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USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 97-1133
SANDRA CRANE, FUND MANAGER,
Plaintiff, Appellant,
v.
GREEN & FREEDMAN BAKING COMPANY, INC., ET AL.,
Defendants, Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge] ___________________
____________________
Before
Selya, Circuit Judge, _____________
Coffin and Campbell, Senior Circuit Judges. _____________________
____________________
David C. Jenkins, with whom Matthew E. Dwyer, Christine L. __________________ _________________ _____________
Nickerson and Dwyer & Jenkins, P.C. were on brief for appellant. _________ _____________________
Adam S. Elman for appellees. _____________
____________________
January 20, 1998
____________________
CAMPBELL, Senior Circuit Judge. The terms of a _____________________
collective bargaining agreement required Green & Freedman
Baking Company, a Massachusetts corporation, to make periodic
payments on behalf of its unionized drivers to the New
England Teamsters and Baking Industry Health Benefits and
Insurance Fund. After experiencing financial difficulties,
Green & Freedman ceased to make the agreed-upon contributions
and transferred all remaining assets to a successor entity
named Boston Bakers, Inc. The Fund Manager of the Health
Benefits and Insurance Fund (referred to hereinafter as the
"Health Fund") thereupon sued Green & Freedman, Boston Bakers
and the two corporations' principals, Richard Elman and
Stanley Elman, in the district court to recover the payments
owed by Green & Freedman with interest, costs and penalties.
Both corporate defendants conceded liability for
the delinquent contributions owed by Green & Freedman to the
Health Fund. The Elmans, however, denied they were
personally liable for these corporate debts, and a jury trial
took place to determine that issue. After the presentation
of evidence, and before submission to the jury, the district
court entered judgment as a matter of law in favor of the
Elmans, pursuant to Federal Rule of Civil Procedure 50(a).
The Health Fund appeals. We affirm in part and reverse in
part.
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I. Background __________
Defendant-Appellee Green & Freedman Baking Company
("Green & Freedman") was a family-owned Massachusetts
corporation formed in 1934 that produced and sold baked goods
until, on January 15, 1993, its remaining assets were
transferred in bulk to Appellee Boston Bakers, Inc. ("Boston
Bakers"). Boston Bakers operated essentially the same
business as Green & Freedman until its demise in 1995.
Starting in 1975, responsibility for Green &
Freedman's affairs rested with Defendants-Appellees Stanley
Elman and Richard Elman, grandsons of one of the company
founders. Stanley Elman started working for Green & Freedman
in 1959 and by 1969 became its treasurer and a director,
positions he occupied through the end of the corporation's
and its successor's existence. Richard Elman began with
Green & Freedman in 1964 and served as its President and a
director from 1975.
Prior to transferring its assets to Boston Bakers
as of January 15, 1993, Green & Freedman employed between 12
and 18 truck drivers who were members of the Bakery Drivers
and Helpers Local 494. The union drivers' wages, hours, and
conditions of employment were governed by a collective
bargaining agreement between the Union and Green & Freedman,
effective from May 5, 1991 to May 1, 1994. That agreement
required Green & Freedman to contribute $88 per week for
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every covered worker to the New England Teamsters and Baking
Industry Health Benefits and Insurance Fund. The Health
Fund's contractual right to contribution was additionally
protected by 515 of the Employee Retirement Income Security
Act ("ERISA"), 29 U.S.C. 1145 (1985), which doubles the
obligation of any employer who promises in a collective
bargaining agreement to make contributions to a multiemployer
benefits or pension plan.
From 1991, Green & Freedman began to suffer what
the Elmans described as a serious, and ultimately
irreversible, decline in sales and profits. Beginning in
April 1992, and continuing until its business was terminated
in January 15, 1993, Green & Freedman stopped making its
required contributions to the Health Fund. Green &
Freedman's unpaid contributions for this period, totaling
$39,776, are the basis for the liability the Health Fund
seeks to impose in this action.
By December 1992, the Elmans had decided to
transfer all of Green & Freedman's assets to a newly-formed
corporate shell entitled Boston Bakers, Inc., pursuant to the
bulk transfer provisions of the Massachusetts Uniform
Commercial Code. See Mass. Gen. Laws ch. 106, 6-101 to 6- ___
110 (1990), repealed, Mass. Acts 1996 ch. 160, 3 (1996).1 ________
____________________
1. Although repealed in 1996, the former Massachusetts
U.C.C. Article 6 still applies to bulk transfers that, like
the Boston Bakers transaction, occurred prior to the repeal.
