primarily to actions taken at the time of breach, plaintiff has
not demonstrated a causal link between any of the
misrepresentations allegedly made at the time of contracting
and its damages. Cf. Rosen v. Spanierman, supra, 894 F.2d at
34. As defendants point out, any chain of causation was broken
by CBI's 1981 offer of rescission, which at the very least gave
notice to CBS that CBI was a separate entity from CBC, and that
CBI was in financial difficulties. Thus, plaintiff cannot
establish proximate cause in relation to its allegations of
Accordingly, for the reasons discussed above, summary
judgment for defendants is granted on the issue of fraudulent
misrepresentation at the time of contracting.
2. Asset Stripping
Plaintiff alleges asset stripping by CBC designed to make CBI
a "judgment proof shell." Plain. Mem. at 101. It necessarily
follows that proof of a stripping of the assets of the
subsidiary by the parent, motivated by a desire to render the
subsidiary judgment proof, would constitute a "fraud or wrong"
under the Gorrill test. See, e.g., United Rubber, Cork,
Linoleum & Plastic Workers of Am., AFL-CIO v. Great Am. Indus.,
Inc., 479 F. Supp. 216, 238-45 (S.D.N.Y. 1979); P. Blumberg, The
Law of Corporate Groups: Substantive § 19.09.01 (1987).
However, a genuine issue of fact exists as to whether such
asset stripping occurred.
Plaintiff compares financial statements of CBI for the years
1979 through 1982, showing assets in excess of $1 million for
each year, PX 26, 28-31, with financial statements of 1984 and
1985, showing zero assets, PX 24, 25. Plaintiff also cites
deposition testimony of Robert Peck that between 1984 and 1988,
while he was first comptroller and chief financial officer of
Diners, CBI had no assets to his knowledge. PX 7, at 20.
Defendants argue that virtually all of CBI's assets consisted
of intercompany loans from CBC, and that in every year after
1977 CBI had a negative net worth. See Affidavit of Glenn J.
Chang, sworn to on ("Chang Aff."), ¶¶ 4, 6; DX 62. Defendants
calculate CBI's debt to CBC at $3,393,383 in 1987. Chang Aff.
¶¶ 4, 11.
According to defendants, the fact that after 1984 revenues
and expenses were not recorded on CBI's profit and loss
statements, or on the balance sheets, "merely reflects an
accounting decision to stop recording the minor activities and
changes in either assets or liabilities in light of the
moribund state of CBI's business at that time. If anything,
this accounting decision simply recognized that the losses
incurred by CBI's parent would never be recouped and
acknowledged the fact that the parent company's investment in
the subsidiary was a total loss." Chang Aff. ¶ 9.
It is true that, as defendants argue, a parent corporation is
not obliged to continue to infuse cash into a failing
subsidiary. See American Protein, supra, 844 F.2d at 58, 63.
Neither, however, can a parent strip the assets of its
subsidiary with impunity. See, e.g., United Rubber, supra, 479
F. Supp. at 238-45; Data Probe, Inc. v. 575 Computer Servs.,
Inc., 72 Misc.2d 602, 340 N.Y.S.2d 56 (N.Y. City Civ.Ct. 1972).
Resolution of this question requires the sort of weighing of
evidence and evaluation of credibility in which the Court
cannot properly engage on a motion for summary judgment.
Therefore, the motions of both parties for summary judgment on
this issue are denied.
3. Breach of Contract
The arbitrators' finding of a breach of contract by CBI is
preclusive in this litigation, as discussed supra. Assuming a
finding by the trier of fact that CBC did have domination and
control over CBI at the time of breach, a further issue of fact
exists as to whether CBC used its control to cause the breach
The Court rejects defendants' argument that Diners had a
right to cause CBI to breach its contract with CBS to protect
Diners' economic interests. Defendants rely on American
Protein, supra, in which the court held that "when a possible
conflict arises between a director's duty to
honor corporate contractual obligations and simultaneously to
protect the stockholders' best interests . . . directors of
parent companies are released from liability for the contract's
dishonor when it results from an effort to protect
stockholders, absent a malicious motive." 844 F.2d at 63.
However, the Court's holding applied only to a claim of
tortious interference with contract, a claim not raised in this
By contrast, courts have found liability on a veil-piercing
theory when parent companies have caused their subsidiaries to
breach contracts when it was in the interest of the parent.
See Gorrill, supra, 761 F.2d 847; In re F & S Central MFG.
Corp., 70 B.R. 569 (E.D.N.Y. 1987).
C. Third Prong: Proximate Cause
Breach of contract being the basis for the damages awarded by
the arbitrators, this Court has no hesitation in finding that
if plaintiff proves that Diners caused the breach of contract
by CBI, it proximately caused the damages resulting from that
breach. On the other hand, if at trial plaintiff attempts to
establish asset stripping as the second prong of the
Gorrill test, an issue of fact as to proximate cause will be
presented to the jury.
II. Alter Ego
If domination and control by the parent are sufficiently
complete, the parent may be held liable under what is often
known as an "alter ego" theory, without a showing that the
domination was used to commit a wrong. See Berkey v. Third Ave.
Ry., 244 N.Y. 84, 155 N.E. 58 (1926) (Cardozo, J.). However,
under this theory, "[d]ominion must be so complete,
interference so obtrusive, that by the general rules of agency
the parent will be a principal and the subsidiary an agent."
