Introduction and Background
On January 29, 2020, the Second Department affirmed a Suffolk County Commercial Division decision applying both the de facto merger doctrine and the veil piercing doctrine. Each doctrine often plays an important role in determining whether plaintiffs in business disputes can recover from certain entities and their owners who are not signatories to operative agreements. The Second Department’s analysis in reviewing a decision by Justice Elizabeth Hazlitt Emerson of the Commercial Division provides a helpful review of these concepts.
The case, Bonanni v. Horizons Investors Corp.,,[i] centers around an entity, formed in 2001, that provided magnetic resonance imaging services to local hospitals. The original entity, named MRI Enterprises, LLC (“MRI LLC” or the “LLC”), was founded by four investors: Plaintiff Luciano Bonanni (through MRI, Inc.) and Defendants Benito Fernandez (through Horizons Investors Corp. (“Horizons”)), Solomon Kalish (through Adex Management Corp.) and Dr. Allan Hausknecht.[ii] Fernandez/Horizons owned 40% of the entity, while the remaining investors each held a 20% stake. Separately, MRI LLC established Defendant Comprehensive Imaging of New York, PLLC (“CINY”), which was 99% owned by Dr. Hausknecht, and 1% by another physician.[iii]
From inception until April 2005, MRI LLC was managed by Bonanni. However, in April of 2005, a dispute arose between the members of the LLC regarding the selection of MRI scanners for a client hospital. Following this dispute, Bonanni was excluded from the management of MRI LLC. In addition, even though the other investors never acquired Bonanni’s interest in MRI LLC, from April 2005 forward, Bonanni was no longer included in the LLC’s distributions.[iv]
In July 2005, Bonanni brought suit on behalf of himself and the LLC, asserting claims for breach of contract and conversion, and seeking an accounting. In addition, derivative causes of action were asserted for misappropriation of corporate opportunities and looting, waste, and misappropriation. After a bench trial, Justice Emerson of the Commercial Division found in favor of Bonanni, ordering Defendants to pay damages, and ordering an accounting of payments made by or for both the LLC and CINY.[v]
Defendants CINY and Hausknecht appealed, contending that Bonanni was not entitled to an accounting from CINY, because Bonanni never held an ownership interest in CINY.[vi] Defendant Fernandez also appealed, asserting that he should not have been held personally liable for the damages awarded against Horizons.[vii]
The Second Department’s Opinion
- An Accounting of CINY Was Appropriate Under the De Facto Merger Doctrine
The first issue addressed by the Court was whether Bonanni was entitled to an accounting of payments to CINY, even though Bonanni never held an interest in CINY. As an initial matter, the Second Department explained that “[g]enerally, a corporation which acquires the assets of another is not liable for the torts of its predecessor.”[viii] However, an exception to that general rule exists where “there was a consolidation or merger of seller and purchaser [or] the purchaser corporation was a mere continuation of the seller corporation.” Indeed, that exception specifically applies...
