SW Legal studies in Business

When Company Manager Engages in Fraud, Piercing the Corporate Veil May Occur
Description

Appeals court held that where a company shareholder and manager personally misused down payments made by people who expected to have a home built, the manager could be personally liable for the fraud he helped to direct.

Topic Business Organization
Key Words

LLC; Manager; Breach of Contract; Fraud; Liability; Pierce the Veil

C A S E   S U M M A R Y
Facts

Schema Development and Deep River Pointe Development were LLCs formed to buy, finance, and develop a residential real estate subdivision. Longhi was a shareholder in Schema and an officer of both LLCs. He was an architect who met with customers at the development, helped them with designs, and served as liaison between customers and constructors. He was a friend of the Mazzonis and told them he could build them a house in the subdivision for half the normal price. Longhi said that because he was giving them a big discount, they had to make a $50,000 down payment. They did and, in 1996, signed an agreement to have a home built. Two years later, when nothing had happened, the Mazzonis requested their money back. About that time, Longhi was fired. In 1999, they sued Schema for breach of contract and fraud. They also sued Longhi, personally, for taking the $50,000 down payment. Finally, in 2008, the trial court found Longhi personally liable under the doctrine of piercing the corporate veil and under the theory of quantum meruit, awarding Mazzonis treble damages and attorney fees. Longhi appealed.

Decision

Affirmed. To pierce the corporate veil, the plaintiff must show that a corporation is merely an instrumentality that has been misused by fraud or promotes injustice. The plaintiff must show: 1) undercapitalization, 2) absence of corporate records, 3) fraudulent representation by corporate shareholders or directors, 4) use of the corporation to promote fraud, injustice or illegal activities, 5) payment by the corporation of individual obligations, 6) comingling of assets and affairs, 7) failure to observe required corporate formalities, or 8) other acts or conduct ignoring, controlling, or manipulating the corporate form. The evidence shows that the companies here were undercapitalized. Longhi, the manager, can be personally liable for the $50,000 down payment, as construction never began and the deed to the property was never executed. Bank records show that the company raised less than needed to get the development going. Evidence shows that Longhi knowingly misled the Mazzonis and misapplied their funds. That justified awarding treble damages.

Citation Longhi v. Mazzoni, ---N.E.2d--- (2009 WL 3231456, Ct. App., Ind., 2009)

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