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
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
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
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.