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Boston Bakers was simply a continuation of Green &
Freedman's business. Its nominal and sole shareholder was
Claire Lank, a long-time Green & Freedman employee installed
by the Elmans. The Elmans were designated as the new
corporation's officers and, along with their wives, as its
directors. A voting trust with Lank enabled the Elmans to
continue exercising complete control of Green & Freedman's
assets, once transferred, in the form of Boston Bakers.
The bulk transfer shifted all of Green & Freedman's
assets, which were then worth somewhere between $480,000 and
$500,000, to Boston Bakers. In exchange, Boston Bakers
assumed Green & Freedman's secured debt. The secured debt,
which totaled $498,498.17, was owed to two secured creditors:
U.S. Trust, the company's institutional lender, and the 75
Old Colony Avenue Realty Trust (the "Realty Trust"), a real
estate trust that owned the company's plant for the benefit
of the Elmans. U.S. Trust held a security interest in all of
Green & Freedman's property, both then-owned and thereafter
acquired, while the Realty Trust held a mortgage on the
plant.
As part of the bulk transfer, Boston Bakers gave
Green & Freedman a promissory note, which Boston Bakers held
for the benefit of Green & Freedman's unsecured creditors,
worth $32,798.99. That amount left the unsecured creditors,
____________________
See 1996 Mass. Acts ch. 160, 5. ___
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including the Health Fund, with claims worth roughly five
cents on the dollar.
As required by law, Green & Freedman, after some
hesitation, announced the bulk transfer to creditors in late
December 1992 and provided a list of its assets. See Mass. ___
Gen. Laws ch. 106, 6-104 to 6-106, repealed, Mass. Acts ________
1996 ch. 160, 3. The Health Fund responded by bringing
this action in the federal district court which, in its
initial form, sought, inter alia, a preliminary injunction _____ ____
against the transfer of Green & Freedman's assets, alleging
the transfer to violate ERISA 515, 29 U.S.C. 1145. On
January 12, 1993, the district court denied injunctive
relief. Three days later, the bulk transfer was consummated.
Boston Bakers thereafter carried on business in the
same manner as Green & Freedman. Employing the same workers
and equipment at the same plant, it produced the same kinds
of baked goods for the same customers. Boston Bakers was as
unprofitable as Green & Freedman. After two-and-a-half years
of continued difficulties, U.S. Trust foreclosed, and Boston
Bakers closed its doors in August 1995. According to Richard
Elman's testimony, which was not contradicted, the Elmans
personally received no distribution in settling the company's
affairs.
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Following the liquidation of Boston Bakers' assets,
the Health Fund filed an amended complaint2 seeking recovery
of the delinquent contributions from both corporations, and
from Richard Elman and Stanley Elman as well. As Green &
Freedman had done previously, Boston Bakers conceded
liability for the contributions Green & Freedman failed to
make to the Health Fund from April 1992 until the bulk
transfer on January 15, 1993. With the assets of both Green
& Freedman and Boston Bakers completely liquidated, the
Health Fund looked to the Elmans personally for recovery of
Green & Freedman's delinquent contributions. Count 3 of the
Health Fund's Second Amended Complaint alleged that the
Elmans were personally liable as the "'alter egos' of Green
and Freedman." Count 4 premised the Elmans' personal
liability on their disregard for Boston Bakers' corporate
identity, alleging that the Elmans completely controlled
____________________
2. An amended complaint dated March 1, 1995, was superseded
by a Second Amended Complaint dated July 14, 1995. In both
complaints, the Health Fund sought recovery for Green &
Freedman's defaulted payments due under the collective
bargaining agreement for the period April 1992 through
January 15, 1993, totaling $39,770, exclusive of interest,
costs and liquidated damages. Recovery from Green & Freedman
was sought under the contract, and from Boston Bakers on the
theory that, as a successor entity to Green & Freedman,
Boston Bakers was obligated to remit the latter's delinquent
contributions. Recovery from the two Elmans personally was
sought because they were allegedly "alter egos" of Green &
Freedman, and because they allegedly established Boston
Bakers with fraudulent intent, exercised complete control
over it (although owning no stock), and disregarded its
corporate identity.
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Boston Bakers and created it with fraudulent intent. Both
parties requested a trial by jury.
At trial, the Health Fund called Stanley Elman,
Richard Elman, and Richard's wife, Barbara Elman as
witnesses. Counsel for the Elmans declined cross-examination
at the time, planning to call the Elmans later as their own
witnesses. The Health Fund also introduced the deposition
testimony of Claire Lank, who had served as Green &
Freedman's secretary before being installed as Boston Bakers'
nominal shareholder. In addition, the parties stipulated to
the admission of many documents recording the collective
bargaining agreement, the creation of Boston Bakers, and the
operation of Green & Freedman.
