Piercing Is a Remedy, And Always Has Been

Piercing Is a Remedy, And Always Has Been

In recent years there have been a number of decisions in Kentucky and around the country confirming that piercing the veil is a remedy and not of itself a cause of action. Recent decisions on the point include:

• In re CC Operations, LLC, No. 17-33389-THF, 2020 WL 1970509, *6 (Bankr. W.D. Ky. Apr. 23, 2020) (“veil-piercing is a remedy for enforcement of a judgment and not an independent cause of action in and of itself, a distinction Trustee does not dispute. Kentucky does not permit veil-piercing as a means of consolidating entities to try and create assets for the debtor company.”);

• In re Bullitt Utilities, Inc., 614 B.R. 676, 684 (Bankr. W.D. Ky. 2020) (“[Piercing] is an equitable remedy, not a separate cause of action.”); and

• Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 212 (Ky. App. 2009) (“Given the above legal reasoning, we find that the action before us involves an equitable remedy and is not one at law or one for damages.”).

        While recently going through some older decisions I stumbled upon Louisville & N.R. Co. v. Nield, 186 Ky. 17, 216 S.W. 62 (1919).  While the context is somewhat different in that the law governing a corporation’s voluntary dissolution has changed, the point made by the Court as to the ability to require a shareholder to pay the corporation’s unresolved debt through piercing is valid today as it was then.  The Kentucky Court of Appeals, then the highest Kentucky court, wrote:

The question upon this appeal is whether, in any event, a suit may be maintained in equity against a stockholder for a debt of the corporation before a judgment has been obtained at law against the corporation and a return of “no property,” and without the corporation being made a party defendant. That ordinarily and as a general rule the secondary and equitable liability of a stockholder for the corporation debt cannot be enforced until the primary and the legal liability of the corporation has been determined and legal remedies exhausted by obtaining a judgment and a return of “no property” thereon …. Id. at 63.

Ergo, as long ago as 1919, piercing presupposed a judgment against the corporation and a determination that it had insufficient assets from which to satisfy the judgment. 

Piercing the Veil of a Louisiana LLC? Yes

Piercing the Veil of a Louisiana LLC? Yes 

        In a recent decision from the Federal District Court in Louisiana, in the absence of a contrary ruling from the Louisiana Supreme Court, it was held that corporate principles of piercing the veil would be applied equally to limited liability companies. In re Carino, 615 B.R. 449 (Bankr. W.D. La. 2020).

Piercing Is A Remedy

Piercing Is A Remedy

      In a recent decision from the Bankruptcy Court, the rule was again stated that piercing is a remedy. In re Bullitt Utilities, Inc. (Keats v. Cogan), Case No. 15-34000(1)(7), AP No. 17-3070, 2020 WL 214761 (Bankr. W.D. Ky. Jan. 10, 2020).

      This decision was handed down in the context of giving summary judgment to an individual named in the adversary proceeding. In one of those counts, the trustee sought to pierce the veil of a corporation in order to hold the defendant, alleging that he was a director of the corporation, liable under a theory of piercing the veil. Rejecting that theory, the court noted that “that piercing” is an equitable remedy, not a separate cause of action. In support thereof, it cited both Howland v. Beads and Steeds Inns, LLC (In re Howland), 516 B.R. 163, 167 (Bankr. E.D. Ky. 2014) and Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 211 (Ky. App. 2009).

Jurisdictional Piercing

Jurisdictional Piercing

      In a case from last year, a federal district court in California applied the law of “jurisdictional piercing” in order to find that it had personal jurisdiction over an individual. Platypus Wear, Inc. v. Bad Boy Europe Ltd., Case No. 16-CV-02751-BAS-DHB, 2018 WL 3706876 (S.D. Ca. Aug. 2, 2018).

      Platypus Wear and Deep Blue Sports entered into a license agreement. That agreement included provisions calling for the application of California law and agreeing that the parties consented to jurisdiction of the courts in San Diego County in California. In 2013, that agreement was assigned to Bad Boy Europe. In 2013 an audit was performed, which purported to show that Platypus Wear was owed in excess of $300,000 by Bad Boy Europe and Deep Blue Sports exceeding $300,000. In 2015, the agreement was renegotiated by Paul Gardner, until then a director and officer of Bad Boy. After Gardner’s resignation, Platypus Wear became aware that Bad Boy was in dire financial condition. When suit was ultimately brought in San Diego, Gardner asserted that the court lacked personal jurisdiction over him.

      Applying a long-arm analysis, the court found that it had personal jurisdiction over Gardner based upon his contacts with California.

      The court then turned its attention to the “fiduciary shield doctrine,” which generally provides that “a person’s mere association with the corporation that causes injury in the form state is not sufficient in itself to permit that form to assert jurisdiction over the person.” 2018 WL 3706876, * 7, quoting Davis v. Metro Prods, Inc., 885F. 2d 515, 520 (9^th Cir. 1989). Because of that limitation, the court undertook an analysis of whether Gardner was the alter ego of either of the subject business corporations, thereby justifying piercing the veil and thereby holding him subject to personal jurisdiction in California. Holding that the plaintiff need only make a prima facia showing of alter ego in order to justify jurisdictional piercing, the court wrote:

Plaintiff makes a prima facie showing that there is a unity of interest between Gardner, Deep Blue Sports, and BBE sufficient for alter ego liability. Plaintiff alleges that Gardner was the sole owner, stockholder, and managing director of both Deep Blue Sports and BBE. In addition, the two companies share the same office and employees, operate the same type of business, and Gardner freely transferred assets between them. Plaintiff also alleges that BBE sold products on a website registered to Deep Blue Sports and Gardner. Finally, Plaintiff alleged that Deep Blue Sports and BBE failed to observe corporate formalities, that BBE was so undercapitalized that it was illusory, and that BBE was a mere shell company without capital, assets, or stock, and was used a device to avoid liability. The Court finds that these allegations demonstrate a unity of interest between Gardner, Deep Blue Sports, and BBE. See Flynn, 734 F.2d at 1393. Thus, Plaintiff establishes a prima facie showing that separate personalities of the companies and Gardner do not exist, and rather they are alter egos. Plaintiff also makes a prima facie showing that failure to find alter ego liability would result in injustice. Because Plaintiff alleges that Gardner engaged in asset stripping and using BBE as a device to avoid liability, failure to find alter ego would allow Gardner to succeed in his alleged fraudulent scheme to avoid liability. Gardner allegedly placed BBE’s assets in Deep Blue Sports’s name, and simultaneously negotiated with Plaintiff to release Deep Blue Sports from liability for its past debts without disclosing the asset transfer to Plaintiff. Plaintiff remained under the impression that BBE was adequately capitalized to operate as a business and maintain a prosperous relationship. Based on these allegations, Gardner may be liable for Deep Blue Sports and BBE’s contract breach and subsequent debts, especially if he caused BBE’s insolvency to the detriment of its creditors, like Plaintiff. If the allegations against Gardner, Deep Blue Sports, and BBE prove to be true, then adhering to the fiction of their separate existence would permit an abuse of corporate privilege. As suggested by Plaintiff, it would be inequitable for Gardner to escape liability to Plaintiff by virtue of his fraudulent scheme. And though Gardner contests Plaintiff’s claims of fraud and asset stripping, for jurisdiction, “the plaintiff need only demonstrate facts that if true would support jurisdiction over the defendant.” Unocal, 248 F.3d at 922.

