MEMORANDUM OPINION AND ORDER
Plaintiff TAC-Critical Systems, Inc. has brought this diversity action for breach of
I. Background
Both TAC and IFS are contracting firms. In around 2005, they entered into an agreement to perform work on “three federal facilities in the District of Columbia.” Compl., ¶ 6. IFS was to be the general contractor, and TAC was to serve as a subcontractor. The arrangement was made contingent on IF S’s being awarded the prime contract from the federal government, which it ultimately obtained. Id., ¶¶ 6-7.
Shortly after starting work on the federal contracts, the relationship between IFS and TAC began to sour. Despite the fact that IFS was the general contractor, Jacob felt that “TAC decided to run th[e] project on [its] own[,] ... disregarding that [IFS] was the GC.” PI. Opp., Exh. 1 (Deposition of Mohan Jacob) at 62. Frustrated by the situation, Jacob became “[un]happy with the whole process right through the contract” and generally believed that he had “lost control of the contract....” Id. Animosity also developed between the parties with respect to the value of each company’s work on the'relevant projects. While they “never had any problem with the scope of work,” the parties were not in accord regarding how much TAC would receive as payment. Id. at 66. Jacob avers that IFS paid TAC $840,000 for its work on the facilities and kept only $128,000 for itself. Id. at 79-80. He further contends that, because of TAC’s alleged conduct, IFS actually lost nearly $75,000 in unrecouped expenses on the federal projects. Id. at 69. Other than a $15,000 debt that Jacobs acknowledges that IFS owes Plaintiff, see id. at 73, 78, 106, he asserts that TAC has been fully paid for its work on all pertinent contracts. Id. at 105-06.
Not surprisingly, TAC takes a different view of their contractual dispute. In filing this breach-of-contract action against both IFS and Jacob, TAC alleges that IFS owes it almost $240,000. Compl., ¶ 14. Plaintiff additionally advances a veil-piercing theory to hold Jacob personally liable for these contractual damages.
Jacob has now filed a Motion for Summary Judgment under FED. R. CIV. P. 56(a), arguing that no genuine issues of material fact remain with respect to his personal liability for the contract.
II. Legal Standard
Summary judgment may be granted if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.CivP. 56(a);
see also Anderson v. Liberty Lobby, Inc.,
The party seeking summary judgment “bears the heavy burden of establishing that the merits of his case are so clear that expedited action is justified.”
Taxpayers Watchdog, Inc. v. Stanley,
The nonmoving party’s opposition, however, must consist of more than mere unsupported allegations or denials and must be supported by affidavits, declarations, or other competent evidence, setting forth specific facts showing that there is a genuine issue for trial. Fed.R.Civ.P. 56(e);
Celotex Corp. v. Catrett, 477
U.S. 317, 324,
III. Analysis
A. Choice of Law
Before addressing the merits of Jacob’s Motion, the Court must first sort through a complicated choice-of-law question. Because the case concerns — albeit indirectly — contracts with the federal government, the Court must determine whether federal or state common law applies to Plaintiffs veil-piercing theory. If federal law controls, the Court must apply that veil-piercing common law. If state law governs, however, the Court must then decide which of three jurisdictions’ common law is applicable here. The State of Delaware, the Commonwealth of Virginia, and the District of Columbia each has an ostensible interest in having its law applied to this dispute. Delaware is the state in which IFS is incorporated. IFS’s principal place of business is located in Virginia, and the Commonwealth is also where the relevant contracts were executed. Finally, the District of Columbia is the jurisdiction in which this action was brought, where the relevant contracts were performed, and where they were allegedly breached. The Court finds that District of Columbia
The question of which jurisdiction’s law applies where a party to a diversity case seeks to pierce the corporate veil can be especially vexing where, as here, the facts present both
vertical
— ie., should federal or state law apply? — and
horizontal
— ie., which state’s law should apply? — choice-of-law questions.
See Roadway Package System, Inc. v. Kayser,
In veil-piercing cases where no federal interest is implicated, the majority view applies the District of Columbia’s choice-of-law principles,
see Pena,
Another approach looks to the Restatement (Second) of Conflict of Laws § 307 (1971), which has been interpreted to abrogate general choice-of-law principles in veil-piercing cases. The rule of § 307 states that “[t]he local law of the state of incorporation will be applied to determine” whether piercing the corporate veil is justified. Some courts have been content to end the inquiry there.
See Moran v. Harrison,
The only relevant decisions relying on § 307’S rule, however, are
Levine
and
Moran;
neither case cites binding authority to support the Restatement’s proposition, nor have any other D.C. federal courts sitting in diversity jurisdiction subscribed to their rationale. Such an approach has, moreover, been harshly criticized in the academic literature and is arguably not even based on a proper reading of § 307.
See
Gregory S. Crespi,
Choice of Law in Veil-Piercing Litigation: Why Courts Should Disregard the Inter
Under those principles, courts conduct a “ ‘governmental interest analysis,’ ” in which they “evaluate the governmental policies underlying the ... conflicting laws[] and determine which jurisdiction’s policies would be most advanced by having its law applied to the facts of the case under review.”
