Corporations are often principally set up to shield individuals from liability. Court generally accept the corporate veil absent proof of “sham” corporations. As a result, the assets of individual officers, directors, shareholders or employees of corporations remains personally protected, absent proof of activity outside of the scope of their authority, intentional negligence, or other limited theories. But when corporations do not have sufficient assets to cover losses, such exceptions may get litigated to establish a recovery pot, and similar facts gave rise to the recently decided case in Henrico Circuit Court by Judge Hicks in Ace Electric Co., Inc. v. Advance Technologies, Inc., et al., Civil Case No. CL09-971, 14 Cir. CL09971 (2011) (April 29, 2011).
In the Spring of 2007, Trent Construction Company subcontracted with Ace Electric Company for boiler work on a project at the University of Richmond. Ace sub-subcontracted work to Advance Technologies, Inc. by written purchase order. Ace later terminated Advance, which had ceased operations. Ace brought suit against Advance and received a default judgment against Advance. After being unable to collect the judgment amount, Ace brought suit against Ace’s sole shareholder, officer and director, Erik Butler, his wife, and ADVTEC, Inc., a later created company claimed to have been fraudulently created to avoid Advance’s debts.
The Court noted that piercing a “corporate veil is an extraordinary remedy that is infrequently granted.” But the court found the evidence sufficient in that case to do so against Mr. Butler because it found that he had failed to uphold corporate formalities, such as conducting annual meetings and maintaining corporate records, and because the company was “grossly undercapitalized” at the time it entered into the contract with Ace. While the court found the facts relating to Mrs. Butler and ADVTEC suspicious, it held Ace had not met the required burden to get to them.
The key lesson learned from this case is the importance of maintaining corporate formalities. They may seem like impositions, but failing to maintain those formalities can have drastic implications, including this type of corporate piercing, and as a result the advantages of corporate protection are lost. It certainly was an important, and expensive, lesson learned to Mr. Butler in this case.