MANHATTAN (CN) - Billionaire George Soros and Indian corporate titan Purnendu Chatterjee have lost their bid to have the combined cases underlying a $39.4 million judgment against them tossed on the grounds that their claims were "implausible and speculative."
Soros and Chatterjee were sued by the backers of a North Carolina-based cargo airline in late 2003 who claimed the two men engaged in an elaborate shell game intended to defraud them.
In their combined complaints, plaintiffs Coreolis and its wholly-owned subsidiary TradeWinds said Soros and Chatterjee entered the aviation financing business in 1994, and put in place a complex, multi-tiered corporate structure designed to conceal Soros' 50 percent ownership in C-S Aviation and ensure that the aircraft management company owned no aircraft and was otherwise judgment proof.
"The entire business structure was designed as an elaborate shell game intended to defraud and perpetrate injustices," the complaint said.
Ultimately, Coreolis claimed that Soros and Chatterjee grossly undercapitalized C-S Aviation for the purpose of defrauding creditors. Coreolis accused the pair of abandoning C-S Aviation to creditors and claimed they "hastily stripped" the company of its officers, directors, employees, contracts and assets, which they then used in a supposedly new company on Soros' property.
In their motion to dismiss, Soros and Chatterjee said the plaintiffs simply failed to prove that fraud or an injustice had taken place.
But U.S. District Judge John F. Keenan disagreed, holding that the plaintiff's allegations that the defendants disregarded corporate formalities, failed to keep proper records, and comingled C-S Aviation's funds with those of other companies were neither implausible nor speculative.
"Defendants' argument that these allegations do not rise to the level of abuse of the corporate structure for personal purposes... is immaterial to the disposition of their motion to dismiss because whether a corporation and its owners operated a single economic entity does not depend on the ultimate purposes for which the corporate form was abused," Keenan wrote.
"Accepting plaintiff's allegations as true as the court must when considering a motion to dismiss, defendants used C-S Aviation as a mere instrument for carrying out certain portions of a larger aircraft rental business, and operated C-S aviation in such a way that it had no independent economic existence," Keenan continued. "In view of these allegations and the allegations concerning C-S Aviation's lack of adequate capitalization, plaintiffs have adequately pleaded that C-S Aviation and defendants operated as a single economic entity."
Soros and Chatterjee also argued that even if the plaintiffs did successfully plead that C-S Aviation and Defendants operated as a single economic entity, they have failed to adequately to plead the second element of a claim to pierce the corporate veil on an alter-ego theory, the existence of fraud or injustice.
Keenan conceded that on one hand, Soros and Chatterjee were correct. "To the extent that plaintiffs allege the corporate structure of the aircraft leasing business in which defendants engaged was intended to defraud, plaintiff's allegations are insufficient to support a veil-piercing claim under Delaware law," he wrote.
"The facts that C-S Aviation was operating on behalf of the Trust Beneficiaries, and that the aircraft at issue were held by Wells Fargo in trust on behalf of the Trust Beneficiaries make any claim for fraud based on the mere structure of defendants' aircraft leasing business legally insufficient," he continued. "Furthermore even if plaintiffs could prove that they were unaware of the structure, nowhere in either the TradeWinds Complaint or the Coreolis complaint do plaintiffs make allegations that satisfy the heightened pleading standard of civil rule."
On the other hand, Keenan held that the plaintiffs were not required to show that they were defrauded in order to state a veil-piercing claim under Delaware law. Plaintiffs need only show an element of injustice distinct from the underlying wrong which gave rise to the cause of action against C-S Aviation.
"According to the 2010 judgment, C-S Aviation is liable for the fraudulent inducement of the aircraft leases," Keenan wrote. "Plaintiffs alleged as an independent wrong that defendants siphoned funds from C-S Aviation and thus improperly left I undercapitalized. In doing so, defendants deprived plaintiffs of the ability to recover damages on its fraudulent inducement claim."
He added, "Defendants argue that this is not an adequate injustice because plaintiffs could have recovered against Wells Fargo, but whether any recovery against Wells Fargo would have satisfied the judgment against C-S aviation is not properly before the court."
As a result, "The allegations in the TradeWinds Complaint and Coreolis Complain, if proven, would support a claim of unfairness sufficient to make out a veil-piercing claim under Delaware law," Keenan concluded.
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