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):
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.