CARPENETI, Chief Justice.
The unpaid employee of a closely-held corporation sued the corporation and its president for back wages in superior court. The day after the employee filed suit, the corporation filed for Chapter 11 bankruptcy. The bankruptcy court discharged the corporation's debts, and the superior court dismissed the corporation, but the superior court allowed trial to proceed against the president on a veil-piercing theory. A jury found that the corporation was a mere instrumentality of the president, and that the president owed the former employee wages under a bonus agreement. The president appeals the superior court's decision on multiple grounds.
When a corporation files for bankruptcy, the corporation's legal claims become property of the bankruptcy estate. Here, the president claims that the corporation theoretically could have brought the plaintiff's
Additionally, the mere-instrumentality test is a sufficient basis to pierce the corporate veil. The superior court did not err in piercing the veil based on the jury's finding that the mere-instrumentality test was met. The superior court correctly answered the jury's questions on the mere-instrumentality test and properly determined the statute of limitations on the employee's claims under the Alaska Wage and Hour Act (AWHA). The superior court's calculation of the overtime and derivative AWHA claims was also proper, and the superior court did not err in awarding attorney's fees. The superior court did not err in declining to find that a dismissed party who was only minimally involved in the litigation was a prevailing party. We therefore affirm.
In 1999, Edward Brown and Leon Knowles entered into a bonus agreement. At the time, Brown was the president, chief operating officer, managing officer, and either the sole owner or half-owner of a closely-held Anchorage-based construction company incorporated as E. Brown, Inc., but doing business as International Steel. Brown stated that his wife Heidi owned 50% of International Steel's stock, but Brown could not explain how or when Heidi obtained the stock, and his account of how she obtained the stock conflicted with International Steel's financial reports. In a 2004 financial statement, Brown stated that he owned 100% of the issued stock.
Brown admitted that he was not aware of the legal requirement that International Steel hold annual meetings. The only minutes found in the corporate record document a meeting between Brown and Heidi held on Grand Cayman Island, British West Indies, in 1988, shortly after Brown's marriage to Heidi. That meeting occurred in November 1988 after International Steel had been involuntarily dissolved by the State of Alaska for failure to pay its taxes. International Steel came back into good standing in 1989, but the corporate record contains no account of any annual meetings after 1988.
In 1994, Brown recruited Knowles to work for International Steel as an "expediter," but as International Steel's volume of work increased, Knowles began receiving project management work, taking on his first official project management job in 1997. In the fall of 1999, Knowles requested a raise. Knowles testified that Brown suggested using a bonus plan instead of a wage raise to compensate him. The two parties reached an agreement on a bonus plan, which Knowles drafted and the parties never signed.
On the basis of the bonus agreement, Knowles received a bonus of $27,455 in 2000, but in 2001 International Steel began to experience financial troubles and was unable to pay a bonus. The next year, after International Steel received a $968,000 settlement on an old project, Brown paid Knowles a bonus of $100,000 for work performed under the bonus agreement. Knowles claimed at trial that, according to his calculations, he was owed an additional $72,666 for that work. Knowles testified that Brown assured him that International Steel would pay him the rest when the company could afford it. Brown testified that he did not believe he owed Knowles any more bonus, but that he could not remember telling Knowles this, because he did not know "how that would come up."
At no time did International Steel pay Knowles overtime on his bonus payments. Knowles testified that when he and Brown negotiated the bonus agreement, Knowles
International Steel's finances continually deteriorated until it had completely drawn down its credit line. Knowles, who testified he had "some serious medical issues," discovered that his health insurance had been cancelled due to nonpayment by International Steel on October 6, 2004. He resigned the same day. Knowles testified that Brown continued to communicate with him about an outstanding claim on one of Knowles's projects, the Bassett claim, which seemed potentially to be worth millions of dollars to International Steel. Knowles also purchased his company truck from International Steel, receiving a bill of sale in return, signed by Brown. The bill of sale, dated November 2004, refers to "wages and/or bonus payments which are outstanding and currently owed by International Steel to Knowles," and according to which "the parties will determine at a later time the total amount which Knowles is owed."
On January 19, 2005, Knowles filed suit in superior court against International Steel and Brown. His original complaint included: (1) a breach of contract claim against International Steel based on the bonus agreement; (2) a breach of contract claim against the company based on failure to pay the agreed-upon bonus; (3) accompanying AWHA claims against the company based on failure to pay overtime on the bonus and pay raise; (4) assorted common law claims directed against both the company and Brown; and (5) a claim under AS 23.05.140 based on International Steel's failure to pay Knowles all of his wages within three days of termination of the employment contract.
The next day, on January 20, 2005, International Steel filed a petition for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Alaska.
After Brown filed his answer to Knowles's complaint, the superior court noted that Knowles's case against International Steel had been stayed by the bankruptcy proceedings and asked the parties whether they intended the bankruptcy stay to apply to Brown as well. The parties stipulated to a six-month stay. In November 2005, they renewed the stay to apply until March 10, 2006.
