Court should decide corporate veil issue

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Where state law requires a finding that a corporate veil must be pierced to prevent injustice or inequity, the decision whether to pierce the veil is for the court to decide, rather than the jury, the Seventh Circuit held on Jan. 23.

The doctrine allows an individual or entity to be liable for purely corporate obligations, where the corporation is merely an alter ego of the individual or other entity.

The International Financial Services Corporation finances printing presses. It sued various defendants in Illinois federal court for breach of a contract to produce a printing press, and for fraud.

A jury made three findings: defendant Chromas Technologies Canada, Inc., was the alter ego of defendant Didde Web Press Corp; Chromas was liable for breach of contract; but Chromas was not liable for fraud. The jury also set damages against Chromas at more than $1 million.

Chromas appealed, arguing that the damages were excessive and that the decision whether to pierce the corporate veil under an alter ego theory should have been made by the court, rather than the jury.

The Seventh Circuit agreed, and vacated the judgment, in a decision by Judge Daniel Manion, with instructions to the district court to decide whether to disregard the corporate entity, and reduce the damages if it so found.

Seventh Amendment

The Seventh Amendment limits the right to a jury trial to “suits at common law, where the value in controversy shall exceed twenty dollars.” Thus, International had a right to a jury on its claims.

However, the court must make the decision as to any issue in equity, rather than law. Accordingly, the court framed the issue as whether piercing the corporate veil under Illinois law is a form of equitable relief.

Illinois Law

Illinois permits a plaintiff to disregard the corporate entity of a defendant because the targeted corporation is merely an alter ego of the dominating personality, if the plaintiff proves two elements: there is such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and circumstances are such that adhering to the fiction of a separate corporate existence would promote injustice or inequity.

The court concluded that piercing the corporate veil is a form of equitable relief, stating, “piercing of the corporate veil on an alter ego theory is available only where failing to provide such relief would promote injustice or inequity. It follows that veil-piercing must be an exercise of equitable power. It is also significant that veil-piercing under Illinois law is a matter of discretion, not of right, and that the remedy of piercing the corporate veil does not itself result in money damages. Each of those observations militates toward the conclusion that veil-piercing is an equitable power.”

The court acknowledged that determining whether there is such unity of interest that the separate personalities of the corporation and individual no longer exist is essentially a question of fact.

The court stated, “Deciding this question of fact depends on whether there was inadequate capitalization, a failure to observe corporate formalities, commingling of funds, an absence of corporate records, etc., and a jury is arguably capable of resolving such issues (cite omitted).”

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However, the court added, “the balance of the veil-piercing analysis — deciding whether adhering to the fiction of a separate corporate existence would promote injustice or inequity — is the type of equitable determination that a jury is not to decide.”

Accordingly, the court held that, notwithstanding the factual questions, the doctrine of piercing the corporate veil is essentially an equitable doctrine not amenable to determination by jury.

Because the jury provided the equitable relief in this case, the court held the relief invalid as a matter of law, and reversed.

Damages

The court also reversed the award of damages. International claimed it had suffered damages of only $949,650. However, the jury awarded $1,099,277.

The court concluded that the award thus had no rational basis, and instructed the trial court to enter an award in the lower amount, should it decide to pierce the corporate veil on remand.

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David Ziemer can be reached by email.