Seventh Circuit Reminds Us That Federal Law, And Not Indiana State Law, May Apply To Some Successor/Alter-Ego Claims

Lesson. If you’re trying to collect a judgment in federal court based upon veil-piercing theories, make sure you’re applying the correct legal standard. If the underlying claim arises out of a federal statute, Indiana’s state law tests may not apply. Although similar in nature, the standards are not the same and require a different analysis.

Case cite. McCleskey v. CWG Plastering 897 F.3d 899 (7th Cir. 2018)

Legal issue. Whether Indiana state law versus federal law standards controlled the outcome of plaintiff’s successor and alter ego claims against defendant.

Vital facts. As discussed here before (see below), corporate veil piercing cases tend to be very fact sensitive, and McCleskey is no different. Please review the opinion for a summary of the operative evidence. The Court examined whether a son’s plastering business should be liable for a judgment previously entered against the plastering business of the son’s father. The judgment stemmed from the father’s failure to make certain payments to a union. The Court noted, among other things, the “inconvenient fact” that the son went into business the same day that the $190,940.73 judgment was entered against his father’s company.

Procedural history. The district court (the trial court) granted summary judgment for the defendant (son), and the plaintiff appealed.

Key rules. Generally, cases resting on federal ERISA and NLRA statutes, including 29 U.S.C. § § 1132, 1145 and 29 U.S.C. § 185(a), respectively, “are within the federal court’s subject-matter jurisdiction and typically governed by federal law.”

Under federal law, both alter ego and successor liability “incorporate a scienter [intent or knowledge of wrongdoing] component coupled with an analysis of similarities between the old and new entities.” The “notice of the obligation” by the new entity is key to successor liability. In McCleskey, liability for alter ego required more, however: “a fraudulent intent to avoid collective bargaining obligations.” The McCleskey opinion spells out the other key factors that courts consider.

Holding. First, the Court found that federal post-judgment standards of collection applied. Second, the Court concluded, “the district court was too quick to grant summary judgment” in the defendant’s (the son’s) favor.

Policy/rationale. In fact-sensitive cases like McCleskey, I find it best to defer to the Court’s opinion for any detailed application of the evidence to the law. Every case is different (and blog posts can only be so long….) Importantly, the judgment arose out of the plaintiff’s action under a collective bargaining agreement. For today’s purposes, the significant takeaway is that federal courts have their own body of law in this veil-piercing arena. Admittedly, the federal standards should never apply to a commercial mortgage foreclosure action, which cases are based on state contract and foreclosure law. Nevertheless, if you’re a party chasing money in federal court or defending a non-foreclosure collection claim in an Indiana federal forum, you should be mindful that the Indiana standards, about which I’ve written previously (see below), might not apply.

Related posts.

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
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I have experience representing parties entangled in post-judgment collection actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.


District Court Denies Fraudulent Transfer and Alter Ego Claims

Fraudulent transfer and alter ego cases seem to almost always be factually dense and, therefore, difficult to summarize in a blog post.  Since I've written about the essential elements of Uniform Fraudulent Transfer Act and alter ego claims in the past, I've decided simply to post the Court's opinion in Wine & Canvas v. Weisser, 2017 WL 2905026 (S.D. Ind. 2017) here

United States District Judge Pratt authored a thorough, twenty-page opinion dealing with plaintiff's motion for turnover of trademarks and for funds received as royalties in connection with the pending proceedings supplemental.  The two bases of the motion were (1) fruadulent transfer under Indiana Code 32-18-2-14 and 15 and (2) alter ego.  The opinion spells out why the Court denied the plaintiff's motion on both theories.  The Court found that the plaintiff did not show that the subject transfer was fraudulent or voidable.  Further, the Court concluded that company 2 was not the alter ego of company 1. 

For more on the law and the Court's reasoning, please review the opinion, which is a good illustration of how a court will walk through all of the relevant factors toward a decision denying relief.      


Indiana Federal Court Finds De Facto Merger Giving Rise To Successor Liability for Contract Obligations

Lesson. Depending upon the facts, a newly-formed company can be liable for a separate, but related, company’s debts under Indiana’s “successor liability” doctrine.

