Opinion ID: 561305
Heading Depth: 2
Heading Rank: 3

Heading: Proper Application of the Alter Ego Doctrine

Text: 50 Were we to accept the defendant's view of the alter ego doctrine, the Court would be sanctioning the abuse of the corporate form. In this case, the alter ego doctrine applies to the plaintiffs' theory of the case, for it is they who have alleged control, fraud and undercapitalization by defendant in order to pierce the corporate veil. 51 In cases involving claims to pension benefits protected by ERISA, it has been recognized that there is a federal interest supporting disregard of the corporate form to impose liability. ERISA protects workers from their employers' attempts to deny them pension benefits. As the First Circuit made clear in Alman v. Danin, 801 F.2d 1 (1st Cir.1986), where it allowed the plaintiffs to press forward with their suit against the incorporators of an underfunded corporation, ERISA    cannot be said to attach great weight to corporate form, id. at 3. 52 In reaching this conclusion, the Alman court first examined the proper approach a court should take when it decides whether to disregard the corporate entity where a federal cause of action is asserted. First, the court noted that although [t]here is no litmus test in the federal courts governing when to disregard corporate form, the Supreme Court has stated that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice. Id. at 3, quoting Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 322, 59 S.Ct. 543, 550, 83 L.Ed. 669. Moreover, the protection afforded by the corporate form might be undercut by the overriding federal legislative policy reflected in the particular statute providing an aggrieved party with a cause of action. 53 The underlying congressional policy behind ERISA clearly favors the disregard of the corporate entity in cases where employees are denied their pension benefits. In Pension Ben. Guaranty Corp. v. Ouimet Corp., 711 F.2d 1085 (1983), certiorari denied, 464 U.S. 961, 104 S.Ct. 393, 78 L.Ed.2d 337, the First Circuit pierced the corporate veil to impose liability upon the solvent members of a corporation that had declared bankruptcy. The court emphasized that the congressional intent of ERISA is to hold employers responsible for pension benefits, so that when the corporate form poses a bar to liability, concerns for corporate separateness are secondary to what we view as the mandate of ERISA. Id. at 1093; see also Pension Ben. Guaranty Corp. v. Anthony Co., 537 F.Supp. 1048 (N.D.Ill.1982) (employer and parent were a single employer for purposes of imposing liability for vested, unfunded benefits; parent corporation obligated to make good on deficiency from pension plan termination). Thus under Ouimet Corp., the corporate form chosen by defendant does not necessarily preclude plaintiffs from piercing the corporate veil and suing Envirodyne. If justice would be served and potential fraud nullified then plaintiffs should be able to proceed against the party that has actual control of WSC and EDC. 54 Conversely, widening the scope of the release so that it applies to Envirodyne would undermine the above-articulated reasons for piercing the corporate veil in the first place. In Alman, the court recognized that the corporate veil may be pierced more easily in ERISA cases than in pure contract cases in order to promote the federal policies underlying the statute: Allowing [the parent] of a marginal [undercapitalized subsidiary] to invoke the corporate shield in circumstances where it is inequitable for them to do so and thereby avoid financial obligations to employee benefit plans, would seem to be precisely the type of conduct Congress wanted to prevent. Alman, 801 F.2d at 4. 55 The Ninth Circuit has previously upheld a district court's decision to disregard the corporate form so that plaintiffs in that case would recover unpaid contributions to their pension plan. Laborers Clean-Up Contract Admin. Trust Fund v. Uriarte Clean-Up Service, Inc., 736 F.2d 516 (9th Cir.1984). The court recognized that the corporate defendant was a dummy corporation set up for the purpose of carrying forth the business of certain individual shareholders. In making this determination, the Ninth Circuit identified three factors: 1) the amount of respect given to the separate identity of the corporation by its shareholders; 2) the fraudulent intent of the incorporators; and 3) the degree of injustice visited on the litigants by respecting the corporate entity. Id. at 524. The court found that all three prongs of the test were satisfied, in particular identifying the extent to which the incorporators undercapitalized the corporation so that the corporation was unable to operate as a business or satisfy its debts. 56 Alman and Uriarte thus provide a framework for applying the alter ego doctrine to determine whether its underlying purposes have been met. The plaintiffs have yet to prove in court their entitlement to benefits from Envirodyne. If they are able to do so as a matter of law, it will be because they have successfully shown that Envirodyne is the alter ego of WSC and EDC so that the corporate form should be disregarded. 57 There is authority to suggest that the release of a subsidiary does not prevent alter ego claims from being brought against the parent. In Mesler v. Bragg Management Co., 39 Cal.3d 290, 702 P.2d 601, 216 Cal.Rptr. 443 (1985) (Mosk, J.), the California Supreme Court construed a California statute which, like the Illinois Contribution Among Joint Tortfeasors Act, abrogated the common law rule that the release of one party released all. The court concluded that the plaintiff who settled with a subsidiary could still proceed against the parent, rejecting earlier decisions construing the same statutory provision. Contra M/V American Queen v. San Diego Marine Construction Corp., 708 F.2d 1483, 1490 (9th Cir.1983); Fuls v. Shastina Properties, Inc., 448 F.Supp. 983 (N.D.Cal.1978). 