Don't Bet the Business

So here is a bit of a new twist. Your client is unhappy after a failed, or at the least a very disappointing real estate transaction.  Your client, the buyer, wants to sue the seller for breach of contract and/or fraud in the inducement.  You fashion a complaint to allege those claims. 

Based on what you believe in good faith to be true, you also include a claim for “piercing the corporate veil” so you can go after the selling company’s owner and a separate officer.  Eventually, a favorable case evaluation award is entered against the three defendants. 

The company and the owner accept, but the officer rejects the award.  After a judgment is entered against the company and its owner, you agree to dismiss the claims against the officer, without prejudice, so as to begin collection efforts as soon as possible. 

Unfortunately, but not uncommonly, your collection efforts later prove to be unsuccessful.  You determine that the company and its owner have no money and suspect that during business operations corporate funds otherwise available to satisfy the judgment may have found their way to the former defendant corporate officer.  So, you decide to go after the officer with a new lawsuit.  Not so fast says the trial court.   

That court dismisses your new claims against the officer on the pleadings because while those facts supported those claims as against the company and its owner, the facts linking the officer to actual wrongdoing were marginal as best – no doubt, in hindsight, why the company and the owner accepted the case evaluation.  Making matters worse, the trial court also rules that you can’t go after the officer to pierce the corporate veil in a second action because you lack a substantive claim to support that remedy.

Your first thought might be to try to reopen the earlier case since it was dismissed without prejudice, and Michigan law does not permit piercing claims to be raised as part of a supplementary proceeding under MCR 2.621 and MCL 600.6104(5).  Recently, however, the Michigan Court of Appeals gave you another option.

Traditionally, Michigan law observes and enforces the corporate form.  In other words, the courts generally will recognize and enforce the rule that corporate entities are separate from their owners and officers, particularly when it comes to questions of liability for corporate debts.  However, this general rule is not absolute.  When the evidence shows that the corporate form has been misused, the “veil” that shields individuals from corporate obligations can be pierced.  This piercing of the corporate veil is an equitable remedy, and it is used, if at all, sparingly and only to avoid the injustice that would result if the corporate form was allowed to be used as a means to commit some other wrongful act.  But as a remedy, the Michigan courts commonly hold that “piercing the corporate veil” is not an independent cause of action.

Piercing claims typically are raised as part of a complaint for money damages – but must they? While the courts in Michigan had not previously addressed or decided whether a separate action could be brought to pierce the corporate veil after a judgment has been obtained, that changed with the case of Gallagher v Persha, ___ Mich App ___; Case No. 325471 (June 9, 2016). 

In Gallagher, a case based on facts similar to those outlined in the hypothetical described above, the appellate court recognized that some sister states have permitted a judgment creditor to file a second action to pierce the corporate veil of a judgment debtor in order to hold individual officers and shareholders liable for the judgment debt.  In trying to decide whether to adopt such a procedural rule, the appellate court viewed as significant the fact that those same sister states had no “unique statutes, court rules, or other laws” specifying a procedural mechanism to pierce the corporate veil. 

Based largely on this lack of distinguishing features from those found in Michigan law, the appellate court held that hereafter in Michigan an action to pierce the corporate veil can be brought against a corporate owner or officer when it is based on nothing more than a prior corporate judgment.  As such after Gallagher, when a judgment exists against a corporate entity, an additional substantive “cause of action is not needed to impose liability against a shareholder or officer if a court finds the necessary facts to pierce the corporate veil.”

So, in the example above, although all claims were dismissed against the officer at the conclusion of the first lawsuit, the entry of the judgment against the company and its owner is all that is required to permit a subsequent action to pierce the corporate veil in an effort to hold the officer personally responsible for the judgment.  Significantly, the Gallagher decision did not change the law concerning what needs to be shown to actually pierce the corporate veil.  That remedy remains one to be used “sparingly.” 

However, when it appears, post judgment, that the corporate form has been abused to improperly avoid legal payment obligations, the Gallagher decision gives collection attorneys another option.