Summary
holding a trial on the merits to determine whether the defendant can be held liable under a veil piercing theory
Summary of this case from Vehicle Interface Techs., LLC v. Jaguar Land Rover N. Am., LLCOpinion
Civil Action No. 18888.
Submitted: April 11, 2003.
Decided: February 20, 2004. Revised: March 12, 2004.
Seth M. Beausang, Esquire, and James A. Whitney, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, LLP, Wilmington, Delaware; Attorneys for Plaintiff.
Bernard George Conaway, Esquire, of MARON MARVEL PA, Wilmington, Delaware; Attorney for Defendants.
MEMORANDUM OPINION
At issue in this case is whether a judgment creditor can "pierce the corporate veil" of her corporate judgment debtor in order to render the sole stockholder (who also is the sole employee) of the debtor corporation personally liable on the judgment. The dispute arises as a result of the plaintiff, Frances M. Gadsden ("Gadsden"), having contracted with the defendants, Home Preservation Company, Inc. ("Home Preservation" or "the company") and Bernard J. Conaway ("Conaway"), to perform certain repairs to her home. Gadsden paid for the repairs before the contract was performed. The repairs were never completed, causing Gadsden to sue Home Preservation in a law court. She obtained a money judgment against Home Preservation, but learned that the corporation has no assets. Gadsden now seeks the aid of equity to pierce the corporate veil of Home Preservation and enforce the judgment against Conaway personally.
A trial on the merits was held on January 14, 2003. This is the Opinion of the Court following post-trial briefing. I conclude, for the reasons set forth below, that the corporate status of Home Preservation will be disregarded and that a judgment against Conaway shall be entered in Gadsden's favor.
I. FACTS
The Court finds the facts to be as set forth below.
A. The "Corporate Form" of Home Preservation
Home Preservation is a closely held, sub-chapter S corporation organized under Delaware law. In 1996, Conaway formed the corporation to engage in the business of general contracting and home repair. When he formed Home Preservation, Conaway paid no ($0) consideration for his stock. Conaway has always been the company's sole stockholder, officer, and employee.
Trial Transcript at 63.
Conaway also served as the company's President and sole director until 1997. At that point, it appears that Michael Dunning, a certified public accountant ("Dunning"), was added as a second director, although neither Home Preservation nor Conaway produced any corporate records evidencing Dunning's election to the board. Dunning played no active role as a director, nor was he involved in the management of Home Preservation. Apparently, his role was to serve as the company's accountant.
Conaway's trial testimony was that Dunning offered to serve and Conaway responded, "Okay. That sounds good." Id. at 90.
Id. at 67.
Since its inception, Home Preservation has never had any assets: no tools, no vehicles, and no inventory or equipment. To enable Home Preservation to conduct its daily business, Conaway supplied his personally-owned tools and vehicles on every job. As the sole employee of the company, Conaway determined the bid price on each job, and ordered all the materials needed to perform each project.
Id. at 47.
Id. at 44.
Although Home Preservation maintained a bank account, Conaway always kept the balance of the account at minimal or zero ($0) levels. After a job was completed and all labor and materials were paid for, Conaway would withdraw whatever funds were left over from the project and place them into his personal account. Thus, any excess cash created from the business of Home Preservation went into Conaway's pocket, rather than remaining in the company's bank account.
See JX 3, Home Preservation Co., Inc., Bank Statements Jan. 1, 1999 through Feb. 28, 2001.
Trial Transcript at 47.
Because Conaway took all of Home Preservation's excess cash and profits for himself, he paid for all supplies needed for the company's business with his own personal checks. Indeed, several of Home Preservation's suppliers refused to accept checks drawn on the company's account. On one occasion, Conaway attempted to pay for material purchased from a supplier with a $23.90 company check. The supplier refused to accept the check, requiring Conaway to pay for the materials with his personal check. At the time the company check was written, Home Preservation's account balance was only $14.10. Thus, the company's check, if accepted, would have been dishonored for insufficient funds.
