Significant Control Over And Complete Lack Of Equity In Formation Of Company Result In Piercing Of Its Corporate Veil
LABORERS' PENSION FUND v. LAY-COM, INC. (September 2, 2009)
King & Larsen, Lord & Essex and Lay-Com are all in the development or construction business. Mike King is the owner of King & Larsen. Lord & Essex and Lay-Com are both owned directly or indirectly by members of the Popp family. King & Larsen had a collective bargaining agreement that required it to make contributions to the plaintiff fund. When it ran into financial difficulty, Lord & Essex and Lay-Com came to its rescue. They loaned money and paid some bills. The companies then entered into a complex series of transactions that resulted in the transfer of most of King & Larsen's assets to a new company, M. A. King. The tax and union pension fund liabilities of King & Larsen remained behind, in an otherwise empty shell. The pension fund sued King & Larsen, M. A. King and Mike King for the unpaid contributions. After obtaining default judgments, the funds added Lay-Com, Lord & Essex, the Lay Trust and John Popp as defendants. The district court found Lay-Com, Lord & Essex and the Lay Trust liable on a veil-piercing theory and dismissed John Popp. All parties appeal.
In their opinion, Judges Cudahy, Manion and Tinder affirmed in part and reversed in part. The Court identified the sole issue on appeal as whether it was appropriate to pierce the corporate veil of M. A. King, as successor to King & Larsen, to reach the other defendants. A primary purpose of the corporate structure is to limit liability. An exception to that limitation of liability occurs when a corporation is used as a mere instrumentality of another. The Court stated that the plaintiffs must both demonstrate that there exists a unity of interest in ownership between or among the companies and that honoring the corporate fiction would result in an injustice. A principal factor in addressing the former is whether the companies respected their separateness. A principal factor in addressing the latter is whether the company operates with sufficient capital. Addressing each of the four defendants, the Court concluded that the test was met with respect to Lay-Com. First, Lay-Com exerted substantial control over M.A. King and did not allow it to operate separately. Second, M.A. King was created with not only inadequate capital – it was created with no equity capital. The Court concluded no capital is inadequate as a matter of law. Although the Court found the analysis with respect to Lord & Essex more difficult, it also concluded that Lord and Essex was a important part of the scheme and did not maintain its separateness from M.A. King. The Court concluded that the Lay Trust and John Popp individually played no role in the scheme. It found neither subject to liability under veil-piercing.
