In general, a corporation is a legal entity that exists separately and distinctly from its shareholders, officers and directors, and such parties are normally not subject to corporate liabilities. Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 775 (2005). See also, Jackson Avenue Subs, Inc. v. 407 Dearborn, LLC, 2016 WL 4639152, at *5 (N.D.Ill.2016). With respect to shareholders, their liability is usually limited to the amount of their investments. In re Oko, 395 B.R. 559, 562 (Bankr.E.D.N.Y.2008). Such limited liability exists even where one corporation wholly owns another and the two corporations have mutual dealings. Steiner Electric Company v. Maniscalco, 2016 IL App (1st) 132023. Courts will depart from the general rule and disregard a corporation’s existence only in narrow and exceptional circumstances, and “piercing the corporate veil” is one of the common equitable remedies whereby an entity’s corporate form is disregarded to prevent injustice. HOK Sports, Inc. v. FC Des Moines, L.C., 495 F.3d 927 (8th Cir. 2007).
In Steiner Electric Company v. Maniscalco, 2016 IL App (1st) 132023, the court recognized the doctrine of direct participant liability which provides that a parent company may be liable for the alleged wrong of its subsidiary when the alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management. See also, Northbound Group, Inc. v. Norvax, Inc., 795 F.3d 647 (7th Cir. 2015). The terminology of “piercing the corporate veil” is often used interchangeably with other expressions such as “alter ego” and “disregarding the corporate entity.” Mobil Oil Corp. v. Linear Films, Inc., 718 F.Supp. 260, 266 (D.Del.1989). However, as noted above, “[p]iercing the corporate veil is not favored,” and as a result, “a party bringing a veil-piercing claim bears the burden of showing that the corporation is in fact a ‘dummy or sham’ for another person or entity.” Jackson Avenue Subs, Inc. v. 407 Dearborn, LLC, 2016 WL 4639152, at *5 (N.D.Ill.2016) (quoting Source One Global Partners, LLC v. KCK Synergize, Inc., 2009 WL 2192791, at *3 (N.D.Ill.2009).
Where piercing is possible, Illinois courts have consistently held that the lack of shareholder status – and, indeed, the lack of status as an officer, director, or employee – does not preclude veil-piercing. Rather, the fundamental question is whether a person exercises equitable ownership and control over a corporation such that separate personalities no longer exist. In re Tolomeo, 537 B.R. 869 (Bankr.N.D.Ill.2015). In United Food and Commercial Workers Union v. Fleming Foods East, Inc., 105 F.Supp.2d 379 (D.N.J.2000), court held that a wholesale food distributor was an alter ego of a retail food store for purposes of determining its liability for contributions to ERISA multiemployer employee benefit plans, even though the distributor did not have any formal ownership interest in store. The court found the distributor created a complicated and elaborate financial structure to enable a third party to purchase the store, and the distributor effectively controlled the store’s day to day operations. However, in Bollore S.A. v. Import Warehouse, Inc., 448 F.3d 317 (5th Cir. 2006), the court stated that under Texas law, for the alter ego doctrine to apply against an individual, the individual must own stock in the corporation. This position has been followed in other jurisdictions. For example, in In re Nihan Financial, LLC, 627 B.R. 529, 532 (Bankr.M.D.Fla.2021), the court held that veil-piercing is available where the defendant has a “familial relationship” with the controlling shareholder, and it when on to note that “there is no reason to limit the family unit to husband and wife.” Id. at 533.
