Attorney for Appellants Attorney for Appellee
Nathaniel Ruff Leona Bonczek
Merrillville, Indiana James L. Clement, Jr.
Attorney for Appellee
James A. Greco
During its existence, BHM had struggled financially. The Internal Revenue Service had
threatened to close BHM because it had failed to forward to the IRS
past and present payroll tax obligations exceeding $200,000.00. Bonczek and Huddleston had
personally guaranteed the payment of that arrearage in order to keep the business
open. At the end of 1996, Defendants negotiated the sale of BHM
to Rocky Mountain Home Care and executed an Asset Purchase Agreement on February
14, 1997, making it effective as of February 1, 1997. It appears
that Rocky Mountain Home Care created AAA Home Care LLC (AAA),See footnote an Indiana
corporation, to purchase BHMs assets. In January, 1997, BHM made payroll payments
for the work performed from January 1 through 15, 1997, and also paid
$70,000.00 to the IRS. As noted above, the employees were not paid
by BHM for the last two weeks of January.
After acquiring the assets of BHM, AAA operated the business. According to
the trial court, AAA treated the [p]laintiffs as new employees in every way.
AAA considered this a new business and one whose employees were not
represented by the [u]nion, as had been BHM. . . . AAA
decided to give the new employees a hiring bonus. AAA made it
clear that the bonus was strictly at its discretion. The bonus was
meant to keep the employees happy and from going elsewhere. The hiring
bonus was equal to 70% of the wages that should have been paid
[to] the [p]laintiffs at the end of January, [1997,] but were not paid
to them. App. at 13.
Plaintiffs sued BHM, AAA Home Care LLC/Rocky Mountain Home Care, AAA Home Care
LLC/Rocky Mountain Home Care, d/b/a BHM, Lee and Donna Huddleston, and Leona Bonczek,
seeking unpaid wages, statutory penalties, and unpaid union dues.See footnote The trial court
entered judgment against BHM for unpaid wages, statutory penalties, and union dues, but
it dismissed all claims against Bonczek, Huddleston, and AAA Home Care LLC/Rocky Mountain
Home Care. Plaintiffs appealed and the Court of Appeals reversed part of
the trial courts judgment and held Bonczek and Huddleston individually liable on the
Escobedo v. BHM Health Associates, Inc., 798 N.E.2d 220, 224 (Ind.
Ct. App. 2003). Bonczek and Huddleston sought transfer to this Court.
We previously granted transfer, 812 N.E.2d 798 (2004), and now affirm the judgment
of the trial court.
Because of the bedrock nature of the principle of limited shareholder liability, the
burden on a party seeking to pierce the corporate veil is severe.
Such a party may only recover from a shareholder if the party proves
by a preponderance of the evidence that the corporate form was so ignored,
controlled or manipulated that it was merely the instrumentality of another and that
the misuse of the corporate form would constitute a fraud or promote injustice.
Aronson, 644 N.E.2d at 867 (citing Winkler v. V.G. Reed & Sons,
Inc., 638 N.E.2d 1228, 1232 (Ind. 1994) (citing in turn Hinds v. McNair,129
N.E.2d 553, 559 (Ind. 1955); Gurnik v. Lee, 587 N.E.2d 706, 710 (Ind.
Ct. App. 1992)). Caselaw sets forth certain guideposts for helping make this
determination: (1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation
shareholders or directors; (4) use of the corporation to promote fraud, injustice, or
illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of
assets and affairs; (7) failure to observe required corporate formalities; or (8) other
shareholder acts or conduct ignoring, controlling, or manipulating the corporate form. Aronson,
644 N.E.2d at 867 (citations omitted).
This case was tried to the court, and in such a circumstance, we
defer to the trial courts findings of fact and will reverse only if
clearly erroneous. Ind. Trial Rule 52(A) (On appeal of claims tried by
the court without a jury . . . the court on appeal shall
not set aside the findings or judgment unless clearly erroneous . . .
.); Yanoff v. Munch, 688 N.E.2d 1259, 1262 (Ind. 1997); Estate of Reasor
v. Putnam County, 635 N.E.2d 153, 158 (Ind. 1994).
Two trial court findings of fact are important to this issue:
9. For a couple of years, BHM had been in serious financial trouble, and the Internal Revenue Service (IRS) had threatened to close BHM due to past and present payroll tax obligations which exceeded $200,000.00. In order to continue the operation of BHM, Bonczek and Huddleston were required to personally guaranty [sic] the payment of the arrearage, and BHM had been making monthly payments of $30,000.00 towards said arrearage.
15. In anticipation of the sale, Bonczek and Huddleston paid on debts of BHM
that Rocky Mountain would not assume instead of paying the Plaintiffs their wages.
The debts that they paid included some $70,000.00 to the IRS for
employee withholding taxes for which Bonczek and Huddleston had agreed they would be
personally responsible. BHM had no assets left after the sale to AAA
Health Care/Rocky Mountain Home Care.
