Posted on July 30, 2018 in Business Law
In Clientron Corp. v. Devon IT, Inc., 2018 WL 3293212 (3rd Cir. 2018), the Third Circuit Court of Appeals found that Appellant failed to establish under Pennsylvania law that shareholders were alter ego of Appellee and thus Appellant was not entitled to pierce Appellee’s corporate veil as reparations for a business tort. In addition, the Court held that the corporate veil could not be pierced as a discovery sanction against one shareholder to hold him personally liable for part of the judgment.
Appellant, a computer component manufacturer brought action against an insolvent Pennsylvania corporation seeking to enforce a $6.5 million arbitration award obtained in Taiwan pursuant to the Pennsylvania Uniform Foreign Money Judgment Recognition Act (“UFMJRA”). The District Court for the Eastern District of Pennsylvania declined to pierce the corporate veil to hold shareholders jointly liable thereby erasing the $6.5 million award obtained by manufacturer. The manufacturer appealed.
Although Pennsylvania law recognizes a strong presumption against piercing the corporate veil, factors weighing in favor include: “failure to observe corporate formalities, non-payment of dividends, insolvency of the debtor corporation at the time, siphoning of funds of the corporation by the dominant shareholder, non-functioning of other officers or directors, absence of corporate records, and the fact that the corporation is merely a façade for the operations of the dominant stockholder or stockholders.”
Appellant attempted to show that shareholders use of credit cards for personal use, loans from Appellee to individual shareholders, and money transfers to personal accounts of shareholders’ other companies amounted to a lack of adhering to corporate formalities. The Court found, however, that the evidence was insufficient because “lack of formalities in a closely-held corporation does not often have as much consequence as where other corporations are involved”. Therefore, the Court held that Appellants evidence was insufficient to overcome Pennsylvania’s strong presumption against piercing the corporate veil.
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