NetJets Aviation, Inc. v. LHC Communications, LLC

United States Court of Appeals for the Second Circuit · Corporations

Corporationsveil piercingalter egolimited liability companiesaccount statedbreach of contractattorneys' feessingle economic entity

Facts

NetJets leased a fractional aircraft interest to LHC and agreed to manage that interest under two contracts, both of which required LHC to pay amounts due and allowed NetJets to recover attorneys' fees in collection or enforcement actions. After LHC terminated the agreements in 2000, its CFO acknowledged an outstanding balance and asked NetJets to apply LHC's $100,000 deposit, leaving about $340,840 unpaid. Zimmerman was LHC's sole member-owner and, according to the record, controlled all financial decisions, moved money into and out of LHC as needed, used LHC funds for personal expenses, and caused LHC to pay substantial personal obligations and provide personal flight benefits. LHC later ceased operations without paying NetJets.

Issue

Whether NetJets's breach-of-contract claims against LHC were duplicative of its account-stated claims when the contracts allowed recovery of attorneys' fees not available on account stated, and whether the record permitted summary judgment dismissing NetJets's alter-ego breach-of-contract and account-stated claims against Zimmerman. More specifically, the court considered whether there was enough evidence for a factfinder to find that Zimmerman and LHC operated as a single economic entity and that an overall element of injustice or unfairness was present.

Rule

Claims are duplicative only when they arise from the same facts and do not allege distinct damages; where one claim permits recovery of a category of damages, such as contractual attorneys' fees, unavailable on the other, the claims are not duplicative. Under Delaware alter-ego law, a plaintiff need not prove actual fraud or that the entity was created with fraudulent intent, but must show that the owner and entity operated as a single economic entity and that there was an overall element of injustice or unfairness; the injustice must be more than the underlying breach itself. In assessing alter ego, courts consider factors including capitalization, solvency, observance of formalities, siphoning of funds, and whether the entity functioned as a facade for the owner, with somewhat less emphasis on internal formalities for LLCs.

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Blue Mesa Charter Services sued Redwood Signal LLC in federal court in Manhattan over unpaid monthly service invoices. Blue Mesa pleaded both account stated and breach of contract; the written service agreement, governed by New York law, expressly provided that the prevailing party in any enforcement action could recover reasonable attorneys' fees.

If Redwood argues that the contract claim must be dismissed as duplicative because both claims arise from the same unpaid invoices, how should the court rule?

Explanation. The governing rule is that claims are duplicative only if they arise from the same facts and do not allege distinct damages. Here, the contract claim potentially allows recovery of reasonable attorneys' fees under the agreement, while account stated ordinarily allows recovery only of the amount due on the account. Because the contract claim seeks a category of damages unavailable on account stated, it is not duplicative. (Derived from NetJets Aviation, Inc. v. LHC Communications, LLC (n.d.).)