Indiana Commercial Foreclosure Law

Effort To Pierce The “Corporate Veil” Denied

Judge Hamilton in MFP Eagle Highlands v. American Health Network, 2009 U.S.Dist. LEXIS 1915 (S.D. Ind. 2009) (MFP.pdf) rejected, as a matter of law, plaintiff’s efforts to pierce the “corporate veil” of an Indiana limited liability company.  The opinion granting the defendants’ motion for summary judgment demonstrates how heavy the burden is for a plaintiff attempting to reach the principals of a corporate entity in Indiana.  At its heart, the case involved the assignment of, and ultimate default on, a commercial lease. 

Aronson factors.  This blog has addressed veil piercing on two prior occasions:  May 15, 2007 More From Symons:  Piercing the Corporate Veil and July 28, 2007 More On Piercing The Corporate Veil In Indiana, And The UFTA.  The proof required to pierce the corporate veil is well-settled in Indiana, as are the following eight factors to be considered:

 1. Undercapitalization;
 2. Absence of corporate records;
 3. Fraudulent representation by corporate shareholders or directors;
 4. Use of the corporation to promote fraud, injustice or illegal activities;
 5. Payment by the corporation of individual obligations;
 6. Commingling of assets and affairs;
 7. Failure to observe required corporate formalities; and
 8. Other shareholder acts or conduct ignoring, controlling or manipulating the corporate form.

Judge Hamilton labeled these the “Aronson factors” after the Indiana Supreme Court’s decision in Aronson v. Price, 644 N.E.2d 864 (Ind. 1994).  The eight factors, which are non-exhaustive, are to be analyzed in determining whether “the corporate form was so ignored, controlled or manipulated that it was merely the instrumentality of another and that the misuses of the corporate form would constitute a fraud or promote injustice.” Although the entity in MFP Eagle was a limited liability company, “the same standards apply equally to corporations and to limited liability companies.”

6 of 8.  In MFP Eagle, six of the factors weighed against piercing the corporate veil, while two of the factors may have been present:  undercapitalization (#1) and use of the limited liability forum to promote fraud, injustice or illegal activities (#8).  As to the plaintiff’s contentions regarding those two factors, Judge Hamilton summed up the Court’s position as follows:

MFP is arguing in effect that it was entitled to have personal guarantees of the lease obligation.  The short answer is that if MFP or its predecessors wanted personal guarantees of the long-term obligations, then they should have bargained for them.  They did not.  MFP is not entitled to such guarantees merely because AHN exercised its rights under the lease to assign the long-term obligations from one limited liability company (AHN) to another (LALR).

The court assumes that a reasonable trier of fact could find that LALR was created for the purpose of allowing Dr. Reitz and Dr. Adams to avoid personal liability for the lease that AHN wanted to assign to them.  This is a perfectly legitimate business goal, particularly since neither Dr. Reitz nor Dr. Adams had been personally liable for the original lease.  Because of tension within AHN, AHN wanted to terminate its agreement with the two doctors and proposed assignment the lease to them as individuals.  At that point, Dr. Reitz and Dr. Adams proposed the creation of a limited liability company to receive the lease assignment.  This device reflected only sound economic planning.  A limited liability company is a perfectly permissible form for organizing a business in Indiana, and a primary benefit is that its members are not personally liable for the debts of the limited liability company.

Heavy burden.  Judge Hamilton seems to believe fairly strongly in the protections afforded by the corporate structure:

In most instances, parties who have observed the formalities of the corporate (or limited liability company) form should be able to count on the promise of limited liability, and there will rarely be a sufficient factual basis for avoiding summary judgment on the issue based on a claim by a party who knew it was dealing with a limited liability company.

The fact is, the plaintiff in MFP Eagle never had any right to personal guarantees of the underlying lease obligations, and the lease itself allowed the defendants to transact business as they did.  As such, the evidence did not permit the Court to impose, in effect, “new personal guarantee obligations on the [defendants].”  Take that, Indiana creditors! 

More On Piercing The Corporate Veil In Indiana, And The UFTA

This follows-up my May 15, 2007 posts (one and two) about Indiana law applicable to creditors that want to pierce the corporate veil and that wish to recover under Indiana’s Uniform Fraudulent Transfer Act.  On July 20, 2007, the Indiana Court of Appeals issued an opinion upholding the trial court’s piercing of the corporate veil, normally a difficult thing to do, as well as affirming liability based on the UFTA.  See, Four Seasons Manufacturing, Inc. v. 1001 Coliseum, LLC, 2007 Ind. App. LEXIS 1589 (Ind. Ct. App. 2007) (FourSeasonsOpinion.pdf ).

Indiana’s general principles on “piercing”.  Four Seasons, on page 12, sets out these guidelines:

1.  Indiana courts are reluctant to disregard the corporate identity and do so only to protect third parties from fraud or injustice when transacting business with a corporate entity.
2.  The process of piercing a corporate veil is equitable in nature, and courts necessarily engage in “a highly fact-sensitive inquiry.”
3.  Parties seeking to pierce the corporate veil bear the burden of establishing that the corporation was so ignored, controlled or manipulated that it was merely the instrumentality of another and that the misuse of the corporate form would constitute a fraud or promote injustice.

