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Successor Liability and Piercing the Corporate Veil:
Protect Your Assets
We have had several meetings recently with new clients who are either purchasing the assets of an existing business, or are beginning a new company. When we are in these meetings, we will often stress the importance of separation between the business assets and those assets that belong to the individual owners of the business. In addition, when a business is purchasing the assets of a former business, it is important to structure the transaction such that the business buying the assets can limit or eliminate any obligations for debts owed by the selling business.
These meetings have brought to mind a previous post concerning the same issues, including the factors that a court will examine when determining whether or not to hold an individual liable for a corporation’s debts period.
While the Ziese case discussed in that previous post was more focused on “successor liability”, another important decision from the Indiana Court of Appeals around that same time held that in addition to the elements discussed in the Ziese case concerning whether or not a court should consider “piercing the corporate veil,” (and thereby hold the individual shareholders liable for the debts of the corporation), a plaintiff seeking to do so must also show a causal connection between the fraud or injustice alleged by the party seeking to pierce the corporate veil and the harm that that party complains of. In other words, it is not enough to prove that the defendant corporation did not follow corporate formalities or otherwise misused the corporate form. Rather, the plaintiff must be able to demonstrate that misuse actually caused the damages that the plaintiff is complaining about. The Indiana Court of Appeals also confirmed what has been discussed in numerous other instances in this blog that these types of cases, as well as many others, are highly fact sensitive, and it is difficult to draw perfect analogies from one case to the next.
In summary, the Indiana courts will be very reluctant to pierce a corporate veil, and are more reluctant to do so than to impose successor liability as the Court of Appeals did in Ziese. A detailed review of the facts of each case will be necessary in order to attempt to determine how a court may view a particular situation, understanding that the hurdle will be quite high to clear in order to create personal liability for the shareholder of a corporation in Indiana.
Indiana Tax Deed Notice Requirement
A recent Indiana decision, 219 Kenwood Holdings v. Properties 2006, 2014 Ind.App. LEXIS 512 (Ind.App. 2014), examined the requirements for the notice that must be provided by a tax sale purchaser to the property owner.
Unexpected Holdings, LLC purchased a property in Lake County, Indiana at a tax sale on April 25, 2013, and the rights related to that purchase were assigned to Properties 2006, LLC. On June 21, 2013, Properties 2006, LLC sent notice of its purchase and its intent to petition for a tax deed to the owner, 219 Kenwood Holdings, LLC, as required by Indiana Code § 6-1.1-25-4.5. The notice provided “A petition for a tax deed will be filed on or after August 24, 2013.” On August 30, 2013, Properties 2006, LLC sent notice to the owner that it had petitioned for a tax deed, as required by Indiana Code § 6-1.1-25-4.6.
Attempting to set aside the sale, 219 Kenwood Holdings, LLC argued that the first notice provided by the tax sale purchaser did not satisfy the statutory requirements. Indiana Code § 6-1.1-25-4.5(e) provides fifteen (15) requirements for that notice, although only the following two (2) requirements were in dispute in the case:
The notice that this section requires shall contain at least the following:
- A statement that a petition for a tax deed will be filed on or after a specified date.
- The date on or after which the petitioner intends to petition for a tax deed to be issued.
The owner argued that (a) Section 4.5(e) required two (2) separate statements to satisfy requirements (1) and (2), and (b) Section 4.5(e)(2) requires a prediction as to the date on which the tax deed would be issued. The Court found both arguments unavailing. The Court acknowledged the partial redundancy of (1) and (2) and determined that a single statement that a petition for tax deed would be filed on or after a specific date, as had been provided to the owner in this case, satisfied both (1) and (2). Furthermore, predicting the date the deed would be issued would only be required under Section 4.5(e)(2) if the phrase “to petition” were omitted from the provision. Consequently, the provided notice satisfied the statutory requirements, and the Indiana Court of Appeals affirmed that the purchaser was entitled to the issuance of a tax deed.
How Much Effort is Required to Find the Person You are Suing?
