Piercing Corporate Veil Without Establishing Fraudulent Conduct

Fraudulent conduct intersects with and permeates many areas and aspects of the law—even apart from actual causes of action for fraud.  It is easy to understand why courts may be willing to afford victims of fraudulent conduct with legal accommodations given fraud’s evil foundation. All the elements of a legally-cognizable claim for civil fraud may not need to be alleged, for example, to get the benefit of some of the favorable legal treatment that courts apply when fraudulent conduct is involved.

For example, I have explained that while the statute of limitations for a cause of action fraud is rather liberal and can be extended past the base six-year period, the statute of limitations for other civil causes of action can also be extended if fraudulent conduct is involved.  See, e.g., Fraud Breathes New Life Into Otherwise Time-Barred Causes of Action.  In fact, when a cause of action for fraud is not even alleged in the case, allegations of fraud can be used to extend the statute of limitations.  See Breach of Fiduciary Duty Claims Get Six-Year Limitation Period Even Without Separate Cause of Action for Actual Fraud.

When it comes to piercing the corporate veil, fraud can form the basis of expanding liability of persons and entities, but it is not an essential element of the doctrine.  In fact, a recent decision of the New York Appellate Division, First Department, shows that the grounds for piercing the corporate veil can be established without proof of any fraud involved at all.

Piercing Corporate Veil

Basically, the “corporate veil” refers to how doing business through a legal entity, such as a corporation, limited liability company or limited partnership can limit the legal obligations and debts to the entity itself rather than imposed upon its owners or affiliated companies. Courts “pierce” that corporate veil, however, and extend liability to owners or affiliated entities where the formalities of the entity are not followed and the result effectuates some fraud or other unfair wrongdoing to those with whom the entity has dealt.

There are two basic prongs that the courts apply to effectuate the veil piercing: “In order to pierce the corporate veil, a plaintiff must show [1] that the dominant corporation exercised complete domination and control with respect to the transaction attacked, and [2] that such domination was used to commit a fraud or wrong causing injury to the plaintiff (see Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141 [1993]).” Fantazia Intl. Corp. v CPL Furs N.Y., 67 AD3d 511, 512 [1st Dept 2009]).

In a new decision of the First Department in Rich v J.A. Madison, LLC, 2025 NY Slip Op 04818 (1^st Dep’t Decided Aug. 28, 2025), the Court took a rather relaxed view of the second prong—recognizing that no actual fraudulent conduct was required, but simply some form of wrong that had an unfair result.  As the persuasive dissent explained, the majority’s opinion could serve to expand piercing the corporate veil.

Rich Facts

The basic facts of Rich:  Plaintiffs had leased a retail space on Madison Avenue in New York City since 1985. In 2005, defendant J.A. Madison, LLC leased an adjacent store. By 2010, J.A. Madison sought to expand by assuming the plaintiffs’ lease. David Frankel, president of both J.A. Madison and its parent, Jonathan Adler Enterprises, LLC (JAE), along with Jonathan Adler, approached plaintiffs to negotiate the lease assignment. The parties executed an “Agreement and Consent,” an “Assignment and Assumption of Lease,” and a “Consulting Agreement.” The Consulting Agreement required J.A. Madison to pay plaintiffs $8,333.33 per month until it vacated the premises, but no later than March 1, 2021. The payments were not for consulting services but were consideration for the lease assignment. Payments under the Consulting Agreement were made by JAE, not J.A. Madison, until March 2017, when payments were reduced and then ceased entirely by July 2017. Plaintiffs commenced suit in January 2018, alleging breach of contract against J.A. Madison and seeking to hold JAE liable under a veil-piercing theory.

Plaintiffs moved for summary judgment on their breach of contract claim against J.A. Madison; JAE cross-moved for summary judgment to dismiss the claims against it. The Supreme Court granted plaintiffs’ motion and denied JAE’s cross-motion, finding issues of fact regarding JAE’s domination of J.A. Madison. The Appellate Division affirmed, noting evidence of JAE’s payment of J.A. Madison’s debts, lack of a separate bank account for J.A. Madison, overlapping personnel, and shared offices. The case proceeded to a nonjury trial in 2024. The trial court found in favor of plaintiffs, holding JAE liable for J.A. Madison’s breach of the Consulting Agreement and awarding damages. JAE appealed. The Appellate Division, First Department, affirmed the trial court’s decision on August 28, 2025.

