The equitable theory of veil piercing, intended to serve as a rectifying mechanism against certain fraud, dishonesty or wrongdoing, is of particular import in the bankruptcy context given that it is an attractive remedy for a creditor of an insolvent company hoping to obtain a greater recovery on its claim. State law governs veil piercing claims and sets forth the hurdles a party must overcome in order to persuade the bankruptcy court that the debtor’s corporate formalities should be ignored. If a party is able to demonstrate under governing state law that an individual or affiliated entity should be held liable for a company’s debt, the bankruptcy court may permit the piercing of the corporate veil to hold such party liable. Whether or not a judgment creditor could pierce the corporate veil of a judgment debtor was at issue in Burberry Limited and Burberry USA v. RTC Fashion Inc., d/b/a Designers Imports t/a Fashion58.Com and Asher Horowitz (Index No. 110615/14) (N.Y. Sup. Ct. 2014).
Luxury designers face the challenging problem of protecting their trademark and battling makers of counterfeit goods. On May 22, 2007, veterans of the counterfeit war, Burberry Limited and Burberry USA, commenced a federal action for trademark infringement in the United States District Court for the Southern District of New York against Designers Imports, Inc. d/b/a USA, Inc. Designers Imports operates the website, which sold, among other things, counterfeit Burberry merchandise. On July 29, 2010, the district court entered a final judgment in the federal action, permanently enjoining Designers Imports from infringing on any Burberry trademark and awarding Burberry money damages plus costs and attorneys’ fees, totaling $2,592,070.89. Although Burberry prevailed, the final judgment failed to mark the end of the saga between Burberry and the sole owner, officer and shareholder of Designers Imports, Asher Horowitz.
During the federal action, in May 2010, Horowitz entered into an agreement with one of his then-recently formed companies, RTC Fashion Inc. d/b/a Designers Imports t/a, to use Designers Imports’ website address for an annual fee of $500. Subsequently, in June 2010, just one month before the final judgment in the federal action was rendered, RTC Fashion assumed the name Designers Imports. Burberry, believing that RTC Fashion intended to frustrate Burberry’s efforts to collect the $2.5 million judgment against Designers Imports and to ensure that Horowitz maintained continuity in the marketplace, commenced an action in September 2011 in the New York State Supreme Court, Queens County, against both RTC Fashion and Horowitz. In the state court action, Burberry sought to pierce Designers Imports’ corporate veil in order to hold Horowitz personally liable for the judgment entered in the federal action.
Burberry’s claim for piercing the corporate veil was governed by New York state law, and it is well established in New York that piercing the corporate veil generally “requires a showing that the individual defendants (1) exercised complete dominion and control over the corporation, and (2) used such dominion and control to commit a fraud or wrong against the plaintiff which resulted in injury.” Courts in New York have considered the following factors in determining whether the two-part showing has been met and the corporate veil may be pierced: (i) failure to adhere to corporate formalities; (ii) inadequate capitalization; (iii) commingling of assets; and (iv) use of corporate funds for personal use.
The following facts, primarily obtained from Horowitz’s own affidavit and deposition and relied upon by the court, weighed heavily in Burberry’s favor: (1) Horowitz is the sole shareholder, officer and director of both Designers Imports and RTC Fashion; (2) RTC Fashion is almost identical to Horowitz’s initial company name; (3) Designers Imports has no by-laws, no stock transfer ledger, no minutes of its shareholders meetings, and no minutes of its board of directors meetings; (4) Horowitz’s only meetings were with his accountant on a yearly basis for the purpose of preparing his tax returns; (5) Horowitz funds from Designers Imports for his personal use; (6) Horowitz used Designers Imports’ American Express business credit card to buy household and personal items; and (7) Horowitz obtained numerous short-term loans in order to keep an undercapitalized Designers Imports solvent.
In light of the foregoing, the court concluded, as a matter of law, that Horowitz completely dominated and controlled Designers Imports, and abused the corporate form to advance his own personal interests. Further, the court found that Burberry established Horowitz exercised his control to commit a wrong against Burberry by dissolving Designers Imports of its assets and transferring its domain name to RTC Fashion, thus rendering Designers Imports incapable of satisfying the judgment entered in the 2007 federal action. Consequently, the court granted Burberry’s motion for summary judgment and held as a matter of law, “equity will intervene to pierce the corporate veil and permit the imposition of personal liability in order to avoid fraud or injustice.”
In issuing the Burberry decision, the New York Supreme Court for Queens County highlighted the importance of properly structuring closely held businesses. The decision reiterates for both bankruptcy and general practitioners that, although limited circumstances exist under which individual corporate principals may be held personally liable for the debts of a corporation, the corporate form cannot not be used as a shield to avoid liability from committing certain wrongs.