LeRoux's Billyle Supper Club v. Ma

Citation602 N.E.2d 685,77 Ohio App.3d 417
Decision Date30 September 1991
Docket NumberNo. L-90-289,L-90-289
PartiesLeROUX'S BILLYLE SUPPER CLUB et al.; DVJ's Plumbing, Appellee, v. MA, Appellant.
CourtUnited States Court of Appeals (Ohio)

Steven L. Crossmock, Toledo, for appellee.

Gerald L. Mills, Toledo, for appellant.


This is an appeal of a judgment of the Lucas County Court of Common Pleas which, after a trial to the bench, granted judgment in favor of appellee, DVJ's Plumbing, Inc. ("DVJ's") in the amount of $8,886.88 plus costs. Appellant, Jimmy Y.H. Ma, appeals that judgment and asserts a single assignment of error:

"The trial court erred in finding that liability for the debt of Lan's of Ohio, Inc. to Appellee could be imposed upon Appellant personally by 'Piercing the Corporate Vail [sic].' "

This case was instituted in the court below by LeRoux's Billyle Supper Club, Inc., as a foreclosure action. Appellee was a named defendant in that action because it had filed a mechanic's lien against the property which was the subject of the foreclosure. Appellant and Lan's of Ohio, Inc. ("Lan's") were permitted to intervene in the action as defendants because of their claimed interest in that same property. After appellant intervened, appellee filed a cross-claim against him and Lan's. Appellee asserted it had entered into a written contract to perform repair work for appellant and Lan's, that the work was completed without exception, and that appellant and Lan's had breached the contract by failing to pay the amount due thereunder. By stipulation and judgment entry all other claims in the foreclosure action were dismissed.

Trial on appellee's claim was held on March 14, 1990. At that trial, Denzyl D. Jones, President of DVJ's, and Jimmy Y.H. Ma, President of Lan's, were sole witnesses. Their testimony, exhibits and other evidence in the record of this case revealed the following relevant facts.

Appellant, who through various corporations operated at one time at least four other restaurants in Chicago, Illinois, began operation of Lan's New China Restaurant ("New China") in Toledo, Ohio in March 1988. The restaurant was owned by Lan's, a corporation organized and funded by appellant. Appellant was the sole shareholder and, as president, he was an officer of the corporation who personally supervised the management of New China. At the time of incorporation, appellant capitalized Lan's with an investment of $200. Prior to opening New China, appellant obtained a $20,000 loan from a Chicago, Illinois, bank. This loan was guaranteed by appellant and one of his Illinois corporations. The $20,000 was used to renovate and commence operation of the Toledo restaurant. It is unclear from the evidence offered at trial as to whether the $20,000 was additional capital or directly paid by appellant for renovations and operations. By the time New China closed in February 1989, appellant had borrowed at least $40,000 in order to keep the restaurant operating.

Appellant testified that for July, August, September, October, and the first half of November of 1988, New China had a negative cash flow. At that point in time, a gas leak forced the restaurant to close. Cindy Dixon, manager of New China, contacted DVJ's and entered, as an agent of the corporation, into a contract with appellee for the repair of the leak. The contract terms required that $1,000 be paid upon the completion of the repair work and that the balance be paid in weekly installments of $1,000 each. It is uncontroverted that DVJ's received $1,000 in cash and a check for $1,000, which left a balance of $8,886.88. No other payments were ever made on the contract.

No corporate records were ever introduced into evidence. Appellant testified that that he had an accountant who took care of the corporate books but these were never requested or produced. The evidence as to how corporate debts, e.g., loans, payroll and payments for supplies were paid is either not in evidence or unclear from the evidence presented. Appellant admitted that the manager of New China had no authority to issue checks in the corporate name. At one point appellant testified that the payroll for New China employees came from the corporations. However, it was not determined whether payroll checks were ever issued from Lan's, from appellant's other corporations, or if the funding for the payroll was merely derived from the other corporations. Conversely, appellant then testified that the funds for payroll, payment to suppliers, etc., came from meal sales in New China. Nonetheless, appellant did admit that he used some personal funds to pay the debts of Lan's and that at the time the corporation entered into the contract with DVJ's, the corporate financial situation was bleak.

In his single assignment of error, appellant contends that the mere domination or control of a corporation by a sole shareholder is an insufficient ground upon which to disregard the corporate entity and impose liability for a corporate debt upon that shareholder. Appellant asserts that fraud, misrepresentation or other wrongdoing must be established before such liability can be imposed. Because the evidence offered below did not demonstrate fraud, misrepresentation or the like, appellant urges that the trial court erred in disregarding the corporate entity.

