Frequently multiple related entities seeking asset protection have no practical business alternative but to utilize a common cash system to operate their entities. These entities can avoid piercing the corporate veil challenge by creditors provided there is no improper commingling of funds.
This concept is illustrated in a ruling in a June 2008 case. Judson Atkinson Candies, Inc. (“Judson”) sought to collect a judgment it obtained against LMC International, an Illinois company that was no longer in business. Unable to collect the money owed it, Judson sued CIC, LMC’s holding company, and several of LMC’s officers, in an attempt to hold them liable for LMC’s judgment debt.
Judson claimed that LMC’s corporate veil should be pierced to hold CIC liable. Among other things, Judson alleged that LMC’s funds were commingled with those of CIC, stating that an outside consultant concluded that LMC did not have a separate bank account, that transfers were made between LMC and CIC and that proceeds of loans to LMC were deposited into accounts owned by CIC. Essentially, Judson’s commingling argument was based on CIC’s use of a common cash management system. Judson, however, did not point to any evidence supporting its blanket assertions that LMC’s funds were used to pay CIC’s expenses nor did it cite any evidence to counter CIC’s assertions that it maintained a strict accounting of each subsidiary’s cash balance.
The court concluded that Judson failed to present sufficient proof that improper commingling occurred and refused to pierce the corporate veil. The court stated that the use of a cash management system alone is not evidence that funds are being improperly commingled. The court referred to other cases in which courts have generally declined to find alter ego liability based on a parent corporation’s use of a common cash management system. Those decisions have held that a centralized cash management system, where the accounting records always reflect the indebtedness of one entity to another, is not the equivalent of intermingling funds; and arrangements by a parent and subsidiary for economy of expense and convenience of administration may be made without establishing the relationship of principal and agent.
Please do not hesitate to contact us if you have any question about asset protection.