Opinion ID: 835369
Heading Depth: 3
Heading Rank: 3

Heading: Improper Conduct

Text: The second element that must be proved to pierce the corporate veil is improper conduct. Amfac, 294 Or. at 106, 654 P.2d 1092. And the relevant conduct is the conduct of the controlling corporation or commonly controlled corporations, not the independent conduct of the subsidiary or affiliated corporation. Id. at 108, 654 P.2d 1092 (analysis centers on the conduct of the shareholder sought to be charged, and the relationship between the improper conduct and the creditor's claim). In Amfac, the court listed several examples of improper conduct, including inadequate capitalization; milking of a subsidiary corporation through payment of excessive dividends to the parent; misrepresentation; and the use of corporate subsidiaries or affiliates to evade regulatory statutes. 294 Or. at 109-10, 654 P.2d 1092. In this case, the Court of Appeals concluded that the examples given in Amfac and other cases demonstrated that conduct is improper only if it has an aspect of moral culpability and manipulates or abuses the corporate form in some way, thereby drawing funds away from the debtor corporation or conferring a benefit on the party sought be charged. Neidig, 208 Or.App. at 14-15, 144 P.3d 1030. The Court of Appeals drew the moral culpability wording from Amfac's quotation of this court's earlier opinion in Schlecht v. Equitable Builders, 272 Or. 92, 97, 535 P.2d 86 (1975), where this court identified the real underpinning of Schlecht and other veil-piercing cases as whether there was `[s]ome form of moral culpability on the part of the parent corporation   .' Amfac, 294 Or. at 108, 654 P.2d 1092 (quoting Schlecht ). On review, OIGA argues that the Court of Appeals erred in requiring a showing that the conduct was morally culpable, although it also contends that, if moral culpability is required, SNIC's conduct here demonstrates moral culpability. OIGA is correct that the phrase moral culpability, standing alone, provides limited guidance to business entities, lawyers, and lower courts in determining when a corporation's limited liability may be set aside and a creditor or other plaintiff be allowed to seek recovery against a parent or affiliated corporation. However, the context in which Schlecht and Amfac used the phrase moral culpability makes it clear that the term refers less to abstract notions of morality and more to dishonest or deceitful conduct intended to harm a third party, whether or not that conduct violates a statute or other legal obligation. In Schlecht, for example, this court cited with approval cases finding improper conduct when a corporation was used for the perpetration of a fraud,  to accomplish fraud or injustice,  or in  bad faith   . 272 Or. at 96-98, 535 P.2d 86 (citations and quotations omitted; emphases in original). Amfac, as noted, gave additional examples of improper conduct that would justify piercing the corporate veil, including misrepresentation that is short of fraud, confusion or commingling of assets, and the evasion of federal or state regulation   . 294 Or. at 110, 654 P.2d 1092. As an illustration of improper conduct to evade government regulation, the court in Amfac cited, among other cases, United States v. Reading Co., 253 U.S. 26, 40 S.Ct. 425, 64 L.Ed. 760 (1920). There, the court considered a federal statute that prohibited a railroad from transporting coal that the railroad had mined. The defendant corporation sought to avoid the statutory prohibition by establishing a separate railroad company and coal company under common ownership. Although the defendants did not violate any other statute or legal standard, the court concluded that the form of organization was being used to evade the federal statute and, therefore, ignored it. 253 U.S. at 61-63, 40 S.Ct. 425. Amfac's citation to Reading further supports our conclusion that the use of the corporate form to frustrate state or federal regulation can be sufficiently improper conduct, even when there is nothing unlawful about the conduct itself. In Reading, for example, that conduct was the creation of a holding company that owned all the stock of a coal company and of a railroad. As used to describe cases such as Reading, the phrase moral culpability emphasizes the fact that conduct may be improper for purposes of piercing the corporate veil even if it is not legally culpable. Our cases thus do not establish moral culpability as a requirement in addition to improper conduct, and we do not read the Court of Appeals opinion as so holding. Rather, the Court of Appeals, like this court in Amfac, used moral culpability as one way of describing the kind of improper conduct that is required to pierce the corporate veil. Understood in context, then, the Court of Appeals' use of the term moral culpability was not erroneous. That phrase narrows the range of illegal or tortious conduct that can be considered improper for purposes of piercing the corporate veil, and it also serves as a reminder that oppressive or manipulative conduct that uses a corporate form to harm a creditor or evade regulation may be improper for those purposes, even if it is not separately actionable. With that background, we turn to the allegedly improper conduct in this case. We begin by noting that the Court of Appeals correctly rejected OIGA's assertion, and the trial court's conclusion, that SNIC violated ORS 731.628 by transferring the deposit at issue here from BICO to SNIC and then renewing the policies originally written by BICO with CCCC, rather than with SNIC. The Court of Appeals concluded that there was a legitimate business reason for renewing [BICO's] policies with CCCC [in 1999] and there was no evidence that CCCC [or Superior Group] expected to default on those policies when they were renewed   . 