Opinion ID: 525067
Heading Depth: 2
Heading Rank: 2

Heading: Disregard of Corporate Entity

Text: 16 The determination of whether or not to pierce the corporate veil and hold a shareholder personally liable for corporate debts is based on three factors: the amount of respect given to the separate identity of the corporation by its shareholders, the degree of injustice visited on the litigants by recognition of the corporate entity, and the fraudulent intent of the incorporators. Seymour v. Hull & Moreland Eng'g, 605 F.2d 1105, 1111 (9th Cir.1979); see Laborers Clean-Up, 736 F.2d at 524. 17
18 The district court found that the shareholders maintained and respected the separate corporate identity of Valley Cabinet. Valley Cabinet was adequately capitalized at its inception, shares of common stock were issued, board of directors meetings were held annually and at special times, and federal and state taxes were filed through 1984. In addition, proper records were kept of the board of directors meetings and other business. 1 19 The Fund directs our attention to the alleged commingling of Valley Cabinet's assets with those of Robert J. Davis. This Circuit has recognized commingling as among the more serious abuses of the corporate identity. Seymour, 605 F.2d at 1112. Even if the Fund demonstrated that commingling occurred, however, it does not necessarily follow that the district court clearly erred in holding that the Estate of Robert J. Davis should not be liable for the debts of Valley Cabinet. We have held that evidence establishing shareholder disrespect for a corporation's separate identity alone is an insufficient reason to pierce the corporate veil. See Audit Serv. v. Rolfson, 641 F.2d 757, 764 (9th Cir.1981); see also Seymour, 605 F.2d at 1112-113 (defendant's corporate veil was not pierced because fraudulent intent and injustice were not shown). 20 In Audit Serv. we held that the district court did not clearly err in finding that the first factor of the corporate piercing test had been established by evidence of commingling and evidence of a disregard of corporate formalities. Nevertheless, we reversed the district court's decision to pierce the corporate veil in Audit Serv. because there was no evidence of fraudulent intent or injustice. Audit Serv., 641 F.2d at 764. Thus, even if the Fund prevailed on the first factor of the corporate piercing test by demonstrating that Davis commingled his personal assets with those of Valley Cabinet, it must additionally prove fraudulent intent or injustice.
21 The Fund concedes that the incorporators of Valley Cabinet formed Valley Cabinet without fraudulent intent. The Fund, however, claims that this element may be satisfied by proof of post-incorporation misuse of the corporate form to perpetrate a fraud against creditors. On the other hand, Valley Cabinet contends that [i]t is well established that for a court to pierce the corporate veil, evidence of fraudulent intent informing the corporation must be presented. Valley Cabinet cites two cases to support this proposition. See Seymour, 605 F.2d at 1113; see also Laborers Clean-Up, 736 F.2d at 524 n. 12 (Fraudulent intent cannot be established by the fact that Uriarte Clean-Up filed fraudulent reports to the Clean-Up Trust. There must be fraudulent intent in the forming of the corporation.). 22 Contrary to Valley Cabinet's assertions the law in this circuit is unclear. Both Audit Services and Seymour indicate that this element could be satisfied in one of two ways: either by proof of fraud in the formation of the corporation or fraudulent misuse of the corporate form after incorporation. Audit Services, 641 F.2d at 764 (While the evidence showed that Marcus was sometimes careless in failing to observe the strict formalities of the corporate form, it fell far short of demonstrating any deliberate misuse of the corporate form or any fraudulent intent in forming it.) (emphasis added); Seymour, 605 F.2d at 1113 (fraudulent draining of the corporate assets cannot be inferred on the basis of bad financial times alone). 23 This court's decision in Laborers Clean-Up is distinguishable. In Laborers Clean-Up, footnote 12 deals only with an allegation that the corporation filed fraudulent reports to the Clean-Up Trust. Garden variety fraud should be insufficient to pierce the corporate veil in the absence of evidence of shareholder abuse of the corporate form to defraud creditors. In Laborers there was no allegation that the officers or the sole shareholder misused the corporate form to perpetuate their fraud. Thus footnote, 12 refers to fraud other than misuse of the corporate form and the final sentence stating that [t]here must be fraudulent intent in the forming of the corporation was unnecessary to the holding and dictum. In contrast, the Fund alleges in this case, that Davis misused the corporate form itself to defraud it by commingling his personal and corporate accounts, and by the use of interest free loans. These allegations, unlike the allegation in Laborers Clean-Up, demonstrate the type of post-incorporation misuse of the corporate form alluded to by this court in Seymour and Audit Services. 24 We perceive no valid distinction between forming a corporation with fraudulent intent and subsequently using a corporate shell to perpetrate a fraud. Consequently, we hold that post incorporation misuse of the corporate form in appropriate cases can satisfy the fraudulent intent element. Our holding better promotes the purposes of labor law and employee protection. See, e.g. Note, Piercing the Corporate Veil: The Alter Ego Doctrine under Federal Common Law, 95 Harv.L.Rev. 853 (1982) (the alter ego doctrine under federal common law can and should diverge from state law when necessary to effectuate the intent of Congress and the purpose of the federal law implicated). 25 We, thus, must determine whether Valley Cabinet misused the corporate form with fraudulent intent. The district court found that Davis did not have a fraudulent intent when he transferred $203,040 from Valley Cabinet to his personal account. There was evidence that Valley Cabinet did not believe that it owed money to the Fund. Valley Cabinet attempted to challenge the withdrawal liability assessment by requesting certain information from the Fund in 1982. The Fund failed to answer until it partially responded in 1985. Furthermore, Valley Cabinet's counsel advised Davis that Valley Cabinet did not owe contribution payments to the Fund, supporting an inference that Davis did not intend to defraud the trust when he transferred corporate assets to his personal account. While the transfer of the assets also supports a contrary inference, it was for the trial court to weigh these inferences in making its findings. The court did not clearly err by finding an absence of intent to defraud.
26 The district court also found that the degree of injustice that the litigants may suffer does not justify piercing the corporate veil of Valley Cabinet. The inability to collect [from an insolvent defendant] does not, by itself, constitute an inequitable result. Seymour, 605 F.2d at 1113. Other remedies may be available if the Fund can show that the money was wrongfully transferred to Davis. 2 The Fund has failed to show that the trial court clearly erred in finding that injustice will not result from its holding that the estate is not liable for the corporate debts of Valley Cabinet.