Steve Harms

Wednesday, March 30, 2011

Can I go after the officers of a corporation that owes me or my company money?

Honestly, these are low percentage claims. Only in a very extreme or clear violation of law is a court going to give you a judgment against individual corporate officers through piercing the corporate veil, for example.

Client's often turn over claims against corporations to attorneys with expectations that the corporate officers will be held personally accountable for some "fraud" committed due to under capitalization or some perceived wrong doing. To some clients, ordinary non-payment of a debt is a wrong doing or "fraud".
Michigan courts basically follow the principal that only extraordinary circumstances justify a disregarding of the corporate entity.
Even if extraordinary circumstances exist, there are three requirements to pierce a corporate veil, 1) the corporation must be a mere instrumentality of another entity or individual; 2) the corporate entity must be used to commit fraud; 3) the plaintiff must have suffered some unjust loss or injury. Generally when you are talking piercing the corporate veil, you are looking at something like 1) corporation under capitalized; 2) separate books maintained; 3) separation between the individual and corporate finances; 4) corporation used to support fraud or illegality; 5) corporate formalities have been ignored and the company is a sham.
All of these elements are very difficult to prove to a court's satisfaction...for example, extensive financial information would have to be provided, which is usually not available for any number of reasons including a debtor's desire that the financial details somehow got lost!
When a corporation sells its assets to another corporation, the purchasing corporation is generally not liable for the debts and other liabilities of the seller. Although Michigan case law on successor liability is not extensive, a number of exceptions to the general rule have been recognized. A purchasing corporation is liable for the debts and liabilities of the seller where (1) the two corporations consolidate or merge to form a new corporation without making provision for the obligations of the selling corporation; (2) the purchasing corporation expressly or impliedly agrees to pay the debts of the selling corporation; (3) the new corporation merely continues the selling corporation; or (4) the sale is fraudulent and the property of the selling corporation can be followed to the purchasing corporation.

To determine actual intent for fraud, the court looks at certain badges such as 1) transfer of obligation to an insider; 2) debtor retained possession or control of property which was transferred after the transfer allegedly took place; 3) the transfer or obligation was disclosed or concealed; 4) before the transfer was made, the debtor had been sued or threatened with suit; 5) the transfer was of all the assets; 6) debtor absconded; 7) debtor removed or concealed assets.

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