At the close of the Health Fund's case-in-chief,
the Elmans moved for judgment in their favor as a matter of
law pursuant to Rule 50(a). The district court granted the
motion with respect to Count 3 and the liability of Green &
Freedman, ruling that the Health Fund had failed to meet the
criteria stated in Alman v. Danin, 801 F.2d 1 (1st Cir. _____ _____
1986), for corporate veil-piercing in an ERISA case. The
court left open for the time being the Health Fund's claim
that the Elmans were personally liable for Boston Bakers'
liability.
The defense then called as its only witness Richard
Elman, who testified about the creation and operation of
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Boston Bakers. The Elmans renewed their motion for judgment
as a matter of law. Again relying on Alman, the district _____
court allowed the motion.
The Health Fund now appeals from the district
court's grant of judgment as a matter of law.
II. Standard of Review __________________
To review a grant of judgment as a matter of law,
we stand in the district court's shoes and may affirm only if
the evidence did not furnish a "legally sufficient basis for
a reasonable jury to find" for the non-moving party. Fed. R.
Civ. P. 50(a)(1); see also Coyante v. Puerto Rico Ports _________ _______ __________________
Auth., 105 F.3d 17, 21 (1st Cir. 1997). This standard _____
requires more than "a mere scintilla" of evidence in the non-
moving party's favor. Fashion House, Inc. v. K Mart Corp., ___________________ ____________
892 F.2d 1076, 1088 (1st Cir. 1989). Every reasonable
inference, however, must be drawn in favor of the non-moving
party. See Favorito v. Pannell, 27 F.3d 716, 719 (1st Cir. ___ ________ _______
1994).
In the instant appeal, we must decide whether there
was a legally sufficient basis in the evidence presented for
a reasonable jury to have pierced the corporate veils and to
have imposed personal liability on the two Elmans for the
conceded indebtedness to the Health Fund of both companies.
The legal standard for when it is proper to pierce
the corporate veil is notably imprecise and fact-intensive.
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Leading commentators state that "no hard and fast rule as to
the conditions under which the [corporate] entity may be
disregarded can be stated as they vary according to the
circumstances of each case," William M. Fletcher, 1 Fletcher ________
Cyclopedia of the Law of Private Corps. 41.30, at 662 (1990 _______________________________________
rev. ed.), and, more skeptically, that "[t]here is a
consensus that the whole area of limited liability, and
conversely of piercing the corporate veil, is among the most
confusing in corporate law," Frank H. Easterbrook & Daniel R.
Fischel, Limited Liability and the Corporation, 52 U. Chi. L. _____________________________________
Rev. 89, 89 (1985).
Because a rigid test could not account for all the
factual variety, the federal common law standard adopted in
our Circuit for measuring an ERISA plaintiff's veil-piercing
claim is somewhat open-ended. We said in Alman that courts _____
should consider "the respect paid by the shareholders
themselves to [the] separate corporate identity; the
fraudulent intent of the [individual defendants]; and the
degree of injustice that would be visited on the litigants by
recognizing the corporate identity." Alman, 801 F.2d at 4. _____
Of these three elements, "a finding of some fraudulent intent
is a sine qua non to the remedy's availability." See United ___ ______
Elec., Radio and Machine Workers v. 163 Pleasant Street ___________________________________ ____________________
Corp., 960 F.2d 1080, 1093 (1st Cir. 1992). _____
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Before examining the district court's Rule 50(a)
ruling in light of these criteria, we need to consider yet
another problem. The ERISA cause of action under which the
Health Fund sued here, ERISA 515(a)(1)(3), authorizes only
injunctive or "other appropriate equitable relief." 29 _________
U.S.C. 1132(a)(1)(3) (emphasis added). Courts have
interpreted this cause of action as providing no right to a
jury trial, even when the relief sought is monetary. See, ____
e.g., Spinelli v. Gaughan, 12 F.3d 853, 855 (9th Cir. 1993). ____ ________ _______
As a result, Alman and other federal precedent were bench _____
proceedings in which the judge determined both the law and
the facts. No consideration was given to the separate
responsibilities of judge and jury in the applying of veil-
piercing criteria.
The jury trial here, not being of right, was
undertaken by the judge with the consent of both parties.
