Determining which individuals or entities are the proper parties to name in a lawsuit can sometimes be a technical matter—for example, determining the legal name of a corporation—but it can also be a strategic consideration.
However, many times parties are considered “necessary” to a lawsuit, such as a party to a contract who is alleged to have breached the contract. Whenever a party is considered “necessary” or “indispensable,” that party must be included in the lawsuit. A plaintiff in a recent case in the Suffolk County Commercial Division, Intelligent Product Solutions, Inc. v. Morstan Gen. Agency, Inc. (J. Whelan), attempted to circumvent the requirement of naming a necessary party by commencing a lawsuit against an entity believed to be a dominant alter ego of the party with whom plaintiff actually contracted. The Court, however, did not let the plaintiff get away with it.
Plaintiff, Intelligent Product Solutions, Inc. (“IPS”), entered into a contract with an entity known as Single Entry Systems, Inc. (“SES”) in which IPS agreed to work with SES in the development, testing, and upgrading of certain computer software applications and to provide program management services to SES. After IPS provided services to SES for a year, SES notified IPS that it could not pay for services rendered, leaving a balance owed to IPS in the sum of $465,450.00.
Rather than naming SES as a defendant in the breach of contract lawsuit, IPS elected to name only Morstan Gen. Agency, Inc. (“Morstan”) as a defendant under non-contractual theories of account stated and unjust enrichment. IPS alleged that Morstan was the “alter ego” of SES, was a controlling 80% shareholder of SES, and had overlapping directors, employees, assets, etc. As such, IPS sought damages from Morstan essentially claiming that SES was a “dummy” corporation set up and controlled by Morstan.
Morstan filed a motion to dismiss the complaint on the grounds that IPS failed to name a necessary party (SES) and that the parties were required to go to arbitration to resolve any disputes pursuant to the contract between IPS and SES. Morstan’s motion alleged that IPS named only Morstan as a defendant in an effort to avoid the arbitration clause in the contract.
In its decision, the Court ruled that SES was, in fact, a necessary party to the lawsuit, because claims that rest upon allegations that a party is liable because it is the alter ego of another entity require that the other entity also be named as a party. Mannucci v. Missionary Sisters of Sacred Heart of Jesus, 94 A.D.3d 471 (1st Dep’t 2012). However, rather than dismiss the Complaint, the Court ordered that SES must be joined because SES was within the jurisdiction of the Court and no reason was given as to why SES could not be joined. Further, although the Court denied as premature Morstan’s request for an order staying the case and compelling the parties to go to arbitration, it noted that the arbitration claim could be renewed upon SES joining the lawsuit.
Cases such as this one provide an example of the types of strategic considerations that could go into which parties are named in a lawsuit. Evidently, according to the allegations in Morstan’s motion, IPS sought to avoid the arbitration clause in its contract with SES and attempted to go after Morstan instead under alternative theories of liability. While this decision did not pay off for the plaintiff in this case, it is always important to give careful consideration to the various factors that could impact the potential outcome of a case when deciding whom to name in a lawsuit.