Opinion ID: 2596
Heading Depth: 3
Heading Rank: 4

Heading: The Evidence of Fraud, Illegality, or Injustice

Text: The district court ruled that NetJets had not adduced sufficient evidence to show that there was any fraud or unfairness in Zimmerman's operation of LHC because the court believed it could not consider, with regard to that issue, any of the factors that showed that Zimmerman and LHC operated as a single entity. In so ruling, the court stated that `[t]o hold otherwise would render the fraud or injustice element meaningless....' 2006 WL 1627899, at  (quoting Mobil Oil, 718 F.Supp. at 268). Mobil Oil, however, did not suggest that there can be no overlap in the proof as to unity of ownership and the proof of unfairness. Rather, it stands for the proposition that the claimed injustice must consist of more than merely the tort or breach of contract that is the basis of the plaintiff's lawsuit: The underlying cause of action does not supply the necessary fraud or injustice. To hold otherwise would render the fraud or injustice element meaningless.... 718 F.Supp. at 268. This proposition has been endorsed by the Delaware courts. See, e.g., Outokumpu Engineering Enterprises, Inc. v. Kvaerner Enviropower, Inc., 685 A.2d 724, 729 (Del.Super.1996) (citing Mobil Oil for the proposition that [t]he `injustice' that must be shown in order to pierce the veil on an alter-ego theory must be more than the breach of contract alleged in the complaint). But nothing prevents a court, in determining whether there is sufficient evidence of fraud or unfairness, from taking into account relevant evidence that is also pertinent to the question of whether the two entities in question functioned as one. Much of the evidence described in Part II.B.3. above, along with other evidence discussed below, reveals that NetJets adduced sufficient evidence of fraud, illegality, or unfairness to warrant a trial on its contract and account-stated claims against Zimmerman as LHC's alter ego. For example, in an effort to parry NetJets's contention that LHC was undercapitalized, Zimmerman submitted an affidavit from LHC's accountant stating that it was not intended by Zimmerman to treat the monies paid into LHC as loans (Affidavit of Mark Balaban dated October 14, 2004, ¶ 6) and that all of Zimmerman's payments into LHC were in fact capital contributions ( see id. ¶¶ 4-8). Yet, as discussed above, Whittier testified that Zimmerman instructed him that those payments were to be characterized as loans, in order to allow Zimmerman to take money out of LHC at will and to do so without tax consequences. Further, although the Balaban affidavit stops short of giving an opinion as to how to characterize Zimmerman's withdrawals of money from LHC, it would appear that, if his payments to LHC were capital contributions as the Balaban affidavit opines, LHC's payments to Zimmerman would be properly characterized as distributions. Yet the DLLCA provides generally, with some qualifications, that an LLC shall not make a distribution to a member to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited liability company... exceed the fair value of the assets of the limited liability company. Del.Code tit. 6, § 18-607(a). Given that LHC ceased operating and was unable to pay its debt to NetJets, if Zimmerman's withdrawals left LHC in that condition those withdrawals may well have been prohibited by § 18-607(a). A factfinder could infer that Zimmerman's payments to LHC were deliberately mischaracterized as loans in order to mask the fact that Zimmerman was making withdrawals from LHC that were forbidden by law, and could thereby properly find fraud or an unfair siphoning of LHC's assets. The record also includes other evidence from which a reasonable factfinder could find that Zimmerman operated LHC in his own self-interest in a manner that unfairly disregarded the rights of LHC's creditors. For example, it could find  that although LHC was apparently unable in 2000 to pay its $340,840.39 (net of LHC's deposit) debt to NetJets, in that year LHC bought, and gave Zimmerman title to, a Bentley automobile for $350,210.95;  that LHC's only paying client for its consulting services began paying LHC for those services in July 2000 (the month in which LHC terminated its agreements with NetJets), sending LHC a first payment of approximately $675,000 on July 9, and that on that day Zimmerman withdrew that amount and more from LHC;  that from the point at which LHC terminated its relationship with NetJets in July 2000 until the end of 2001  the year in which NetJets ceased operations  LHC's records of its transactions directly with Zimmerman indicate that Zimmerman withdrew from LHC approximately $750,000 more than he put in;  and that, excluding moneys put into LHC solely for its investments in Bazillion, the total amount of money taken out of LHC by Zimmerman and his other companies appears to exceed the amount that he and those companies put into LHC by some $3 million. From this record, a reasonable factfinder could properly find that there was an overall element of injustice in Zimmerman's operation of LHC. Summary judgment should not have been entered dismissing NetJets's breach-of-contract and account-stated claims against Zimmerman. We reject, however, NetJets's contention that the evidence supporting its claims against Zimmerman on the alter-ego theory was such as to entitle NetJets to summary judgment in its favor. In this opinion, we have dealt with the granting of summary judgment against NetJets and accordingly we have, as required, viewed the evidence in the light most favorable to NetJets; a factfinder after trial, however, is not required to view the evidence in this light. Both the question of whether LHC was operated as Zimmerman's alter ego and the question of whether it was so operated in a way that shows fraud, illegality, bad faith, or an overall element of injustice or unfairness, remain to be answered by the factfinder after trial.