Federal Rule of Civil Procedure 39(c), allows a judge to
order a consensual jury trial in actions not triable as of
right by a jury. In such cases, the "verdict has the same
effect as if trial by jury had been a matter of right." Id. ___
Accordingly, in reviewing the district court's Rule 50(a)
determination, we are supposed to apply the same principles
as if the jury trial had been one of right. We must do so
here, however, without the benefit of ERISA precedent
instructing on whether, and to what degree, the jury rather
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than the judge is responsible for applying the Alman veil- _____
piercing factors.
While the absence of ERISA precedent on this aspect
is somewhat troubling, we conclude that, in a consensual jury
trial, it is principally the jury's function, and not the
court's, to decide whether or not the Alman veil-piercing _____
standards were met. The jury, to be sure, can find
individual liability only if the evidence is minimally
sufficient to do so under Alman criteria. Whether the _____
evidence reaches that threshold is a question of law. But
given the issue's fact-intensive nature, the legal threshold
of evidentiary sufficiency is a relatively low one.
In reaching the above conclusion, we are influenced
by the fact that federal courts, outside the ERISA context,
have held that veil-piercing "is the sort of determination
usually made by a jury because it is so fact specific." Wm. ___
Passalacqua Builders, Inc. v. Resnick Developers S., Inc., ___________________________ ____________________________
933 F.2d 131, 137 (2d Cir. 1991); see also FMC Finance Corp. ________ _________________
v. Murphree, 632 F.2d 413, 421 & n.5 (5th Cir. 1980) (holding ________
that, as a matter of federal procedure in diversity cases,
"the issue of corporate entity disregard is one for the
jury"). Most state courts adopt a similar approach. See, ____
e.g., Pepsi-Cola Metropolitan Bottling Co. v. Checkers, Inc., ____ ____________________________________ ______________
754 F.2d 10, 14 (1st Cir. 1985)(applying Massachusetts law);
Castleberry v. Branscum, 721 S.W.2d 270, 277 (Tex. 1986) ___________ ________
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(treating veil-piercing as factual and, therefore, jury
question). Courts in these jurisdictions have emphasized
that "[t]he conditions under which the corporate entity will
be disregarded vary according to the circumstances present in
each case." Electric Power Bd. v. St. Joseph Valley ____________________ ___________________
Structural Steel Corp., 691 S.W.2d 522, 526 (Tenn. 1985). _______________________
Even where veil-piercing is decided by judge rather than
jury, the courts have held that the question, while
equitable, is one of fact. See, e.g., Smetherman v. Wilson, _________ __________ ______
626 So. 2d 71, 73 (La. Ct. App. 1993) (explaining that trial
judge decides whether to pierce corporate veil after
examining the "totality of the circumstances"). Indeed, in
Alman we reviewed the district court's determinations that _____
the individual defendants "had acted in bad faith" and "had
not respected [corporation's] separate existence even
minimally" as "inferences" subject to the clearly-erroneous
review accorded issues of fact. 801 F.2d at 4; see also Pipe ________ ____
Fitters Health and Welfare Trust v. Waldo, R., Inc., 969 F.2d ________________________________ _______________
718, 721 (8th Cir. 1992) (reviewing ERISA veil-piercing
decision for clear error).
In assigning veil-piercing here largely to the
jury, we are also influenced by the fact that, although
entitled to a bench trial, the parties agreed to proceed
before a jury. This choice would be next to meaningless were
we now to hold that the principal contested issue -- the
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Elmans' personal liability -- remained one for the court to
determine. Given a Rule 39(c) election to proceed by jury
trial, other courts have held that the district court may
relegate all factual determinations to the jury, even those
normally treated as equitable. See, e.g., Gloria v. Valley __________ ______ ______
Grain Prods., Inc., 72 F.3d 497, 499 (5th Cir. 1996); ____________________
Thompson v. Parkes, 963 F.2d 885, 888 (6th Cir. 1992); cf. ________ ______ ___
McCain Foods, Inc. v. St. Pierre, 463 A.2d 785, 787 (Me. ___________________ ___________
1983)(holding that veil-piercing, while normally in Maine a
matter for the court, was properly submitted to jury under a
state rule parallel to Fed. R. Civ. P. 39(c)). The point of
Rule 39(c)'s jury-by-consent provision has been said to be to
allow parties who so wish to have disputed facts, including
ultimate facts, resolved by a jury. See generally 9 Charles _____________
A. Wright & Arthur R. Miller, Federal Practice and Procedure ______________________________
2333 (1995).
As the veil-piercing determination is principally
for the jury to make, we shall affirm the district court's
grant of judgment for the individual defendants only, as
previously noted, if we determine there was no "legally
sufficient basis for a reasonable jury to find" for the
plaintiff Health Fund. (Our review standard would obviously
be different were veil-piercing regarded as a legal issue
relegated to the judge even in a jury trial.)
