United States District Court, S.D. New York
January 16, 2004.
FAVOUR MIND LIMITED, Plaintiff, -against- PACIFIC SHORES, INC., ALPINE APPAREL GROUP D/B/A CAMERON ROBERTS, LTD., and ROBERT CZWARTACKY, Defendants
The opinion of the court was delivered by: GEORGE DANIELS, District Judge
MEMORANDUM OPINION AND ORDER
This is an action by Plaintiff, Favour Mind Limited ("FML"), a Hong
Kong corporation which manufactures, exports, and distributes garments,
against Pacific Shores, Inc. ("Pacific Shores"), Alpine Apparel Group
d/b/a Cameron Roberts, Ltd. ("Alpine Apparel"), and Defendant Robert
Czwartacky ("Czwartacky").*fn1 Plaintiff seeks $216,408.06 in unpaid
invoices for garments that it manufactured, asserting breach of
contract, fraud, and unjust enrichment. Plaintiff also seeks a
declaratory judgment allowing it to pierce the corporate veil of Pacific
Shores and Alpine Apparel to hold Defendant Czwartacky personally liable
for the outstanding debt. On May 7, 1999 Plaintiff was granted default
judgments against Pacific Shores and Alpine Apparel with respect to the
breach of contract claim for $216,408.06, on the basis that neither
answered Plaintiffs complaint.
On May 26, 2000 Plaintiff voluntarily discontinued with prejudice its
claims against Defendant Czwartacky for breach of contract, fraud, and
unjust enrichment. Presently before this
Court is Defendant Czwartacky's Rule 56 motion for summary judgment
of Plaintiff's remaining cause of action seeking a declaratory judgment
allowing Plaintiff to pierce the corporate veil to hold Defendant
Czwartacky liable for the debts of Pacific Shores and Alpine Apparel.
Fed.R.Civ.P. 56. For the following reasons, Defendant Czwartacky's
motion for summary judgment is hereby GRANTED.
Pacific Shores was incorporated in New York in May 1988. The company
consisted of Defendant Czwartacky, the President, and Steve Kent
("Kent"), the Vice-President and Secretary. Kent's son may also have been
listed as an officer, though he was never actively involved in the
operation of the business. Defendant Czwartacky and Kent were the
company's sole directors and 50% shareholders, and Pat Roberts
("Roberts") participated in designs. Pacific Shores also employed
temporary help which it compensated via a temporary service. Defendant
Czwartacky managed Pacific Shores' day-to-day operations. Defendant's
Memorandum, 3. Defendant Czwartacky invested $50,000 to start up Pacific
Shores and Kent invested S100,000. Both later invested $15,000 and
Defendant Czwartacky subsequently invested S5,000 or $10,000 on several
In or about mid-1991, Pacific Shores ordered sample garments from
Plaintiff. The samples were billed to Pacific Shores on open credit
terms. After Pacific Shores approved the sample order, it ordered
production goods. Plaintiff required Pacific Shores to obtain a letter of
credit to pay for the production goods, or else wire transfer funds
before shipment. The production goods were paid for by letters of credit
issued by Pacific Shores' factor, Finova
Capital Corporation ("Finova"). Plaintiff subsequently invoiced and
expected payment from Pacific Shores. As Plaintiff became Pacific Shores'
sole overseas supplier, Pacific Shores gradually became slow in paying
for samples. In December 1993, Pacific Shores asked Plaintiff to allow it
to pay two-thirds of the invoices of production goods by letter of credit
and one-third by wire transfers some time after shipment. Plaintiff
agreed to this request to help Pacific Shores expand its business and
enable it to pay the outstanding sample charges faster, so that Plaintiff
might receive more business from Pacific Shores. Deposition of Daisy
One of Plaintiff's affiliates was a Hong Kong company named Wai Tai
Piece Goods ("Wai Tai"), wholly-owned by Wai Tai Enterprises Limited
("Wai Tai Enterprises"). Wai Tai and Wai Tai Enterprises shared the same
office space as Plaintiff Wai Tai Enterprises and Plaintiff also had the
same officers and shareholders. Deposition of Tommy Ho, 12-13. Wai Tai
Enterprises obtained Dun & Bradstreet's March 6, 1991 credit report
("Report") on Pacific Shores. The Report showed, among other things, that
Pacific Shores had three employees, that it lost $30,365 in 1989 on gross
sales of $866,294, that it lost $31,325 in retained earnings, that its
initial capital investment was S10,000, and that Dun & Bradstreet
ascribed it a Financial Appraisal Ranking of "3." Wai Tai Enterprises
shared the Report's information with Plaintiff. Id., at 26.