Id. at 118.
Id. at 119, 123.
Id. at 121-23; see JX 3, supra.
B. The Gadsden Contract
In June 1999, Gadsden invited and received bids to complete certain home improvements on her residence. On June 10, 1999, Gadsden entered into a contract with Home Preservation, in which she agreed to pay $7,000 for Home Preservation to perform the repairs. The agreed-upon payment schedule required Gadsden to pay $5,500 "upfront" and the $1,500 balance after the job was completed. In that contract, Home Preservation warranted both the timely performance and the workmanship of the repairs on Gadsden's residence for ten years.
JX 4, Work Scope and Payment Schedule, signed by Conaway and Gadsden, June 9, 1999.
C. Home Preservation's Non-Performance
At the time work began on the Gadsden project, Home Preservation had a total of $14.10 in its bank account. Under the payment schedule in the contract, when work began on Gadsden's residence, Gadsden would pay Home Preservation $5,500.00 "upfront" to cover the expenses of the project. Soon after work began, however, Gadsden paid Conaway and Home Preservation the entire $7,000 contract price. But then, after completing about sixty percent of the Gadsden project and incurring $4,460.14 in expenses — Conaway caused Home Preservation to abandon the job, because (he concluded) the company would incur a loss if it completed the Gadsden project. Despite its clear default and breach of contract, Home Preservation did not refund any of Gadsden's deposit payment.
Trial Transcript at 56.
Id. at 56-57.
Id. at 15-17.
Trial Transcript at 57-58, 60-61.
Id. at 57.
D. Gadsden Sues in the Justice of the Peace Court
In July 2000, Gadsden filed suit against Conaway in the Justice of the Peace Court. On September 6, 2000, that Court entered a default judgment against Conaway for $14,000. After receiving notice of the default judgment in the mail, Conaway petitioned the Justice of the Peace to re-open the case. Granting his motion, the court vacated the judgment and granted a new hearing. Thereafter, Conaway successfully petitioned the court to amend the pleadings to remove Conaway as a party defendant and to name Home Preservation as the sole defendant.
In October 2000, having procured the vacation of the default judgment, Conaway removed all funds from Home Preservation's corporate account, and thereafter, neither Conaway nor Home Preservation ever used that corporate account again. On December 19, 2000, Gadsden won, and the Justice of the Peace Court entered a judgment for $10,230 against Home Preservation. Neither the company nor Conaway has ever paid any portion of the judgment to Gadsden.
Trial Transcript at 128-129.
Id. at 83.
E. Home Preservation's Continued Operation
Despite the unpaid Gadsden judgment, Home Preservation continued to operate and to issue warranties for workmanship to its other customers on other projects for periods of up to twenty years. From October 2000 forward, all funds Home Preservation received from customers were deposited in Conaway's personal account, and all company expenses were paid by Conaway's personal check. Any profits generated from Home Preservation projects remained with Conaway. On March 8, 2001, after Gadsden had made unsuccessful efforts to collect her judgment against Home Preservation, Conaway closed the corporate account that had maintained a zero ($0) balance since October 2000.
Id. at 78-81.
F. Gadsden Files This Action in the Court of Chancery
Frustrated in her efforts to collect on her judgment, Gadsden filed an action in this Court in 2001 to "pierce the corporate veil" of Home Preservation and recover her judgment against Conaway personally. Thereafter, in July 2001, Home Preservation ceased performing all work and paid no further corporate franchise taxes in 2002, because "the company was no longer in operation." Although Home Preservation had no bank account, income or assets, it still maintained a phone number (paid for by Conaway) and it issued warranties on workmanship with expiration dates extending to 2020. At trial, Conaway testified that because Home Preservation has no assets and is incapable of fulfilling its warranty obligations, he would personally make any necessary repairs or would hire a subcontractor at his own expense to fulfill the company's warranty obligations.
Id. at 69-70.
Id. at 77-78.