      Speaking for myself, and this is a topic on which I need to do some more research and an expanded discussion, decisions such as this are analytically flawed in that this is a misapplication of piercing law. Piercing is not a cause of action, but is rather a remedy by which individual owners of the business venture may be held personally liable on the venture’s debts. Because piercing sets aside the statutory rule of limited liability, high thresholds are required for its application. When courts use piercing in order to exercise personal jurisdiction over the constituents of the business, they are applying a post-judgment remedy as substantive law. In addition, they are doing so without a developed factual record, but based only upon the assertions of the plaintiff. If it is ultimately determined that a defendant is both liable and is unable to satisfy the judgment, there then may be a post-trial determination as to whether or not piercing is appropriate. It should not happen, however, at the beginning of a proceeding.

At the Risk of Repetition, Piercing the Veil is a Remedy

At the Risk of Repetition, Piercing the Veil is a Remedy

      Under Kentucky law, it applying the same rule that is applied largely throughout the country, piercing the veil is a remedy, and is not itself a cause of action. A recent decision from the US Court of Appeals for the Fourth Circuit applying Virginia law, held that to be the case. Bennett v. Garner, 2019 WL 209106 (4^th Cir. Jan. 16, 2019).

      Bennett sued his former employer, Virtus Consulting, LLC, and its member, James Garner, in order to enforce a state law judgment. Most of the case would turn upon res judicata; in that context the timing and therefore the nature of a piercing claim were described. The court wrote:

With respect to Bennett’s alter-ego claim, we similarly conclude that the claim could not have been brought before the state court judgment was entered against Virtus. When an individual uses a corporate form to “disguise wrongs, obscure fraud, or concealed crime,” Virginia law permits a plaintiff to pierce the corporate veil and to impose liability directly on the individual as the “alter ego” of the corporation. However, before bringing an action to pierce the corporate veil, the plaintiff must “first obtain[] a judgment against the corporation.” (Slip op. at 11; citations omitted).

Thanks to Adam Back for the lead on this decision.

Additional Questions on Piercing the Veil

Additional Questions on Piercing the Veil

      Yesterday, Beth Fenton and I presented an ALI webinar on Piercing the Veil. After the program, we received two questions from participants. Those questions, and the answers provided, are as follows:

You asked:

 

You mentioned that, for LLC's, annual meetings are not required if there are written consents (as long as the operating agreement allows). Does this rule apply to corporations as well?

 

To my knowledge, every state allows the directors and the shareholders of a corporation to act by written consent. Sometimes the consent must be unanimous, as is the case with directors, or a majority, as is the case in Delaware for shareholders.  The problem is that there are cases that state as a factor in support of piercing that all actions were done by written consent and nobody ever had a meeting.  Now this is (in my opinion) an unjustified criticism as the statute expressly allows action by written consent, and typically says an action by consent should be treated the same as an action at a meeting.  The remedy/response is to advise your clients to from time to time have live meetings (even by phone) so as to break the chain of actions “only” by written consent.

 

As for LLCs, there is typically no requirement of an annual or other meeting of the members (unless created in a particular operating agreement).  If the LLC Act does not authorize actions by consent, I’d add that capacity into the operating agreement.  If the operating agreement says there will be a meeting, make sure it happens whether live or by consent.

I hope that helps.

 

******

You asked:

 

What about member's spouse trying to pierce LLC veil to collect divorce judgment? Any trends with this?

 

This will typically be an outside reverse pierce in which the spouse holding the judgment will seek to pierce the entity holding assets even as the former spouse pleads poverty. I can’t say that I am aware of any trends in this area, but I think family court judges are aware of the games that people will play and are able to spot former-spouses who are playing fast and loose with the rules.  If I had to make a prediction it would be that the courts will often award the judgment-creditor spouse the ownership in the corporation or LLC (assuming there to be no other shareholders or members) to enforce the judgment.  That said, outside reverse piercing will be rare in a multi-shareholder / multi-member situation.  In the case of a multi-member LLC the judgment-creditor former spouse can get a charging order against the interest in the LLC and thereby collect on any distributions when made.  Foreclosure on a charging order can be a useful approach as to single member LLCs, but not all states permit foreclosure (Del does not).

 

I hope that helps.

Kentucky Court of Appeals Reversed the Trial Court, Holds that Veil of LLC Should be Pierced

Kentucky Court of Appeals Reversed the Trial Court, Holds that Veil of LLC Should be Pierced

       In a recent decision, the Kentucky Court of Appeals held that a trial court had misapplied the law of piercing the veil and determined that, in fact, it should in this instance be pierced. Tavadia v. Mitchell, No. 2017-CA-001358-MR, 2018 WL 5091048 (Ky. App. Oct. 19, 2018). At this juncture it is not known whether Mitchell will be filing a petition for discretionary review with the Kentucky Secretary of State.

      Sheri Mitchell, in 2013, formed One Sustainable Method Recycling, LLC (“OSM”), a company that contracted with healthcare providers to recycle healthcare waste such as plastics and sharp metal objects. Mitchell was initially the 99% owner and the acting CEO, of OSM, with Ahmet Matha holding the other 1% total. Shortly after starting OSM, Mitchell approached Behram Tavadia about investing in the company. Within two months of OSM’s founding, Tavadia, acting through his company Tavadia Enterprises, Inc., loaned OSM $40,000 at a 6% interest rate. That loan was to be repaid $1,000 per month. In addition, Tavadia would be paid 5% of OSM’s yearly profits. Mitchell did not guarantee that loan. Not long thereafter, OSM received a $150,000 loan from the Louisville Metropolitan Business Development Corporation (“METCO”). Tavadia personally guaranteed that loan and pledged certain bonds as security thereon.

