More on Piercing the Veil – Not Appropriate on the Pleadings

More on Piercing the Veil – Not Appropriate on the Pleadings

Issued the same day as Inter-Tel Technologies, Inc., in Schultz v. General Electric Healthcare Financial Services Inc. the Supreme Court addressed additional procedural issues in piercing claims.  2012 WL 593203, 2010-SC-000183-DG (Ky. Feb. 23, 2012).

Thomas Schultz was the sole shareholder Intra-Med Services, Inc., a corporation that entered into a lease agreement for certain medical equipment from GE.  Intra-Med subsequently defaulted on that contract, and GE received a judgment on its complaint, exceeding $4.7 million.  GE was able to collect approximately $700,000 of that judgment.

While in the collection phase, GE learned of documents in another lawsuit demonstrating that Schultz used Intra-Med assets for his own purposes.  For example, he had purchased properties using Intra-Med assets but retained to himself all of the gains on the subsequent sale of that property.  At least one of these sales took place after the entry of the judgment in favor of GE.  GE intervened in that other lawsuit, filing a complaint seeking to pierce the veil of Intra-Med and hold Schultz personally liable on its debt to GE.  In response, Schultz filed an answer including twenty-two affirmative defenses.

            Initially, the Court here emphasized that piercing is an equitable, and not a legal doctrine.  Slip op. at 8, relying upon the ruling of the Kentucky Court of Appeals Daniels v. DCB, LLC, 300 S.W.3d 204, 213 (Ky. App. 2009).  It bears noting that a similar determination by the Kentucky Court of Appeals was recently rendered in Killian v. Tunacakes Properties, Inc., 2012 WL 162717 (Ky. App. Jan. 20, 2012).

Having confirmed that the perspective to be employed is one of equity, the Court turned its attention to whether, in the context of a motion for judgment on the pleadings, piercing can be appropriate.  Ultimately the Court determined that making such a decision on the pleadings would be inappropriate:

In light of [the Court’s] obligation to respect the legal fiction of corporate separateness, trial courts should be very reticent to pierce at this juncture of litigation [judgment on the pleadings].  And, though we do not completely foreclose such action, we simply cannot conceive of a scenario in which a trial court could appropriately pierce the corporate veil based solely on pleadings raising a multitude of equitable issues.  Slip op. at 11.

Ultimately, the trial court was directed to reconsider these issues in light of the Inter-Tel Technologies decision.