Opinion ID: 664929
Heading Depth: 2
Heading Rank: 2

Heading: Promotion of injustice

Text: 27 To hold MNP liable as the alter-ego of American Hydraulics, Hystro was also required to prove that adherence to the fiction of separate identities would sanction a fraud or promote injustice. Van Dorn, 753 F.2d at 565. The district court did not address this requirement in the opinion denying j.n.o.v. Nonetheless, we conclude that there was sufficient evidence to support the jury's verdict. 28 In Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir.1991), this court considered at length the additional requirement of Van Dorn that the corporate relationships would sanction a fraud or promote injustice. Although the promote injustice test requires something less than an affirmative showing of fraud, it requires something more than the mere prospect of an unsatisfied judgment. Id. at 522-23. [C]ourts that properly have pierced corporate veils to avoid 'promoting injustice' have found that, unless it did so, some 'wrong' beyond the creditor's inability to collect would result. Id. at 524. Instead, some element of unfairness, something akin to fraud or deception, or the existence of a compelling public interest must be present in order to disregard the corporate fiction. Pederson v. Paragon Pool Enterprises, 214 Ill.App.3d 815, 822, 158 Ill.Dec. 371, 574 N.E.2d 165 (1st Dist.1991). Canvassing Illinois law, the Sea-Land court found that Illinois had pierced corporate veils to avoid injustice when failure to do so would: unfairly enrich one of the parties, B. Kreisman & Co. v. First Arlington Nat'l Bank, 91 Ill.App.3d 847, 47 Ill.Dec. 757, 415 N.E.2d 1070 (1980); allow a parent corporation, that had created a subsidiary's liabilities and was the cause of the subsidiary's inability to meet them, to escape responsibility, In re ContiCommodity Servs., Inc. Sec. Litig., 733 F.Supp. 1555, 1565 (N.D.Ill.1990); allow former partners to ignore obligations, Gromer, Wittenstrom & Meyer, P.C. v. Strom, 140 Ill.App.3d 349, 95 Ill.Dec. 149, 489 N.E.2d 370 (1986); or uphold a corporate arrangement to keep assets in a liability-free corporation while placing liabilities on an asset-free corporation, Van Dorn, 753 F.2d at 569. Sea-Land, 941 F.2d at 524. Considering Sea-Land on remand, the court found that a corporate owner who used his several corporations to avoid responsibilities to creditors was unjustly enriched and that the corporate veil was properly pierced. Sea-Land Svcs., Inc. v. Pepper Source, 993 F.2d 1309, 1312 (7th Cir.1993). 29 At the time of the shutdown, American Hydraulics had about $304,000 in trade debt, including the $10,258.64 owed to Hystro. Hystro claimed that it would be an injustice to allow MNP to escape liability when it had decided to shut down the American Hydraulics plant and knew that American Hydraulics would not be able to pay trade creditors, yet continued to order goods. As proof of MNP's fraudulent intentions, Hystro relied heavily on the testimony of Larry Berman, president of MNP. Mr. Denny, counsel for Hystro, read the following portions of Berman's deposition into evidence at trial: 30 Q: When was it that you [Berman]--either you personally or your company reached the decision that operations of American Hydraulics should be shut down? 31 A: When? 32 Q: Yes, sir. 33 A: Sometime prior to me doing it. I don't remember the date or the year. 34 Q: Well, you didn't make that decision one day and shut it down the next, did you?MR. DENNY: Then Mr. Murphy [Berman's counsel], If you know. 35 A: I assume if you specifically make the decision today to shut it down tomorrow, no. 36 Q: Over how many months did you make plans to shut it down? 37 MR. DENNY: Mr. Murphy, assumes a fact not in evidence that he made plans to shut it down. 38 A: I am not sure. It was months. 39 Richard Kuzma testified at trial that vendors were not told that American Hydraulics was in default on its loan to Heller or was over $1 million in the red. Kuzma had also testified in his deposition that the August 1987 shutdown was not a total surprise to him since he knew Heller was considering calling in the debt owed it. 5 However, these latter parts of Kuzma's deposition testimony were not read into the record at trial. Thus Kuzma's testimony that vendors were not told of the financial difficulties, together with Berman's testimony, are the only pieces of direct evidence we find to support Hystro's claim that, in June 1987, when American Hydraulics ordered goods from Hystro, MNP knew it would close American Hydraulics. 