App. at 11, 13.
The trial court concluded:
Plaintiffs failed to present evidence which allows the Court to engage in a careful review of the relationship to determine whether undercapitalization existed; whether there was an absence of corporate records; whether there were fraudulent representations; whether the corporations were used to promote fraud and injustice or illegal activities; whether there was payment by the corporation of individual obligations; whether there was commingling of assets and affairs; whether there was a failure to observe required corporate formalities; and whether there were any other acts or conduct which ignored controlled or manipulated the corporate form. As to BHM there is only evidence that an overpayment on payroll tax arrearage was made while the January 16 through January 31 payroll was not. This payment was not on Huddleston and Bonczeks personal taxes, but on the corporate payroll taxes that were due and owing. The fact that this payment benefited Huddleston and Bonczek as they were guarantors on this debt does not change the nature of the obligation from a corporate one to an individual one.
App. at 17.
The Court of Appeals, however, found it appropriate to impose liability on Bonczek and Huddleston personally. Its reasoning was as follows:
Bonczek and Huddleston were the sole shareholders of BHM and designated $100,000 salaries for themselves. It is abundantly clear that these salaries were subsidized by their decisions to forego BHMs tax obligations. As such, there is a direct nexus between Bonczek and Huddlestons salaries and their personal guarantee of BHMs tax arrearages.
Because Bonczek and Huddleston effectively absconded with BHM employee wages to pay off
the arrearagea debt that arose at least in part from their efforts to
subsidize larger salaries for themselvesit would promote substantial justice to deny them the
protection of BHMs corporate status. Accordingly, we reverse the decision of the
trial court and extend the trial courts finding of BHMs liability to Bonczek
and Huddleston, personally, jointly, and severally.
Escobedo v. BHM Health Associates, Inc., 798 N.E.2d 220, 223 (Ind. Ct. App. 2003) (footnote omitted).
We conclude that the Court of Appeals was wrong both as to procedure and law.
In reaching the conclusion that it did, the Court of Appeals appears to
have disregarded the trial courts findings in favor of findings of its own.
A trial courts findings of fact should be set aside only if
clearly erroneous, when the record contains no facts to support them either directly
or by inference. Estate of Reasor, 635 N.E.2d at 158. The
trial court made no findings that the salaries of Bonczek and Huddleston were
subsidized by their decisions to forego BHMs tax obligations and the record contains
evidence that Bonczek and Huddleston did not always draw their salary. Tr.
at 60; Huddleston Dep. at 27. Huddleston said she mortgaged her home
to pay the rest of the tax liability and, to the best of
her knowledge, no company money was used to pay the loan from February,
1996, to February, 1997. Given these facts in the record, and in
the absence of any trial court findings on the subject, the standard of
appellate review does not permit us to find that Bonczek and Huddleston failed
to pay tax withholdings to subsidize their salaries.
Even if such a finding were permissible, it would not, standing alone, justify
piercing the corporate veil. As set forth above, corporate law permits the
corporate form to be disregarded and personal liability imposed only where (1) the
corporate form is so ignored, controlled, or manipulated that it is merely the
instrumentality of another, and (2) the misuse of the corporate form constitutes a
fraud or promotes injustice. Aronson v. Price, 644 N.E.2d 864, 867 (Ind.
1994). The Court of Appeals did not use this two-prong standard.
It held merely that the law permitted the corporate form to be disregarded
to promote substantial justice. Escobedo, 798 N.E.2d at 223. This is
not the same as misuse of the corporate form to promote injustice.
And there is nothing in either the findings of the trial court or
the Court of Appeals that would support a conclusion that Bonczek and Huddleston
so ignored, controlled, or manipulated the corporate form that it was merely their
instrumentality. The tax arrearage was a corporate debt; the personal guaranty of
Bonczek and Huddleston did not change the debt from a corporate to an
individual one. And the fact that BHM paid more than the usual
monthly payment to the IRS at the end of January, 1997, is an
inadequate reason to disturb the trial courts findings.
I concur in the majoritys holding that facts sufficient to pierce the corporate
veil are not established. The Court of Appeals reversed the trial court
on the basis that it would be inequitable to permit the corporate officers
to escape liability for discharging a liability they had guaranteed as individuals, if
it had the effect of diverting limited assets otherwise available for other creditors,
including the plaintiffs. I agree that the facts as found by the
trial court would support such a theory of recovery except for one point.
The debt discharged was to the Internal Revenue Service for past payroll
taxes. If the nature of that obligation rendered the IRS a preferred
creditor vis-à-vis claims for wages for the period immediately preceding collapse of the
corporation, the plaintiffs here suffered no loss by the payment of the debt
to the IRS. Perhaps this was the reason no theory of self
dealing by corporate officers or directors, breach of fiduciary duty, fraudulent transfer or
fraud on creditors was advanced. In any event, the facts are sufficiently
murky that I concur in affirming the trial court.