Corporations are designed to protect the individuals who work there from personal liability.
Naturally, it’s difficult to hold an individual owner of a corporation liable for the corporation’s acts. Even in cases where plaintiffs are able to obtain a judgment against a corporation, they’re often discouraged from trying to enforce it against the individuals who own the business – and plaintiffs who do attempt to enforce the judgment are only occasionally successful.
Recently K&K successfully pierced the corporate veil in a case involving the sole shareholder of a professional corporation. We represented a client who had already won a judgment against the PC, but could not collect from it. Although we attached the PC’s bank account, there weren’t enough funds to pay the judgment. So, we couldn’t force the corporate entity to comply with the judgement.
Not satisfied, we suspected that the sole shareholder had misused the corporate form and enriched himself at the expense of the corporation’s creditors. We sent subpoenas to several banks, and reviewed all of the checks and account statements that we received in response. We found hundreds of payments made from corporate funds for the individual’s personal benefit, such as:
- Nursery school tuition
- Country club dues
- Landscaping
- Residential mortgage payments
The individual defendant also commingled funds between the corporate accounts and his personal account. It was particularly galling that the shareholder repeatedly used the corporate form as his alter ego, because he was a collections attorney and should have known better. He even raided his attorney trust account – not necessarily an indicator of personal liability for the corporation’s acts, but an indicator of an unlikable defendant.
Our burden was to do the necessary research to confirm that he had depleted the account in a way that was inconsistent with the corporation’s needs, and to trace the commingled funds. We found that he had, over many years, systematically abused the corporate structure to benefit himself personally. He also hadn’t observed corporate formalities, like having by-laws, holding annual meetings, or using “P.C.” or “Corporation” in his name. Relatively minor infractions, but more significant in the context of his using the PC to pay for personal expenses.
We sought summary judgment to hold the individual responsible for the liability of his shell corporation. The PC had no real function other than to serve as the piggy bank for him. One of his defenses was, “I wasn’t insolvent, I had lots of money that I spent down in the normal course of business.” But he admitted that these expenses were not for the business; they benefitted him and his family, instead.
The judge granted us summary judgment, and our client could attach the accounts of the individual defendant to enforce the judgment initially entered against the corporation.
It’s unusual to successfully pierce the corporate veil, because a corporation’s purpose is to provide protection. If you find yourself trying to collect from an allegedly insolvent PC, take advantage of our experience by contacting K&K about your situation.