Case cite. Continental Casualty v. Construct Solutions, 2017 U.S. Dist. LEXIS 76396 (S.D. Ind. 2017) (pdf).

Legal issue. Whether Company 2 was a successor company of Company 1 and thus responsible for Plaintiff’s contract damages because Company 2 was either a “de facto merger” or a “mere continuation” of Company 1.

Vital facts. Continental Casualty was a breach of contract action. About a year after Defendant Company 1 signed the contract, the owner incorporated Defendant Company 2. Both companies were commercial roofing operations. Company 1’s people controlled the operations of Company 2. The same individual was the president of, and owned, both companies. Both operated from the same location. Company 2 assumed the trade name of Company 1.

Procedural history. Continental Casualty was Judge Tonya Walton Pratt’s opinion on Plaintiff’s motion for summary judgment. Plaintiff asked for a judgment against Defendant Company 2 as the successor company for Defendant Company 1. In other words, Plaintiff sought to hold Company 2 liable for Plaintiff’s losses under its contract with Company 1.

Key rules.

Generally, in Indiana, a successor company may liable for the obligations of its predecessor if it’s a “de facto consolidation or merger” or where the successor is a “mere continuation of the seller.”

Indiana looks at the following factors to make such a determination:

1. Continuity of ownership,
2. Continuity of management, personnel and physical operation,
3. Cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible, and
4. Assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor.

Holding. The Court granted summary judgment in favor of Plaintiff.

Policy/rationale. The same person owned both companies. The same person was the president of both companies, which were both operated from the same location. Company 1 dissolved in early 2015, before Company 2 was formed. Plus, the companies adopted each other’s trade names and provided the same roofing services. The Court concluded that these uncontested facts were sufficient to establish that Company 2 was a de facto merger with Company 1 and, thus, was “liable as a successor company to amounts owed under the [subject contract].”

Related post. Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II


Creditor’s Lack Of Recourse Against Corporation Not A Proper Basis For Piercing The Corporate Veil

In County Contractors v. Songer, 4 N.E.3d 677 (Ind. Ct. App. 2014), a mechanic’s lien and breach of contract case, the plaintiff filed claims against the shareholders of an excavation contractor, a corporation, which was defunct.  Plaintiff sought to collect money owed by the corporation from its individual owners.  The trial court concluded that the shareholders were personally liable, and the shareholders appealed, resulting in the Country Contractors opinion that discusses the issue of piercing the corporate veil. 

Fundamental principle.  As the lawyer for the plaintiff creditor, you know you’re cooked when the Court of Appeals starts its opinion by citing to “fundamental principles” of American and Indiana corporate law.  The Court in Country Contractors stated “that corporate shareholders sustain liability for corporate acts only to the extent of their investment and are not held personally liable for acts attributable to the corporation.”  From the top, the Court pointed out that the burden on parties seeking to pierce the corporate veil is “severe.”  

Undercapitalization.  Indiana law is well settled on what courts must examine in deciding whether to pierce the corporate veil, and my post of 3/29/13 goes over those rules, including the Aronson factors.  One of the eight Aronson factors is undercapitalization.  “Capitalization is inadequate when it is very small in relation to the nature of the corporation’s business and risks attendant to such businesses.”  Importantly, the adequacy of capital generally is measured “as of the time of the corporation’s formation.”  A corporation that was adequately capitalized at the outset “but subsequently suffers financial reverses is not undercapitalized.”  In Country Contractors, the corporation originally was formed in 1983 and earned a profit for many years.  By the end of 2007, however, the corporation started operating at a loss.  The Court held:  “[plaintiff] failed to establish that [the corporation’s] dwindling capital was due to anything other than a general downturn in the economy and a specific downturn in the construction industry.”

Corporate formalities.  The second Aronson factor at issue was the alleged failure to observe corporate formalities.  Generally, “a corporation should be operated as a distinct and separate business and financial unit, with its own books, records, and bank accounts.”  The main argument against the shareholders in Country Contractors was that the corporation conducted all of its business from one bank account.  The Court found that it is not uncommon for small corporations to operate from one bank account.  Additionally, the record was devoid of any facts suggesting that the shareholders had comingled personal and corporate funds or used the bank account for personal purposes.  The Court ultimately held that the plaintiff “failed to establish a causal link between the corporation’s recordkeeping and any injustice resulting from it.” 

