The doctrine of piercing the corporate veil permits a claimant to hold officers, directors or other principals liable for the actions or debts of a corporation or other entity. Often, the doctrine is used in business tort cases, and requires meeting a stringent standard to prove that the entity is a sham or alter ego of its principals. When a plaintiff seeks to pierce the corporate veil in breach of contract cases, however, “courts apply an even more stringent standard to determine when to pierce the corporate veil than in tort cases.” Saletech, LLC v. East Balt, Inc., 2014 IL App (1st) 132639, ¶ 26; Tower Investors, LLC v. 111 East Chesnut Consultants, Inc., 371 Ill. App. 3d 1019, 1033 (1st Dist. 2007). Illinois courts have widely accepted and applied this standard, as have courts in other jurisdictions. OMV Associates, L.P. v. Clearway Acquisition, Inc., 976 N.E.2d 185 (Mass. App. Ct. 2012); Torts versus contracts, 1 Fletcher Cyc. Corp. § 41.85. These courts reason that when plaintiffs seeking to pierce the corporate veil entered into the subject contracts, they “expect[ed] to suffer the consequences of the limited liability status of the corporate form,” which means it should be more difficult for them to pierce the veil than the garden-variety claimant. Saletech, 2014 IL App (1st) 132639, ¶ 26.
Prior to a recent Illinois appellate court decision, the more stringent standard appeared to apply to all veil piercing claims arising from a corporation’s breach of contract. However, in A.L. Dougherty Real Estate Mgmt. Co., LLC v. Su Chin Tsai, 2017 IL App (1st) 161949, the First District significantly eroded the standard by holding the stringent standard does not apply after a breach of contract plaintiff obtains a judgment.
In A.L. Dougherty Real Estate Mgmt., Co, LLC, the plaintiff was a commercial landlord that had obtained a default judgment against a commercial tenant, a limited liability company, in an underlying action for breach of contract. After being unable to collect on the judgment, the commercial landlord filed a veil-piercing claim against the tenant’s principal and the principal’s daughter.
At first glance, the facts of A.L. Dougherty warrant application of the more stringent standard triggered by a breach of contract dispute. After all, the underlying claim was for breach of contract by a commercial tenant. But, the First District held that the dispute before the court was not for breach of contract, but rather for enforcement of a judgment obtained in the underlying action. The court reasoned that, “[u]nder the merger doctrine, once the underlying judgment became final, the [contract] entirely merged into the judgment, and no further action at law or equity could be maintained on the [contract].” 2017 IL App (1st) 161949, ¶29.
Given that A.L. Dougherty appeared to conflict with established Illinois precedent, many within the legal community believed that the Illinois Supreme Court would reverse the First District’s holding in A.L. Dougherty. On March 21, 2018, however, the Illinois Supreme Court denied the defendants’ petition for leave to appeal. A.L. Dougherty Real Estate Mgmt. Co., LLC v. Su Chin Tsai, 95 N.E.3d 497 (Ill. 2018). Then, on May 24, 2019, the Northern District of Illinois refused to apply a more stringent standard in a veil-piercing case seeking to enforce a judgment, citing to A.L. Dougherty in support. Puntillo v. Dave Knecht Homes, LLC, No. 15 CV 11839, 2019 WL 2225987, at *10 (N.D. Ill. May 24, 2019). Given the federal decision, A.L. Dougherty is gaining strength as Illinois law, and must be considered as such unless a contrary Illinois appellate court decision issues.
The A.L. Dougherty decision may impact litigation strategy before a lawsuit is even filed. If a party is contemplating a breach of contract action against a company it suspects is a sham, the party may not want to pursue both a breach of contract and a veil-piercing claim at the same time. In light of A.L. Dougherty, it may be more effective to pursue a breach of contract claim first, and then seek to enforce the judgment in a subsequent veil-piercing action.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact Yvette Mishev at 312.419.6900 or email@example.com.