Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part I
Secured lenders and other creditors sometimes obtain useless judgments against assetless companies. But occasionally there is hope for a recovery. Ziese & Sons v. Boyer, 965 N.E.2d 713 (Ind. Ct. App. 2012) very nicely summarizes Indiana law on the matter of collecting a defendant company’s debt from a separate, yet related, company. (This is similar to, yet distinguished from, how individuals can be liable for the debt of a company.) There are two applicable theories: (1) piercing the corporate veil and (2) successor liability. Today’s post deals with the former while Part II will address the latter.
History. The operative parties to the litigation were Ziese, the plaintiff, and Boyer Construction Group Corporation (“Group”), the defendant. The issue was whether Group should be responsible for the debts of Boyer Construction Corporation (“Corporation”). Corporation, a general contractor, failed to pay Ziese, a subcontractor, for work performed in 2003. In 2006, Group, also a general contractor, was formed. Group purchased some of Corporation’s assets for $100,000.00. Group utilized a name almost identical to Corporation, and used Corporation’s website, trademark and logo. Certain assets used by Group were Corporation’s even though those particular assets were not acquired under the purchase agreement. Corporation ceased business operations and dissolved in 2008. Ziese filed suit against both entities in 2009 for breach of contract. Group filed a motion for summary judgment that the trial court granted. For the reasons outlined below, the Court of Appeals reversed.
Piercing corporate veil/alter ego doctrine. Ziese zeroed in on the “subset” of veil piercing law labeled by some Indiana courts as the “corporate alter ego doctrine.” The doctrine is one by which a plaintiff shows that two corporations are “so closely connected that the plaintiff should be able to sue one for the actions of the other.” The doctrine’s purpose “is to avoid the inequity that results when one corporation uses another corporation as a shield from liability.” Indiana’s so-called eight badges of fraud apply:
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 corporation formalities; and
8. Other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.
In addition to those eight badges, which apply to veil piercing to individuals, Indiana courts look to four additional factors when the target is an entity:
1. Similar corporate names used;
2. Sharing common principal corporate officers, directors and employees;
3. Similar business purposes; and
4. Utilization of same offices, telephone numbers and business cards.
The courts examine all twelve factors for an indication of “the intermingling of business transactions, functions, property, employees, funds, records, and corporate names in dealing with the public.” The point of assessing the badges of fraud is to arrive at an inference of fraudulent intent. The ultimate objective of the doctrine is to prevent fraud or unfairness to third parties.
Remand. Collection cases based upon these theories are, by their nature, very fact sensitive. Please review the opinion for the details. The Court in Ziese identified sufficient evidence that created a factual issue with respect to whether Group was the alter ego of Corporation. In other words, the Court of Appeals remanded the case for a trial.
In Part II, I will discuss the successor liability/mere continuation theory of recovery explained in Ziese.