In re Coala, Inc.
| Decision Date | 24 May 1995 |
| Docket Number | Bankruptcy No. 93-82327-EDB-7. Adv. No. 93-80161. |
| Citation | 182 BR 887 |
| Parties | In re COALA, INC., Debtor. AUREUS INTERNATIONAL, INC. and Omni, Inc., Plaintiffs, v. COALA, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
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William L. Chenault, III, Chenault, Hammond and Hall, P.C., Decatur, AL, for plaintiffs.
Michael F. Terry, Moulton, AL, for Former Employees of Coala, Inc.
This matter came before the Court for a pretrial conference on the Complaint to Determine Debtor's Interest in Property and to Compel Turnover of Property filed by Aureus International, Inc. and Omni, Inc. Mr. William L. Chenault, III, the attorney for the Plaintiffs; Mr. Michael F. Terry, the attorney for former employees of Coala, who oppose the complaint; and Mr. Bob Rodgers, the Chapter 7 trustee, appeared at the hearing. The Defendant, Coala, Inc., was not represented and has made no response to the complaint or appearance in the case. Mr. Rodgers appeared at the hearing but did not oppose the complaint. The matter was submitted on a stipulation of facts filed jointly by the plaintiffs and the former employees, the record in the case and the arguments and briefs of counsel, who advised the Court that no testimony would be offered.1
Frieda F. Hyles ("Hyles") is the president of Aureus International, Inc., ("Aureus") a Colorado corporation. Edward C. Nott ("Nott") is the president of another Colorado corporation, Omni, Inc. ("Omni"). Aureus and Omni each purchased a quantity of sewing machines and related sewing equipment from Walker and Reed Manufacturing Company of Moulton, Alabama, ("Walker and Reed") on December 18, 1992. Aureus and Omni both executed leases of their respective sewing machines and equipment to the Defendant, Coala, Inc., on January 2, 1993. As of that date, Coala, Inc. was not a legal entity, but on January 12, 1993, Hyles and Nott incorporated Coala, Inc. in Lawrence County, Alabama, and are the sole stockholders and officers of Coala, Inc. ("Coala").
The sewing machines and related equipment were subsequently delivered to Coala. Coala hired employees and proceeded to conduct a clothing manufacturing business. The sewing machines and related equipment leased from Aureus and Omni were used by the employees of Coala in the manufacturing operation.
Coala began to experience financial difficulties and on October 21, 1993, a petition for involuntary bankruptcy was filed against Coala by former employees who are owed wages. An order for relief under Chapter 7 of the Bankruptcy Code was entered against Coala on November 17, 1993, and a trustee was appointed.2
Aureus and Omni filed the above adversary proceeding seeking the return of the sewing machines and other equipment that had been leased to Coala. The former employees of Coala oppose the return of the property. They contend that Coala is a mere sham corporation, that Hyles and Nott allowed Coala to generate debts while insulating assets from the claims of creditors by retaining the assets in the name of Aureus and Omni, and that the Court should therefore pierce the corporate veil and hold that the property is subject to the claims of Coala's creditors. In other words, the employees argue that because Hyles and Nott are the alter egos of Aureus, Omni, and Coala, that the assets of Hyles, Nott, Aureus and Omni should be subject to the claims of Coala's creditors. In an additional but secondary argument, the employees contend that Aureus and Omni cannot obtain the property because neither has obtained a certificate of authority to do business in the state of Alabama.
The employees contend that the following excerpts from or conclusions derived from the Joint Stipulation of Facts support their contentions: (a) Hyles and Nott are the officers of all three corporations; (b) no lease payments were made by Coala to either Aureus or Omni; (c) neither Aureus nor Omni attempted to recover the property, even though Coala was in default under the lease; (d) Coala did not provide evidence of insurance to Aureus and Omni as is required under the lease agreements; (e) neither Aureus nor Omni filed a UCC-1 statement covering the property; (f) Coala did not pay security deposits to Aureus and Omni; (g) neither Aureus nor Omni were authorized to do business in the state of Alabama during the time frames when the events outlined herein occurred; (h) neither Aureus nor Omni listed the property with the Lawrence County tax assessor; and, (i) Coala had no assets at the time the property was leased.