Veil-piercing on an alter ego theory is permitted only when two separate prongs are met: (i) there must be such unity of interest and ownership that separate personalities of the corporation and individual no longer exist, and (ii) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction fraud, promote injustice, or inequitable consequences. People v. V&M Industries, Inc., 700 N.E.2d 746 (Ill. 5th Dist. 1998); Int’l Fin. Servs. Corp. v. Chromas Technologies Canada, Inc., 356 F.3d 731, 737 (7th Cir. 2004); Wachovia Secs., LLC v. Banco Panamericano, Inc., 674 F.3d 743, 751-52 (7th Cir. 2012); and In re Tolomeo, 537 B.R. 869 (Bankr.N.D.Ill.2015). Some courts have described these two elements as a factual test and an equitable test. With the factual test, the court determines whether there is a lack of attention to corporate formalities, such as where the assets of two entities are commingled, and their operations intertwined. An alter ego relationship might also lie where a corporation parent (or an individual) exercises complete domination and control over its subsidiary (or his corporation). Thus, a corporate veil will be pierced when there is such a unity of interest and ownership that the corporation is a mere “instrumentality of its parent.”
However, the factual test alone is insufficient to pierce a corporate veil and the alter ego theory also requires a finding that “use of the corporate form would, if left unchecked, work as a fraud or . . . injustice.” Mobil Oil Corp., 718 F.Supp. at 267. Under this second element, the court must determine there was some fraud or injustice either in the creation or management of a corporate entity. The fraud usually consists of something more than the typical wrong alleged in a complaint and relates to misuse of the corporate structure. For example, a breach of contract or a tort is not usually sufficient to meet the fraud test. The unjust conduct that may permit a piercing of the corporate veil must be a wrong beyond a creditor’s mere inability to collect on account of a debt. See, In re Intelefilm Corp., 301 B.R. 327 (Bankr.D.Minn.2003). Moreover, although the promotion of injustice element requires something less than an affirmative showing of fraud, it does require something more than the mere prospect of an unsatisfied judgment. In re Tolomeo, 537 B.R. 869 (Bankr.N.D.Ill.2015). The “promote injustice” part of the veil-piercing inquiry has been interpreted to prevent unfair enrichment, keep a party from escaping responsibility or ignoring obligations, and prevent manipulation of corporation to the benefit of one and the detriment of another. Id. The mere channeling of corporate funds to a favored secured creditor, rather than satisfying unsecured claims, is not enough in itself. However, shuttling assets between entities in an effort to avoid accountability to creditors or tort claimants is an example of fraud in the management of a corporation. Note, however, that in Waste Conversion Tech. v. Warren Recycling, 191 Fed.Appx. 429 (6th Cir. 2006), the Sixth Circuit stated that a fraudulent conveyance may not provide the predicate fraud because the fraudulent conveyance law is more carefully tailored to the interests of all parties than the blunt instrument of piercing the corporate veil, which, for instance, could permit recovery against the new party defendants beyond any amounts that were fraudulently transferred. A New Hampshire decision, for example, held that in determining whether to pierce the corporate veil, the court should consider whether the shareholder substantially depleted corporate assets, and whether the shareholder used the corporation to further his own private business rather than that of the corporation. In re Martin, 413 B.R. 12 (Bankr.D.N.H.2008).
In determining whether the corporate veil can be disregarded, courts consider the following factors, with no single factor determinative: (i) inadequate capitalization, (ii) the failure to issue stock, (iii) the failure to observe corporate formalities, (iv) the payment of dividends, (v) the insolvency of the debtor corporation at the time, (vi) the non-functioning of other officers or directors, (vii) the absence of corporate records, (viii) commingling of funds; (ix) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (x) failure to maintain arm’s-length relationships among related entities; and (xi) whether the corporation is a mere facade for the operation of dominant shareholders. Fontana, 840 N.E.2d at 778. In HOK Sports, interpreting Iowa law, the court stated that the corporate form can be disregarded if (1) the corporation is undercapitalized, (2) without separate books, (3) its finances are not kept separate from individual finances, individual obligations are paid by the corporation, (4) the corporation is used to promote fraud or illegality, (5) corporate formalities are not followed, or (6) the corporation is merely a sham. No one factor is dispositive, and a combination of the foregoing factors (coupled with a finding of inequity, injustice, or fraud) typically is present in those cases in which plaintiffs have successfully pierced the corporate veil.
