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Kinoian v. Independent Home Inspection Service, Inc.

A-6659-01T3 (N.J. Super. App. Div. 2004) (Unpublished)

CORPORATIONS; SUCCESSOR LIABILITY—Where a corporation’s owner, shortly after the corporation is sued and without any apparent legitimate business purpose, creates a new company to conduct the same business from the same address with the same personnel using the same equipment and phone numbers, the new company may be liable for the obligations of the predecessor company.

Home buyers sued their home inspector for failing to detect the presence of asbestos in the home. After closing, the buyers found asbestos in the heating ducts. The buyers were forced to move out of the house and stayed out for more than a year during remediation. The buyers sued the home inspector, the home inspection service, and an inspection company owned by the same owner. The suit alleged negligence and consumer fraud. The lower court dismissed the buyers’ complaints and the buyers appealed.

The Appellate Division affirmed. With respect to the negligence claim, the Court noted that the New Jersey Supreme Court had previously held that when parties enter into a contract, the failure of one party to comply with the contract (even if negligent), creates a cause of action for breach of contract and not for negligence. One exception to this rule is where there is an injury that directly results from the breach. Consequently, had the buyers been physically injured as a result of the undetected asbestos, they could have brought a negligence suit. However, since they were not injured, but rather were inconvenienced and required to pay remediation costs, those damages were not actionable as negligence. The buyers’ claim against the individual home inspector was that they were unaware that they were dealing with a corporation and that the inspector was an undisclosed agent. The Court rejected that claim, noting that the buyers had made their check payable to the corporation and received an inspection report issued by the corporation. It also ruled that the buyers were fully aware that they were dealing with a corporation.

With respect to the buyers’ consumer fraud claim, the Court noted that the buyers did not show that the inspection service had knowingly concealed, suppressed or omitted the existence of asbestos in the report and were therefore not liable under the Consumer Fraud Act. The buyers’ last claim was against a successor corporation to the inspection service. The Court, in reversing the lower court’s dismissal on this claim, found that the buyers may well have had grounds to pierce the corporate veil of the successor corporation. A corporate veil can be pierced if the related corporation is a mere continuation of the old corporation or was formed to defraud the buyers. The Court noted that shortly after the lawsuit was filed, the new company was formed to conduct home inspection services. Both businesses had the same principal, the same address, the same equipment, and the same phone numbers. It could be inferred that the new company was a mere continuation of the old company. The Court also noted that there was no apparent legitimate business reason for changing the business’ name, with the exception of avoiding the consequences of the lawsuit filed by the buyers. One could infer that the new company was formed so that the inspector could continue his business while protecting his income stream from the buyers if they prevailed in their lawsuit.

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