Business Associations, Pages 426–431

Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc.

United States Court of Appeals for the Fourth Circuit, 1992
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Facts:

Michaelson formed MPI to enter into joint real estate ventures. He was the president and sole shareholder. It then entered into two partnerships, BAA and AAA, with plaintiff PRES to convert apartment buildings into condominiums. For AAA, both corporations contributed $50,000 and agreed to share pro rata in satisfying any liabilities of the partnership. AAA also borrowed $24 million from PRES's parent corporation, but only after the Michaelsons agreed to personally guarantee repayment of $750,000 of it. When it needed an additional $2.1 million, MPI could not come up with its share, so PRES loaned MPI $1.05 million after the Michaelsons again gave a personal guarantee of repayment.

Several condo purchasers sued AAA for breach of warranty claims and it settled for $950,000, which PRES fully paid itself. PRES then filed this suit against Michaelson and MPI, seeking indemnity.

Procedural History:

The district court entered summary judgment on the indemnity claim against MPI. At trial, the jury returned a verdict in plaintiff's favor of veil piercing which the district court upheld.

Defendant's Argument:

The jury instruction misstated the standard for veil piercing. Under the correct standard, defendant is entitled to judgment as a matter of law.

Issues:

  • What is the appropriate standard for veil piercing?

  • Is defendant entitled to judgment as a matter of law on veil piercing?

Rule/Holding:

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[P]laintiff bears the burden of convincing the court to disregard the corporate form, and must first establish that "the corporate entity was the alter ego, alias, stooge, or dummy of the individuals sought to be charged personally." This element may be established by evidence that the defendant exercised "undue domination and control" over the corporation . . . .

[P]roof that some person "may dominate or control" the corporation, or "may treat it as a mere department, instrumentality, agency, etc." is not enough to pierce the veil. In Virginia, "something more is required to induce the court to disregard the entity of a corporation." Hence, plaintiff must also establish "that the corporation was a device or sham used to disguise wrongs, obscure fraud, or conceal crime."

Reasoning:

  • The jury standard in this case correctly described the alter ego element but failed to communicate the requirement that the defendant used the corporation to "disguise" some legal "wrong."

  • Ordinarily, an incorrect instruction would require the case to be remanded for a new trial, but here, PRES is unable to raise a trial issue with respect to piercing the corporate veil. The district court pointed to several factors to justify such action, such as that Michaelson was the sole shareholder and director of MPI, that corporate formalities were not followed, and that capitalization was not adequate.

    However, even if MPI was Michaelson's alter ego, the district court found that Michaelson did not use it "obscure fraud" or "conceal crime." Thus, to satisfy the second element, a reasonable jury must have been able to find that Michaelson used MPI to "disguise wrongs," which PRES has failed to show. PRES had a longstanding contractual relationship with MPI, fully understanding its structure and capitalization. PRES still distributed money to MPI without limitation or complaint when it distributed it to Michaelson.

    PRES understood the risk MPI posed, as shown by its requirement of guarantees of very specific amounts, yet it still contracted with it in the partnership without a personal guarantee. It is not the courts' place to restructure the parties' agreement.

Holding:

Defendant is not entitled to pierce MPI's corporate veil. Reversed.