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We turn now to the evidence presented below,
inquiring whether jury issues were presented concerning the
Elmans' personal liability, first, for Green & Freedman's
obligations to the Health Fund, and, second for Boston Bakers
responsibility for those same obligations.
III. Piercing the Corporate Veil: Green & Freedman _____________________________________________
We hold that, on the record before the district
court its decision to take from the jury the question of the
Elmans' liability for Green & Freedman's delinquent
contributions was erroneous and must be vacated. We find
ample evidence to afford a reasonable jury, applying the
Alman criteria, 801 F.2d at 4, and exercising its broad _____
authority over the veil-piercing issue, supra, a legally _____
sufficient basis to reach beyond Green & Freedman's corporate
identity and hold the Elmans liable for the corporation's
unpaid contributions.
A. Fraudulent Intent _________________
As previously noted, "the cases that permit veil
piercing in the ERISA milieu all emphasize that a finding of
some fraudulent intent is a sine qua non to the remedy's
availability." United Elec., Radio and Machine Workers, 960 _______________________________________
F.2d at 1093. We explained in that case that, in the ERISA
veil-piercing sense, fraud need not reach the level needed
for criminal or even independently actionable civil fraud.
Still, it has to be more than "invisible." Id. ___
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There was evidence that the Elmans, through their
domination of Green & Freedman, caused the corporation to
make payments to themselves and their relatives at a time
when the corporation was known to be failing and could be
expected to default, or was already in default, on its
obligations to the Health Fund. These payments could be
found to lack any business justification. Courts have
routinely viewed the wrongful diversion of corporate assets
to or for controlling individuals at a time when the
corporation is in financial distress as a fraud that can
justify piercing the corporate veil. See, e.g., Laborers' __________ _________
Pension Trust Fund v. Sidney Weinberger Homes, Inc., 872 F.2d __________________ _____________________________
702, 705 (6th Cir. 1988) (per curiam)(piercing veil where
shareholder withdrew corporate funds at time of dissolution);
Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 1221 _____ _____________________________
(2d Cir. 1987) (holding individuals responsible for
fiduciary's ERISA violations on evidence of "extensive
intermixing of assets . . . among the corporations and
individual defendants"); Labadie Coal Co. v. Black, 672 F.2d ________________ _____
92, 98-99 (D.C. Cir. 1982) (instructing trial court to
consider defendants' diversion of corporate assets to
personal uses); I.A.M. National Pension Fund v. Wakefield ______________________________ _________
Indus., Inc., 14 Employee Benefits Cas. (BNA) 1890 (D.D.C. _____________
1991) (piercing employer's corporate veil under ERISA based
in part on "selective diversion of corporate assets"); see ___
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generally 1 William M. Fletcher, Cyclopedia of the Law of _________ __________________________
Corporations 41.30, at 663 (listing among relevant factors ____________
"siphoning of corporate funds by dominant stockholders" and
"the use of corporate funds to pay personal expenses without
proper accounting").
The Health Fund introduced a series of checks that
the Elmans made out to themselves from Green & Freedman's
corporate accounts. These checks dated from January 1991 to
January 1993, a period during which, according to Richard
Elman, Green & Freedman "was in trouble," "los[ing] some
money," and experiencing a "decline in profits and sales."
In the last few months of this period, Green & Freedman
ceased to be able to pay its debts including its required
contributions to the Health Fund. It then transferred its
assets to Boston Bakers.
Meanwhile, the Elmans had been writing themselves
and their relatives checks for no business purpose that the
Elmans could adequately explain. When questioned about one
of these payments, Richard Elman testified that the
corporation was repaying him an unrecorded loan -- itself
evidence weighing in favor of piercing the corporate veil,
see United States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981) ___ _____________ ______
(piercing corporate veil on basis of repayment of
shareholders' loan at time when corporation was failing) --
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before stating that he could not remember the purpose of the
payment.
Particularly flagrant was the evidence of a
personal vacation that the Elmans financed with corporate
funds. In January 1991, the Elmans caused Green & Freedman
to pay for them to travel to New Orleans, where they attended
the Super Bowl. On direct examination, Stanley Elman
testified that the checks in question represented "payment
for expenses and conducting business." On cross-examination,
however, Stanley Elman admitted that Green & Freedman had no
customers in Louisiana and did no business in connection with
the Super Bowl. Nothing in Stanley Elman's testimony
rehabilitated his initial claim that he conducted business on
the Super Bowl trip.
