A Lesson From The Business Court On Pleading Partnership Liability

The June 8th opinion from Business Court Judge Judge Gale in Best Cartage, Inc. v. Stonewall Packaging, LLC, 2011 NCBC 15, dismissed the Plaintiff's complaint, finding its allegations that an alleged partner should be liable for the partnership debts, or otherwise liable on a veil piercing basis, were insufficient to state a valid claim.  There's also a choice of law issue.

The Plaintiff Best, which had contracted with the Defendant Stonewall to provide transportation services, sued another defendant, Jackson, arguing that Jackson and Stonewall were partners or joint  venturers or alternatively that Stonewall was Jackson's alter ego, and therefore liable for Stonewall's debt to the Plaintiff.

The facts that seemed to the Court  to be most detrimental to Plaintiff's claims of partnership were Best's own allegations that it had known of the claimed partnership before it entered into its contract only with the Defendant Stonewall LLC instead of with the partnership itself, and also that the contract made no mention at all of a relationship between Stonewall and Jackson but instead disclaimed the existence of any third party beneficiary to the contract.

The Court faulted Plaintiff for its pleading of the basis for partnership liability, stating:

A party seeking to impose partnership liability on a fellow partner when neither the partnership nor that partner is a party to the contract faces a particularized pleading burden to show that the contract was for partnership purposes.

Op. ¶19.  Judge Gale said that the Plaintiff "hadn't alleged the minimal elements to show that the [contract] was entered into for partnership purposes," including a lack of an allegation that the alleged partners had shared profits and losses, an "essential element of a partnership."  Op. ¶22

 The lack of specificity in Plaintiff's complaint  also did in its claim that the Court should pierce Stonewall's corporate veil and find Jackson behind the veil.  The Court said the veil piercing allegations were "broad and conclusory" and were missing the "critical element" that Jackson had misused the corporate form to "achieve a wrongful or inequitable result."  Op. ¶30  Judge Gale concluded by saying that:

Disregarding the protection of the limited liability company under these circumstance reaches beyond the intended purpose of the doctrine and improperly seeks to use a “drastic remedy” which should be utilized sparingly. See Dorton v. Dorton, 77 N.C. App. 667, 672, 336 S.E.2d 415, 419 (1985).

On the choice of law issue, Plaintiff had argued that the Court couldn't decide the corporate veil issue without evidence as to Stonewall''s state of formation, which the contract recited was Delaware.  Judge Gale agreed that the appellate courts of this State had not ruled on which state's law should apply to a veil piercing claim.

He nevertheless concluded that the claim couldn't survive under either North Carolina law or Delaware law, based on an opinion from Judge Beaty of the Middle District in Richmond v. Indalex, Inc., 308 F.Supp.2d 648 (M.D.N.C. 2004) in which Judge Beaty dismissed a veil piercing claim based on insufficient allegations to support a veil piercing claim under the law of the same two states.  Judge Beaty's opinion contains an extensive discussion of what Delaware law requires to pierce a corporate veil.  He said in the Richmond case that that the entity alleged to be liable must exercise “complete domination and control” over the alter ego and have "used such control to commit a fraud or injustice."

 

 

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