Business & Corporate

Piercing the Corporate Veil – Part II

By March 17, 2016 December 2nd, 2019 No Comments

In a previous article we examined the doctrine known as piercing the corporate veil. The article concluded by noting that a recent Illinois Appellate Court opinion affirmed the lower court’s decision to allow a claimant (itself a corporation) to pursue collection from the owner and companion company where the claimant was unable to collect from the first corporation itself. Steiner Electric Co. v. Maniscalco and Sackett Systems, Inc., 2016 IL App (1st) 132023.

Steiner Electric Company was a supplier of electrical products. Maniscalco was the sole owner of Delta Equipment Company and Sackett Systems, Inc. Delta sold and serviced batteries and generators. Sackett sold battery storage systems. Steiner sold some generators to Delta but was not paid. After several failed attempts to collect, Steiner sued and obtained a default judgment against Delta. When discovering it could not collect on the judgment because Delta had been dissolved, Steiner sued Maniscalco individually and Sackett. The circuit court pierced the corporate veil and entered judgment in favor of Steiner against Maniscalco and Sackett, jointly and severally. Upon appeal, the Illinois Appellate Court recited the salient facts and then affirmed the judgement. The court reviewed the law in Illinois governing whether a corporation’s veil should be pierced such that its owners, or other parties closely aligned with the corporation, may be held liable for the corporation’s obligations. 

The court on appeal affirmed the circuit’s finding that both Maniscalco and Sackett should be liable for Delta’s debt to Steiner. Several factors influenced the appellate court. Delta had been inadequately capitalized, with no equity capitalization, or unencumbered capital; it had only funds loaned from Maniscalco, and it consistently had negative equity. Delta failed to observe corporate formalities. Despite being required by its bylaws, Delta had no vice president, and had no bona fide officers other than Maniscalco. It failed to document financial transactions, including loans from its owner with no promissory notes. Maniscalco engineered a $600,000 management fee scheme which resulted in the funds going from Maniscalco to Delta to Sackett and then back to Maniscalco. This transaction lacked any documentation and no record of corporate action. The record reflects the transaction’s purpose was income tax avoidance. When Delta was dissolved, corporate action to support its ceasing operations and liquidating was lacking. Delta and Sackett had a joint bank account, which contributed to the court’s finding of a commingling of funds. Another significant factor was that when Delta was dissolved, its list of customers, totaling over 400, and with a value of $200,000, was transferred to a new company run by Maniscalco’s son-in-law for no payment or other consideration to Delta. A related factor found by the court was a failure to maintain an arms-length relationship among related entities and persons.

The appellate court also affirmed the circuit court’s extension of Delta’s liability to Sackett, a separate corporation but co-owned by the same person (Maniscalco). The main factor was that one corporation was merely a dummy or sham for another, such that the two will be treated as one. The management fee of $600,000, running through both corporations, was important evidence supporting this finding. The commingling of funds in a joint bank account was another factor. The appellate court quoted the circuit court’s statement that Maniscalco’s two corporations had a “unity of interest and ownership that the separate personalities of the corporation and the parties who compose it no longer exist.”

Lastly, the appellate court affirmed a finding that adherence to the fiction of a separate corporation, and not allowing piercing of the veil in this case, would promote injustice or perpetuate a fraud or deception. The court found it significant that Maniscalco closed Delta in response to Steiner’s attempts to collect what it was owed, and his stripping of Delta’s assets, leaving nothing for Steiner to obtain. In conclusion, the appellate court held that the circuit court’s decision to pierce the corporate veil and hold Maniscalco and Sackett liable for the judgement against Delta was not against the manifest weight of the evidence.