Hart v. Steel Products, Inc.
1996 WL 355330, 1996 Ind. App. LEXIS 828, 666 N.E.2d 1270 (1996)
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Rule of Law:
A court may pierce the corporate veil to hold a sole shareholder personally liable for a corporation's contractual obligations when an agent of the corporation commits fraud to induce the contract and the corporation was severely and consistently undercapitalized, as allowing the shareholder to benefit from the fraud would constitute a manifest injustice.
Facts:
- In 1990, Paul Hart, a veterinarian, sold his practice and began looking for a business to purchase.
- In January 1991, Hart became interested in Steel Products, Inc., a company solely owned by Katherine Seales and managed by Alvah Rochon.
- Hart made an offer contingent on reviewing financial records. Rochon provided documents for 1987-1989 showing fluctuating performance, but this initial offer expired.
- Prior to April 11, 1991, Rochon authorized the company's accountant to show Hart the 1990 financial information.
- The initial 1990 federal tax return and financial statements shown to Hart indicated an ordinary income of $176,301.94.
- Relying on this information, Hart made a new offer on April 11, 1991, to purchase the assets of Steel Products, and the deal closed on May 1, 1991.
- In April 1993, Hart discovered that an amended 1990 federal income tax return had been filed for Steel Products.
- Hart obtained the amended return from Seales, which revealed that Steel Products had actually sustained a loss of $4,344.76 in 1990, not a large profit.
Procedural Posture:
- Paul and Linda Hart filed suit against Katherine Seales, Alvah Rochon, and Steel Products, Inc. in an Indiana trial court.
- The Harts alleged fraud and sought rescission of the purchase contract and punitive damages.
- The Defendants filed a counterclaim, alleging that the Harts had failed to make payments on promissory notes related to the sale.
- Following a bench trial, the trial court found in favor of the Harts, ruling that fraud had been committed.
- The trial court ordered the contract rescinded and entered a judgment of $215,114.56 against Katherine Seales individually, piercing the corporate veil.
- Defendants (Seales, Rochon, and Steel Products) appealed the trial court's judgment to the Indiana Court of Appeals.
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Issue:
Is it appropriate to pierce the corporate veil and hold a sole shareholder personally liable for a corporation's fraudulent misrepresentation when the corporation was severely undercapitalized and the shareholder benefited from the fraud?
Opinions:
Majority - Chezem, J.
Yes, it is appropriate to pierce the corporate veil under these circumstances. Although Indiana courts are reluctant to disregard the corporate entity, the corporate form will be disregarded to prevent fraud or unfairness. To pierce the veil, a plaintiff must show that the corporate form was so ignored or manipulated that it was merely an instrumentality of another and that misuse of the corporate form would constitute fraud or promote injustice. Here, Rochon, acting as an agent of Steel Products, committed fraud by misrepresenting the company's 1990 income, which induced Harts to purchase the assets. The court found this fraudulent conduct alone was sufficient to hold Seales, the sole shareholder and beneficiary of the sale, personally liable. Furthermore, the court found that Steel Products was significantly and continuously undercapitalized throughout its existence, a key factor weighing in favor of piercing the veil. Allowing Seales to hide behind the corporate form to retain the proceeds of a sale based on fraudulent figures would work a manifest injustice.
Analysis:
This case illustrates a classic application of the equitable doctrine of piercing the corporate veil. It reinforces that the protection of limited liability is not absolute and can be forfeited, particularly in closely-held corporations where fraud and undercapitalization are present. The decision emphasizes that even a passive sole shareholder who benefits from a fraudulent transaction orchestrated by their agent can be held personally liable. This holding serves as a deterrent against using underfunded corporate structures as instruments of fraud, clarifying that courts will look past the corporate form to prevent unjust enrichment and ensure a fair remedy for the defrauded party.
