COA: trial court erred in piercing corporate veil

Because there was no causal connection established between misuse of the corporate form and fraud or injustice, the Indiana Court of Appeals reversed the trial court’s decision to pierce the corporate veil.

In CBR Event Decorators, Inc., Gregory Rankin, Robert Cochrane and John Bales v. Todd M. Gates, No. 49A02-1010-CT-1117, Robert Cochrane, John Bales and Gregory Rankin arranged to purchase MCS Decorators Inc.’s assets from Todd Gates. Gates had loaned money to the company, which was owned and operated by his then-son-in-law, David Marquart. Cochrane, Bales and Rankin formed a limited liability company to purchase the assets from Gates, who had initiated a replevin action to foreclose on his security interest in MCS’ assets. The three men became shareholders of CBR Event Decorators Inc.

The shareholders gave Gates $100,000 for a down payment, but a day later, the shareholders claimed MCS’ status with regard to clients’ relationships with the company was misrepresented. Gates refused to return the money, so a stop payment was put on the check. Gates never transferred any assets to CBR.

Gates sued CBR claiming breach of contract and that the corporate veil should be pierced to allow the imposition of personal liability on the shareholders. The trial court accepted in full Gates’ proposed findings of fact and conclusions of law and entered judgment in favor of Gates for $260,815.77 plus interest and attorney fees. The judge also found that the shareholders had fraudulently conveyed $100,000 by withdrawing it from their attorney’s trust account.

To justify the decision to pierce the corporate veil, the trial court determined that CBR was undercapitalized, lacked corporate records, and the shareholders had fraudulently represented to Gates in the purchase agreement that there were no representations, warranties, or understandings other than those set forth or provided for in the purchase agreement.

The Court of Appeals reversed the piercing of the corporate veil, relying on caselaw that supports the shareholders’ assertion that the fraud or injustice alleged by a party seeking to pierce the corporate veil must be caused by, or result from, misuse of the corporate form. The fraud alleged by Gates had nothing to do with the misuse of the corporate form, wrote Judge Nancy Vaidik, and the necessary causal link doesn’t exist because the alleged misrepresentation doesn’t pertain to CBR’s corporate status.

The judges did affirm the judgment against CBR for breach of contract and against the shareholders for $100,000 for fraudulent conveyance, fraudulent transfer, and wrongful stop payment. The appellate court ordered the trial court to determine the portion of attorney fees the shareholders are liable for to Gates as a result of the wrongful stop payment.