Firstar Bank (“Firstar”) learned the hard way that Illinois corporate law will protect a shareholder from the corporation’s creditors’ claims provided the debtor corporation keeps adequate corporate records and maintains the distinction between corporate assets and operations and those of its shareholders.
Faul Chevrolet, Inc. (“Faul”) was a Chicago area auto dealership. All of the shares of Faul were owned by The Faul Group, Inc. (“Faul Group”). The shares of Faul Group were owned by Lawrence Faul (“Lawrence”) and a trust in which his children were beneficiaries. Lawrence was the sole officer and director of Faul. Although Lawrence ran the dealership, including supervision of the financing and accounting departments and weekly meetings with sales and service department managers, he also spent time monitoring his other business interests. The dealership provided him with customary owner perks, such as a car, a place to park his boat, and a cell phone for his wife. Lawrence also separately owned the real estate on which the dealership operated.
Faul had two primary financing arrangements in its business. First, Chrysler Credit Corporation (“Chrysler”) provided “floor plan” financing, which financed Faul’s purchase of automobile inventory. Faul also had an agreement with Firstar by which Firstar agreed to purchase retail installment contracts and leases for the cars sold or leased by Faul. Faul’s business began to decline after 1996, and by early 2000, Faul was in default on its financing agreement with Chrysler. Therefore, Faul arranged a sale of its assets to another auto dealer. Faul’s debt to Firstar was not paid as a result of the transaction, and Firstar filed suit against Faul, Faul Group, and Lawrence, seeking to assert against Lawrence and Faul Group the debt Faul owed to Firstar.
In Illinois, a creditor may pierce the corporate veil upon proof that: (1) there is so close a unity of interests and ownership that the separate personalities of the individual and the corporation no longer exist; and (2) to adhere to the legal distinction of separate corporate existence would sanction fraud or promote injustice. To find a unity of interest sufficient to justify the piercing of debtor’s corporate veil, the court must consider: (1) whether the debtor failed to maintain corporate records or to comply with corporate formalities; (2) whether the corporation was adequately capitalized; (3) whether the corporation commingled its assets with those of its shareholders; and (4) whether the shareholders of the corporation treated corporate assets as their own.
In refusing to pierce the corporate veil, the court found the dealership was not undercapitalized; that Lawrence’s ownership of the real estate from which the dealership operated was not relevant; the fact that some Faul employees also worked for other Faul Group businesses or that Lawrence had other business interests to which he devoted part of his time was not sufficient to subject Faul to having its corporate veil pierced; and that Faul provided Lawrence a place to park his boat and provided a cell phone for Lawrence’s wife were not so egregious to require a finding of the unity of interests of Faul and its shareholder, Lawrence.
This case provides an excellent reason why lenders should obtain guaranties of the holding company and the individual shareholders, personally, together with cross collateral covenants of the financing obligations.