Piercing the corporate veil is a remedy in which a court disregards a corporate form and, typically, holds a parent corporation liable for the debts of a subsidiary. While parent-subsidiary veil piercing is uncommon, it is even less common for courts to laterally pierce the corporate veil of two affiliated or “sister” corporations. In North Mill Equipment Finance, LLC, v. Cinemacar Leasing, Inc., 2020 WL 563486 (N.J. App. Div. Feb. 5, 2020), defendants Cinemacar Leasing and Cinemacar II, two closely-held sister corporations, appealed a judgment finding them jointly and severally liable for damages. The Superior Court of New Jersey, Appellate Division, affirmed the judgment, including the decision to laterally pierce the corporate veil between them.
North Mill Equipment Finance, LLC, (“Plaintiff”) finances commercial vehicle purchases. Defendant Cinemacar II is a used car and truck dealer, while Cinemacar Leasing is a leasing company. Guy Carnazza, president and owner of both defendants, signed a dealer agreement with Plaintiff on behalf of Cinemacar Leasing. Carnazza testified at trial that the dealer agreement should have been signed by Cinemacar II. Regardless, the agreement required at least one of the Cinemacar defendants to perfect the first priority lien for trucks it sold by properly recording leases with the New York Department of Motor Vehicles. After a Cinemacar customer who financed through Plaintiff abandoned a Volvo truck, it was seized by authorities and sold for storage and towing costs. Plaintiff was never notified because the financing agreement was not recorded as the dealer agreement required. Plaintiff successfully held the Cinemacar defendants jointly and severally liable for breach of the contractual obligation to record and perfect Plaintiff’s lien, among other claims. On appeal, Cinemacar Leasing argued that it should not be liable for Cinemacar II’s breach, but the Appellate Division disagreed and affirmed.
Ordinarily, courts recognize the separate identities of corporations and other entities even where they are under common ownership and management. However, New Jersey courts will use the power to pierce the corporate veil “to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate a fraud, to accomplish a crime, or otherwise to evade the law.” Id. at *3.
In the case of closely held entities, North Mill Equipment Finance held that veil piercing “is appropriate where the corporations are closely identified and there is ambiguity about the manner and capacity in which the various corporations and their representatives are acting.” Id. The court cited its previous ruling in Stochastic Decisions, Inc. v. DiDomenico, 236 N.J. Super. 388, 393-94 (N.J. App. Div. 1989), in which it also permitted lateral veil piercing of several closely held corporations where there was a “pervasive commingling of corporate assets and identities.” North Mill Equipment Finance, 2020 WL 563486, at *3.
Citing Stochastic Decisions and a Massachusetts Supreme Court case, My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614 (1968), the court “reiterated the well-established rule that common ownership and management, standing alone, will not give rise to common liability.” North Mill Equipment Finance, 2020 WL 563486, at *4. However, an agency or similar relationship can exist among entities where there is: (1) “pervasive control” by one corporation over another and fraud or injury as a result of the relationship; or (2) “a confused intermingling of activity” among entities engaged in a common enterprise with “substantial disregard” of the separate corporate forms or “serious ambiguity” about the manner and capacity in which the corporations and their representatives are acting. Id. “In such circumstances, in imposing liability upon one or more of a group of closely identified corporations, a court need not consider with nicety which of them ought to be held liable for the act of one corporation for which the plaintiff deserves payment.” Id. (internal quotation marks omitted).
The court held that this standard was met. Plaintiff viewed Cinemacar Leasing and Cinemacar II as the same entity. The companies are closely related, they have similar names, are located in the same building, and share the same owner and president. Carnazza signed the dealer agreement under Cinemacar Leasing, and the another agreement under Cinemacar II. Based on these facts, there existed a “serious ambiguity about the manner and capacity in which the various corporations and their representatives were acting.” Id. Thus, both entities could be held liable for the contract breach.
In the same way New Jersey’s approach to veil-piercing is cautious, Illinois courts employ the remedy only reluctantly. Illinois courts look to whether “(1) there is such a unity of interest and ownership that the separate personalities of the corporations no longer exist and (2) circumstances exist so that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.” Gajda v. Steel Solutions Firm, Inc., 2015 IL App (1st) 142219, at ¶ 23. In determining whether to pierce the corporate veil, Illinois courts consider similar factors to determine if there is a unity of ownership and interest. Just like in New Jersey, it is permitted but infrequent for courts to laterally pierce the corporate veil of two affiliated or “sister” corporations. E.g. Angell v. Santefort Family Holdings LLC, 2020 IL App (3d) 180724.
In light of North Mill Equipment Finance and others like it, closely-held companies and their owners should use caution when conducting business through common enterprises to maintain their distinct identities and avoid ambiguity.