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!