      Two years later, when no payments had been made to Tavadia under the original $40,000 loan, he agreed to delay repayment. Then, OSM and Tavadia entered into a second loan, in the amount of $250,000, refinancing as well the original $40,000 and another $12,000 loan Tavadia had made to the company in the fall of 2014. That second loan agreement provided that Tavadia would receive a 25% ownership interest in OSM (previously he only had a right to 5% of its annual profits). Again, Mitchell did not execute a personal guarantee on the loan from Tavadia. Mitchell explained that this 2015 loan was needed to purchase certain equipment that Mitchell represented was needed for the business.  No such equipment was ever purchased or even ordered.

      Thereafter, still in a cash flow crisis, OSM received a $20,000 loan from Fundworks, LLC. Without authority from Tavadia to do so, Mitchell signed Tavadia’s name on behalf of OSM and as well signed a personal guarantee in Tavadia’s name. That loan carried an interest rate of 15%.

      Not long thereafter, in October, 2015, OSM ceased operations. Its equipment was sold, and more than half of the sale proceeds were deposited in Mitchell’s personal bank account, the balance going to OSM’s account. Necessarily, OSM defaulted on the Fundworks’ loan, which Tavadia learned about for the first time when Fundworks contacted him demanding repayment. The loan from METCO also went into default, and it contacted Tavadia about selling or redeeming the bonds he had pledged as collateral.

      Tavadia filed suit against OSM and Mitchell asserting claims for breach of contract, fiduciary duty, of misappropriation and conversion of company assets, and failure to afford him access to company records. An amended complaint would add claims for fraud as well as for forgery.

       Mitchell never caused OSM to retain legal counsel, and she sought to represent it pro se. The court rejected that notion, and a default judgment was entered against OSM for $302,000. Thereafter, a bench trial was held as to whether or not Mitchell, individually, could be held personally liable on the judgment against OSM in favor of Tavadia. The trial court concluded that the elements of piercing, namely as set forth in Inter-Tel Technologies, Inc. v. Lynn Station Properties, LLC, 260 S.W.3d 152 (Ky. 2012) had not been met. HERE IS A LINK to my review of that decision. From the determination that the veil of OSM would not be pierced, and that Mitchell would not be held liable on the judgment, this appeal was taken.

      As there was a bench trial, the standard of review was that of “clearly erroneous.”

      Curiously, Mitchell did not file a brief with the Court of Appeals. In consequence, Tavadia had the opportunity to set the tone of the discussion.

       Beginning with the statement, made in reliance upon Pro Tanks Leasing v.  Midwest Propane and Refined Fuels, LLC, 988 F. Supp. 2d 772, 788 (W.D. Ky. 2013), that courts will assess “limited liability companies the same as corporations for purposes of liability analysis.”, the Court of Appeals assessed whether the Inter-Tel test was satisfied, namely were there both “domination of the [LLC] resulting in a loss of [LLC] separateness” and as well “circumstances under which continued recognition of the [LLC] would sanction fraud or promote injustice.” 2018 WL 5091048, *4.

      As to the first element:

While the trial court did, in fact, discuss several of the factors enunciated in Inter-Tel Technologies, Inc. in concluding that Tavadia failed to establish the first prong of domination of the [LLC] resulting in a loss of [LLC] separateness, we must agree with Tavadia that it ignored material facts and evidence in reaching its conclusion. Id. *5

       The Court of Appeals would determine that the permission granted to Mitchell to use OSM funds for living expenses had been abused, once she utilized them for “extravagant personal expenses,” notwithstanding that the total amount withdrawn was less than she would have received had she been drawing a salary. Continuing to the question of co-mingling funds with respect to the sale proceeds and a deposit of more than half in Mitchell’s bank account, “once Tavadia proved that Mitchell deposited OSM monies into her personal bank account, Mitchell was under an obligation to show that she spent those funds on business expenses.” She failed in that obligation. Still:

Concerning some of the other Inter-Tel Technologies, Inc. factors, the trial court found that OSM was grossly undercapitalized, although it noted that Tavadia was aware that it was a start-up company and could have protected himself by requiring Mitchell to execute a personal guarantee or post collateral. We cannot disagree. Nor can there be any dispute that OSM did not follow any corporate formalities, much less pay dividends. Finally, Mitchell and Tavadia both agreed that she was the only functioning member of OSM and had sole control over all day-to-day decisions. Id. *6.

      The court did not, however, provide any protocol by which these factors should be weighed against those where the Court of Appeals had found that Inter-Tel Technologies factors would support piercing.

      As to the second prong, that of “sanctioning fraud or promoting injustice,” the court wrote:

Contrary to the trial court’s conclusion, we believe that Mitchell was unjustly enriched from her use of OSM’s funds while it was insolvent and its creditors remained unpaid. Mitchell went so far as to forge Tavadia’s name on a loan application and personal guarantee to continue a source of funding. To continue to recognize OSM and permit Mitchell to avoid liability would essentially be condoning her personal use of OSM funds to the detriment of OSM and Tavadia, as an investor. Such a result would promote injustice and would excuse what we believe was morally culpable behavior on Mitchell’s part. Id.

      Also at issue was the determination by the trial court that Tavadia had not been injured with respect to the Fundworks loan in that he had paid nothing thereon and had defenses to liability. Tavadia prevailed in the argument that the trial court, having found fraud and forgery, should have considered nominal damages and then addressed Tavadia’s claim for both punitive damages and attorney's fees. “The trial court clearly erred in summarily dismissing these claims.”

 

Court of Appeals Avoids the Question of Whether Kentucky Will Allow for the “Reverse Pierce” of an LLC

Court of Appeals Avoids the Question of Whether Kentucky Will Allow for the “Reverse Pierce” of an LLC

In a decision rendered last Friday, the Kentucky Court of Appeals determined, on the facts presented to the trial court, to affirm the granting of summary judgment to all the defendants on the question of whether the veil of an LLC could be pierced in order to hold it liable on a claim against the person who, at least at one time, had been the sole member. Unfortunately, the decision raised as many questions as it provided answers. Rector v. Calvert, Case No. 2013-CA-002057-MR, 2018 WL 2460361 (Ky. App. June 1, 2018).

