Asset Protection Concepts and Strategies by Riser Adkisson LLP

Alter ego case demonstrates facts-and-circumstances nature of challenge

In litigation, whether an asset protection structure will survive may often depend on whether the business entities involved in the planning can withstand a challenge based on alter ego. As this case illustrates, the body of law involving alter ego is a poorly-defined mess that often (perhaps usually) boils down to a facts-and-circumstances test of whether it would be fair or not to allow the defendant to stand behind the entity.

NetJets Aviation, Inc. v. LHC Communications, LLC, ___ F.3d
____, 2008 WL 3256981 (2nd Cir. (N.Y.), August 8, 2008)

United States Court of Appeals, Second Circuit.

NETJETS AVIATION, INC., and Netjets Sales, Inc.,
Plaintiffs-Appellants,

v.

LHC COMMUNICATIONS, LLC, and Laurence S. Zimmerman,
Defendants-Appellees.

Docket No. 06-3340-cv

Argued: Jan. 15, 2008; Decided: Aug. 8, 2008.

Robert T. Barnard, New York, N.Y. (Joseph B. Koczko,
Courtney L. Scheinmel, Thompson Hine, New York, NY, O. Judson Scheaf, Scott A.
Campbell, Michele L. Noble, Thompson Hine, Columbus, OH, on the brief), for
Plaintiffs-Appellants.

Michael F. Schwartz, New York, N.Y. (Penn Proefriedt
Schwarzfeld and Schwartz, New York, NY, on the brief), for Defendants-Appellees.

Before KEARSE, LEVAL, and CABRANES, Circuit Judges.

KEARSE, Circuit Judge:

*1 Plaintiffs NetJets Aviation, Inc., and NetJets Sales,
Inc. (collectively "NetJets"), appeal from so much of a judgment of the United
States District Court for the Southern District of New York, Deborah A. Batts,
Judge, as summarily dismissed their claims against defendant LHC Communications,
LLC ("LHC"), for breach of contract and their claims against defendant Laurence
S. Zimmerman, as LHC's alter ego, for breach of contract and account stated. The
district court, having granted partial summary judgment in favor of NetJets on
account-stated claims against LHC, sua sponte dismissed NetJets's
breach-of-contract claims against LHC on the ground that they were duplicative
of the account-stated claims. The court sua sponte granted summary judgment
dismissing NetJets's claims against Zimmerman on the ground that NetJets had not
adduced sufficient evidence to pierce the corporate veil. On appeal, NetJets
contends principally that the district court erred (1) in treating its
breach-of-contract claims as duplicative of its-account-stated claims, because
the pertinent contracts allow NetJets to recover not only the balances due on
LHC's accounts but also attorneys' fees, and (2) in concluding that there was
not sufficient evidence to support its breach-of-contract and account-stated
claims against Zimmerman as LHC's alter ego. Finding merit in NetJets's
contentions, we vacate so much of the judgment as dismissed the above claims and
remand for further proceedings.

I. BACKGROUND

NetJets is engaged in the business of leasing fractional
interests in airplanes and providing related air-travel services. LHC is a
Delaware limited liability company whose sole member-owner is Zimmerman. Most of
the facts with respect to the relationship between NetJets and LHC are not in
dispute.

A. The Contracts Between NetJets and LHC

On August 1, 1999, LHC entered into two contracts with
NetJets. In the first (the "Lease Agreement"), NetJets leased to LHC a 12.5
percent interest in an airplane, for which LHC was to pay NetJets a fixed
monthly rental fee. The lease term was five years, with LHC having a qualified
right of early termination. The second contract (the "Management Agreement")
required NetJets to manage LHC's interest in the leased airplane and to provide
services such as maintenance and piloting with respect to that airplane, or
substitute aircraft, at specified hourly rates. It required LHC to pay a monthly
management fee, as well as fuel charges, taxes, and other fees associated with
LHC's air travel. The Management Agreement allotted to LHC use of the airplane
for an average of 100 hours per year for the five-year term of the lease ("LHC
air hours"), and it provided that if the leased airplane were unavailable at a
time when LHC wished to use it, NetJets would provide substitute aircraft.
NetJets regularly sent LHC invoices for the services provided under the Lease
and Management Agreements.

The Lease Agreement provided that "[i]f any action at law
or in equity is necessary to enforce the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees in addition to any other
relief to which such party may be entitled." (Lease Agreement sec. 19.) It was
agreed that the Lease Agreement would be "governed by and construed in all
respects in accordance with the laws of the State of New York." ( Id. sec. 17.)
The Management Agreement, which the parties agreed would be governed by Ohio law
( see Management Agreement sec. 21), provided that if LHC failed to pay amounts
due under that Agreement, LHC would be liable for the costs of collection,
including reasonable attorneys' fees ( see id. sec. 7).

*2 In July 2000, LHC terminated its agreements with
NetJets. LHC's chief financial officer ("CFO") James P. Whittier sent a letter,
addressed to a NetJets vice president, stating, in pertinent part, that "[t]he
present outstanding is $440,840.39 and we are requesting that you apply the
deposit of $100,000 against the outstanding and contact this office to resolve
the balance." (Letter from James P. Whittier to Ron Miller dated July 24, 2000
("LHC Termination Letter").)

As requested, NetJets contacted LHC and applied the
$100,000 deposit against LHC's debt; however, it did not receive payment of the
remaining balance of $340,840.39. In 2001, LHC ceased operations.

