Seventh Circuit Affirms Piercing Corporate Veil to Attach $7.5m Judgment

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by: Colin E. Flora

     For today’s discussion, we turn our attention to the United States Court of Appeals for the Seventh Circuit applying Indiana corporate law. The question presented in William R. Lee Irrevocable Trust v. Lee (In re Lee) was whether the bankruptcy court erred in ruling that the corporate veil should be disregarded and the majority owner of two companies should be held personally liable for a judgment in excess of $7.5 million.

Other Decisions of Note Since Our Last Post

     Since it has been almost a month since our last post, there are a handful of other cases that merit some note.

     Use of Unsigned Deposition at Summary Judgment. First up is Dotson v. Stryker Corp. from the Court of Appeals of Indiana. The issue in Dotson was the propriety of using at summary judgment a deposition that had not yet been read and signed by the deponent prior to its submission in support of summary judgment. The appellate court ruled that there was no abuse of discretion by the trial court in allowing and considering the prematurely filed deposition because there is no absolute need for a signature and the deponent read and signed the deposition prior to the court hearing and ruling on the motion.

     Duty Analysis in Negligence Actions. Another decision of particular note from the Indiana Court of Appeals was ONB Insurance Group, Inc. v. Estate of Megel, which continued the progress of developing the law of duty in the wake of Rogers v. Martin and Goodwin v. Yeakle’s Sports Bar and Grill, Inc. We have discussed these developments on numerous occasions, most recently in our last post. Most of the cases following Rogers and Goodwin have focused on duty in the context of premises liability. The ONB decision is now the second to apply Rogers and Goodwin to general negligence claims, the other being Estate of Staggs v. ADS Logistics Co. from May.

     Specific Personal Jurisdiction & Choice-of-Law Provisions. Rounding out the Indiana appellate decisions of particular note was Oswald v. Shehadeh. The decision addressed specific personal jurisdiction arising from business dealings by Arkansas-based defendants in Indiana. It provides an extremely thorough summary of Indiana law on personal jurisdiction and reminder that a contract provision dictating only that the law of a particular jurisdiction will govern the agreement does not act as a forum selection provision.

     Class Action Fees. There are also a series of decisions from the Seventh Circuit in the realm of class actions that merit some attention. In the span of nine days, the court handed down three rulings in class action cases addressing attorney fee awards. (We have previously discussed the underlying rationale of attorney-fee awards in class actions.) The first of the three cases was Birchmeier v. Caribbean Cruise Line, Inc. The important observations from Birchmeier were: (1) Just because a “fee award is bigger than some awards in other suits . . . does not mean the award is too big. When awarding fees to class counsel, district courts must approximate the fees that the lawyers and their clients would have agreed to at the outset of the litigation given the suit's risks, competitive rates in the market, and related considerations.” And (2) an objector is not necessarily entitled to fees even when its recommendation is ultimately followed if the position advanced is one the district court is certain to have otherwise considered.

     Three days later, the court issued its opinion in Camp Drug Store, Inc. v. Cochran Wholesale Pharmaceutical, Inc. In Camp, unlike Birchmeier, the focus was on whether the fee award was too small, not too great. Comparison of the two decisions demonstrates the high-degree of deference shown to such determinations by the district court. The court affirmed an award that was under one-half the purported lodestar rate—though the rejection of the lodestar amount appears to have been in part due to a lack of specificity in the hours reported.

     Finally, the court reversed a denial of objector attorney fees in Levitt v. Southwest Airlines Co. Whereas the objector in Birchmeier was determined to have not added value, the Levitt objector did. The court explained, “Objectors who add value to a class settlement may be compensated for their efforts. Unless the parties expressly agree otherwise, settlement agreements should not be read to bar attorney fees for objectors who have added genuine value. Because the equitable common-fund doctrine applies, Markow’s counsel should receive fees for improving the settlement.” 

     Use of Damages Calculations. One final case from the Seventh Circuit merits note before we jump into today’s main discussion. In Entertainment USA, Inc. v. Moorehead Communications., Inc. the Seventh Circuit affirmed an award of no damages in a breach of contract action “[s]ince the district court’s liability findings did not accord with the assumptions built into any of [the proposed damages] calculations, the parties, and especially the plaintiff, which had the burden of proof, left the court without reliable guidance in finding a supportable figure somewhere between $20,600 and $2.28 million.”

