In Flagstar Bank, FSB v. Adrian Sellers, 2010-Ohio-3951, 2010 WL 3294683 (Ohio App. 12 Dist. Aug. 23, 2010) (Powell, J.), the Twelfth District Court of Appeals upheld the Butler County Common Pleas trial court’s Order holding that the owner of the borrower-corporation became personally liable for the corporation’s debt when the corporation transferred its assets to another entity controlled by the owner without adequate consideration. The primary issue before the Court of Appeals was whether the plaintiff-bank was able to establish that there was no genuine issue of material fact as to the second prong for piercing the corporate veil test.1
The evidence indicated that in August, 1999, Plaintiff Flagstar Bank, FSB, entered into a “Wholesale Lending Purchase Agreement” to purchase mortgage loans from American Liberty Mortgage, Inc., Defendant Adrian Sellers’ business entity. Under this agreement, American Liberty warranted that all information submitted in each loan would be true and accurate, and that the loans would conform to the requirements of secondary lenders. If any loan had a breach of its warranty, American Liberty agreed to repurchase that loan from Flagstar Bank. In late 2001, Flagstar Bank requested American Liberty to repurchase a number of non-conforming loans. American Liberty, however, did not repurchase the offending loans, but instead, ceased its brokerage operations and transferred virtually all of American Liberty’s assets to either Sellers or American Financial Freedom, Inc., a corporation Sellers had established in June of 2001. That left American Liberty insolvent. In January of 2002, Sellers, as the sole owner of American Financial, began operating American Financial by using the same offices, equipment, computer software, and employees as that of the recently defunct American Liberty.2 Flagstar Bank had sued American Liberty on the purchase agreement in Hamilton County. American Liberty did not defend and Flagstar Bank obtained a judgment by default against the corporation.
Flagstar Bank then sued Sellers in Butler County, seeking to hold him personally liable for the actions of American Liberty. Sellers put forth two defenses: (i) Flagstar Bank failed to plead fraud with sufficient particularity under Ohio Civ.R. 9(B); and (ii) that there was no evidence in the record that he, personally, did anything wrong. In essence, Sellers stood behind the principle that shareholders of a corporation are generally not liable for the debts of the corporation, which is ingrained in Ohio law.3
However, in certain circumstances, the corporate form may be disregarded and the corporate veil pierced for the purpose of reaching the assets of the corporation’s individual shareholders.4 In this case, the Court of Appeals disregarded the corporate protections normally afforded owners such as Sellers and ruled against both of Seller’s asserted defenses, relying on the Ohio Supreme Court’s recent decision in Dombrowski v. Wellpoint, Inc., 119 Ohio St.3d 506, 895 N.E.2d 538, 2008-Ohio-4827, which expanded the previous test for an owner to be found personally liable for the bad acts of his corporation.
In 1993, the Ohio Supreme Court established a three-pronged test for courts to use when deciding whether to pierce the corporate veil.5 The test, which focuses on the extent of the shareholder’s control of the corporation and whether the shareholder misused the control so as to commit specific egregious acts that injured the plaintiff, provides the following:
"The corporate form may be disregarded and individual shareholders held liable for wrongs committed by the corporation when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong."6
In Dombrowski, the Ohio Supreme Court explained the second prong of the Belvedere test by stating that a plaintiff could establish personal liability if the defendant-shareholder used the corporation to commit fraud, an illegal act, or a similarly unlawful act.7 This is an expansion of the previous test for piercing the corporate veil, which may result in greater personal liability for an owner of a corporation in cases where the bad actions of that corporation resulted in damages.