Throughout 1994, Plaintiff continued to sell goods to Pacific Shores,
while constantly pursuing Pacific Shores for payment. By December 6,
1994, Plaintiff threatened to cut off Pacific Shores' credit because of
slow payment. By April 1995, due to Pacific Shores' slow payments,
Plaintiff rescinded its agreement to allow Pacific Shores to wire
transfer one-third of the invoiced value after shipment. It instead
reverted to the original requirement that Pacific
Shores provide a letter of credit for the full amount of the invoice
before shipment. Plaintiff also insisted upon payment of the past due
amount before it would ship any further goods. Deposition of Daisy Chan,
106. Plaintiff continued to ship samples to Pacific Shores on credit to
help keep it in business. Id., 93.
By April 25, 1995, Pacific Shores had become Plaintiff's largest
account debtor, owing Plaintiff over $200,000. On May 24, 1995, Pacific
Shores notified Plaintiff that because of quality defects in goods that
Plaintiff supplied, it was operating at a loss. On June 1, 1995 Defendant
Czwartacky wrote to Plaintiff on Cameron & Roberts stationery that "I
[have] become cash poor." Defendant's Exhibit N.
In May 1995, Defendant Czwartacky incorporated Cameron & Roberts
under New York law. He was the President, sole shareholder, and managing
director. There is no evidence that Defendant invested any money other
than the payment of the incorporation fee. Cameron & Roberts licensed
its name to Alpine Apparel, an unrelated New York corporation of which
Defendant Czwartacky was never a shareholder, officer, or employee. Under
the terms of the License Agreement, Alpine Apparel would pay a 6% royalty
to Cameron & Roberts.
On September 5, 1995 Pacific Shores advised Plaintiff that Finova would
no longer amend its letter of credit for payments to Plaintiff. As
Pacific Shores would therefore be unable to purchase goods, it advised
Plaintiff the next day that it was going out of business. On September
25, Pacific Shores informed Plaintiff that it lost $6,118 over the
eight-month period ending August 31, 1995. Defendant's Memorandum, 8.
Pacific Shores advised Plaintiff that Alpine Apparel would open a
letter of credit for the purchase of additional goods. In fact. Defendant
Czwartacky named Cameron & Roberts as the
corporation that would assume Pacific Shores' debt to Plaintiff.
Plaintiff's Exhibit 1, 59. On January 25, 1996, Alpine Apparel opened a
letter of credit to Plaintiff. Plaintiff thereafter made two shipments of
goods to Alpine Apparel amounting to $122,261.25, which were paid for by
letter of credit. Czwartacky Aff., ¶ 12.
In March 1996, Pacific Shores and Cameron & Roberts went out of
business, though Pacific Shores was never formally dissolved. At that
time, Alpine Apparel owed Plaintiff $3,486.50 for samples and Pacific
Shores owed Plaintiff $100,000 to $200,000. all or most of which were for
samples. Defendant Czwartacky took $700 from Cameron & Roberts' bank
account because "it was my money that I put in there in the first place."
Plaintiffs Exhibit 1. 54. Defendant also withdrew $200 to $300 from
Pacific Shores' bank account.
Defendant Czwartacky has not produced any stock certificates, record
books, minutes of shareholders, officers, and/or directors meetings, or
financial records except tax returns for Pacific Shores and Cameron &
Roberts. He claims that minutes of Pacific Shores' directors meetings
were not kept after the initial meetings. He also explains that Pacific
Shores' final tax return for 1996 showed its address as his own home
address in South Carolina because, by the time of filing taxes, Pacific
Shores was out of business and had no offices.
Summary judgment is proper "if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if
any, show that there is no genuine issue of material fact and that the
moving party is entitled to judgment as a matter of law." Fed.R.Civ.P.
56(c); Nebraska v. Wyoming, 507 U.S. 584,590, 113 Sect. 1689, 1694
(1993). A dispute
regarding a material fact is genuine if a verdict at trial could
reasonably be returned for the non-moving party. See Weinstock v.
Columbia University, 224 F.3d 33, 41 (2d Cir. 2000). The burden of
demonstrating that no factual dispute exists is on the moving party.