58 The Mesler court properly drew a distinction between cases where the corporate veil is pierced so that a parent is held liable for the actions of a subsidiary and cases where the parent attempts to evade liability by benefitting from a release that applies to a subsidiary. In cases where the veil is pierced to expose the parent to liability, it is not as though one corporation is held liable for the acts of another corporation; instead a hole is drilled in the wall of limited liability erected by the corporate form. Id. 702 P.2d at 607, 216 Cal.Rptr. at 449. Aside from the liability of the parent where the alter ego doctrine applies, the corporate form remains intact. Therefore, the veil is pierced only to the extent that justice requires and no further. 59 While permitting veil-piercing in the above equitable circumstances, the Mesler court addressed the situation in which the parent invokes the alter ego doctrine to benefit from a release and escape liability. According to its rationale, if the wall of the corporate form remains erect in all other respects, when the plaintiff settles with only the subsidiary, the parent's liability continues. To hold otherwise would be to defeat the policy of promoting justice that lies behind the alter ego doctrine. Id. The opinion in Mesler provides a credible argument that the alter ego doctrine can be invoked to impose liability on a parent even when the plaintiff settles with the subsidiary. 8 60 Envirodyne claims that the equities favor its position, and that the Settlement Agreement requires that it be relieved from any further liabilities. However, Envirodyne's desire to remain insulated by the settlement release cannot bar the plaintiffs' claim to benefits, where Envirodyne provides the only recourse for the plaintiffs to recover their vested pension benefits. Therefore, justice can hardly be said to require that the release be interpreted broadly so as to exonerate a party unnamed in the release. 61 Moreover, Envirodyne does not contest the plaintiffs' claim that the subsidiaries, WSC and EDC, were set up specifically for Envirodyne's purchase of the Division. Yet the plaintiffs allege that the corporate veil should be pierced because the two subsidiaries were grossly undercapitalized and appear to have been set up for no other reason than to insulate the parent, Envirodyne, from potential claims against the Division for pension benefits or other liabilities. See Pension Ben. Guaranty Corp. v. Envirodyne Industries, Inc., 10 EBC 1458, 1462 (N.D.Ill.1988). At least from the perspective of Lehman Brothers, which issued a report concerning the sale by Navistar of the Division to the two subsidiaries of Envirodyne, the transaction was a fraud, and the report demanded that Envirodyne assume responsibility for the pension benefits instead of insulating itself from liability by creating a corporate shell. 62 Because in all probability Envirodyne has not been released by the Settlement Agreement, the plaintiffs will be able to present their case for piercing the corporate veil in the district court. In order to prevail, the plaintiffs must satisfy the requirements for piercing the corporate veil. Under Illinois law, two factors are required: 63 [F]irst, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and second, circumstances must be such that an adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. 64 Koch Refining v. Farmers Union Central Exch., Inc., 831 F.2d 1339, 1345 (7th Cir.1987), certiorari denied, 485 U.S. 906, 108 S.Ct. 1077, 99 L.Ed.2d 237, quoting Gallagher v. Reconco Builders, Inc., 91 Ill.App.3d 999, 1004, 47 Ill.Dec. 555, 558-59, 415 N.E.2d 560, 563-564 (1980); see also In re Kaiser, 791 F.2d 73, 75 (7th Cir.1986) (permitting alter ego claims whenever reliance on the corporate form would defeat some strong equitable claim), certiorari denied, Wise v. Kaiser, 479 U.S. 1011, 107 S.Ct. 655, 93 L.Ed.2d 710. As to the first requirement of the Illinois alter ego doctrine, the plaintiff must show the degree of control by the parent by presenting evidence of misrepresentation; commingling of funds, assets, or identities; undercapitalization; failure to operate at arm's length; and failure to comply with corporate formalities. Koch Refining, 831 F.2d at 1345, citing Main Bank v. Baker, 86 Ill.2d 188, 205-206, 56 Ill.Dec. 14, 22, 427 N.E.2d 94, 102 (1981). 65 The second requirement of the Illinois alter ego doctrine--that adherence to the corporate form would give rise to fraud or injustice--will apply if the plaintiff proves the existence of either fraud (such as intentional wrongdoing) or injustice. Koch, 831 F.2d at 1345. However, proper application of Illinois' test for piercing the corporate veil invariably involves factual questions to be determined by the circumstances of each case. Id., citing Stap v. Chicago Aces Tennis Team, Inc., 63 Ill.App.3d 23, 28, 20 Ill.Dec. 230, 234, 379 N.E.2d 1298, 1302 (1st Dist.1978). In Koch Refining, this Court conducted an individualized inquiry based on the Illinois alter ego doctrine to conclude that a bankruptcy trustee can pierce the corporate veil to bring an alter ego claim against the debtor corporation's shareholders. 66