40 Illinois law has recognized that a corporate veil may properly be pierced in this situation: 41 If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. 42 Stap v. Chicago Aces Tennis Team Inc., 63 Ill.App.3d 23, 28-29, 20 Ill.Dec. 230, 379 N.E.2d 1298 (1st Dist.1978), quoting Ballantine on Corporations 302-03 (rev. ed. 1946). The district court in In re ContiCommodity Servs. also addressed this question of a corporate parent's liability. 733 F.Supp. at 1565. There, plaintiff sought to hold Continental Grain Company liable for the acts of its fully-owned subsidiary ContiCommodity Services. The evidence was similar in some respects to the evidence here: 43 (1) Continental owns substantially all of Conti's stock; (2) Conti's chairman of the board was an executive vice president of Continental; (3) Conti borrowed only from Continental and Continental provided significant capital infusions; (4) Conti was undercapitalized for short periods during 1982 and 1984 and may presently have funds insufficient to satisfy any judgment that may be entered against it; (5) Continental closed Conti and Conti is presently a nonfunctioning shell with a $35,000,000 reserve; (6) Continental controlled decisions at Conti including reducing positions, shutting down CAH [an office], restricting certain trading practices, and approving capital expenditures over $100,000; (7) Continental and Conti had consolidated financial statements; (8) funds of the two corporations were commingled to a limited degree; (9) Continental guaranteed some of Conti's debts; (10) Continental was involved in the hiring and firing of some Conti employees; and (11) Continental was informed of internal matters at Conti. 44 733 F.Supp. at 1565. On these facts, the court denied Continental's motion for summary judgment, noting that if Conti is found liable, it may be an injustice to permit Continental to order Conti closed down and left with funds insufficient to satisfy liabilities and not have Continental be liable for injuries caused in part by a practice of Conti ordered or approved by Continental. Id.; see also Sea-Land, 941 F.2d at 525 (following ContiCommodity ). These cases, while not dispositive, involve analogous situations where Illinois permitted the corporate veil to be pierced. 45 Hystro was apparently unable to adduce evidence that MNP caused American Hydraulics to place orders with Hystro, knowing funds would not be available to pay for them. This would have been damning. But the jury did hear much other (albeit less dispositive) evidence and was entitled to give great weight especially to the testimony of Berman, the president of MNP. Of course, we must view the evidence, and all reasonable inferences from it, in the light most favorable to Hystro. A reasonable jury could have found that MNP allowed American Hydraulics to continue to place orders knowing that it would stiff Hystro on the final bill. We cannot disturb the jury's conclusion that MNP should not escape liability behind the corporate veil. No doubt MNP justified its conduct by reference to the more than a million dollars that it pumped into American Hydraulics, of which a substantial part was spent for the benefit of suppliers. This, of course, does not change the legal consequences of the various events and relationships under examination here. 46 Perhaps the jury verdict in this case was affected by the instructions agreed to by both parties. The jury was instructed that it could disregard the corporate entity if it found that the corporation was a mere device or sham to accomplish some ulterior purpose, or a mere instrumentality or agent of another corporation, or a device to evade some statute or to accomplish some fraud or illegal purpose in violation of plaintiff's legal rights. This formulation is somewhat less precise than the Sea-Land test on which MNP now relies. However, MNP never objected to the instruction and agreed at oral argument that the instruction was consistent with the law. Having failed to object or seek different instructions, MNP now advocates a somewhat more demanding standard but cannot show that there was no credible evidence to support the jury verdict. 6