II. THE PARTIES' CONTENTIONS AND THE ISSUES PRESENTED
The failure (or, more precisely, the refusal) of Home Preservation to satisfy the Gadsden judgment raises a single issue: should the corporate veil of Home Preservation be pierced to hold Conaway personally liable for the Gadsden judgment? Gadsden argues that the corporate status of Home Preservation must be disregarded, because Conaway misused the corporate form both to defraud her and avoid paying the judgment she obtained in the Justice of the Peace Court. In support of her position, Gadsden points out that Home Preservation gave her a ten-year warranty on its workmanship, yet it never had any funds, assets or resources to honor such a warranty. That is, not only was Home Preservation deliberately undercapitalized, but also Conaway operated the company so as to make it certain that the company would never have any value. Gadsden urges that because Conaway rendered the company worthless by continually siphoning all of Home Preservation's excess cash profits, the corporate form of Home Preservation should be disregarded as a sham and Conaway should be personally liable on the Gadsden judgment.Gadsden further contends that these same facts justify piercing the corporate veil of Home Preservation on the basis that Home Preservation is Conaway's instrumentality or alter ego. She argues that Conaway used the corporate form simply as a facade to shield himself from personal liability, and on that basis the corporate veil of Home Preservation should be pierced and Conaway held personally responsible for the Gadsden judgment.
In response, Conaway argues that the corporate status of Home Preservation should remain fully intact, because Gadsden failed to make the showing required to pierce the corporate veil. Conaway contends that Gadsden must prove her case by clear and convincing evidence. Alternatively, even if Gadsden is held to a preponderance of the evidence standard, Conaway argues that she has not met even that lesser burden.
Specifically, Conaway argues that Gadsden has failed to prove the existence of a fraud or other cognizable injustice that would warrant disregarding Home Preservation's separate corporate existence. In this connection, Conaway insists that Gadsden provided no evidence that Home Preservation was inadequately funded or that Gadsden herself relied on the warranties.
The parties' contentions are next addressed.
III. ANALYSIS
Having considered the parties' positions, the Court is satisfied that Gadsden has established, both factually and legally, adequate grounds to disregard Home Preservation's separate corporate existence. My reasons follow.
A Delaware court will not lightly disregard a corporation's jural identity. Absent sufficient cause the separate legal existence of a corporation will not be disturbed.
Harco Nat'l Ins. Co. v. Green Farms, Inc., 1989 Del. Ch. LEXIS 114, *10 (Del.Ch. 1989).
Id.
A court of equity will disregard the separate legal existence of a corporation where it is shown that the corporate form has been used to perpetrate a fraud or similar injustice. Stated differently, where the interests of justice make it appropriate, a "party wronged by actions [of] an owner shielded by the veil of a corporate shell may exercise the equitable right to pierce that screen and `skewer' the corporate owner." As the Supreme Court stated in Pauley Petroleum, Inc. v. Continental Oil Co.:
Martin v. D.B. Martin Co., 88 A. 612, 616 (Del.Ch. 1913).
David v. Mast, 1999 Del. Ch. LEXIS 34, *6 (Del.Ch. 1999).
There is, of course, no doubt that upon a proper showing corporate entities as between parent and subsidiary may be disregarded and the ultimate party in interest, the parent, be regarded in law and fact as the sole party in a particular transaction. This, however, may not be done in all cases. It may be done only in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or where equitable consideration among members of the corporation require it, are involved.
Pauley Petroleum, Inc., v. Continental Oil Co., 239 A.2d 629, 633 (Del. 1968), citing 1 FLETCHER, CYCLOPEDIA CORPORATIONS (Perm.Ed.) § 41; Martin v. D.B. Martin Co., supra.
Pauley Petroleum, Inc., v. Continental Oil Co., 239 A.2d 629, 633 (Del. 1968), citing 1 FLETCHER, CYCLOPEDIA CORPORATIONS (Perm.Ed.) § 41; Martin v. D.B. Martin Co., supra.
