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lwpat
lwpat, Attorney
Category: Business Law
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Experience:  Attorney with over 35 years of business experience.
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Business Ethics

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Business Ethics Jon-T Chemicals, Inc. (Chemicals), was an Oklahoma corporation engaged in the fertilizer and chemicals business. John H. Thomas was its majority shareholder and its president and board chairman. Chemicals incorporated Jon-T Farms, Inc. (Farms), as a wholly owned subsidiary, to engage in the farming and land-leasing business. Chemicals invested $10,000 to establish Farms. All the directors and officers of Farms were directors and officers of Chemicals, and Thomas was its president and board chairman. In addition, Farms used officers, computers, and accountants of Chemicals without paying a fee, and Chemicals paid the salary of Farms &’s only employee. Chemicals made regular informal advances to pay Farms &’s expenses. These payments reached $7.5 million by January 1975. Thomas and Farms engaged in a scheme whereby they submitted fraudulent applications for agricultural subsidies from the federal government under the Uplands Cotton Program. As a result of these applications, the Commodity Credit Corporation, a government agency, paid over $2.5 million in subsidies to Thomas and Farms. After discovering the fraud, the federal government obtained criminal convictions against Thomas and Farms. In a separate civil action, the federal government obtained a $4.7 million judgment against Thomas and Farms, finding them jointly and severally liable for the tort of fraud. Farms declared bankruptcy, and Thomas was unable to pay the judgment. Because Thomas and Farms were insolvent, the federal government sued Chemicals to recover the judgment. Was Farms the alter ego of Chemicals, permitting the United States to pierce the corporate veil and recover the judgment from Chemicals? Did Thomas act ethically in this case? Should the corporate veil be pierced? Why or why not? (must be a paragraph or 2 in length)
Submitted: 2 years ago.
Category: Business Law
Expert:  lwpat replied 2 years ago.
In this situation Chemicals is liable. I will work up the paragraphs for you.
Expert:  lwpat replied 2 years ago.
Here is the case

http://law.justia.com/cases/federal/appellate-courts/F2/768/686/407913/

In general, equitable principles govern the veil-piercing remedy, and “t is settled authority that the doctrine of piercing the corporate veil is not to be applied without substantial reflection.” Sturkie v. Sifly, 280 S.C. 453, 457, 313 S.E.2d 316, 318 (Ct. App. 1984). “If any general rule can be laid down, it is that a corporation will be looked upon as a legal entity until sufficient reason to the contrary appears; but when the notion of legal entity is used to protect fraud, justify wrong, or defeat public policy, the law will regard the corporation as an association of persons.” Id. The party seeking to pierce the corporate veil has the burden of proving that the doctrine should be applied. Id.

In Sturkie, the court of appeals adopted a two prong test for piercing the corporate veil. The first prong analyzes the shareholder’s relationship to the corporation by evaluating eight factors. The second prong requires the plaintiff to demonstrate that “fundamental unfairness” would result from recognition of the corporate entity. “The essence of the fairness test is simply that an individual businessman cannot be allowed to hide from the normal consequences of carefree entrepreneuring by doing so through a corporate shell.” Dumas v. Infosafe Corp., 320 S.C. 188, 192-193, 463 S.E.2d 641, 644 (Ct. App. 1995).

 