Piercing the Corporate Veil in William R. Lee Irrevocable Trust

     We now turn to our main discussion, which is the decision of the Seventh Circuit to affirm a ruling piercing a corporate veil and personally attaching a $7.5m judgment. What seems a lifetime ago, we discussed the concept of piercing the corporate veil under Indiana law, in which the shield of limited liability is set aside and the owner of a business is held liable for corporate debts (or, in the case of a reverse pierce, the business is held to answer for personal debts). Since that post, I have written and presented on the topic.

     The propriety of piercing the veil is an incredibly fact-sensitive inquiry. Accordingly, we must start with what happened to merit such a remedy. It began with a business called Lees Inns of America (“LIA”) formed by two brothers in the 1970s. Two decades later, after one of the brothers had transferred his shares to a trust with his children as trustees, a conflict began. Lester, the brother with 516 of the 1,000 shares, “encountered substantial financial difficulties associated with another company he owned, Maxim.” Lester sought to merge Maxim with LIA. His nephews rejected the idea but Lester went ahead with it anyway. The merger forced the trust and the nephews out of the company, for which they demanded payment.

     With the merger complete and Lester left as the sole owner, he “allegedly gutted LIA to prevent the Trust from collecting the value of its LIA shares.” The trust ultimately obtained a judgment for $7.5 million for its rights in LIA, but that judgment was against LIA. Four years later, Lester filed chapter 7 bankruptcy and the trust filed an adversarial proceeding in the bankruptcy court to pierce LIA’s veil and attach directly to Lester.

During the bankruptcy proceedings, Lester testified he “[a]bsolutely” filed the collusive lawsuit to make sure the Trust would not recover if it obtained a judgment in the appraisal proceeding. He did not dispute that he told Robert and Donald: “I will screw you at every opportunity,” and “I will do everything I can to make sure you never receive one dime from this company,” and “I’ll guarantee you one thing, I'll nail your ass to the wall.”

     The trust sought summary judgment on its veil-piercing theory. “The bankruptcy court held that remedies for Lester’s pre-merger conduct were limited to the appraisal proceeding established by Indiana's Dissenters’ Rights Statute. Therefore, the bankruptcy court held his pre-merger conduct could not support piercing the corporate veil. But the bankruptcy court held that his post-merger conduct could, and did, satisfy the veil-piercing requirements under Indiana law: Lester ‘has exhibited a clear pattern of conduct and fraudulent intent that allows the Court to conclude as a matter of law that [he] manipulated LIA post-merger to promote an injustice against the Trust such that piercing the corporate veil is warranted.’ Thus the bankruptcy court put Lester personally on the hook for the entire balance due on the judgment against LIA.”

     The first issue on appeal was whether the Dissenters’ Rights Statute should have also provided the exclusive remedy for the post-merger conduct. “The Dissenters’ Rights Statute in effect at the time of the merger . . . stated: ‘A shareholder . . . who is entitled to dissent and obtain payment for the shareholder’s shares under this chapter . . . may not challenge the corporate action creating . . . the shareholder’s entitlement.’” It “allows a shareholder to dissent from a merger and obtain payment of the fair value of its shares.”

     The court had no trouble rejecting Lester’s argument:

The problem with Lester’s argument is simple. The statute stops a dissenting shareholder from challenging the corporate action creating its entitlement. But in seeking to pierce LIA’s corporate veil, the Trust does not challenge the corporate action creating its entitlement. In seeking to pierce the corporate veil, the Trust does not challenge the merger. As the district court aptly put it: “The Trust is not challenging the merger itself in any way—i.e., it does not seek an injunction to prevent the merger or to undo it.”

In fact, the court went a step further and noted, “Contrary to Lester’s argument that the Trust is attempting to circumvent the exclusive remedy provided by the Dissenters’ Rights Statute, it is Lester who attempted to evade this remedy by stripping LIA of its assets after the merger.”

     Next, Lester argued that only an outsider of the company can pierce the veil. The court again rejected the argument with ease because the conduct for which the trust sought to impose liability occurred entirely once it was no longer a shareholder of LIA.

     Finally, “Lester argue[d] that the decision to pierce a corporate veil involves a highly fact-sensitive inquiry ordinarily inappropriate for summary judgment, given the involvement of complex economic questions and allegations of fraud.” But he also admitted that “the facts are undisputed.”

     This was a textbook example of abuse of the corporate form that merited disregard of limited liability. May it stand as a wise lesson for other business owners with the simple, far-too-often overlooked, proposition that in order to derive the benefits of limited liability, you must respect the accompanying obligations.

     Join us again next time for further discussion of developments in the law.

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*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.