Schultz v. Gen. Elec. Healthcare Fin. Servs. Inc.

Decision Date23 February 2012
Docket NumberNo. 2010–SC–000183–DG.,2010–SC–000183–DG.
Citation360 S.W.3d 171
PartiesThomas J. SCHULTZ, Appellant, v. GENERAL ELECTRIC HEALTHCARE FINANCIAL SERVICES INC., et al., Appellees.
CourtUnited States State Supreme Court — District of Kentucky

OPINION TEXT STARTS HERE

Bruce Alan Brightwell, New Albany, IN, Counsel for Appellant.

Tanya Yarbrough Bowman, Steven Michael Crawford, Sheryl G. Snyder, Griffin Terry Sumner, Frost, Brown, Todd, LLC, Louisville, KY, Counsel for Appellees.

Opinion of the Court by Justice SCOTT.

This is an appeal from an opinion of the Court of Appeals affirming the decision of the Jefferson Circuit Court. The trial court granted Appellees, General Electric Healthcare Financial Services, Inc., General Electric Company, and General Electric Capital Corporation (hereinafter collectively referred to as “GE”) 1 a judgment on the pleadings and awarded them a $450,000 judgment against Thomas Schultz, the sole shareholder of Intra–Med Services, Inc. (hereinafter “Intra–Med”). Based solely on the pleadings, the court pierced Intra–Med's corporate veil, thereby allowing GE to obtain its judgment against Schultz. For the reasons that follow, we hold that the trial court improperly granted GE's motion for judgment on the pleadings. We, therefore, reverse the decision of the Court of Appeals and remand this matter to the trial court for further proceedings.

I. Background

Schultz served as the president and sole shareholder of Intra–Med, a Kentucky corporation that performed medical diagnostic services. In July 2001, Intra–Med entered into a contract to lease medical equipment from GE. The company subsequently defaulted on the contract by failing to make required payments in 2004. As a result, GE filed a complaint against Intra–Med in Jefferson Circuit Court, which entered a judgment on the pleadings in favor of GE for over $4.7 million on November 15, 2004. GE was able to collect approximately $700,000 of that judgment.

During its collection process, GE learned of certain documents produced in another lawsuit demonstrating that Schultz had used Intra–Med for his own private purposes. GE intervened in this lawsuit and filed a third-party complaint against Schultz seeking to pierce the corporate veil and hold him personally liable for the judgment against Intra–Med.

Schultz subsequently filed an answer to GE's third-party complaint setting forth several admissions, denials, and affirmative defenses. He admitted GE's judgment of November 15, 2004 and that he had knowledge of the judgment on or after that date. He also admitted that, on or about December 1998, he purchased real property in his own name using Intra–Med funds and that Intra–Med did not receive any of the proceeds from the subsequent sale of the property in March 2000. Schultz further admitted that, on or about October 2000, he purchased and improved another piece of real property, again in his own name, using Intra–Med funds and that, after entry of the $4.7 million judgment, he sold the property and Intra–Med did not receive any proceeds from the sale. Finally, he admitted that, on or about May 24, 2001, he purchased a marina slip in his own name with Intra–Med funds and that Intra–Med did not receive any of the proceeds from its subsequent sale.2 Schultz, however, denied that Intra–Med was his instrumentality, that he exercised control over Intra–Med to defraud or harm GE, and that any refusal to pierce the corporate veil would subject GE to an unjust loss. Finally, Schultz set forth twenty-two affirmative defenses including:

14. The Complaint is barred, in whole or in part, because General Electric knew, at the time it entered into its agreement with Intra–Med in July of 2001, that if there was a default and the acceleration clause was invoked, Intra–Med did not have sufficient assets to pay the full amount that was owed.

15. The Complaint is barred, in whole or in part, because GE had, at the time it entered into the agreements with Intra–Med in July of 2001, full access to Intra–Med's financial information, and still proceeded with the transactions.

16. The Complaint is barred, in whole or in part, because GE had, at the time it entered into the agreements with Intra–Med in July of 2001, the option of asking Thomas Schultz for an individual guaranty to secure these agreements, and it failed to do so.

On September 10, 2007, the trial court entered judgment on the pleadings in favor of GE in the amount of $450,000. In so doing, the court held that Schultz's admissions in his answer to GE's complaint supported the conclusion that he improperly used Intra–Med's funds and that none of his affirmative defenses would preclude entry of judgment against him.3

On review, the Court of Appeals affirmed the trial court, concluding that none of Schultz's affirmative defenses negated the fact that he admittedly used corporate funds and property as his own to GE's detriment. The court held that his admissions fulfilled the requirements for piercing the corporate veil and supported the trial courts judgment on the pleadings. This Court granted Schultz's motion for discretionary review.