A corporation is a separate legal entity from its shareholders, even where there is but one shareholder. E.g., First Natl. Bank of Chicago v. Trebein Co. (1898), 59 Ohio St. 316, 52 N.E. 834; Suzzi, Inc. v. Atlantic Dept. Stores (1976), 49 Ohio App.2d 65, 68-69, 3 O.O.3d 125, 127-128, 359 N.E.2d 721, 724-725, fn. 1. Generally, in such situations, only the corporation can be held liable for corporate obligations. O'Neill v. United States (D.C.Ohio 1968), 281 F.Supp. 359, 43 O.O.2d 83, affirmed (C.A.6, 1969), 410 F.2d 888. Nevertheless, in certain circumstances, courts can "pierce the corporate veil," that is, disregard the corporate entity, and treat the shareholder and his corporation as a single entity. E.S. Preston Assoc., Inc. v. Preston (1986), 24 Ohio St.3d 7, 11, 24 OBR 5, 9-10, 492 N.E.2d 441, 445-446; Suzzi, supra. In such cases, the corporation is treated as the "alter ego" of the shareholder thereby rendering the shareholder liable for the obligations of the corporation. Shury v. Rocco (Mar. 30, 1989), Cuyahoga App. No. 56214, unreported, 1989 WL 30538. The leading case in the state of Ohio, North v. Higbee Co. (1936), 131 Ohio St. 507, 6 O.O. 166, 3 N.E.2d 391, cites with approval those cases which find the ownership of the stock of a corporation by one party as insufficient, in and of itself, to pierce the corporate veil. Higbee, supra, at 512-513, 6 O.O. at 168-169, 3 N.E.2d at 392-393. In addition, the Higbee court finds favor with statements which hold that the legal entity of the corporation cannot be disregarded unless it was used as a blind or instrumentality to defeat public convenience, justify a wrong or perpetuate a fraud. Id. In short, Higbee, supra, stands for the proposition that the corporate entity will be disregarded and the individual shareholder or parent corporation held liable only where there is proof that the corporation "was formed for the purpose of perpetuating a fraud, and that domination by the parent corporation [shareholder] over its subsidiary [corporation] was exercised in such manner as to defraud [a] complainant." Id. at the syllabus. This precept has been followed in later cases. See Khoury v. Bd. of Liquor Control (C.P.1957), 74 Ohio Law Abs. 492, 141 N.E.2d 787; Ohio Edison Co. v. Warner Coal Corp. (1946), 79 Ohio App. 437, 35 O.O. 231, 72 N.E.2d 487; Robinson v. A/L Equipment (July 29, 1988), Washington App. No. 87-CA-29, unreported, 1988 WL 85082; Union Enterprises, Inc. v. Garland (Dec. 11, 1986), Franklin App. No. 86AP-612, unreported, 1986 WL 14252; Westrick v. Fish Boat, Inc. (May 22, 1981), Lucas App. No. L-80-245, unreported, 1981 WL 5603.

More recently, in Bucyrus-Erie Co. v. Gen. Prod. (C.A.6, 1981), 643 F.2d 413, the Sixth Circuit Court of Appeals held that the fiction of a corporate entity would be disregarded and the corporation considered the alter ego of the shareholder or officer only when three conditions were satisfied:

"(1) domination and control over the corporation by those to be held liable is so complete that the corporation has no separate mind, will, or existence of its own; (2) that domination and control was used to commit fraud or wrong or other dishonest or unjust act, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong." Id. at 418.

See, also, Miles v. Kohli & Kaliher Assoc., Ltd. (C.A.6, 1990), 917 F.2d 235, at 254.

In discussing the element of fraud as a element for disregarding the corporate entity, the Bucyrus-Erie Co. court specifically held that the same is not "essential." Rather, that court held that the corporate fiction would be disregarded "when its retention would produce injustice or inequitable consequences." Id. at 419. Although the Supreme Court of Ohio has not expressly addressed this issue, it appears to agree that the perpetuation of a fraud or illegality is not the sole ground for disregarding the corporate entity. In E.S. Preston Assoc., Inc., supra, 24 Ohio St.3d at 11, 24 OBR at 9, 492 N.E.2d at 446, the court held:

"Courts have been reluctant to disregard the corporate entity and have done so only where the corporation has been used as a cloak for fraud or illegality or where the sole owner has exercised such excessive control over the corporation that it no longer has a separate existence. North v. Higbee Co. (1936), 131 Ohio St. 507 [6 O.O. 166, 3 N.E.2d 391]. It has also been stated that the corporate entity should be disregarded only when justice cannot be served in any other way. Auglaize Box Board Co. v. Hinton (1919), 100 Ohio St. 505, 518-519 ."

This view was also expressed in Justice Brown's concurrence in Thrift...

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