Court should
decide corporate veil issue
By
David Ziemer
Wisconsin Law Journal
Jan.
28, 2004
Where
state law requires a finding that a corporate veil must be pierced
to prevent injustice or inequity, the decision whether to pierce
the veil is for the court to decide, rather than the jury, the
Seventh Circuit held on Jan. 23.
The
doctrine allows an individual or entity to be liable for purely
corporate obligations, where the corporation is merely an alter
ego of the individual or other entity.
The
International Financial Services Corporation finances printing
presses. It sued various defendants in Illinois federal court
for breach of a contract to produce a printing press, and for
fraud.
A
jury made three findings: defendant Chromas Technologies Canada,
Inc., was the alter ego of defendant Didde Web Press Corp; Chromas
was liable for breach of contract; but Chromas was not liable
for fraud. The jury also set damages against Chromas at more than
$1 million.
Chromas
appealed, arguing that the damages were excessive and that the
decision whether to pierce the corporate veil under an alter ego
theory should have been made by the court, rather than the jury.
|
What
the court held
Case:
International Financial Services Corp. v. Chromas Technologies
Canada, Inc., Nos. 02-4079 & 02-4188
Issue:
Is it for the court or the jury to decide whether to pierce
the corporate veil, when the decision requires a finding
that failure to do so would result in injustice or inequity?
Holding:
Equitable findings are not to be made by juries, but by
courts.
|
The
Seventh Circuit agreed, and vacated the judgment, in a decision
by Judge Daniel Manion, with instructions to the district court
to decide whether to disregard the corporate entity, and reduce
the damages if it so found.
Seventh
Amendment
The
Seventh Amendment limits the right to a jury trial to “suits
at common law, where the value in controversy shall exceed twenty
dollars.” Thus, International had a right to a jury on its
claims.
However,
the court must make the decision as to any issue in equity, rather
than law. Accordingly, the court framed the issue as whether piercing
the corporate veil under Illinois law is a form of equitable relief.
Illinois
Law
Illinois
permits a plaintiff to disregard the corporate entity of a defendant
because the targeted corporation is merely an alter ego of the
dominating personality, if the plaintiff proves two elements:
there is such a unity of interest and ownership that the separate
personalities of the corporation and the individual no longer
exist; and circumstances are such that adhering to the fiction
of a separate corporate existence would promote injustice or inequity.
The
court concluded that piercing the corporate veil is a form of
equitable relief, stating, “piercing of the corporate veil
on an alter ego theory is available only where failing to provide
such relief would promote injustice or inequity. It follows that
veil-piercing must be an exercise of equitable power. It is also
significant that veil-piercing under Illinois law is a matter
of discretion, not of right, and that the remedy of piercing the
corporate veil does not itself result in money damages. Each of
those observations militates toward the conclusion that veil-piercing
is an equitable power.”
The
court acknowledged that determining whether there is such unity
of interest that the separate personalities of the corporation
and individual no longer exist is essentially a question of fact.
The
court stated, “Deciding this question of fact depends on
whether there was inadequate capitalization, a failure to observe
corporate formalities, commingling of funds, an absence of corporate
records, etc., and a jury is arguably capable of resolving such
issues (cite omitted).”
However,
the court added, “the balance of the veil-piercing analysis
— deciding whether adhering to the fiction of a separate
corporate existence would promote injustice or inequity —
is the type of equitable determination that a jury is not to decide.”
Accordingly,
the court held that, notwithstanding the factual questions, the
doctrine of piercing the corporate veil is essentially an equitable
doctrine not amenable to determination by jury.
Because
the jury provided the equitable relief in this case, the court
held the relief invalid as a matter of law, and reversed.
Damages
The
court also reversed the award of damages. International claimed
it had suffered damages of only $949,650. However, the jury awarded
$1,099,277.
The
court concluded that the award thus had no rational basis, and
instructed the trial court to enter an award in the lower amount,
should it decide to pierce the corporate veil on remand.
Click
here for Case Analysis.
David
Ziemer can be reached by email.