Causal connection.  The Court’s opinion highlighted the need for a “causal connection” between an Aronson factor and the fraud against the plaintiff before the veil can be pierced.  I discussed this principle in detail in my 3/20/13 post.  The general rule is that “the fraud or injustice alleged by a party seeking to pierce the corporate veil must be caused by, or result from, misuse of the corporate form.”  In Country Contractors, the Court concluded that there was no causal link between either the alleged undercapitalization or the abuse of corporate formalities, and any injustice resulting from them.  This doomed the plaintiff’s case.

Out of luck.  The trial court had ruled in the shareholders’ favor, in part, because the corporation had filed bankruptcy and the plaintiff had “no other recourse” except as against the shareholders.  Immaterial, said the Court of Appeals:  “lack of other recourse simply is not a proper basis for piercing the corporate veil.”  If it were, any entity contracting with a company that ends up in bankruptcy could pursue its owners individually.  This would be contrary to the fundamental principles of corporate law.  However frustrating, this is simply the risk you run in doing business with a corporation, as opposed to individuals, when the corporate owners do not personally guarantee the outcome. 


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.


Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II

This follows-up Part I, from March 29th, dealing with veil piercing from one company to another (alter ego doctrine) in order to recover a debt.  Please click on Part I for introductory information about the subject case, Ziese & Sons v. Boyer.  Today’s post focuses on the second theory of recovery – successor liability. 

Successor liability, generally.  Plaintiff Ziese’s second contention was that defendant Group was liable for Corporation’s debt based upon certain exceptions to the general rule against successor liability, which centers upon the fraudulent sale of assets.  (Although the Ziese opinion did not rely upon Indiana’s Fraudulent Transfer Act, these kinds of cases are very similar to one another.)   Importantly, successor liability “is implicated only when the predecessor corporation no longer exists, such as in the case of dissolution or liquidation in bankruptcy.” 

Indiana’s general rule is that, when one corporation purchases the assets of another, the buyer does not assume the debts or liabilities of the seller.  There are four exceptions:

 1. An implied or express agreement to assume liabilities;
 2. A fraudulent sale of assets done for the purpose of evading liability;
 3. A purchase that is a de facto consolidation or merger; or
 4. Where the purchaser is a mere continuation of the seller.

Ziese focused upon the second and fourth exceptions. 

Exception 2 - fraudulent sale.  Regarding the second exception, Indiana courts look to eight badges of fraud, which are different than the eight badges of fraud applicable to the veil piercing theory discussed in Part I:

 1. The transfer of property by a debtor (defendant) during the pendency of a suit;
 2. A transfer of property that renders the debtor (defendant) insolvent or greatly reduces his estate;
 3. A series of contemporaneous transactions which strip the debtor (defendant) of all property available for execution;
 4. Secret or hurried transactions not in the usual mode of doing business;
 5. Any transaction conducted in a manner differing from customary methods;
 6. A transaction whereby the debtor (defendant) retains benefits over the transferred property;
 7. Little or no consideration in return for the transfer; and
 8. A transfer of property between family members.

Indiana courts examine these badges to determine whether a fraudulent asset sale took place.  In Ziese, the Court concluded that genuine issues of material fact existed as to whether Ziese could recover under this theory.  There was evidence that Group acquired assets of Corporation without giving consideration for them. 

Exception 4 - mere continuation.  The other exception at issue in Ziese was the “mere continuation” (a/k/a "direct continuation") concept that explores “whether the predecessor corporation should be deemed simply to have re-incarnated itself, largely aside of the business operations.”  The focus is upon whether there is a continuation of shareholders, directors and officers into the new corporate entity.  (Remember – successor liability only applies when one entity purchases the assets of another entity.)  After analyzing the evidence in Ziese, the Court held that there were genuine issues of material fact regarding whether Group was a mere continuation of Corporation.  Thus the Court remanded all claims for trial.

The Ziese opinion provides an excellent outline of Indiana law regarding the doctrines applicable to recovering debts owed by one corporation from a separate, yet connected, corporation.  The Court’s analysis is a road map for the proof needed to prevail on these claims or, conversely, to defeat them. 