The doctrine of piercing the corporate veil has historically been proposed by creditors of a corporation to impose personal liability on the corporation's stockholders, and to obtain satisfaction of the corporation's obligations from the stockholders' assets. In this case the former employees have not proved that the property is owned by the stockholders or anyone else other than Aureus and Omni. According to the stipulations of the parties, the property was purchased and paid for by Aureus and Omni from Walker and Reed. Coala has possession of the property only by virtue of leases from Aureus and Omni. Neither Aureus nor Omni owns stock in Coala. The "corporate veil" theory is useful only to impose liability on stockholders. Therefore, since the property is owned by Aureus and Omni, it cannot be reached by piercing Coala's corporate veil. If the former employees have grounds for piercing Coala's corporate veil, their remedy is by separate suit for money judgment against the stockholders of the corporation.
The shareholders of the debtor corporation, Hyles and Nott, are not parties to this proceeding and the former employees have not, to the Court's knowledge, filed suit in any other forum or obtained judgment against either Hyles or Nott based on the debts owed to the employees by Coala. The Court knows of no basis for condemning specific property for the payment of a money obligation which has not been reduced to judgment. Even if Hyles and Nott had been proved to be the owners of the property, the property cannot be subjected to the payment of the debts owed to the former employees until the employees obtain a money judgment against Hyles and Nott. Chapter 7 may not be used as a de facto prejudgment attachment simply because the assets of the non-debtor entity happen to be in the hands of the bankruptcy trustee, especially where no proceeding has been instituted where a judgment may be anticipated.
The former employees's theory appears to be that:
1. Because Hyles and Nott are the alter egos of Aureus and Omni, then the sewing equipment actually belongs to Hyles and Nott;
2. Because Hyles and Nott are the alter egos of Coala, then any debt owed by Coala is the personal obligation of Hyles and Nott;
3. Therefore, since the debt owed to the former employees by Coala is a personal obligation of Hyles and Nott, then that debt may be satisfied from the personal assets of Hyles and Nott, including the sewing equipment.
The first part of the argument, that Hyles and Nott own the sewing machines, is based on sort of an "inverted alter ego" theory, that is, if the corporation is a sham and a mere instrumentality of the stockholders, then the property owned by the corporation is in fact that of the stockholders and subject to payment of their individual debts. In other words, rather than the typical alter ego theory that corporate obligations are to be satisfied from stockholder assets, the employees argue that stockholder obligations are to be satisfied from corporate assets, here the sewing machines of Aureus and Omni. There are at least three problems with this theory. First, the joint stipulation does not indicate the extent, if any, that either Hyles or Nott own stock in either Aureus or Omni. The Court is limited by the stipulated facts in deciding the issues between the parties and may not assume facts which may be essential to either party's cause of action or defense. Second, the former employees have cited no case which espouses or supports their "inverted alter ego" theory. While the corporate veil clearly may be pierced to subject the assets of individual stockholders to the payment of corporate obligations, the legal basis for subjecting the assets of the corporation to the satisfaction of the individual liabilities of the stockholders, except by judgment against the individual stockholders and execution on the stock owned by them, is less than clear.3 Third, others would be necessary parties to any action in which the assets of Aureus and Omni were being distributed. This would include other stockholders of Aureus and Omni, if any; other creditors of Aureus and Omni, who would be entitled to satisfaction from the corporate property first; and other creditors of the two individuals, who would be entitled to share in what was left after satisfaction of corporate creditors.
Even if Hyles and Nott owned all of the stock of Aureus and Omni, the former employees have not proved a basis for piercing Coala's corporate veil, or that Hyles and Nott were the alter egos of Aureus and Omni. A corporation is a distinct and separate entity from the individuals who compose it as stockholders or who manage it as directors or officers and a corporation's obligations and transactions are to be considered separately from those of the corporation's stockholders.4 A corporation's separate existence is recognized so that liability for the corporation's debts will be limited to the corporate assets and those who invest in and operate the corporation will be...
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