Judgments Cannot Be Collected Directly From Separate, Albeit Related, Corporate Entities

Lenders and other parties often are frustrated trying to collect business debts owed by assetless corporate entities.  This is especially true when it’s known that there are related, healthy entities owned by the same person.  Indiana Regional Council of Carpenters v. First American Steel, 2013 U.S. Dist. Lexis 79562 (N.D. Ind. 2013) (.pdf) helps explain the fundamentals of corporate entity judgment collection and why separate and distinct entities are not liable for the debts of another. 

Pertinent parties.  Plaintiff obtained a judgment against defendants First American Steel, LLC (“Steel LLC”) and its owner Castellanos, who also owned a company named First American Construction, Inc. (“Construction, Inc.”).  Power and Sons Construction, named as a garnishee defendant in Plaintiff’s proceedings supplemental, owed money to Construction, Inc. but not to Steel, LLC or to Castellanos.

Collection theory.  The First American Steel opinion dealt with Plaintiff’s efforts to compel Power and Sons to turnover money it owed to Construction, Inc.  In other words, Plaintiff asked the trial court for an order directing Power and Sons to pay to Plaintiff the money Power and Sons owed to Construction, Inc.  Castellanos contested the motion on grounds that Power and Sons could not be ordered to turnover money due to a non-party to the underlying action.

Execution basics.  In Indiana, a judgment-creditor (plaintiff) carries the burden of demonstrating that the judgment-debtor (defendant) has property or income subject to execution (collection).  Rules of property govern whether the judgment-debtor holds an interest in the targeted property.  The core issue in First American Steel was whether the judgment-debtor, Castellanos, held an interest in the debt owed by Power and Sons.  If so, then Plaintiff could step into the shoes of Castellanos and collect the debt.  Thus the question was whether the money owed by Power and Sons to Construction, Inc. was the personal property of Castellanos. 

Separate and distinct.  The Court noted that a corporation is a legal entity created by the state that has its own legal identity.  People who own stock in a corporation do not own the capital of the corporation.  Instead, the capital belongs to the corporation as a legal person.  “Because a corporation is a separate legal entity, although Castellanos owns the corporation in its entirety, his ownership interest is distinct from the corporate assets.”  In other words, Castellanos’ personal property consisted “of his shares of the corporation, not the corporate assets themselves.”  (See also:  Does A Guarantor’s Bankruptcy Stop A Foreclosure Case Against the Borrower?)

Motion denied.  Because the money Plaintiff sought was an asset of Construction, Inc. (a separate and distinct legal entity) and not Castellanos, ordering Construction, Inc. to turn over the funds “essentially would hold it liable for the debts of another.”  No can do.  Plaintiff therefore failed to meet its burden to demonstrate that the property was subject to turnover.

Alternatives.  The Court noted that Plaintiff could have, if supported by the facts, extinguished the fictional separation between Castellanos and Construction, Inc. (his corporation) by piercing the corporate veil or by showing the company was being used as an alter ego.  The Court also stated that, if Construction, Inc. was dissolved or in the process of dissolving, then the assets of the corporation “would become the personal property of the owner (Castellanos), provided there were no creditors of that corporation to absorb the assets.”  Instead of pursuing Construction, Inc. directly, Plaintiff could have explored those theories to effectively terminate the separation between Castellanos, the owner, and his corporation.  The Court in First American Steel said that Plaintiff made no attempts to establish grounds for those remedies.