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:

 1. Undercapitalization;
 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.


In Indiana Veil-Piercing Cases, There Must Be A “Causal Connection” Between The Misuse Of The Corporate Form And The Alleged Fraud

CBR v. Gates, 962 N.E.2d 1276 (Ind. Ct. App. 2012) is an important opinion on the issue of veil piercing, a method by which creditors can recover corporate debts from principals of the corporation.  The CBR decision is unique in that it very clearly adopts a “causal connection” requirement for fraud-related veil piercing theories. 

The trial court judgment.  The facts of CBR are dense.  Essentially, the trial court entered a judgment in favor of the plaintiff and against the shareholders of a corporation for the corporation’s breach of a purchase agreement and default on a promissory note.  In deciding to pierce the corporate veil, the trial court concluded that (1) the entity was undercapitalized and lacked corporate records and (2) the shareholders had fraudulently represented [to the plaintiff] in the purchase agreement that there were no representations, warranties or understandings other than those set forth and provided for in the purchase agreement.  As to (2), the trial court felt the shareholders “‘knowingly traded off any representations outside the agreement in return for obtaining limited liability of the corporate form,’ but they nonetheless ‘attempted to back out of the agreement based on oral representations outside the agreement . . . .’”  The trial court concluded that the shareholders had “abused the corporate form to promote both fraud and injustice” so as to render the shareholders individually liable. 

Shareholders’ contention.  Generally, in Indiana, “the party seeking to pierce the corporate veil bears the burden of establishing that:  (1) the corporate form was ‘so ignored, controlled or manipulated that it was the mere instrumentality of another’ and (2) ‘that the misuse of the corporate form would constitute a fraud or promote injustice.’”  Escobedo v. BMH Health Assocs., Inc., 818 N.E.2d 930, 933 (Ind. 2004).  On appeal, the shareholders contended that the plaintiff failed to establish element (2).  Their theory was that the trial court’s judgment ignored the underlying business transaction context, which was to create a corporate entity for a limited purpose.  The shareholders asserted that Indiana law requires a causal link, based upon the second prong of Escobedo, that where fraud is alleged it must be accomplished through misuse of the corporate form. 

Fraud?  CBR is unique in that it digs into the issue of whether the fraud or injustice alleged by the plaintiff must be caused by, or result from, misuse of the corporate form.  The following undisputed facts from CBR were outcome determinative:

[Plaintiff] was informed during the negotiation stage that [the corporate entity] was being formed for the sole purpose of purchasing his event-decorating assets.  As such, before entering into the agreement with [the corporate entity], [plaintiff] was aware, or should have been aware, that the fledgling corporation would possess many of the attributes [the corporate entity] would later point to as evidence of abuse of the corporate form, such as a lack of corporate records.  At the time of formation, [the corporate entity] possessed capital for the initial $100,000 down payment to [plaintiff].  Though the corporation also had an obligation to repay the amount due on the promissory note, [the corporate entity] had seven years to do so, and the first payment was not due until six months after closing.  The shareholders intended to capitalize future payments and contribute funds for operation of the business through capital contributions, a practice common in the corporate context.

No nexus.  The Court concluded that the “alleged fraud [did] not flow from any misuse of the corporate form; it had no nexus to the corporate form.”  In short, the alleged misrepresentation in CBR did not pertain to the defendant corporate entity’s corporate status.  The Court suggested that the only way the corporate veil could have been pierced in CBR would have been through proof that the shareholders formed the corporate entity with the intent - at the time - to later breach the subject purchase agreement and hide behind the shield of limited liability.  Since there was no such evidence, there was no basis for a finding of misuse of the corporate form constituting a fraud (or, in turn, for a finding to pierce). 

The CBR case speaks to the potential liabilities of individuals who routinely form SPEs (special purpose entities) or SAEs (single asset entities).  See also, January 19, 2009 post.  The case favors the investing individuals and not their creditors.  Because these cases are always highly fact sensitive, CBR should not be interpreted as some wide ranging shift under Indiana law.  But the opinion does highlight the causal connection standard.  Not every case of alleged fraud against a corporate entity will pierce the corporate veil. 