The following are several court decisions, from multiple jurisdictions, where alter ego and piercing theories were discussed in detail:
In Trustees of the National Elevator Industry Pension v. Lutyk, 140 F.Supp.2d 447 (E.D.Pa.12001), the court explained why it pierced the corporate veil to find the sole director and shareholder of American Elevator Company personally liable for the corporation’s unpaid contributions to employee benefit funds established under ERISA. Analyzing this issue, the court cited to the factors listed in the United States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981) (the “Pisani Factors”) which are as follows:
First, is whether the corporation is grossly undercapitalized for its purposes. The other factors are failure to observe corporate formalities, non-payment of dividends, the insolvency of the debtor corporation at the time, siphoning of funds of the corporation by the dominant shareholder, non-functioning of other officers and directors, absence of corporate records, and the fact that the corporation is merely a facade for the operations of the dominant stockholder or stockholders. Also, the situation must present an element of injustice or fundamental unfairness, but a number of these factors can be sufficient to show unfairness.
The court noted that the debtor corporation was clearly insolvent at the relevant time period, i.e., the time when the corporation incurred the liability which was the focus of the lawsuit. Further, the corporation was grossly undercapitalized. In this regard, the court noted that the obligation to provide adequate capital begins with incorporation and continues thereafter during the corporation’s operation (a proposition not uniformly held by the courts). But see, Matter of Lifschultz Fast Freight, 132 F.3d 339 (7th Cir.1997) (holding that owners owe no duty to recapitalize failing firms, and courts should not introduce one through back door by retrospectively finding undercapitalization by proof of eventual failure); See also, In re Autostyle Plastics, Inc., 238 B.R. 346 (Bankr.W.D.Mich.1999) (The relevant time for determining whether capitalization was adequate is generally at the corporation’s creation.) The court stated the ratio of loans to equity investments was an indicator of undercapitalization. In this case, the corporation’s $25,000 in capital stock was out of proportion to the approximately $96,000 in shareholder loans through 1995, which then rose to $174,881 by the end of 1996.
The siphoning of corporate funds was also found to be a factor. However, the mere repayment of legitimate shareholder loans by itself did not constitute siphoning and was insufficient to pierce the corporate veil. Yet, the repayment of loans from shareholders or any other diversion of corporate assets at a time when the company’s finances were in trouble could be a strong indication of siphoning. Such was the situation in Lutyk. Use of corporate funds for personal benefits, particularly at a time of financial distress, also supported piercing the corporate veil. In Lutyk, such improper use was found in the “partner’s draws” for living expenses, and the use of corporate funds for golfing and yacht club fees despite infrequent business uses and for other unidentified travel and entertainment expenses.
Although courts often do not hold closely-held corporations to strict standards with respect to corporate formalities, disregard of corporate formalities remains a factor of some significance even where the corporation is closely held. In Lutyk, the court stated that a corporation that keeps minimal records, such as tax returns, accounting books, insurance records, and bank records, does not necessarily met its obligation. In Lutyk, scant corporate records were produced, which created the inference that corporate record keeping was not properly met. Furthermore, the defendant admitted that the officers’ meetings were held only occasionally and no minutes were kept of those meetings.
When determining if a corporation is merely a facade, another factor is whether the shareholder owns title to the operating assets, indicating an intent to protect such assets from business misfortunes. In Lutyk, there was no evidence that the defendant held title to corporate assets, so this was not a factor. Finally, in order to pierce the corporate veil, it is required that the “situation present an element of injustice or fundamental unfairness.” In Lutyk, the court found such injustice by the mere existence of a sufficient number of the above referenced factors.
In Wachovia Securities, LLC v. Jahelka, 586 F.Supp.2d 972 (N.D.Ill.2008), Wachovia obtained a judgment against Loop Corp. Seven years later, the debt remained unpaid and Wachovia filed an action contending that Loop’s principals transferred assets to themselves and related entities, which made it impossible for Wachovia to collect. Wachovia sought to find these individuals liable under the doctrine of piercing the corporate veil.