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party
has met this burden, the nonmoving party "must set forth specific facts
showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e).
`The non-moving party may not rely on conclusory allegations or
unsubstantiated speculation." Scotto v. Alemas, 143 F.3d 105, 114 (2d
Cir. 1998). In deciding a motion for summary judgment, a court must
resolve all ambiguities and draw all reasonable inferences in favor of
the party opposing the motion. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.3d.2d 202 (1986). Summary
judgment should be granted only when no reasonable trier of fact could
find in favor of the nonmoving party. Gallo v. Prudential Residential
Services, Ltd., 22 F.3d 1219, 1224 (2d Cir. 1994). The burden in
demonstrating that summary judgment should be granted is significant in
that summary judgment is a "drastic devise, since its prophylactic
function, when exercised, cuts off a party's right to present his case to
the jury." Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc.,
182 F.3d 157, 160 (2d Cir. 1999), quoting Eastway Construction Corp. v.
City of New York, 762 F.2d 243, 249 (2d Cir. 1985).
Defendant Czwartacky argues that he is entitled to summary judgment
dismissing Plaintiff's cause of action seeking a declaratory judgment
piercing the corporate veil to hold him liable for the debts of Pacific
Shores and Alpine Apparel. Defendant Czwartacky argues that Plaintiff
cannot show that he committed a fraud or wrong against Plaintiff, this
being a required showing in order to pierce the corporate veil.
New York courts disregard the corporate form where it is necessary to
do so in order "to prevent fraud or to achieve equity." Walkovsky v.
Carlton, 276 N.Y.S.2d 585, 587 (1966) (quoting International Aircraft
Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292, 79 N.E.2d 249,
252 (1948)). Under New York law, a company's corporate form may be
disregarded and the corporate veil may be pierced where the party seeking
to do so makes a two-part showing: "(i) that the owner exercised complete
domination over the corporation with respect to the transaction at
issue; and (ii) that such domination was used to commit a fraud or wrong
that injured the party seeking to pierce the veil." American Fuel
Corporation v. Utah Energy Development Company, Inc., 122 F.3d 130, 134
(2d Cir. 1997) (citing Morris v. New York State Dep't of Taxation &
Fin., 623 N.E.2d 1157, 1160-61 (1993)); See also MAG Portfolio Consult,
GMBH v. Merlin Biomed Group. LLC, et al., 268 F.3d 58, 63 (2d Cir.
2001). An employee/shareholder who uses his control of the corporation to
further his own personal business rather than that of the corporation may
be held liable for the corporation's acts. Id. For example, an employee
may be deemed liable where he exercises complete domination and control
over the corporation. Austin Powder Co. v. McCullough, 216 A.D.2d 825,
826, 628 N.Y.S.2d 855 (1995).
While control or complete domination of the corporation is an essential
factor in determining whether to pierce the corporate veil, it is not
enough to only show such domination, standing alone-there must also be
"some showing of a wrongful or unjust act toward [the party seeking
piercing]." Id., (citing Morris, at 161). Further, the test for piercing
the corporate veil is not disjunctive in that piercing the corporate veil
does not depend upon a showing of either domination or a fraud or wrong.
Id. The test is instead conjunctive-in order to pierce the
corporate veil, a showing of both domination and fraud or wrong is
required. Id., (citing Morris, at 1160-61).
In determining corporate domination, a court may consider several
(1) whether corporate formalities are observed, (2)
whether the capitalization is adequate, (3) whether
funds are put in and taken out of the corporation for
personal rather than corporate purposes, (4) whether
there is overlap in ownership, officers, directors,
and personnel, (5) whether the corporate entities
share common office space, address and telephone
numbers, (6) the amount of business discretion
displayed by the allegedly dominated corporation, (7)
whether the alleged dominator deals with the dominated
corporation at arms length, (8) whether the
corporation is treated as an independent profit
center, (9) whether others pay or guarantee debts of
the dominated corporation, and (10) whether the
corporation in question had property that was used by
the alleged dominator as if it were the dominator's
William Passalaqua Builders, et al. v. Resnick Developers South, Inc., et
al., 933 F.2d 131
, 139 (2d Cir. 1990); See also American Fuel
Corporation, 122 F.3d at 134.
