By: Alexander A. Miuccio Published: March 2017

Contractor Rejects Supplier's Motion to Dismiss Contractor's Fraud Claim

Claims for fraud often involve intentional false statements.  Generally, a party who suffers money damages as a result of fraud may seek a recovery in court.  In the case of North Shore Stone Architectural Stone, Inc. v. American Artisan Constr., Inc., a contractor sued its supplier of stone, claiming that he relied upon an intentionally false misrepresentation by the supplier, resulting in financial injury to the contractor.  The supplier’s president was also sued personally for his fraudulent misrepresentation.

Background

North Shore is an installer of stone in residential, commercial and industrial buildings. In April of 2013, North Shore entered into an agreement with American Artisan, a stone wholesaler, to supply a specific and unique type of limestone, which was to be installed at certain property owned by Joseph Vitacco. The agreement was subsequently amended in January of 2014 to account for three additional shipments of limestone, some of which had to be colored and polished due to the owner’s rejection of earlier deliveries as nonconforming. Following the installation of half of the limestone, the property owner refused to release any funds, claiming that some of the limestone was missing, or had been stolen from the property. North Shore reordered the limestone, but Artisan subsequently refused to abide by the price schedule and charged North Shore thousands of dollars more for the replacement stone. Thereafter, North Shore discovered that the missing limestone had not been stolen, but that some of the stone had never been shipped by Artisan.

North Shore sued Artisan for breach of contract.  It also sued Artisan and John Cina, its principal, for conversion, claiming that North Shore was the rightful owner of the stone and that Artisan and Cina interfered with North Shore’s rights to the stone.  The lawsuit also included a claim for fraud against Artisan and Cina, personally. North Shore claimed that Artisan has refused to refund the amount that North Shore paid for the replacement stone. According to North Shore, the property owner and Artisan colluded to make North Shore pay for the extra limestone, which was needed and used by the property owner.

Cina moved to dismiss the conversion and fraud claims brought against him personally, arguing that at all times he acted in his capacity as Artisan’s president, that he did not personally benefit from the fraud, and that North Shore had no factual basis to pierce Artisan’s corporate veil and hold him personally liable. Similarly, Artisan moved to dismiss the fraud claim against it, arguing that the factual allegations to support the fraud claim were duplicative of the allegations contained in the breach of contract claim and, therefore, the allegations are insufficient to support the independent fraud action.

Decision

The court dismissed North Shore’s conversion and fraud claims against Cina, but not the claims against Artisan.  The court followed long settled case law which holds that before a plaintiff can seek to hold a corporate defendant’s officer personally liable it must allege facts that indicate that the shareholder exercised complete domination and control over the corporation and abused the privilege of doing business in the corporate form to perpetuate a wrong or injustice.  Among the factors to be considered in making this determination are (1) the failure to adhere to corporate formalities, (2) inadequate capitalization, (3) the commingling of assets, and (4) the personal use of corporate funds. The court found that North Shore’s allegations were insufficient to pierce the corporate veil and hold Cina personally liable.

As for the fraud claim against Artisan, the court found that North Shore sufficiently pleaded a fraud cause of action, notwithstanding the fact that some of the factual allegations also supported a cause of action for breach of contract.  North Shore’s complaint satisfied the elements of a fraud claim by asserting that (1) Artisan falsely represented that some of the stones were missing; (2) that North Shore intended to and justifiably relied on the misrepresentations when re-ordering and paying for the “missing stone” and the representation caused damages to North Shore by paying an inflated amount for the replacement stone.   

Comment

North Shore filed an appeal from the lower court’s dismissal of the claims against Cina personally. It’s primary appellate argument will be that the lower court erred in dismissing the claims against Cina because North Shore failed to plead the facts needed to pierce the corporate veil.  According to case law cited by North Shore, however, a corporate officer who participates in a wrongful or fraudulent act on behalf of the corporation, is personally liable, regardless of whether the corporate veil must be pierced.  Consequently, North Shore argues that it does not have to make an allegation that the corporate veil must be pierced to hold Cina personally liable.  North Shore’s appeal is expected to be heard by the appellate court during the Spring Term.

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