JONES &TREVOR MARKETING INC. V. JONATHAN L. LOWRY, ET. AL.
In Jones & Trevor Marketing, Inc. v. Jonathan L., Lowry, et. al., 2012 UT 39; 284 P.3d 630 (2012), Jones & Trevor Marketing entered into a contract with Jonathan Lowery and Nathan Kinsella. The contractual relationship did not flourish and Lowery and Kinsella sought to cancel the contract. In response. Jones & Trevor Marketing filed suit. During the pending lawsuit, the defendants dissolved the company and Jones & Trevor sought instead to hold Lowery and Kinsella personally liable by piercing the corporate veil under the alter ego theory. Jones & Trevor Marketing alleged that Lowery and Kinsella used company funds and thus should be held personally liable. The lower court granted Lowery and Kinsella’s motion for summary judgement. Jones & Trevor Marketing appealed the holding, however, the court of appeals affirmed the lower court’s ruling. The plaintiffs appealed to the Utah Supreme Court who also affirmed the holdings of the lower courts. The Court held that although Lowery and Kinsella personally used funds of the company, these funds were accounted for. These facts alone do not establish a material fact necessary to establish a cause of action.
This case presents several legal and business issues. The case describes the legal entity of a corporation, the test used to pierce the corporate veil and the necessary factors to pierce the corporate veil, as well as the alter ego doctrine. The case also reviews the issues required in order for the court to grant a motion for summary judgement.
Piercing the corporate veil involves a circumstance wherein a court will set aside the limited liability created in the corporation and find the directors or stockholders personally liable the actions or debts of the corporation. A corporation is a separate legal entity which protects stockholders by only holding them accountable for the amount of money put into the corporation. Stockholders are not liable for corporate actions unless the court pierces the corporate veil. Piercing the corporate veil involves an analysis of the specific facts of the case and a review of the relationship between the stockholders and the corporation itself.
The Utah Supreme Court adopted a two-part test to determine if the corporate veil may be pierced. The two parts are the formalities and fairness requirements. The first seven factors assist in evaluating the formalities and the eighth factor aids in determining fairness. Utah Supreme Court adopted the factors set forth by the Appeals Court as aids to determine whether a corporate veil should be pierced. These factors are not exclusive nor dispositive, and they are not required but exist as considerations. The factors include whether there was “(1) undercapitalization of a one-man corporation; (2) failure to observe corporate formalities;(3) nonpayment of dividends; (4) siphoning of corporate funds by the dominant stockholder;(5) nonfunctioning of other officers or directors;(6) absence of corporate records; (7) the use of the corporation as a facade for operations of the dominant stockholder or stockholders; and (8) the use of the corporate entity in promoting injustice or fraud” . There are not a set number of factors necessary to be present in order to succeed on the theory of an alter ego.
The alter ego doctrine is an exception to the limited liability of stockholders and places liability on stockholders for obligations made by the corporation. There are no real distinctive attributes between piercing the corporate veil and the alter ego doctrine . The alter ego doctrine provides for a piercing of the corporate veil. As a result, judgment may be sought against shareholders for disputes involving the corporate entity.
Summary judgment on the issue of an alter ego is not determined by the number of factors present in the factual situation but rather on whether there are disputed facts present to meet the two-part test to determine if piercing the veil is appropriate. To adequately contest a motion for summary judgement, a party must provide evidence that a” genuine issue of disputed material fact” is present in the case. In this case, although there was evidence that the stockholders took money from the corporation, it was all accounted for and there is no basis to pierce the corporate veil.
The business entity of the corporation is often chosen as the form of business by investors due to its shield of liability. There is no guarantee that forming a corporation will protect personal assets in all circumstances. Thus, it is important for company owners and investors to be aware of situations that may present issues. In a recent article in the National Law Review, Aaron Werner presents the circumstances that may results in a piercing of the corporate veil . The author recommends best practices in his article that include observing corporate formalities, keeping separate records and bank accounts, conducting affairs of the entity at arm’s length, and considering the branding of the entity to customers and creditors . If these practices are followed, there is less likelihood that the corporate veil will be pierced.
Protection from liability of stockholders should has always been a subject in the corporate world. There are always situations in which the court finds it necessary to pierce the corporate veil. For instance, as recently as this month, the Illinois Court of Appeals allowed for a corporate veil piercing in the case of Steiner Electric Company v. Manisalco and Sackett Systems, Inc. and the Court of Appeals for the Seventh Circuit allowed the same in Continental Casualty Company v. Alan Symons, et. al. . In each of these cases, the corporations failed to follow corporate formalities in keeping separate accounts for personal and business assets.
References
Funai, M. (2016, May 17). Another Corporate Veil Piercing Case - Sham Transactions Make Affiliates and Individuals Vulnerable. Retrieved from Lexology: http://www.lexology.com/library/detail.aspx?g=c7d4e397-6cb6-4277-903d-3157cb1e7a3a
Hollander, E. C. (2015, May 13). Beware Distinctions Between Veil Piercing and Alter Ego. Retrieved from Q Law 360: http://www.law360.com/articles/654425/beware-distinctions-between-veil-piercing-and-alter-ego
Jones & Trevor Marketing, Inc. v. Jonathan L. Lowry, Nathan Kinsella, et. al., 2012 UT 39 (Supreme Court of the State of Utah June 29, 2012).
Piercing the Corporate Veil. (2016). Retrieved from Cornell University Law School: https://www.law.cornell.edu/wex/piercing_the_corporate_veil
Werner, A. D. (2016, May 19). Best Practices to Prevent "Piercing of your Corporate Veil" - Keep Your Liability Shield Intact. Retrieved from The National Law Review: http://www.natlawreview.com/article/best-practices-to-prevent-piercing-your-corporate-veil-keep-your-liability-shield
