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By: Thomas H. Welby Gregory J. Spaun Published: February 2020

Court Finds Personal Liability Against Contractor's Principal Based on Independent Fraud

In many situations, the utility of commencing a lawsuit against a business entity such as a corporation or a limited liability company is questionable—particularly where the target of the lawsuit has numerous other claims and lawsuits against it. The chief concern is whether the defendant is adequately capitalized to satisfy the claims of its creditors; i.e.: whether a resulting judgment will actually be collectible. Accordingly, many plaintiffs also name corporate principals in an attempt to reach through the corporation and into another pocket from which to collect. The burden in piercing a corporate veil is high because the whole purpose of a business entity is to shield its principals from individual liability. However, an appellate court, in the recent case of Belle Lighting, LLC v Artisan Construction Partners, LLC, reminds us that there are other ways that corporate principals can be reached personally, even without having to pierce the corporate veil.

Background

In 2016, Belle Lighting entered into a contract with Artisan Construction Partners for Belle to provide lighting and electrical supplies to Artisan in connection with several construction projects, including one located at 1411 Broadway in Manhattan. Belle provided the required materials, but was never paid by Artisan. After Artisan ceased operations, Belle discovered that Artisan’s principal, James Galvin, had forged lien waivers from Artisan’s subcontractors and suppliers, including Belle, in order to get paid by the project’s owner. Based on that, Belle not only sued Artisan on the breach of contract claim, but also sued Galvin, personally, to pierce the corporate veil and hold him liable for Artisan’s obligations, and also for the fraud based on the forgery. Galvin was ultimately convicted and sentenced to 1½ to 4½ years in prison for the forgery. Unfortunately, the forging of lien waivers and other documents is not unheard of in our industry.

After discovery, Belle moved for summary judgment on its complaint, including its claim to pierce the corporate veil. Artisan and Galvin opposed, simply claiming that there were questions of fact which needed to be sorted out by a jury.

Decision

The trial court granted Belle’s motion from the bench and, on appeal, an appellate court affirmed. In affirming the grant of summary judgment to Belle, the appellate court noted that although Belle failed to satisfy the requirements to pierce Artisan’s corporate veil, Galvin could nonetheless be held liable to Belle based on his commission of a tort (here, the fraud of forgery), even though his participation in the fraud was for the corporation’s benefit. Accordingly, judgment was entered against both the insolvent corporation and its principal.

Comment

While the appellate court once again referenced the high burden required to pierce a corporate veil—here, even the act of forgery and a resulting criminal conviction was not sufficient—it is important to remember that there is more than one way to skin a proverbial cat. One must look to the specific behavior of the corporate principal to determine whether that behavior is merely the action of a businessperson (even a bad one), or whether it rises to the level of independently tortious conduct. If the latter is the case, then one can sue the principal on the tort and need not go through the rigorous exercise of attempting to hold him or her liable on the pierced-through contract claim. 

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