B. The Present Action and the Decision of the District
Court

NetJets commenced the present diversity action in 2002,
asserting claims against LHC and Zimmerman for breach of contract, account
stated, and unjust enrichment. In connection with the breach-of-contract claims,
NetJets requested an award of attorneys' fees.

Following a period of discovery, NetJets moved for summary
judgment against both defendants on the breach-of-contract and account-stated
claims. NetJets contended that Zimmerman should be held liable for the debts of
LHC as its alter ego based on evidence, described in greater detail in Part
II.B. below, of, inter alia, (a) the frequent use of LHC air hours for personal
travel by Zimmerman and his friends and family, (b) the frequent transfers of
funds between LHC and Zimmerman's other companies, (c) Zimmerman's frequent
withdrawal of funds from LHC for his own personal use, and (d) the fact that LHC
is no longer in business and has no assets with which to pay its debt to
NetJets, a condition that NetJets contends was caused by Zimmerman's
withdrawals.

In a Memorandum and Order dated June 12, 2006, the district
court granted NetJets's summary judgment motion in part, awarding it $340,840.39
against LHC on the account-stated claims. See NetJets Aviation, Inc. v. LHC
Communications LLC, No. 02 Civ. 7441, 2006 WL 1627899 (S.D.N.Y. June 12, 2006).
The court concluded that, in light of the LHC Termination Letter, whose
authenticity was unchallenged, there was no genuine issue to be tried with
respect to LHC's liability to NetJets in the amount of $340,840.39. See 2006 WL
1627899, at *7. The district court denied the remainder of NetJets's motion and
dismissed its contract claims against LHC-as well as its unjust enrichment
claims. The court concluded that because it had ruled in favor of NetJets
against LHC on the theory of account stated, NetJets's claims against LHC "for
alternative relief under a breach of contract theory do not survive." Id. The
court concluded that NetJets could not recover against LHC for unjust
enrichment, a theory alternative to breach of contract, because NetJets's rights
were grounded in contracts that were essentially undisputed. See id. at *8.

The district court also denied NetJets's motion for summary
judgment on its contract and account-stated claims against Zimmerman. It stated
that under Delaware law, in order to recover against Zimmerman for the debts of
LHC, NetJets would be required to meet a two-pronged test showing "(1) that the
business entity and its owner ‘operated as a single economic entity’ and (2)
that [there was] an ‘overall element of injustice or unfairness.’ " Id. at *4
(quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1458 (2d Cir.1995), which applied
Delaware law). The court concluded that although NetJets had "shown that
Zimmerman and LHC functioned as a single economic unit," 2006 WL 1627899, at *5,
NetJets had not "set forth any facts from which a jury could reasonably conclude
that Zimmerman formed LHC with the specific fraudulent intent of evading
liability to Plaintiffs," id. at *6. The court noted that while "something other
than specific fraudulent intent could satisfy the second prong, wherever courts
have given shape to the second prong, they primarily have focused on the need to
show fraud or bad faith," id.; it stated that NetJets had "not proven as a
matter of law that Zimmerman conducted a sophisticated shell game to the
purposeful detriment of creditors, namely NetJets," id. The district court
rejected the proposition that the requisite unfairness was shown by the evidence
that "Zimmerman allowed LHC to default on its payments to NetJets even as he was
siphoning money from the company coffers, transferring funds to other companies
he controlled, and making payments through LHC on a mortgage and luxury cars
that were in his own name." Id. (internal quotation marks omitted). The court
stated that "each of these actions are factors in considering the first prong of
the alter ego analysis and cannot simultaneously be used by Plaintiffs to
satisfy the second prong. ‘To hold otherwise would render the fraud or injustice
element meaningless....' " Id. (quoting Mobil Oil Corp. v. Linear Films, Inc.,
718 F.Supp. 260, 268 (D.Del.1989)).

*3 Although Zimmerman had not moved for summary judgment in
his favor, the court sua sponte granted summary judgment dismissing all of
NetJets's claims against him.

II. DISCUSSION

On appeal, NetJets contends principally (1) that the
district court erred in dismissing its contract claims as duplicative of its
account-stated claims, arguing that the pertinent contracts allow NetJets to
recover not only the balances due on LHC's accounts but also reasonable
attorneys' fees incurred in collecting those debts; and (2) that the evidence as
to Zimmerman's operation of LHC for his personal use warranted the entry of
summary judgment in NetJets's favor on its veil-piercing breach-of-contract and
account-stated claims against Zimmerman, or at least was sufficient to preclude
the entry of summary judgment dismissing those claims. Zimmerman, in addition to
endorsing the district court's decision that he was entitled to judgment for
lack of proof of an overall element of injustice or unfairness, contends that
the entry of summary judgment in his favor may also be upheld on a different
ground, see, e.g., Massachusetts Mutual Life Insurance Co. v. Ludwig, 426 U.S.
479, 480-81, 96 S.Ct. 2158, 48 L.Ed.2d 784 (1976) (a party need not cross-appeal
in order to assert an alternative ground, based on the record, to support the
district court's judgment). He argues that the court was presented with
sufficient evidence to preclude a finding that he and LHC operated as a single
entity.

For the reasons that follow, we conclude that NetJets's
breach-of-contract claims against LHC were erroneously dismissed and that
NetJets is entitled to trial on its contract and account-stated claims against
Zimmerman as LHC's alter ego.

