News

Piercing the Corporate Veil

The Michigan Court of Appeals recently confirmed that corporations that do not conduct annual meetings or properly keep their corporate record books up to date risk subjecting their owners to individual liability.  In New Properties, Inc. v Lakes of the North Association, unpublished Court of Appeals decision dated June 26, 2012 (Docket No. 301910), the Court of Appeals applied the “piercing the corporate veil” doctrine to subject its sole stockholder to individual liability.  The Court of Appeals cited the Foodland Distributors v Al-Naimi case for the “piercing the corporate veil” legal requirements that for the veil to be pierced, the corporate entity must be a “mere instrumentality” for a third party, must be used to commit a fraud or wrong, and that the injured party must suffer an unjust wrong or injury.

The Court of Appeals found that the Defendant stockholder was liable for the corporation’s debt and in particular noted the following facts:

1. The Defendant failed to pay dividends to the stockholder owner;
2. The Defendant that owned the building leased to the corporation failed to charge reasonable rent;
3. The Defendant failed to conduct annual meetings or at least failed to keep records of the meetings;
4. The Defendant did not maintain a corporate minute book;
5. The Defendant failed to issue stock certificates;
6. The Defendant paid the money shortfalls of the corporation; and
7. The Defendant paid some of the litigation expenses of the corporation.

In essence, very little was done to make the Defendant look and operate like a real company.  The Court of Appeals noted that where a stockholder of a company does not treat the company as an entity separate from himself, that a court shouldn’t do so either.

The moral of this story is that owners of corporate entities should make sure that corporate formalities are followed or risk losing the protections of using the corporate entity.

GGTM Law

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