So the question on appeal was whether there were sufficient grounds to hold the parent LLC—JAE—liable for the breach of contract entered into solely by the LLC owned by JAE—J.A. Madison.

The First Department affirmed the trial court’s decision to pierce the corporate veil and hold JAE, the parent company, liable for the breach of contract committed by its subsidiary, J.A. Madison. The majority and dissenting opinions diverged sharply on the sufficiency of the evidence supporting veil-piercing and the legal standards applied.

For the required first prong (corporate dominance and lack of separateness) the First Department noted the following factors were relevant:  “‘disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the allegedly dominated corporation; whether dealings between the entities are at arms’ length; whether the corporations are treated as independent profit centers; and the payment or guaranty of the corporation’s debts by the dominating entity. No one factor is dispositive.’” [Citation omitted]

The First Department then found that the following evidence satisfied the first prong:

• Disregard of Corporate Formalities & Intermingling of Funds

• • J.A. Madison never had its own bank account; all revenues were swept daily into JAE’s account.
  • Payments under the Consulting Agreement were made by JAE, not J.A. Madison.
  • Centralized cash management rendered J.A. Madison judgment proof and unable to pay its obligations.
• Overlap in Ownership, Officers, and Personnel
  • David Frankel was both the president and only officer of J.A. Madison and also president of JAE.
  • Corporate offices and address for service of process were shared.
• Lack of Arm’s Length Dealings
  • Negotiations and contract execution were conducted by Frankel as president of JAE, not J.A. Madison.
  • JAE’s controller, not J.A. Madison personnel, handled renegotiations and payments.

The First Department then proceeded to the second prong, correctly recognizing:  “The law does not require that the parent company’s actions be fraudulent, only that it result in a wrong or an inequity.”

The majority did not find any deception or fraud in the formation of the entities, during the negotiations of the agreements with plaintiff or during the performance of the contract.  Rather, the “wrong” was evidenced by JAE’s “stopping payments to plaintiffs under the Consulting Agreement, causing J.A. Madison to become judgment proof, and then by dissolving J.A. Madison after this action had already been commenced, making plaintiffs’ judgment against J.A. Madison nothing more than a pyrrhic victory.”

Dissent

The dissent complained that “the majority focuses on the domination prong and gives short shrift to the equally important fraud prong.”  The dissent also pointed out: “Ostensibly, the only wrong plaintiffs alleged is that JAE, through Frankel, acted improperly when he caused J.A. Madison to stop making the monthly payments, as mandated by the Consulting Agreement, and then dissolved J.A. Madison. Contrary to the majority’s findings, there was nothing fraudulent, malfeasant, or illegal about Frankel’s actions taken on behalf of JAE and J.A. Madison.”

The dissent continued:

Contrary to the majority’s determination, this simple breach of contract does not constitute the type of wrong warranting the piercing of the corporate veil (see e.g. Skanska USA Bldg. Inc. v Atlantic Yards B2 Owner, LLC, 146 AD3d at 12 [“a simple breach of contract, without more, does not constitute a fraud or wrong warranting the piercing of the corporate veil”], quoting Bonacasa Realty Co., LLC v Salvatore, 109 AD3d 946, 947 [1st Dept 2013]; see also New York City Waterfront Dev. Fund II, LLC v Pier A Battery Park Assoc., LLC, 206 AD3d 565, 567 [1st Dept 2022] [The allegation that a corporation caused its subsidiary to breach a contract is insufficient to show the requisite wrongdoing]).

