Mere Acquisition and Dual Ownership Not Enough to Pierce the Corporate Veil

In Parexel Int’l LLC v. PrisymID Ltd., the United States District Court of Massachusetts allowed defendant Loftware Inc.’s motion to dismiss without prejudice due to the plaintiff’s failure to properly plead a breach of contract claim needed to pierce the corporate veil. No. 23-CV-12381-ADB, 2024 WL 3471930, at *1 (D. Mass. July 19, 2024).

In 2017, Parexel, a leading clinical research organization entered into a contract with PrisymID where PrisymID agreed to deliver an automated labeling system called “Vision” that would allow Parexel to print its own labels on an as-needed basis instead of hiring an outside vendor. Id. at 2-3. The automated system was designed to find all errors on self-printed labels. Id.

Upon initial testing, Vision returned a series of labels with unidentified errors on them that the software could not catch. Id. at 4. The testing went on for three years with the same result. Id. In 2022, defendant Loftware acquired PrisymID. In April 2022, plaintiff issued a Notice of Material Breach to PrisymID and Loftware due to the ongoing failure to deliver Vision. Id. Counsel for Loftware responded for both defendants and informed the plaintiff that nothing could be done to ensure that Vision would consistently detect all labels with errors. Id. at 5. Parexel asked for its money back and the Defendants refused. Id. 5.

The plaintiff filed a lawsuit in September 2023, and Loftware filed a motion to dismiss the breach of contract count against it. Id. The Court held that because Loftware was not a party to the original agreement, it could only be held liable where there was active and direct participation by the representatives of Loftware in the affairs of PrisymID resulting in fraud or injurious harm to the plaintiff as a result of the intercorporate relationship between the defendants. Id. at 7; see also My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 618 (1968). Additionally, the Court looked at several factors necessary to pierce the corporate veil such as common ownership, pervasive control of any corporation by another, confused asset intermingling, thin capitalization, nonobservance of formalities, an absence of corporate records, no dividends, litigation based insolvency, non-functioning directors, siphoning of assets by a lead shareholder, the use of a corporation for multiple transactions by the dominant shareholder, and fraud. Id. at 7; see also Att’y Gen. v. M.C.K., Inc., 432 Mass. 546, 557 (2000).

When reviewing the Complaint, the Court found that the only allegations involving Loftware were its acquisition of PrisymID in 2022 and its subsequent communications with the plaintiff. Id. at 7-8. There were no allegations that the two companies were inappropriately intertwined or that the two entities colluded to defraud the plaintiff. Id. As such, the plaintiff failed to overcome the presumption of corporate separateness and the plaintiff’s count for breach of contract against Loftware was dismissed without prejudice. Id.

When a party attempts to pierce the corporate veil, its complaint must extend beyond mere association. It must show pervasive intermingling between the two entities resulting in injury to the aggrieved party. While advising clients in corporate veil matters, counsel should be careful to advise their clients of this important nuance so that lawsuits will survive a motion to dismiss.