Using the Corporation as Your Personal Piggybank

When You Use the Corporation as Your Personal Piggybank,

Don’t Be Surprised When Your Creditors Do So As Well

      It axiomatic, all else being equal, the assets of a corporation are not the property of corporation’s shareholders.  A concept identified under a number of labels including “asset partitioning,” while the shareholder may own 100% of the corporation, that ownership does not translate into an ownership interest in the corporation assets.  Sometimes, however, all else is not equal, and shareholders treat the corporation assets as their own.  As reviewed in a recent decision by the Kentucky Court of Appeals, when a shareholder acts in that manner, they should not be surprised when their creditors are permitted to do so as well.  Caswell v. Richardson, 2012 WL 5457402 (Ky. App. Nov. 9, 2012).

      Richardson held a judgment against Caswell and sought to enforce it by a garnishment action served against C. Caswell, Inc., a corporation wholly owned by Caswell.  The corporation made no response to that garnishment order, and Richardson filed a motion to hold both Caswell and the corporation in contempt.  Following a hearing on the contempt motion (the decision does not recite whether or not either Caswell or the corporation appears thereat), the corporation was found to be in possession of Caswell’s property, that it had failed to file a timely affidavit, and that civil sanctions in the amount of $25,000 were appropriate.  The corporation was afforded the opportunity to purge the contempt by answering the garnishment order.

      The corporation did finally respond through an affidavit from Caswell denying that the corporation held any of his property.  That affidavit denied that the corporation had any net assets, whereupon Richardson was granted the opportunity to subpoena the corporation’s bank records.

      The inspection of the bank records demonstrated that corporation assets were being dispersed for Caswell’s personal expenses:

In her motion, Richardson alleged that Caswell had been untruthful in his affidavit.  She contended that the corporation’s bank statements showed that the business had made substantial withdrawals to pay Caswell’s expenses of a purely personal nature soon after its receipt of the garnishment order in May.

The trial court held an evidentiary hearing whereupon it found that: 

Caswell regularly deposited money in the corporate bank account and freely accessed any and all funds held by the corporation.  The court determined that Christopher Caswell’s affidavit filed in answer to the order of garnishment was intended merely to thwart Richardson’s efforts to collect on the judgment.

      In light of his actions, Caswell was fined $14,853.18 payable to Richardson, was sentenced to 24 days of jail, was ordered to pay Richardson’s attorney’s fees; there was as well assessed against the corporation a contempt penalty in the amount of $1,482.00.  On appeal, Caswell argued that the trial court was in error in concluding that the corporation held assets belonging to him.  Based upon his own testimony to the effect that he used the corporation as his personal piggybank, the Court of Appeals rejected that assertion:

In support of his argument, Caswell relies on the affidavit and testimony of Belinda Pinotti, accountant for Caswell and his corporation.  Pinotti indicated to the court that as of the day on which the garnishment was served, there was no money to which Caswell was entitled. In light of this testimony, Caswell objects to the court’s conclusion that the corporation was, in fact, holding money that belonged to him.

At the hearing, Caswell indicated to the court that he had routinely paid personal expenses from the corporate bank account and that he “knew it was my business’s money, but ... if I did not have the money in my personal account, yes, I used it at my leisure.” From an abundance of testimony in a similar vein, the trial court concluded that the corporation was a mere instrumentality and that all the funds held in the corporate account on the day the garnishment was served “was for all intents and purposes being held for Mr. Caswell to do with as he pleased.” Opinion and Order at 5. The trial court did not err by concluding from the evidence presented that the corporation held money belonging to Caswell.

      In response to the defense that in fact he had not lied on his affidavit, again the Court of Appeals was able to reject his argument based upon his own testimony:

While Caswell indicated in his affidavit that the funds in the corporate bank account were all tagged for disbursement to contractors and suppliers, he admitted that he wrote checks from the corporate account in May 2009 to pay off the loan on his Mercedes-Benz and to pay his home mortgage and that he otherwise generally used the corporate account as his own. Although he denied that he had lied or willfully refused to obey the court's garnishment order, the trial court concluded from his testimony that Caswell's affidavit was patently false and that he had intended by this falsehood to avoid the order of garnishment by perpetrating this deception. The record contains ample proof to refute any claim of an abuse of discretion.

       The Court of Appeals was able to summarily dispose of assertion that the trial court was prejudiced against Caswell and that somehow Richardson was acting in bad faith in seeking to enforce the judgment.

      Limited liability, the rule that the shareholders are not, by reasons of that status, liable for the debts and obligations of the corporation, is oft (incorrectly) cited as the sine qua non of the corporation.  Just as important as that rule is its flip side, namely that the corporation is a legal entity distinct from the shareholders and that the corporation’s assets are not available to satisfy the shareholders’ debts and obligations.  These rules, however, assume that the corporate form is being appropriately utilized.  The rule of shareholder limited liability from the debts and obligations of the corporation may be, in appropriate circumstances, set aside under doctrines including piercing the veil.  As demonstrated by this case, efforts to rely upon the asset segregation aspects of the corporation can similarly be set aside when the corporate form is abused.