Freeman v. Complex Computing Co.

United States Court of Appeals for the Second Circuit · 1997 · Corporations

CorporationsArbitrationPiercing the corporate veilSuccessor liabilityequitable ownershipalter egoveil piercingnonsignatory arbitration

Facts

C3 entered into a contract with Freeman to sell and license C3's software products, and that agreement included an arbitration clause. Although Glazier was not formally an employee, officer, director, or shareholder of C3, he had extensive control over C3: he was the sole signatory on its bank account, operated through Glazier, Inc. under a consulting agreement covering essentially C3's business, worked from the same apartment as C3, received most of C3's revenues, and held an option to buy all of C3's stock for $2,000. After C3 terminated Freeman, Thomson later bought C3's assets, assumed many C3 obligations, but expressly excluded the Freeman agreement. The district court compelled arbitration as to Glazier based on veil-piercing, denied arbitration as to Thomson, and stayed the Thomson claims pending arbitration.

Issue

May a person who is not a shareholder, officer, director, or employee of a corporation nevertheless be treated as an equitable owner for veil-piercing purposes and compelled to arbitrate as a nonsignatory? If so, is domination and control alone enough, or must the district court also find that the dominator used that control to commit a fraud or other wrong causing injury to the plaintiff?

Rule

Under New York law, veil-piercing requires proof that (1) the owner exercised such control that the corporation became a mere instrumentality of the owner, (2) that control was used to commit a fraud or other wrong, and (3) the fraud or wrong resulted in an unjust loss or injury to the plaintiff. For veil-piercing purposes, a person need not be a formal shareholder if the facts show equitable ownership through such pervasive control that the person in reality treated the corporation's assets as his own and disregarded the corporate form.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In New York City, North Harbor Analytics, Inc. signed a sales-representative agreement with Lena Ortiz that included an arbitration clause. Omar Sayeed never held stock or office in North Harbor, but he alone controlled its bank account, operated its business through his own consulting company from the same office, took most of the company's revenues, and held an option to buy all of its shares for a nominal amount.

If Lena seeks to compel Omar to arbitrate on a veil-piercing theory, which is the best statement of New York law as applied by the court?

Explanation. The majority held that a nonsignatory need not be a formal shareholder, officer, director, or employee to be treated as an equitable owner for veil-piercing purposes. But domination alone is insufficient. New York law also requires that the control be used to commit a fraud or other wrong that causes unjust loss or injury to the plaintiff.