Tuesday, April 30, 2019
Wednesday, April 24, 2019
CAN A BREACH OF CONTRACT JUSTIFY CORPORATE VEIL PIERCING?
In a recent North Carolina Business Court decision, the court reviewed whether a breach of contract itself was sufficient to pierce the corporate veil.
Plaintiff Kerry Bodenhamer Farms (KB Farms) and Defendant Nature’s Pearl entered into a written supply agreement for Plaintiff to supply grapes to Nature’s Pearl, a juice manufacturer. The turning point in the relationship was when Nature’s Pearl received a load of grapes which revealed after processing that the alcohol content of the grapes was too high. Nature’s Pearl notified KB Farms that it was not willing to pay for the grapes because they were not of suitable quality. The relationship between the parties worsened and Nature’s Pearl notified KB Farms that it was terminating the supply agreement. KB Farms did not acknowledge the termination and instead continued to supply grapes to Nature’s Pearl. Nature’s Pearl owner Jerry Smith sent a check for the previous load of grapes using the bank account of Le Bleu, another company owned by Smith. KB Farms rejected the check and soon after filed a lawsuit against Nature’s Pearl, Le Bleu, and Smith for breach of contract. KB Farms alleged that Le Bleu and Smith should also be liable because they got involved in the breach of contract when Smith used Le Bleu’s check to pay for the grapes.
In North Carolina, the test for piercing the corporate veil is called the “instrumentality rule.” To pierce the corporate veil the plaintiff must demonstrate that (1) the defendant (either an entity or person) dominated and controlled a corporation; (2) the defendant used that domination and control to perpetrate a fraud or wrong; (3) the defendant’s domination and control was the proximate cause of the wrong. The court held that there was insufficient evidence to pierce the corporate veil under the instrumentality test. In the past, the court only pierced the corporate veil when there were other compelling factors aside from the breach of contract. Typically, there must be some evidence of fraudulent or inequitable conduct; for example, evidence that the entity was created only as a puppet entity to limit its liability or for the purpose of entering into the relevant contract. Another common example would be if all of the entity’s assets have been transferred to render it judgment-proof. Here, KB Farms was unable to demonstrate that either Le Bleu or Smith were otherwise engaged in wrongful conduct that would give rise to liability under the Instrumentality Rule. Thus, the court dismissed Le Bleu and Smith from the case.
What are the takeaways from this case?
Generally, business owners who operate several companies should take special care to observe corporate formalities. Commingling one entity’s assets with another entity’s assets is a significant factor in favor of veil piercing. Here, Le Bleu and Smith narrowly avoided this fate based upon a detailed review of the surrounding facts. A mere breach of contract was not enough to justify piercing the corporate veil, and Smith’s use of another company’s check did not rise to the level of “commingling” in light of all the evidence presented.
Tuesday, April 02, 2019
On March 12, 2019, fifty people were charged in federal court by the U.S. Attorney for the District of Massachusetts for illicitly gaining admission for their children to highly selective universities, including Georgetown, the University of Southern California, Stanford and Wake Forest. Among these fifty people are high profile individuals like actresses Lori Loughlin and Felicity Huffman, CEOs, as well as executives from a major asset manager, an investment firm, and a prestigious law firm.
Their goal was to get their children admitted to prestigious colleges across the U.S. The parents allegedly paid between $200,000 and $6.5 million each for an approximate total amount of $25 million.
The main character in this alleged scheme is William Singer, a college counselor based in Newport Beach, California. He operated The Edge College & Career Network, a for-profit counseling and admissions company, and The Key World Foundation, a nonprofit organization.
To get the children admitted, Mr. Singer would bribe college entrance exam officials, who would either help the kids or change their answers at the end. In other cases, he bribed university coaches, to have applicants recruited as athletes when in reality they had never played or participated in the sport. There are also allegations of third parties taking classes and exams in place of the children, and submission of falsified applications.
The investigation is ongoing but Yale University already took some measures. The University is the first to officially rescind the admission of a student linked to the Admissions Scandal. The student’s parents allegedly paid $1.2 million to get their child into Yale.
On March 25, 2019, the first 12 defendants appeared in a Boston federal courtroom and pleaded not guilty to charges of racketeering conspiracy. More hearings with other defendants are scheduled for the end of March and the beginning of April.