“Negative Value” Dooms Indiana Fraudulent Transfer And Direct Continuation Claims

Not infrequently, a borrower’s loan collateral will fail to fully satisfy a secured debt, particularly after the add-ons of default interest, attorney’s fees and other costs of collection.  In such cases, lenders must choose whether to pursue a recovery of the remaining, unsecured debt from either the borrower or a corporate or individual guarantor.  Sometimes, a pre-loan and post-judgment comparison of financial statements causes lenders to question whether there may have been fraudulent transfers of assets that could be avoided and become a source of recovery.  Guttierrez v. Kennedy, 2010 U.S.Dist. LEXIS 73053 (S.D. Ind. 2010) (.pdf) helps guide a judgment creditor’s decision of whether to incur the time and expense of pursuing suspected fraudulently-transferred assets. 

Fact sensitive.  No two fraudulent transfer/veil piercing cases are alike, and I’ve concluded that a detailed summary of facts in cases like Guttierrez adds little to the overall message.  For more about the assets and relationships at issue, I recommend that you read the opinion. 

Negative value.  The key asset in Guttierrez involved a contract previously held by the judgment debtor that was transferred (assigned) to a related corporate entity.  Indiana’s Uniform Fraudulent Transfer Act (“UFTA”) at Ind. Code § § 32-18-2-1 through 21 permits creditors to obtain avoidance of a fraudulent transfer to the extent needed to satisfy a claim.  Guttierrez specifically touched upon the amount of the potential recovery.  “The creditor may recover the lesser of the amount necessary to satisfy its claim or the value of the transferred asset.”  Valuation is determined at the time of the transfer but can be adjusted “as the equities may require.”  To the extent the asset may generate income from use, the liability of the transferee will be “limited in any event to the net income after the deduction of the expense incurred in earning the income.”  After an examination of the facts in Guttierrez, the Court concluded that the judgment creditor could not recover under the UFTA because the subject contract had negative value after the deduction of the expenses incurred in earning the income. 

Direct continuation.  The judgment creditor in Guttierrez also argued that the corporate assignee of the contract was a “direct continuation” of the judgment debtor and, as such, should be liable for the judgment.  I discussed this type of veil piercing claim on July 28, 2007.  Generally, in Indiana “when a corporation is clearly a direct continuation of the ownership and operations of another corporation, it will be liable to the other corporation’s creditors.”  The corporate entities in Guttierrez operated from the same location and performed the same jobs.  On the other hand, the targeted entity was not created immediately after the threat of judgment against the judgment debtor and indeed preexisted the judgment by twelve years.  Additionally, even though one of the principals of the judgment debtor had a stake in the targeted entity, two of the other principals did not.  Moreover, the judgment creditor did not offer evidence of the important factors of undercapitalization, comingling of personal and corporate assets, or corporate payment of personal obligations.  But the nail in the coffin was the “negative value” of the asset at issue:  “Plaintiffs were not harmed by the transfer because the [contract] turned out to be a losing proposition.”   

No harm, no foul.  From the perspective of judgment creditors, one lesson of Guttierrez is to ensure that the asset being chased is worth chasing.  Guttierrez centered upon the capture of an income-producing asset (a contract) that, on its face, appeared to have significant worth.  But the Court concluded that, after deducting operating/overhead costs, the contract had negative value.  The judgment creditor’s efforts to seize the contract were for naught.  While it may be understandable that a value determination cannot be made before a claim is filed, prompt post-filing discovery and investigation should be undertaken in order to assess what an income-producing asset may be worth.  In Guttierrez, the subject transfers and corporate entities were suspect, but in the end those circumstances didn’t matter because the targeted asset turned out to be a liability. 


Corporate Veil Pierced In Recent Decision

Last week, while discussing the G4S case, I suggested that efforts to collect judgments by piercing the corporate veil may be better left for post-judgment proceedings supplemental.  With facts and circumstances like those in Longhi v. Mazzoni, 2009 Ind. App. LEXIS 2093 (Ind. Ct. App. 2009) (.pdf), however, clearly a pre-judgment effort to pierce can be appropriate.  Unlike the G4S case, Longhi involved very specific allegations and evidence of fraud.  In fact, the plaintiffs did not even name as defendants the corporate entities in question.  The plaintiffs proceeded directly against the alleged bad actor (corporate agent/representative) under the veil-piercing theory. 