A. NetJets's Breach-of-Contract Claims Against LHC

Two claims are duplicative of one another if they "arise from the same facts ... and
do not allege distinct damages." Sitar v. Sitar, 50 A.D.3d 667, 670, 854
N.Y.S.2d 536, 538 (2d Dep't 2008); see, e.g., Conway v. Icahn and Co., 16 F.3d
504, 511 (2d Cir.1994). Where a claimant is entitled to a particular category of
damages on one claim but not the other, the claims are not duplicative. See
generally Freitag v. Bill Swad Datsun, 3 Ohio App.3d 83, 86, 443 N.E.2d 988, 992
(1981) (when a plaintiff establishes the elements of two claims arising out of
the same set of facts, he is entitled to judgment on the claim that provides the
greater measure of damages).

Under New York law, a contract that provides for an award of reasonable attorneys'
fees to the prevailing party in an action to enforce the contract is enforceable
if the contractual language is sufficiently clear. See, e.g., Mid-Hudson
Catskill Rural Migrant Ministry, Inc. v. Fine Host Corp., 418 F.3d 168, 177-79
(2d Cir.2005); Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487,
491-92, 549 N.Y.S.2d 365, 366-67, 548 N.E.2d 903 (1989) (same). Under Ohio law,
such contractual provisions for attorneys' fees are enforceable to the extent
that the trial court, after consideration of all the circumstances of the case,
may award such fees as are fair, just, and reasonable. See, e.g., Nottingdale
Homeowners' Association, Inc. v. Darby, 33 Ohio St.3d 32, 37, 514 N.E.2d 702,
706-07 (1987); Northwoods Condominium Owners' Association v. Arnold, 147 Ohio
App.3d 343, 348, 770 N.E.2d 627, 630-31 (2002).

*4 On a valid cause of action for account stated, a plaintiff is entitled to recover the
amount due on the defendant's account. Recovery on such a claim does not
ordinarily include an award for attorneys' fees. See, e.g., Citibank (South
Dakota), N.A. v. Martin, 11 Misc.3d 219, 225 n. 6, 807 N.Y.S.2d 284, 290 n. 6
(Civ.Ct.2005) (a "fee award cannot be based upon a cause of action pleading an
account stated"); see generally Keal v. Day, 164 Ohio App.3d 21, 24, 840 N.E.2d
1139, 1141 (2005) ("Ohio has adopted the ‘American Rule,’ by which each party to
a lawsuit must pay his or her own attorney fees," unless an exception applies,
such as "the parties' contract provid[ing] for fee-shifting"). Thus, when a
party has both a claim for account stated and a claim under a contract that
provides for an award of attorneys' fees, the claims for breach of contract and
account stated are not duplicative.

In dismissing NetJets's breach-of-contract claims as
duplicative of its account-stated claims, the district court relied on Lankler
Siffert and Wohl, LLP v. Rossi, No. 02 Civ. 10055, 2004 WL 541842 (S .D.N.Y.
Mar. 19, 2004) (" Lankler "). That reliance was misplaced, however, because in
that case the plaintiffs' claims (for account stated, breach of contract,
conversion, unjust enrichment, and tortious interference with contractual
relations) all "s[ought] the same relief"; thus, the Lankler court noted that
"[i]f each of the judgments for the Moving Plaintiffs on their account stated
claims are satisfied, then the Moving Plaintiffs will have received full
relief." Id. at *4.

LHC's brief on appeal presents no serious argument in
support of the district court's conclusion that the NetJets claims for account
stated and breach of contract were duplicative. It merely states conclusorily
that those claims "are duplicative" (LHC brief on appeal at 22), and cites the
fact that "NetJets' Memorandum of Law" in support of its motion for summary
judgment discussed the account-stated claims "first" before discussing the
breach-of-contract claims ( id. at 21-22).

As set forth in Part I.A. above, both the Lease Agreement,
which the parties agreed is to be governed by New York law, and the Management
Agreement, which the parties agreed is to be governed by Ohio law, contain
clauses that allow NetJets to recover reasonable attorneys' fees incurred in
collecting the sums due under the respective Agreements. As those fees could not
be recovered on claims for account stated, NetJets's contract claims were not
duplicative of its claims for account stated.

B. NetJets's Claims Against Zimmerman

1. Limitations on Limited Liability

A limited liability company (or "LLC"), formed by one or more entities and/or
individuals as its "members," is an entity that, as a general matter, provides
"tax benefits akin to a partnership and limited liability akin to the corporate
form." Elf Altochem North America, Inc. v. Jaffari, 727 A.2d 286, 287
(Del.1999); see generally id. at 290. The shareholders of a corporation and the
members of an LLC generally are not liable for the debts of the entity, and a
plaintiff seeking to persuade a Delaware court to disregard the corporate
structure faces "a difficult task," Harco National Insurance Co. v. Green Farms,
Inc., No. CIV. A. 1331, 1989 WL 110537, at *4 (Del. Ch. Sept. 19, 1989) (" Harco
").

