Bodenhamer Bldg. Corp. v. Architectural Research Corp.

• Citation: 873 F.2d 109
• Decision Date: 21 April 1989
• Docket Number: 87-1269,Nos. 86-2078,s. 86-2078
• Parties: BODENHAMER BUILDING CORPORATION, Plaintiff-Appellee, v. ARCHITECTURAL RESEARCH CORPORATION; American Standards Testing Bureau, Inc.; and Ar-Lite Panelcraft, Inc., Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 109

873 F.2d 109

13 Fed.R.Serv.3d 1144

BODENHAMER BUILDING CORPORATION, Plaintiff-Appellee, v. ARCHITECTURAL RESEARCH CORPORATION; American Standards

Testing Bureau, Inc.; and Ar-Lite Panelcraft,

Inc., Defendants-Appellants.

Nos. 86-2078, 87-1269.

United States Court of Appeals,

Sixth Circuit.

Argued Jan. 7, 1988.

Decided April 21, 1989.

Thomas S. Shore, Jr. (argued) Rendigs, Fry, Keily & Dennis, W. Breck Weigel, Cincinnati, Ohio, William M. Saxton, Butzel, Long, Gust, Klein & Van Zile, Detroit, Mich., for defendants-appellants.

Charles D. Bavol (argued), Detroit, Mich., for plaintiff-appellee.

Before: ENGEL, Chief Judge, ^* RYAN, Circuit Judge, and PORTER, ^** Senior District Judge.

ENGEL, Chief Judge.

In this diversity case, appellants American Standards Testing Bureau (ASTB), Architectural Research Corporation (ARC), and Ar-Lite Panelcraft Inc. (API) appeal the judgment of the United States District Court for the Eastern District of Michigan imposing damages in the amount of $51,069.75, for disregarding the corporate entity and violating both the Michigan Fraudulent Conveyance Act and the Michigan Bulk Sales Act. Appellants also challenge the district court's award of $77,795.75 for appellee's attorney fees and costs under Fed.R.Civ.P. 11. We affirm the damage award, but vacate the award of Rule 11 sanctions and remand for further proceedings with respect to that issue.

Bodenhamer Building Corporation (Bodenhamer) is a Georgia corporation with its principal place of business in Georgia. In 1978, Bodenhamer, a general contractor on a construction project, subcontracted with ARC for a supply of pre-cast polymer concrete panels. At the time it entered the subcontract with Bodenhamer, ARC was a wholly-owned corporate subsidiary of ASTB, a Delaware corporation with its principal place of business in New York. Vassilis Morfopolous, 100% shareholder and Chief Executive Officer of ASTB, acquired controlling interest in ARC in 1977 and became ARC's Chief Executive Officer in 1979, when ASTB acquired 100% ownership of ARC.

On June 12, 1980, ASTB and ARC executed a revolving loan agreement whereby: ASTB loaned money to ARC, payable upon demand by ASTB; ARC granted ASTB the right to collect ARC's accounts receivable; and ARC gave ASTB a security interest in "Any and all personal property of whatever nature, kind and description, including but not limited to, equipment, fixtures, inventory, patents, stock, assets and accounts receivable." On June 25, 1980, ASTB filed a corresponding financing statement.

After ARC failed to discharge its subcontract with Bodenhamer, Bodenhamer sued ARC in the United States District Court for the Southern District of Georgia seeking damages for breach of contract; on October 14, 1982 Bodenhamer received a $49,633.66 judgment against ARC. Before the judgment, Elliott Winograd, the corporate attorney for ASTB, informed Carl Lukens, another ASTB employee, that if Bodenhamer won its suit, ASTB would declare ARC in default on the revolving loan and foreclose on the loan in order to prevent Bodenhamer from executing any judgment. After Bodenhamer received judgment, ASTB filed claim and delivery actions to foreclose on its lien and to enforce its security interest in ARC's property; appropriate orders were subsequently entered for ASTB by the Wayne County, Michigan, Circuit Court.

To satisfy ASTB's lien against ARC, a November 4, 1982 auction sale of ARC's assets was conducted on the premises of ARC. Winograd, Lukens, Morfopolous and representatives of one of defendants' competitors, Lone Star Polymer Concrete Company, were the only ones present. The only bid submitted was that of ASTB in the amount of $115,000, conveyed through Lukens. ASTB thereupon took possession of ARC's assets, leaving $92,796.22 in unsecured and unpaid debt still owed by ARC to Bodenhamer and others. Although remaining in existence after the sale of its assets, ARC ceased operations, and ASTB leased the foreclosed assets to another wholly owned subsidiary, Ar-Lite Panelcraft, Inc. (API), which occupied the premises previously used by ARC. The evidence is clear that ASTB incorporated API in the State of Delaware in October 1982 in order to continue manufacturing Ar-Lite panels if Bodenhamer were to receive judgment against ARC in the Georgia lawsuit.

The auction having frustrated its efforts to collect its Georgia judgment, Bodenhamer certified the judgment for purposes of collection in the United States District Court for the Eastern District of Michigan on December 27, 1982. On May 16, 1983, Bodenhamer filed a complaint charging defendants ARC, ASTB and API with disregard of the corporate entity of ARC, and violation of both the Michigan Fraudulent Conveyance Act, Mich.Comp.Laws Ann. Sec. 566.11 et seq., and the Michigan Bulk Transfer Act, Mich.Comp.Laws Ann. Sec. 440.6101 et seq. Defendants answered the complaint on June 22, 1983 and filed a counterclaim against both Bodenhamer and its owner, Douglas Bodenhamer, alleging abuse of process and conspiracy.