First, the court found that Loop was inadequately capitalized at its formation. The court noted that undercapitalization occurs when the corporation “has so little money that it could not and did not actually operate its nominal business as its own.” Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371, 379 (7th Cir. 2008). In this case, the fact of undercapitalization was established from Loop’s Annual Report filed with the Illinois Secretary of State, which noted that Loop was capitalized with $1,000 of paid-in capital. This was also confirmed on the Application for Authority to Transact Business that Loop filed with the State. Further, Loops certificates also confirmed that 25,000 shares of the company were issued with a par value of $0.04 per share (i.e., $1,000). While the defendants contended that Loop was actually infused with $10 million worth of investments, no records were produced establishing that fact.
The court also found that Loop’s directors, officers and shareholders failed to adhere to Loop’s by-laws, failed to prepare and maintain corporate records, failed to file income taxes, and failed to observe formalities when they distributed money to the directors, officers, and shareholders and in their dealings with other principal controlled entities. For example, according to Loop’s Illinois application, Loop had five directors – three more than the by-laws allowed. Testimony was elicited that no meeting between the shareholders were held, also in contravention of the by-laws. The by-laws also stated that no loan should be contracted on behalf of the corporation and no evidence of indebtedness issued unless authorized by a resolution of the Board of Directors. Such a resolution never occurred. Further, Loop’s by-laws required consent in writing should the shareholders wish to undertake informal action without a meeting. No evidence of such consents were submitted to the court.
Loop’s by-laws specifically referenced the need to keep minutes of the shareholders’ and Board of Directors’ meetings “in one or more books provided for that purpose.” However, no corporate minute book of meetings were produced at trial. Furthermore, Loop’s accountant, while responsible for preparing Loop’s accounting records, did not prepare or maintain profit-and-loss statements, account payable records, account receivable records, or operating budgets on Loop’s behalf. Additionally, Loop failed to file taxes from 2000 to 2002 which was “evidence of its failure to adhere to the corporate form.” No capital account reconciliation reports or any other record concerning the capital accounts of the owners were prepared. No bills or invoices were prepared to account for Loop’s legal and accounting services provided to affiliated entities. The court found that Loop failed to maintain any documentation of its employees’ time, bills, invoices, or fee-sharing agreements for the purpose of seeking reimbursement for its employees’ work for other affiliated entities. It concluded that a corporation that observed corporate formalities would have required its employees to keep track of their time and would have sought reimbursement for its employees’ work performed for the benefit of entities other than Loop.
Further, the shareholders operated their various affiliated companies out of a suite of interconnected offices. These entities did not have their own telephone or fax numbers and did not separately pay utility bills. Loop never paid rent for its office space and was never a party to a lease. Employees unexplainably changed employment among the entities. For certain employees, their offices, salaries, telephones, telephone numbers, fax machines, fax numbers, and e-mail addresses remained the same even though their employers switched.
Finally, in order to satisfy the second prong for piercing the corporate veil, the court found that Wachovia established that the corporate owners used their several corporations to avoid responsibilities to creditors. Wachovia’s inability to collect on its judgment resulted from the defendants scheme to fully encumber Loop’s assets and then turn control over to the principals to decide who would get paid. With only minor exceptions, the only time that the defendants used corporate funds and loan proceeds was to only pay themselves, the affiliated lender, or related entities.
In In re Oko, 395 B.R. 559, 562 (Bankr.E.D.N.Y.2008), the defendant was a self-employed freelance disc jockey, who incorporated his business on the advice of his accountant for “personal protection.” The defendant was the sole shareholder, officer and director. The corporation had no permanent employees. The court pierced the corporate veil between the company and its shareholder and in doing so, found that the defendant did not bother with corporate formalities. As the sole director, officer and shareholder, the record showed that he did not hold any formal meetings or keep corporate minutes or other corporate records. “[H]e was not able to show the court a single slip of paper evidencing corporate activity, having apparently thrown away all of his records and the corporate computer before the filing of the debtor’s bankruptcy case. Id. at 564.
