Inter-Tel Techs., Inc. v. Linn Station Props., LLC

• Decision Date: 23 February 2012
• Docket Number: No. 2009–SC–000819–DG.,2009–SC–000819–DG.
• Citation: 360 S.W.3d 152
• Parties: INTER–TEL TECHNOLOGIES, INC. and Inter–Tel, Inc., Appellants, v. LINN STATION PROPERTIES, LLC and Integrated Telecom Services Corp., Appellees.
• Court: United States State Supreme Court — District of Kentucky

360 S.W.3d 152

INTER–TEL TECHNOLOGIES, INC. and Inter–Tel, Inc., Appellants,

v.LINN STATION PROPERTIES, LLC and Integrated Telecom Services Corp., Appellees.

No. 2009–SC–000819–DG.

Supreme Court of Kentucky.

Feb. 23, 2012.

Scott David Spiegel, William Henry Mooney, Lynch, Cox, Gilman & Goodman, PSC, Louisville, KY, Counsel for Appellants.

Ridley M. Sandidge, Jr., Reed, Weitkamp, Schell & Vice, PLLC, Louisville, KY, Counsel for Appellee, Linn Station Properties, LLC.

Opinion of the Court by Justice ABRAMSON.

Piercing the corporate veil is an equitable doctrine invoked by courts to allow a creditor recourse against the shareholders of a corporation. In short, the limited liability which is the hallmark of a corporation is disregarded and the debt of the pierced entity becomes enforceable against those who have exercised dominion over the corporation to the point that it has no real separate existence. A successful veil-piercing claim requires both this element of domination and circumstances in which continued recognition of the corporation as a separate entity would sanction a fraud or promote injustice. The leading Kentucky case on piercing, White v. Winchester Land Development Corp., 584 S.W.2d 56 (Ky.App.1979), like decisions from courts across the country, refers to this two-part test as the “alter ego” test. In recent years, courts and commentators have recognized piercing by using various tests and formulations, most commonly the “alter ego” and “instrumentality” tests, and by identifying common characteristics of corporations which have forfeited the right to separate legal existence, the “equities” assessment referenced in White, 584 S.W.2d at 61. This case requires us to consider this important doctrine in the context of an increasingly common scenario, a creditor's attempt to collect on debt incurred by a wholly-owned subsidiary where the subsidiary has been deprived of all income and rendered asset-less by the acts of its parent (and in this case also grandparent) corporation. While piercing the corporate veil, as one leading commentator has aptly noted, is a doctrine that can be characterized by “frustrating fluidity,” Stephen B. Presser, Piercing the Corporate Veil 9 (2011), we have no doubt that the case before us presents a clear example of circumstances under which entitlement to the privilege of separate corporate existence should be forfeited.

Integrated Telecom Services Corp. (ITS) is a wholly-owned subsidiary of Inter–Tel Technologies, Inc. (Technologies), which in turn is a wholly-owned subsidiary of Inter–Tel, Inc. (Inter–Tel). Inter–Tel, the grandparent corporation, designs, manufactures, sells and services telecommunications systems through its subsidiaries and affiliates. Technologies, the parent corporation, is the retail division of Inter–Tel. ITS, the subsidiary, was the company's first retail branch in Kentucky, selling Inter–Tel's telecommunications products from an office building it leased from Linn Station Properties, LLC (Linn Station). Linn Station obtained a default judgment against ITS after ITS breached the lease agreement, but was unable to enforce the judgment because ITS was, by then, a defunct corporation without any assets. Linn Station then sued ITS, Technologies and Inter–Tel, seeking to pierce the corporate veil and establish Technologies and Inter–Tel's liability for the judgment. The trial court granted summary judgment to Linn Station and the Court of Appeals affirmed, finding it appropriate to pierce the corporate veil where the evidence showed ITS was merely an instrumentality or alter ego of Technologies and Inter–Tel, operated by them to achieve tax benefits and avoid various liabilities. Technologies and Inter–Tel appealed and are now before this Court on discretionary review. Because Technologies and Inter–Tel exercised complete dominion and control over ITS, depriving it of a separate existence, and both parent and grandparent derived the benefits associated with the Linn Station lease while rendering ITS an income-less and asset-less shell incapable of meeting its lease obligations, the trial court and Court of Appeals properly pierced the ITS corporate veil to hold Technologies and Inter–Tel liable for the debt to Linn Station.