In addition, the Elmans caused Green & Freedman to
pay Eleanor Elman, Stanley Elman's wife, three checks for a
total of $4,500. Stanley Elman initially explained these
payments as wages. However, the Elmans did not report this
amount on their tax return and there was no evidence that
Green & Freedman reported it as wages. Moreover, Green &
Freedman's receptionist, Claire Lank, testified that Eleanor
Elman did not work at Green & Freedman during 1992.
Finally, just days before Green & Freedman executed
the bulk transfer to Boston Bakers, and at a time when the
company had ceased to meet its obligations to the Health
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Fund, the Elmans caused the corporation to write an
unexplained check for cash in the amount of $10,000, and a
second check payable to Stanley Elman for $2,500.
The payments made by Green & Freedman to the Elmans
and their relatives during 1991 and 1992 with no apparent
business justification amounted to $30,109. In ruling on the
Elmans' Rule 50(a) motion, the district court was required to
draw all reasonable inferences and resolve credibility issues
in favor of the non-movant Health Fund. Looked at in this
light, the evidence was sufficient to support a jury
determination that the Elmans had used corporate funds for
personal purposes at times when they knew either that the
company was inadequately capitalized to meet its obligations,
or that, in fact, it had stopped doing so -- and, in
particular, had ceased to pay its Health Fund obligations.
We add that the jury's ability to conclude that the Elmans
had acted in a knowingly fraudulent manner would have been
bolstered by inconsistencies in the Elmans' testimony about
the payments, particularly their testimony that the Super
Bowl trip and Eleanor Elman's "wages" had business purposes.
The Elmans protest that the amount of arguable
self-dealing evidenced at trial was too little to justify
sending the Health Fund's case to the jury. The Elmans point
out that the payments described above amounted to less than
one percent of the corporation's gross annual sales, and that
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the trip to New Orleans was, after all, only one trip. While
it is difficult to quantify nicely the amount of fraud
required, the Elmans's self-dealing occurred on several
occasions, at a time when the company was in financial
straits. We cannot say that this conduct and the amounts
involved were de minimis, to the point that no reasonable
jury could find that the fraudulent intent prong of the Alman _____
standard was established.
B. Disregard of Corporate Identity _______________________________
The fraudulent self-dealing just discussed was
probative not only of fraudulent intent but also of another
Alman element, disregard of corporate identity. On the _____
latter score, there was additional evidence. For example,
the Elmans appear to have mixed their own finances with those
of Green & Freedman's. At a time that the Elmans owed the
corporation $141,000 in loans, they also loaned it $170,000
through their real estate trust. These unexplained dealings
suggest that money was being moved around with little or no
regard for the corporate identity. There was no record of
the terms of the purported loans nor of any agreement to
repay. Undocumented and interest-free loans could be found
to show a disregard for the corporate form. See, e.g., __________
Uriarte, 736 F.2d at 524 (treating unrecorded and interest- _______
free loans from shareholders to the corporation as evidence
of shareholders' disrespect for corporate form).
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Beyond the undocumented loans, there was evidence
of inadequate and, indeed, fraudulent record keeping. The
Elmans admittedly falsified Green & Freedman's minutes to
state that their wives, who served as nominal directors,
attended and authorized corporate borrowing, when in fact
their wives did neither.
We accept the Elmans' contention that a closely-
held corporation need not hew to every corporate formality in
order to maintain its shareholders' immunity from the
corporation's debts. A veil-piercing plaintiff will not
prevail if the evidence shows only that the closely-held
defendant corporation was run without the strict formalities
of its publicly-held counterpart. But the evidence adduced
at trial, viewed most favorably to the Health Fund, could be
found to show practices that went beyond mere informalities.
Important transactions between the corporation and its
controlling shareholders went undefined, and the Elmans
appear to have created false minutes. These facts, when
added to the financial self-dealing and when viewed in a
light most favorable to the Health Fund, support a reasonable
inference by a jury that the Elmans, in the two years before
Green & Freedman's demise, did not treat Green & Freedman as
a separate entity.