Facts, distilled to their essence.  Veil-piercing cases tend to be very fact sensitive, so I must gloss over the facts.  The underlying corporate entities were in the business of residential real estate development.  The defendant was a shareholder/officer in the entities.  The defendant negotiated to build the plaintiffs a house at a 50% discount.  The plaintiffs entered into a purchase agreement.  The executed documents provided that the $50,000 paid by the plaintiffs was an earnest money deposit.  But other facts showed that the corporate entities actually intended the $50,000 to be an investment in the development project and not a standard earnest money deposit.  The entities never built the plaintiffs’ house, never deeded the real estate to them and never refunded the $50,000.

Piercing issues.  Longhi has a nice outline of the general rules applicable to piercing the corporate veil, which rules and policies I have posted here before.  Of the eight factors typically weighed by Indiana courts in deciding whether to pierce the corporate veil, the Court of Appeals focused in detail on (1) undercapitalization and (2) whether the defendant used the corporate entities to promote fraud

Undercapitalization.  The Court cited to a definition of “inadequate capitalization” as “capitalization very small in relation to the nature of the business of the corporation and the risks attendant to such business.”  The Court stated that the adequacy of capital is measured “by evaluating the amount of capital the company had at the time of its formation, unless the company at some point substantially expands the size or nature of its business with an attendant increase in business hazards.”  Again, these veil-piercing cases tend to be very fact-sensitive, meaning that courts typically must evaluate many pieces of information and documentation.  One should read the opinion for a more in-depth analysis of the facts.  In the end, the Court affirmed the trial court’s findings, which included (1) that the developers needed, but didn’t have, $400,000 at the time of the venture’s formation and (2) that the developers hoped to raise sufficient capital through large down payments.  The main point here is that undercapitalization may be a factor in veil-piercing cases and that the Longhi case provides guidance on the issue. 

Promotion of fraud.  The Court also affirmed the trial court’s decision as to the fraud element of the veil-piercing claim.  The alleged fraud centered upon the plaintiffs’ belief that they were making an earnest money deposit on a house, not an investment in the development project.  One of the critical facts was that the purchase agreement required the plaintiffs’ $50,000 to be placed into a broker’s trust account, but the money instead went to a corporate account used to finance the development of the project. 

Although not mentioned in the opinion, I’m guessing that that the plaintiffs in Longhi knew the corporate entities were judgment-proof, so the plaintiffs focused all of their energies on recovering their 50k from the key player in the transaction through a direct veil-piercing suit.  The plaintiffs succeeded in obtaining a judgment, which included treble damages, that the Court of Appeals affirmed.


Veil-Piercing Claim Better Left For Proceedings Supplemental

A recent decision by Magistrate Judge Jane Magnus-Stinson in the Southern District of Indiana, G4S Justice Services, Inc. v. Correctional Program Services, Inc., 2009 U.S. Dist. LEXIS 88689 (S.D. Ind. 2009) (.pdf), explains, albeit indirectly, why efforts to collect judgments by piercing the corporate veil are more appropriate in the context of proceedings supplemental.   

Strategic decision.  In G4S, the plaintiff pursued a strategy I have seen but have never myself utilized.  The plaintiff filed a lawsuit against a defendant corporation seeking, among other things, damages for breach of contract.  The contract/debt was not personally guaranteed by the owners of the corporation.  Nevertheless, the plaintiff included a cause of action seeking to pierce the defendant’s corporate veil and named the corporation’s shareholders, personally.  I’ve posted about veil piercing before, most recently on January 19, 2009

Dismissal, on technicality.  The Court’s opinion arose out of the defendant shareholders’ pre-trial motion for judgment on the pleadings seeking a dismissal of the count asserted against them.  The Court held that the plaintiff’s veil-piercing allegations in the complaint were conclusory and did not contain any details “that would plausibly justify concluding that [defendant corporation] did in fact [fraudulently] pay the [shareholders’] personal obligations.”  The Court seemed to feel that the allegations were not based upon anything other than speculation.  The Court therefore dismissed the count related to the defendant shareholders:  there was a “complete absence of any allegations that would justify piercing [defendant corporation’s] corporate veil.”

