Opinion ID: 447586
Heading Depth: 1
Heading Rank: 3

Heading: insider loans, fraudulent transfers, piercing the corporate veil

Text: 20 Appellants contend that the district court erred in denying their motion for judgment notwithstanding the jury's verdict holding all defendants jointly and severally liable for Checkers's debt to Metropolitan. While the jury's verdict did not disclose the precise theory on which the jury held the defendants other than Checkers liable, we conclude there was sufficient evidence for the jury to have determined that Checkers, Bentley, and Chips were run as a single enterprise for the personal benefit of Patricia and Randolph. We therefore affirm the denial of appellants' motion for judgment n.o.v. 21 In reviewing the evidence, we of course make all reasonable inferences in appellee's favor. At all times since April 1979, Randolph, Patricia, and their children were the sole directors and officers of Bentley, Checkers, and Chips, and owned all the stock of Bentley and Checkers and 85 percent of the stock of Chips. After April 1979, when Marvin Freund sold his 50 percent interest in Checkers to Randolph and resigned as an officer and director of Checkers, Checkers began to make expenditures on behalf of Randolph and Patricia, including paying for Randolph's accumulated expenses since the formation of Checkers, paying for health and life insurance for Randolph, paying dental bills for both Whites, and paying for telephone service at their residence. Patricia, Chips, and Bentley made similar payments for the same expenses and insurance plans. Though the insurance was purportedly an employee benefit rendered to Randolph by Checkers, no written evidence of such a benefit plan exists, and no deductions for such a plan were ever claimed by Checkers on its tax returns. None of the corporations had its own telephone listing. Prior to July 1, 1980, Checkers and Chips shared the same business address, while Bentley's business address was the Whites' home address; after July 1, 1980, all three operated out of the Whites' home. No records of shareholders' meetings, loans, expense accounts, or major corporate transactions such as a purported lease between Checkers and Chips, were ever produced. Although Patricia was nominally no longer an officer or employee of Checkers after the summer of 1979, she continued to sign most of Checkers's checks. Bentley's line of business during the time of the events giving rise to the present action consisted largely of brokering soda, which involved Bentley's purchasing from the same suppliers as Checkers and in some cases making sales on the premises of the Woburn Beverage Center. 22 During 1979, Checkers became embroiled in a dispute with Coca-Cola similar to the present one over the quantity of product that Checkers would be allowed to purchase. Checkers responded to Coca-Cola's refusal to sell it unlimited quantities of product by stopping payment on a check for $110,000 issued on May 21, 1979 for product already delivered. The next day, Randolph and Patricia incorporated Bentley and transferred to it $100,000. Eventually, Checkers's unpaid bills to Coca-Cola totaled $212,000, and the amount of funds transferred to Bentley $163,000. Randolph testified that the funds were transferred to Bentley for investment purposes, since Bentley's line of business included investments, and Patricia, who was soon to be the sole officer and director of Bentley, had investment expertise; when interrogated on the subject of her expertise, however, Randolph admitted that she had only dabbled on and off in the stock market. Bentley invested the funds in commodities futures accounts managed first by E.F. Hutton and then by Dean Witter and suffered substantial losses from doing so. Eventually, Coca-Cola sued Checkers for the $212,000 it was owed, against which Checkers brought an antitrust counterclaim for $75,000. That suit was pending during the time the dispute with Pepsi arose. It was settled by a payment from Checkers of $30,503.64, the amount remaining in its investment account with Bentley. 23 These and various other facts were sufficient for the jury to disregard the corporate personalities under standards enunciated in the leading Massachusetts case of My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 233 N.E.2d 748 (1968). In My Bread the Massachusetts Supreme Judicial Court enunciated inter alia the following general criteria for ignoring the separate corporate existences of a group of corporations under common ownership and control: 24 [W]hen there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting[,] ... in imposing liability upon one or more of a group of closely identified corporations, a court need not consider with nicety which of them ought to be held liable for the act of one corporation for which the plaintiff deserves payment. 25 My Bread, 233 N.E.2d at 752 (citations omitted). 