Further, as it regarded capitalization, the record established that the defendant failed to properly capitalize his business when it was formed. Specifically, “[h]e testified that he did not put money into a bank account when he formed the business. Although Mr. Oko testified that he did provide other capital contributions in the form of equipment to get the corporation started, he could not point to any documentary or other physical evidence regarding the type, quantity or value of whatever equipment he may have provided.” Id. The court also found that the defendant used the funds of his corporation to pay his own debts and obligations, as well as those of his parents. Checks were written for a large amount of non-corporate expenses, including mortgage payments, car payments, life insurance premiums, medical bills and utility bills for its shareholder. This problem was compounded by the fact that no ledger was kept by the defendant or his parents evidencing the true amount of monies that were transferred between them.
The court considered a request to pierce a corporate veil under New Hampshire law in In re Martin, 413 B.R. 12 (Bankr.D.N.H.2008). In refusing to pierce a corporate veil, the court stated that the question was whether “a shareholder suppresses the fact of incorporation, misleads his creditors as to the corporate assets, or otherwise uses the corporate entity to promote injustice or fraud.” Martin, 413 B.R. at 15. In this case, the court noted that the debtor was not the sole shareholder of the corporate entity. Rather, the debtor’s wife owned 49% of the stock and served as the company’s vice-president. Second, the court found that the debtor did not suppress the corporate existence of his company. Third, the court did not find that the debtor misled the plaintiff about the corporate assets nor its net worth, i.e., he did not create a false appearance which caused a reasonable creditor to misapprehend the worth of the corporate obligor. Id. at 15-16.
Finally, the court found that the debtor had not proven that use of the corporate form promoted an injustice or fraud. This inquiry involved a determination as to whether the shareholder substantially depleted corporate assets, and whether the shareholder used the corporation “to further his own private business rather than that of the corporation.” Id. at 17. The debtor’s salary was not unreasonable and the company was solvent.
In Matter of Ritz, 832 F.3d 560 (5th Cir.2016), a creditor who sold electronic device components, brought adversary proceeding against Daniel Ritz, a Chapter 7 debtor, who was in financial control of the company that had purchased components from creditor. With the adversary proceeding, this creditor sought to pierce corporate veil in order to hold the debtor personally liable on the corporate debt, and to except the debt from discharge on, inter alia, a “false pretenses, false representation, or actual fraud” theory. The court noted that because corporations offer their shareholders limited liability, a plaintiff seeking to impose individual liability on a shareholder must pierce the corporate veil to do so. In particular, shareholder may be held personally liable for the business’s obligations “if the obligee demonstrates that the … beneficial owner … caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the … beneficial owner.” Tex. Bus. Orgs. Code Ann. §21.223(a)(2) & §21.223(b). As to the actual fraud requirement, a fraudulent transfer under Texas Uniform Fraudulent Transfer Act, if made with the actual intent to hinder, delay, or defraud, could satisfy the actual fraud requirement of the Texas veil-piercing statute. Id. at 567 (“establishing that a transfer is fraudulent under the actual fraud prong of TUFTA is sufficient to satisfy the actual fraud requirement of veil-piercing because a transfer that is made “with the actual intent to hinder, delay, or defraud any creditor”).
In Lim v. Miller Parking Co., 560 B.R. 688 (E.D.Mich.2016), the trustee of a corporate bankruptcy estate brought an adversary proceeding to pierce corporate veil separating the debtor from a related corporate entity or, in alternative, to substantively consolidate the two entities. In discussing piercing, the court noted that under both Michigan and Illinois law, the plaintiff must show that some wrong other than mere diminishment of the plaintiff’s prospect of recovery would occur if the court declined to pierce the corporate veil. The plaintiff must prove, for example, that a parent corporation that caused a subsidiary’s liabilities and its inability to pay for them would escape those liabilities, or that an intentional scheme to squirrel assets into a liability-free corporation while heaping liabilities upon an asset-free corporation would be successful. Moreover, proof of the element of “fraud or wrong” is explicitly and necessarily distinct from the separate (and additional) required showing that the plaintiff would suffer some “unjust loss.” Id. at 704.
