MoNi defeats motion to dismiss parent corporations facing “alter ego” allegations under New York law

Under New York law, there are two alternate methods to state a breach of contract claim against non-contracting parents under an “alter ego” theory of liability.

“There are two circumstances under which a parent will be held liable as a party to its subsidiary's contract: (1) if the parent manifests an intent to be bound by the contract; or (2) if the elements of piercing the corporate veil are present.” World Wide Packaging, LLC v. Cargo Cosms., LLC, 193 A.D.3d 442, 144 N.Y.S.3d 41 (2021).

Typically, parties only argue No. 2, and we frequently see equitable alter ego arguments about a subsidiary being used to perpetrate “fraud” or a “wrong.” Yet just as frequently, judges are loath to allow alter ego theories to proceed for failure to allege such “wrongs.”

But if a 100% parent corporation totally dominated a subsidiary in the negotiation, performance, termination and/or breach of a contract, it may well be subject to breach of contract liability under an alter ego theory under the first alter ego theory: manifestation of intent.

On April 18, 2024, a New York trial court did just that by allowing our client’s “alter ego” breach of contract claims to proceed against the publicly listed parents of what appears to be a shell subsidiary. The court did so despite certain limitation of liability provisions in the contract, and over the defendants’ objections that our client knew full well who it was contracting with (the subsidiary, not the parents), and there being no “fraud” or equitably “wrongful” conduct alleged.

As the court held, “neither the parties’ agreement nor the defendants’ submissions on the motion demonstrate that “affiliates” is intended to include defendants Soluna Computing Inc. and Soluna Holdings Inc., as they are not expressly mentioned therein and, indeed, may not have existed at that time. Furthermore, the defendants do not dispute the plaintiff’s allegations that defendant Soluna MC LLC is a 100% subsidiary of defendant Soluna Computing, Inc. which, in turn, is a 100% subsidiary of Soluna Holdings Inc., that the Soluna MC LLC entity was formed by the other two solely for purposes of the subject contract, that the three Soluna entities share common principals with whom the plaintiff negotiated and corresponded and that the plaintiff was contractually required to send payments to Soluna Computing, Inc.”

The case is Atlas Technology Group LLC v. Soluna MC LLC et al. Index No. 654676/2023, New York Supreme: Commercial Division.