Alter ego describes a theory of procedural relief. Drury Dev. Corp. v. Found. Ins. Co., 380 S.C. 97, 101 n.1, 668 S.E.2d 798, 800 n.1 (2008). "[T]he alter ego doctrine is merely a means of piercing the corporate veil." Id. (citing 18 C.J.S. Corporations § 23 (2008)); see also Mid-South Mgt. Co. Inc. v. Sherwood Dev. Corp., 374 S.C. 588, 603-04, 649 S.E.2d 135, 143-44 (Ct. App. 2007) (affirming the alter ego theory of recovery's application to parent and subsidiary situations). Under this theory, when a parent company controls the business decisions and actions of its subsidiary, the subsidiary becomes an instrument or alter ego of the parent. Peoples Fed. Sav. & Loan Ass'n v. Myrtle Beach Golf & Yacht Club, 310 S.C. 132, 148, 425 S.E.2d 764, 774 (Ct. App. 1992). Control required for liability under an alter ego doctrine amounts to total domination of the subsidiary to the extent the subsidiary manifested no separate corporate interests and functioned solely to achieve the purpose of the dominant corporation. Id. (citing Krivo Indus. Supply Co. v. Nat'l Distillers & Chem. Corp., 483 F.2d 1098, 1106 (5th Cir. 1973). Moreover, "[c]ommon officers and/or directors and public identification of one corporation as the other's subsidiary do not, without more, support the conclusion the subsidiary is its parent's alter ego or agent for the transaction of its business." Yarborough & Co. v. Schoolfield Furniture Indus., Inc., 275 S.C. 151, 153-54, 268 S.E.2d 42, 44 (1980) (citations omitted).

However, merely establishing the level of control or dominance a parent must have over a subsidiary, in order to prove it is the alter ego of the subservient corporation, is not sufficient to maintain an alter ago action. Mid-South Mgt., 374 S.C. at 603, 649 S.E.2d at 143 (citing Colleton County Taxpayers v. School Dist. of Colleton County, 371 S.C. 224, 638 S.E.2d 685 (2006); Baker v. Equitable Leasing Corp., 275 S.C. 359, 271 S.E.2d 596 (1980)). Instead "one must [also] show that the retention of separate corporate personalities would promote fraud, wrong or injustice, or would contravene public policy." Mid-South Mgt., 374 S.C. at 603, 649 S.E.2d at 143. "Furthermore, when a motion for summary judgment is made and properly supported, an adverse party may not rest solely upon the allegations or denials in his pleading, but must set forth specific facts showing that there is a genuine issue for trial." Colleton County Taxpayers v. School Dist. of Colleton County, 371 S.C. 224, 237, 638 S.E.2d 685, 692 (2006) (citing Rule 56(e), SCRCP).

In addition, several factors should be considered before a parent corporation may be held liable for the torts of its subsidiaries. These include: stock ownership by parent; common officers and directors; financing of subsidiary by parent; payment of salaries and other expenses of subsidiary by parent; failure of subsidiary to maintain formalities of separate corporate existence; identity of logo; and plaintiff's knowledge of subsidiary's separate corporate existence. 16 Am. Jur. Proof of Facts 2d 679 (2006).

Here we are told that Chemicals owned all the stock of Farms
That Chemicals completely financed farms by making regular informal advances to pay Farms &’s expenses. In other words Chemicals failed to follow the corporate formalities
That all the officers and directors of Farms were also officers and directors of Chemicals
That Chemicals paid the expenses of Farms
Finally we are told that Farms and Thomas were found guilty of criminal fraud.

 

“The essence of the fairness test is simply that an individual businessman cannot be allowed to hide from the normal consequences of carefree entrepreneuring by doing so through a corporate shell.”

 

Thomas did not act ethically since he was guilty of fraud and Chemicals should be liable as the alter ego of farms.

 

these are the elements from the actual case

 

(1) the parent and the subsidiary have common stock ownership;

(2) the parent and the subsidiary have common directors or officers;

(3) the parent and the subsidiary have common business departments;(4) the parent and the subsidiary file consolidated financial statements and tax returns;

(5) the parent finances the subsidiary;

(6) the parent caused the incorporation of the subsidiary;

(7) the subsidiary operates with grossly inadequate capital;

(8) the parent pays the salaries and other expenses of the subsidiary;

(9) the subsidiary receives no business except that given to it by the parent;

(10) the parent uses the subsidiary's property as its own;

(11) the daily operations of the two corporations are not kept separate; and

(12) the subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings.

Nelson, 734 F.2d at 1093; Miles, 703 F.2d at 195-96; Baker, 656 F.2d at 180. See generally Douglas & Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193 (1929).

 

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