The court noted that establishing an entity for the purpose of avoiding personal responsibility is not by itself a wrong that would warrant disregarding the entity’s separate existence.” The court further explained, the plaintiff separately must prove that “the wrong would cause the complainant to suffer an unjust loss.” Id. at 705. “It is evident, therefore, that the Michigan courts regard proof of the ‘wrong’ to be a separate and distinct showing from the mere proof that failure to pierce the corporate veil would cause the plaintiff to suffer an ‘unjust loss.’ Id. In order to prove the “fraud or wrong” element, the plaintiff must establish that a controlling entity engaged in deliberate wrongful conduct that either was designed to or actually did produce injury to obligees of the instrumental entity. The proof of “fraud or wrong” must comprise something other than a mere showing of an unjust loss to the plaintiff.
Analyzing the facts of the case, the court noted that Miller Chicago was not undercapitalized. Further, Miller Detroit enjoyed its own revenue stream from the parking lot entities for which it performed administrative services. It paid its bills as they came due, with the exception of distributing proceeds to other Miller-family-owned entities. Additionally, the companies kept separate books and observed adequate corporate formalities. Both businesses had separate and substantial historical roots, and neither was a sham. The plaintiff argued that the entities were operated to perpetrate tax fraud, pointing to the conversion of Bruce Miller’s debt to Miller Chicago into wages; however, there was no dispute that Bruce Miller paid income tax to the appropriate units of government for that “income” and there was no requirement that a person perform any specific type of service before compensation can be characterized as such. An employer, if he chooses, may hire a man to do nothing, or to do nothing but wait for something to happen. Id. at 706-07. Finally, the court noted the following:
[T]he evidence does not establish that the creditors of Miller Detroit suffered an “unjust loss” at the hands of Miller Chicago. The creditors – more particularly, the judgment creditors – sought to recover from Miller Detroit and Bruce Miller, and they complain that neither has assets to satisfy their judgments. But there is very little evidence of money moving from Detroit to Chicago.
In Gumino v. First Data Corporation, 2017 WL 1478115 (N.D.Ill.2017), the court noted that piercing the corporate veil requires “showing that: (1) the owners exercised complete domination over the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” Here, the court found that the plaintiff failed to satisfy the first element of the test, i.e., failed to establish “actual domination.” In this regard, it stated that To determine “actual domination,” a court considers the following factors:
the intermingling of corporate and shareholder funds, undercapitalization of the corporation, failure to observe corporate formalities such as the maintenance of separate books and records, failure to pay dividends, insolvency at the time of a transaction, siphoning off of funds by the dominant shareholder, and the inactivity of other officers and directors.
Id. at *4 (quoting P.A.C. Consolidators Ltd. v. United Cargo Sys. Inc., No. 10 CV 1981, 2011 WL 3099887, at *4 (E.D.N.Y. July 25, 2011). The court went on to state that the fact that a corporation exerts some control over another corporation’s business affairs does not rise to the level of actual domination. “Common management among two corporate entities or duplication of some or all of the directors or executive officers is also insufficient to show domination.” Id. at *4-5. Here, in support of their veil-piercing theory of liability, the plaintiff alleged that “nearly all” of their communications was with the parent rather than subsidiary and that their interactions with the parent did not indicate that any individuals from the subsidiary exerted control over managing contracts or made decisions. The plaintiff bases these allegations on several email exchanges regarding the residual and upfront payments for the accounts. While these communications demonstrate some control by the parent, they do not show “actual domination.” The parent’s involvement or authority in determining residual or upfront payments did not rise to the level of intermingling or siphoning of funds, undercapitalization, failure to observe corporate formalities, or the subsidiary’s insolvency or inactivity.
The opinion Johnke v. Espinal-Quiroz, 2017 WL 3620745 (N.D.Ill.2017), involved lawsuits related to a multi-vehicle accident that occurred in Will County, Illinois. The plaintiff was a driver for M&S Management, a union staffing company that leased drivers to operate Steel Warehouse Inc. who sought to pierce the corporate veil between Steel Warehouse Inc., which provided transportation services to, first and foremost, for Steel Warehouse Company LLC.
