Illinois Appellate Court Affirms Judgment Against Alter Ego Parties

A breach of lease case resulted in a $278,198 default judgment, which was Count II of a Complaint brought by A.L. Dougherty Real Estate and Phyllis K. Dougherty. The complaint was filed against Cube Global LLC and March Fasteners Inc.  The complaint alleged that Cube Global was liable as March’s alter ego.

A bench trial was held.  The plaintiff presented evidence that Cube Global, which was incorporated while the lease case was pending, wound up with all of March Fastener’s assets and customers.

With the underlying decree boosted by fees, costs and interest, the judgment against Cube Global was $676,222. The judgment was against Su Chin Tsai, whose 16-year-old daughter was listed as Cube’s incorporator, and it totaled $435,584.

Cube and Tsai’s post-trial motion argued that a “stand-alone” alter ego claim was improper because it diluted the requirements for veil piercing. These parties also insisted that because the underlying judgment was based on breach of a lease, the judge should have applied the more rigorous standards required for veil piercing in contract cases.

On appeal, Cube and Tsai argued that the judge “invented a new claim, with a less stringent standard requiring just one prong of the veil-piercing test.”

Although the appellants “are correct that there is no ‘stand-alone’ alter ego cause of action,” the trial judge’s “expressed findings” show that all the requirements for veil-piercing were satisfied. The appeals panel went on to say that the trial judge “properly declined to evaluate plaintiffs’ veil-piercing claim under the principles applicable to breach of contract claims because the present dispute does not involve a breach of contract.  Instead, this case involves the enforcement of a judgment.”

The appeals panel stated that “a court may disregard a corporate entity and pierced veil of limited liability where the corporation is merely the alter ego or business conduit of another person or entity.” Peetoom v. Swanson, 334 Ill.App.3d 523 (2002).

The alter ego doctrine places liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.  Piercing the corporate veil is not a separate cause of action, but instead it’s the means for imposing liability in an underlying cause of action.

“The party seeking to pierce a corporate veil must make a substantial showing that one corporation is a dummy or sham for another.” Buckley v. Abuzir, 2014 IL App (1st) 130469. The plaintiff must demonstrate that: “(1) there is such a unity of interest and ownership that this separate personality of the corporation and the parties who compose it no longer exist, and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances.” Tower Investors v. 111 E. Chestnut Consultants, 371 Ill.App.3d 1019 (2007).

In this case, the defendants argued that the circuit court judge required plaintiffs to prove the alter ego prong of the veil-piercing claim which ultimately failed because the judge’s written orders made it clear that the circuit court found both that Cube Global was the alter ego of March and that “adhering to the fiction of separate corporate existences for March and Cube Global would certainly work an injustice and sanction fraud.”

“The concept of disregarding the corporate existence and imposing liability personally upon the real parties to a transaction is well established and is summarized in 19 C.J.S. Corporation Section 839: ‘Where the director or officer is the alter ego of the corporation, that is, where there is such unity of interest and ownership that the separateness of the individual and corporation has ceased to exist, and the facts are such that an adherence to the fiction of separate existence of the corporation would sanction a fraud or promote injustice, such director or officer will be held liable for obligations of the corporation.’

It is possible that a corporation may be the alter ego of another corporation. If that occurs, the distinct corporate entity will be disregarded and the two corporations will be treated as one.  Dregne v. Five Cent Cab Co., 381 Ill. 594 (1943).

Since this case was not about a breach of contract but was more about enforcement of a judgment, the circuit court properly declined to evaluate plaintiffs’ veil-piercing claim under the principles of breach of contract.  Instead, this case involves the enforcement of judgment.  Plaintiffs are attempting to hold Tsai and Cube Global liable for the underlying judgment obtained in the underlying action.  Under the merger doctrine, once the underlying judgment became final, the lease entirely merged into the judgment, and no further action at law or equity could be maintained on the lease.

In sum, the appeals panel found no basis to reverse the circuit court’s judgment that Cube Global was liable for the underlying judgment entered against March. The circuit court did not enter judgment on a “stand-alone” alter ego cause of action and the circuit court was not required to evaluate plaintiffs’ veil-piercing claims under breach of contract principles. The Illinois Appellate Court therefore affirmed the circuit court’s judgment in favor of the plaintiff on Count II.

A.L. Dougherty Real Estate Management Co. v. Tsai, 2017 IL App (1st) 161949 (Dec. 29, 2017).

Kreisman Law Offices has been handling business litigation matters, arbitration and mediation cases, catastrophic injury lawsuits, business disputes and probate litigation for individuals, families and businesses for more than 40 years in and around Chicago, Cook County and its surrounding areas, including River Forest, Rosemont, Mount Prospect, Bolingbrook, Joliet, Wauconda, Gurnee, Tinley Park, Park Forest, Chicago (Wicker Park, Logan Square, Lincoln Park, Lakeview), Lansing, Villa Park and Vernon Hills, Ill.

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