26 The evidence here falls within this standard. Checkers, Bentley, and Chips were under common ownership and control. Their funds were used interchangeably, and the jury was entitled to conclude that the choice of which corporation would make a given payment was made at random. Funds from all three corporations were used for the personal benefit of the Whites, particularly Randolph. Sufficient evidence was introduced to support the conclusion that Bentley was in the soda business as well as Checkers, and it is questionable whether Chips was ever in business at all. 27 Slightly different is the question of Patricia's and Randolph's liability for the debt of Checkers. My Bread contains dicta that a corporation or other person controlling a corporation and directing, or participating actively in its operations may become subject to civil or criminal liability on principles of agency or of causation. My Bread, 233 N.E.2d at 751 (citation omitted). Cases cited with approval in My Bread as stating appropriate standards for imposing liability on shareholders, e.g., Consolidated Sun Ray, Inc. v. Oppenstein, 335 F.2d 801, 806-08 (8th Cir.1964); G.E.J. Corp. v. Uranium Aire, Inc., 311 F.2d 749, 756-57 (9th Cir.1962), cited in My Bread, 233 N.E.2d at 752 n. 7, stand generally for the rule that shareholders may be held liable where they control the operation of the corporation and run it for their personal benefit, and where justice requires that the separate existence of the corporation be ignored. While we have been directed to no Massachusetts case treating the question of disregard of the separate existence of a close corporation in greater depth, courts in other jurisdictions usually weigh a list of factors, including insufficient capitalization for purposes of the corporate undertaking, nonobservance of corporate formalities, nonpayment of dividends, insolvency of the corporation at the time of the litigated transaction, siphoning of corporate funds by the dominant shareholders, nonfunctioning of officers and directors other than the shareholders, absence of corporate records, use of the corporation for transactions of the dominant shareholders, and use of the corporation in promoting fraud. See, e.g., Ramsey v. Adams, 4 Kan.App.2d 184, 603 P.2d 1025 (1979); Victoria Elevator Co. v. Meridian Grain Co., 283 N.W.2d 509 (Minn.1979). 28 The jury could have found here that Randolph failed to observe corporate formalities, siphoned funds, kept no records, and used Checkers, Chips, and Bentley for his own personal transactions. While the evidence of Patricia's involvement is less substantial, evidence that Checkers paid her personal obligations and vice versa, and of Patricia's close and informal relationship with the corporate defendants (she signed most of their checks), constituted sufficient evidence of her direct participation in the affairs of the corporate defendants, her disregard of their separate personalities, and her personal use of them with little or no regard for their separate existence, to support the jury's verdict against her. Where the principal shareholders of a close corporation fail to observe with care the corporation's existence, a court will not later heed their requests to do so. See Mayo v. Pioneer Bank & Trust Co., 270 F.2d 823, 830 (5th Cir.1959), cert. denied, 362 U.S. 962, 80 S.Ct. 878, 4 L.Ed.2d 877 (1960); H. Henn & J. Alexander, Laws of Corporations and Other Business Enterprises 362 (1983). 29 We reject two other objections to the verdict which appellants make. First, appellants are barred, by their own failure to lodge a timely objection, from complaining about the court's jury instructions, or lack thereof, concerning the need to assess the liability of each defendant separately. Gay v. P.K. Lindsay Co., 666 F.2d 710, 712 (1st Cir.1981), cert. denied, 456 U.S. 975, 102 S.Ct. 2240, 72 L.Ed.2d 849 (1982). 30 Second, appellants contend that the district court improperly admitted evidence, chiefly summaries of checks issued by defendants, that tends to show that after July 1980 funds of Checkers, Bentley, and Chips were used interchangeably for the Whites' personal benefit. As the debt to Metropolitan was incurred in June 1980 before the payments in question were made, appellants argue the evidence was irrelevant. However, the gravamen of the corporate disregard count is that Patricia and Randolph conducted Chips, Bentley, and Checkers in a manner inconsistent with their separate legal identities so as to make it unjust to require Metropolitan to look only to the assets of Checkers to satisfy Checkers's debt to it. The challenged records bear on this allegation. 31 The case appellants cite, CM Corp. v. Oberer Development Co., 631 F.2d 536 (7th Cir.1980), is not helpful to them. The plaintiff there was seeking to hold a parent corporation liable for damages inflicted by a subsidiary. The damages, however, arose from a breach of warranty on construction performed by the subsidiary before it was acquired by its future parent. Thus the court's holding, that conduct inconsistent with a corporation's separate identity that occurs after the period that the party seeking to pierce the corporate veil dealt with it, is factually inapposite. In the present case the conduct covered by the admitted records occurred during the period that Checkers owed Metropolitan money. The fact that, in Oberer, the parent did not acquire the subsidiary until after the breach of warranty rendered irrelevant the question of the relationship between the two entities. In the present case, the plaintiff seeks to hold Checkers's sister corporations and the Whites liable because the Whites so intermingled their personal affairs and the affairs of the corporate defendants that limiting the plaintiff's recovery to the assets of Checkers would be unjust. It is clearly relevant that, after the dispute arose, funds of Checkers that might have been available to Metropolitan were commingled with those of the other defendants. (Interestingly, the Oberer court suggested that if the parent were accused of raiding the subsidiary's assets after it acquired the subsidiary, an action to pierce the corporate veil might have been justified. Id. at 541.)