When plaintiff Diana Angell was injured while touring a home, she sued the wrong entity. In Angell v. Santeford Family Holdings LLC, after the circuit court granted summary judgment for the defendant on that basis, the appellate court reversed. It held that the corporate veil between the defendant company and a sister company in the same family real estate business could be pierced to hold the sister liable for Angell’s injury even though it was not named in the suit. 2020 IL App (3d) 180724, ¶21. This ruling has significant ramifications for any real estate organization utilizing single-purpose entities to own properties and management entities to maintain them.
Brian Gallagher was the COO and CFO of defendant Santefort Family Holdings, LLC (LLC). At deposition, he testified that the Santefort Family 2012 Irrevocable Trust (Trust) owned a subsidiary, which in turn owned and operated the LLC. He further testified that there were at least 11 companies related to the Trust’s real estate business, including single-purpose entities that owned each real property asset, as well as a management entity and a payroll entity providing services to them.
This type of structure is common in family and other real estate investment and development companies. In fact, single-purpose entities are generally required by commercial real estate lenders, who want borrowers to be single-purpose entities to facilitate pursuit of collateral in the event of a default. In Angell, the actual owner of the home at issue was not the LLC, but one of the other companies affiliated with the Trust’s real estate business, Midwest Home Rentals, LLC. Midwest’s revenues were recorded on the LLC’s books. Gallagher was the COO of Midwest.
The LLC filed a motion for summary judgment contending that it owed no duty to plaintiff because it did not own the home at issue. Angell responded by arguing that the LLC’s veil should be pierced to Midwest, the sister entity and actual owner of the home. The circuit court granted the LLC’s motion and denied Angell’s motion to amend her complaint. Angell appealed.
The appellate court reversed, holding that it was possible that the facts warranted piercing of the veil between the LLC and Midwest. Piercing the corporate veil is an equitable remedy. It “is not itself a cause of action but rather is a means of imposing liability on an underlying cause of action, such as a tort or breach of contract.” Angell, 2020 IL App (3d) 180724, ¶20 (internal quotation marks and citation omitted). The doctrine is generally used to pierce the veil of a subsidiary corporation to reach a parent corporation or individual shareholder. However, “courts may pierce the corporate veil of two affiliated or ‘sister’ corporations.” Id. ¶ 21 (internal quotation marks and citation omitted).
Illinois courts “are reluctant to pierce the corporate veil,” and a party asserting the doctrine must make “a substantial showing that the entities are not separate and distinct.” Id. ¶ 22. To do so, that party must demonstrate that: “(1) there is such a unity of interest and ownership that the separate personalities of the corporations no longer exist and (2) circumstances exist so that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.” Id. (internal quotation marks and citation omitted). Courts consider many factors in determining the first element, including:
- Inadequate capitalization or insolvency;
- Diversion of assets to the detriment of creditors;
- Commingling of funds;
- Failure to maintain arm's-length relationships among related entities;
- Failure to observe corporate formalities or keep corporate records;
- Failure to issue stock;
- Nonpayment of dividends;
- Nonfunctioning of the officers or directors; and
- Whether, in fact, the corporation is a mere façade for the operation of the dominant stockholder or parent company. Id.
The court held that Angell had raised a genuine issue of material fact that the corporate veil could be pierced, and thus, the LLC’s motion should have been denied. The court found that the LLC and Midwest failed to observe corporate formalities, maintain separate funds and have different and independent officers. Gallagher referred to the LLC and Midwest as a single “organization” and admitted that it was hard to keep track of the various Trust entities. He also testified that homes may have been transferred between the LLC and Midwest with an accounting entry, indicating that they maintain the same accounting measures. Indeed, Gallagher testified that the revenues from Midwest were recorded on the LLC’s books and the LLC filed Midwest’s taxes. And, all of the Trust companies paid employees using a single entity. Finally, Gallagher was the COO of both the LLC and Midwest, and was the LLC’s CFO while also being the COO of its owner.
This holding poses problems for any real estate business using the same or similar structure as the Trust’s. Indeed, the court opened its analysis by stating that “Gallagher’s testimony shows that the two entities [the LLC and Midwest] exist only to facilitate the operations of the irrevocable trust.” Id. ¶ 24. That statement will apply to any two entities within a similar real estate business. Moreover, many such companies use common officers for their entities, a common management company and common books and records, further suggesting that Angell could apply to nearly all of them. Real estate investment companies should consider the risk posed by potential veil piercing among their entities and, if necessary, mitigate that risk by separating them as much as practicable.