District Court Holds That Moorman Doctrine Bars A Conversion Claim

Lansing v. Carroll, Dist. Court, ND Illinois 2012 - Google Scholar:

The economic loss or Moorman doctrine bars tort claims where the damages are purely economic.    Moorman Mfg. Co. v. Nat'l Tank Co., 435 N.E.2d 443, 453, 91 Ill. 2d 69, 61 Ill. Dec. 746 (Ill. 1982); Fireman's Fund Ins. Co. v. SEC Donohue, Inc., 679 N.E.2d 1197, 1199, 176 Ill. 2d 160, 223 Ill. Dec. 424 (Ill. 1997).

In this case a dispute arose concerning the provisions of a buy-sell agreement.  The plaintiff brought a conversion claim.  Because the conversion claim sought contract damages, it was barred by the Moorman doctrine. The court concluded that the plaintiff's conversion claim was really a breach of contract claim accompanied by the words "willful" and "wanton."

Moorman often swallows up tort claims in business litigation where the parties also have a contract.  The purpose of Moorman is to prevent clever lawyers from turning every breach of contract into a tort.  Interpreting Moorman is one of the main issues facing business litigators today.

Edward X. Clinton, Jr.

www.clintonlaw.net

'via Blog this'

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Corporate Law - Piercing the Corporate Veil - Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491 (Ill. App. 2nd Dist. 2005)

Fontana v. TLD Builders 362 Ill. App. 3d 491 (Ill. App. 2d Dist 2005).

This is probably the most famous piercing the veil case in Illinois because it pierced the corporate veil and held liable a non-shareholder of the corporation. The result is counter-intuitive, but, is understandable when one considers the underlying facts of the case.

The Fontanas alleged that they entered into a contract with TLD under which TLD agreed to construct a single family home in Clarendon Hills for the sum of $1,475,800.

The Fontanas alleged that TLD breached the contract by failing to construct the home as specified in the contract and "by abandoning all work on the home in February 2001, leaving the home incomplete and uninhabitable."

After a bench trial, the court held that TLD breached the contract and failed to cure the breach. As to damages the court held that it would be too costly to complete the home, so the unfinished home should be demolished. The court held that the Fontanas had been damaged in the amount of $1,271,816.10. The trial court entered judgement against TLD and DiCosloa jointly and severally.

The only relevant appeal from the judgment was that of DiCosola. Plaintiffs alleged that DiCosola was the alter ego of TLD and that, after the lawsuit was filed, he caused TLD to cease its business operations so that it had no funds with which to compensate plaintiffs. DiCosola was not a shareholder of TLD.

Theresa DiCosoloa was called as a witness by the Plaintiffs. Mrs. DiCosola admitted that she was the incorporater of TLD. She could provide no evidence that the corporation had any start-up capital. There was no evidence that she or DiCosola ever paid for the stock issued by the corporation. The purported owner of the corporation, Theresa DiCosola, knew nothing about the corporation, did not sign checks, kept no records and did not know whether the corporation had ever earned a profit or a loss.

Theresa "said that she has never received a dividend from TLD and did not know if TLD had profits or losses in the years, 1998,1999, 2000, 2001 and 2002. However, Theresa did sign TLD's income tax returns for those years." She also admitted that she had no idea where the company's assets of $1.8 million went after the lawsuit was filed.

The company had almost no financial records, and almost no records of payments that it made to vendors and subcontractors.

As a result, the trial court found that "Mr. DiCosola is the dominant force behind this corporation" and that the corporation "was little more than a shell which was established to shield him from liability."

In Illinois a party seeking to pierce the corporate veil has the burden of making a substantial showing that the corporation is really a dummy or sham for another person or corporation. In re Estate of Wallen, 262 Ill. App. 3d 61, 68 (1994). The doctrine "imposes liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person's or entity's business."

The court first rejected the argument that DiCosola could not be held liable because he was not a shareholder. There is authority in Illinois and other states that a non-shareholder can be held liable if the other elements of the test are met.

Illinois uses a two-step test to determine whether the veil should be pierced:

"(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences."

To determine whether the "unity of interest" test has been met courts examine many factors, including (1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (7) commingling of funds; (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors; (10) failure to maintain arm's length relationships amont related entities; and (11) whether, in fact the corporation is a mere facade fro the operation of the dominant stockholders." Jacobson v. Buffalo Rock Shooters Supply, Inc., 278 Ill. App. 3d 1084, 1088 (1996).

Obviously, the factors when analyzed strongly favored plaintiffs:

(1) no evidence of adequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; ... (5) insolvency; (6) no evidence that Theresa functioned as a real officer or director; (7) almost total absence of corporate records.

The Appellate Court affirmed the finding of piercing the veil.

Comment: this case involves a corporation and a shareholder who did almost everything wrong - no capital; no records; no consistent use of the corporate name; no effort to follow corporate formalities and evidence of commingling. The result - personal liability in excess of $1.2 million logically follows when one considers the underlying facts and the underlying transaction and the apparent effort to stiff the plaintiffs and deny them their legitimate recovery.

This case is a lesson to all entrepreneurs that it is not enough to form a corporation - you must use the corporation and treat it as a separate and independent person. You must use the corporate checking account or credit card and keep records of corporate expenses. You must keep your own affairs and accounts separate from those of the corporation. Finally, it is wrong to transfer funds to yourself or others to avoid paying your creditors.

A corporation should not be forgotten once established, but carefully maintained over time.

Edward X. Clinton, Jr.
Copyright 2010

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