*5 Nonetheless, in appropriate circumstances, the distinction between the entity
and its owner "may be disregarded" to require an owner to answer for the
entity's debts. Pauley Petroleum Inc. v. Continental Oil Co., 239 A.2d 629, 633
(Del.1968). In general, with respect to the limited liability of owners of a
corporation,

Delaware law permits a court to pierce the corporate veil "where there is fraud or where
[the corporation] is in fact a mere instrumentality or alter ego of its owner."
Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch.1992); see, e.g.,
Martin v. D.B. Martin Co., 10 Del.Ch. 211, 217, 88 A. 612, 615 (1913) (" Martin
") ("Where one corporation owns all the shares of another corporation,
co-operating in the same business, the former financing the latter, and the same
persons are officers of both corporations, the latter is for certain purposes to
be considered as an agency, adjunct or instrumentality of the former."); id. at
216-17, 88 A. 612, 88 A. at 615 ("It must be in the power of the court to look
through these legal fictions to the equitable realities and see by whom and
through what agencies the wrong is done and on whom the loss ultimately
falls."). Given the similar liability shields that are provided by corporations
and LLCs to their respective owners, "[e]merging caselaw illustrates" that
"situations that result in a piercing of the limited liability veil are similar
to those [that warrant] piercing the corporate veil." J. Leet, J. Clarke, P.
Nollkamper and P. Whynott, The Limited Liability Company sec. 11:130, at 11-7
(rev. ed.2007); see also id . at 11-9, 88 A. 612 ("Every state that has enacted
LLC piercing legislation has chosen to follow corporate law standards and not
develop a separate LLC standard.").

To prevail under the alter-ego theory of piercing the veil, a plaintiff need not prove that
there was actual fraud but must show a mingling of the operations of the entity
and its owner plus an "overall element of injustice or unfairness." Harco, 1989
WL 110537, at *4.

"[A]n alter ego analysis must start with an examination of
factors which reveal how the corporation operates and the particular defendant's
relationship to that operation. These factors include whether the corporation
was adequately capitalized for the corporate undertaking; whether the
corporation was solvent; whether dividends were paid, corporate records kept,
officers and directors functioned properly, and other corporate formalities were
observed; whether the dominant shareholder siphoned corporate funds; and
whether, in general, the corporation simply functioned as a facade for the
dominant shareholder."

Id. at *4 (quoting United States v. Golden Acres, Inc., 702
F.Supp. 1097, 1104 (D.Del.1988) (" Golden Acres "), aff'd, 879 F.2d 857 and 860
(3d Cir.1989)).

"[N]o single factor c[an] justify a decision to disregard
the corporate entity, but ... some combination of them [i]s required, and ... an
overall element of injustice or unfairness must always be present, as well."
Harco, [1989 WL 110537, at *5] (quoting Golden Acres, 702 F.Supp. at 1104).

*6 Harper v. Delaware Valley Broadcasters, Inc., 743
F.Supp. 1076, 1085 (D.Del.1990) (" Harper ") (emphasis added), aff'd, 932 F.2d
959 (3d Cir.1991).

As the above discussion indicates, "[n]umerous factors 34 come into play
when discussing whether separate legal entities 35 should be regarded as alter
egos," id., and "[t]he legal test for determining when a corporate form should
be ignored in equity cannot be reduced to a single formula that is neither
over-nor under-inclusive," Irwin and Leighton, Inc. v. W.M. Anderson Co., 532
A.2d 983, 989 (Del.Ch.1987). Stated generally, the inquiry initially focuses on
whether "those in control of a corporation" did not "treat[ ] the corporation as
a distinct entity"; and, if they did not, the court then seeks "to evaluate the
specific facts with a standard of ‘fraud’ or ‘misuse’ or some other general term
of reproach in mind," id., such as whether the corporation was used to engage in
conduct that was "inequitable," Mobil Oil Corp. v. Linear Films, Inc., 718
F.Supp. 260, 269 (D.Del.1989) (" Mobil Oil ") (internal quotation marks
omitted), or "prohibited," David v. Mast, No. 1369-K, 1999 WL 135244, at *2
(Del.Ch. Mar.2, 1999), or an "unfair trade practice," id., or "illegal," Martin,
10 Del.Ch. at 219, 88 A. at 615.

Simply phrased, the standard may be restated as: "whether
[the two entities] operated as a single economic entity such that it would be
inequitable for th [e] Court to uphold a legal distinction between them." Mabon,
Nugent and Co. [v. Texas American Energy Corp. ., No. CIV. A. 8578, 1990 WL
44267, at *5 (Del.Ch. Apr.12, 1990) ].

Harper, 743 F.Supp. at 1085. Our Court has stated this as a
two-pronged test focusing on (1) whether the entities in question operated as a
single economic entity, and (2) whether there was an overall element of
injustice or unfairness. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d
Cir.1995).

Finally,
we note that the plaintiff need not prove that the corporation was created with
fraud or unfairness in mind. It is sufficient to prove that it was so used. See,
e.g., Martin, 10 Del.Ch. at 219, 88 A. at 615 (corporate form may be disregarded
"when used as a shield for fraudulent or other illegal acts, though it does not
appear that the arrangement was originally intended to perpetrate a fraud");
Sonne v. Sacks, No. CIV.A. 4416, 1979 WL 178497, at *2 (Del.Ch. June 12, 1979)
(courts "look behind the corporate curtain" generally "where the facts indicate
that the corporate entity has been or is being used by those in control of it to
perpetrate a fraud" or to "promote injustice" (internal quotation marks
omitted)).

