Legal Malpractice

The Alter Ego in Legal Malpractice

By (Andrew Lavoott Bluestone)

Single stockholder corporations are quite common.  Entrepreneurs know that they must start a corporation, and they often equate the corporation's activities with their own, for they, of course, are the CEO, CFO, COO, and sole shareholder.  Here is an example of what can go wrong.

Baccash v. Sayegh is the story of a sole shareholder who probably has done well with her bridal gown business.  She hears that a competitor is going to retire, and hires attorney to prepare sale/purchase documents.  Here is where things go awry.  Defendant prepares a stock purchase agreement rather than an asset purchase agreement, and plaintiff finds herself [or is it the corporation] indebted to a creditor for $ 50,000.

Plaintiff pays off, and sues attorney.  She wins at trial, only to have the verdict reversed and dismissed.  "Here, the plaintiff's theory of the case was that she sustained damages because the stock purchase agreement which the defendant negotiated without her knowledge required her to assume responsibility for Peggy Peters' liabilities, consisting of trade debt and an outstanding bank loan. However, the proof presented at trial revealed that all payments of Peggy Peters' debts after the February 2001 purchase were made by Bridal Couture rather than the plaintiff, and that Bridal Couture also paid $6,000 in settlement of the creditor's suit brought against both Bridal Couture and Peggy Peters. Although it is undisputed that the plaintiff is Bridal Couture's sole officer and shareholder, a corporation has a separate legal existence from its shareholders even where the corporation is wholly owned by a single individual (see Harris v Stony Clove Lake Acres, 202 AD2d 745, 747; see also Rohmer Assoc., Inc. v Rohmer, 36 AD3d 990; Winkler v Allvend Indus., 186 AD2d 732, 734; New Castle Siding Co. v Wolfson, 97 AD2d 501, 502, affd 63 NY2d 782). Moreover, "the courts are loathe to disregard the corporate form for the benefit of those who have chosen that form to conduct business" (Harris v Stony Clove Lake Acres, 202 AD2d 745, 747).

Furthermore, while the doctrine of piercing the corporate veil allows a corporation's separate legal existence to be disregarded to prevent fraud and achieve equity (see Matter of Morris v New York State Dept. Taxation & Fin., 82 NY2d 135, 141; Millennium Constr., LLC. v Loupolover, 44 AD3d 1016; Rohmer Assoc., Inc. v Rohmer, 36 AD3d 990), the doctrine is typically employed by third parties seeking to circumvent the limited liability of the owners, and requires a showing of a wrongful or unjust act toward the plaintiff (see Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141-142). Even assuming that the doctrine of piercing the corporate veil would be available to allow the plaintiff to disregard the corporate form in which she chose to do business, no evidence was presented to support the trial court's conclusion that Bridal Couture is, in fact, the plaintiff's alter ego. Under these circumstances, the plaintiff's proof was insufficient to establish that she sustained actual damages as a result of the defendant's conduct (see Rogers v Ciprian, 26 AD3d 1, 6; Winkler v Allvend Indus., 186 AD2d 732, 734). Thus, the plaintiff failed to establish a prima facie case of legal malpractice (see Carrasco v Pena & Kahn, 48 AD3d 395; Edwards v Haas, Greenstein, Samson, Cohen & Gerstein, P.C., 17 AD3d 517), and that branch of the defendant's motion which was to set aside the verdict and for judgment as a matter of law dismissing the complaint should have been granted. "

Full post as published by New York Attorney Malpractice Blog on August 07, 2008 (boomark / email).