Opinion ID: 778306
Heading Depth: 2
Heading Rank: 1

Heading: Counts I and II: Disregarding Corporate Formalities

Text: 22 Abuses of the corporate form allow courts to impose liability on the corporation's shareholders. The purpose of alter ego liability and piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law.... State Dep't of Envtl. Protect. v. Ventron Corp., 94 N.J. 473, 500, 468 A.2d 150 (1983) (internal citations omitted). 23 Piercing the corporate veil is a tool of equity, Carpenters Health & Welfare Fund v. Kenneth R. Ambrose, Inc., 727 F.2d 279, 284 (3d Cir.1983), a remedy that is involved when [a subservient] corporation is acting as an alter ego of [a dominant corporation.] Peter J. Lahny IV, Securitization: A Discussion of Traditional Bankruptcy Attacks and an Analysis of the Next Potential Attack, Substantive Consolidation, 9 Am.Bankr.Inst. L.Rev. 815, 865 (2001). In order to state a claim for piercing the corporate veil under New Jersey law, a plaintiff must show that: (1) one corporation is organized and operated as to make it a mere instrumentality of another corporation, and (2) the dominant corporation is using the subservient corporation to perpetrate fraud, to accomplish injustice, or to circumvent the law. See Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145, 149 (3d Cir.1988); Major League Baseball Promotion Corp. v. Colour-Tex, Inc., 729 F.Supp. 1035, 1046 (D.N.J.1990). 9 Factors to be considered in determining whether to pierce the corporate veil include 24 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.' 25 Craig, 843 F.2d at 150 (quoting American Bell, Inc. v. Federation of Telephone Workers, 736 F.2d 879, 886 (3d Cir.1984)). 26 Appellant alleges that defendants failed to maintain formal barriers between the management structures of Foodtown and Twin; failed to maintain formal barriers between Foodtown and Twin for purposes of legal representation; commingled funds and other assets; and failed to observe other corporate formalities. Am. Compl. ¶¶ 79(a), (b), (c), (e). Furthermore, Appellant contends that Foodtown and Twin shared twelve of thirteen common directors and that at all times Twin's Board of Directors was dominated and controlled by the Foodtown-affiliated Directors. Id. ¶¶ 69, 70. Appellant also claims that all of Foodtown's shareholder/members were also members of Twin and that all the corporate defendants were common shareholder/members of Foodtown and Twin. Id. ¶ 71. Appellant also claims that Foodtown and Twin shared the same principal office and registered office. Id. ¶¶ 72, 73. These allegations, accepted as true in consideration of a 12(b)(6) motion, support the first prong of the veil piercing test — that Twin was merely an instrumentality of Foodtown. 27 Appellant, however, must also allege that Foodtown used Twin to perpetrate fraud, to accomplish injustice, or to circumvent the law. 10 Here, Appellant alleges, in subparagraph 79(d), that the Appellees diverted monies destined for withdrawal liability. Appellant's enumeration of Appellees' actions, consisting of diverting funds, fictitious invoices and kickbacks, inject[s] precision and some measure of substantiation into their allegations of fraud, consistent with Rule 9(b). See Naporano Iron & Metal, 79 F.Supp.2d at 511. When viewed in the light most favorable to the Appellant, these allegations can support a claim that Appellees used Twin to perpetrate fraud, to accomplish injustice, or to circumvent the law. Major League Baseball, 729 F.Supp. at 1046.