Page 14 - John Hundley 2014

separate identities would sanction a fraud or promote injustice." It said veil-piercing requests had to meet
two tests: "(1) there is such a unity of interest and ownership that the separate personalities of the
corporation and the parties who compose it no longer exist, and (2) circumstances are such that
adherence to the fiction of a separate corporation would promote injustice or inequitable circumstances."

Defendant's defense of the trial court ruling focused principally on the first prong and was based on the
fact that he was neither an officer, director or shareholder of the corporation. Finding that none of these is
required, the panel purported to apply Illinois law but plainly based its decision on a survey of corporate
law nationwide. While it noted that caselaw was not uniform, it said "the weight of authority supports the
conclusion that lack of shareholder status -- and, indeed, lack of status as an officer, director, or employee
-- does not preclude veil-piercing."

"Equitable Ownership" Key: Key to the court's holding on that point was the concept of
"equitable ownership". It noted that the complaint alleged the corporation had not issued any stock to
anyone. "If plaintiffs' allegation is true, the reason defendant was not a Silver Fox shareholder is that
Silver Fox had no shareholders. It would make little sense to hold that, where a corporation fails to issue
stock, defendant's status as a nonshareholder both precludes veil-piercing and is a
factor in favor of it."

It said that in deciding whether the "unity of interest and ownership" test is met,
courts generally examine many factors, including "(1) inadequate capitalization; (2)
failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of
dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other
officers or directors; (7) absence of corporate records; (8) commingling of funds; (9)
diversion of assets from the corporation by or to a stockholder or other person or entity
to the detriment of creditors; (10) failure to maintain arm's-length relationships among
related entities; and (11) whether, in fact, the corporation is a mere facade for the
operation of the dominant stockholders."

Second Test Also Met: The panel also found the "promote injustice or inequitable
circumstances" test was met. Noting allegations leading to the inference that defendant hired plaintiffs'
head baker simply to obtain their customer lists and recipes in violation of the Illinois Trade Secrets Act
(765 ILCS 1065), the panel said this alleged conduct was not benign and was unlawful.

Comment: On the issue of piercing corporate veils, Buckley arguably extends
Illinois law, and at least answers questions which were previously unclear under
Illinois law. An argument can be made that that effort was unnecessary, however.
As noted above, plaintiffs alleged that the corporation never issued any shares,
never elected directors, never had shareholder or board meetings, and never filed
annual reports with the state. The case thus silently seemed to raise the question
whether formalities had been sufficiently obeyed so as to raise the corporate veil in
the first place. It is hornbook law that when a corporation is defectively formed, that
leaves the promoters personally liable. For some reason, this issue was not
explored in Buckley.

Brenda\SharpThinking\#113.pdf
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