Categories & Search

Alter Ego Claim Survives Pre-Answer Motion to Dismiss on an Equitable Ownership Theory

On July 2, 2018, Justice Barry R. Ostrager of the Commercial Division denied a motion to dismiss by UMG Recordings, Inc. (“Universal”), an alter ego theory of liability against it in Aspire Music Group, LLC v. Cash Money Records, Inc.,[i] concluding that Aspire sufficiently alleged that Universal was the equitable owner of Cash Money to survive the pre-answer motion to dismiss.[ii]

Background

Aspire Music Group (“Aspire”), the record label that first signed hip-hop artist Aubrey Drake Graham (“Drake”), sued Cash Money Records (“Cash Money”) and Universal for unpaid royalties related to Drake’s record sales.  In 2009, Aspire entered into an Agreement with Cash Money[iii] to furnish Drake’s services to Cash Money in exchange for one-third of the net profits from Drake’s record sales; record distribution fees would be deducted from the net profits.  Under the Agreement, Cash Money was obligated to provide monthly accounting statements to Aspire.  Aspire alleges that Cash Money provided sporadic, deceptive statements that reflected no monies were due, even though Drake had sold millions of records.

Initially, Universal had a contractual relationship with Cash Money to serve as the distributor of Drake’s records.[iv]  However, as Cash Money developed a cash flow problem, Aspire alleges that around 2015, Universal paid off millions of dollars of Cash Money’s debt in exchange for a controlling interest in Cash Money.[v]  This purported control allowed Universal to “renegotiate” its distribution agreement with Cash Money and provide itself with a higher distribution fee than what Cash Money had initially agreed.[vi]  Therefore, Aspire alleges that Universal’s control of Cash Money resulted in a significant loss of revenue for Aspire.  Aspire further asserts that Universal is the alter ego of Cash Money and is thus liable for Cash Money’s obligations under the Agreement.

Discussion

Universal filed a pre-answer motion to dismiss, arguing that since it does not hold any ownership interest, director, or officer position in Cash Money, Aspire’s alter ego theory of liability is barred under both Louisiana and New York law.[vii]

The threshold issue that the Commercial Division addressed is whether New York or Louisiana[viii] law should apply in assessing the viability of the alter ego claim.[ix]  The Court began by noting that New York courts usually look to the law of the state of incorporation in determining the applicability of alter ego liability.[x]  Nonetheless “‘New York courts will disregard the state of incorporation’ where ‘the Defendant's contacts and the events at issue in the case substantially implicate New York.’”[xi] Here, Justice Ostrager determined that New York law is controlling because the Agreement was executed in New York and “is governed by New York law by way of a New York choice-of-law provision.”[xii]

Next, the Commercial Division examined the viability of the alter ego claim under New York law.  According to the Court, New York law is not definitive as to whether to extend alter ego liability to a non-owner of a company.[xiii] But “New York courts have recognized for veil-piercing purposes the doctrine of equitable ownership, under which an individual who exercises sufficient control over the corporation may be deemed an ‘equitable owner,’ notwithstanding the fact that the individual is not a shareholder of the corporation.”[xiv]  Justice Ostrager explained that “[e]quitable ownership is determined by considering whether [the defendant] ‘exercised considerable authority’ over the corporation and acted as though the ‘assets were his alone to manage and distribute.’”[xv]

Here, Aspire alleges that: Cash Money is a corporate instrument of Universal; Universal shares offices with Cash Money; Universal operates Cash Money's website; and Cash Money remains undercapitalized and entirely dependent on advances and payments from Universal.  The Commercial Division held that Aspire had adequately alleged that Universal was the equitable owner of Cash Money, ruling that Aspire’s amended complaint contained sufficiently specific examples of Universal’s control to survive a pre-answer motion to dismiss.[xvi] 

Conclusion

Although New York courts are not in agreement as to whether to extend alter ego liability to a non-owner, non-director, or non-officer of a company, specific examples showing significant control over the company may be sufficient to establish a theory of equitable ownership and thereby survive a pre-answer motion to dismiss.

 

[i] Aspire Music Group, LLC v. Cash Money Records, Inc., No. 652029/2017, 2018 BL 241939 (Sup. Ct. July 2, 2018).

[ii] Id. at *6-7.

[iii] In this decision, Judge Ostrager largely denied Cash Money’s separate motion to dismiss, finding that they cannot benefit from the incontestability provision of the Agreement when they prevented the condition precedent from occurring.  Id .at *4.  The court only granted Cash Money’s motion to dismiss as to the claims that accrued on or before March 1, 2010 as they are time barred under the statute of limitations.  Id. at *5.

[iv] Id. at *2; Aspire alleges that Universal only became the alter ego of Cash Money in or after 2015. Id. at *8.

[v] Id. at *7.

[vi] Id. at *2.

[vii] Id. at *6.

[viii] Cash Money is alleged to be a Louisiana corporation. Id. at *6.

[ix] Id. at *6.

[x] Id. at *6 (quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995)).

[xi] Aspire, 2018 BL 241939, at *6 (quoting Hayden Capital USA, LLC v. Northstar Agri Indus., LLC, No. 11-594, 2012 BL 447756, at *6 (S.D.N.Y. Apr. 23, 2012)).

[xii] Aspire, 2018 BL 241939, at *6.

[xiii] Id. at *7; “The Court of Appeals ‘found no definitive authority on the issue of whether a nonshareholder could be personally liable under a theory of piercing the corporate veil.’ Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 142 (1993).  Other New York courts have generally declined to extend alter ego liability to a non-owner defendant.  See Lantau Holdings, Ltd. v. Orient Equal Intl. Group, 2017 WL 914636, at *18 (N.Y. Sup. Ct. Mar. 8, 2017)[, aff’d, 161 A.D.3d 714 (1st Dep’t 2018)]” Id.

[xiv] Id. at *7 (quoting Freeman v. Complex Computing Co., 119 F.3d 1044, 1051 (2d Cir. 1997)).

[xv] Id. at *7 (quoting United Mizrahi Bank Ltd. v. Sullivan, No. 97-9282, 2000 WL 1678040, at *3 (S.D.N.Y. Nov. 6, 2000) (quoting Freeman, 119 F.3d at 1051)).

[xvi] Id. at *7.