In what should have been an otherwise uneventful mortgage foreclosure, the Indiana Court of Appeals recently made clear to parties in lawsuits that they must take some reasonable efforts to notify all necessary parties of a lawsuit before they will be entitled to a judgment. In Hair v. Deutsche Bank National Trust Company, a bank filed a foreclosure action, and needed to name another lien holder in order to complete the foreclosure, clear title to the real estate, and obtain a judgment. There was no question that the bank’s mortgage lien was the first lien on the property, but Hair held a “junior” lien on the property. After the bank was unable to serve a summons on Hair, it attempted to serve him through “publication”, which is a technique allowed under Indiana law. However, a party may only rely upon service by publication after providing evidence that a diligent search was made and that the party cannot be found, has concealed his whereabouts, or has left the State.
The Court found that the bank had not made a diligent effort to ascertain Hair’s whereabouts, and held that “mere gestures are not enough” and the “means employed must be such as one desirous of actually informing the party might reasonably adopt to accomplish it.”
Because the Court found that the bank had not exercised that due diligence, and that had the bank performed even a bit of Internet research Hair could have easily been located, the Court granted Hair’s motion to set aside the judgment. The Court of Appeals then sent the case back to the trial court for further handling.
Where this case will end up remains to be seen because the real estate has already been sold to a third party. However, by operation of law, Hair’s lien was not foreclosed and therefore is still attached to the real estate. At the same time, there is no dispute that Hair’s lien was inferior to the bank’s lien, and the property sold at the sheriff’s sale for less than what was owed to the bank. Therefore, even if Hair had been properly served with a summons, the bank would have foreclosed the lien and Hair would not have received any of the proceeds of the sale. The Court of Appeals did not address that issue, and sent the case back to the trial court for further proceedings.
The practical lesson here is that it is not sufficient to simply serve a party by publication without being able to demonstrate that you have exercised reasonable efforts in your due diligence to locate that party so that the party can be personally served. The failure to do this can result in the setting aside of a foreclosure judgment and the unwinding of subsequent transactions based upon that judgment. Furthermore, with modern technologies, particularly the Internet and Internet based applications, what constitutes due diligence is likely more extensive now than what would have been required in the past.
A bedrock principle of Indiana law is that the intent of the parties controls the contract. We are constantly advising our clients of this principle, and that is why it is so important that a contract clearly express the true intent of the parties, so that anyone who later reads that contract can understand without question what both parties meant when they agreed to the contract. The Indiana Court of Appeals has again reaffirmed this principle and repeated its long-standing policy of enforcing business contracts when the parties’ intent is clear.
In the case, which involved lien priorities, subordination agreements, crop financing and bankruptcy issues, there were 3 different lenders who had loaned money to a farmer. At one point the lender who had the senior lien (“Lender #1), and therefore was entitled to be paid first from the proceeds of the farmer’s assets, entered into a partial subordination agreement with the lender which was “third in line” in terms of its lien position (“Lender #3). It was clear from the subordination agreement that the reason for Lender #1 and Lender #3 to enter into the agreement was to induce Lender #3 to loan additional money to the farmer to plant crops. Lender #3 then loaned additional money to the farmer, who ultimately filed bankruptcy. The question then was which Lender was entitled to proceeds from those crops.
After analyzing case law concerning subordination agreements from other States, and parsing through a number of different arguments made by Lender #2 (who was trying to claim some portion of the crop proceeds even though it had not loaned any money towards those crops), the Indiana Court of Appeals noted that subordination agreements are merely contracts. They are contracts that often modify lien priorities. Because they are contracts, their interpretation is controlled by the intent of the parties as expressed by the clear language of the contract.
The Court ultimately determined that the intent of the parties was clear, that Lender #3 was entitled to be paid its debt from the proceeds of the crops for which it had loaned the additional money, and Lender #2, which was not even a party to the subordination agreement, was no worse off than it would have been had there been no subordination agreement.
The business lesson in all of this is, as always, to clearly document and say what you intend an agreement to be. Use clear language, simple words, examples and even illustrations where appropriate to express that intent. By devoting a little more time and effort to clearly constructing the agreement, you will greatly increase the chance that the parties’ intent will be enforced and you will receive what you anticipated when you entered into the contract.