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
MEMORANDUM OPINION AND ORDER
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
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
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.
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
(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.