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United States District Court, S.D. New York

May 28, 2004.

HORIZON PLASTICS, INC., Plaintiff, -against- DOUGLAS CONSTANCE, Defendant

The opinion of the court was delivered by: RICHARD CASEY, District Judge


Plaintiff Horizon Plastics, Inc. ("Horizon") brings this action against Defendant Douglas Constance, seeking a judgment declaring that Horizon is not subject to arbitration with respect to an employment contract between Constance and Horizon subsidiary Clear Pak, LLC ("Clear Pak"). On March 12, 2002, this Court denied both Horizon's request to enjoin arbitration and Constance's motions to dismiss and to compel arbitration, finding that discovery was required in order to determine whether Horizon was a proper party to the arbitration. The parties have now completed discovery and Horizon again moves for a declaratory judgment that it is not a proper party to the arbitration; Constance moves to compel Horizon to proceed with arbitration.*fn1 For the reasons that follow, Horizon's motion to enjoin arbitration is GRANTED and Constance's motion to compel arbitration is DENIED. I. Background

Constance was hired by the Horizon subsidiary Clear Pak on August 21, 1998 to develop its sales and create a sales force. Clear Pak, a now-defunct New Jersey corporation, was formed to distribute a shrink wrap product in the United States for the Italian company Polifilms, SRL ("Polifilms"). Clear Pak was wholly owned by Horizon and Polifilms, which held equal shares of the corporation.

  On March 25, 1999, Constance filed for arbitration against Horizon (and not Clear Pak) based on an alleged breach of his employment contract. Constance claims that Horizon was Clear Pak's alter ego and should therefore be held responsible for any damages he incurred as a result of Clear Pak's breach. Horizon may be held liable for Clear Pak's breach only if the Court determines that it is appropriate to pierce Clear Pak's corporate veil. A determination of whether to pierce a corporate veil is highly fact-dependent. Accordingly, it is necessary to examine the circumstances surrounding Clear Pak's incorporation and Horizon's involvement in Clear Pak operations.

  Peter Feniello and Ferdinand Lutz formed Horizon as equal partners for the purpose of importing pressure sensitive tape. (Feniello Dep. at 13-14.) Until 1998, Horizon had three employees: Feniello, Lutz, and a customer service representative. (Id. at 21-22.) In 1997, Feniello transferred 10% of his Horizon shares to his son Peter ("Feniello, Jr."). As of September 2002, Lutz owned 37% of Horizon stock; Feniello owned 33%; and Feniello, Jr. owned 30%.*fn2 (Id. at 34.) In 1998, Horizon and Polifilms, an Italian manufacturer of shrink wrap, formed Clear Pak for the purpose of selling Polifilms' product in the United States. (Id. at 44.) Horizon's initial cash infusion to Clear Pak was approximately $30,000, while Polifilms provided approximately $20,000 in cash and $170,000 worth of inventory. (Id. at 42; Shea Certification, Ex. K at 1.) Feniello was appointed president of Clear Pak; Livio Guidici, the president of Polifilms, was appointed as vice president; and Gerard Meulman of Polifilms was appointed as an officer of the corporation. (Feniello Dep. at 43.) As president, Feniello was charged with securing someone to run Clear Pak. (Id. at 43-44.)

  Feniello had met Constance prior to the formation of Clear Pak, and Constance had told Feniello that he was looking to leave his current job working for the shrink wrap company Intertape Polymer. (Id. at 65.) When Feniello became involved in creating Clear Pak, he contacted Constance about the possibility of employment. (Id. at 66.) Prior to his offer of employment, Constance traveled to Italy to meet with representatives from Polifilms. (Id. at 66-67.) After conferring with representatives from Polifilms, Feniello offered Constance a position with Clear Pak and signed an employment contract with him on behalf of the new corporation. (Id. at 68.)

  Constance's employment contract with Clear Pak provides, in pertinent part:

In the event that any dispute shall arise under this agreement that cannot be settled by the parties, either party may submit same to an arbitrator selected in accordance with the rules of the American Arbitration Association (Commercial Panel).
  Prior to its receipt of a corporate tax identification number, Clear Pak had no separate bank account. (Feniello Dep. at 48-49.) Horizon paid Constance's initial salary and expenses during this period, but was later reimbursed for these sums by Clear Pak. (Garbaccio Dep. at 17-18.)

  Clear Pak and Horizon shared an office, along with Tafco Sales ("Tafco"), a related packaging company whose sole owner was Feniello, and all three companies shared the same telephone number. (Feniello Dep. at 44.) All employees answered the phone "Tafco." (Id. at 47-48.) Tafco invoiced Clear Pak for office services, and Horizon invoiced Clear Pak for computer services. (See Shea Certification, Exhibits G and E.) Tafco, Horizon, and Clear Pak each invoiced customers separately and had separate letterheads. Clear Pak also had its own general ledger and filed its own tax returns. (See Shea Certification, Exs. K, L.) Clear Pak's product, which was sent by Polifilms, was shipped as Clear Pak inventory. Clear Pak paid for its inventory to be stored at a public warehouse. (See Shea Certification, Ex. E; Feniello Dep. at 52-53.)

  For approximately five months after its inception, Clear Pak struggled to do business and incurred approximately $100,000 in losses. Due to poor business, Horizon and Polifilms decided to dissolve Clear Pak. Feniello discharged Constance in February 1999, and Constance filed for arbitration the next month. (See Shea Certification, Exs. B, C.)

