New York Appellate Division, First Department Holds Parent Liable for Subsidiary’s Obligations
In a notable decision issued August 28, 2025, the New York Supreme Court, Appellate Division, First Department, in Rich v. J.A. Madison, LLC (Index No. 150305/18/Appeal No. 4049/Case No. 2024-05929)1, affirmed a trial court ruling that pierced the corporate veil to hold defendant Jonathan Adler Enterprises, LLC (“JAE”) liable for the breach of a “Consulting Agreement” entered into by its subsidiary, J.A. Madison, LLC (“J.A. Madison”), with plaintiffs George and Regina Rich, doing business as Guild Antiques II (“Plaintiffs”).
The court emphasized that corporate veil piercing may be appropriate even absent fraud, where a parent so dominates and controls a subsidiary that the latter becomes a mere instrumentality used to commit “a wrong and injustice that invites a court in equity to intervene.”2
Background
-Plaintiffs had leased retail space at 1095 Madison Avenue since 1985.
- In 2010, J.A. Madison sought to assume that lease to expand its adjacent store at 1097 Madison Avenue, and ultimately J.A. Madison and Plaintiffs executed a “Consulting Agreement” under which J.A. Madison agreed to pay Plaintiffs $8,333.33 per month as lease payments until it vacated the premises.
- Payments under the Consulting Agreement were made monthly by JAE until March 2017 when JAE’s business was extremely difficult, and JAE stopped making payments in July 2017.
- Plaintiffs commenced litigation in January 2018, primarily alleging (i) J.A. Madison’s breach of the Consulting Agreement and (ii) JAE’s was liable for such breach due to its domination over J.A. Madison.
Corporate Veil Piercing Analysis
Courts in New York have held that in order to pierce the corporate veil, a plaintiff must meet the burden under a two prong test by showing that (i) the dominant corporation exercised complete domination and control with respect to the transaction attacked, and that (ii) such domination was used to commit a fraud or wrong causing injury to the plaintiff. Factors to be considered under the first prong of the test include3:
- The disregard of corporate formalities;
- Inadequate capitalization;
- Intermingling of funds;
- Overlap in ownership, officers, directors and personnel;
- Common office space or telephone numbers;
- The degree of discretion demonstrated by the allegedly dominated corporation;
- Whether dealings between the entities are at arms' length;
- Whether the corporate entities are treated as independent profit centers; and
- The payment or guaranty of the corporation's debts by the dominating entity. No single factor is dispositive.
While fraudulent conduct certainly satisfies the second prong of the test, “other claims of inequity or malfeasance can satisfy and warrant piercing the corporate veil as well.”4
The trial court in Rich v. J.A. Madison found—and the First Department affirmed—that (i) JAE exercised complete domination over J.A. Madison in the transaction and (ii) there was sufficient wrongdoing or inequity causing injury to Plaintiffs which warranted corporate veil piercing.
Key facts to support the decision included:
- J.A. Madison never had its own bank account.
- JAE paid all of J.A. Madison’s obligations under the Consulting Agreement.
- JAE and J.A. Madison shared offices and personnel.
- J.A. Madison was dissolved during the litigation.
- Plaintiffs negotiated and communicated with JAE executives regarding the agreement and late payments.
- J.A. Madison’s revenue was swept into a single account in JAE’s name at the end of each retail day.
The court concluded that J.A. Madison was JAE’s alter ego and that JAE used its complete control to commit a wrong causing injury to Plaintiffs—namely, failing to pay under the Consulting Agreement, causing J.A. Madison to become judgment proof, and then dissolving J.A. Madison after the litigation at issue had already been commenced.
Legal Significance and Dissenting Opinion
This decision reinforces the evolving principle that corporate veil piercing in New York does not require actual fraud. Instead, courts here may impose a subsidiary’s liability on its parent where:
1. The parent exercises complete domination over the subsidiary, and
2. That parent’s dominance is used to commit a wrong or unjust act causing injury to a plaintiff.
However, not all judges in this case found that Plaintiffs met their burden under the two- prong test. While the dissenting judges found that JAE exercised complete domination over J.A. Madison, they argued that Plaintiffs failed to meet their heavy burden under the second prong of the test by showing that the complete domination here was used to commit a fraud or wrong which in their view would warrant piercing the corporate veil.
They noted:
- J.A. Madison had a legitimate business purpose and operated as a separate entity;
- The Consulting Agreement was an arm's length transaction negotiated between Plaintiffs and J.A. Madison; and
- The daily sweep of J.A. Madison’s revenue into JAE’s accounts was a lawful business practice contractually required by J.A. Madison’s lenders, who held a first lien on both companies’ assets and accounts; and
- Plaintiffs were sophisticated businesspeople who could have obtained security or a personal guarantee from JAE or its owners.
Takeaways
The decision in Rich v. J.A. Madison raises interesting and potentially challenging questions concerning an analysis of facts and circumstances under the second prong of the test, namely “a wrong or unjust act”, to determine if corporate veil piercing is warranted in a specific situation. Although not all judges in this case reached the same conclusion with respect to the second prong of the test, the impact of the decision should not be neglected.
While the Appellate Division’s ruling may be appealed, it is important to keep this decision in mind in connection with parent-subsidiary relationships and business operations.
As a practical matter and in order to enjoy the limited liability protection generally afforded to corporations and limited liability companies, owners and management of such entities operating with subsidiaries or affiliates should remember to observe appropriate corporate formalities, including, without limitation:
- Maintaining appropriate and separate governance structures and, where possible, separate bank accounts;
- Avoiding overlapping personnel without clear documentation;
- Ensuring intercompany transactions are conducted on an arm’s length basis; and
- Documenting legitimate business purposes for subsidiary actions.
Failure to observe corporate formalities—even without fraudulent conduct—potentially can expose parent and affiliated entities to unforeseen liabilities.
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