The court started its analyses by noting that in order to determine whether a corporation is so controlled by another to justify piercing the corporate veil and disregarding their separate identities, Illinois courts focus on four factors: (1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) the commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own. It stated that courts also consider additional factors, such as failing to issue stock, failing to pay dividends, corporate insolvency, nonfunctioning corporate officers, missing corporate records, diverting assets to an owner or other entity to creditor detriment, failing to maintain an arm’s-length relationship among related entities, and whether the corporation is a mere façade for a dominant owner. No single factor is determinative. Id. at *7.
Applying the above factors to its case, the court noted that first, the history of Steel Warehouse Inc.’s creation suggested that it was a “mere façade” for Steel Warehouse Company LLC. When Steel Warehouse Company LLC had problems with ICC’s regulations, it split its transportation department off as Steel Warehouse Inc. so that the ICC would no longer regulate Steel Warehouse Company LLC. Once the split occurred, there was no “arm’s length relationship” between the two companies. The evidence also showed that Steel Warehouse Company LLC treated the assets of Steel Warehouse Inc. as its own. Id. at *8. Steel Warehouse Inc.’s trucks were housed at Steel Warehouse Company LLC’s plant, and J.H. Jones employees – who were hired by Steel Warehouse Company LLC’s human resources department, worked on the maintenance of Steel Warehouse Inc.’s trucks. Further, Steel Warehouse Company LLC promoted its “own fleet of trucks” on its website and admitted that this referred to Steel Warehouse Inc.’s trucks. Further, the officers of Steel Warehouse Inc. were not paid by that company, but by Steel Warehouse Company LLC.
In short, the record indicates that Steel Warehouse Inc. exists solely for the benefit of Steel Warehouse Company LLC. It is undisputed that the goal of Steel Warehouse Inc. is not to turn a profit, but rather to deliver Steel Warehouse Company LLC’s products to customer without losing money. There is overlapping ownership, as Steel Warehouse Company LLC is owned by Lerman Enterprises LLC and Lerman Holding Co. Inc., which in turn are owned by Gerald Lerman, some of his siblings, and their children, and Steel Warehouse Inc. is similarly owned by Gerald Lerman and four of his siblings, David, Michael, James, and Ted Lerman. Steel Warehouse Inc., which has no employees of its own, essentially operates as the transportation department of Steel Warehouse Company LLC. It is located on Steel Warehouse Inc.’s industrial campus, and the two companies also share a phone number, corporate logo, web address, email address, P.O. Box, and computer system. Steel Warehouse Company LLC and Steel Warehouse Inc. hold themselves out to the public as one entity, as the steelwarehousecompany.com website promotes the sale of Steel Warehouse Company LLC’s steel products and advertises delivery using “our” trucks, which admittedly are Steel Warehouse Inc.’s trucks.
Id. at *9.
Next, the court assessed whether circumstances were such that “adherence to the fiction would sanction a fraud or promote injustice.” It noted that the Seventh Circuit had explained that Illinois law does not require the party seeking to pierce the corporate veil to establish an intent to defraud creditors. Rather, the moving party must establish “either the sanctioning of a fraud (intentional wrongdoing) or the promotion of injustice. The Seventh Circuit also noted that “promote injustice” means “something less than an affirmative showing of fraud.” Sea-Land Servs., Inc., 941 F.2d at 522. However, the prospect of an unsatisfied judgment was not, in and of itself, enough to satisfy this requirement.