Danny Calvert was the son of James Calvert. After the death of James, Rector, his Executor, brought claims against Danny for disposing of certain items of James’ property pursuant to a power of attorney. Over the course of this litigation, Danny would himself die, and Linda Calvert was appointed as his Executrix.

Some years prior to the time that Danny misused James’ power of attorney, Danny had organized an LLC under the name Lindan, LLC. Apparently at various undocumented times, Danny had conveyed to his wife, Linda and to their children interests in the LLC, perhaps all of the interests in the LLC. After James’ death, his estate brought an action against Danny Calvert and Lindan. The estate was awarded damages of $343,636.96. In seeking to collect, the Estate sought to reach Lindan’s assets by means of a “reverse pierce.” The trial court granted summary judgment to the defendants, and this appeal followed.

Ultimately, the Court of Appeals would avoid the entire question, writing:

Although Kentucky has not yet recognized a claim for reverse piercing, we agree with the trial court that James’ Estate failed to present sufficiently strong equities in support of such an extraordinary remedy.

In another place it wrote:

“We conclude that the current case is not the appropriate means of recognizing such a [reverse piercing] claim.”

Acknowledging that various courts either have or have not recognized outside reverse piercing, it was found that the plaintiff’s presentation to the trial court was not sufficient to support a pierce. Rather, while it was agreed that certain formalities had not been satisfied, including allowing Lindan to be administratively dissolved in 2008 (and only reinstated in 2015), there was a failure to bring forth evidence with respect to the other factors identified in Inter-Tel Technologies. Also, the court noted that reverse veil piercing cases must consider the impact thereof on the entity’s creditors and other innocent shareholders.

There are, however, a number of unanswered questions that still result from this opinion, namely:

(1) As is noted in the concurring opinion, it appears that the original judgment was against not only Danny individually but also Lindan LLC. If Lindan is a judgment-debtor to James’ Estate, why is piercing an issue at all?;

(2) As is mentioned in both the opinion and the concurring opinion, why was no charging order sought against Danny’s interest in Lindan?; 

(3) While, in footnote 6, the California decision Postal Instant Press, Inc. v. Kaswa Corp. was a case cited for the proposition that reverse veil piercing is not permissible, the opinion failed to acknowledge that, in Curci Investments, LLC v. Baldwin, 2017 WL 3431457 (Ca. App. 4^th Dist., Aug. 8, 2017), the possibility of reverse veil piercing was recognized;

(4) The repeated references to the “corporate veil” and the piercing of a “corporation” indicate a lack of attention to the appropriate nomenclature of an LLC. As Professor Jonathan Fershee of West Virginia Law oft points out, an LLC does not have a “corporate” veil; and

(5) As piercing is a remedy, rather than an independent cause of action, is the denial of that remedy necessarily subject to the same standard of review as is a grant of summary judgment with respect to a claim on the merits?

There is quite a bit happening with respect to the law of piercing the veil both in Kentucky and, across the country.

My thanks to Jay Adkisson for his email pointing out the Kaswa / Curci issue in this case.

Interrelated Family of LLCs and Other Entities Pierced, Largely on the Basis of Co-Mingling of Assets

Interrelated Family of LLCs and Other Entities Pierced, Largely on
the Basis of Co-Mingling of Assets

      One of the classic justifications for piercing the veil of a corporation, LLC or other structure that otherwise affords asset partitioning is the co-mingling of the assets of the various business structures. Rather, each corporation, LLC or otherwise needs to receive its accounts receivable and pay its accounts payable. The balance may, in appropriate circumstances, the distributed as a distribution. In a recent case from Colorado, these rules are violated, and the assets of certain ventures were used to pay the debts of others. On the basis of this co-mingling, piercing was awarded so that assets, in this case a tax return payable to one subset of the companies could be applied to satisfy tax liabilities of other parts of the family. Cordes v. United States, 121A.F.T.R. 2^nd  2008-510, 2018 WL 496839 (D. Colo. Jan. 22, 2018).

      W.H.M. “Willy” Van Bakel, a citizen of the Netherlands, through a wide variety of LLCs and other structures organized in various states or in the Netherlands, operated a string of dairy farms around the United States. Numerous of these organizations fell behind on their responsibility to collect and remit employment taxes with respect to the employees. Separately, one of the LLCs, Orleton Farms, LLC had sold its property at a public auction. 10% of the sales price, $2,710,000, was paid to the IRS under section 1445(a). It would, ultimately, be determined and no tax was owed, so those funds were due to be refunded.

      Meanwhile, as the various LLCs experienced problems, judgments were issued against various of the companies and in some cases against Willy. In the course of a bankruptcy proceeding, it was learned that the refunded amount of it was that there was a plan to apply the refund amount to the withholding tax liability. That withholding tax liability did not arise, however, from the activities of Orleton Farms. Still, that tax return would be applied to address a liability incurred under the consolidated tax return of the various LLCs. When the government applied an offset against the tax return, the receiver for one of the companies within the group filed an action seeking a refund. The course of discovery, Marcus Carlin, a CPA who served as the controller for the group of companies, described them as being in “complete disarray,” that intra-company transfers were not recorded or were recorded improperly and that the assets of every entity were cross collateralized. Further, based upon his testimony, it was determined that:

By the middle of 2009 the entities were unable to pay their bills as they became due. Carlin testified that before bills would be paid, bookkeepers assigned to particular entities would make a list of those entities’ obligations. Carlin recalled that “a lot of times it happened that we would see what we would have with the milk checks coming in, what we had outgoing, and then kind of divvying it up from there.” Carlin said that funds to cover the bills might come from “whatever particular entity had a few extra pennies in its account.” Carlin testified that by 2009 Van Bakel was making the ultimate decisions about which bills would be paid and from which accounts.

      Based upon these facts, the LLCs were pierced, thereby denying the receiver’s claim for the funds collected by the IRS in its withholding from the tax return.

