Theberge v. Darbro, Inc.
undisclosed (1996)
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Rule of Law:
Courts will not pierce the corporate veil in a breach of contract case to hold shareholders personally liable for corporate debts, even if corporate formalities were disregarded, when the plaintiffs are sophisticated parties who understood but failed to obtain a personal guarantee, and there is no evidence of illegality or fraud.
Facts:
- Thomas and Michael Theberge sold seven rental properties to the Worden Group, who in turn executed a $180,000 promissory note to the Theberges.
- Darbro, Inc., a corporation controlled by Albert Small and his family, negotiated to purchase the properties from the Worden Group.
- Prior to closing, the Worden Group was informed that a newly formed corporation, Horton Street Associates (also controlled by the Smalls), would be the actual purchaser instead of Darbro.
- Horton Street Associates assumed the $180,000 promissory note to the Theberges; however, the Theberges did not release the Worden Group from liability.
- Horton Street Associates maintained no corporate records, had no separate offices or employees, and commingled its business with other entities controlled by Albert Small.
- During negotiations, representations were made to the Worden Group that Albert Small was a person of financial substance who would 'stand behind' the transactions, but he did not sign a personal guarantee for the Theberge note.
- After Horton Street began losing money, Albert Small personally negotiated a deal with the primary lender, Casco Northern Bank, which resulted in Darbro acquiring the first mortgage, foreclosing on the properties, and extinguishing the Theberges' second mortgage.
Procedural Posture:
- The Theberges and the Worden Group filed a lawsuit against Darbro, Inc., Albert Small, and Mitchell Small in the Superior Court of Androscoggin County, a state trial court.
- The plaintiffs sought a judgment to hold the defendants personally liable on a promissory note defaulted on by Horton Street Associates, arguing that Horton Street was the defendants' alter ego.
- After a nonjury trial, the trial court found in favor of the plaintiffs, concluding that the defendants should be equitably estopped from asserting Horton Street's corporate status as a defense and pierced the corporate veil.
- The trial court entered a judgment holding the defendants liable to the plaintiffs for the outstanding balance on the promissory note.
- The defendants (Darbro, Inc., Albert Small, and Mitchell Small) appealed this judgment to the Supreme Judicial Court of Maine.
- The plaintiff Worden Group cross-appealed the trial court's denial of their claim for attorney fees.
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Issue:
Does the disregard of corporate formalities combined with oral representations that a shareholder would 'stand behind' a corporate obligation justify piercing the corporate veil to impose personal liability, when the creditors are sophisticated parties who failed to secure a formal personal guarantee and the shareholder's actions did not constitute fraud or illegality?
Opinions:
Majority - Glassman, Justice
No. The corporate veil should not be pierced because courts apply more stringent standards in contract cases where sophisticated parties have the opportunity to negotiate for personal guarantees. The plaintiffs were sophisticated real estate investors who understood the significance of a personal guarantee but failed to obtain one from the defendants for the Theberge note, although they successfully secured one from Albert Small on a different, smaller note. The defendants' conduct was characterized as 'shrewd' and employing 'sharp business practices,' but the trial court found no evidence of illegality or fraud. The court will not rewrite a contract to give a party a benefit, like a personal guarantee, that they failed to bargain for themselves.
Dissenting - Lipez, Justice
Yes. The trial court's decision to pierce the corporate veil should be upheld because Horton Street was a mere shell with no independent substance, and its corporate form was used to perpetrate an injustice. The record supports the trial court's finding that Albert Small's agent made misrepresentations that Small would personally stand behind the deal, which misled the plaintiffs into believing their investment was secure. When a creditor is misled, the rationale for applying a stricter standard in contract cases is diminished. Disregarding the corporate entity is appropriate when it is used to 'justify a wrong,' and it was inequitable for Small to disregard Horton Street's corporate form for his own benefit and then invoke its status as a shield against liability.
Analysis:
This decision solidifies a high threshold for piercing the corporate veil in contract disputes involving sophisticated parties in Maine. It emphasizes that the failure to secure a formal personal guarantee is a significant, often dispositive, factor against piercing. The ruling suggests that even substantial disregard for corporate formalities and informal assurances may be insufficient to impose shareholder liability without clear evidence of fraud or illegality. This case serves as a strong precedent favoring the principle of limited liability and places the burden on contracting parties to protect their own interests through explicit contractual terms rather than relying on equitable remedies from the court.
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