In a recent unpublished decision, 701 Penhorn Avenue Associates, Inc. v J. Fanok Services, Inc., BMF Air Freight aka Team Fanok and Jeffrey Fanok, App Div. Docket # A-2921-11T3, the Appellate Division upheld the trial court’s judgment allowing Landlord to pierce the corporate veil of Tenant’s principal. It is an important decision for commercial landlords because it not only shows the factors required to pierce the corporate veil in New Jersey, but also the highlights due diligence needed before negotiating a lease.
In Penhorm, Landlord owned and leased a warehouse. Landlord had leased to a tenant, J. Fanok Services, Inc. (“Services”) since the 1960s. Services’ CEO was J. Fanok. In 2006, Fanok created J. Fanok Holdings, LLC (“Holdings”). Due to the relationship with Services, Landlord and Holdings entered into a lease for four (4) units in the warehouse. Conveniently, all four (4) units were occupied by Services with subleases with Holdings. Holdings had no employees, no inventory and no assets, other than the lease with Landlord.
In 2010, Holdings lost its biggest customer. Subsequently, Holdings defaulted on all four (4) leases. Landlord filed a complaint, alleging among other things, veiling piercing and fraud. Specifically, Landlord claimed Holdings was just a shell corporation and was entitled to pierce the corporate veil against the other defendants.
The court found that Fanok did not disclose to the Landlord that Holdings had no assets. Further, the court held that they abused corporate assets by setting up the shell corporation – Holdings. Fanok and the entities appealed.
The Appellate Division upheld the trial court’s judgment in-full . The Appellate Division held that Fanok did not dispute that he was the sole shareholder of Holdings. Further, Services paid all rent for Holdings. Finally, the company was completely undercapitalized and the lease was used to shield Services. The Appellate Division held that based on Landlord’s showing of same owner, no employees, and undercapitalization, corporate veil piercing was shown.
This case is important because it emphasizes the importance of knowing who your tenant is, and what corporate form your tenant has structured for itself. When entering into a lease with the tenant, it is imperative for commercial landlords to conduct appropriate due diligence to find out the assets, ownership and form of the tenant. The landlord has the ability to find out this information before the lease is signed, rather than discovering after the fact that its tenant has no assets to pursue if they fail to pay.
For more discussion on your leasing issues, Stark & Stark’s Commercial Real Estate Group can help.