In a case involving a default judgment in the amount of $421,582 against an Illinois corporation, Mama Gramm’s Bakery requested that a Cook County judge pierce the corporate veil of Silver Fox Pastry and put the liability on Haitham Abuzir. Abuzir was never a director, officer, shareholder or employee of the corporation, Silver Fox.
In the attempt to pierce the veil, Mama Gramm’s alleged that Abuzir funded Silver Fox, “made all business decisions” and “exercised ownership control over the corporation to such a degree that separate personalities of the corporation and defendant did not exist.” The trial judge dismissed the complaint for failing to state a cause of action against Abuzir. The Illinois Appellate court reversed that decision and provided an opinion on the issue of “whether the veil may be pierced to reach non-shareholders.”
The underlying case that resulted in a default judgment was a trade secret case. The appellate court discussed the ways to create and organize a sham corporation. “In some instances, the wrongdoer neither holds stock nor serves in an official capacity. Making officer, director or shareholder status a pre-requisite to veil-piercing elevates form over substance and is therefore contrary to veil-piercing’s equitable nature.”
Illinois courts have been reluctant to pierce the corporation veil in the past. See, e.g., Tower Investors, LLC v. 111 Chestnut Consultants, Inc., 371 Ill.App.3d 1019 (2007). According to the appeals panel’s opinion, studies have shown that Illinois courts pierced the corporate veil in approximately 42% to 52% of the cases. That is near the average for American courts.
Further, veil piercing occurs almost exclusively in closely held corporations, especially one-person corporations such as the case here. A corporation is an entity that is separate and distinct from its shareholders, directors and officers. The primary purpose of the corporation is to insulate shareholders from unlimited liability.
In cases where the corporate veil is pierced, the corporation is so organized and controlled by another entity or person that maintaining the fiction of separate identities would sanction a fraud or promote injustice.
A party thinking to pierce the corporate veil must make a substantial showing that one corporation is a dummy or sham for another. Illinois courts have allowed the piercing of the corporate veil where: (1) there is such a unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exists, and (2) circumstances are such that adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances.
With respect to the first item, unity of ownership, courts will examine many factors, including capitalization, whether the stock was issued, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation, non-functioning of the other officers or directors, absence of corporate records, commingling of funds, diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, failure to maintain arm’s-length relationships among related entities, and whether in fact the corporation is a mere façade for the operation of the dominant shareholders.
In this case, the court held that the weight of authority supports the conclusion that lack of shareholder status, as is the case here, and lack of status as an officer, director or employee, does not preclude veil-piercing. Illinois falls in line with the majority. In Fontana v. TLD Builders, Inc., 362 Ill.App.3d 491 (2005), plaintiff property owners hired defendant’s construction corporation to construct a single-family home. The builder abandoned the project, and plaintiffs sued seeking to pierce the corporation’s veil and hold individual defendant personally liable. There was a bench trial in that case and the trial court pierced the veil and held defendant and the corporation jointly and severally liable. In the Fontana case, the court noted that piercing the corporate veil is an equitable remedy that looks to substance over form. The court held that the status of a non-shareholder does not preclude piercing the corporate veil because equitable ownership may satisfy the unity-of-interest-and-ownership prong.
In this case, the amended complaint alleged that “Silver Fox never issued any stock to anyone.” If plaintiffs’ allegation is true, the reason defendant was not a Silver Fox shareholder is that Silver Fox had no shareholders. It would make little sense to hold that, where a corporation fails to issue stock, defendant’s status as a non-shareholder both precludes veil-piercing and is a factor in favor of it.
Thus the appellate court found that the plaintiffs alleged sufficient facts to satisfy the first veil-piercing prong. The court also said that the plaintiffs’ allegations, when liberally construed, allowed for the inference that refusing to pierce Silver Fox’s corporate veil would promote injustice. The appellate court found that the plaintiffs’ allegations in their amended complaint was sufficient to survive a §2-615 motion to dismiss.
In a way, the appellate court apologized to the trial judge for his careful analysis of the case, but nevertheless reversed its finding dismissing the plaintiffs’ amended complaint.
Kreisman Law Offices has been handling business litigation matters, breach of contract cases, corporation litigation and trial practice representing individuals, families and businesses for more than 38 years in and around Chicago, Cook County and its surrounding areas, including Elmwood Park, Melrose Park, Burbank, Bedford Park, St. Charles, Western Springs, Lake Forest, Kenilworth, Evergreen Park, Deerfield, Cicero, Joliet, Chicago (Humboldt Park, Garfield Park, Back of the Yards, Archer Heights, Avondale, Lakeview), Arlington Heights, Brookfield and Lincolnshire, Ill.
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