South-Western Legal Studies in Business

Court May Pierce Corporate Veil to Allow Recovery of Debt Under Certain Conditions
Description Appeals court held that a creditor could pierce the veil of a corporation to hold its parent liable for an unpaid debt because the corporation failed to follow the standards expected of a corporation to be treated as an entity.
Topic Business Organization
Key Words Corporations; Pierce the Veil; Parent Corporation; Fraud
C A S E   S U M M A R Y
Facts Plaintiff gave Karen Lynn, a corporation, a ten-year lease for retail space in Chicago. Later, Lynn was in default due to unpaid rent and the court issued a default judgment for $22,000. Plaintiff moved to enforce the judgment, but Lynn had insufficient assets. Plaintiff sued Lynn’s parent corporation and the owners of that corporation, requesting the court to hold them liable for the debt. The trial court dismissed the suit. Plaintiff appealed.

Reversed. Karen Lynn never did anything other than sign the lease. It is owned by Fashion Enterprises, which owns other corporations that also have retail outlets. Karen Lynn only had sufficient capital in it to maintain a bank account. The corporation was dissolved once the default judgment was entered. Fashion Enterprises, its parent corporation, is owned by one person. “A corporate veil will be pierced where (1) there is such unity of interest and ownership that the separate personalities of the corporation and the individual are nonexistent, and (2) the circumstances are such that adherence to the fiction of a separate corporate existence would promote injustice or inequitable consequences.” The court looks to evidence such as inadequate capitalization, failure to observe corporate formalities, insolvency of the debtor corporation, and absence of corporate records. Plaintiff may proceed against the parent corporation to recover the debt for unpaid rent.

Citation Miner v. Fashion Enterprises, Inc., --- N.E.2d --- (2003 WL 21659093, App. Ct., Ill., 2003)

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