Effort to Reverse Pierce P.S.C. Rejected

Effort to Reverse Pierce P.S.C. Rejected

      In a typical case seeking to pierce the veil, a judgment-creditor seeks to hold the shareholders the corporation or the members in an LLC, the corporation or LLC being the judgment-debtor, liable for the obligations of the business entity. More rarely, we see efforts to hold a business entity liable for the debts of its owners. In certain instances, a judgment-creditor of a member or shareholder will seek to access the assets of the corporation or LLC in order to satisfy the judgment. This is referred to as outsider reverse piercing. Occasionally, we will see efforts by shareholder or a member to have a corporation or LLC ignored so as, intentionally, to make the assets of the business organization directly accessible by the owner. This is referred to as “insider reverse piercing.” In a case decided just last week by the Kentucky Court of Appeals, it rejected an effort by a shareholder in a professional service corporation (“P.S.C.”) to effect an insider reverse pierce and thereby claim coverage under an insurance policy. Isaacs v Sentinel Insurance Company, Limited, No. 2017-CA-000204-MR, 2018 WL 663001 (Ky. App. Feb. 2, 2018).

      Darrell Isaacs, a well-known personal injury plaintiff’s attorney in Louisville (a/k/a “Hammer”), was on January 19, 2015 injured while riding his bicycle on River Road, having been struck by Michael Baumann. Isaacs sued not only Baumann but also Sentinel Insurance, the firm that had written a policy to Isaacs’ firm, Isaacs & Isaacs P.S.C., of which he was the sole shareholder. Essentially (at least as I understand it), on the basis that Baumann did not have sufficient insurance, Isaacs was making a claim against Sentinel under the policies issued to the PSC. It bears noting that there is no suggestion that Isaac’s bicycle (which I understand to have been a Pinarello Dogma) was an insured vehicle under the Sentinel policy.

      Initially, the Court of Appeals dismissed the suggestion that the Sentinel policy covered Isaacs at the time of the accident.

So, an individual is entitled to UIM coverage if occupying a covered motor vehicle at the time of the accident. In short, the terms of UIM coverage set forth in the insurance policy are clear and unambiguous.

In this case, Isaacs was riding a bicycle at the time of the accident and was not occupying a covered auto. Under the clear and unambiguous terms of the insurance policy, Isaacs is not an insured entitled to recover UIM benefits. 2018 WL 663001, *3.

       The Court of Appeals as well rejected an effort by Isaacs to treat him and his PSC as “synonymous,” rejecting as well the argument “that the P.S.C. is nothing more than a ‘legal fiction’ for tax purposes only.” Rather, the court found:

In Kentucky, a professional service corporation (P.S.C.) is a corporate entity as set out in Kentucky Revised Statutes (KRS) 274.015. The corporation must provide professional service to the public of the type which requires as a condition precedent thereto, the obtaining of a license or other required legal authorization to perform the service.  This, licensed attorneys like Isaacs, are “qualified” persons under the statute who may form a P.S.C. to conduct their legal practice.  More importantly, a P.S.C. formed under KRS Chapter 274 has the “same powers, authority, duties and liabilities as a corporation formed under KRS Chapter 271B.”

Thus, a professional service corporation is a distinct legal entity under Kentucky law.  The formation of a P.S.C. under Kentucky law does not involve tax issues.  Rather, those issues look to an election under various federal tax laws by management as to whether the newly formed corporation will elect to be a C-Corporation or S-Corporation for tax purposes.  Isaacs’ argument that he is one and the same as his P.S.C. for insurance purposes because of a tax election is totally without legal merit under Kentucky law, as the record reflects he is a shareholder of the corporation.  Similarly, Isaacs’ argument that he is the named insured of the corporation’s automobile insurance policy by virtue of his stock in the P.S.C. is also without merit (citations omitted).

      And so ended the effort to reverse pierce the P.S.C.

Trial Court and Court of Appeals Puts the Court Before the Horse in Piercing Case

Trial Court and Court of Appeals Puts the Court Before the Horse in Piercing Case

       In Albakri v. A& M Oil Co., Inc., No. 2016-CA-000740-MR, 2017 WL 4862510 (Ky. App. Oct. 27, 2017), the Court of Appeals considered and rejected a trial court’s decision to pierce the veil of a single shareholder corporation.  That decision to pierce had been granted prior to the time the corporation’s liability was determined and necessarily prior to the time piercing needed to be considered.  The cart, the remedy of piercing, was put before the horse, that being the joint question of is the corporation liable and can the corporation satisfy the judgment.

      Ahmad Albakri (“Albakri”) was the sole shareholder/officer/director of Jorusa International, Inc., a Kentucky corporation (“Jorusa”); Jorusa owned and operated a gas station under the name of Tony’s Food Mart.  A&M Oil Co., Inc. (“A&M”) supplied fuel to the gas station.  Some payment for the gas was via automatic receipt of credit card payments on sales with the balance by invoice from A&M to Jorusa.  For reasons not detailed in the opinion the relationship between A&M and Jorusa ended, and at that time A&M claimed an account receivable of $19,903.82; The opinion does recite that “Albakri sold the gas station around the same time the invoices that are the subject of the instant case went unpaid.” 2017 WL 4862510, *5. A&M filed suit for that amount, plus interest at the rate of 18%, and tendered with the complaint a credit agreement and personal guarantee.  In answering the complaint, Albakri claimed the signature on the credit agreement and the guarantee was not his.  After an initial round of discovery, A&M amended its complaint to add Albakri as a defendant, asserting that he is jointly and severely liable on the amount owed.

      And then the cart began to precede the horse. A&M moved for summary judgment to (1) pierce Jorusa’s veil and hold Albakri liable for its debt and (2) find Albakri/Jorusa liable to A&M in the amount sought.  The trial court held that factual questions precluded summary judgment as to the liability, but granted summary judgment as to the piercing “claim”.

       At trial, a handwriting expert opined that the signature on the credit agreement and the guarantee were not those of Albakri.  An A&M representative testified that he witnessed Albakri sign the two documents.  The court would hold ultimately that Albakri did not sign those agreements, but held as well that his lack of execution went only to the enforceability to the 18% interest on late payments.  The trial court awarded A&M judgment for $19,903.82 plus interest at 8%; the 18% interest in the credit agreement and the provision for attorney fees were rejected as that agreement had not been signed by Albakri. It denied a motion to reverse its determination that Jorusa’s veil should be pierced.

      The Court of Appeals would reverse the decision to pierce Jorusa, but on grounds that are at best confusing. 

Piercing the Veil

      Turning to the propriety of the order piercing the veil, the standard of Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012) was recited.  HERE IS A LINK to my prior review of that decision.  From there the various elements of the trial court’s decision to pierce were scrutinized.

