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Source: www.nyfraudclaims.com

Entities are often named as defendants in fraud actions.  Of course, a legal entity, such as a corporation, a limited liability company, or a limited partnership can be held liable for fraud that was perpetrated by those acting on behalf of the entity.  As a new case by the New York Appellate Division, Second Department, rules, those acting on behalf of the entity are also personally liable for the fraudulent acts in which they participate, even if strictly and solely doing so on behalf of the entity and not in any personal capacity — North Shore Architectural Stone, Inc. v American Artisan Constr., Inc., 2017 NY Slip Op 06655 (2d Dep’t Decided on September 27, 2017).

Case Facts

In North Shore, the plaintiff, a corporation that supplies and installs stone for use in residential and commercial buildings, agreed to supply and install limestone for a property owned by the defendant Joseph Vitacco. The plaintiff contracted with the defendant American Artisan Construction, Inc. (whose president was defendant John Cina), to obtain and deliver the limestone from a quarry in Portugal. During the course of the work, Vitacco refused to release a progress payment to the plaintiff, claiming that one of the shipments of limestone had not contained the agreed-upon quantity.

The plaintiff, believing that the purportedly missing limestone had been stolen from the property, ordered and paid Artisan for replacement limestone. The replacement limestone was rejected by Vitacco because it did not match the other limestone. Artisan agreed to pick up the replacement limestone from the plaintiff, repolish it, and return it to the plaintiff. The plaintiff alleged that, instead, the defendants arranged with the property owner (Vitacco) for him to pick up the limestone and bring it to the property, even though he had not paid for the “missing” or replacement limestone. Plaintiff also alleged that it eventually determined that no limestone actually had been stolen from the property, but, rather, that defendant Artisan had failed to ship some of the limestone that had been ordered. According to the plaintiff, defendant Cina (the president) misrepresented to plaintiff that all of the limestone had been delivered, with the intent that the plaintiff would rely upon the misrepresentation and order and pay for replacement limestone.

Fraud Claims

The plaintiff sued and alleged, among other things, fraud against the defendants. The individual defendant Cina moved pursuant to CPLR 3211(a)(7) and 3212 to dismiss on the basis that “at all times [Cina] was acting in his capacity as an officer of [Artisan], and not in his individual capacity.” The lower court granted that motion.  The Second Department reversed on appeal and reinstated the fraud claim against the president of the defendant corporation.

The Second Department explained that a corporate officer cannot be held personally liable for the torts committed by the corporation solely because he or she is an officer of the entity that commits the tort.  However, where the officer is alleged to have participated in the tort, there is personal liability:

“A director or officer of a corporation does not incur personal liability for its torts merely by reason of his [or her] official character” (Greenway Plaza Off. Park-1 v Metro Constr. Servs., 4 AD3d 328, 329 [internal quotation marks omitted]), and thus, cannot be liable for torts “attributable to the corporation if he [or she] did not participate in and was not connected with the acts in any manner” (PDK Labs, Inc. v G.M.G. Trans. W. Corp., 101 AD3d 970, 973 [internal quotation marks omitted]). However, ” [a] corporate officer who participates in the commission of a tort may be held individually liable, regardless of whether the officer acted on behalf of the corporation in the course of official duties and regardless of whether the corporate veil is pierced’” (Rajeev Sindhwani, M.D., PLLC v Coe Bus. Serv., Inc., 52 AD3d 674, 677, quoting American Express Travel Related Servs. Co. v North Atl. Resources, 261 AD2d 310, 311).

The Second Department then pointed out that the court below erred by relying upon the principles applicable to piercing the corporate veil, finding that the lower court “incorrectly directed the dismissal of the causes of action alleging conversion and fraud insofar as asserted against Cina on the ground that there was ‘no basis on which to pierce the corporate veil.’” The Second Department found that “[t]he complaint adequately alleged that Cina … participated in the alleged fraud by knowingly misrepresenting the facts regarding the delivery of the original limestone, with the intent of inducing the plaintiff’s detrimental reliance.”

The Second Department also explained that it did not matter that the president was merely acting on behalf of the corporation and not in any personal capacity: “That Cina’s alleged conduct may have been committed ‘on behalf of the corporation in the course of official duties’ does not prevent liability from being imposed upon him (Rajeev Sindhwani, M.D., PLLC v Coe Bus. Serv., Inc., 52 AD3d at 677; see PDK Labs, Inc. v G.M.G. Trans W. Corp., 101 AD3d at 973; Hamlet at Willow Cr. Dev. Co., LLC v Northeast Land Dev. Corp., 64 AD3d 85, 116; Aguirre v Paul, 54 AD3d 302; Greenway Plaza Off. Park-1 v Metro Constr. Servs., 4 AD3d at 329-330). Accordingly, the defendants were not entitled to dismissal of the causes of action asserted against Cina pursuant to CPLR 3211(a)(7).”

Commentary

Piercing the corporate veil should not be confused with personal liability for torts.  While the traditional veil surrounding legal entities such as corporations, limited liability companies and limited partnerships can protect agents of those entities from contractual liability of the entity, the individuals are liable for any torts in which they participate, such as fraud.