C. Manifest Injustice __________________
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The evidence just described under the first two
Alman factors could also allow a reasonable jury to conclude _____
that sheltering the Elmans from Green & Freedman's liability
to the Health Fund would be manifestly unjust. As one
commentator has explained, courts have found this prong met
when "a corporation is so undercapitalized that it is unable
to meet debts that may reasonably be expected to arise in the
normal course of business." Note, Piercing the Corporate Law __________________________
Veil: The Alter Ego Doctrine Under Federal Common Law, 95 _________________________________________________________
Harv. L. Rev. 853, 855 (1982). Thus, a jury would not be
unreasonable in viewing as manifestly unjust the Elmans'
decision to issue themselves payments for personal, non-
corporate purposes, as well as other unexplained payments, at
a time when the corporation could not meet its obligations to
the Health Fund. Of course, the mere non-payment of debt is
not, by itself, enough to justify piercing the corporate
veil. However, a jury could reasonably conclude on the basis
of the evidence below that the Elmans both placed their
personal interests ahead of their corporation's
responsibilities and did not themselves honor Green &
Freedman's corporate form. As a result, it could be thought
manifestly unjust to insist that the Health Fund be
restricted by the corporate form.
IV. Piercing the Corporate Veil: Boston Bakers ___________________________________________
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Whether the evidence sufficed for a jury to find
the Elmans personally liable for Boston Bakers' successorship
obligation to pay Green & Freedman's indebtedness for Health
Fund contributions missed in April 1992, through January
1993, is more problematic. Given the Elmans' potential
direct liability, supra, for Green & Freedman's debts on this _____
score, the question of their tangential exposure for the same
debt via Boston Bakers may seem more theoretical than real.
Still, the court's ruling on count 4 of the complaint raises
the issue, and we must address it.
For the showing of fraud needed to pierce Boston
Bakers' corporate veil, the Health Fund relies inter alia
upon the Elmans' transfer of Green & Freedman's assets to
Boston Bakers, a transaction said to be inherently
fraudulent. Yet we can see nothing in the transfer itself
that further disadvantaged the Health Fund in its ability to
realize its claim for Green & Freedman's unpaid
contributions. Had the Elmans chosen simply to shut
down the operations of Green & Freedman in early 1993,
instead of undertaking the bulk transfer to Boston Bakers, a
jury would have to conclude that the Health Fund would have
received nothing. At the time of the bulk transfer, it was
undisputed that Green & Freedman had no more than $2,000 in
cash on hand, and liabilities to secured creditors that _______
outweighed its assets. The firm's primary secured creditor,
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U.S. Trust, held a security interest in all of Green &
Freedman's assets. Once a debtor grants an all-assets
security interest, unsecured creditors like the Health Fund
are made no worse off by a bulk transfer: the transferred
assets were already encumbered and therefore unavailable to
the Health Fund regardless of the bulk transfer.
We note that neither in its second amended
complaint nor in arguments on appeal, has the Health Fund
claimed that Boston Bakers, as Green & Freedman's successor,
was liable under the latter's collective bargaining contract
for payments after January 15, 1993, the date Green & _____
Freedman shut down. Rather the damages sought are for the
period from April 1992, until January 15, 1993, being all
based on defaulted contributions owed by Green & Freedman
while it was still operating. Boston Bakers' liability is
premised solely on its inherited responsibility for these
earlier debts of its predecessor. As said, had Green &
Freedman simply shut down on January 15, 1993, the Health
Fund would apparently have been no better off. (It might,
arguably, have been worse off.) Plaintiff propounds no
concrete theory as to how the bulk transfer further
diminished its prospects for recovering the sums owed by
Green & Freedman between April 1992 and January 15, 1993.
It is significant that, from the outset, Boston
Bakers continued openly to carry on the business of Green &
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Freedman. Lank, Boston Bakers' nominal shareholder and
receptionist, even continued to answer the phone "Green and
Freedman" after the bulk sale. A company does not extinguish
its ERISA obligations simply by changing the name on its
letterhead. See Hawaii Carpenters Trust Funds v. Waiola ___ _______________________________ ______
Carpenter Shop, Inc., 823 F.2d 289, 294 (9th Cir. 1987) ______________________
(holding that alter ego test is met when two corporations
share a "substantial continuity"); cf. Guzman v. MRM/ELGIN, ___ ______ _________
409 Mass. 563, 566 (1991) (explaining exception to general
rule of successor non-liability for a transferee that "is
merely a continuation of the seller corporation"). Thus,
Boston Bakers was available throughout its existence to
answer for the liabilities of its predecessor.
At trial, the Health Fund produced no evidence as
to how the bulk transfer worked to its disadvantage. As
Richard Elman's uncontradicted testimony put it, by December
1992, Green & Freedman was in such dire straits that it had
to choose between liquidation and reorganization. The Elmans
chose the latter course, and undertook a reorganization
through the bulk transfer.
Further undercutting the contention that the mere
fact of the bulk transfer demonstrates the Elmans' fraudulent
intent is the fact that they did not conceal the transfer.