Undercapitalization

      In what appears to have been a typo, Albakri had in an answer to an interrogatory said that Jorusa “was ever capitalized in any amount.” 2017 WL 4862510, *2.  The Court of Appeals attached meaning to this typo, writing:

First, the trial court found Jorusa was never capitalized in any amount.  This finding is erroneous.  Albakri admitted only that “Jorusa International, Inc. was ever capitalized in any amount.” (Emphasis added). 2017 WL 4862510, *8.

      The court thus justified a determination that the corporation was properly capitalized because over time it had paid over $300,000 of payments to A&M, and in total they had done business “likely approaching one million dollars.”  On the basis that only $19,903.82 or 2% of the total transactions had not been paid, “None of this evidence demonstrates that Jorusa was undercapitalized.” 2017 WL 4862510, *8.  It then cited a 9^th Circuit decision, Perfect 10, Inc. v. Giganews, Inc., 847 F.3d 657 (9^th Cir. 2017), in which it was found that a company with $1.7 million of net assets and equity was not undercapitalized.

      Which is entirely beside the point.  The suggestion that the interrogatory answer was not a typo is disingenuous, and “ever” must mean “never”; no other reading is possible.  Second, capital and retained earnings are the cushion to satisfy debts when cash flow is not sufficient.  The mere fact that over a period of time cash flow was sufficient to pay debts as they came due does not evidence that the venture has any capital, much less that the capital is adequate. 

      In effect, the Court of Appeals reversed a determination of inadequate capitalization by: (i) a let’s just say curious interpretation of an interrogatory answer that would seem to admit under-capitalization; (ii) a discussion of cash flow that does not go to the question of adequate capitalization; and (iii) without any evidence of capitalization.

Formalities

      The trial court had relied upon a pair of administrative dissolutions of Jorusa to evidence a lack of respect for formalities.  Relying upon Inter-Tel Technologies, 360 S.W.3d at 157 for the requirement that in order to support piercing disregard of formalities must be “egregious,” the Court of Appeals wrote that the failure “to file necessary documents with the Secretary of State twice during the corporation’s existence…. is hardly egregious.” 2017 WL 4862510, *9.

Failure to Pay Dividends

      With respect to the failure to pay dividends, another point relied upon to pierce, the Court of appeals began by noting that Albakri never admitted that the corporation never paid dividends, but rather only that he was unaware whether it paid dividends.  2017 WL 4862510, *9. Even had the corporation never paid dividends, (which the Court of Appeals treated as a factor in failure to observe formalities (“But assuming, arguendo, that no dividend as paid, that fact alone does not demonstrate an egregious failure to follow corporate formalities.”) even though under Inter-Tel it is its own factor), the court explained why that could have been proper as whether to pay dividends is a question left to the board of directors and there are tax reasons for not declaring dividends. What the court failed to note is that the double taxation of dividends is a problem only in C-corporations, and dividends were tax favored in S-corporations vis-a-vis salary. How Jorusa was taxed was never addressed even as the Court of Appeals wrote:

Here, A&M proffered no proof that Jorusa was either capable of distributing a dividend or that doing so was a wise choice in light of the double taxation for dividends.  And, most importantly to the veil-piercing analysis, A&M proffered no proof that Albakri was egregiously ignoring corporation formalities by exercising his discretion and not making a distribution.  Thus, the trial court’s reliance on the second factor is erroneous. Id.

Domination of Corporation by Shareholder

      The trial court had found that piecing was justified because Albakri dominated and controlled Jorusa.  See 2017 WL 4862510, *3.  The Court of Appeals rejected that conclusion, writing:

After Inter-Tel was rendered, and effective July 12, 2012, the General Assembly amended KRS 271B.6-220 by adding subsection 3: “(3) That a corporation has a single shareholder is not a basis for setting aside the rule recited in subsection (2) of this section.” Thus, it appears the fact that Albakri was the sole shareholder of Jorusa should not be a consideration in our piercing-the-corporate-veil analysis. It likewise follows that Albakri, as the sole shareholder and manager of Jorusa, would also exercise dominion and control over the company. At minimum, this factor in and of itself does not justify piercing the corporate veil. 2017 WL 4862510, *9 (footnote omitted).

            Here the court of appeals went too far. The 2012 amendment to KRS § 271B.6-220 was in response to the Rednour decision and the piercing of an LLC on the basis that it had only a single member. See Rutledge, The 2012 Amendments to Kentucky’s Business Entity Statutes, 101 Kentucky Law Journal Online 1, 3 (2012). HERE IS A LINK to that article, wherein it was observed at footnote 20:

See White v.Winchester Land Dev. Corp., 584 S.W.2d 56, 61 (Ky. Ct. App. 1979) (“[M]ere ownership and control of a corporation by the person sought to be held liable is not alone a sufficient basis for denial of entity treatment.”). These amendments to the corporate and LLC acts should be read not as removing sole or near–sole ownership from the list of factors considered in whether a predicate case for piercing may be made, see Inter–Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152, 167–68 (Ky. 2012), but rather as precluding piercing on that basis alone.

It remains possible for a single shareholder corporation to suffer domination jut as a single-shareholder corporation may not be dominated. Under Inter-Tel, “domination” results in “a loss of corporate separateness.” Inter-Tel, 360 S.W.3d at 165. Domination is not itself a factor in support of piercing, but rather a component of alter ego analysis.

But That’s Not the Problem

      Okay, so in the view of the Court of Appeals the trial court misapplied the Inter-Tel Technologies factors in finding that the veil of this corporation should be pierced.  But that is not really the problem.  Rather, it did so in the context of reviewing a determination to grant A&M partial summary judgment, and made its ruling in the context of the rules governing a review of a grant of summary judgment.  2017 WL 4862510, *8.  Except that piercing is a remedy, and a court’s grant of a remedy is not subject to review under the standard which governs the grant or denial of summary judgment. 

But the Bigger Problem Is

      Still, the bigger problem is that the Court of Appeals did not apply Inter-Tel in determining whether the trial court’s piercing of Jorusa was appropriate.  Under Kentucky law, piercing may take place under either of two alternative tests:  alter ego or instrumentality.  The various factors are employed in these tests.  As written in Inter-Tel (360 S.W.3d at 165):

A Kentucky trial court may proceed under the traditional alter ego formulation or the instrumentality theory because the tests are essentially interchangeable.  Each resolves to two dispositive elements: (1) domination of the corporation resulting in a loss of corporate separateness and (2) circumstances under which continued recognition of the corporation would sanction fraud or promote injustice.