These
principles are generally applicable as well where one of the entities in
question is an LLC rather than a corporation. See, e.g., Oliver v. Boston
University, No. 16570, 2000 WL 1091480, at *9, *12 (Del.Ch. Jul.18, 2000)
(holding that a Massachusetts LLC, created solely to serve the interests of its
owner and completely dominated by the owner, could be fairly characterized as
the alter ego of its owner). In the alter-ego analysis of an LLC, somewhat less
emphasis is placed on whether the LLC observed internal formalities because
fewer such formalities are legally required. See, e.g., Delaware Limited
Liability Company Act, Del.Code Ann. tit. 6, sec. 18-101 et seq. ("DLLCA")
(requiring little more than that an LLC execute and file a proper certificate of
formation, see id. sec. 18-201(a), maintain a registered office in Delaware, see
id. sec. 18-104(a)(1), have a registered agent for service of process in
Delaware, see id. sec. 18-104(a)(2), and maintain certain records such as
membership lists and tax returns, see id. sec. 18-305(a)). On the other hand, if
two entities with common ownership "failed to follow legal formalities when
contracting with each other it would be tantamount to declaring that they are
indeed one in the same." Trustees of Village of Arden v. Unity Construction Co.,
No. C.A. 15025, 2000 WL 130627, at *3 (Del.Ch. Jan.26, 2000) (emphasis added).

2. Summary Judgment Principles

*7 With
the above substantive framework in mind, we turn to (a) Zimmerman's contention
that he was entitled to summary judgment on the ground-contrary to the district
court's opinion-that there was insufficient evidence to permit a finding that he
and LHC operated as a single economic entity, and (b) NetJets's contention that
the district court erred in finding that despite the intertwined operation of
Zimmerman and LHC, there was insufficient evidence to permit a finding of an
overall element of injustice or unfairness. In addressing these contentions, we
apply the familiar principles that, in reviewing the grant-or denial-of summary
judgment, see, e.g., Local Union No. 38, Sheet Metal Workers' International
Association, AFL-CIO v. Pelella, 350 F.3d 73, 80 (2d Cir.2003) (denial of
summary judgment is reviewable after a final decision has rendered the case
appealable), we review the record de novo, and we view the evidence in the light
most favorable to the party against which summary judgment was granted or
sought, see, e.g ., Amidon v. Student Association of the State University of New
York at Albany, 508 F.3d 94, 98 (2d Cir.2007); Cronin v. Aetna Life Insurance
Co., 46 F.3d 196, 202-03 (2d Cir.1995); New York State Association of Realtors,
Inc. v. Shaffer, 27 F.3d 834, 838 (2d Cir .), cert. denied, 513 U.S. 1000, 115
S.Ct. 511, 130 L.Ed.2d 418 (1994).

Further, we note that although a district court may, on an appropriate record,
grant summary judgment sua sponte-after giving the party against which the court
is contemplating such a decision notice and an opportunity to present evidence
and arguments in opposition, see, e.g., B.F. Goodrich v. Betkoski, 99 F.3d 505,
531 (2d Cir.1996)-the court, in considering such a decision, is required to view
the record in the light most favorable to the party against which summary
judgment is contemplated and to resolve all ambiguities and draw all factual
inferences in favor of that party, see generally Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Coach
Leatherware Co. v. AnnTaylor, Inc., 933 F.2d 162, 167 (2d Cir.1991). Summary
judgment is not appropriate if the evidence is such that a reasonable jury could
return a verdict in favor of the party against which summary judgment is
contemplated. See, e.g., Anderson, 477 U.S. at 248.

Finally, we emphasize that the fact that a party who has moved for summary
judgment in his own favor has not shown that he is entitled to judgment as a
matter of law does not mean that it is appropriate to grant summary judgment
against him. See, e.g., id. at 248-49 ("[T]he issue of material fact required
... to entitle a party to proceed to trial is not required to be resolved
conclusively in favor of the party asserting its existence; rather, all that is
required is that sufficient evidence supporting the claimed factual dispute be
shown." (internal quotation marks omitted) (emphasis added)); Brown v. Cara, 420
F.3d 148, 160-61 (2d Cir.2005). Thus, in deciding a party's summary judgment
motion, the district court is required to view the record in the light most
favorable to the party against which summary judgment is sought. But in
considering whether to grant summary judgment against the moving party sua
sponte, the court is required to view the evidence in the moving party's favor.

3. The Evidence that LHC and Zimmerman Operated as One

*8 With
respect to the question of whether LHC and Zimmerman operated as a single
entity, the record contains, inter alia, financial records of LHC and deposition
testimony from Zimmerman and LHC's CFO, Whittier. The evidence discussed below,
taken in the light most favorable to NetJets, shows, inter alia, that LHC, of
which Zimmerman is the sole member-owner, was started with a capitalization of
no more than $20,100; that LHC proceeded to invest millions of dollars supplied
by Zimmerman, including some $22 million in an internet technology company
eventually called Bazillion, Inc. ("Bazillion"); and that Zimmerman put money
into LHC as LHC needed it, and took money out of LHC as Zimmerman needed it.

Whittier, who had known Zimmerman since 1980 and worked
with him full time from 1996 until April 2002 ( see, e.g., Deposition of James
P. Whittier ("Whittier Dep.") at 10-12), was LHC's only officer other than
Zimmerman ( see Affidavit of Laurence Zimmerman dated October 14, 2004
("Zimmerman Aff."), para. 16). In addition to LHC, Zimmerman directly or
indirectly owned or controlled a number of companies, including Landover Telecom
Corporation ("Landover Telecom"), LandTel N.V. ("LandTel"), IP II Partners, LP
("IP II"), Fox Lair Holdings Corporation ("Fox Lair"), and Kimlar Consulting
Corporation ("Kimlar"). ( See Whittier Dep. 66-67, 70, 72-73, 78.) Whittier
acted as CFO for each of those companies. ( See id. at 23, 68, 71, 72, 74, 79.)
During most of the period 1996 to April 2002, Whittier "got paid from either Mr.
Zimmerman or one of his corporations." ( Id. at 14.)

