Kraft Power Corp. v. Merrill

• Decision Date: 14 January 2013
• Docket Number: SJC–11063.
• Citation: 981 N.E.2d 671,464 Mass. 145
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: KRAFT POWER CORPORATION v. Sharon F. MERRILL, executrix,& another.

464 Mass. 145

981 N.E.2d 671

KRAFT POWER CORPORATION

v.Sharon F. MERRILL, executrix,¹& another.²

SJC–11063.

Supreme Judicial Court of Massachusetts, Middlesex.

Argued Sept. 4, 2012.

Decided Jan. 14, 2013.

Paul Marshall Harris (Sara A. Decatur with him), Boston, for the plaintiff.

Mark S. Furman (Emily C. Shanahan with him), Boston, for Sharon F. Merrill.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

DUFFLY, J.

This case requires us to decide whether certain claims premised on a theory of corporate disregard survive the death of John J. Marino, such that his estate may now be sued by the plaintiff, Kraft Power Corporation (Kraft).

Because the doctrine of corporate disregard is not a cause of action but an equitable doctrine by which an act or obligation of a corporation giving rise to a cause of action may be charged to a principal of the corporation, we look to the underlying claims to decide whether a cause of action survives.³ We conclude that Kraft's claims for breach of contract, for remedies under the Uniform Fraudulent Transfer Act, G.L. c. 109A (UFTA), and for violations of G.L. c. 93A should not have been dismissed, because all three claims are contractual in nature. Since fraud is a tort not enumerated in G.L. c. 228, § 1, Kraft's fraud claim does not survive Marino's death, and properly was dismissed. Because Kraft's unjust enrichment claim is premised on the allegation that Sharon F. Merrill, as executrix of Marino's estate (estate), is currently retaining funds that belong to Kraft, neither the doctrine of corporate disregard nor the doctrine of survival have any application; this claim should not have been dismissed.

Background and prior proceedings. Marino was the sole shareholder, sole director, president, and treasurer of Power Wiring & Emergency Response Inc. (Power Wiring). Kraft sold equipment to Power Wiring, which failed to pay Kraft. Kraft eventually obtained a default judgment against Power Wiring for breach of contract, in the amount of $259,417.47, but was unable to enforce the judgment because Power Wiring had no assets. Marino died before entry of the default judgment, and Kraft brought an action in the Superior Court against Merrill, as executrix of the estate; Merrill in her individual capacity; and Integrated Systems & Service, LLC (Integrated).⁴ Kraft's complaint in essence alleges that Marino was responsible for the contractual obligations of Power Wiring because he abused the corporate form in that he caused Power Wiring, a corporation over which he exercised pervasive control, to become insolvent by transferring all of its assets to Integrated, another corporation owned and controlled by Marino; used Power Wiring and Integrated as sham corporations for his personal benefit; and used Integrated to deny Kraft the means to enforce its judgment against Power Wiring. Kraft's complaint asserts claims against the estate based on breach of contract, the UFTA, violations of G.L. c. 93A, unjust enrichment, and fraud.

The defendants filed a joint motion for judgment on the pleadings, raising only the narrow issue whether the claims against the estate must be dismissed because they do not survive Marino's death. The defendants argued that none of the claims survived, as each claim arises from fraudulent acts or misrepresentations made by Marino. Concluding that the doctrine of corporate disregard did not transform the underlying actions into contract actions, and that the doctrine could not be extended “to establish survivability of a claim that would otherwise be extinguished upon the death of a party,” a Superior Court judge dismissed all claims against the estate.

A separate and final judgment, pursuant to Mass. R. Civ. P. 54(b), 365 Mass. 820 (1974), issued as to Kraft's claims against the estate, thus permitting Kraft's appeal to go forward. After Kraft's appeal was entered in the Appeals Court, we transferred the case on our own motion.

Discussion. We review the allowance of a motion for judgment on the pleadings de novo, based on our review of the allegations in the complaint. See Commonwealth v. Fremont Inv. & Loan, 459 Mass. 209, 212, 944 N.E.2d 1019 (2011); Wheatley v. Massachusetts Insurers Insolvency Fund, 456 Mass. 594, 600–601, 925 N.E.2d 9 (2010). We begin by examining the nature of the doctrine of corporate disregard and its relationship to an underlying cause of action.

