BT Ams. Inc. v ProntoCom Mktg., Inc.

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[*1] BT Ams. Inc. v ProntoCom Mktg., Inc. 2008 NY Slip Op 50401(U) [18 Misc 3d 1141(A)] Decided on February 14, 2008 Supreme Court, New York County Cahn, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on February 14, 2008
Supreme Court, New York County

BT Americas Inc., Plaintiff,

against

ProntoCom Marketing, Inc., Khandoker (Ken) Kader, Sabera Kader and World Routes LLC, Defendants.



602014/07



Plaintiff was represented by Hogan & Hartson LLP, 875 Third Avenue, New York, NY 10022, (212) 918-3000, Dennis H. Tracey, III, Esq.

Defendants were represented by Hodgson Russ LLP, 1540 Broadway, New York, NY 10036, (212) 751-4300, Joseph P. Goldberg, Esq.

Herman Cahn, J.

Defendants move to dismiss the third, fourth and fifth causes of action of the complaint for failure to state a claim (CPLR 3211[a] [7]).

This is a breach of contract action arising from defendant ProntoCom Marketing, Inc.'s purchase of telecommunications services from plaintiff, and its alleged failure to pay the monies therefor due under the parties' written contract. Plaintiff has named ProntoCom's owners, Ken and Sabera Kader, as individually liable on the contract as ProntoCom's alter ego. It also has alleged alter ego and successor liability claims against defendant World Routes LLC, another company in which the individual defendants have an interest. Defendants contend that the complaint fails to provide any facts to support piercing the corporate veil and that, therefore, the claims against the individual defendants and against World Routes should be dismissed.

Plaintiff, BT Americas Inc., a Delaware corporation, provides communications, consulting, and technology services (Compl, ¶ 13). It sells voice services, which allow for the delivery of voice traffic around the world (id., ¶ 14). Defendant ProntoCom, a California corporation with a principal place of business in New York, purchases voice services from plaintiff, and resells those services to third party customers (id., ¶ 15). According to the Complaint, defendants Ken and Sabera Kader are husband and wife and are the co-owners of ProntoCom. Both have functioned as its president (id., ¶¶ 8-9). Defendant World Routes LLC, a New York limited liability company, is allegedly co-owned by Ken Kader and his son (id., ¶ 10).

On September 12, 2002, ProntoCom and plaintiff entered into a written contract for the purchase of voice services (id., ¶ 16). The contract consisted of a Master Agreement, a BT Ignite Voice Port Schedule and a series of Voice Port Service Orders (together, the Contract). [*2]The Master Agreement and the BT Ignite Voice Port Schedule were executed on behalf of ProntoCom by Sabera Kader (id., ¶ 16). In November 2002, December 2002, February 2003, November 2004 and May 2005, defendant Ken Kader executed additional Voice Port Service Orders on ProntoCom's behalf, and in November 2004, ProntoCom and plaintiff executed a revised schedule (id., ¶¶ 19-23). The Master Agreement continued to govern the Contract at all relevant times (id., ¶ 24).

On each of the following dates: December 14, 2005, January 12, 2006 and February 10, 2006, plaintiff issued two regular monthly invoices to ProntoCom (id., ¶¶ 25-27). These bills were for services used by ProntoCom during the prior 30-day period. According to the Complaint, ProntoCom was required to pay these bills within 30 days, but failed to pay them, despite plaintiff's demands (id.). In March 2006, plaintiff alleges that it notified ProntoCom's lawyer regarding the failure to pay for services, that ProntoCom still did not pay the overdue invoices and that, therefore, plaintiff exercised its rights under the Contract and discontinued services to ProntoCom (id., ¶¶ 30-34). In total, plaintiff alleges that ProntoCom owes it $3,680,164 in principal plus interest (see id., ¶ 36).

In the Complaint, plaintiff asserts that the Kaders dominated and controlled ProntoCom (id., ¶ 37). It alleges that the "Kaders failed to pay amounts owing to [plaintiff] and transferred funds from ProntoCom to their own personal accounts or to the accounts of other companies dominated and controlled by the Kaders in order to defraud creditors, including [plaintiff]" (id.). The Complaint further alleges that the Kaders made false statements to the plaintiff to induce it to provide services to ProntoCom, and that they have "disregarded the required corporate formalities by conducting business on behalf of ProntoCom under different corporate names, including TIM Consultants LLC' and World Routes, and alternatively identifying themselves as holding shifting positions within the company" (id.). With regard to World Routes, the Complaint alleges that it is owned by Kader, that starting in 2004, Kader conducted the business of ProntoCom under the name "World Routes," and that Kader dominates and controls World Routes and "has used this company for personal purposes, including the transfer of assets from ProntoCom to World Routes in order to defraud creditors, including [plaintiff]" (id., ¶ 38).

