Court Opinion

ID: 9752654
Source: CourtListenerOpinion
Date Created: 2023-08-28 18:27:50.811896+00
Date Added: 2024-06-11T09:44:57.003512
License: Public Domain

LIPEZ, Justice,
dissenting.
I respectfully dissent. The trial court found that “Horton Street had no real substance as an independent entity.” The record amply supports this finding. Horton Street had no offices, employees, or utilities. It kept no corporate records and had no general ledger, journal, or minutes. It did not comply with the most basic corporate formalities. It had no corporate bylaws or board of directors. It commingled funds with Albert Small’s other corporate entities and failed to maintain arm’s length transactions between these related entities. It appeared to be undercapitalized, relying on Darbro and Albert Small to keep it afloat via undocumented infusions of cash and the direct payment of its corporate debts. It operated as a mere shell for the business dealings of Albert Small, with Small acting unilaterally through the corporation to further his own personal objectives.
The court also found the following:
At the time of the sale from the Worden Group to Horton Street representations were made to both the Worden Group and the Theberges that Albert Small was a person of financial substance and he would stand behind these transactions. While he did not formally, personally guarantee the transaction, and the plaintiffs were sophisticated enough to understand the formalities, nevertheless, he (or his agent, Mr. Garthwaite) certainly created the impression that the plaintiffs could count on Mr. Small. When the financial crisis arose, Albert Small ignored the independence of Horton Street and shrewdly arranged a transaction with Casco Bank which was to his benefit and to the detriment of plaintiffs.
The record amply supports this finding. During negotiations for the sale of his properties, the corporation’s agent repeatedly misrepresented that Horton Street was a partnership and he reassured the plaintiffs that Albert Small was wealthy and would stand behind the deal. Given the applicable law, these misrepresentations about the *1303readiness of Small to pay corporate debt from his personal wealth were appropriately critical to the court in its decision to disregard the limited liability of shareholders and pierce the corporate veil.
The concept of limited liability is the central tenet of corporate law. See LaBelle v. Crepeau, 593 A.2d 653, 655 (Me.1991) (principal benefit of the corporate form “is limited liability for the shareholders”). See also James B. ZimpRitch, Maine CORPORATION Law & PRACTICE § 4.5 at 65 (1993) (“A principal purpose in most incorporations is to obtain limited shareholder liability ...”). Those doing business with a corporation, forewarned that they may look only to the corporation’s income and assets for security, routinely seek to reallocate a portion of this risk to the corporation by, inter alia, lessening the amount loaned, increasing the interest rate charged, or requiring that additional collateral be pledged. Richard Posner, The Rights of Creditors of Affiliated Corporations, 43 U.Chi.L.Rev. 499, 520-22 (1973). Because of the “contract” creditors’ ability to assess and compensate for this risk, the Court adopts the position suggested by some commentators that “contract” creditors seeking to pierce the corporate veil should face a more stringent standard of proof than tort claimants who did not choose to deal with the corporate enterprise that was ultimately unable to pay its obligations. See, e.g., FletchER Cyc Cokp § 41.85 (Perm.Ed.1990) (“Courts apply more stringent standards to piercing the corporate veil in contract cases than they do in tort cases”); Frank H. East-erbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U.Chi.L.Rev. 89, 89 (1985) (“Courts are more willing to disregard the corporate veil in tort than in contract cases.”).1
This distinction between contract and tort creditors, however, breaks down when the debtor engages in fraud or misrepresentation. As one commentator explained:
For the cost of excessive risk taking to be fully internalized, creditors must be able to assess the risk of default accurately. If the creditor is misled into believing the risk of default is lower than it actually is, the creditor will not demand adequate compensation.
Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U.Chi.L.Rev. 89, 112 (1985). Based on this rationale, a corporation’s shareholders are liable for corporate obligations when the shareholders mislead the creditors into believing that they would have recourse to the assets of other corporations or individuals in the event of the corporation’s nonperformance. Richard Posner, The Rights of Creditors of Affiliated Corporations, 43 U.Chi. L.Rev. 499, 520-22 (1973) (stating that the presence of misrepresentations is “the dominant approach in fact used by courts in deciding whether to pierce the corporate veil.”). See also Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L.Rev. 1036, 1063-64 (1991) (corporate veil pierced 94% of time when misrepresentation was found by court); David C. Cummins, Disregarding the Corporate Entity: Contract Claims, 28 Ohio St.L.J. 441, *1304451-61 (1967) (discussing types of misrepresentation that support piercing the corporate veil).
Although piercing the corporate veil is an equitable remedy reserved for the exceptional case, see Brennan v. Saco Constr. Inc., 381 A.2d 656, 662 (Me.1978), the Court’s application of a more stringent standard of proof to a contract creditor of the corporation, and the substitution of its judgment for that of the trial court on the equities of the case, rob the remedy of its continuing vitality as a deterrent against abuse of the corporate form. The decision to pierce the corporate veil is “heavily fact specific” and, as such, it is peculiarly -within the province of the trial court. United States v. Jon-T. Chemicals, Inc., 768 F.2d 686, 694 (5th Cir.1985), cert. denied, 475 U.S. 1014, 106 S.Ct. 1194, 89 L.Ed.2d 309 (1986); Falcone v. Night Watchman, Inc., 11 Conn.App. 218, 526 A.2d 550, 553 (1987) (stating that each piercing case is sui generis presenting an issue of fact that is particularly in the province of the trial court). Consequently, we should not disturb the trial court’s resolution of this issue on appeal unless it is clearly erroneous. Id.
After a five day trial and careful consideration of the evidence, the court found that Albert Small disregarded the corporate formalities in the conduct of business by Horton Street, used the corporation as a shell for his personal business dealings, represented through an agent that he would personally be responsible for the obligations of the corporation, and then invoked the corporate status of Horton Street to bar the claim of the plaintiffs against him personally. The court concluded that this conduct was inequitable: “Having totally disregarded Horton Street’s integrity as an independent entity, it would be unjust and inequitable to permit him [Albert Small] now to raise Horton Street’s corporate status as a defense to the Plaintiffs’ claims.” That judgment is amply supported by the evidence. It is consistent with our earlier pronouncement that “[t]he corporate entity will be disregarded when used to cover fraud or illegality, or to justify a wrong." Bonnar-Vawter v. Johnson, 157 Me. 380, 387, 173 A.2d 141, 145 (1961) (emphasis added). I would reaffirm that principle and the decision of the trial court.

