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Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

Even in Egregious Cases, “Piercing the Corporate Veil” Difficult at Summary Judgment Stage

A recent Minnesota case demonstrates the difficulty of holding corporate officers and directors liable for the debts of the corporation. In Corporate Commission of the Mille Lacs Band of Ojibwe Indians v. Money Centers of America, Inc., No. 12-1015 (D. Minn. Feb. 18, 2014), the Minnesota federal district court, applying Delaware law, analyzed the standards for holding a corporate officer or director personally liable for the debts of a corporation, a concept commonly referred to as “piercing the corporate veil.” Despite substantial evidence that a corporate officer misappropriated corporate funds, the court determined that there were issues of material fact making summary judgment improper. Thus, the court allowed the case to proceed to a jury trial. The Corporate Commission case demonstrates the difficulty of establishing “piercing the corporate veil” claims and the fact-intensive nature of such claims.

In 2009, the Corporate Commission of the Mille Lacs Band of Ojibwe (the “Commission”) and Money Centers of America (“MCA”) entered into an agreement in which MCA was to provide cash-access services at the Commission’s casinos. Under the agreement, the Commission would advance MCA cash each day, MCA would distribute the cash to casino patrons, and four to six days later MCA would deduct its fees from the amount advanced and the remaining balance would go to the Commission. MCA, however, did not fulfill its end of the bargain, frequently holding advances in excess of four to six days. In April 2012, the Commission terminated the agreement. At that time, MCA held approximately $5.6 million in outstanding advances on behalf of the Commission.

In July 2012, the Commission brought an action against MCA seeking repayment of the $5.6 million. During discovery, the Commission learned MCA was insolvent and suspected MCA officers were siphoning corporate funds for their personal use. The court granted the Commission’s motion for summary judgment and entered judgment against MCA, but left the personal liability of MCA’s officers a question to be determined at trial.

Blurring of the Corporate Formalities
In the Corporate Commission case, several factors demonstrated that Christopher Wolfington, MCA’s CEO, and MCA itself, functioned as a single unit. These factors included: MCA did not pay dividends; MCA did not consistently observe corporate formalities; and MCA was insolvent during the course of the agreement. The court concluded, however, that a question existed whether Wolfington, individually, was siphoning money and unfairly disregarding the rights of MCA’s creditors.

The Commission alleged that Wolfington used corporate funds and credit cards to pay for his children’s school tuition, family vacations abroad, his own mortgage and other personal debts, addiction treatment, and a number of lavish shopping and entertainment purchases. In addition to personal expenses, the Commission alleged that MCA made several payments to Wolfington in excess of his salary and bonuses, either directly or through intermediaries.

Ultimately, the court decided that in viewing the evidence in the light most favorable to Wolfington, a jury could reasonably conclude that many of the transactions labeled as “siphoning” may have been loan charge-offs or legitimate business expenses, making summary judgment improper.

Standard for “Piercing the Corporate Veil”
Under Delaware law, it is a difficult task to persuade a court to disregard the corporate structure and find personal liability on the part of corporate shareholders or officers. NetJets Aviation, Inc. v. LHC Commc’ns, LLC, 537 F.3d 168, 176 (2d Cir. 2008). Under Delaware law, to find an individual accountable and “pierce the corporate veil,” one must establish fraud or that the corporation is a mere instrumentality or alter ego of its owner. Under the alter-ego theory, Delaware law requires that plaintiffs prove: (1) the individual and the corporation “operated as a single economic entity,” and (2) there was an “overall element of injustice or unfairness.”

To determine whether the individual and corporation operated as a single economic unit, the Corporate Commission court considered: (1) whether the corporation was adequately capitalized for its business purpose; (2) whether the corporation was solvent; (3) whether dividends were paid, corporate records were kept, corporate officers and directors operated in their roles, and if general corporate formalities were observed; (4) whether the dominant shareholder siphoned corporate funds; and (5) whether the corporation functioned as a façade for the dominant shareholder. The court noted that no one factor is determinative, but all should be taken into consideration when deciding whether to “pierce the corporate veil.”
The second prong, injustice or unfairness, is satisfied by showing that the individual unfairly disregarded the rights of the corporation’s creditors or engaged in fraudulent or unfair siphoning of the corporation’s assets.

Although the Corporate Commission court applied Delaware law, it reaffirmed the common standard used by many courts in assessing when to “pierce the corporate veil.” Further, it showed how difficult it is to prove personal liability for corporate officers at the summary judgment stage. Even in cases where there is substantial evidence that a corporate officer misappropriated corporate funds, a court may determine that the issue is to be decided by a jury and not upon summary judgment. Regardless, to ensure that the “corporate veil” is not pierced, it is essential that corporate shareholders and officers separate their personal affairs from those of the corporation and follow other corporate formalities.
For advice on shareholder and officer personal liability, officer fiduciary duties, and other corporate governance issues, contact one of the business law attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota corporate attorney Jim MacGillis advises clients on corporate and business law matters such as corporate governance, officer fiduciary duties, asset transfers, and company wind-downs. Jim may be reached at 612.455.0503 or Trepanier MacGillis Battina P.A. is a Minnesota corporate law firm located in Minneapolis, Minnesota.