Poor Business Practices May Bring Down “The Corporate Veil”

On April 17, 2007, the Massachusetts Appeals Court issued a decision that should serve to remind clients that, in order to maintain the liability limiting protection of their corporate form, they must abide by the fundamental rules of business governance.  In Cahaly v. Benistar Property Exchange Trust Co., Inc., No. 05-P-1717, 2007 WL 1098223 (Mass. App. Ct. Apr. 17, 2007), the Appeals Court ruled that the corporate veil could be pierced enabling the plaintiffs to recover damages from affiliates of defendant corporations.

The Appeals Court’s decision affirmed Superior Court Judge Botsford’s prior ruling from the Superior Court’s Business Litigation Session, in which she held that these affiliates “should not be permitted to escape responsibility through the misuse of the corporate form.”  See Cahaly v. Benistar Property Exchange Trust Co., Inc., Nos. 01-0116, 01-0229, 01-0330, 01-0581, 01-3433, 01-4305, 01-0075 (consolidated actions), slip op. at www.socialaw.com (Mass. Super. Sept. 23, 2003).  Among the facts supporting Judge Botsford’s conclusion were:

  • Individual defendant exerted pervasive control over the various corporate defendants, which were owned by him and/or his family members;
  • Various unexplained inter-company transfers of funds;
  • Individual defendant treated the various defendant companies as “one group,” with one individual serving as “chairman”; and
  • Individuals holding director positions were uninformed about company management.

The Appeals Court concluded that there was“ample evidence to support”Judge Botsford’s conclusion, including:

that the corporations were commonly owned by the [individual defendants], who had pervasive control over all of their activities; that the business activities, assets, and management of the organizations were intermingled; that the corporations were inadequately capitalized; that corporate formalities were not observed; that no corporate records existed; that no dividends were paid; that [the main company defendant] was insolvent; that no officers or directors of any of these corporations existed apart from the [individual defendants]; that [company] funds were used by [one of the individual defendants] to carry out ‘his personal penchant for risky option trading on the stock market’; and that the corporations were used to promote fraud.

While the Benistar decision does not appear to depart from existing Massachusetts law on veil piercing, it serves as a useful reminder to corporate clients that the benefits they enjoy as a result of incorporation -- i.e., limited liability -- will be lost if corporate executives ignore the basic principles of sound business management.

Should you have any questions, feel free to contact David S. Godkin at (617) 307-6110; godkin @ birnbaumgodkin.com.

This memorandum is provided by Birnbaum & Godkin, LLP for educational and information purposes only and is not intended and should not be construed as legal advice, nor does this memorandum represent any undertaking to keep recipients advised as to all relevant legal developments. This memorandum may be considered advertising under applicable state laws.

©Birnbaum & Godkin, LLP
May, 2007

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