Medina County Courthouse

Tuesday, January 09, 2007

Ninth Appellate District Court of Appeals Decision on Piercing the Corporate Veil

The Ninth Appellate District Court of Appeals, sitting as the Medina County Court of Appeals, recently issued a decision affirming a decision that my court had made. One of the issues raised on appeal was whether the trial court had erred when it pierced the corporate veil to find the defendant personally liable for a corporate debt. The case was Potterschmidt v. Klosterman, 2006-Ohio-6964. The language from the opinion dealing with the issue of piercing the corporate veil is reproduced below. Attorneys who do business litigation will find this opinion interesting. Judge Slaby dissented from the opinion on this point, although on the other issues raised, he agreed with the majority.

{¶34} Appellants assert that the trial court erroneously pierced the corporate veil of the original corporation and the new corporation to hold Dr. Klosterman personally liable to Dr. Pottschmidt.

{¶35} “Generally, shareholders are not liable for the debts of the corporation.” Frechette v. Kovanda (Apr. 18, 2001), 9th Dist. No. 20207, citing Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274, 287. However, creditors of a corporation may “pierce the corporation’s veil” and hold individual shareholders liable when the following three conditions are present: “[T]he corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the Appellees from such control and wrong.” Frechette, at *3, citing Belvedere, 67 Ohio St.3d at 289.

{¶36} We initially acknowledge the cases cited by Appellants that a simple breach of contract is not sufficient to pierce the corporate veil. The trial court found more than a breach of contract here, however, and held that each element of the Belvedere test had been met thus allowing Dr. Pottschmidt to pierce the corporate veil of the new corporation to find Dr. Klosterman personally liable for the judgment rendered. We agree.

A. Alter Ego Doctrine

{¶37} The first prong of the Belvedere test is basically the “alter ego doctrine.” See Willoway Nurseries v. Curdes (Oct. 13, 1999), 9th Dist. No. 98CA007109, at *4. In order to satisfy this requirement, a plaintiff must prove that “the individual and the corporation are fundamentally indistinguishable.” Belvedere, 67 Ohio St.3d at 288. Some of the factors used to determine if this standard has been met include: (1) whether corporate formalities were observed; (2) whether corporate records were kept; (3) whether corporate funds were commingled with personal funds; and (4) whether corporate property was used for a personal purpose. LeRoux’s Billyle Supper Club v. Ma (1991), 77 Ohio App.3d 417, 422-423; Pikewood Manor, Inc. v. Monterrey Concrete Constr., 9th Dist. No. 03CA008289, 2004-Ohio-440, at ¶15.

{¶38} The trial court found that Dr. Klosterman had complete control over both corporations. He was the manager and sole shareholder of both entities. He wrote the paychecks, managed the retirement plan and worked with counsel on all legal matters, including the drafting of legal documents.

{¶39} The record demonstrates that neither Dr. Klosterman nor either of the entities followed corporate formalities in that they did not use the corporate name either on signage or letterhead and did not consistently bill patients or insurance companies in the name of either entity, often issuing billing in the name of Dr. Klosterman, individually.

{¶40} Evidence in the record also establishes that the funds of each corporation and of Dr. Klosterman were commingled. Dr. Klosterman purchased an automobile paying $24,000 in personal funds while titling the vehicle in the name of the original corporation and directing the original corporation to make the car payments and allocate the amount of the payments as income to Dr. Klosterman. The original corporation also depreciated the automobile. After the new corporation was formed, Dr. Klosterman transferred title to the vehicle into his name. Finally, some of the income earned by the original corporation was deposited into the bank account of the new corporation and some of the expenses of the new corporation were paid from the account of the original corporation. Similarly, the original corporation purchased and made payments for equipment and office furniture, which payments were subsequently made by the new corporation, despite the fact that the loan documents and rental agreements related thereto only bound the original corporation for the debt.

{¶41} Finally, it is undisputed that the vehicle was used by Dr. Klosterman personally, although titled in the name of the original corporation.

B. Fraud in Disregard of the Corporate Entity

{¶42} It is undisputed that Dr. Klosterman formed the new corporation one month after the original corporation was sued by Dr. Pottschmidt. It is also undisputed that Dr. Klosterman formed the new corporation to avoid potential liability related to Dr. Pottschmidt’s employment with the original corporation. Finally, it is undisputed that neither the new corporation nor Dr. Klosterman paid any consideration for the assets of the original corporation. While it is not clear the value of the assets of the original corporation, it is undisputed that the original corporation had some accounts receivable that were subsequently collected by the new corporation and that the original corporation possessed equipment and office furniture that is being used by the new corporation. As to the latter, Dr. Klosterman asserts that the value of the office equipment exceeded the debt thereon, which he personally assumed. The appraisal Dr. Klosterman testified that he obtained related to the equipment, however, is not a part of the record.

C. Injury or Loss to Dr. Pottschmidt

{¶43} Finally, the trial court properly found that the final element of the Belvedere test was satisfied because the transfer of all of the original corporation’s assets to the new corporation, without adequate consideration being paid, left the original corporation simply an empty shell and made it impossible for Dr. Pottschmidt to collect the judgment rendered in his favor.

{¶44} Based on the foregoing, we find there was competent, credible evidence before the trial court to support a finding that the corporate veil of the new corporation has been appropriately pierced, rendering Dr. Klosterman liable for the judgment rendered in this action. Appellants’ third assignment of error is overruled.

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