Piercing the Architectural Firm’s Corporate Veil
Posted on: February 17, 2016 by Professional Underwriters Agency
Kent Holland, J.D.
The sole shareholder/director/officer of an incorporated architectural firm was held jointly and personally liable to pay a judgment awarded against the corporation. The court found that the corporation was operated as the alter ego of the individual. Among the points cited by the court for piercing the corporate veil were that when it entered into a contract with the real estate developer that subsequently filed suit against it for breach of contract, the firm was grossly undercapitalized and the individual had been using the firm “as a mere instrumentality or as his alter ego. He did not observe the required corporate formalities.”
The court also found that a “fraudulent transfer” took place when, after judgment was obtained against the firm, the individual created a new architectural firm and transferred the old firm’s assets to it. This case is a bit unique due to the reported egregious circumstances, but it certainly provides some useful insight into things a sole owner of a small firm should not do if he or she wants to avoid being tagged with personal liability for actions done under the auspices of the corporation. Green v. Ziegelman, 2015 WL 2142690 (Michigan 2015)
The corporation had represented itself to plaintiffs to be an ongoing concern that was capable of doing the design and construction management for a significant development project. It turned out that the firm had not done any significant work for over fifteen years, and because it had no revenue from operations, the firm was entirely dependent on the individual architect for cash to pay its expenses. The evidence showed that over the years, the architect, in his personal capacity or through another entity, had lent over $630,000 to the corporation to cover its expenses. He never required the firm to execute a note or repay any of the funds. The individual also caused another of his entities to lease space to the corporation for approximately 20 years without any lease and without any payment of rent.
The appellate court affirmed the trial court’s decision to pierce the corporate veil. The court stated, “The fact that [the corporation] was entirely dependent on [individual architect’s] support to continue its operations-such as they were—also strongly suggests … that [the corporation] existed merely to serve as [architect’s] alter ego.” The architect used the firm “to pay his automobile lease and insurance, cell phone bill, travel expense, and used it to purchase thousands of dollars of supplies for his sculpting hobby. He claimed that he intended to sell the sculptures on behalf of his architectural firm, but admitted that he had not sold any sculptures.”
The appellate court stated, “There was also evidence that [architect] had not properly maintained [the corporation’s] corporate formalities over the years. He did not keep minutes for any meetings of shareholders, directors, or officers.” He also did not formalize transactions in which he and another entity loaned money to the corporation. “The lack of formality … suggests that [architect] himself disregarded [the corporation’s] separate existence whenever it was convenient or suited his needs, but asserted its separate existence when it benefited him personally, such as for tax purposes.”
This decision demonstrates the importance of following appropriate protocols and formalities for a corporation, and maintaining required indicia of a corporation to show that it has a viable and genuine existence separate and apart from the individual.
About the author: J. Kent Holland, J.D. is founder and president of a the firm, ConstructionRisk, LLC, providing risk management services for PUA and Arch Insurance Group, as well as to owners, design professionals, contractors and attorneys on construction projects. He is publisher of the ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.
Posted in: Architect Professional Liability