To determine whether there is a “unity of interest and ownership” to support the piercing of the corporate veil, a court generally examines many factors, including: inadequate capitalization; failure to issue stock or to observe corporate formalities; nonpayment of dividends; insolvency of the debtor corporation; non-functioning of the other officers or directors; absence of corporate records; commingling of funds; diversion of assets from the corporation by or to a shareholder or other person to the detriment of creditors; failure to maintain arm's-length relationships with related entities; and whether the corporation is a mere facade for the personal actions of dominant shareholders.
DiCosola argued there could be no unity of interest and ownership because his wife, Theresa, owned all of the shares of TLD. The Appellate Court rejected this argument. It noted that share ownership, while important, is not a prerequisite to piercing the corporate veil. It is merely another factor to consider in evaluating the total circumstances of a corporation’s operations.
Although all shares were registered in Theresa’s name, and she was designated as the sole director, she did not know who had served as TLD’s incorporator, the date of incorporation, how many shares she owned, or the amount paid for the shares. She said that DiCosola handled all financial matters, and she did not know how money was transferred into the company. She did not know that it owed her $572,000 as of December 31, 2002, nor that TLD was an S corporation, what a K-1 form is, or whether she ever received a paycheck from TLD. She had never received a dividend from TLD, and did not know whether it had profits or losses for the years 1998 through 2002. She had no idea how moneys were deposited into her and DiCosola’s personal accounts, but knew they came “from the business.” She admitted when informed by counsel that TLD reported assets of $1,818,213 as of January 1, 2002, and zero assets at the end of 2002, but did not know where the assets went. In short, there was little evidence to establish that Theresa had any knowledge of, or involvement in, TLD operations, as a shareholder, director or otherwise.
DiCosola admitted he was TLD’s president. TLD had adopted corporate bylaws, prepared resolutions, made required Secretary of State and tax return filings, and maintained its own bank accounts and financial records. Nevertheless, the court concluded that, on the whole, TLD failed to observe proper corporate procedures. There were no records regarding loans between TLD, Theresa, and DiCosola, or the terms of such loans. Loans were not reported in tax returns and there were no notes or other substantiating documentation, or evidence of any loan repayments. TLD never had any employees, never had a written contract with a subcontractor, and never took bids from subcontractors. TLD kept no financial records for any payments made, except for draw schedules filed with title companies. It kept no written records of any construction change orders. DiCosola admitted that TLD assets decreased from approximately $1.8 million to zero between January 1 and December 31, 2002. He claimed the reduction resulted from payments against a line of credit established to fund construction of buildings that were sold.
Based on these factors, and that TLD’s capitalization was only $1,000, the Court of Appeals agreed with the trial court that TLD was DiCosola’s alter ego. It agreed that piercing the corporate veil was appropriate to avoid fraud or inequitable consequences. It concluded that DiCosola caused TLD to be incorporated and placed nominal ownership and control in Theresa’s hands with the intent of shielding himself from the liabilities to which his general contracting activities might expose him. Moreover, all of TLD’s assets had been transferred, supposedly to repay shareholder loans or a line of credit, when TLD was being sued by the Fontanas. Indeed, after Fontana sued, TLD ceased operations and DiCosola transferred general contracting activities into a new entity, presumably to keep assets beyond the Fontanas’ reach.
The corporate form of business provides many benefits. The separation it creates between business and personal assets and actions of the owner generally will be recognized and enforced. However, as Fontana indicates, courts will step in to protect third parties from abuse of the corporate form by those that control operations, even if they are not shareholders.