Based on these allegations, the Complaint asserts five causes of action. The first and second are pleaded against ProntoCom for breach of contract and for attorneys fees and costs, and are not at issue on this motion. The third is asserted against Ken and Sabera Kader alleging alter ego liability. This claim asserts that they exercised complete dominion and control over ProntoCom; commingled the assets and economic activity of ProntoCom with their other companies and their personal affairs; disregarded the corporate formalities; undercapitalized ProntoCom; and used the proceeds of the Contract for personal uses (id., ¶¶ 53-58).

The fourth is asserted against World Routes also on an alter ego theory. The Complaint alleges that World Routes is the alter ego of Kader and, as such, is liable for Kader's debts. It contends that Kader commingled his personal funds with those of World Routes; diverted funds from ProntoCom to World Routes; and misused the corporate form, placing asserts beyond the reach of plaintiff (id., ¶¶ 60-63).

Finally, the fifth cause of action against World Routes asserts successor liability based on allegations that: there is a continuity of ownership between ProntoCom and World Routes by the Kader family; they share a business location; that World Routes has assumed the operation of ProntoCom; and there was a defacto merger between World Routes and ProntoCom (id., ¶¶ 65-[*3]70).

Defendants seek dismissal urging that the complaint fails to state a claim for alter ego liability against either the Kaders or World Routes. They argue that the Complaint fails to allege any factual basis to hold them responsible for ProntoCom's debt to plaintiff. They urge that plaintiff admits that ProntoCom has operated for legitimate business purposes; there is nothing illegal or fraudulent about its activities; and it does not exist merely as an instrumentality for the Kaders to conduct their personal business. They argue that plaintiff's Complaint completely lacks the necessary factual specificity to sustain a claim based on alter ego liability, and it is purely conclusory. With regard to World Routes, defendants urge that the Complaint similarly is factually unsupported, and fails to even allege that World Routes is an alter ego of ProntoCom. Instead, it alleges that World Routes is an alter ego of the Kaders, and is liable for the Kaders' debt. The debt at issue, however, is ProntoCom's debt to plaintiff arising from the Contract, not a debt owed by the Kaders in their individual capacities. Defendants further argue that World Routes is not a shareholder of ProntoCom, nor is it in a parent/subsidiary relationship with ProntoCom and, therefore, veil piercing is not appropriate. Finally, defendants urge that plaintiff's theory that World Routes is liable as an alleged successor of ProntoCom, again, fails because it lacks any factual support for an assertion of a defacto merger.

In opposition, plaintiff asserts that the Complaint is sufficient to withstand this pre-discovery dismissal motion. It contends that the Complaint alleges the factors required by the courts in determining whether the corporate veil should be pierced, including that: the Kaders used their power over ProntoCom to advance their personal interests; they commingled its assets with their own and assets of other companies; they disregarded corporate formalities; and they stripped it of assets, diverting the assets to their personal accounts and those of other companies in order to place ProntoCom's assets beyond the reach of plaintiff. Plaintiff alleges that World Routes is also liable on the alter ego theory. It alleges that World Routes is the alter ego of Kader, and is the instrumentality through which Kader hid ProntoCom's assets, leaving ProntoCom with insufficient funds to pay plaintiff under the Contract (id., ¶¶ 60-63). As to its theory of World Routes' successor liability based on a defacto merger, plaintiff points to its allegations that: there is a continuity of ownership between ProntoCom and World Routes, because Ken Kader and his family own each corporation; the corporations share a business location; and World Routes has assumed ProntoCom's operation at the same location, with the same assets and many of the same personnel (id., ¶¶ 66-70). These allegations, plaintiff contends, constitute cognizable claims against World Routes.

DISCUSSION

The motion to dismiss is denied.