RELEVANT FACTS

On December 4, 1997, ITS, a Kentucky corporation, leased an office building on Linn Station Road in Louisville, Kentucky from Caldwell R. Willig, the then-owner of the building and a principal shareholder of ITS. The lease, which was to run from January 1, 1998 to December 31, 2003, stated that ITS was responsible for all non-structural repairs to the interior of the building. The lease also contained an arbitration provision for all disputes arising under the lease, excepting those concerning the tenant's default in rent payment.

On July 2, 1998, Technologies, an Arizona corporation, acquired ITS by purchasing all of ITS's stock; the purchase price for the stock was paid by Technologies' parent company, Inter–Tel. Inter–Tel, also an Arizona corporation, is a public holding company that conducts business through its various subsidiaries and affiliates. As noted, Inter–Tel is in the business of designing, manufacturing, selling and servicing telecommunications systems and related services primarily to business, as opposed to individual, customers. Technologies operates as the company's retail branch, selling Inter–Tel's telecommunications hardware and software applications to customers. By and through Technologies, the former ITS operations became Inter–Tel's first direct sales operations in Kentucky, with offices in Louisville and Lexington.

Linn Station Properties purchased the Linn Station Road office building from Caldwell Willig on July 29, 1999 and thus became lessor of the ITS premises. In February 2002, Linn Station discovered ITS had not maintained the property as required under the lease and sent ITS a letter informing ITS the repairs would cost $91,398.00. ITS never made any repairs and abandoned the property in May 2002. Linn Station then wrote a letter to ITS regarding its non-payment of rent and abandonment of the premises and demanded compliance with the lease. Linn Station also initiated proceedings with the American Arbitration Association to resolve the dispute over ITS's failure to maintain and repair the premises. General Counsel for Inter–Tel and Technologies, John Gardner, responded and informed Linn Station that ITS was the only lessee on the lease and the parent company, Technologies, had neither guaranteed nor agreed to assume liability for the lease and would not pay any damages. Gardner further informed Linn Station that ITS was, by then, a defunct corporation without any assets and, as such, had no need to participate in any arbitration or legal proceeding. Gardner invited Linn Station to take a default judgment against ITS.

On June 19, 2002, Linn Station filed suit against ITS, seeking damages for failure to repair and maintain the premises and for unpaid rent. ITS was properly served but failed to respond, and on August 12, 2002, a default judgment was entered against ITS for $332,900.00 plus interest. After repeated, unsuccessful attempts to satisfy the judgment against ITS, on June 20, 2003 Linn Station sued ITS, Technologies and Inter–Tel to pierce the corporate veil and establish Inter–Tel and Technologies' liability for the judgment against ITS.¹ Eventually, the trial court concluded ITS was being maintained for tax purposes, rather than operating purposes, which arrangement provided a benefit to the company but unfairly harmed Linn Station. The trial court found that the parent company had “co-mingle[d]” its corporate entity with its subsidiary but then tried “to hide behind the corporate shield of liability” by claiming the subsidiary was a separate entity. The trial court concluded that the corporate veil should be pierced given the circumstances and proceeded to grant summary judgment to Linn Station and order Inter–Tel and Technologies to pay Linn Station the amount of the judgment.

The Court of Appeals affirmed the trial court. Relying on White, the Court of Appeals conducted a thorough analysis and found ITS was merely an' instrumentality or alter ego of Inter–Tel and Technologies. The Court of Appeals concluded that after it was acquired by Technologies, ITS no longer possessed any financial independence, ITS could not maintain a bank account, hold any funds or pay any bills. All of ITS's regional offices were transformed from independent dealers of communications equipment into direct sales “branches” of Inter–Tel. ITS employees became employees of Inter–Tel and were paid by Inter–Tel from its headquarters in Arizona. When a customer purchased a telecommunications system from ITS the payment went directly into a “lock box” or depository account controlled by Inter–Tel. Once the funds were placed in this account they belonged to Inter–Tel. Inter–Tel paid all the vendors who provided ITS with goods and services. All of ITS's inventory was provided by another Inter–Tel subsidiary, which was compensated for the inventory through what the Inter–Tel corporate controller described as “intercompany transactions, credits, and what-not.” Inter–Tel paid ITS's rent for the Linn Station Road property from the time Technologies acquired ITS until ITS abandoned the premises in 2002. Further, Inter–Tel and Technologies were the named insureds listed on the property damage insurance for ITS's premises on Linn Station Road.

ITS, Technologies and Inter–Tel also failed to observe standard corporate formalities and processes. ITS did not hold an annual board of directors or shareholders meeting from 1999 through 2002. Nor did Technologies hold an annual board of directors or shareholders meeting from 1998 through 2002. Appellants produced copies of unanimous written consent forms waiving these meetings, but none of the copies were signed or dated. The original waivers...