. The notion of a tort/contract dichotomy in this area of the law is nothing new. In fact, it was noticed at least as early as 1929. William O. Douglas and Carol M. Shanks, Insulation from Liability through Subsidiary Corporations, 39 Yale L.R. 193, 210-11 (1929) (organizing discussion of exceptions to limited liability on basis of whether claim sounded in tort or contract). Despite the longevity of this dichotomy as a theoretical construct and its popularity among commentators, this distinction has not been adopted by a majority of courts. G. Michael Epperson & Joan M. Canny, The Capital Shareholder's Ultimate Calamity: Pierced Corporate Veils and Shareholder Liability in the District of Columbia, Maryland, and Virginia, 37 CahlU.L.Rev. 605, 633 (1988) (noting that despite extensive scholarship on tori/contract dichotomy most courts have not recognized the distinction); David H. Barber, Piercing the Corporate Veil, 17 Williamette L.Rev. 371, 385-86 (1981) (stating that courts mechanically apply same test to both tort and contract claims). In fact, a recent nationwide empirical study analyzing about 2000 piercing cases and their judicial outcomes contradicts the conventional wisdom that courts wiE be more likely to pierce the corporate veE in tort cases. The study found that courts disregard a corporation’s identity more often in the contract context than in the tort context. Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L.Rev. 1036, 1058-59 (1991).