Lesson. Common presidents and physical locations alone is insufficient evidence to render two companies one enterprise in disguise.
Legal issue. Whether Company A was the “alter ego” of Company B so as to be liable for claim against Company B.
Vital facts. Plaintiff named Company A in his lawsuit against Company B that sought damages for discrimination. Company B was a wholesale jobber of fabrics and textiles. Company A was an engineering firm. Although separate corporate entities, the two businesses occupied two halves of a single building. Also, the president of both companies was the same.
Procedural history. Company A filed a motion for summary judgment on Plaintiff’s alter ego claim.
Key rules. In the Seventh Circuit, “where two companies are alter egos, ‘a parent (or other affiliate) would be liable for the torts...of its subsidiary….’” Under Indiana state law, which applied to Vasquez:
… the focus is on whether the corporate form 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. Courts are reluctant to disregard corporate identity, and [Plaintiff] has the burden on what is described as a "highly fact-sensitive question."
The court noted that evidence of such misuse of the corporate form “might include circumstances such as undercapitalization, the absence of corporate records, fraud by corporate shareholders or directors, use of the corporation to ‘promote fraud, injustice, or illegal activities,’ commingling of the companies' assets and affairs, and conduct by the corporations ignoring corporate formalities.”
Holding. The U.S. District Court for the Northern District of Indiana granted Company A’s motion and dismissed it from the case.
Policy/rationale. Vasquez was a federal employment discrimination case, but its principles apply equally to post-judgment collection actions where a borrower or a judgment debtor may be trying to avoid payment of a debt. One of the main policies behind the alter ego theory is to protect creditors from being confused about whom they can look to for the payment of their claims.
Plaintiff contended that Companies A and B were alter egos of a single business entity. The primary basis of this contention was the allegation that both entities were fully owned and controlled by the same individual, who was president of both. However, Plaintiff offered no evidence of any misuse of the corporate form. In rejecting the claim, the court in Vasquez reasoned that companies can do “a fair amount of sharing” and have a “degree of integration” without misuse of the corporate form.
Under Indiana law, "separate corporate identity" can only "be disregarded where one corporation is so organized and controlled and its affairs are so conducted by another corporation that it is a mere instrumentality or adjunct of the other corporation." The fact that Companies A and B shared the same president and the same building was insufficient to support such a conclusion. The court declared: “[n]o reasonable fact finder could conclude that [Company A and Company B] were one enterprise in disguise….”
- District Court Denies Fraudulent Transfer and Alter Ego Claims
- Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part I
- Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II
- Seventh Circuit Reminds Us That Federal Law, And Not Indiana State Law, May Apply To Some Successor/Alter-Ego Claims
- Judgments Cannot Be Collected Directly From Separate, Albeit Related, Corporate Entities
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