- Cracking The Concrete Corporation Veil
- December 21, 2009 | Author: Matthew J. Noble
- Law Firm: Marshall, Dennehey, Warner, Coleman & Goggin - Philadelphia Office
David Szymanski was the sole shareholder, director, and officer of several construction corporations, which included Delmarva Concrete, Del Concrete and David Concrete among others. Fletcher-Harlee was a general contractor for the construction of an elementary school. It subcontracted the concrete work for this project to Delmarva, and a dispute arose between the two companies during the construction. Fletcher took the dispute to arbitration, and Delmarva did not participate. Fletcher was awarded the sum of $313,179.52 plus fees. Delmarva stopped doing business because of the judgment against it and eventually filed for bankruptcy. However, Szymanski continued doing concrete business and performed jobs through other corporations which he owned and ran.
In the case of Fletcher-Harlee Corp. v. David G. Szymanski & David Concrete Corp. Inc., 2007 PA Super 310; 2007 Pa. Super, Fletcher filed a complaint against Szymanski to pierce Delmarva's corporate veil in order to hold Szymanski liable for the judgment. Fletcher claimed it proved that Delmarva was undercapitalized, that Szymanski failed to follow corporate formalities and keep relevant records, that Szymanski intermingled his personal funds and assets with those of Delmarva, and that Szymanski used Delmarva in order to perpetrate fraud and injustice. The trial court found in favor of Szymanski stating that Fletcher failed to prove that it was the victim of common law fraud. Fletcher appealed, arguing that the trial court erred as a matter of law in requiring a showing of fraud in order to pierce the corporate veil of Delmarva.
In their appeal, Fletcher cited Lumax Industries v. Aultman, 543 Pa. 38, 669 A.2d 893 (Pa. 1995), arguing that a Pennsylvania court is required to consider several factors when it is asked to pierce the corporate veil. The following factors were to be considered in piercing the corporate veil: undercapitalization, failure to adhere to corporate formalities, substantial intermingling of corporate and personal affairs, and use of the corporate form to perpetrate a fraud. Fletcher insisted that it was not required to prove fraud in order to establish its claim that Szymanski should not be shielded from personal liability simply because he incorporated Delmarva. The Pennsylvania Supreme Court stated in Lumax that there is a strong presumption in the Commonwealth against piercing the corporate veil.
Szymanski testified at trial that he was the sole shareholder, officer, and director of several corporations that were all located in the same office and shared the same computer system. Szymanski either did not keep proper financial records, purposely withheld relevant documents during discovery, or both. Szymanski claimed he could not produce several relevant financial records. The documents Szymanski did provide showed that he would loan Delmarva money, through his personal money market account, when the company needed money to operate. Szymanski was Delmarva's largest creditor. Szymanski was aware of the arbitration award for Fletcher and admitted that he stopped operating Delmarva due to the judgment. Delmarva had no assets and owned no equipment. Delmarva would rent equipment owned by one of Szymanski's other corporations by oral agreement. After Szymanski stopped operating Delmarva, he started Del Concrete, of which he was the sole shareholder, director, and officer. Del Concrete operated out of the same building as all of Szymanski's other corporations. Fletcher produced a check that was obtained through discovery that was made out to Del Concrete but which showed up on Delmarva's general ledger. Szymanski also admitted to putting a company check into his personal account on one occasion.
Szymanski's accountant testified he was not aware of any fraudulent transfers in connection to his work with Szymanski and his companies, but he was also not aware of any capital contributions made to Delmarva. The only money that ever came into Delmarva were loans from Szymanski. It was also revealed that the accountant made out checks to Delmarva and Del Concrete and that the two corporations had the same vendor code.
Considering the Lumax factors proposed by the Pennsylvania Supreme Court, the Superior Court vacated the Judgment for Szymanski and remanded it for entry of Judgment for Fletcher stating that the court believed that justice and equity required that Szymanski be held liable for the judgment obtained by Fletcher against Delmarva. The court's findings were as follows:
Delmarva was not appropriately capitalized. When faced with having to defend Delmarva in arbitration, Szymanski decided not to defend, to cease doing business, and subsequently filed for bankruptcy.
Delmarva failed to adhere to corporate formalities. Szymanski disregarded the separate legal status of Delmarva thereby rendering Delmarva's corporate form to be a sham. Szymanski held out that David Concrete and Delmarva were the same company to others, despite the fact that these two corporations were most certainly separate legal entities. While his various corporations supposedly had different suite numbers, they all shared the same office space, and several of these companies, including Delmarva, shared the same computer and sole employee.
There was some intermingling of funds between and among Szymanski's various corporations. Szymanski on at least one occasion deposited corporate funds into his personal bank account. In addition, Szymanski stored his corporate and personal records together. Szymanski made little effort to ensure that the interests of Delmarva diverged from his personal interests and the interests of his other businesses. Additionally, Szymanski's difficulties with credibility in his testimony, including letters to clients claiming that David Concrete and Delmarva were the same company, and his noncompliance with discovery requests and orders, called into question his explanations for incorporating a new concrete business (David Concrete) when he already was the sole shareholder, director, and officer of just that, a concrete business (Delmarva).
Fletcher failed to sufficiently demonstrate that Szymanski perpetrated a fraud upon it. However, the court held that to shield Szymanski's misbehavior with a guise of a corporation would result in an injustice not only to Fletcher, but to all those who diligently comply with the responsibility of treating corporations as separate and distinct legal entities. Accordingly, in this case it was appropriate to overcome the presumption against cracking Delmarva's concrete corporate veil.