Lesson for Business Owners: Keep up Your Guard – Avoid a “Corporate Veil Pierce”

 

I recently wrote a post about limiting your liability in creating a limited liability company for your business. You can check that post out here: https://jeshualaukalegalnews.wordpress.com/2013/11/05/businesses-so-you-want-to-limit-your-personal-liability-not-so-fast/

 

Even though one of the main purposes in creating a business entity is, generally, to limit an owner’s personal liability from the obligations of the company, liability is not limited in all cases.

Generally though, proper creation of a business entity results in the following:

 

Owners are not personally liable for the debts of the company.

 

However, a recent court of appeals decision illustrates the dangers of actions that an owner can take to remove the protection that he otherwise would have.

 Woodridge Hills Ass’n v. Williams – see the opinion here: http://www.michbar.org/opinions/appeals/2013/102413/55684.pdf

I. Facts of Woodridge
  • In 2006, plaintiff Woodridge Hills Association hired Redford to replace all the roofs in its condominium development.
  • Williams was the president, sole shareholder, and sole officer of Redford.
  • The project was completed, but plaintiff filed suit against Redford alleging that it breached the contract by, among other things, performing substandard work.
  • On May 29, 2009, the Livingston Circuit Court entered a judgment in favor of plaintiff and against Redford in the amount of $182,975.
  • Plaintiff’s attempts to collect on the judgment were unsuccessful.
  • On October 29, 2009, Redford filed for bankruptcy protection.
  • Shortly thereafter, Williams created DWW.
  • Williams was DWW’s sole member and officer.
  • On May 6, 2010, plaintiff filed suit against Williams and DWW, seeking to hold each of them jointly and severally liable on the judgment plaintiff obtained against Redford.
  • Plaintiff sought to recover against Williams and DWW under theories of piercing the corporate veil, fraudulent transfer, and successor liability.
Woodridge Hills Ass’n v. Williams, 310940, 2013 WL 5762990 (Mich. Ct. App. Oct. 24, 2013)
It doesn’t take genius to realize that, in this scenario, Williams did some things he shouldn’t have. Those mistakes cost him the protection his corporate structure otherwise would have provided him.
II. Law:
A. Piercing the Corporate Veil
 In general, a corporation is treated as an entity that is completely separate from its stockholders. Foodland Distrib v. Al–Naimi, 220 Mich.App 453, 456; 559 NW2d 379 (1996).
That separation may be ignored, however, “where there is a unity of interest of the stockholders and the corporation and where the stockholders have used the corporate structure in an attempt to avoid legal obligations.” Id.
“Piercing the corporate veil requires the following elements:
(1) the corporate entity is a mere instrumentality of another individual or entity,
(2) the corporate entity was used to commit a wrong or fraud, and
(3) there was an unjust injury or loss to the plaintiff.” Lakeview Commons, 290 Mich.App at 510.

Woodridge Hills Ass’n v. Williams, 310940, 2013 WL 5762990 (Mich. Ct. App. Oct. 24, 2013)
Whether a “corporate veil” should be pierced to hold an owner personally liable is a factually intensive inquiry.
The Court looked at the facts and found: “The evidence overwhelmingly established that Williams treated Redford as his alter ego.” Woodridge Hills Ass’n v. Williams, 310940, 2013 WL 5762990 (Mich. Ct. App. Oct. 24, 2013)
This was based on the following facts:
  • Williams routinely used the corporation to pay his personal expenses, including his personal vehicle, home cable, internet, and telephone service, as well as his family’s cellular telephone service.
  • He also used the corporation to pay his dues and other expenses at the Detroit Athletic Club and the Western Golf & Country Club.
  • Williams used the corporation to pay health insurance premiums on behalf of himself and his family. Id.
The obvious lesson here is that if a business owner is treating the business assets like his own personal piggy bank, the law will disregard the corporate “shield” in place and hold the owner personally responsible for any obligations that the business/owner incurred.
B. Successor Liability
The Court also discussed that DWW had successor liability.
What is successor liability?
The best way to describe it is to use an example:
Here, Business Owner gets sued. As a result, Business sustains a judgment against it. In order to avoid paying that judgment, Business Owner dissolves (or bankrupts) the Company, and then creates a new business entity.
The new business is now protected from any of the old business’ debts, right?
WRONG.
 A new business is liable for the debts of a predecessor business “where the transferee corporation was a mere continuation or reincarnation of the old corporation.” [Foster, 460 Mich. at 702, quoting Turner v. Bituminous Cas Co, 397 Mich. 406, 417 n. 3; 244 NW2d 873 (1976).]

III. Lesson:
Business owners need to take care in forming as well as maintaining their business in order to keep their personal liability protection.
Don’t take actions, like commingling your personal and business funds, that could jeopardize your protection.
Keep up your guard! 
I have previously quoted an excellent business attorney in Grand Rapids, Jeff Ammon, a partner at Miller Johnson. I believe I heard Jeff once describe it as “putting down your shield.”
Business owners, don’t put down your shield.
In conclusion, I believe this  last point should go without saying – If you are considering going into business, consult an attorney.
Questions? Comments?
Email me: Jeshua@dwlawpc.com
Ph: 616 454 3883
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: