Last week, while discussing the G4S case, I suggested that efforts to collect judgments by piercing the corporate veil may be better left for post-judgment proceedings supplemental. With facts and circumstances like those in Longhi v. Mazzoni, 2009 Ind. App. LEXIS 2093 (Ind. Ct. App. 2009) (.pdf), however, clearly a pre-judgment effort to pierce can be appropriate. Unlike the G4S case, Longhi involved very specific allegations and evidence of fraud. In fact, the plaintiffs did not even name as defendants the corporate entities in question. The plaintiffs proceeded directly against the alleged bad actor (corporate agent/representative) under the veil-piercing theory.
Facts, distilled to their essence. Veil-piercing cases tend to be very fact sensitive, so I must gloss over the facts. The underlying corporate entities were in the business of residential real estate development. The defendant was a shareholder/officer in the entities. The defendant negotiated to build the plaintiffs a house at a 50% discount. The plaintiffs entered into a purchase agreement. The executed documents provided that the $50,000 paid by the plaintiffs was an earnest money deposit. But other facts showed that the corporate entities actually intended the $50,000 to be an investment in the development project and not a standard earnest money deposit. The entities never built the plaintiffs’ house, never deeded the real estate to them and never refunded the $50,000.
Piercing issues. Longhi has a nice outline of the general rules applicable to piercing the corporate veil, which rules and policies I have posted here before. Of the eight factors typically weighed by Indiana courts in deciding whether to pierce the corporate veil, the Court of Appeals focused in detail on (1) undercapitalization and (2) whether the defendant used the corporate entities to promote fraud.
Undercapitalization. The Court cited to a definition of “inadequate capitalization” as “capitalization very small in relation to the nature of the business of the corporation and the risks attendant to such business.” The Court stated that the adequacy of capital is measured “by evaluating the amount of capital the company had at the time of its formation, unless the company at some point substantially expands the size or nature of its business with an attendant increase in business hazards.” Again, these veil-piercing cases tend to be very fact-sensitive, meaning that courts typically must evaluate many pieces of information and documentation. One should read the opinion for a more in-depth analysis of the facts. In the end, the Court affirmed the trial court’s findings, which included (1) that the developers needed, but didn’t have, $400,000 at the time of the venture’s formation and (2) that the developers hoped to raise sufficient capital through large down payments. The main point here is that undercapitalization may be a factor in veil-piercing cases and that the Longhi case provides guidance on the issue.
Promotion of fraud. The Court also affirmed the trial court’s decision as to the fraud element of the veil-piercing claim. The alleged fraud centered upon the plaintiffs’ belief that they were making an earnest money deposit on a house, not an investment in the development project. One of the critical facts was that the purchase agreement required the plaintiffs’ $50,000 to be placed into a broker’s trust account, but the money instead went to a corporate account used to finance the development of the project.
Although not mentioned in the opinion, I’m guessing that that the plaintiffs in Longhi knew the corporate entities were judgment-proof, so the plaintiffs focused all of their energies on recovering their 50k from the key player in the transaction through a direct veil-piercing suit. The plaintiffs succeeded in obtaining a judgment, which included treble damages, that the Court of Appeals affirmed.