As required by statute, Green & Freedman notified its
creditors, including the Health Fund, before executing the
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bulk transfer. The district court thereafter denied the
Health Fund's motion to enjoin the transfer, an action from
which no appeal was taken.
We are thus unable to find, on this record, that
the bulk transfer provided the Elmans with an unfair
advantage, amounting to a fraud, material to the Health
Fund's current claim. Under Alman, fraudulent intent is a _____
necessary element in order to piece the corporate veil. We
do not think a jury could properly derive a relevant finding
of fraudulent intent material to the harm alleged from the
transfer by itself. See United Elec., Radio and Machine ___ _________________________________
Workers, 960 F.2d at 1094 (approving "good faith if _______
ultimately unsuccessful attempt to resurrect a moribund
company"); Laborers Clean-Up Contract Admin. Trust Fund v. _______________________________________________
Uriarte Clean-Up Serv., Inc., 736 F.2d 516, 525 (9th Cir. _____________________________
1984) (noting difference between a corporation that was
unable to pay its debts from the outset and one that simply
"fell upon bad times").
Besides the fact of the bulk transfer, the Health
Fund points to other factors as a supposed basis for piercing
Boston Bakers' veil. In its complaint it alleged that the
nominal and sole shareholder, Claire Lank, was "unaware" of
her obligations and rights as a shareholder and, instead of
following her independent judgment, followed the Elmans'
instructions. Also alleged was the Elmans' complete control
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over Boston Bakers, even though they owned no stock; the
Elmans' disregard of corporate identity; and the
incorporation of Boston Bakers with fraudulent intent. These
allegations, however, to the extent legally material, must
stand or fall on the existence in the record of some
supporting evidence. Moreover, proof of corporate
informalities, standing alone, are insufficient. Plaintiff
may not prevail without some evidence of fraudulent intent
material to the harm suffered. _____________________________
There is no evidence of financial self-dealing in
the case of Boston Bakers such as occurred with Green &
Freedman. None of the checks introduced by the Health Fund
as payable to or for the Elmans came from Boston Bakers'
accounts.
In respect to the claimed "undercapitalization" of
Boston Bakers, all the latter's capital came from the bulk
transfer; there was no unmet agreement by the Elmans to add
more, nor evidence that, after transfer to Boston Bakers,
they diverted the bulk transfer funds to personal objectives.
The mere fact that Boston Bakers eventually failed or had
less capital than needed is not a basis for reaching the
Elmans personally, absent fraud.
Much is made of the fact that Richard Elman
indicated ignorance as to how he was named president and
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director of Boston Bakers3 or whether Boston Bakers held an
annual shareholders' meeting. Stanley Elman failed to
recognize the firm's stock ledger. And Lank, the sole
shareholder, appears to have been a straw for the Elmans,
allegedly so as to make it harder for creditors to reach them
personally. None of these items, however, singly or
together, provide a sufficient evidentiary basis to pierce
the corporate veil. While they may suggest a lack of
attention to corporate formalities, they do not reflect
fraudulent intent material to the harm alleged, nor is it
clear how any of them, even slightly, disadvantaged the
plaintiff.
There was also evidence that the Elmans' wives did
not know they were directors; did not participate in board
meetings, although corporate records falsely indicated they
did; and did not know that Lank was the sole stockholder.
But these snippets do little to demonstrate more than
corporate informality. Even if the false corporate records
concerning the wives' attendance at directors' meetings are
characterized as a "fraud," there is no evidence the Health
Fund knew or relied on this information to its detriment or
____________________
3. Q: And would you acknowledge, sir, that you don't know
by what authority you were elected a director of
Boston Bakers?
A: The attorneys set up the corporation. I don't know
the direction. I know I was an officer, the
president.
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sustained any injury whatever as a result. The "fraudulent
intent of the individual defendants" mentioned in Alman _____
requires some meaningful relationship between the intent and
the harm visited upon plaintiff. We add that even the Health
Fund itself does not argue that the incorrect records by
themselves show fraudulent intent sufficient under Alman. _____
We conclude that the district court was correct in
granting the Elmans' motion for judgment as a matter of law
with respect to the Elmans' alleged personal liability for
Boston Bakers' corporate obligation to make good Green &
Freedman's delinquent payments to the Health Fund.
V. Conclusion __________
The district court's grant of judgment as a matter
of law is vacated with respect to Count 3 and affirmed with vacated affirmed _______
respect to Count 4. The case is remanded for a new trial and
other proceedings consistent herewith.
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Document Info
Docket Number： 97-1133
Filed Date： 1/22/1998
Precedential Status： Precedential
Modified Date： 9/21/2015