(Flagstar Bank, FSB v. Sellers)

An Ohio Court of Appeals recently ruled that use of a corporation to engage in a fraudulent conveyance resulted in piercing the corporate veil to impose personal liability on the 100% owner, Flagstar Bank, FSB v. Sellers, 12th Dist. No. CA2009-11-287, 2010-Ohio-3951.

The bank sued a mortgage broker, Mr. Sellers, in an attempt to pierce the corporate veil and hold him personally liable, for a default judgment the bank received against his corporation. The trial court granted the bank’s motion for summary judgment. On appeal, the summary judgment was affirmed by the Ohio Court of Appeals, Twelfth District, Butler County.

The Court began its analysis with the principal that, generally, shareholders of a corporation are not liable for the debts of the corporation, citing Dombroski v. Well Point, Inc. (2008), 119 Ohio State 3d 506. In analyzing the “rare exception” to the rule, allowing piercing the corporate veil, the Court turned to the seminal Ohio Case, Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio State 3d 274. Belvedere established the 3-prong test for deciding when to pierce the corporate veil. The Belvedere court held:

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. Id at syllabus paragraph 3.

The Court of Appeals in Flagstar Bank v. Sellers stated that the Dombroski case expanded upon the second prong of the Belvedere test by stating:

To fulfill the second prong of the Belvedere test for piercing the corporate veil, the plaintiff must demonstrate that the defendant shareholder exercised control over the corporation in such a manner as to commit fraud, an illegal act, or a similarly unlawful act. Dombroski, supra at syllabus paragraph 26, 28.

The Court in Flagstar Bank noted that fraud was not required, because the second prong allowed for the alternative of “an illegal act, or a similarly unlawful act.”

The Flagstar Bank Court found that Mr. Sellers’ control over the corporation was complete and resulted in the actions that caused the Bank to suffer unjust injury. Thus the first and third terms of the Belvedere test prongs were satisfied. As to the second prong, the Court also found that a fraudulent conveyance had occurred. The Bank had requested the corporation to repurchase certain nonconforming loans. Instead, the corporation ceased operations and transferred almost all of its assets to its sole shareholder, Mr. Sellers, and another corporation of which he was sole owner. Thereafter, Mr. Sellers began operating the second corporation using the same employees, offices and equipment as the transferor corporation had used. The Flagstar Bank Court found “no genuine issue of material fact as to whether Sellers controlled [the transferor corporation] in such an egregious manner as to commit fraud, an illegal act, or a similarly unlawful act” by the fraudulent conveyance. Thus the corporate veil was properly pierced.