Opinion ID: 3001748
Heading Depth: 2
Heading Rank: 1

Heading: Veil-piercing claims

Text: Texas has the same choice-of-law rule for veil- piercing claims as Illinois, namely that the law of the state of incorporation governs such claims. See Alberto v. Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir. 1995) (citing Tex. Bus. Corp. Act. Ann. art. 8.02 (West Supp. 1994)). LMC was incorporated in Illinois and CIC in Delaware. Thus, the district court correctly applied the laws of Illinois and Delaware to Judson Atkinson’s veil-piercing claims. Judson Atkinson claims that LMC’s corporate veil should be pierced to hold CIC, Carroll, Elsen and Hohberger liable for the 2004 default judgment. Under Illinois law, a corporation is presumed to be “separate and distinct from its officers, shareholders, and directors, and those parties will not be held personally liable for the corporation’s debts and obligations.” Tower Investors, LLC v. 111 E. Chestnut Consultants, Inc., 864 N.E.2d 927, 941 (Ill. App. Ct. 2007). A corporation’s veil of limited liability will be pierced only when there is “such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] no longer exist[,]” and when “adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.” Van Dorn Co. v. Future Chem. & Oil Corp., 753 F.2d 565, 569-70 (7th Cir. 1985) (quoting Macaluso v. Jenkins, 420 N.E.2d 251, 255 (Ill. App. Ct. 1981) (alteration in original)). Piercing the corporate veil is not favored and in general, courts are reluctant to do so. See In re KZK Livestock, Inc., 221 B.R. 471, 478 (Bankr. C.D. Ill. 1998) (citing C Nos. 07-1660 & 07-2116 7 M Corp. v. Oberer Dev. Co., 631 F.2d 536 (7th Cir. 1980); In re Kevin W. Emerick Farms, Inc., 201 B.R. 790 (Bankr. C.D. Ill. 1996)). Accordingly, a party bringing a veil-piercing claim bears the burden of showing that the corporation is in fact a “dummy or sham” for another person or entity. Jacobson v. Buffalo Rock Shooters Supply, Inc., 664 N.E.2d 328, 331 (Ill. App. Ct. 1996). Illinois courts consider the following factors when determining whether there is sufficient “unity of interest” to justify disregarding the corporate form: (1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm’s-length relationships among related entities; and (11) whether, in fact, the corporation is a mere facade for the operation of the dominant stockholders. Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 778 (Ill. App. Ct. 2005). Judson Atkinson argues that several of these factors are present: LMC was undercapitalized, LMC failed to observe corporate formalities and LMC’s funds were commingled with those of CIC and Carroll. Judson Atkinson argues that because LMC was losing money, it was undercapitalized. But a court will find a corporation to be undercapitalized only when it “has ‘so little money that it could not and did not actually operate its nominal business as its own.’ ” Firstar Bank, N.A. 8 Nos. 07-1660 & 07-2116 v. Faul Chevrolet, Inc., 249 F. Supp. 2d 1029, 1041 (N.D. Ill. 2003) (quoting Browning-Ferris Indus. of Ill., Inc. v. Ter Maat, 195 F.3d 953, 961 (7th Cir. 1999)). The fact that a corporation is losing money does not show that it is undercapitalized. See Firstar Bank, 249 F. Supp. 2d at 1042 (“[T]he evidence that the Dealership was losing money has no probative value in showing that the corporation was undercapitalized.”). Judson Atkinson provided no evidence that LMC “maintained a lower capitalization than the law required.” Browning-Ferris Indus. of Ill., 195 F.3d at 961. Judson Atkinson also alleges that LMC failed to observe corporate formalities. It is undisputed that LMC was incorporated in Illinois, that it filed annual reports with the Illinois Secretary of State and that it held annual meetings. (R. 232, Pl’s Resp. To CIC’s Facts ¶ 16.) In addition, LMC issued stock certificates to CIC, conducted board meetings and entered into contracts in its own name. The only evidence Judson Atkinson points to as proof of LMC’s failure to observe corporate formalities is the company’s failure to file tax returns since 1999. This is not enough to justify treating LMC as a mere shell. See Jacobson, 664 N.E.2d at 331 (“[M]erely missing one annual meeting is not a sufficient showing of failure to observe corporate formalities.”); People v. V & M Indus., Inc., 700 N.E.2d 746, 751-52 (Ill. App. Ct. 1998) (failure to hold regular meetings, take minutes, maintain corporate records showed failure to observe corporate formalities); Ted Harrison Oil Co., Inc. v. Dokka, 617 N.E.2d 898, 902 (Ill. App. Ct. 1993) (finding a “complete lack of corporate formalities” where “[n]o records were kept and the company did not hold formal shareholder or director meetings”). Nos. 07-1660 & 07-2116 9 Finally, Judson Atkinson alleges that LMC’s funds were commingled with those of CIC and Carroll, stating that an outside consultant concluded that LMC did not have a separate bank account, that transfers were made between LMC and CIC and that proceeds of loans to LMC were deposited into accounts owned by CIC. Ultimately, Judson Atkinson’s intermingling argument is based on CIC’s use of a cash management system. But the use of a cash management system alone is not evidence that funds are being improperly commingled. