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Law School Case Brief

OTR Assocs. v. IBC Servs., Inc. - 353 N.J. Super. 48, 801 A.2d 407 (Super. Ct. App. Div. 2002)

Rule:

The purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law. Thus, the basic finding that must be made to enable the court to pierce the corporate veil is that the parent so dominated the subsidiary that it had no separate existence but was merely a conduit for the parent. But beyond domination, the court must also find that the parent has abused the privilege of incorporation by using the subsidiary to perpetrate a fraud or injustice, or otherwise to circumvent the law. And the hallmarks of that abuse are typically the engagement of the subsidiary in no independent business of its own but exclusively the performance of a service for the parent and, even more importantly, the undercapitalization of the subsidiary rendering it judgment-proof.

Facts:

Plaintiff OTR leased a space for use by a Blimpie franchisee, Samyrna, Inc., a corporation owned by Sam Iskander and his wife. The franchise agreement, styled as a licensing agreement, had been entered into in 1984 between Samyrna and the parent company, then known as International Blimpie Corporation, whose name was changed in to Astor Restaurant Group, Inc., and again to Blimpie International, Inc. Blimpie was the sole owner of a subsidiary named IBC Services, Inc. (IBC), created for the single purpose of holding the lease on premises occupied by a Blimpie franchisee. IBC entered into the lease with OTR and with OTR's consent, subleased the space to the franchisee. The history of the tenancy was marked by regular and increasingly substantial rent arrearages, and it was terminated by a dispossess judgment and warrant for removal. OTR commenced this action for unpaid rent then in the amount of close to $ 150,000, against Blimpie under both its present name and its former name, International Blimpie Corporation. It also joined as defendants the leasing subsidiary, IBC, as well as Garden State Blimpie, Inc., another wholly-owned leaseholding subsidiary of Blimpie to whom IBC had assigned the lease in 1991 without notice to the landlord in violation of the terms of the lease requiring such notice.

Issue:

Was the trial court correct, based on its findings was justified in piercing the corporate veil and thus holding a parent corporation liable for the debt incurred by its wholly owned subsidiary?

Answer:

Yes

Conclusion:

The trial court was justified in piercing the corporate veil and thus holding the franchisor liable for the debt incurred by the subsidiary. The appellate court was satisfied the facts presented a textbook illustration of circumstances mandating corporate-veil piercing. The appellate court agreed with the trial court that the inference was ineluctable, that the subsidiary was created as a judgment-proof corporation for the sole purpose of insulating the franchisor from any liability on the lease in the event of the franchisee's default. Further, the appellate court noted domination and control by the franchisor of the subsidiary was patent and was not reasonably disputed. Finally, the appellate court was satisfied there clearly was an implicit representation in the franchisor's conduct, which reasonably induced the owner to believe it and the subsidiary were the same.

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