An Interesting Case On Piercing The Corporate Veil
Posted Sep 23, 2020
By Washington State Business and Real Estate Lawyer David C. Tingstad
Maple Valley Park Place, LLC v. Tax Resource Centers, Inc., No. 78832-9-I, 2020 WL 1853575 (Wn. App. Apr. 13, 2020) highlights Washington courts’ reluctance to permit creditors to pursue individuals for corporate debts.
Maple Valley Park Place, LLC (“MVPP”) owns and operates certain office space in Maple Valley. Northwest Tax Specialists, Inc. (“NTS”) was a tax preparation service whose sole owner and shareholder was Edward Harris (“Harris”). In 2014, on behalf of NTS, Harris entered into a lease agreement for office space with MVPP in anticipation of a pending merger with another accounting firm. Harris did not personally guarantee the lease.
The merger failed and NTS defaulted on the lease in 2015. In light of the failed merger, Harris closed NTS and started a new business, Tax Resource Centers, Inc. (“TRC”). TRC continued the same tax-oriented business as NTS.
MVPP subsequently filed suit against NTS and obtained a $523,804.33 judgment against NTS in May 2016. As NTS had virtually no assets, MVPP was unable to collect the judgment.
MVPP realized Harris started this new business and filed suit against TRC and Harris. This second suit and its subsequent appeal is the interest of this post.
MVPP argued that both TRC and Harris, individually, should be liable for the judgment based on two causes of action: 1) TRC was the successor in liability to NTS and 2) piercing the corporate veil. The successor in liability cause of action sought to pin TRC with NTS’ debts, while the second cause of action sought to pin Harris with the judgment. For reasons discussed below, MVPP succeeded to establish that TRC was the successor in liability but failed to establish the necessary elements to pierce the corporate veil.
Piercing the Corporate Veil
At trial, the court determined that MVPP adequately demonstrated that TRC was the successor in liability to NTS, but MVPP had not adequately demonstrated all the elements necessary to pierce the corporate veil. The holding that TRC was the successor in liability to NTS provided MVPP with an opportunity to collect the May 2016 judgment. MVPP did not challenge the “successor in liability” holding, which was ultimately one of the main reasons why MVPP was not entitled to pierce the corporate veil and pin Harris with personal liability.
To pierce the corporate veil in Washington, a party must show 1) the corporate form was intentionally used to violate or evade a duty, and 2) piercing the veil is necessary and required to prevent unjustified loss to the injured party. The trial court held, and the appellate court affirmed, that MVPP failed to show that piercing was necessary to prevent unjustified loss.
On appeal, the court did not discuss whether Harris abused the corporate form. The second element, however, was at issue. TRC was NTS’ successor in liability, and therefore MVPP could recover against TRC for the May 2016 judgment. Because MVPP could pursue the judgment against TRC, there was no necessity to pierce the veil against Harris personally.
This affirmation by the Court of Appeals furthers the widely held Washington policy that piercing the corporate veil will only be imposed in “exceptional circumstances.” Eagle Pacific Ins. Co. v. Christensen Motor Yacht Corp., 85 Wn. App. 695, 707-708, 934 P.2d 715 (1997). Practitioners involved in “veil piercing” cases ought to be aware of this high bar. Even in cases where a defendant’s actions abused the corporate form, it appears as though courts will not permit the veil to be pierced unless piercing is the only way to collect.
Additionally, this case ought to remind practitioners of the practical aspects of legal outcomes. Specifically, even though you lose in litigation, your client may still come out ahead. In the case at hand, Harris’ business was ultimately saddled with the old $500,000+ judgment, which looks like a win for MVPP and a loss for Harris. However, when you consider that Harris ultimately avoided this judgment against himself personally, then the outcome takes on a completely different outlook. There is a significant difference between losing a business and losing a home. It appears limited liability is alive and well, at least in the TRC case.
Next week, I will discuss the elements of “successor in liability” in Washington. I write on Washington business entity law considerations every Wednesday at noon.
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