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1459 (2d Cir. 1995) (“Courts have generally declined to find alter ego liability based on a parent corporation’s use of a cash management system.”); In re Acushnet River & New Bedford Harbor Proceedings, 675 F. Supp. 22, 34 (D. Mass. 1987) (“A centralized cash management system . . . where the accounting records always reflect the indebtedness of one entity to another, is not the equivalent of intermingling funds.”); Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F. Supp. 831, 846 (D. Del. 1978) (“Arrangements by a parent and subsidiary for economy of expense and convenience of administration may be made without establishing the relationship of principal and agent.”). Judson Atkinson has not cited any evidence to counter CIC’s assertions that it maintained a strict accounting of each subsidiary’s balance. In addition, Judson Atkinson does not point to any evidence supporting its blanket assertions that LMC’s funds were used to pay CIC’s expenses. Nor does Judson Atkinson offer proof to support its allegation that advances Carroll received from CIC were made from funds belonging to LMC. Thus, the district court correctly concluded that Judson Atkinson failed to present sufficient proof that improper commingling occurred. 10 Nos. 07-1660 & 07-2116 Where Judson Atkinson has cited specific, verifiable facts to support its veil-piercing argument, those facts do not come close to making “a substantial showing that the corporation is really a dummy or sham for a dominating personality.” Rosier v. Cascade Mountain, Inc., 855 N.E.2d 243, 251 (Ill. App. Ct. 2006) (internal quotation marks and citation omitted). Judson Atkinson argues that Carroll’s control of both CIC and LMC weighs in favor of finding a unity of interest. It points to CIC’s ownership of LMC’s stock and Carroll’s ownership of CIC’s stock. But “[t]he separate corporate entities of two corporations may not be disregarded merely because one owns the stock of another . . . .” Hornsby v. Hornsby’s Stores, Inc., 734 F. Supp. 302, 308 (N.D. Ill. 1990) (quoting Sumner Realty Co. v. Willcott, 499 N.E.2d 554, 557 (Ill. App. Ct. 1986)). In Illinois, the principle that “[a] corporation is a legal entity separate and distinct from its shareholders, directors, and officers. . . . applies even where one corporation wholly owns another and the two have mutual dealings.” Joiner v. Ryder Sys. Inc., 966 F. Supp. 1478, 1483 (C.D. Ill. 1996) (internal quotation marks and citation omitted) (alteration in original). See also Plastic Film Corp. of Am., Inc. v. Unipac, Inc., 128 F. Supp. 2d 1143, 1147 (N.D. Ill. 2001) (“[T]he fact that a corporation has only one single shareholder is not proof that the corporation is the ‘alter ego’ of that shareholder.”); Melko v. Dionisio, 580 N.E.2d 586, 595 (Ill. App. Ct. 1991) (noting that “the mere allegation that [defendant] was a dominant or sole shareholder is insufficient to enable a court to disregard the separate corporate existence”). Judson Atkinson also points out that Carroll was an officer of both CIC and LMC. While having common officers and directors is generally a prerequisite to piercing the corporate veil, this factor is insufficient to Nos. 07-1660 & 07-2116 11 justify disregarding the corporate form because it is a “common business practice” that “exist[s] in most parent and subsidiary relationships.” C M Corp., 631 F.2d at 539 (citation omitted). The fact that Carroll owned the outstanding shares of CIC, LMC’s parent company, “only shows that [he] may have had the opportunity to create a unity of interest,” not that he actually did so. Firstar Bank, 249 F. Supp. 2d at 1040 n.3. Judson Atkinson has failed to show that LMC is an alter ego of CIC or Carroll and thus, the district court properly entered summary judgment for those defendants.1 Judson Atkinson’s veil-piercing claims against Elsen and Hohberger appear to be baseless. The evidence supporting Judson Atkinson’s veil-piercing claim against Hohberger seems to consist of nothing more than the 1 Even if Judson Atkinson had shown that LMC was a sham corporation, it has failed to provide evidence that would satisfy the second element of a successful veil-piercing claim under Illinois law, i.e., showing that failure to pierce the corporate veil “would sanction a fraud or promote injustice.” Sea-Land Servs., Inc. v. Pepper Source, 941 F.2d 519, 520 (7th Cir. 1991) (quoting Van Dorn Co. v. Future Chemical & Oil Corp., 753 F.2d 565, 569-70 (7th Cir. 1985)). The injustice must be more than the prospect of an unsatisfied judgment. Id. at 522. A plaintiff must show that “a party would be unjustly enriched; a parent corporation that caused a sub’s liabilities and its inability to pay for them would escape those liabilities; or an intentional scheme to squirrel assets into a liability-free corporation while heaping liabilities upon an asset-free corporation would be successful.” Id. at 524. Judson Atkinson has not pointed to evidence tending to show that any such injustice would result from the district court’s refusal to pierce LMC’s corporate veil. 12 Nos. 07-1660 & 07-2116 fact that Hohberger was employed by LMC and was aware of the company’s financial difficulties. The evidence Judson Atkinson offers against Elsen is that he was an officer of LMC and CIC and had knowledge of the corporations’ respective finances. Under Illinois law, it is possible for a non-shareholder to be found personally liable under a veil-piercing theory. See Fontana, 840 N.E.2d at 776. But Judson Atkinson has failed to provide any evidence that either Elsen or Hohberger “exercise[d] ownership control” over LMC “to such a degree that the separate personalities of [LMC] and [the defendants] did not exist, and that [LMC] was a business conduit of [Elsen and Hohberger].” Macaluso v. Jenkins, 420 N.E.2d at 256. Finally, Judson Atkinson argues that the district court erred in refusing to pierce CIC’s corporate veil to hold Carroll and Elsen liable. Since Judson Atkinson has a judgment against LMC alone, whether or not CIC’s veil could ever be pierced to hold Carroll or Elsen liable for an obligation owed by CIC is irrelevant. We have determined that Judson Atkinson did not show that LMC was an alter ego of CIC. Since LMC’s veil cannot be pierced to hold CIC liable for the default judgment, liability for the default judgment cannot be imposed on Carroll or Elsen by piercing CIC’s corporate veil.