Zimmerman formed LHC in 1998; for most of its operating
life, it shared office space with some of Zimmerman's other companies; LHC
employed no more than five-to-seven people at any given time; and some of its
employees worked for both LHC and Zimmerman's other companies or for LHC and
Zimmerman personally. ( See Whittier Dep. 24; Deposition of Laurence Zimmerman,
October 1, 2003 ("Zimmerman Dep. I"), at 58.) Whittier ran much of LHC's
day-to-day operations based on instructions, general or specific, received from
Zimmerman. ( See Whittier Dep. 23, 39.)

Zimmerman formed LHC "to be used as an investment vehicle
for Mr. Zimmerman for him to make investments." ( Id. at 19.) "With regards to
investments, Mr. Zimmerman reviewed investments. If he decided to go forward
after his review, he would make an investment through [LHC] to an investment
corporation he wanted to invest in." ( Id. at 22.) Although Zimmerman sought
Whittier's advice as to the best way of accomplishing something he had decided
he wanted to do ( see id. at 23), the ultimate decisions were always made by
Zimmerman. "There were no decisions, financial decisions, made with regard to
LHC without Mr. Zimmerman's approval." ( Id. at 22.)

Whittier testified that LHC also "was an operating company
which maintained a consulting agreement with another entity called Landtel NV."
( Id. at 19.) But LandTel, which was wholly owned by Zimmerman's Landover
Telecom-and was apparently LHC's only paying client-did not come into existence
until January 2000 ( id. at 69-70), and LHC records do not show receipt of any
consulting fees from LandTel until July 2000. Until LandTel was formed,
therefore, the day-to-day LHC operations run by Whittier apparently consisted
only of making Zimmerman's investments and carrying on Zimmerman's personal
business:

*9 Q. What was your role with regard to LHC?

A. I was acting chief financial officer.

Q. What were your responsibilities as chief financial
officer?

A. They were defined by Mr. Zimmerman. I basically tried to
carry out what Mr. Zimmerman's wishes were.

....

Q. What did your day-to-day responsibilities with regard to
Mr. Zimmerman include?

A. They varied. It was working on a potential investment
that LHC might make; it was overseeing the consulting agreement that it had,
might have had, that it did have with Landtel, and it was personal business.

Q. By "personal business," do you mean the personal
business of Mr. Zimmerman?

A. Sure.

Q. Do you mean anything else by "personal business? "

A. No.

(Whittier Dep. 23, 24 (emphases added).) Whittier's
compensation was paid sometimes by LHC and sometimes by Zimmerman personally. (
See id. at 14.)

In connection with Zimmerman's personal business, LHC's
records show numerous transfers of money by Zimmerman to LHC, as well as
numerous transfers of money from LHC to Zimmerman. Some of the transfers by
Zimmerman to LHC were for the purpose of having LHC make investments,
principally in Bazillion. Other transfers by Zimmerman to LHC were made for the
purpose of meeting LHC's operating expenses:

To the extent that the corporation had to pay operating
expenses like rent, telephone, copy, employees, if there was not sufficient
capital in the corporation, he would then advance the money personally to the
corporation to meet these obligations.

(Whittier Dep. 27.) Whittier testified that Zimmerman would
transfer funds to LHC "as needed." ( Id. at 26; see also id. at 61 ("Monies
would go in ... LHC based on the need.").) Often those funds would come from
Zimmerman's personal bank accounts. However, because Zimmerman generally waited
until the eleventh hour to provide money to meet LHC's operating needs,
sometimes "shortcuts" were taken by having the money come to LHC directly from
one of Zimmerman's other companies ( id. at 46-47) such as Landover Telecom,
Kimlar, Fox Lair, or IP II, none of which had any business relationship with LHC
( see, e.g., Deposition of Laurence S. Zimmerman, February 20, 2004 ("Zimmerman
Dep. II"), at 16, 24, 26; Whittier Dep. 68, 75).

Whittier testified also that "[m]onies would go ... out of
LHC based on the need." (Whittier Dep. 61 (emphasis added).) For example,
Zimmerman would take money out of LHC to "mak[e] an investment in another
entity." ( Id. at 41.) In addition, at several brokerage firms, Zimmerman had
personal accounts that were unrelated to LHC's operations; he had many margin
calls in those accounts ( see id. at 60) because he "utilized margin debt very
aggressively," especially with respect to two stocks whose market prices dropped
sharply in 2000 ( id. at 59 (one "from a high of above 90 down to the 60s" and
the other "from a high of 93 down to 3")). Zimmerman had LHC make payments to
meet some of these margin calls in his personal accounts. On May 15 and 16,
2000, for example, LHC wired a total of $2 million to Salomon Smith Barney to
meet margin calls or reduce the margin debt on Zimmerman's personal brokerage
accounts. ( See id. at 50-51, 60-62.) On August 22 and October 6, 2000, LHC sent
Paine Webber, another firm at which Zimmerman personally had "big brokerage
accounts" ( id. at 44), checks totaling $2 million. Some of the money that LHC
used to pay Zimmerman's margin calls was "loan money" that Zimmerman had put
into LHC. (Whittier Dep. 61 (describing the money as being "repatriated back to
Mr. Zimmerman").) Other money used to meet Zimmerman's margin calls was money
that LHC received from a third party ("Riverside") purchasing a share of an LHC
asset. Thus, the $2 million that LHC paid to Salomon Smith Barney in May 2000
was money that Riverside paid LHC to buy participation in a Bazillion
convertible subordinated note owned by LHC. Riverside "bought [participation in
the note] directly from LHC" ( id. at 64); but Riverside's payment to LHC was
used to meet margin calls in Zimmerman's personal brokerage accounts ( id. at
62-64).

