Banking and Business Monthly – September 2017

JUDGMENT CREDITOR RECOVERS ATTORNEYS’ FEES IN POST-JUDGMENT VEIL-PIERCING ACTION

The case of Steiner Electric Company v. Maniscalco, 51 N.E.3d 45, 2016 IL App (1st) 132023 (2016), should be of interest to both banks and businesses, as it involves the use of corporate veil-piercing in the post-judgment collection of a loan under a credit agreement. In this case of first impression, the First District of the Illinois Appellate Court held that the credit agreement’s provisions regarding costs of collection were broad enough to encompass post-judgment attorney fees incurred in the subsequent veil-piercing action.

The defendant, Leonard Maniscalco (Maniscalco), owned and was the sole shareholder, director and officer of Delta Equipment Company (Delta) and Sackett Systems, Inc. (Sackett). Steiner Electric Company sold electrical products to Delta and Sackett on credit. The applicable provisions of the credit agreements imposed liability for “all reasonable costs of collection including attorney fees and expenses” and also provided “[t]he customer shall be responsible for all costs of collection incurred by Company, including without limitation lien costs and all attorneys’ fees and expenses.” Steiner brought suit against Delta in 2009 and was awarded a default judgment of $226,686, which included collection costs. However, Maniscalco dissolved Delta before the judgment was issued. After Steiner’s post-judgment efforts came up empty, Steiner commenced an action in 2010 asking the circuit court to pierce the corporate veil to hold Maniscalco and Sackett liable for Delta’s judgment. The court pierced the corporate veil and found Maniscalco and Sackett jointly and severally responsible for the money judgment against Delta but declined to award Steiner its attorneys’ fees generated in litigating the piercing action.

A.   VEIL-PIERCING

The First District affirmed the piercing judgment and reversed the trial court’s refusal to assess attorneys’ fees against Maniscalco. In so holding, the appellate court engaged in both vertical (up to the shareholder) and horizontal (across to a brother/sister entity) veil-piercing using the conventional two-pronged test (see my previous article for an explanation of the test). Let’s look at how the court vertically and horizontally pierced the corporate veil.

1.  Prong 1:  Unity of Interest 

The first prong of the test is whether there is such a unity of interest and ownership that the separate personalities of the corporation and the individual shareholder/affiliate corporation no longer exist. The courts determine this by examining multiple factors such as inadequate capitalization, failure to observe corporate formalities, insolvency, commingling of funds, diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors and the failure to maintain arm’s-length relationships among related entities.

Here, the court found the existence of many of the above factors. Delta and Sackett were both inadequately capitalized, transactions were not properly documented, funds were commingled among both entities and Maniscalco, and corporate formalities were not observed. Maniscalco had consistently treated both companies in such a manner that they were, in practice, his alter egos.

2.  Prong 2:  Injustice or Fraud

The court discussed this second prong, whether a fraud or injustice exists, jointly in relation to Maniscalco’s liability and Sackett’s liability and determined that injustice would prevail if Maniscalco and Sackett were not held liable, especially since Maniscalco closed Delta in an attempt to avoid payment to Steiner. Further, not determining both of them liable would sanction deception or fraud, as evidenced by a circular payment of management fees among the two entities and Maniscalco designed to reduce Sackett’s taxes. Because both prongs of the test were met with respect to the horizontal and vertical veil-piercing, the appellate court upheld piercing the corporate veil to impose liability on Maniscalco and Sackett.

B.   POST-JUDGMENT ATTORNEYS’ FEES

In a case of first impression, the appellate court determined that a provision in the credit agreement between Steiner and Delta was broad enough to encompass post-judgment attorney fees incurred in the subsequent veil-piercing action. The circuit court had denied these enforcement expenses. While a prevailing party in Illinois must normally pay its own attorneys’ fees, the fees can be shifted to the losing party where a statute or contract says so. There must be clear language in a contract for a court to award attorneys’ fees to a prevailing litigant.

Looking to both a Seventh Circuit case (Centerpoint Energy Services, Inc v. Halim, 743 F.3d 503 (7th Cir. 2014)) and a Colorado case (Swinerton Builders v. Nassi, 272 P.3d 1174 (Colo.App. 2012)) that awarded attorney fees in ancillary veil piercing claims where attorney fees were contractually provided for in collection of the original judgment, the appellate court found that since the underlying credit agreement contained expansive fee-shifting language, Steiner could recoup from the defendants the fees expended in both the first breach of contract suit against Delta and the second, piercing case against Maniscalco and Sackett. The appellate court echoed the Colorado appeals court’s depiction of piercing the corporate veil as a “procedural mechanism” to enforce an underlying judgment.

C.  TAKEAWAYS

For business owners, Steiner is another lesson to respect the separate existence of their business entities to ensure limited liability protection. Business owners should review the veil-piercing factors to be sure they do not satisfy them. Further, Steiner could be bad for business owners because it creates an exception to the general rule that fee-shifting language in a contract only binds parties to the contract, not third parties.

For creditors, Steiner is a boon. Steiner teaches us that broad, unequivocal attorneys’ fees language in a credit agreement or other contract not only applies to an initial breach of contract suit against a dissolved company but also to a subsequent, veil-piercing action to enforce the earlier judgment against a corporate officer or controlling shareholder (or even against an affiliate entity under facts similar to those in Steiner). Creditors may be more likely to pursue post-judgment veil-piercing actions knowing that recovery of their attorneys’ fees and costs is possible.

 

Steven A. Migala is a partner at Lavelle Law and possess over 20 years of providing excellent representation to banks, businesses and individuals in a variety of matters. He can be contacted at (847) 705-7555 and smigala@lavellelaw.com.