Meanwhile, Knowles filed a proof of claim with the bankruptcy court dated May 18, 2005, for unpaid compensation from International Steel in the years 2002 to 2005, estimating that he was owed $365,000 in unsecured debts and $5,000 in secured debts from International Steel, but noting in an attachment that he was still gathering information regarding the amounts due. On April 14, 2006, the bankruptcy court confirmed International Steel's Amended Plan of Reorganization (the Plan). Knowles, along with other unsecured nonpriority claimants, received nothing under the Plan. Nonetheless, he filed a notice withdrawing his claim against International Steel in the bankruptcy court.
The superior court reported in a later order that at a status hearing on September 5, 2006, "in anticipation of the approval of the reorganization plan, the parties agreed the complaint against [Brown] could proceed." Later that month, Knowles filed an amended complaint, still directed toward both International Steel and Brown, but adding for the first time a veil-piercing claim against Brown. The claim alleged that International Steel "was a mere instrumentality or alter ego of Brown." Brown's answer asserted "collateral estoppel or res judicata" as an affirmative defense.
In early 2007, the parties stipulated to dismiss International Steel from the state court litigation without prejudice. After Knowles moved for partial summary judgment against Brown, Brown opposed and cross-moved for partial summary judgment, asserting as a defense that Knowles's wage and overtime claims were barred by AWHA's two-year statute of limitations.
In early 2008, Knowles was granted leave to file a second amended complaint, seeking to add a spoliation claim and to add Heidi as a defendant. His motion was supported
In March 2008, the superior court issued an order that made several preliminary legal determinations regarding AWHA's overtime provisions, but it also found genuine issues of material fact surrounding the bonus agreement and its effects. The next month, International Steel moved for dismissal or summary judgment of Knowles's spoliation claim, arguing that the claim violated the company's discharge in bankruptcy, and noting in any case that the corporate book had now been found and produced to Knowles. International Steel, Brown, and Heidi also filed counterclaims alleging that Knowles breached the covenant of good faith and fair dealing in various ways and that Knowles's claims against International Steel violated the bankruptcy discharge.
In May 2008, the U.S. Bankruptcy Trustee moved to dismiss or convert International Steel's bankruptcy case for cause, based on International Steel's "failure to file post-confirmation reports and to pay quarterly fees." The IRS joined the motion, based on late payments by International Steel. The company opposed the Trustee's motion on May 28, arguing that it had "performed its obligations to provide post-petition reports and is current on its quarterly fees."
In July 2008, Knowles moved to file a third amended complaint, to add parallel claims under the federal Fair Labor Standards Act (FLSA) to his wage claims under AWHA, and to drop unnecessary claims. The motion was granted.
In an October 2008 order granting in part and denying in part Brown's cross-motion for partial summary judgment, the superior court concluded that the accrual of both Knowles's AWHA and contract claims "cannot be decided as a matter of law, but is for the jury as a matter of fact."
The case went to trial. On the first day, November 3, 2008, Knowles moved to dismiss Heidi and International Steel. Brown asserted, without prior briefing, that because of International Steel's bankruptcy discharge, the superior court could not proceed against Brown on a veil-piercing theory. The superior court ordered a stay of claims against International Steel, allowed the veil-piercing claim to proceed against Brown, and ordered the dismissal with prejudice of the claims involving Heidi, while reserving the matter of attorney's fees for later resolution.
Before the jury began deliberations, the parties agreed that the court would address the matter of overtime after the verdict was returned. On November 19, the jury delivered a verdict. It found "it to be more likely true than not true that [International Steel] owes [Knowles] additional bonus compensation" in the amount of $62,311. It found that Knowles was entitled to keep the $100,000 bonus compensation as of September 25, 2002. The jury did not find "it more likely true than not true that [International Steel] owes [Knowles] additional hourly pay." Finally, the jury did not find that "the corporate form of [International Steel] was used to defeat public convenience, justify wrong, commit fraud, or defend crime," but it did find that International Steel "was a mere instrumentality or alter ego of Ed Brown."
On February 3, 2009, the bankruptcy court issued an order granting the U.S. Trustee's motion to dismiss International Steel's bankruptcy case, a motion which International Steel non-opposed on the day of the bankruptcy court's decision. The bankruptcy court stated, at the company's request, that "International Steel shall continue to have the right and ability to operate its business, including any outstanding construction projects, as if it had not filed for bankruptcy."
After the jury delivered its verdict, the superior court issued an order denying Heidi's motion for attorney's fees, on the ground that there was no prevailing party as between Heidi and Knowles. The court also
On September 28, 2009, the superior court issued an order granting in part Knowles's motion for attorney's fees under AWHA. The court declared that Knowles was the prevailing party. The court then granted Knowles 60% of his actual fees, taking into account: (1) the amount of work Knowles's attorneys dedicated to non-AWHA-related claims; (2) the Rule 82 fees Knowles would receive; and (3) the overlap in Knowles's attorneys' work when Knowles changed counsel. On the same day, the superior court issued its final judgment, awarding Knowles $216,894.83 based on Knowles's unpaid bonus; his unpaid overtime on that bonus; the liquidated damages, attorney's fees, and costs Knowles received under AWHA for non-payment of overtime; and interest.