Factors to be considered.  To get to individual owners, the following evidence may be considered (see, pp. 12 and 13):

1.  Undercapitalization;
2.  Absence of corporate records;
3.  Fraudulent representation by corporation shareholders or directors;
4.  Use of the corporation to promote fraud, injustice or illegal activities;
5.  Payment by the corporation of individual obligations;
6.  Commingling of assets and affairs;
7.  Failure to observe required corporate formalities; or
8.  Other shareholder acts or conduct ignoring, controlling or manipulating the corporate forum.

To get to other entities, in addition to the eight factors above, Indiana courts consider these:

1.  Similar corporate names were used;
2.  The corporations shared common principal corporate officers, directors, and employees;
3.  The business purposes of the corporations were similar; and
4.  The corporations were located in the same offices and used the same telephone numbers and business cards.

Importantly, each of the above factors does not need to be proven in order to pierce a corporate veil.  The list is non-exhaustive.  There does not necessarily need to be evidence of every  factor.  Id. at 16.  In Four Seasons, the Court of Appeals held that the plaintiff commercial lessor (creditor) presented adequate evidence that the defendant entity basically orchestrated a fraudulent purchase agreement between two related entities (both of which were owned by the defendant) in order to shield those entities from liability associated with a lease default.   

Uniform Fraudulent Transfer Act.  Actions pursuant to the UFTA and proceedings to pierce the corporate veil sometimes go hand in hand.  Four Seasons is one of those cases.  Indeed the plaintiff was able to recover its damages from the corporate owner of the defaulting entity/lessee under the piercing theory and, alternatively, the fraudulent transfer theory.  One specific question in Four Seasons was whether the defendant was a “debtor” under the UFTA, Ind. Code § 32-18-2.  A “debtor” is “a person who is liable on a claim.”  I.C. § 32-18-2-6.  The Court of Appeals held that the defendant entity was a debtor because it coordinated the fraudulent transfer at issue.  Also important was the fact that the defendant was the 100% owner of both the defaulting lessee and the entity that “purchased” the lessee at the time of the default. 

The remedies provision of the UFTA, I.C. § 32-18-2-7, focuses on the amount of the fraudulent transfer – no more, no less.  In Four Seasons, the UFTA damages consisted of the value of assets the defendant entity fraudulently transferred between one entity to the other entity in order to avoid a judgment based on the lease breach.  Id. at 22-24.  That amount consisted of the value of the assets that the breaching entity (the corporate lessee) possessed upon default – the same amount of money fraudulently transferred out of that entity to the second, related entity. 

The Four Seasons case offers secured lenders guidance when faced with decisions concerning whether to pursue the assets of individuals or entities other than those of the actual borrower’s.  Piercing the corporate veil and UFTA actions can be expensive and time-consuming cases, not to mention difficult ones to win.  This and other recent Indiana cases demonstrate, however, that it can be done under certain circumstances. 

MORE FROM SYMONS: Piercing the Corporate Veil

The March 31, 2007 opinion in Symons International v. Continental Casualty Company, et al., 2007 U.S. Dist. LEXIS 27356 (S.D. Ind.) discusses Indiana’s common law theory of piercing the corporate veil.  (SymonsOpinion.pdf).  The legal principle, not unlike the principles in Indiana’s Uniform Fraudulent Transfer Act, which also is analyzed in the case, provides a method for collecting a debt from someone other than the actual, named borrower.  If applicable, the piercing doctrine provides a nice remedy for Indiana creditors victimized by shady debtors hiding behind the corporate shield.

Piercing the corporate veil.  It’s frustrating when a lender knows that there are assets to cover the debt but that the assets are protected from collection because they are in the hands of the individual owners of a corporate entity or by entities separate from the borrowing entity.  The theory of “piercing the corporate veil,” in rare circumstances, will permit lenders/creditors to chase the assets of the individuals or entities who actually have the money.   

Persons/Owners.  “Indiana courts are reluctant to disregard a corporate entity and extend the liabilities of one corporation and its affiliates, shareholders and/or officers; however, they may do so to prevent fraud or injustice to a third party.”  Symons at 56.  The issue is “highly fact sensitive.”  Id.  With regard to targeting individuals, here are eight factors Indiana courts look to, but the factors are not exhaustive or ranked:

1. Undercapitalization;
2. Absence of corporate records;
3. Fraudulent representation by a corporation’s shareholders or directors;
4. Use of the corporation to promote fraud, injustice or illegal activities;
5. Payment by the corporation of individual obligations;
6. Commingling of assets and affairs;
7. Failure to observe required corporate formalities; and
8. Other shareholder acts or conduct ignoring, controlling or manipulating the corporate forum.

Other entities.  In addition to these eight factors, Indiana courts look to at least four other factors when a plaintiff seeks to pierce the corporate veil in order to hold a corporation (or LLC, etc.) liable for another corporation’s debt:

1. Similar corporate names;
2. Common principal corporate officers, directors and employees;
3. Similar business purposes; and
4. The same offices, telephone number and business cards.

Id. at 57.  Again, this is not an exhaustive or ranked list.  On pages 57-62 of Judge Young’s opinion, he addresses many of the factors in detail and provides an excellent analysis of the remedy should you want a better understanding of what it takes to pierce the corporate veil.  He held there to be questions of fact and denied the defendants’ motion for summary judgment.  Symons is a favorable opinion for Indiana creditors.