      While it is true the Court of Appeals found that none of the Inter-Tel factors was present (a questionable conclusion as set forth above), it never reviewed how they would be employed in either an alterego or instrumentality analysis.

But Even Then, the Real Problem Was

      The real problem here is that summary judgment should never have been requested, much less either denied or granted, in this dispute.  The trial court, presumably following the lead of the plaintiff, treated piercing as a cause of action.  But it isn’t.  Rather, piercing is an equitable remedy employed to allow a judgment-creditor to collect a judgment against the owners of a judgment-debtor.  This is a central point made in Phaedra Spradlin v. Beads and Steeds Inns, LLC (In re Howland), ___ Fed. App’x ___, No. 16-5499, 2017 WL 24750, *4,  2017 U.S. App. LEXIS 222 (6th Cir. Jan. 3, 2017) (HERE IS A LINK to a review of that decision).  Indeed, the Inter-Tel decision described piercing as being an “equitable remedy.”

      Piercing should not have been a point of consideration until (1) the corporation’s liability (if any) was determined and (2) it was found that the judgment could not be collected from the corporation.  Then and only then should A&M have sought to pierce the veil of Jorusa in order to hold Albakri liable for the deficiency.

California Court of Appeal Recognizes Reverse Veil Piercing for LLCs (unfortunately, it does not do a good job in doing so)

California Court of Appeal Recognizes Reverse Veil Piercing for LLCs

(unfortunately, it does not do a good job in doing so)

 

      In a decision rendered earlier this month, the California Court of Appeals recognized the possibility that a Delaware organized LLC, namely JPB Investments LLC (“JPBI”) is subject to reverse piercing. Curci Investments, LLC v. Baldwin, ___ Cal.Rptr.3d ___, 2017 WL 3431457 (Ca. App 4^th Dist., August 8, 2017).

      Curci held a judgment against Baldwin individually in the original amount of $7.2 million. Efforts to collect on that judgment were regularly stymied by Baldwin even as multimillion dollar transfers were made within Baldwin’s family amongst various trusts, partnerships and JPBI, that last company being the “management company” for Baldwin’s family assets. Charging orders entered against Baldwin’s interests in those various entities generated no return to Curci in that the entities thereafter terminated distributions notwithstanding a prior history of having made them. “Although Baldwin caused JPBI to distribute approximately $178 million to him and his wife, as members, between 2006 and 2012, not a single distribution has been made since the October 2012 entry of judgment on the Curci note.” 2017 WL 3431457, *2. In addition, loans in the original amount of $402.6 million made to various family partnerships were unilaterally extended by Baldwin, thereby delaying JPBI’s receipt of the principal and accrued interest. On these bases, the plaintiff sought to “reverse pierce” JPBI in order to directly access its assets and make them available to discharge the debt owed to Curci. The appellate court would agree that it is conceptually possible, writing:

For the reasons explained below, we agree with Curci and find remand appropriate to allow the court to make a factual determination of whether the facts in this case justify piercing JPBI’s veil. 2017 WL 3431457, *2.

      After noting the effect of reverse veil piercing, namely that “reverse veil piercing seeks to satisfy the debts of an individual through the assets of an entity of which the individual is an insider.” (2017 WL 3431457, *3), the court turned its attention to whether there should be a particular test for reverse piercing or whether it should be the same test utilized in traditional piercing to hold the shareholders liable for a debt of the business organization. The court also considered another California decision, Postal Instant Press, Inc. v Kaswa Corp, 162 Cal.App.4^th 1510, 77 Cal.Rptr.3d 96 (2008), in which it had been held that it was not possible to reverse pierce a corporation.

      Finding that Postal Instant Press did not control in this case, the court first noted that here there is no risk to innocent owners in that Baldwin and his spouse, her assets being liable on the judgment pursuant to California community property law, were the only owners. Hence, there were no independent innocent owners whose interests could be infringed by reverse piercing. All of that is true, but the reasoning is somewhat questionable; the Postal Instant Press decision was not conditioned upon the existence of independent third parties whose interest would be impacted by reverse pierce. The Curci court also distinguished Postal Instant Press on the basis that it is “expressly limited to corporations,” and this is a case of trying to pierce an LLC. 2017 WL 3431457, *4. With due respect to the court, this reasoning is intrinsically flawed. Piercing is an equitable remedy available to courts to address situations in which individuals and business organizations are taking improper advantage of the rule of limited liability and the corresponding negative/affirmative asset partitioning function. Those concerns are consistent and equally applicable across all business organization forms that afford asset partitioning and limited liability, including corporations, LLCs, LLLPs and LLPs. Saying that a case precluding reverse veil piercing of a corporation may be distinguished on the basis that this dispute inolves an LLC is without merit.  This distinction is especially weak when the court’s opinion had previously stated: “The question presented is whether reverse piercing of the corporate veil may be applied under the circumstances of this case,…” 2017 WL 3431457, *2.

      In turn, the court did note an important distinction between a corporate shares and an interest in an LLC, namely the rights of a judgment creditor.

Where the debtor is a shareholder, the creditor may step straight into the shoes of the debtor. They may acquire the shares and, thereafter, “have whatever rights the shareholder had in the corporation,” including the right to dividends, to vote, and to sell the shares.

In contrast, if the debtor is a member of an LLC, the creditor may only obtain a charging order against the distributions made to the member. The debtor remains a member of the LLC with all the same rights to manage and control the LLC, including, in Baldwin’s case, the right to decide when distributions to members are made, if ever. 2017 WL 3431457, **4-5 (citations omitted).

      Unfortunately, the court did not expand on how these distinctions, true as they are, favor reverse piercing of an LLC as to why even if not allowed in a corporation. Further, the court failed to address the relationship of the capacity to foreclose on the charging order, thereby taking title ownership to the underlying LLC interest, albeit as an assignee, would impact upon this comparison.

      The court as well skirted the “exclusivity provision” of the charging order provision, noting that “Reverse veil piercing is a means of reaching the LLC’s assets, not the debtors’s transferable interest in the LLC.” 2017 WL 3431457, *5.

      Ultimately, the court would conclude:

The case before us presents a situation where reverse veil piercing might well be appropriate. Curci has been attempting to collect on a judgment for nearly half a decade, frustrated by Baldwin’s nonresponsiveness and claimed lack of knowledge concerning his own personal assets and the web of business entities in which he has an interest. Although the formation of JPBI predates the underlying judgment, its purpose has always remained the same—to serve as a vehicle for holding and investing Baldwin’s money.