208 Or.App. at 17, 144 P.3d 1030. For that reason, the Court of Appeals concluded that the evidence did not support the trial court's conclusion that that conduct by SNIC or CCCC was improper. Id. Rather, as the Court of Appeals correctly noted, The conduct that is at the heart of this case is not the renewal of the BICO policies on CCCC paper; it is the failure of CCCC to comply with its Schedule P obligations with respect to those [insurance] policies [written in 1999 and 2000]. Id. The Court of Appeals next considered whether CCCC's failure to comply with its obligations under ORS 731.628 for policies written after 1998  that is, to file the Schedule P form when required in 2000 and to make the deposit required by statute  was improper conduct. The Court of Appeals held that that conduct, standing alone, was not the type of conduct that would justify the extraordinary remedy of piercing the corporate veil. Id. We agree with that statement in abstract, but, on de novo review, conclude that it is not consistent with the facts in this case. In our view, the conduct of SNIC and CCCC, taken together, with respect to the required Schedule P filings and deposits, was improper. The following facts support the conclusion that improper conduct by the commonly controlled corporations, SNIC and CCCC, violated ORS 731.628. As described previously, SNIC and CCCC essentially operated as a single entity. SNIC and CCCC were required to file their respective Schedule P forms on March 1, 2000. Neither company did so. If SNIC had made an accurate filing at that time, the filing would have revealed to DCBS that SNIC had a deposit of about $10.6 million, that it no longer had a reinsurance obligation for BICO's pre-1999 obligations, and that it now did have a reinsurance obligation to CCCC. As noted previously, if CCCC had made an accurate filing at that time, it would have revealed that CCCC had done extensive business in Oregon during 1999, that CCCC owed an additional deposit of about $4.4 million, and that CCCC was reinsured, in part, by SNIC (and by other Superior Group companies). CCCC also violated Oregon law by failing to make that required additional deposit when it should have by March 31, 2000. Moreover, as far as can be determined from the record, in the first quarter of 2000, CCCC likely had sufficient funds to make a deposit. On March 30, 2000, DCBS sent a letter to CCCC requesting that it file its Schedule P form that had been due on March 1. On August 7, 2000, DCBS sent another letter, again directing CCCC to make the required filing. CCCC did not respond to the DCBS letters, file its Schedule P form, or increase its Schedule P deposit. Instead, it continued to write workers' compensation insurance policies in Oregon until August 18, 2000. CCCC violated Oregon law by failing to respond promptly and truthfully to the requests for information from DCBS. See ORS 731.296 (authorizing DCBS director to inquire about insurers' activities, condition, and transactions, and requiring insurers to respond promptly and truthfully). As noted previously, SNIC did file a Schedule P in August, indicating that it had done no business in Oregon and requesting the return of the $10.6 million deposit. That filing was inaccurate and in violation of the insurance code because it did not disclose, as Schedule P requires, that SNIC had reinsurance obligations to CCCC under the pooling agreement. It also did not disclose that SNIC was in conservatorship proceedings in California. See ORS 731.260 (prohibiting insurers from submitting to DCBS any information known to be false or misleading in any material respect). On October 4, 2000, CCCC filed Schedule P forms for 1999 and the first half of 2000. The latter form indicated that CCCC owed a deposit of $6.6 million. No part of that deposit was ever paid. Both of CCCC's forms were inaccurate in that they did not disclose CCCC's obligations and benefits under the pooling agreement, as required by Schedule P. Indeed, DCBS did not learn of the pooling agreement until June 2001. Although we agree with the general statement by the Court of Appeals that one company's failure to file timely and accurate forms or to make required deposits ordinarily would not constitute the kind of improper conduct required to pierce the corporate veil, the facts in this case lead us to conclude that CCCC and SNIC, and the individuals who controlled both of those companies, took those actions to evade government regulation and deceive DCBS. See Amfac, 294 Or. at 110, 654 P.2d 1092 (citing, as examples of improper conduct, use of wholly owned subsidiary to evade federal or state regulation); see also Neidig, 208 Or.App. at 14-15, 144 P.3d 1030 (summarizing Amfac examples as demonstrating that improper conduct is that which manipulates or abuses the corporate form in some way, thereby drawing funds away from the debtor corporation or conferring a benefit on the party sought to be charged). All of the actions described above, whether taken by SNIC or CCCC, were taken by the same individuals. The evidence demonstrates that those individuals made the filings and deposits required by Oregon law only if and when they believed that it was in the overall interest of the Superior Group companies and without regard to the requirements that Oregon law imposed on SNIC and CCCC. Levine's internal memo in August 2000, stating that, as to SNIC, Oregon owes us $10,293,957, while, as to CCCC, we owe Oregon $6,570,498 (emphases added) illustrates the common control of the companies. The wrongful use of those corporate entities to deceive DCBS was further demonstrated when Levine contemporaneously filed a materially false Schedule P for SNIC  with a request for return of SNIC's deposit  and failed to file a Schedule P for CCCC. As he testified when asked why he filed SNIC's Schedule P, but not CCCC's: [T]he powers that be were interested in getting back money, not giving money to somebody else.    We didn't want to give them money because we were being conserved. Defendants did not respond promptly and truthfully to the DCBS inquiries. Even the filings that were made were misleading, inaccurate, and untimely, in violation of Oregon statutes. We have little difficulty concluding, on these facts, that SNIC and CCCC engaged in improper conduct that justifies piercing the corporate veil. [18]