*10 LHC also transferred money to Zimmerman, or to third
persons on his behalf, in connection with his living expenses. For example, LHC
made payments to Fox Lair (consistently called "Fox Liar" in LHC's general
ledger), a Zimmerman corporation that owned a $15 million New York apartment on
Park Avenue, which was characterized by Zimmerman as "a corporate residence" but
was used by no one other than Zimmerman and his family (Zimmerman Dep. II, at
28). Fox Lair needed money "to pay phone bills and cleaning people and things of
that nature" (Whittier Dep. 80); according to LHC's ledgers, from December 5,
2000, through July 2, 2001, Fox Lair received some $70,000 from LHC. In
addition, LHC made periodic payments to the Screen Actors Guild (of which
Zimmerman's wife was a member) for health insurance for Zimmerman and his family
( see id. at 49-50); LHC purchased a Bentley automobile at a cost of
approximately $350,000 for Zimmerman's personal use, placing title in his name (
see Zimmerman Dep. I, at 68-69); and LHC made a payment of $110,000,
characterized in its general ledger as "Loan receivable" and in its check
register as "Interest Expense," to a person who had no connection with LHC but
who held a mortgage on a property owned by Zimmerman personally ( see Zimmerman
Dep. II, at 28-29).

In addition, many of the air hours to which LHC was
entitled under its agreements with NetJets were used by Zimmerman personally. Of
the 40-odd LHC flights invoiced by NetJets, Zimmerman acknowledges that
"approximately 6" were for vacations for himself and/or his wife. (Zimmerman
Aff. para. 12.) But in addition to those six, there were at least an equal
number of flights that apparently had no relation to LHC's business. These
flights included several that transported Zimmerman's family to and from Europe
or to and from one of Zimmerman's five homes. Zimmerman contends that use of LHC
air hours for these purposes was "part of [his compensation] package" (Zimmerman
Dep. I, at 41) and "[o]ne of the perks of being the chairman" ( id. at 39-40).
That may be; but for purposes of determining whether Zimmerman and LHC were
alter egos, it is pertinent that Zimmerman made all of LHC's financial decisions
( see, e.g., Whittier Dep. 22, 39-40); Zimmerman alone decided what his perks
and package would be.

In LHC's general ledger, each of the transfers of money
between LHC and Zimmerman-in either direction-is labeled "Loan receivable ."
They were also so labeled regardless of whether Zimmerman's payment to LHC was
to be used to make an investment or was to be used for operating expenses.
Whittier, who had responsibility for LHC's financial records, testified that the
ledger treated Zimmerman's payments to and withdrawals from LHC as loans and
loan repayments in order to allow Zimmerman to make withdrawals as he needed
money, without having to pay taxes on the moneys withdrawn. ( See, e.g., id. at
34.) Thus, aside from Zimmerman's initial capital contribution to LHC (which
Whittier thought was $100), "any monies that Mr. Zimmerman ... deposited into
LHC should have been designated as loans" ( id. at 38-39, 25). The decision that
those transactions would be labeled loans or loan repayments was made by
Zimmerman. ( See id. at 39.)

*11 "There were no written agreements" with regard to any
of Zimmerman's loans ( id.); nor were there any "set repayment program" or
agreements as to repayment terms ( id. at 40): "Money was put in as needed and
when money was not needed and Mr. Zimmerman needed money elsewhere, he might
transfer it out. That was his decision to make." ( Id. at 40 (emphasis added).)
" There was no procedure. Money was put in and taken out as needed." ( Id. at 62
(emphasis added).)

In all, LHC's financial records for the period January 1,
2000, through June 18, 2002, show-in addition to some two dozen transactions
between LHC and Zimmerman's other companies-approximately 60 transfers of money
directly from Zimmerman to LHC and approximately 60 transfers of money out of
LHC directly to Zimmerman. In sum, there is evidence that, inter alia, Zimmerman
created LHC to be one of his personal investment vehicles; that he was the sole
decisionmaker with respect to LHC's financial actions; that Zimmerman frequently
put money into LHC as LHC needed it to meet operating expenses; that LHC used
some of that money, as well as some moneys it received from selling shares of
one of its assets, to pay more than $4.5 million to third persons for
Zimmerman's personal expenses including margin calls, mortgage payments,
apartment expenses, and automobiles; and that with no written agreements or
documentation or procedures in place, Zimmerman directly, on the average of
twice a month for 2 1/2 years, took money out of LHC at will in order to make
other investments or to meet his other personal expenses. This evidence is ample
to permit a reasonable factfinder to find that Zimmerman completely dominated
LHC and that he essentially treated LHC's bank account as one of his pockets,
into which he reached when he needed or desired funds for his personal use.
Accordingly, we reject Zimmerman's contention that the district court should
have granted summary judgment in his favor on the ground that he and LHC did not
operate as a single economic entity.

