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The Mall at IV Group Properties, LLC v. Roberts

2005 WL 3338369 (U.S. Dist. Ct. D. N.J. 2005)

CORPORATIONS; LIMITED LIABILITY COMPANIES; VEIL PIERCING —Corporate veil piercing principles will be applied to limited liability companies, and provisions in agreements listing only some types of business entities will be applicable to limited liability companies, even if that form of entity is not specifically listed.

A landlord obtained state court judgments against two tenants, one of which was a corporation and the other of which was a limited liability company. It alleged that the individual and beneficial owners of those entities “acted as the alter egos of the judgment debtors.” The landlord sought to “‘pierce the corporate veil’ and assign joint and several liability” to the individuals for the judgment debts. The landlord alleged that the individuals created the corporate and limited liability entity tenants “for the purpose of taking title to the leases at issue ... without assuming any of the related monetary obligations.” Specifically, it alleged that the entities “had little capital or assets, were undercaptialized throughout their existence, and were operating with funds commingled with assets” belonging to the individuals or other businesses conducted by those individuals. Later, the landlord argued that receipts from these tenants and similar entities “were deposited into a central bank account, bills and expenses for all [the businesses] and related activities were paid from a central account, [that the individual owners] funded shortfalls ... with their own personal funds and all of the [businesses] and related entities ... were insured under the same umbrella insurance policy.” Moreover, the landlord pointed out that these particular limited liability entities and similar entities all “shared the same corporate address and phone number, which was also the personal address for” two of the individual owners.

“Piercing the corporate veil is an equitable remedy through which a court may impose liability on an individual or entity normally subject to the limited liability protections of the corporate form. In New Jersey, courts ‘begin with 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.’ ... In New Jersey and most other jurisdictions, there are two overarching elements required to pierce the corporate veil: ‘First, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exists. Second, the circumstances must indicate that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.” In determining whether the first element has been satisfied, “a number of factors must be considered, including: gross undercapitalization, failure to observe corporate formalities, non-payment of dividends, insolvency of the debtor corporation at the time, siphoning of funds of the corporation by the dominant stockholder, non-function 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.” With respect to the second element, “there must be some ‘wrong’ beyond simply a judgment creditor’s inability to collect (otherwise, the corporate veil would be pierced in virtually every case).”

The Court found this to be an interesting case because of the landlord’s contention “that the only thing the [corporation] ever did was execute a lease.” The individual tenants claimed that the corporation “took the critical step of legally assigning that lease to another entity ... a few months later.” The Court looked at the assignment question, and agreed that the assignment was valid, but pointed out that, notwithstanding the assignment, the original corporate tenant remained bound to the lease. Therefore, the Court felt comfortable in making a veil-piercing analysis. This particular action was a motion for summary judgment, and the Court could not and would not decide the validity of the landlord’s contention that its corporate tenant was a “sham” entity based on the record before it. According to the Court, the individuals who owned the business “articulate[d] a plausible explanation why the corporate form was neglected: the lease was assigned shortly after it was executed for commercial reasons.” Further, summary judgment was not appropriate because the landlord had not yet borne “the burden of proving that [the individual owners had] perpetrated fraud or injustice.” The Court pointed out that an analysis of that argument would “undoubtedly address the intent and knowledge of the parties.” For example, it needed to determine whether the landlord was “fully aware of the limited liability and other assets” of its corporate tenant and whether “the lease was undertaken with full disclosure at a time when [the landlord] needed tenants for [its] commercially struggling properties.”

With respect to the tenant that was organized as a limited liability company, the Court thought that this was “somewhat more straightforward case [because the limited liability company] was both the holder of the lease and the operator of the [business].” The Court applied the same veil-piercing analysis to the limited liability company entity as would be applied to corporations. Doing so, it didn’t find the undisputed facts adequate enough “to satisfy the first prong of the veil-piercing analysis. That the [businesses] share[d] a central office, insurance, certain expenses [was] not enough to establish that [the individual owners] were the alter egos of the individuals’ [businesses]. Even a shared account [was] not dispositive, especially if accurate books were kept for each individual [business]. The accounting methods by [the individual owners were] germaine to the veil-piercing analysis, but the Court require[d] additional findings of fact to make its determination.”

The limited liability company’s lease had a no-fault recourse provision which seemed to bar any claims against persons or entities having an interest in the limited liability tenant. The landlord argued that this particular provision, because of its placement in the lease, did not apply to the sections of the lease covering “Change of Ownership,” or “Landlord’s Remedies.” Furthermore, the landlord argued that because the tenant was a “limited liability ‘company’ [it was] not covered by the language of the contractual provision, which appli[ed] [only] to a ‘corporation or partnership or joint venture.’” The Court was “unpersuaded that the location of the contractual language within the [lease] or the absence of the term ‘limited liability’ [were] sufficient to exclude the non-recourse provision.” According to the Court, “[t]he language of the provision [was] plainly intended to limit liability and the scope of the language seem[ed] adequate to cover a limited liability company.”

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