Aaron Michaelson (Aaron) formed Michaelson Properties, Inc. (Properties) in 1981 to invest in real estate joint ventures. Aaron was the sole shareholder and the corporation's president.
Properties entered a joint venture with Perpetual Real Estates (Perpetual), forming a partnership called "Arlington Apartment Associates" (AAA) to build condominiums. During building, AAA needed additional financing; Properties could not contribute its share, so Perpetual loaned it $1.05 million and obtained a personal guarantee from Aaron.
The condominiums were poorly built, and several purchasers successfully sued AAA for $950,000. Perpetual paid the judgments on behalf of AAA and then sought recovery from Properties. Properties lacked sufficient funds and went bankrupt, prompting Perpetual to sue Aaron personally.
Aaron argued that Properties was a separate legal entity and that pierce the corporate veil was inappropriate. However, the jury ruled that the veil could be pierced and held Aaron personally liable.[2] Aaron appealed.
Judgment
Wilkinson J noted that Virginia law had assiduously upheld the "vital economic policy" of respecting a corporation as a separate legal entity, since it underpinned the operation of vast enterprises. He emphasised that the veil would only be lifted where a defendant exercises "undue domination and control" and uses the corporation as "a device or sham... to disguise wrongs, obscure fraud, or conceal crime."[3] He said the description of the law which the jury had heard was in a "rather soggy state" and emphasised that it was not enough that "an injustice or fundamental unfairness" would be perpetrated. Wilkinson continued:
The fact that limited liability might yield results that seem "unfair" to jurors unfamiliar with the function of the corporate form cannot provide a basis for piercing the veil. Virginia law requires proof of some legal wrong before it undermines this basic assumption of corporate existence.
Because there was no evidence that Aaron was attempting to defraud anybody, the veil could not be lifted. There was no "unfair siphoning of funds" when Aaron paid himself a dividend, because distribution was entirely foreseeable when the money was given, and the distribution happened well before any suit was filed. The fact that Aaron had given personal guarantees strengthened the corporate veil presumption, because the transactions recognised it existed.
Aronson v. Price 644, N.E.2d 864 (Ind. 1964) a plaintiff brought his car for repair to "Corbett's Body Shop" which did not indicate its corporate status.
Text of Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc., 974 F.2d 545 (4th Cir. 1992) is available from:CourtListenerGoogleScholarJustia
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