The Illinois Appellate Court for the First District has affirmed a judgment that pierced the corporate veil of a closely held corporation and then awarded the plaintiff attorney fees connected to this litigation. The case was reported to be one of first impression in Illinois.
Steiner Electric sold electrical products on credit to Delta Equipment Co., a corporation wholly owned by an individual, Leonard Maniscalco. Although there were many attempts to collect payment, Steiner finally sued Delta and obtained a default judgment for the purchase price plus interest, attorney fees and costs. By the time judgment was entered, Delta no longer existed. Steiner filed suit against Maniscalco and Sackett Systems Inc., another corporation wholly owned by Maniscalco. That lawsuit sought to pierce Delta’s corporate veil and hold both Maniscalco, individually and Sackett Systems Inc., liable for the default judgment.
Steiner was successful in proving that it was entitled to pierce the veil wherein both Maniscalco and Sackett Systems appealed from that order.
Steiner also asked the trial court to award it attorney fees that were associated with its efforts to pierce the corporate veil of Delta Equipment Co. The trial judge denied Steiner’s request and Steiner appealed that ruling. The two appeals were consolidated.
The Illinois Appellate Court’s decision explained when the veil of an Illinois corporation may be pierced. The court stated that the veil of an Illinois corporation is pieced when there is such a unity of interest that the separate personalities of the corporation and the parties who compose it no longer exist. Treating it as a separate corporation would promote injustice.
The court wrote that generally many factors impact whether the “unity of interest” prong of the piercing test is met. Those factors include: “(1) Inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm’s-length relationships among related entities; and (11) whether, in fact, the corporation is a mere façade for the operation of the dominant stockholders.”
The Illinois Appellate Court affirmed the trial judge’s judgment that piercing was proper because the evidence showed that many of these factors were present including inadequate capitalization, the failure to follow corporate formalities, the absence of corporate records on certain significant matters, the commingling of funds, the diversion of assets to the detriment of creditors and the failure to maintain an arm’s length relationship among related entities.
Importantly, the court ruled that Delta “was a mere instrumentality or dummy for Sackett.” The court noted that Maniscalco controlled and was the sole shareholder and president of both Delta and Sackett. It was found that he transferred money between them and also with him without any proper documentation, commingled the funds of the two companies in a joint account and used Delta’s funds to pay himself management services for Delta and Sackett that he apparently did not provide.
The court concluded that the trial court’s judgment that Sackett’s and Maniscalco’s alter ego was not against the manifest weight of the evidence. In addition, it was stated that Maniscalco “slowly had stripped Delta” of its financial assets, closed Delta when Steiner refused to give up its right to payment and engaged in a management fee scheme to evade taxes.
What turned out to be the most important part of this decision perhaps was the fact that the Illinois Appellate Court reversed the trial court’s refusal to give Steiner an award of attorney fees that Steiner incurred in its suit to pierce the corporate veil. The court noted that neither side had cited an Illinois case on this point and that in its own research had uncovered none. Thus, the court considered this question one of first impression. The credit agreement that Steiner and Delta had entered into included a clause that all reasonable costs of collection, including attorney fees and expenses, would be a condition of the sale. In addition, the same agreement contained a provision stating that: “The customer shall be responsible for all costs of collections incurred by company, including without limitation, lien costs and all attorney fees and expenses.”
At the trial court level, the judge refused to award attorney fees because it could not find authority for granting them. The appellate court was persuaded by other cases where there was an award of plaintiff’s legal fees incurred in the litigation pursuing the piercing of the veil of the corporation. There was an attorney fee provision in the underlying contract between the plaintiff and its original debtor. The court was persuaded by those cases and held that:
“A party who prevails in an action to pierce the corporate veil of a corporation may recover the attorney fees and costs incurred in that action when the contract underlying the judgment authorized an award of fees for enforcing the judgment against the corporation.”
In this situation where the corporate form is pierced, the alter ego should be considered bound to any contract the corporation made just as if the alter ego had entered into that corporation itself. That would include being bound by the attorney-fee provision in the party’s contract. For those reasons, not only was the corporate veil pierced, but attorney fees were awarded.
Steiner Electric Co. v. Leonard Maniscalco and Sackett Systems, Inc., 2016 IL App (1st) 132023 (March 2, 2016).
Kreisman Law Offices has been handling business litigation, corporate litigation, catastrophic injury cases, civil jury trials and commercial litigations for individuals, families and businesses for more than 40 years in and around Chicago, Cook County and its surrounding areas, including St. Charles, Winfield, Lemont, Romeoville, Joliet, Elgin, Aurora, Flossmoor, Homewood, Highwood, New Lenox, Crete, Naperville, Elk Grove Village, Country Club Hills, Elgin, Joliet, Waukegan and Winnetka, Ill.
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