With Baldwin’s possession of near complete interest in JPBI, and his roles as CEO and managing member, Baldwin effectively has complete control over what JPBI does and does not do, including whether it makes any disbursements to its members (he & his wife). Since the time judgment was entered in Curci’s favor, Baldwin has used that power to extend the payback date on loans made to ultimately benefit his grandchildren (loans on which not a single cent has been repaid), and to cease making distributions to JPBI’s himself and his wife, despite having made $178 million in such distributions in the six years leading up to the judgment.

For all of these reasons, we conclude reverse veil piercing may be available in this case. However, we express no opinion as to whether JPBI’s veil should actually be pierced. Instead, we remand the matter for the trial court to engage in the required fact-driven analysis in the first instance. As with traditional veil piercing, there is no precise litmus test. Rather, the key is whether the ends of justice require disregarding the separate nature of JPBI under the circumstances. In making that determination, the trial court should, at minimum, evaluate the same factors as are employed in a traditional veil piercing case, as well as whether Curci has any plain, speedy, and adequate remedy at law.  2017 WL 3431457, **5-6, citations omitted.

      So a California court, applying California law, may allow, on appropriate circumstances, the reverse piercing of an LLC.  As that is well and good, but it should never have taken place.  JPBI is a Delaware LLC, and the rule is that the law of the jurisdiction of organization applies to the piercing of an entity.

Sixth Circuit Court of Appeals Considers Ohio Standard for Piercing the Veil and Finds the Claims Lacking

Sixth Circuit Court of Appeals Considers Ohio Standard for Piercing the Veil

and Finds the Claims Lacking

 

      In a recent decision, the Sixth Circuit Court of Appeals considered an effort to pierce the veil of a corporation in an effort to hold its officers liable on its breach of a contract with respect to a point-of-sale system. The Sixth Circuit would reject that effort. Rutherlan Enterprises, Inc. v. Zettler Hardware, No. 16-4147, 2017 WL 2684109 (Sixth Cir. June 21, 2017).

      This appeal was in response to the District Court's grant of summary judgment dismissing the complaint in its entirety. After affirming the dismissal of certain counts alleging fraudulent misrepresentations on the basis of the statute of limitations, it turned to the argument that there was a breach of contract for which the various individual defendants could be hold personally liable under a theory of piercing the veil. Applying Taylor Steele, Inc. v. Keeton, 417 F.3d 598, 605 (Sixth Cir. 2005), the court found that the elements of piercing were not adequately demonstrated on the record.

      With respect to the failure to observe corporate formalities and hold meetings, the court rejected a suggestion that the mere failure to produce records of the meetings gives rise to an inference that they did not take place.

      With respect to a suggestion that the corporation was insolvent at the time it incurred its obligation, the court reviewed financial documents and tax returns which demonstrated that in fact the company had never been insolvent.

      With respect to an argument of inadequate capitalization, the court found that the mere fact that it began with minimal capitalization did not compel the conclusion that it was inadequately capitalized.

      Ultimately:

Giving the facts in the light most favorable to Rutherlan, like the District Court, we find no evidence in the record that supports an assertion of fraud, bad faith, or illegality. While it is true that ordinarily factual disputes should be decided by a jury rather than dismissed on summary judgment, that supposes that there is some factual evidence for a jury to consider in the first place. Ruthrtlan pointed to no factual evidence to prove fraud, bad faith, or even legality and its opposition to summary judgment and, likewise, fails to point to any such factual evidence on appeal. (citation omitted)

Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC

Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC

      In a decision rendered last December, a Bankruptcy Court sitting in Massachusetts found, on the facts, that it could “substantively consolidate” the assets of the corporation, the debtor in bankruptcy, and a commonly owned LLC. In re Cameron Construction & Roofing Co., Inc. (Lassman v. Cameron Construction LLC), Case No. 14-13723-JNF, Adv. P. No. 15-1121, 2016 WL 7241337 (D. Mass. Dec. 14, 2016).

      Cameron Construction & Roofing Co. was, for all intents and purposes, in common ownership with Cameron Construction, LLC. When the corporation went into bankruptcy, the Trustee (Lassman) sought to bring into the bankruptcy Cameron Construction LLC and its assets.

      Cameron Construction LLC was the owner of the property out of which Cameron Construction & Roofing operated. Its articles of organization identified the purpose of the company as owning and managing real estate. It, however, went well beyond that, and had employees who were utilized in the corporation's construction and roofing activities. There was not, however, an employee leasing agreement with respect to those activities, and neither was there a signed lease for the use of the real property. Based on these and other activities indicating that the two ventures were not operated on arm’s-length terms, Lassman sought substantive consolidation.

      In response, it was argued that each company was duly organized, that the proper annual reports had been filed with the Massachusetts Secretary of State, and that each company filed its own income tax returns.

      The court would find that those distinctions were insufficient to preclude substantive consolidation. 2016 WL 7241337, *7. Specifically:

The Trustee demonstrated that there is a “substantial identity between the entities to be consolidated.” The common ownership and control of the Debtor and the Defendant by Cameron are admitted facts. The Debtor initially contributed $12,000 of capital for a 1% interest in the Defendant, whereas Cameron's contribution of $108,000 for a 99% interest in the Defendant was disproportionate. The capital structure was unfair to the Debtor, which should have been entitled to a greater percentage of ownership in the Defendant given its 10% capital contribution.

The Defendant did not engage in business in accordance with its business purpose as set forth in its Operating Agreement and Annual Report. It’s business went beyond the ownership, management and development of real estate. The Defendant’s seventeen employees worked exclusively for the Debtor in performing services in the Debtor’s business during 2011, 2012 and 2013. Thus, the work of the Defendant’s employees was outside the scope of the stated business purpose of the Defendant’s business as a real estate holding company. There was no formal sharing arrangement for the services provided by the Defendant’s employees to the Debtor.

The Debtor and the Defendant also did not have a written lease for the premises occupied by the Debtor. Funds were paid by the Debtor to the Defendant in denominated rent, but those amounts varied from year to year. The funds paid as “rent” were booked as payment of the work performed by the Defendant’s employees.

       While the court had been careful, earlier in the opinion, to distinguish substantive consolidation from piercing the veil, it also applied certain of the piercing factors as further evidence that substantive consolidation in this instance was appropriate.