OTR Associates v. IBC Services, Inc.
353 N.J.Super. 48, 801 A.2d 407 (N.J.Super.A.D. 2002)

  • Iskander owned a corporation called Samyrna that in turn owned some fast food franchises. They opened a Blimpie franchise in a mall owned by OTR.
    • Under the terms of Iskander’s franchise agreement, Blimpie’s subsidiary corporation, IBC would take out the lease on the property in OTR’s mall, and then sublease the property to Iskander.
      • The sole purpose of IBC was to hold leases for Blimpie’s franchisees.
  • Iskander did not pay his rent. OTR had Iskander evicted and then sued Blimpie for the unpaid back rent.
    • Blimpie argued that they never signed a lease for anything, so they shouldn’t be responsible. If OTR wanted their money they could only sue IBC.
      • Of course, since IBC had no assets, they were unlikely to be able to pay.
    • OTR argued that IBC was not a real corporation. Therefore they should be allowed to pierce the corporate veil and sue Blimpie, the parent corporation.
      • Normally, parent corporations cannot be held liable for claims against the subsidiary corporation, but sometimes courts with pierce the corporate veil and hold parent corporation liable.
  • The Trial Court found for OTR and told Blimpie’s to pay the back rent. Blimpie appealed.
  • The Appellate Court affirmed.
    • The Appellate Court found that courts can only pierce the corporate veil if the parent corporation:
      • So dominated the subsidiary that it has no separate existence, but is merely a conduit for the parent, and
      • The control was used to commit a fraud or wrong, or to avoid a positive legal duty.
    • The Court found that IBC had no office, no staff, and no assets beyond the leases, it did not have a separate existence.
    • The Court found that IBC misrepresented itself in its dealings, leading OTR to believe that they were dealing with Blimpie. That was fraud because IBC was just a corporate shell created by Blimpie to avoid liability.
    • Blimpie argued that IBC met all of the legal requirements to being a legitimate corporation, but the Court found that didn’t matter.
  • The Court seemed to feel that OTR had been deceived by IBC, but shouldn’t OTR have done due diligence to see who they were signing a lease with?
    • The lease clearly said “IBC” and not “Blimpies” but OTR didn’t ask to see a balance sheet or query what IBC’s assets were.