4. The Evidence of Fraud, Illegality, or Injustice

The
district court ruled that NetJets had not adduced sufficient evidence to show
that there was any fraud or unfairness in Zimmerman's operation of LHC because
the court believed it could not consider, with regard to that issue, any of the
factors that showed that Zimmerman and LHC operated as a single entity. In so
ruling, the court stated that " ‘[t] o hold otherwise would render the fraud or
injustice element meaningless....' " 2006 WL 1627899, at *6 (quoting Mobil Oil,
718 F.Supp. at 268). Mobil Oil, however, did not suggest that there can be no
overlap in the proof as to unity of ownership and the proof of unfairness.
Rather, it stands for the proposition that the claimed injustice must consist of
more than merely the tort or breach of contract that is the basis of the
plaintiff's lawsuit: "The underlying cause of action does not supply the
necessary fraud or injustice. To hold otherwise would render the fraud or
injustice element meaningless...." 718 F.Supp. at 268. This proposition has been
endorsed by the Delaware courts. See, e.g., Outokumpu Engineering Enterprises,
Inc. v. Kvaerner Enviropower, Inc., 685 A.2d 724, 729 (Del.Super.1996) (citing
Mobil Oil for the proposition that "[t]he ‘injustice’ " that must be shown in
order to pierce the veil on an alter-ego theory "must be more than the breach of
contract alleged in the complaint"). But nothing prevents a court, in
determining whether there is sufficient evidence of fraud or unfairness, from
taking into account relevant evidence that is also pertinent to the question of
whether the two entities in question functioned as one.

*12 Much of the evidence described in Part II.B.3. above,
along with other evidence discussed below, reveals that NetJets adduced
sufficient evidence of fraud, illegality, or unfairness to warrant a trial on
its contract and account-stated claims against Zimmerman as LHC's alter ego. For
example, in an effort to parry NetJets's contention that LHC was
undercapitalized, Zimmerman submitted an affidavit from LHC's accountant stating
that "it was not intended by Zimmerman to treat the monies paid into LHC as
loans" (Affidavit of Mark Balaban dated October 14, 2004, para. 6) and that all
of Zimmerman's payments into LHC were in fact capital contributions ( see id.
paras. 4-8). Yet, as discussed above, Whittier testified that Zimmerman
instructed him that those payments were to be characterized as loans, in order
to allow Zimmerman to take money out of LHC at will and to do so without tax
consequences.

Further, although the Balaban affidavit stops short of
giving an opinion as to how to characterize Zimmerman's withdrawals of money
from LHC, it would appear that, if his payments to LHC were capital
contributions as the Balaban affidavit opines, LHC's payments to Zimmerman would
be properly characterized as distributions. Yet the DLLCA provides generally,
with some qualifications, that an LLC "shall not make a distribution to a member
to the extent that at the time of the distribution, after giving effect to the
distribution, all liabilities of the limited liability company ... exceed the
fair value of the assets of the limited liability company." Del.Code tit. 6,
sec. 18-607(a). Given that LHC ceased operating and was unable to pay its debt
to NetJets, if Zimmerman's withdrawals left LHC in that condition those
withdrawals may well have been prohibited by sec. 18-607(a). A factfinder could
infer that Zimmerman's payments to LHC were deliberately mischaracterized as
loans in order to mask the fact that Zimmerman was making withdrawals from LHC
that were forbidden by law, and could thereby properly find fraud or an unfair
siphoning of LHC's assets.

The record also includes other evidence from which a
reasonable factfinder could find that Zimmerman operated LHC in his own
self-interest in a manner that unfairly disregarded the rights of LHC's
creditors. For example, it could find

-that although LHC was apparently unable in 2000 to pay its
$340,840.39 (net of LHC's deposit) debt to NetJets, in that year LHC bought, and
gave Zimmerman title to, a Bentley automobile for $350,210.95;

-that LHC's only paying client for its consulting services
began paying LHC for those services in July 2000 (the month in which LHC
terminated its agreements with NetJets), sending LHC a first payment of
approximately $675,000 on July 9, and that on that day Zimmerman withdrew that
amount and more from LHC;

-that from the point at which LHC terminated its
relationship with NetJets in July 2000 until the end of 2001-the year in which
NetJets ceased operations-LHC's records of its transactions directly with
Zimmerman indicate that Zimmerman withdrew from LHC approximately $750,000 more
than he put in;

*13 -and that, excluding moneys put into LHC solely for its
investments in Bazillion, the total amount of money taken out of LHC by
Zimmerman and his other companies appears to exceed the amount that he and those
companies put into LHC by some $3 million.

From this record, a reasonable factfinder could properly
find that there was an overall element of injustice in Zimmerman's operation of
LHC. Summary judgment should not have been entered dismissing NetJets's
breach-of-contract and account-stated claims against Zimmerman.

We reject, however, NetJets's contention that the evidence
supporting its claims against Zimmerman on the alter-ego theory was such as to
entitle NetJets to summary judgment in its favor. In this opinion, we have dealt
with the granting of summary judgment against NetJets and accordingly we have,
as required, viewed the evidence in the light most favorable to NetJets; a
factfinder after trial, however, is not required to view the evidence in this
light. Both the question of whether LHC was operated as Zimmerman's alter ego
and the question of whether it was so operated in a way that shows fraud,
illegality, bad faith, or an overall element of injustice or unfairness, remain
to be answered by the factfinder after trial.

CONCLUSION

We have considered all of defendants' contentions in
support of the dismissals challenged by NetJets on this appeal and have found
them to be without merit. For the reasons stated above, the judgment of the
district court is vacated insofar as it dismissed the breach-of-contract claims
against LHC and the breach-of-contract and account-stated claims against
Zimmerman; with respect to those claims, the case is remanded for further
proceedings not inconsistent with this opinion.

Labels: Alter Ego, asset protection, veil piercing