Plaintiff contends that Defendant Czwartacky is personally liable for
Pacific Shores' and Alpine Apparel's corporate debt because Defendant
Czwartacky as shareholder used the corporation for his own personal
business and exercised complete domination. A defendant may be held
liable only where he has used the corporation "to perpetrate a fraud or
ha[s] so dominated and disregarded [the corporation's] corporate form
that [the corporation] primarily transacted [his] personal business
rather than its own corporate business." Kirno Hill Corp. v. Holt,
618 F.2d 982, 985 (2nd Cir. 1980). However, the Second Circuit has denied
personal liability for the shareholder even where the corporation is
thinly capitalized, kept no separate books or files, and had no offices
distinct from the shareholder's other corporations. Garter v. Snyder,
607 F.2d 582 (2nd Cir. 1979). The Garter court also refused to render
dispositive the fact that the corporation
paid some of the shareholder's personal expenses, noting that the payment
was petty. Id. at 587. More was needed to evince control. The corporate
form could be disregarded only where a corporation's "separate identity
[is] so disregarded, that it primarily transacted the dominator's
business rather than its own and can be called the other's alter ego."
Id., at 586.
With respect to Pacific Shores, there is no evidence that corporate
formalities were generally observed as no meetings or records have been
produced. Pacific Shores did not appear to display much business
discretion independent of Defendant Czwartacky's will. With regard to the
exchange of personal and corporate funds, although Plaintiffs employee
concluded that Pacific Shores' payments came from Defendant Czwartacky
personally, this employee's testimony does not evince an appreciation of
the difference between Defendant Czwartacky's payments in his personal
capacity and those that he made as "the boss" of Pacific Shores.
Deposition of Daisy Chan. Also, as in Garter, supra, the $200 to $300
that Defendant used for personal or showroom expenses was petty. Though
Pacific Shores' initial capital investment was only $10,000, at least
$170,000 was additionally invested. Also, Pacific Shores existed as a
profit center independent of Defendant Czwartacky, and Finova issued
Pacific Shores' letters of credit. There is no evidence that Defendant
Czwartacky used Pacific Shores' property as his own personal property.
The Second Circuit in American Fuel Corporation, supra, found that the
defendant shareholder did not dominate the subject corporation because he
was only a 50% owner, the other shareholder was active in the business,
and the defendant had not taken corporate funds for his own use. It did
so despite the fact that the corporation had no contracts, no employees,
no independent office space, it used the defendant shareholder's home
address on the corporation
letterhead, it had no separate bank account, capital, or assets at
the time of trial, and the shareholder had personally paid corporate
expenses and kept no records of the expenditures.
Defendant Czwartacky does not substantially address the issue of his
alleged domination or control of Pacific Shores or Alpine Apparel beyond
denying such allegations of domination or control. Defendant's
Memorandum, 14. Defendant Czwartacky instead focuses on the second prong
of the test for piercing the corporate veil, arguing that Plaintiff
cannot show that he committed any fraud or wrong, and that therefore, his
motion for summary judgment should be granted.
The second part of the piercing inquiry concerns whether domination was
used to commit a wrongful, fraudulent, or unjust act towards the
Plaintiff. In the present case, it cannot be shown that Defendant
Czwartacky committed any such fraud or wrong against Plaintiff Therefore,
Plaintiff has not satisfied the required showing in order to pierce the
Since early in Plaintiff's relationship with Pacific Shores, Plaintiff
perceived signs of and was informed of the credit risks that Pacific
Shores posed. As early as the start of the parties' relationship,
Plaintiff was significantly aware of the corporate structure and
financial condition of the entity with which it sought to do business.
The Dun & Bradstreet's March 6, 1991 credit report on Pacific Shores
showed that Pacific Shores had three employees, that it lost 530,365 in
1989 on gross sales of S866,294, that it lost S31,325 in retained
earnings, that its initial capital investment was $10,000, and that it
earned a Financial Appraisal Ranking of "3." Plaintiff knew of these
risks. Nonetheless, just two-and-a-half years into Plaintiff's
relationship with Pacific
Shores, even after Pacific Shores was slow in making payments to
Plaintiff, Plaintiff agreed to accept only one-third of Pacific Shores'
production goods payment via wire transfer and two-thirds by letter of
Further, throughout 1994, Plaintiff continued to sell goods to Pacific
Shores even though Plaintiff had to "chase" after Pacific Shores for
payment of these goods and at times, was worried about being paid.