The issue here is whether the business practices of Home Preservation — at all times engineered and controlled exclusively by Conaway — amounted to a fraud, contravention of contract, or public wrong sufficient to justify this Court ignoring the company's corporate form and holding Conaway personally responsible for the Gadsden judgment. This Court concludes that that question must be answered in the affirmative.
From its inception, and by design, Home Preservation never had any economic worth. The company was never capitalized with any funds, and its stock has never had any value. At no time did Home Preservation own any assets, tools, equipment, inventory or vehicles. Conaway, who was Home Preservation's sole stockholder and employee, made sure that at all times the corporation's bank account contained minimal or no funds. Suppliers who were aware of that fact protected themselves by refusing to extend Home Preservation credit and by making Conaway pay for all materials personally. Unlike those suppliers, Gadsden, however, was unable to protect herself, as she was unaware of these practices.
To reiterate, after each Home Preservation project was completed, Conaway transferred any excess cash from the company to his personal accounts. But, even though his company had no economic value, Conaway caused Home Preservation routinely to furnish to its customers contracts containing ten to twenty-year workmanship warranties. In these circumstances, the only conceivable purpose that Home Improvement could serve would be as a vehicle to enable Conaway to avoid personal liability.
Faced with similar circumstances in other cases, this Court has disregarded the corporate status of a debtor and held its owner personally responsible for the debt. In David v. Mast, a roofing company advertised ten-year warranties on its workmanship, even though the company was in debt and had no assets or salaried employees. Determining that the plaintiff was entitled to pierce the corporate veil, this Court found such "misuse of the corporate form constitutes a public wrong justifying disregard of the corporate entity." This case is functionally indistinguishable from Mast.
David v. Mast, 1999 WL 135244, 1 (Del.Ch. 1999).
Conaway attempts to distinguish Mast, nonetheless, by arguing that the public wrong committed there was a violation of Consumer Fraud laws due to the content of the roofing company's advertisements. The argument is unpersuasive. Here, as in Mast, Home Preservation, despite having no assets, capital, or tools, furnished its customers ten and twenty-year guarantees on its workmanship. By doing that, Conaway, through Home Preservation, personally profited based on promises that his company had no ability to perform. As Conaway admitted, Home Preservation had no resources to honor its warranty promises or otherwise to perform its obligations, independently of Conaway. Given his business practice of removing all funds from the corporate accounts, Conaway knew the company had no resources to honor its warranties from the moment they were issued. Manifestly, Conaway was using his company's corporate form to perpetrate a fraud on the public.
Quite telling in this regard is Conaway's trial testimony that he always intended to be personally responsible for the obligations of Home Preservation. After admitting that the company had no assets and could not pay for any repairs, Conaway testified at trial that he would personally fix any problem or personally hire a sub-contractor to do any warranty work. Conaway explained that it was "obvious" that he was responsible for Home Preservation's obligations and that he would personally pay for any labor or material needed.
Trial Transcript at 77-78.
The blatant falsity of that testimony is established by Conaway's actual conduct. Conaway persuaded the Justice of the Peace Court to vacate the default judgment previously entered against him personally, to schedule a new hearing, and to remove Conaway as a party defendant and substitute Home Preservation as the sole defendant in his place. Having done that, Conaway then permanently emptied (and later closed) Home Preservation's corporate bank account, to render that company incapable of responding to any judgment entered against it. Yet Home Preservation continued to operate its business even though the company no longer had a corporate account. If it was "obvious" that Conaway would personally honor Home Preservation's debts and obligations, that obvious fact has escaped both Ms. Gadsden and this Court.
Manifestly, the business practices of Home Preservation and Conaway constituted a fraud, contravention of contract, and a public wrong. No court should countenance such a misuse of the corporate form, and this Court surely will not. To uphold the corporate status of Home Preservation in these circumstances would be tantamount to blessing a scheme for business owners to defraud creditors routinely. If ever there were a case where the interests of justice justify piercing the corporate veil, this is it.
David v. Mast, supra, at *2.