On August 27, 1986, the case proceeded to a jury trial on the fraudulent conveyance issue and to a bench trial on the disregard of the corporate entity and bulk sales issues. The jury found in favor of Bodenhamer on the fraudulent conveyance issue, and shortly thereafter, the trial court filed a written opinion ruling in favor of Bodenhamer on the disregard of the corporate entity and bulk sales issues. On October 15, 1986, a $51,069.75 judgment was entered for Bodenhamer. The court also held that Bodenhamer was entitled to Rule 11 sanctions. After Bodenhamer submitted a list of costs and attorneys fees to the court, the court issued an order awarding Bodenhamer $77,795.75 in Rule 11 sanctions, and entered judgment on February 3, 1987. ARC, ASTB and API filed joint notices of appeal on both judgments and we ordered the appeals consolidated.

I.

In a carefully crafted opinion, filed on October 3, 1986, United States District Judge Lawrence P. Zatkoff held that ARC, ASTB and API had abused the corporate form. Judge Zatkoff's extensive findings on this issue are fully supported by the evidence and consistent with the specific findings of the jury which heard and decided the fraudulent conveyance issue.

"[T]he general principle in Michigan is that separate corporate identities will be respected, and thus corporate veils will be pierced only to prevent fraud or injustice." Wodogaza v. H & R Terminals, 411 N.W.2d 850, 852 (Mich.App.1984). See Wells v. Firestone Tire and Rubber Co., 421 Mich. 641, 364 N.W.2d 670, 674 (1984) (courts will ignore fiction of corporate existence if invoked to subvert justice); Allstate Insurance Co. v. Citizens Insurance Co., 118 Mich.App. 594, 325 N.W.2d 505 (1982); Wechsler v. Aetna Life Ins. Co., 83 Mich.App. 320, 268 N.W.2d 394 (1978). "[F]raud or other attempts to evade the law justify invoking equity's power to look through and behind the legal entity of corporate existence." Klager v. Robert Meyer Co., 415 Mich. 402, 329 N.W.2d 721, 725 (1982) (quoting Gledhill v. Fisher & Co., 272 Mich. 353, 262 N.W. 371 (1935)), "The entire spectrum of relevant fact forms the background for such an inquiry, and the facts are to be assessed in light of the corporation's economic justification to determine if the corporate form has been abused." Klager, 329 N.W.2d at 725. Each case must be decided on its own facts. Lettinga v. Agristor Credit Corp., 686 F.2d 442, 446 (6th Cir.1982).

If separate corporate entities are employed and incorporated to perpetuate a fraud, the court may consider them a single legal entity. U.S. v. Certain Parcel of Land in Wayne County, Michigan, 466 F.2d 1295, 1297 (6th Cir.1972) (per curiam); Choate v. Landis Tool Co., 486 F.Supp. 774, 775 (E.D.Mich.1980). A court may find an identity between business entities and pierce the corporate veil upon proof of three elements: first, the corporate entity must be a mere instrumentality of another entity or individual; second, the corporate entity must be used to commit a fraud or wrong; third, there must have been an unjust loss or injury to the plaintiff. Nogueras v. Maisel & Assoc., 142 Mich.App. 71, 369 N.W.2d 492 (1985); Maki v. Copper Range Co., 121 Mich.App. 518, 524-25, 328 N.W.2d 430 (1982) (per curiam) lv. den. 417 Mich. 1030 (1983). Cf. Action Plumbing & Heating Co. v. Jared Builders, Inc., 368 Mich. 626, 118 N.W.2d 956 (1962) (parent corporation held liable for acts of subsidiary after exercising undue domination over subsidiary to defraud complainant and causing unjust loss or injury). Further, as Judge Zatkoff acknowledged in his opinion, the corporate veil may be pierced when, as he characterized it: (a) a corporation and shareholders have complete identity of interests; (b) the corporation is a mere instrumentality of the shareholders; (c) the corporation is a device to avoid a legal obligation; or (d) the corporation is used to defeat public convenience, justify a wrong, protect fraud or defend a crime. See Kline v. Kline, 104 Mich.App. 700, 305 N.W.2d 297 (1981); Williams v. American Title Insurance Co., 83 Mich.App. 686, 269 N.W.2d 481 (1978).

The evidence and Judge Zatkoff's specific findings clearly support his conclusion that it was proper to pierce the corporate veils of ARC and API. In support of his findings that ARC and API were mere instrumentalities of ASTB, Judge Zatkoff noted that the officers of the corporations were exactly the same, and that Morfopolous, who used his control of ASTB to finance and control the corporate books for ARC and API, ran all of the businesses. Judge Zatkoff further found that API was an alter-ego of ARC, having used the auction to acquire ARC's assets and employees, the address and equipment formerly possessed by ARC, and ARC's accounts receivable and back log orders. As to the latter, he found that Morfopolous paid no consideration for their acquisition. He further found that various ASTB employees...