  Dissolution discussions between Horizon and Polifilms were ongoing through at least the summer of 1999. (See Schulman Aff., Ex. J.) During the dissolution, Polifilms took possession of $140,000 of inventory; Horizon expected to receive a payment from Polifilms, but the money was never received. (Id. at 59, 62.) Clear Pak never repaid Horizon for the $35,000 loan used to start up the company. (Feniello Dep. at 19.) Clear Pak was officially dissolved on November 16, 2001. (See Schulman Aff, Ex. G.) II. Discussion

  Horizon argues that it cannot be subject to arbitration under the employment contract between Clear Pak and Constance because it was not a party to the agreement. Although Constance admits that Horizon is not a party to the agreement, he argues that Horizon is nonetheless subject to arbitration as Clear Pak's alter ego.

  In its previous opinion in this case, the Court held that (1) a parent corporation may be bound by its subsidiary's arbitration agreement on the basis of, among other things, a veil-piercing or alter ego theory; (2) New Jersey law governs the issue of whether Horizon may be subject to arbitration as the alter ego of Clear Pak; and (3) further factual development was required in order to determine whether Horizon was the alter ego of Clear Pak. See generally Horizon Plastics, Inc. v. Constance, 2002 WL 398668 (S.D.N.Y. Mar. 13, 2002)

  Under New Jersey law, a corporation is considered to be a separate entity from its shareholders, and courts generally will not abrogate limited liability "even in the case of a parent corporation and its wholly-owned subsidiary." State v. Ventron Corp., 468 A.2d 150, 164 (1983). However, when the "subsidiary [is] the mere instrumentality of the parent corporation," veil-piercing may be appropriate. Id. In essence, courts must find that (1) "the parent so dominated the subsidiary that it had no separate existence but was merely a conduit for the parent," and (2) the corporation used the subsidiary "to perpetrate a fraud or injustice, or otherwise to circumvent the law." Id. at 164.

  The Third Circuit, applying New Jersey law, has held that the following factors weigh in favor of piercing the corporate veil:

[G]ross undercapitalization[,] failure to observe corporate formalities, non-payment of dividends, the insolvency of the debtor corporation at the time, siphoning of funds of the corporation by the dominant stockholder, non-functioning of other officers or directors, absence of corporate records, and [whether] the corporation is merely a facade for the operations of the dominant stockholder or stockholders.
Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145, 150 (3d Cir. 1988) (internal citations and quotation marks omitted).

  The seminal New Jersey case on piercing the corporate veil, New Jersey Department of Environmental Protection v. Ventron Corp., 468 A.2d 150 (1983), makes clear that a corporate veil may be pierced only in the most unusual of circumstances. In Ventron, the parent corporation owned 100% of the subsidiary's stock, the directors of the parent and the subsidiary were identical, and the parent board of directors met monthly in the subsidiary's offices. Id. at 155. At the monthly meetings, the board reviewed details of the daily operations of the subsidiary, including personnel practices, sales efforts, and production. Id. The parent also arranged for the subsidiary's insurance coverage, accounting, and credit approvals. Id. Although the Ventron court found that the parent corporation was constantly involved in the day-to-day operations of the subsidiary, it nonetheless concluded that the evidence was not sufficient to support a finding of dominance. Id. at 165. Noting that the subsidiary had not been incorporated for an unlawful purpose, the court held that the corporate veil could not be pierced. Id.

  In weighing the factors present here, the Court "begins with the fundamental propositions that a corporation is a separate entity from its shareholders . . . and that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise. Id. at 164 (internal citations omitted). Accordingly, the corporate veil will only be pierced in "cases of fraud, injustice, or the like." Id.

  Constance argues that the corporate veil should be pierced in this case because Horizon and Clear Pak shared office space and resources, monies of the two corporations were intermingled, and Feniello controlled Clear Pak as an agent of Horizon. Although the two corporations shared office space and some staff members, the facts here do not indicate that the influence of Horizon in Clear Pak's affairs rose to the level of dominance required under New Jersey law.

  Constance additionally points to payments Clear Pak received from Horizon as evidence of an "alter ego" relationship. While the intermingling of funds between a subsidiary and parent corporation is prohibited, the fact that a stockholder may have lent money to a corporate property owner to pay its debts to a subcontractor does not provide a basis for piercing the corporate veil. See Marascio v. Campanella, 298 N.J. Super. 491, 689 A.2d 852, 858 (1997). Moreover, Horizon's invoicing of Clear Pak for any shared services indicates that the two corporations indeed operated as separate entities. Although Horizon loaned money to Clear Pak, it actually lost money over the approximately five months that Clear Pak conducted business. Thus, the Court need not be concerned that Horizon siphoned Clear Pak's assets unto itself, and thus used the corporate form to perpetrate a fraud. Cf. Kuibyshevnefteorgsynthez v. Model, 1995 WL 66371, at * 15 (D. NJ. Feb. 6, 1995) (piercing corporate veil where sole owner diverted corporate funds to himself).

  After a review of the relevant caselaw and the evidence submitted by both parties, the Court concludes that it would be inappropriate to pierce the corporate veil in this case. Accordingly, Horizon's request for declaratory judgment is GRANTED and Constance's motions to dismiss and to compel arbitration are DENIED. SO ORDERED.

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