II. Law
A. The Nature of Piercing the Corporate Veil

General principles of corporate law, specifically with respect to piercing the corporate veil, have become axiomatic. For example, it is widely accepted that a corporation should be viewed as a separate legal entity. Dare To Be Great, Inc. v. Commonwealth ex rel. Hancock, 511 S.W.2d 224, 227 (Ky.1974). As a result, a court will disturb the legal fiction of corporate separateness only in the rarest of circumstances. Morgan v. O'Neil, 652 S.W.2d 83, 85 (Ky.1983) (“Holding a shareholder in a corporation individually liable for a corporate debt is an extraordinary procedure and should be done only when the strict requirements for imposing individual liability are met.”); White v. Winchester Land Development Corporation, 584 S.W.2d 56, 62 (Ky.App.1979) (“Generally speaking, the corporate veil should only be pierced ‘reluctantly and cautiously’....”); See also Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood, 752 A.2d 1175, 1183 (Del.Ch.1999) (“Persuading a Delaware court to disregard the corporate entity is a difficult task.”), (footnote omitted); TNS Holdings, Inc. v. MKI Securities Corp., 92 N.Y.2d 335, 680 N.Y.S.2d 891, 703 N.E.2d 749, 751 (1998) (stating that [t]hose seeking to pierce a corporate veil ... bear a heavy burden....”).

Perhaps because these principles are so akin to a creed, Kentucky case law primarily outlines the factual circumstances in which a court may set aside the corporate veil. See, e.g., White, 584 S.W.2d 56. However, the issue in this case—whether the trial court erred in granting GE's motion for judgment on the pleadings—compels us to elucidate the nature of the piercing doctrine rather than simply regurgitate platitudes. Specifically, we must first resolve whether the doctrine of piercing the corporate veil arises in law or equity because such a determination guides the appropriateness of piercing the veil based solely upon the pleadings.

Although we have never addressed this underlying issue, the Court of Appeals set forth a well-reasoned argument that “the decision as to whether to pierce the corporate veil is an equitable one” in Daniels v. CDB Bell, LLC, 300 S.W.3d 204, 213 (Ky.App.2009). In Daniels, the trial court submitted to the jury the question of whether the instrumentality theory was available to pierce the corporate veil. Id. at 212. Because equitable issues are generally not triable by juries,4 the appellate court narrowed its analysis to whether “piercing the corporate veil” is an equitable action:

In order to resolve whether “piercing the corporate veil” is an equitable action for judicial determination, it is important to review the concept and theories available for “piercing the corporate veil.” First, as previously stated, a corporation is a separate entity from its shareholders. Continuing the inquiry, we cite the definition of “piercing the corporate veil” in 18 C.J.S. Corporations § 14 (2008):

the judicial act of imposing personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation's wrongful acts, and certain elements must be established[.]

Interestingly, the text refers to “the judicial act.” Further, Kentucky jurisprudence recognizes three basic “theories” to “pierce the corporate veil” and hold the shareholders of a corporation responsible for corporate liabilities....

....

In order to ascertain whether the corporate form should be disregarded, courts weigh various factors, including whether the corporate form was abused and whether the form was used to perpetrate a fraud.

Further guidance on whether the issue is for judicial or jury determination is provided in Poyner v. Lear Siegler, Inc., 542 F.2d 955, 959 (6th Cir.1976), wherein the federal court explained:

Whether it is appropriate to disregard the corporate entity, and whether Poyner would have to litigate both liability for the injuries and LSI's liability for Erma's obligations in order to recover from LSI, are clearly questions of law. Whether an arrangement works an “unfair” hardship is similarly a question of law. If a determination concerns whether the evidence showed that something occurred or existed, it is a finding of fact. However, if a determination is made by processes of legal reasoning from, or of interpretation of the legal significance of, the evidentiary facts, it is a conclusion of law. Galena Oaks Corp. v. Scofield, 218 F.2d 217, 219 (5th Cir.1954). See also Kippen v. Am. Automatic Typewriter Co., 324 F.2d 742, 745 (9th Cir.1963) (whether there was “good cause” to discharge); Campbell Soup Co. v. Wentz, 172 F.2d 80 (3rd Cir.1948) (whether carrots are “unique,” permitting the remedy of specific performance). The issue whether a corporate arrangement works a hardship which is “unfair,” and which therefore warrants denial of corporate entity treatment, is a question about the legal...

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