Here, Steel Warehouse Company LLC and Steel Warehouse Inc. manipulated the corporate form by conducting business as a single enterprise, while shielding Steel Warehouse Company LLC from liability related to transportation and Federal Motor Carrier Safety Regulations by operating Steel Warehouse Inc. – which is essentially Steel Warehouse Company LLC’s transportation department – as a “separate” motor carrier. Steel Warehouse Inc. was created to serve Steel Warehouse Company LLC and not to turn a profit, and thus if and when Steel Warehouse Inc. incurs liability in the course of delivering Steel Warehouse Company LLC’s products, Steel Warehouse Inc. does not have the necessary assets to cover the liability. In these circumstances, the Court concludes that permitting Defendants to manipulate the corporate form to escape liability in this manner would promote injustice.
Id.
In In re Concepts America, Inc., 2018 WL 3419076 (Bankr.N.D.Ill.2018), the court held that that the chapter 7 trustee stated an alter ego cause of action which would survive a motion to dismiss. Here, the debtor served as a holding and management company for a group of restaurants. Each restaurant was owned by its own holding company (“HoldCo”), with the HoldCos either owned by the debtor, or the debtor’s principals. The debtor helped develop new restaurants, provided legal, financial, operational and managerial services to the restaurants, and provided cash management services to all the restaurant entities. There were no management agreements between the debtor and any of the HoldCos.
The debtor also guaranteed leases for the HoldCos. It received no compensation or reimbursement for any of the services it rendered, including provision of the guarantees. The principals operated the Restaurant Group as a single economic unit. Since the HoldCos had no historical financials, landlords requested financial statements from the debtor prior to entering leases and agreeing to provide tenant improvement funds. The debtor provided landlords with consolidated financials. The consolidated financial statements falsely suggested that the debtor owned assets that were producing tens of millions of dollars more in revenue than they actually were. A credit card processor deposited most credit card receipts from HoldCo customers into one of two commingled bank accounts: an account maintained by the debtor and an account maintained by an affiliate. HoldCo ownership, and even restaurant type, was disregarded for purposes of determining where HoldCo revenue would be deposited. The court held that these facts were sufficient to state an alter ego claim, noting:
In Chatz v. World Wide Wagering, Inc., 413 F.Supp.3d 742 (N.D.Ill.2019), Balmoral Racing Club, Inc. and Maywood Park Trotting Association, Inc. received $56 million from the State of Illinois through successive statutes intending to assist the horse racing industry. Pursuant to the legislation, recipients of the funds were required to use 40% of the funds disbursed to improve, maintain, market and operate the racing facilities, while the other 60% was to support prize money for races. The board of Balmoral and Maywood, however, used $20 million of the funds to increase executive compensation and pay director fees. A creditor trustee sued the officers and directors, arguing that in diverting the funds, they breached their fiduciary duty to the corporations, and also sought relief under veil piercing arguments.
The court denied a motion to dismiss the veil piercing claims. In doing so, it noted that according to the complaint, a single board of directors oversaw and controlled all of the defendant entities. These entities had no separate corporate offices. No separate board meetings were held for each of them; instead, meetings were held by the single board for all of them. Only minimal corporate records were kept that identified any degree of separation between the various corporate entities. The parent corporation had no employees at all, and its only purpose was to serve as a conduit for transfers of money. The other three companies shared overlapping officers and employees without regard to corporate form. Id. at 757.
The court also noted that the complaint alleged that the corporate entities had an arrangement whereby profits were allocated to one company whereas losses were allocated to Balmoral and Maywood. This led to a distribution of $1.25 million in profits to the first company’s shareholders that should have gone to Balmoral and Maywood. The complaint further alleges that the director defendants adopted a so-called “Asset Protection Plan” by which assets were moved away from Balmoral and Maywood in anticipation of a possible large judgment in the RICO lawsuit. As part of this plan, Balmoral and Maywood made various “pre-payments” of expenses. “In short, one could reasonably conclude, on the basis of all the complaint’s well-pleaded allegations, that there was such a unity of interest among the various corporate entities that they did not have separate legal personalities. One could also conclude that to adhere to the fiction of legal separateness would sanction fraud, promote injustice, or serve as a sham, causing injury by draining Balmoral and Maywood of funds that should have belonged to them and otherwise would have been available to repay creditors.” Id.
Matthew T. Gensburg
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