To be sure, the wrongdoing needed to pierce the corporate veil does not necessarily require allegations of actual fraud. However, the Court of Appeals has reiterated that the requirements of piercing the corporate veil are not easy to meet because the party seeking this rare legal remedy “bear[s] a heavy burden of showing that the corporation was dominated as to the transaction attacked and that such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences” (TNS Holdings, 92 NY2d at 339; see also Baby Phat Holding Co., LLC v Kellwood Co., 123 AD3d 405, 407 [1st Dept 2014]). The fact that J.A. Madison may have been judgment proof at the time it was dissolved does not justify holding JAE liable for J.A. Madison’s breach of contract, where there is no evidence of any intentionally deceptive or willfully unjust behavior at issue. The majority’s suggestion that by “stopping payments to plaintiffs under the Consulting Agreement, [JAE] caus[ed] J.A. Madison to become judgment proof” is mere speculation. Again, it is undisputed that what caused the unexpected downfall of J.A. Madison was strictly the failure to generate business.

The dissent had a good point questioning whether simply dissolving an entity that could not sustain its business operations during a litigation should constitute the “wrong” sufficient to support the second prong of piercing a corporate veil.

Commentary

The Rich decision is good authority for those seeking to hold parent or affiliated entities liable for the debts or obligations of subsidiary or other affiliated entities.  Avoiding corporate veil piercing is particularly challenging for the many companies with a single or group ownership that form multiple legal entities to try to limit liabilities of each business venture within the family of companies.  It becomes difficult to limit and separate legal exposure, for example, because the very purpose of using joint management, employees, bank accounts, space or other resources of the overall business is to reduce cost and take advantage of combined resources.

Best Practices for Entity Accounting/Financial Advisers

To minimize the risk of inter-company veil piercing, in-house accounting/financial personnel and advisers must be keenly mindful of the need to maintain certain formalities to the extent possible, such as:

1. Robust Documentation of Inter-Company Transactions

• • Formalize all inter-company transactions (e.g., loans, services, resource sharing) with written agreements that specify terms, pricing, and payment schedules as if the parties were unrelated.
  • Charge market rates for shared services, space, or personnel, and document the basis for those rates.
  • Record all inter-company ledger entries with clear explanations and supporting documentation, showing legitimate business purposes and compliance with transfer pricing rules.

2. Clear Allocation of Costs and Revenues

• • Allocate costs and revenues to the correct entity based on actual usage or benefit, using reasonable and consistent methodologies.
  • Avoid blanket or arbitrary allocations; instead, use time sheets, usage logs, or other objective measures to support allocations.
  • Ensure each entity’s financial statements reflect its true economic activity and obligations.

3. Segregation of Decision-Making Authority

• • Define and document the scope of authority for shared employees. For example, if a CFO serves multiple entities, specify which decisions are made for which company, and keep records of board or management approvals for major actions.
  • Maintain separate minutes and resolutions for each entity’s board or management meetings, even if the same individuals are present.

4. Regular Review and Audit of Inter-Company Arrangements

• • Conduct periodic internal audits to ensure that inter-company transactions are properly documented, priced, and reflected in each entity’s books.
  • Review compliance with corporate formalities and update policies as needed to address any areas of risk identified in audits.

5. Transparency in Centralized Functions

• • If centralized cash management or payroll is used:
    • Document the business rationale (e.g., lender requirements, efficiency).
    • Ensure each entity’s obligations are met independently—for example, by maintaining sub-accounts or ledgers that track each entity’s cash position and liabilities.
    • Avoid using centralized systems to shield assets or render subsidiaries judgment proof; ensure subsidiaries retain sufficient liquidity to meet their obligations.

6. Adequate Capitalization and Solvency

• • Ensure each entity is adequately capitalized for its business activities and contractual obligations.
  • Avoid creating or maintaining subsidiaries that are undercapitalized or unable to pay creditors, especially if entering into significant contracts.

7. Contingency Planning for Dissolution or Insolvency

• • If a subsidiary is to be dissolved, make appropriate reserves for contingent liabilities and document the business reasons for dissolution.
  • Avoid dissolving entities solely to defeat creditor claims, as this was a factor cited by the majority in the Rich decision supporting veil-piercing.