In a groundbreaking decision for the State of Michigan, the Michigan Court of Appeals ruled that piercing the corporate veil may be brought in a separate cause of action against a defendant effectively in control of a corporation unable to pay on a judgment entered against it. Gallagher v. Persha, Docket No. 32471, was argued by Mark Demorest and Melissa Demorest LeDuc of Royal Oak’s Demorest Law Firm and involved a couple who sold a home to a real estate investment company.
The Gallaghers were underwater on their home and entered a purchase agreement with Kaper Properties in which Kaper purchased the Gallagher’s home subject to two existing mortgages. Because the Gallaghers owed more on the home than it was worth, the Gallaghers agreed to pay Kaper $37,000 to make up the difference between the agreed upon purchase price and the balance on the mortgages. In return, Kaper agreed to pay off the two existing debt obligations and release the Gallaghers from their debt obligations. The Gallaghers fulfilled their obligations under the agreement, paying Kaper the entirety of the excess debt by the agreed upon date. However, Kaper fell behind on the mortgage payments, failing to hold up its end of the bargain.
The Gallaghers filed suit against Kaper for breach of contract. The Gallaghers also asserted their claims against Kaper’s president and sole shareholder, Kathleen Persha, under the theory that certain actions taken by Persha constituted a situation in which she abused the corporate form and, as such, the corporate veil should be pierced and Persha herself should be held liable. A case evaluation panel recommended an award to which Kaper and the Gallaghers agreed with the stipulation that claims against Persha be dismissed without prejudice.
Two years later, when Kaper failed to pay the judgment against it, the Gallaghers filed a claim against Persha attempting to pierce the corporate veil in order to hold her personally liable for the judgment entered against Kaper. The trial court dismissed the claim, holding that piercing the corporate veil is an equitable remedy, not a cause of action unto itself. The trial court stated that the previous case would have to be reopened in order for a claim to pierce the corporate veil to be brought. However, when the Gallaghers moved to reopen the case, the trial court denied the motion, forcing an appeal.
On appeal, Michigan Court of Appeals stated that, while piercing the corporate veil is an equitable remedy which may not normally be brought as an independent action, that principle does not apply to this case. Specifically, the Court stated that “when a judgment already exists against a corporate entity, an additional cause of action is not needed to impose liability against a shareholder or officer if a court finds necessary facts to pierce the corporate veil.”
The Court noted that this specific issue had not been previously addressed by a Michigan appellate court. As such, the Court relied upon decisions from Kentucky and Illinois which state that such claims can be brought as separate actions when correlating to a judgment previously entered against a corporation. The Michigan Court of Appeals went on to note that neither Illinois or Kentucky have any statutory or case law in this area to distinguish them from Michigan. Therefore, the Michigan Court of Appeals found that there was no reason not to adopt the reasoning of those courts and held in favor of the Gallaghers, remanding the case to be heard on the merits of the claim of piercing the corporate veil.
This article was written by Tyler Kemper, law clerk.
Congratulations Mark.