns out that plaintiffs knew that they were dealing with a DISC, that fact will be relevant in determining whether the defendants are guilty of fraud, but that determination should be made in the context of all the facts and is not controlled by the single fact that Exporting's capitalization met the minimum permissible capitalization required for a DISC. 43 In re Farkar Co. and R.A. Hanson DISC, Ltd., 441 F.Supp. 841 (S.D.N.Y.1977), aff'd in part 583 F.2d 68 (2d Cir.1978), modified 604 F.2d 1 (2d Cir.1978), is instructive on this issue. That case involved the question of whether a parent company was bound by an arbitration agreement signed by its DISC. The district court, applying Washington law, found that the DISC was so closely related to its parent as to justify treating them as one. 7 44 The Second Circuit affirmed. It reserved the question of which body of law applied to this issue because it found that under any body of applicable law the result would be the same, ... [t]he corporate veil was so diaphanous that it did not even require piercing. 583 F.2d at 71. 45 We agree with the Second Circuit. The issue of whether the corporate veil of a DISC can be pierced is primarily a question of fact. Plaintiffs have alleged sufficient facts to state a claim and should be permitted to proceed with discovery to further develop the factual record. 46 Finally, the district court also concluded that plaintiffs were collaterally estopped from asserting their count two claims because they had litigated the veil piercing issue in the context of their motion to amend the caption of the previous action. We find this reliance on principles of issue preclusion misplaced. The motion to amend was filed in May, 1983, over a year after entry of judgment in the first case. The district court refused to permit the amendment on the grounds that plaintiffs had been aware of the financial condition of Exporting prior to trial and that it would be improper to add new defendants and then purportedly hold those defendants responsible for a verdict rendered in a lawsuit to which they had no opportunity to defend themselves. Accordingly, the district court had no occasion to address the issue of whether Exporting's corporate form should be disregarded. 47 We therefore reinstate plaintiffs' second count.