Corporate Officer Escapes Corporate-Capacity Fraud Claims in Ponzi Scheme Case in Commercial Division
In corporate fraud suits, it is common for plaintiffs to file claims against executives in their capacity as corporate officers. However, to succeed on a corporate-capacity claim, a plaintiff must be able to show that the corporate veil should be pierced so as to hold an officer personally liable for the corporation’s legal obligations. This issue is illustrated by the Commercial Division’s recent decision in Coast to Coast Energy, Inc. v. Gasarch.[i]
Coast to Coast arises from an allegedly fraudulent scheme by defendants Mark Gasarch, John Wampler, and Petro Suisse Limited (“PSNY”), a company controlled by Gasarch, to solicit investors to buy into partnerships focusing on oil exploration and drilling in Trinidad.[ii] The plaintiffs allege that the oil exploration venture was in fact a Ponzi scheme and that Gasarch and Wampler fabricated documents in an attempt to fool investors into thinking wells were being drilled and were generating profits when in fact nothing of the sort was actually happening.[iii]
Plaintiffs Lawrence J. Doherty and William Spence moved pursuant to CPLR 3212 for partial summary judgment on liability for their fraud claims against Gasarch. Gasarch, for his part, moved pursuant to CPLR 3212 for summary judgment dismissing the complaint as against himself. The Court, in a decision by Commercial Division Justice Eileen Bransten, denied the moving plaintiffs’ motion and granted Gasarch’s motion in its entirety.
The Court began by setting aside and disregarding the parties’ self-serving affidavits, which contained many statements that were, according to the Court, “utterly without supporting documentation.”[iv] The Court explained that “[m]ere conclusions, unsubstantiated allegations, or expressions of hope are insufficient” to create a material issue of fact.[v] In any event “[t]he proponent of summary judgment must eliminate material issues of fact by producing evidentiary proof in admissible form,” and here “questions as to whether statements made by the parties are admissible are apparent throughout their submissions,” which “either warrants a finding that a material issue of fact exists, at a minimum, or a finding in favor of [Gasarch] as a matter of law.”[vi] The Court therefore disregarded the affidavits.
Next, the Court explained that because “[t]he entirety of the [corporate-capacity[vii]] fraud claims against Gasarch rest upon a finding that he is an alter ego of PSNY,” the Court was required to first “determine whether it may pierce PSNY’s corporate veil in order to hold Gasarch liable for any of PSNY’s corporate obligations” before it could consider the merits of the claims.[viii] To “establish alter ego liability sufficient to pierce the corporate veil, the complaining party must establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court in equity will intervene.”[ix] In determining whether the corporation was dominated by another, the Court stated that it may consider the following factors: (1) disregard of corporate formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors and personnel; (5) common office space or telephone numbers; (6) the degree of discretion demonstrated by the corporation; (7) whether the corporation is treated as an independent profit center; and (8) the payment or guarantee of the corporation's debts by the dominating entity. No one factor is dispositive.[x]
After considering several of these factors, the Court determined that Gasarch was entitled to summary judgment on the corporate-capacity fraud claims.
First, as to the failure to adhere to corporate formalities, after disregarding the moving plaintiffs’ evidentiary submissions as improper, the Court noted that “[n]o evidence has been presented that Gasarch did not adhere to corporate formalities, rather, at a minimum Gasarch adhered to those formalities by filing separate tax returns.”[xi]
Second, as to inadequate capitalization, Gasarch pointed to a 2013 decision by Judge Nathan in the U.S. District Court for the Southern District of New York, which noted that PSNY and Gasarch had disbursed $9.5 million to investors to satisfy a consent judgment with the SEC, as well as PSNY’s 2007 tax return, which showed that PSNY had over $16 million in assets. The Court found that the moving plaintiffs, for their part, did not present any evidence in opposition that would raise a question of fact as to whether PSNY was adequately capitalized.[xii]
Third, as to commingling of assets, the Court found that the moving plaintiffs failed to present any evidence that Gasarch’s and PSNY’s assets were commingled. Although the moving plaintiffs had argued that Gasarch had more than one personal bank account, and that he may have used his bank accounts to commingle his assets with PSNY’s, according to the Court, the moving plaintiffs had no documentary support for these assertions, which rendered them mere “averment[s] of a factual conclusion,” and therefore insufficient to raise a question of fact.[xiii]
Fourth, as to personal use of corporate funds, the moving plaintiffs pointed to a “Special Account” through which Gasarch allegedly paid himself corporate funds, but the Court concluded there was “ample evidence that the Special Account was not Gasarch’s personal account.”[xiv]
Accordingly, the Court found that because Gasarch had sufficiently set forth that the record was devoid of evidence that he abused PSNY’s corporate form, and because the moving plaintiffs failed to provide sufficient evidence that the Court should pierce PSNY’s corporate veil, Gasarch was entitled to summary judgment dismissing the fraud claims against him in his corporate capacity.[xv]
[i] No. 651670/2010, 2018 BL 481341 (Sup. Ct. Dec. 18, 2018).
[ii] Id. at *1.
[iii] Id. at *1-2.
[iv] Id. at *3.
[v] Id. (quoting Zuckerman v. City of New York, 49 N.Y.2d 557, 562 (1980)).
[vii] The plaintiffs also filed individual-capacity claims against Gasarch. However, because Gasarch’s counsel conceded at oral argument that Gasarch was “being sued not because he is Mark Gasarch,” but rather “because he was an officer of [PSNY],” the Court granted summary judgment for Gasarch on these claims and dismissed them in their entirety. Id. at *4.
[ix] Id. (quotation marks omitted).
[x] Id. at *5.
[xii] Id. at *5-6.
[xiii] Id. at *6.
[xiv] Id. at *6-7.
[xv] Because the non-moving plaintiffs did not oppose Gasarch’s motion, the Court dismissed the fraud claims alleged against him by all of the plaintiffs.