Better strategy.  In dicta (legalese for “opinions of a judge which do not embody the resolution or determination of the court,” Black’s Law Dictionary), Judge Magnus-Stinson suggested that veil-piercing claims are better left for post-judgment proceedings.  In the event the plaintiff in G4S subsequently obtained a money judgment that the assets of the defendant corporation could not satisfy, the plaintiff would have the ability to conduct proceedings supplemental, a post-judgment proceeding I touched upon on June 29, 2007.  Proceedings supplemental, commonly referred to by lawyers as “pro supp,” are equitable in nature and “permit the judgment-creditor to discover and obtain property held by third-parties that ought to be used to satisfy the judgment.”  For example, in that process:

The judgment-creditor can obtain access to the judgment-debtor’s books and records.  See Fed. R. Civ. Pro. 69(a)(2); Ind. T.R. 69(E)(4).  Using information obtained from those sources, judgment-creditors can—and do—argue that a court should pierce the judgment-debtors’ corporate veil and make their shareholders’ assets available to satisfy the judgment.

Later, perhaps.  The Court made it clear that the dismissal of the defendant shareholders was without prejudice (not final or permanent) and that the plaintiff could revisit veil-piercing during proceedings supplemental “in the event it obtains a judgment against [defendant corporation], and assuming that it can obtain evidence to support the imposition of such a remedy.” 

The notion is that there is a time and place for piercing the corporate veil - during post-judgment proceedings, not during the litigation of the underlying claims.  Perhaps other judges or lawyers may feel differently, but I share the Court’s view in G4S.  Please e-mail or post a comment with your thoughts.


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! 


More On Piercing The Corporate Veil In Indiana, And The UFTA

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):

1.  Undercapitalization;
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. 


MORE FROM SYMONS: Piercing the Corporate Veil

The March 31, 2007 opinion in Symons International v. Continental Casualty Company, et al., 2007 U.S. Dist. LEXIS 27356 (S.D. Ind.) discusses Indiana’s common law theory of piercing the corporate veil.  (SymonsOpinion.pdf).  The legal principle, not unlike the principles in Indiana’s Uniform Fraudulent Transfer Act, which also is analyzed in the case, provides a method for collecting a debt from someone other than the actual, named borrower.  If applicable, the piercing doctrine provides a nice remedy for Indiana creditors victimized by shady debtors hiding behind the corporate shield.

Piercing the corporate veil.  It’s frustrating when a lender knows that there are assets to cover the debt but that the assets are protected from collection because they are in the hands of the individual owners of a corporate entity or by entities separate from the borrowing entity.  The theory of “piercing the corporate veil,” in rare circumstances, will permit lenders/creditors to chase the assets of the individuals or entities who actually have the money.   

Persons/Owners.  “Indiana courts are reluctant to disregard a corporate entity and extend the liabilities of one corporation and its affiliates, shareholders and/or officers; however, they may do so to prevent fraud or injustice to a third party.”  Symons at 56.  The issue is “highly fact sensitive.”  Id.  With regard to targeting individuals, here are eight factors Indiana courts look to, but the factors are not exhaustive or ranked:

1. Undercapitalization;
2. Absence of corporate records;
3. Fraudulent representation by a corporation’s 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 forum.

Other entities.  In addition to these eight factors, Indiana courts look to at least four other factors when a plaintiff seeks to pierce the corporate veil in order to hold a corporation (or LLC, etc.) liable for another corporation’s debt:

1. Similar corporate names;
2. Common principal corporate officers, directors and employees;
3. Similar business purposes; and
4. The same offices, telephone number and business cards.

Id. at 57.  Again, this is not an exhaustive or ranked list.  On pages 57-62 of Judge Young’s opinion, he addresses many of the factors in detail and provides an excellent analysis of the remedy should you want a better understanding of what it takes to pierce the corporate veil.  He held there to be questions of fact and denied the defendants’ motion for summary judgment.  Symons is a favorable opinion for Indiana creditors.