On a CPLR 3211 motion to dismiss, the test is whether the proponent of the pleading has a claim, not whether a claim is stated (see Leon v Martinez, 84 NY2d 83, 87-88 [1994]). At this preliminary stage of the action, the plaintiff's allegations must be accepted as true, liberally construed and afforded the benefit of every favorable inference. (id.).

First, the Court will address the liability of the individual Kader defendants and defendant World Routes as alter egos of ProntoCom for ProntoCom's debt to plaintiff, and then it will address the successor liability claim.

Generally, to pierce the corporate veil and impose alter ego liability, a plaintiff must show that: (1) the owners of the corporation exercised complete domination of the corporation in [*4]respect to the transactions at issue; and (2) such domination was used to commit a fraud or otherwise resulted in wrongful or inequitable consequences causing plaintiff's injury (TNS Holdings., Inc. v MKI Securities Corp., 92 NY2d 335, 339-40 [1998]; Morris v New York State Dept. of Taxation and Fin., 82 NY2d 135, 141-42 [1993]; Teachers Ins. Annuity Assn. of Amer. v Cohen's Fashion Optical of 485 Lexington Ave. Inc., 45 AD3d 317 [1st Dept 2007]). "Evidence of domination alone does not suffice without an additional showing that it led to inequity, fraud or malfeasance" (TNS Holdings, Inc. v MKI Securities Corp., 92 NY2d at 339, citing Morris v New York State Dept. of Taxation and Fin., 82 NY2d at 141-42). While this theory and its application depend on the facts and circumstances of each case, several factors have emerged in determining domination and control. These factors include: the absence of corporate formalities; inadequate capitalization of the corporation; personal use of corporate funds; commingling of personal funds; overlap in officers, directors and personnel; and common office space, phone numbers and addresses with other commonly owned corporate entities (see William Passalacqua Builders, Inc. v Resnick Developers South, Inc., 933 F2d 131, 139 [2d Cir 1991]). The theory of piercing the corporate veil involves a fact laden inquiry that is not well suited for resolution on a pre-answer, pre-discovery motion to dismiss (see Ledy v Wilson, 38 AD3d 214, 214 [1st Dept 2007]; Kralic v Helmsley, 294 AD2d 234, 235-36 [1st Dept 2002]; First Bank of Ams. v Motor Car Funding, 257 AD2d 287, 294 [1st Dept 1999]; see also Berry Packing Corp. v Atlantic Veal Corp., 302 AD2d 417, 418 [2d Dept 2003]).

Within the four corners of this complaint, it appears that cognizable claims for piercing the corporate veil as to defendants Ken and Sabera Kader, as well as World Routes, have been stated. At the very least, plaintiff is entitled to obtain the necessary discovery to ascertain whether there are grounds to pierce the corporate veil of ProntoCom (see First Bank of Ams. v Motor Car Funding, 257 AD2d at 294). The Complaint includes allegations that: the Kaders dominated ProntoCom, making all decisions; used ProntoCom for their own personal purposes; commingled ProntoCom's assets and business activities with those of other companies they owned and with their own assets; undercapitalized ProntoCom; and repeatedly disregarded the required corporate formalities, "by conducting business on behalf of ProntoCom under different corporate names, including TIM Consultants, LLC,' and World Routes and alternatively identifying themselves as holding shifting positions within the company" (Compl, ¶ 37); transferring funds of ProntoCom to themselves and World Routes in order to place ProntoCom's assets beyond the reach of creditors, including plaintiff (id., ¶¶ 37, 54-58).

With regard to World Routes, the Complaint contains allegations that it shared common owners, Ken Kader, and that World Routes operated the same business, assumed the operation of ProntoCom, and now continues ProntoCom's business at the same physical location, with the same assets, business operation and many of the same employees (id., ¶¶ 61-63, 66-69). These allegations are sufficient to show domination and control (see Ledy v Wilson, 38 AD3d at 214; Teachers Ins. Annuity Assn. of Amer. v Cohen's Fashion Optical of 485 Lexington Ave. Inc., 45 AD3d at 317; see also Kralic v Helmsley, 294 AD2d at 235). Plaintiff's allegations that the Kaders transferred money and services from plaintiff to enrich themselves and their other companies, including World Routes, while stripping ProntoCom of its assets and making it judgment proof, sufficiently alleges a wrong or injustice against the plaintiff which resulted in plaintiff's injury. This is sufficient to withstand a motion to dismiss (see, e.g. Teachers Ins. Annuity Assn. of Amer. v Cohen's Fashion Optical of 485 Lexington Ave. Inc., 45 AD3d at 317; [*5]Simplicity Pattern Co. v Miami Tru-Color Off-Set Serv., Inc., 210 AD2d 24 [1st Dept 1994]; 29/35 Realty Assocs. v 35th Street New York Yarn Center, Inc., 181 AD2d 540, 541 [1st Dept 1992]; see also Kralic v Helmsley, 294 AD2d 234; Trans Intl. Corp. v Clear View Technologies, Ltd., 278 AD2d 1, 1-2 [1st Dept 2000]; Galin Partnership v Flynn, 295 AD2d 473, 473 [2d Dept 2002]).

