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Illinois Case Demonstrates Circumstances Under Which A Contractor May Pierce The Corporate Veil


Posted on April 28, 2015

Every contractor, subcontractor, and material supplier has, at some time, found themselves owed money by an insolvent owner, contractor, or developer that is hiding behind the protective shield of corporate organization.  Generally, corporations and limited liability companies (“LLC’s”) are treated as a separate legal person, which is responsible for any financial liability incurred by the company.  This means that the owner(s) of the company cannot be held personally liable for its debts.  However, under certain circumstances, a creditor of such an insolvent entity can “pierce the corporate veil” so as to hold the shareholders of a corporation, or owners of and LLC, liable for its debts.

Such was the case in a recent decision issued by the First District Appellate Court of Illinois in A.G. Cullen Constr., Inc. v. Burnham Partners, LLC, wherein Robert and Lori Halpin (“Halpins”) were held personally liable for $450,000 of construction work commissioned by the limited liability company owned by the Halpins.  The Halpin-owned Westgate Ventures, LLC (“Westgate”) contracted with A.G. Cullen Construction, Inc. (“Cullen”) to build a warehouse and distribution facility in Big Beaver, Pennsylvania.

During the project, Westgate refused to pay one of Cullen’s pay applications.  Cullen filed an arbitration claim and was awarded $448,406.87.  Prior to arbitration, however, the Halpins liquidated Westgate’s assets and used the proceeds to pay Westgate’s other creditors.  The Halpins also paid another company they owned a $400,000, and $97,500 to themselves.  These transfers left Westgate with no assets to satisfy Cullen’s arbitration award.

Cullen filed a lawsuit against Westgate and the Halpins, arguing that the Halpins were personally liable for Westgate’s debt because they had committed fraud by disposing of Westgate’s assets.  After a bench trial, the court dismissed the complaint, opining that Cullen had failed to present any evidence that warranted piercing of the corporate veil.

On appeal, the First District Appellate Court of Illinois reversed, holding that the Halpins’ conduct demonstrated nine of the eleven “badges of fraud” stated in the Illinois Uniform Fraudulent Transfer Act which give rise to a presumption of fraud.  Specifically, the Court found:

  1. There was a transfer of funds to a company “insider”, i.e. the Halpins.
  2. The transfer of assets was hidden from Cullen.
  3. The transfer of assets was for the purpose of hiding the assets from Cullen.
  4. The transfers were “for substantially all of Westgate’s assets.”
  5. The transfers rendered Westgate insolvent.
  6. The transfers occurred only ten months after the arbitration claim was made and two months before the arbitration award was issued.
  7. The Halpins were put on notice of Cullen’s arbitration claim before the transfers occurred.
  8. Westgate did not receive “reasonably equivalent value” in exchange for the transfers.
  9. Westgate transferred the assets to a company owned by the Halpins, who then transferred those assets to the Halpins.

Ultimately, the Court held that violated the Halpins violated the Act by “disbursing all of Westgate’s assets to themselves and other unsecured creditors when they knew about their potential liability to Cullen on its arbitration claim…”  Accordingly, the Court ordered that Cullen was entitled to a judgment against the Halpins personally.

Under the Ohio Uniform Fraudulent Transfer Act, which is nearly identical to that of Illinois, the eleven badges of fraud are:

  1. Whether the transfer or obligation was to an insider.
  2. Whether the debtor retained possession or control of the property transferred after the transfer.
  3. Whether the transfer or obligation was disclosed or concealed.
  4. Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit.
  5. Whether the transfer was of substantially all of the assets of the debtor.
  6. Whether the debtor absconded.
  7. Whether the debtor removed or concealed assets.
  8. Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
  9. Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
  10. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
  11. Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.

As demonstrated by the A.G. Cullen case, a contractor, subcontractor, or material supplier that gets stiffed on its bill by an insolvent corporation or LLC is not necessarily without legal recourse. Evaluating the factual and legal circumstances under which a claim can be made to the pierce the veil of a corporate entity is an undertaking that should be discussed with experienced legal counsel.  For questions regarding Ohio’s corporate law, or any other aspect of Ohio construction or business law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or tharpst@harpstross.com or nhorrigan@harpstross.com.

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