Indiana courts will not pierce the corporate veil absent a causal connection between the misuse of the corporate form and fraud or injustice. In CBR Event Decorators v. Gates, 962 N.E.2d 1276 (Ind. Ct. App. 2012), the court refused to pierce the corporate veil and hold the shareholders personally liable, as the plaintiff had failed to establish such causal connection. In Gates, defendants agreed to invest in a company that the plaintiff had loaned money to but had never been repaid. Prior to investing in the company, the defendants formed a limited liability company (LLC), to which the plaintiff was informed of the LLC formation. After investing in the company, the defendants entered into a purchase agreement with the plaintiff for the sale plaintiff’s business assets. After the purchase agreement was signed by both parties, the defendants learned of defects in their investment company. Upon learning of the company’s status, the investors requested to renegotiate the contract and stop-payment on the down payment submitted to plaintiff after signing the purchase agreement. Plaintiff rejected the proposed terms of a new purchase agreement and demanded the stop-payment not be placed on the check. The shareholders eventually placed a stop-payment on the check and the plaintiff sued, claiming the corporate veil should be pierced because of misrepresentation and fraud on the part of the shareholders.
Generally, corporate shareholders are liable for the acts of the corporation only to the extent of their investments and are not held personally liable for the corporation’s acts. However, if a court finds that the corporate form has been misused and that such misuse resulted in fraud or injustice, the court will piece the corporate veil. In Gates, the court stated that absent a finding that the shareholders formed the company with intent at the time of formation to later breach the purchase agreement and hide behind the shield of limited liability, there was no fraud or injustice flowing from misuse of the corporate form. The court noted that a causal connection between the misuse of corporate form and fraud or injustice was essential to the court’s analysis. As a result, the court did not hold the shareholders personally liable to the plaintiff for the corporation’s acts.
Jeremy Fetty is a partner in the law firm of Parr Richey Frandsen Patterson Kruse with offices in Lebanon and Indianapolis. He often advises businesses and utilities (for profit, non-profit and cooperative) on organizational, human resources, and transactional matters and drafts and reviews commercial contracts.
The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.