1. Piercing the corporate veil. It is a general principle of corporate law “deeply ‘ingrained in our economic and legal systems' that a parent corporation ... is not liable for the acts of its subsidiaries.” United States v. Bestfoods, 524 U.S. 51, 61, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998), quoting Douglas & Shanks, Insulation from Liability Through Subsidiary Corporations, 39 Yale L.J. 193, 193 (1929). See My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 618, 233 N.E.2d 748 (1968), quoting Douglas & Shanks, supra. This general rule, which also applies to defeat claims against corporate principals for a corporation's acts, gives way when circumstances arise that provide an “occasion ‘to look beyond the corporate form for the purpose of defeating fraud or wrong, or for the remedying of injuries.’ ” Id., quoting M. McDonough Corp. v. Connolly, 313 Mass. 62, 65–66, 46 N.E.2d 576 (1943). See Scott v. NG U.S. 1, Inc., 450 Mass. 760, 766–767, 881 N.E.2d 1125 (2008), citing Hanson v. Bradley, 298 Mass. 371, 381, 10 N.E.2d 259 (1937) (equitable doctrine of corporate disregard exercised “only for the defeat of fraud or wrong, or the remedying of injustice”). In such circumstances, the corporate veil can be pierced, as a tool of equity, to disregard the corporation's existence and impose liability on individual principals. See United States v. Bestfoods, supra at 64, 118 S.Ct. 1876.

Here, we consider whether a cause of action survives the death of the alleged wrongdoer, a corporate principal, when the plaintiff attempts to bring a cause of action against the corporate principal by piercing the corporate veil. Once the corporate veil is pierced, the individual defendant and the corporation become “one for all purposes.” United States v. Lehigh Valley R.R., 220 U.S. 257, 272, 31 S.Ct. 387, 55 L.Ed. 458 (1911). We therefore conclude that the analysis is no different when a cause of action is premised on piercing the corporate veil than when it has been brought directly against an alleged wrongdoer. This is because the doctrine is not itself a cause of action but “an equitable tool that authorizes courts, in rare situations, to ignore corporate formalities, where such disregard is necessary to provide a meaningful remedy for injuries and to avoid injustice.” Attorney Gen. v. M.C.K., Inc., 432 Mass. 546, 555, 736 N.E.2d 373 (2000), citing My Bread Baking Co. v. Cumberland Farms, Inc., supra at 620, 233 N.E.2d 748.

Litigants attempt to pierce a corporate veil as a “means of imposing liability on an underlying cause of action such as a tort or breach of contract.” ⁵ 1 W.M. Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41.10 (rev. ed. 2006). See Peacock v. Thomas, 516 U.S. 349, 354, 116 S.Ct. 862, 133 L.Ed.2d 817 (1996), quoting 1 C. Keating & G. O'Gradney, Fletcher Cyclopedia of the Law of Private Corporations § 41, at 603 (perm. ed. 1990) (piercing corporate veil is not itself independent ERISA cause of action “but rather is a means of imposing liability on an underlying cause of action”). Therefore, to determine whether a cause of action survives the death of a party, courts must look beneath the corporate veil to the underlying substantive claim for which a plaintiff seeks to impose a corporation's liability on an individual shareholder.⁶

2. Survival of actions. We turn next to a discussion of the Massachusetts survival statute, G.L. c. 228, § 1,⁷ which provides for the survival of enumerated tort actions, “[i]n addition to the actions which survive by the common law.”

At common law, actions based on contract survived the death of a party. See Gasior v. Massachusetts Gen. Hosp., 446 Mass. 645, 649, 846 N.E.2d 1133 (2006); Rendek v. Sheriff of Bristol County, 440 Mass. 1017, 1017, 797 N.E.2d 891 (2003); McStowe v. Bornstein, 377 Mass. 804, 806–807, 388 N.E.2d 674 (1979). By contrast, tort actions did not survive. See Pine v. Rust, 404 Mass. 411, 417, 535 N.E.2d 1247 (1989), citing Putnam v. Savage, 244 Mass. 83, 85, 138 N.E. 808 (1923).⁸ The Legislature enacted the survival statute “to abrogate the common law rule established in Massachusetts that tort actions were personal and, thus, did not survive the death of either the injured party or the wrongdoer.” ⁹Sheldone v. Marino, 398 Mass. 817, 818, 501 N.E.2d 504 (1986). Subsequently, a cause of action survives if it falls within the list of torts enumerated in G.L. c. 228, § 1, or if it is “deemed an action that survives ‘by the common law.’ ” Gasior v. Massachusetts Gen. Hosp., supra at 649, 846 N.E.2d 1133, citing G.L. c. 228, § 1. See Rendek v. Sheriff of Bristol County, supra at 1017, 797 N.E.2d 891 (to survive death of party, claim not enumerated in G.L. c. 228, § 1, “must be deemed a cause of action that survives by common law”).

When assessing whether a claim is contractual or tortious in nature to determine if it survives under common law, “[w]e have looked with disfavor on rigid procedural distinctions between contract and tort and are more concerned today with substance than with form.” McStowe v. Bornstein, supra at 808, 388 N.E.2d 674. For example, we held in Gasior v. Massachusetts Gen. Hosp., supra at 650–651, 846 N.E.2d 1133, that an employee's claim for wrongful termination under G.L. c. 151B, § 4(16), survived his death because his claim was, in substance, a claim that his employer breached an implied contractual term of the at-will employment relationship.¹⁰

3. Whether the plaintiff's claims survive. We recite in some detail the allegations of the complaint, accepting all...