A. Subject Matter Jurisdiction
Before Defendant ITT Corp. ("ITT") can move to dismiss, it must prove that the Court has subject matter jurisdiction over the Complaint. Defendants allege that this Court has jurisdiction based on diversity.
Plaintiff is a citizen of New York. Defendant ITT is a citizen of Delaware and New York. Hence, it appears initially that complete diversity is lacking in this case. However, Defendant alleges that "fraudulent joinder" has occurred in this case. Fraudulent joinder occurs when a Plaintiff joins a party to destroy complete diversity. See, e.g., Truglia v. KFC Corp., 692 F. Supp. 271, 274-75 (S.D.N.Y. 1988), aff'd, 875 F.2d 308 (2d Cir. 1989); Allied Program. Corp. v. Puritan Ins. Co., 592 F. Supp. 1274, 1276 (S.D.N.Y. 1984); American Mut. Liability Ins. Co. v. Flintkote Co., 565 F. Supp. 843, 845 (S.D.N.Y. 1983); Nosonowitz v. Allegheny Beverage Corp., 463 F. Supp. 162, 163-64 (S.D.N.Y. 1978). If fraudulent joinder is found, and the requirements of jurisdiction are otherwise met, then the case was properly removed and the Court has subject matter jurisdiction.
Defendant not only has the burden of proving that jurisdiction exists, McNutt v. General Motors Acceptance, Corp., 298 U.S. 178, 183, 80 L. Ed. 1135, 56 S. Ct. 780 (1936); Mopaz Diamonds, Inc. v. Institute of London Underwriters, 822 F. Supp. 1053, 1055 (S.D.N.Y. 1993); Isaacs v. Group Health, Inc., 668 F. Supp. 306, 311 (S.D.N.Y. 1987); Crazy Eddie, Inc. v. Cotter, 666 F. Supp. 503, 508 (S.D.N.Y. 1987); Rosenberg v. GWV Travel, Inc., 480 F. Supp. 95, 96 (S.D.N.Y. 1979); Irving Trust Co. v. Century Export & Import, S.A., 464 F. Supp. 1232, 1236 (S.D.N.Y. 1979), but also has the heavy burden of persuasion placed on those who claim fraudulent joinder. Flintkote, 565 F. Supp. at 845; Nosonowitz, 463 F. Supp. at 163; see also Batoff v. State Farm Ins. Co., 977 F.2d 848, 851 (3d Cir. 1992). The Defendant must show fraudulent joinder by clear and convincing evidence. Nosonowitz, 463 F. Supp. at 163 (citing Parks v. New York Times Co., 308 F.2d 474, 478 (5th Cir. 1962), cert. denied, 376 U.S. 949, 11 L. Ed. 2d 969, 84 S. Ct. 964 (1964)). In evaluating the existence of fraudulent joinder, the Court must determine whether the mere possibility exists that plaintiff can establish any cause of action against a defendant; or that there has been outright fraud committed in the plaintiff's pleadings. Fahnestock & Co. v. Castelazo, 741 F. Supp. 72, 74 (S.D.N.Y. 1990); Allied, 592 F. Supp. 1274; see also Batoff, 977 F.2d at 851 (quoting Boyer v. Snap-on Tools Corp., 913 F.2d 108, 111 (3d Cir. 1990) ("where there is no reasonable basis in fact or colorable ground supporting the claim against the joined defendant, or no real intention in good faith to prosecute the action against the defendant or seek joint judgment")).
Since the Defendant herein does not allege any outright fraud by the Plaintiff, the Court turns to the issue of whether it is possible, based on the pleadings, that Plaintiff has a claim against ITT. Truglia, 692 F. Supp. at 275. The Plaintiff has alleged, and, for purposes of the instant motion, the facts must be resolved in its favor,
that ITT entered into an agreement with Plaintiff, fraudulently misrepresented its intentions to employ Plaintiff, and used Plaintiff's information to acquire Ciga stocks. However, Defendant ITT did not negotiate or sign the contract, nor was it a party to the contract. Plaintiff thus attempts to reach ITT by piercing the corporate veil.
Piercing the corporate veil is a state law claim. Under the New York choice of law principles "the law of the state of incorporation determines when the corporate form" will be pierced. Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995) (quoting Fletcher v. Atex, Inc., 861 F. Supp. 242, 244 (S.D.N.Y. 1991) (quoting Kalb Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993))). ITT is incorporated in Delaware. (Compl. P 3.) Hence, Delaware law controls.
Piercing the corporate veil to expose the parent to liability is permitted "where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner." Fletcher, 68 F.3d at 1457 (quoting Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del. Ch. 1992)). As the Court in Fletcher points out, the Delaware Supreme Court has never explicitly adopted a theory of alter ego parent liability for its subsidiaries, but the lower courts and the United States District Court for the District of Delaware have adopted the standard. Fletcher, 68 F.3d at 1457.
Fraud is not required. Id. However, if there is no fraud then the Plaintiff must show (1) that the parent and the subsidiary "operated as a single economic entity" and (2) that an "overall element of injustice or unfairness . . . [is] present." Id. (quoting Harper v. Delaware Valley Broadcasters, Inc., 743 F. Supp. 1076, 1085 (D. Del. 1990), aff'd, 932 F.2d 959 (3d Cir. 1991)). To determine whether a parent and its subsidiary are a "single economic unit" there are several factors to consider, including:
Whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder.