Piercing the Corporate Veil (Again): Even a Company's Bankruptcy

by David P. Weiss

Facts always make the case, and in a particular case across the state in Kansas City, the facts, when applied to the law, found the owners of a construction company liable to a building owner not only for the full contract amount but also for punitive damages. The question is: What can I do to avoid the same outcome when the case involves suing corporation owners and piercing the corporate veil?

 

In John Knox Village v. Fortis Construction Company, et al., the defendant, Fortis Construction Company, LLC, agreed to provide construction and general contracting services on a particular project, the PACU Project, at plaintiff's retirement living facility. Upon entering into the contract, the defendant represented and warranted that anytime it would submit a payment application for payment to plaintiff, all work for which payment was requested would be free and clear of all liens, claims and encumbrances. Further, defendant represented that it would pay subcontractors in a timely manner after receiving payment for work on the particular project.

 

While the PACU Project was underway, plaintiff contracted with a company related to Fortis Construction, Triad Construction Company, Inc., to contract and again provide general contracting services on what was referred to as the Hospice Project at plaintiff's retirement community. Contract terms were the same as provided under the Fortis Construction agreement, along with the provision that neither the plaintiff nor its architect would have any responsibility for payments to subcontractors. Moreover, plaintiff considered such terms material to the contract and relied upon those terms, and, perhaps most telling, the defendants agreed during the litigation that such terms were material, that plaintiff had the right to rely upon them and in fact did rely upon them.

 

Plaintiff subsequently discovered that neither Fortis Construction nor Triad Construction had paid its subcontractors, notwithstanding that both companies had represented and warranted in its respective payment applications to plaintiff that its subcontractors had been paid from the proceeds of any prior payments made by plaintiff to the respective general contractor, and would be paid from the proceeds of the payment application then being submitted. At Triad Construction's request, its checks were to be made jointly payable with Fortis Construction, a request to which plaintiff agreed. Although demand was made by plaintiff to both construction companies to pay its subcontractors, no such payments were in fact made. Plaintiff then negotiated settlements with the subcontractors, ranging from 70 percent to 100 percent of the amounts so claimed. During this same period one of the defendants, Triad Construction Company, filed for liquidation under the Bankruptcy Act.

 

John Knox Village then filed suit against Fortis Construction and the individual owners of Triad Construction Company, notwithstanding that it had filed for bankruptcy protection. The counts filed against Fortis and the Triad owners alleged fraudulent misrepresentation, fraudulent conveyance and civil conspiracy in relation with the Hospice Project.

 

In its claims for fraudulent misrepresentation and fraudulent conveyance, as well as civil conspiracy, plaintiff alleged that the Triad owners were insiders and had complete control and dominion over Triad Construction, though Triad was not even a party to the lawsuit because of its bankruptcy filing.

 

As an initial procedure point, the appellate court found that there existed subject matter jurisdiction over plaintiff's claim against the defendants, notwithstanding the Triad bankruptcy. Differentiating from another case that found to the contrary, this court found that here the Bankruptcy Court never declared the creditor's claim to be property of the bankruptcy estate.

 

The individual defendants argued that they could not be found to be personally liable because another employee, a non-owner, of Triad Construction actually signed the documents in which the representations were made. The court dismissed such argument because John Knox Village, the plaintiff, sought to hold the individual defendants liable under a piercing-the-corporate-veil theory, a situation in which a claimant seeks to hold a corporation liable not for the wrongful acts of an employee but rather "so that [the owners] could be held individually liable for the corporation's fraudulent misrepresentations."

 

The court reiterated the elements necessary for imposing personal liability on a business entity's owners:

-First, control, not mere majority or complete domination not only of finances but also of policy and business practices such that the entity had at the time no separate mind, will or existence of its own.

-Second, such control must have been used by the business entity to commit fraud or wrong, to perpetuate the violation of statutory or other positive legal duty, or to commit a dishonest and unjust act in contravention of another's legal rights.

-Third, the control and breach of duty must proximately cause the injury or unjust loss in the instance for which redress is sought.

 

In the John Knox Village case, the court found, generally through the admissions of Triad Construction's owners themselves, that they knew the representations were material; that they knew that they had not, would not and could not satisfy those representations; and that they used the contract payments to pay themselves and expenses related to their employment, not the payment of subcontractors as the

construction contracts required and to which both construction companies had agreed. Thus, all three elements had been satisfied to permit the court to find that piercing the corporate veil was justified to hold the owners personally liable.

 

Conclusion

 

Facts must support each element of a cause of action, and in the John Knox Village case, facts were plentiful for the court to find as it did in piercing the corporate veil and holding the corporation's owners personally liable. While each case is different, Weiss Attorneys at Law, P.C. has substantial experience in representing business entities from the boardroom to the courtroom. Whether you need assistance in forming your business entity, conducting its business through policies and actions properly adopted by the governing body, or litigating a dispute, our attorneys bring experience, focus and dedication to the representation. Please contact Weiss Attorneys at Law, P.C. at 314-588-9500, by email at law@weisslawstl.com or online to see how we can help you and your business.

David P. Weiss is an attorney and managing officer at Weiss Attorneys at Law (www.weisslawstl.com). David counsels business owners and individuals in a variety of legal matters central to business including corporate law, real estate, tax and employment law matters. David also represents clients in business litigation involving business disputes, shareholder matters and issues relating to collections. He can be

reached at 314-588-9500 or dweiss@weisslawstl.com.