Hartley v. Dombrowski,
Under such an analysis, District of Columbia law must be applied to Plaintiffs veil-piercing theory. The District is the place where the relevant contracts were performed, the jurisdiction that would be most affected by performance, and the place where the contracts were allegedly breached. “As th[e D.C. Circuit] has previously stated, ‘[t]he state where the defendant’s [alleged] conduct occurred] has the dominant interest in regulating it....’”
Bledsoe,
The same result is required as to the vertical choice-of-law issue. Some courts suggest that “‘the choice between state and federal [veil-piercing] law may in many cases present questions of academic interest, but little practical significance.’ ”
Bestfoods,
The Court may thus proceed to apply District of Columbia law without affecting the outcome even if the circumstances would require application of federal law.
B. Piercing the Corporate Veil
The gravamen of the dispute in this Motion is whether Jacob is, as a matter of law, shielded from personal liability for IFS’s contractual debts to TAC. In arguing that it can pierce IFS’s corporate veil
It should be preliminarily noted that both parties misapprehend some details regarding the doctrine of veil-piercing. Counts II and III of Plaintiffs Complaint allege, respectively, “Personal Liability for Acts of Void and Forfeited Corporation” and “Insider Reverse Piercing.”
Id.
at 3-4. Both sides routinely refer to these counts as discrete claims in their submissions. They are not. Plaintiffs sole cause of action in this case is for common-law breach of contract; its assertions concerning veil-piercing merely comprise a legal theory by which it hopes to extend liability — on its underlying breach-of-contract claim — beyond IFS as a corporate entity to Jacob as an individual.
See Gallagher v. McClure Bintliff,
Plaintiff, moreover, most certainly does not wish to “inside reverse pierce” IFS’s corporate veil. This is because such a feat is not possible here. Reverse veil-piercing — sometimes superfluously referred to as inside reverse piercing — typically “involves a corporate insider ... attempting to pierce the corporate veil from within so that the corporate entity and the individual will be considered one and the same.” 1 Fletcher § 41.70. Plaintiffs theory, therefore, is one of ordinary veil-piercing in which an outsider asks a court to disregard a corporate entity and impose liability on an individual owner. See id. § 41.10.
Jacob also misstates the test for veil-piercing under District of Columbia law. He argues that Plaintiffs veil-piercing theory is a “fraud-based claim,” which has failed to satisfy Fed.R.Civ.P. 9(b)’s heightened pleading standard for fraud. Def. Resp. to Pl. Surreply at 9;
see also
Mot. at 4. As noted, however, veil-piercing is not a “claim.” Even if it were, it requires neither allegations nor proof of fraud. It would certainly be to Defendant’s benefit if courts still required a showing that an entity “use[d] the corporate form to perpetrate fraud or wrong,” Mot. at 8 (citing
Vuitch v. Furr,
Indeed, this is the exact point the Court in
Vuitch
made when it explicitly discarded the restrictive standard formerly applied in cases such as
McAuliffe v. C. & K. Builders,
Properly enunciated, the D.C. veil-piercing doctrine requires “(1) unity of ownership and interest [between the entities], and (2) [either] use of the corporate form to perpetrate fraud or wrong, or other considerations of justice and equity justify it.”
Estate of Raleigh v. Mitchell,
Under the appropriate veil-piercing test, Jacob has not met his burden on summary judgment. Although the precise dates involved are unclear, IFS’s good corporate standing and its certifícate to conduct business in the District of Columbia have, during certain periods, been revoked. See Opp., Exh. 2 (showing IFS’s D.C. registration status as “revoked”); see also Mot., Exh. 3 (Declaration of Mohan Jacob), ¶ 5 (acknowledging that he “allowed [IFS’s] corporate status to lapse” in Delaware). If IFS was operating without either or both of these authorizations during the period in which its contracts with TAC were executed and performed, this would show that corporate formalities were being disregarded.
It should nevertheless be noted that the absence of only the D.C. Certificate of Authority during the relevant period would not be sufficient in itself to pierce IFS’s corporate veil: “Despite its lack of a certificate of authority from D.C., a foreign corporation remains in existence and can continue to rely on its corporate form to protect its officers from personal liability for corporate debt.”
BDC Capital Properties, L.L.C. v. Trinh,
It is furthermore uncertain whether Jacob disregarded other corporate formalities in his management of IFS. This is so because he alleges that virtually all documents germane to the inquiry were either “thrown away” during “one spring cleaning,” see Jacob Dep. at 16, or have been “damaged,” id. at 29, wheri they “got rained on” and “have been thrown out because [they were] completely covered with water.” Id. at 15-16. Likewise murky is whether Jacob’s decision to file all of IFS’s paperwork in “boxes in an outside area ... under a porch” itself constitutes an instance of disregarding corporate formalities.
It is also notable that, according to Jacob himself, he “was the only one in charge
IV. Conclusion
As a dispute of material fact exists on whether Plaintiff can pierce IFS’s corporate veil and hold Jacob personally liable, the Court ORDERS that:
1. Jacob’s Motion for Summary Judgment is DENIED; and
2. The parties shall appear for a status hearing in Courtroom 19 on September 14, 2011, at 10:30 a.m.
SO ORDERED.
Notes
. The court has reviewed Defendant's Motion for Summary Judgment, Plaintiff's Opposition, Defendant’s Reply, Plaintiff's Surreply on Delaware Law, and Defendant's Response.