Deposition of Daisy Chan. By April 25, 1995, Pacific Shores had
become-Plaintiffs largest account debtor, owing Plaintiff in excess of
$200,000. Plaintiff continued to sell to Pacific Shores on open credit
terms. Id. On May 24, 1995, Pacific Shores informed Plaintiff that it was
operating at a loss due to quality defects in the goods. Defendant's
Exhibit L. On June 1, 1995, Pacific Shores informed Plaintiff of its
deteriorating financial condition due to returns of defective
merchandise. Defendant's Exhibit N. On September 5, 1995 Pacific Shores
advised Plaintiff that Finova would no longer amend its letter of credit
for payments to Plaintiff. Defendant's Exhibit 0. As Pacific Shores would
therefore be unable to purchase goods, it advised Plaintiff the next day
that it was going out of business. Czwartacky Aff. ¶ 10. On September
25, 1995, this time enclosing a copy of Pacific Shores' Profit and Loss
Statement for the eight month period ending on August 31, 1995, showing a
loss of $6,118, Pacific Shores again apprised Plaintiff of its financial
situation. Defendant's Exhibit R.
Pacific Shores then advised Plaintiff that Alpine Apparel would open a
letter of credit for the purchase of additional goods. Defendant's
Exhibit I. Alpine Apparel was a company that had licensed the name of
Cameron & Roberts, Ltd, which Defendant Czwartacky had incorporated
in May 1995 and of which he was the President and sole shareholder.
Despite previous warning signs. Plaintiff thereafter agreed to do
business with Alpine Apparel. Deposition of Daisy Chan.
On January 25, 1996, Alpine Apparel opened a letter of credit to
Plaintiff. Czwartacky Aff. ¶ 12. Plaintiff thereafter made two
shipments of goods to Alpine Apparel amounting to $122,261.25, which were
paid for by letter of credit. Id.
Where a party is aware of the risks of dealing with a corporation, that
party has assumed the risk of such dealings. In Brunswick Corp. v.
Waxman, 599 F.2d 34 (2nd Cir. 1979), for example, the Second Circuit
held that Plaintiff was precluded from piercing the corporate veil of the
defendant's shell corporation because it had
knowingly entered into the conditional sales contracts
. . . with a no-asset corporation which was created
for the sole purpose of taking title to the equipment
which Brunswick sold. Brunswick knew or should be
charged with the knowledge that the Waxmans wished to
avoid personal liability and that the sole obligor on
the sales contract was to be the corporate dummy
created for that purpose.
In the present case, Plaintiff knew of Pacific Shores' poor 1991 Dun
& Bradstreet ranking, its losses, and its 510,000 initial capital
investment. Plaintiffs decision to do business with Pacific Shores in
light of this knowledge indicates an informed decision. After Plaintiff
was alerted to signs that Pacific Shores needed help in paying its bills,
Plaintiffs unabated business with Pacific Shores indicates a ratification
of its previous decision and evinces a deeper appreciation of the risks
involved. Plaintiffs decision to accept one-third of the payment for
production goods after shipment most notably evidences Plaintiffs assumed
There is no evidence that Plaintiff ever had any reasonable expectation
that Defendant Czwartacky would be personally liable for payment. Nor did
he conceal the nature of his personal relationship and involvement with
either Pacific Shores or Alpine Apparel. Plaintiffs employee indicated
Plaintiffs assumption of the risk when it indicated that it made no sense
to inquire of Defendant Czwartacky as to whether he had any money.
Deposition of Daisy Chan.
This employee concluded that "[w]e make a wrong decision, we have to bear
the result." Defendant's Exhibit 0. In light of this knowledge of risk
and assumption of responsibility, it cannot be said that Defendant
Czwartacky committed a fraud or wrong against Plaintiff.
Therefore, though Plaintiff ultimately did lose $216,408.06, this loss
cannot be attributed to a fraud or wrong that Defendant Czwartacky
visited upon Plaintiff.
Pacific Shores and Alpine Apparel have been held liable for their debts
to Plaintiff. Defendant Czwartacky's involvement in Pacific Shores does
not rise to the level of domination used to inflict a fraud or wrong upon
Plaintiff. Defendant Czwartacky's summary judgment motion to dismiss
Plaintiff's claim for declaratory judgment piercing the corporate veil
with respect to Pacific Shores is therefore GRANTED. Defendant's summary
judgment motion to dismiss Plaintiff's claim for declaratory judgment
piercing the corporate veil with respect to Alpine Apparel is also