"The corporate veil will be pierced (1) to achieve equity,
even absent fraud, where the officers and employees of a parent
corporation exercise control over the daily operations of a
subsidiary corporation and act as the true prime movers behind
the subsidiary's actions, and/or (2) where a parent corporation
conducts business through a subsidiary which exists solely to
serve the parent." In re Sbarro Holding, Inc., 91 A.D.2d 613,
456 N.Y.S.2d 416, 417 (2d Dep't 1982) (citations omitted).
The second part of this theory has been explicated in the
[W]here a shareholder uses a corporation for the
transaction of the shareholder's personal
business, as distinct from the corporate business,
the courts have held the shareholder liable for
the acts of the corporation in accordance with the
general principles of agency. The determinative
factor is whether `the corporation is a "dummy"
for its individual stockholders who are in reality
carrying on the business in their personal
capacities for purely personal rather than
Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652,
656-57, 389 N.Y.S.2d 327, 331, 357 N.E.2d 983, 987 (1976)
(quoting Walkovszky v. Carlton, 18 N.Y.2d 414, 418, 276
N YS.2d 585, 588, 223 N.E.2d 6, 9 (1966); other citations
omitted) (holding that where separate identities of
corporations were respected and each corporation pursued
separate corporate business, veil should not be pierced).
Several New York cases have pierced the veil upon a finding
that a single business "is actually carried on by a larger
corporate entity composed of many corporations which, under
general principles of agency, would be liable to each other's
creditors in contract and in tort." Walkovszky v. Carlton, 18
N Y2d 414, 276 N.Y.S.2d 585, 223 N.E.2d 6 (1966); see also
Worldwide Carriers, Ltd. v. Aris Steamship Co., 301 F. Supp. 64
(S.D.N.Y. 1968); In re Sbarro Holding, Inc., 111 Misc.2d 910,
445 N.Y.S.2d 911, aff'd, 91 A.D.2d 613, 456 N.Y.S.2d 416
(1982). Plaintiff attempts to argue this as a separate theory,
but as the language quoted above indicates, it represents
little more than one of the many formulations of the "alter
ego" theory, and it requires no separate analysis, particularly
since plaintiff relies on identical facts in support of both
The evidence before the Court demonstrates that genuine
issues of fact exist as
to the extent of CBC's control over the actions of CBI at the
time of the breach of contract. CBS concedes that at the time
of contracting, CBI was not a shell. Plain. Mem. at 18. A trier
of fact could reasonably conclude either that CBI had at all
times a separate identity and business purpose from that of CBC
and Diners, and that Diners merely accommodated its subsidiary
or, as CBI's largest creditor, properly protected its own
interests by assisting its subsidiary; or that at the time of
breach CBC management controlled the activities and finances of
its subsidiary and improperly directed them for Diners'
purposes. Therefore, the motions of both parties for summary
judgment on this issue must be denied.
New York courts have held that "when . . . the facts are not
disputed, the question of agency should be resolved by the
court." Plymouth Rock Fuel Corp. v. Leucadia, Inc., 100 A.D.2d 842,
474 N.Y.S.2d 79, 81 (2d Dep't 1984) (citing Hedeman v.
Fairbanks, Morse & Co., 286 N.Y. 240, 248, 36 N.E.2d 129
Plaintiff raises agency arguments separate from its alter ego
theory, based on the events surrounding the formation of the
contract rather than the breach. Plaintiff asserts theories of
actual and apparent authority, as well as ratification, to
argue that Diners is directly liable on the contract.
I. Actual Authority
Actual authority arises from a manifestation of consent from
principal to agent. See, e.g., Itel Containers, supra, 909 F.2d
at 702-03; Empire Communications Consultants, Inc. v. Pay TV,
126 A.D.2d 598, 510 N.Y.S.2d 893 (2d Dep't), appeal dismissed,
69 N.Y.2d 1037, 517 N.Y.S.2d 1030, 511 N.E.2d 89 (1987);
Kingston Dry Dock Co. v. Lake Champlain Transp. Co.,
31 F.2d 265 (2d Cir. 1929). Such consent can be either express or
implied from "the parties' words and conduct as construed in
light of the surrounding circumstances." Riverside Research
Inst. v. KMGA, Inc., 108 A.D.2d 365, 489 N.Y.S.2d 220, 223 (1st
Dep't 1985), aff'd, 68 N.Y.2d 689, 506 N.Y.S.2d 302,
497 N.E.2d 669 (1986). If actual authority exists, a disclosed
principal may be liable on a contract in which it is not a
named party, provided that the contract is made by an agent
acting within its authority, in the proper form, and with the
understanding that the principal is a party. Restatement
(Second) of Agency §§ 144, 147, 149 (1958). Plaintiff contends
that CBC is liable as a disclosed principal to the Agreement.
Plaintiff bases much of its argument that an agency-principal
relationship existed on language contained in the Agreement
itself. The Franchise Agreement included the following
STATEMENT OF PURPOSE
(1) Carte Blanche Corporation ("Carte Blanche")
owns and operates a general purpose credit card
business . . . and either by itself or pursuant to
agreements through others issues credit cards. . .
. (2) The name Carte Blanche is a registered
service mark of Carte Blanche. . . .
(4) By agreement with Carte Blanche, CBI is the
duly authorized contracting corporate entity to
make available for use by franchisees the service
mark CARTE BLANCHE. . . . Pursuant to its
agreement with Carte Blanche, CBI will exercise
quality control over Franchisee on behalf of Carte
(6) CBI is willing, on behalf of Carte Blanche, to
grant such a license to Franchisee upon the terms
and conditions set forth in this Agreement.
2.01(a) CBI on behalf of Carte Blanche hereby
grants Franchisee an exclusive license for the
term of this Agreement, to use the service marks
and names owned by Carte Blanche . . . and the
rights to operate and conduct such business
only in accordance with the Carte Blanche System,
and CBI "Operational Rules". . . .
Agreement at 4-5, 8.