While some of the allegations appear to lack particularized facts, discovery may reveal factual evidence supporting these allegations, since the relevant facts are exclusively within the control of the defendants seeking dismissal (cf. Andejo Corp. v South Street Seaport Ltd. Partnership, 40 AD3d 407, 407 [1st Dept 2007]; Albstein v Elany Contr. Corp., 30 AD3d 210 [1st Dept], lv denied 7 NY3d 712 [2006]). Therefore, the third and fourth causes of action are sufficient to withstand this motion to dismiss.

The fifth cause of action states a claim for successor liability against World Routes on a theory of defacto merger or continuity of ownership. A corporation may be held liable for a breach of contract of its predecessor if: (1) it expressly or impliedly assumed such liability; (2) there was a consolidation or merger of the two corporations; (3) the successor corporation was a mere continuation of the predecessor; or (4) the transaction was entered into fraudulently to escape such obligations (Schumacher v Richards Shear Co., 59 NY2d 239, 244-45 [1983]; Fitzgerald v Fahnestock & Co., 286 AD2d 573, 575 [1st Dept 2001]). A defacto merger occurs when there is a transaction, while not in the form of a merger, which is in substance a consolidation or a merger of two companies, one being the successor to the other (see Schumacher v Richards Shear Co., 59 NY2d at 245; Cargo Partner AG v Albatrans, Inc., 352 F3d 41, 46 [2d Cir 2003]). This doctrine is not limited to tort liability, but extends to breach of contract actions as well (see Fitzgerald v Fahnestock & Co., 286 AD2d at 575). The factors considered in determining whether a de facto merger has occurred include: (1) continuity of ownership; (2) cessation of the ordinary business and dissolution of the predecessor, as soon as practical; (3) assumption by successor of liability necessary for the uninterrupted continuation of the predecessor's business; and (4) continuity of management, personnel, assets, physical location and general business operation (In re New York City Asbestos Litigation, 15 AD3d 254, 255-56 [1st Dept 2005]). A de facto merger finding does not necessarily require the presence of each of these factors (id.; Fitzgerald v Fahnestock & Co., 286 AD2d at 574).

Here, defendants' argument that plaintiff fails to plead an actual transaction between ProntoCom and World Routes, and that this requires dismissal of the claim, is rejected. The essence of this claim is that ProntoCom's business at the premises ceased, and was taken over by World Routes, including ProntoCom's assets, liabilities for continuity of its voice services business, management, ownership, physical space and personnel, leaving ProntoCom an empty, judgment-proof shell. This is sufficient to state a claim against World Routes under the continuity of business or defacto merger doctrine, particularly at this early stage of the action, prior to any discovery (see e.g. Teachers Ins. Annuity Assn. of Amer. v Cohen's Fashion Optical of 485 Lexington Ave. Inc., 45 AD3d at 317; see also Societe Anonyme Dauphitex v Schoenfelder Corp., 2007 WL 3253592 [SDNY Nov 2, 2007]). While plaintiff has not plead a particular transaction in which World Routes purchased ProntoCom's assets with a closing at which stock or cash was exchanged, it has pleaded the transfer of ProntoCom's operations to an entity with overlapping ownership, management and personnel, at the same physical location in order to avoid liability for ProntoCom's debts, and which left ProntoCom as an empty shell. This [*6]satisfies its burden in opposition to this motion.

Accordingly, it is

ORDERED that the motion to dismiss is denied; and it is further

ORDERED that the defendants are directed to serve a verified answer to the complaint within 10 days after service of a copy of this order with notice of entry, upon their attornys.

Dated: February 14, 2008

ENTER:

______/s/______________________

J.S.C.