Brown and Heidi appeal.
We review questions of law de novo.
We review findings of fact for clear error,
Finally, we review awards of attorney's fees for abuse of discretion,
Once a bankruptcy case has been initiated by the filing of a bankruptcy petition,
A corporation can bring a veil-piercing claim against its own corporate insider only if the veil-piercing claim alleges that the corporate insider's conduct caused an actionable injury to the corporation.
Did the corporation in this case have a legal claim against Brown as of the commencement of its bankruptcy case? In re Educators Group Health Trust
If a claim alleges indirect harm to a creditor (i.e. harm that derives from an injury to the corporation), then the claim belongs to the corporation's estate.
In Smith v. Arthur Andersen LLP, the Ninth Circuit explained that this distinction may at times be difficult:
In re Transcolor illuminates the distinction between claims that belong to the estate and claims that belong to creditors:
The critical distinction is between (1) claims that allege injury to the corporation (and thus, indirect injury to all creditors generally) and (2) claims that allege direct injury to creditors personally. If a corporation files
"The Ninth Circuit [has] held that misuse of a company's assets qualifies as an injury to the [corporation]...."
Stated simply, if no injury to the corporation is alleged in the creditor's alter-ego claim, then the alter-ego claim belongs to the creditor personally, and it does not become part of the bankruptcy estate.
To identify the nature of the injury asserted we look to the "facial allegations in [the] complaint."
The court today considers two legal questions: (1) which legal claims are property of the estate (a matter of state law) and (2) whether the trustee has power to bring a claim on behalf of a creditor of the estate absent a legal claim held by the estate (a matter of federal law that has been decided
Brown claims that allowing Knowles's alter-ego claim to proceed outside of bankruptcy would undermine the Bankruptcy Code because: (1) Knowles would collect from an undiluted pool of assets rather than being limited "to no more than a pro-rata distribution"; and (2) a multi-jurisdictional rush to potentially conflicting judgments would ensue. But the Bankruptcy Code generally
Contrary to Brown's assertion that Knowles attempted to "undercut the general[] bankruptcy policy of ensuring that all similarly-situated creditors are treated fairly," it is Brown who attempts to make an end run around the Bankruptcy Code by achieving its protections without ever filing for bankruptcy.
Veil-piercing is an equitable doctrine, premised on the court's ability to look past the "legal fiction" to do equity.
Similarly, allowing Brown to benefit because of his misuse of the corporate form would be an inequitable result. Courts and commentators have noted the inequity in extending the discharge injunction to non-debtors.
Brown presents a variety of additional arguments against the superior court's use of Alaska's veil-piercing doctrine. First, Brown questions whether the "alter ego" or "mere instrumentality" test for shareholder liability actually exists in Alaska. Second, if the test does exist, he argues that the superior court instructed the jury incorrectly on the nature of the test. Third, he argues that the superior court responded incorrectly to a question from the jury about the test. Fourth, he argues that the facts do not support piercing the corporate veil.
We reject Brown's arguments. In a recent decision addressing the doctrine of piercing the corporate veil, we summarized the central principles as follows:
It is therefore clear that the corporate form may be disregarded in Alaska under either of two alternate theories. The relation between the theories is disjunctive, not conjunctive.
Also contrary to Brown's assertion, the superior court's jury instructions correctly defined the "mere instrumentality" test. The pertinent portion of the instructions is as follows:
The superior court then proceeded, correctly, to recite the Uchitel factors. We conclude that the superior court properly instructed the jury on the applicable law.
Next, Brown argues that the superior court offered an incorrect answer when the jury asked: "please define `mere instrumentality or alter ego'; does this mean occasional or continuous activities?" The superior court responded:
In other words, the superior court referred the jury back to its original instructions. We affirm the superior court's instruction to the jury in response to the jury's question.
Finally, Brown argues that the facts do not support piercing the corporate veil. Brown made this argument to the superior
After the jury determined that Brown owed Knowles an additional bonus of $62,311, the superior court accepted Knowles's argument that he was entitled to overtime compensation for the additional bonus, based on AWHA.
On September 25, 2002, Knowles received a bonus of $100,000. Knowles maintained that his bonus agreement with International Steel entitled him to a greater sum. The jury found that Brown did in fact owe Knowles an additional bonus of $62,311. Based on AWHA's requirement that overtime be paid on bonuses like Knowles's, the superior court awarded Knowles overtime on the increase in his bonus. Also pursuant to AWHA, the superior court awarded Knowles an equal amount in liquidated damages. Finally, AWHA grants Knowles additional penalties in the form of attorney's fees and costs,
Brown argues that Knowles's overtime and derivative claims were barred by AWHA's two-year statute of limitations. The superior court addressed this issue in detail and correctly determined that Knowles's claims were not time-barred.
As an initial matter, neither party disputes that under AWHA, "[a]n employee is entitled to overtime compensation for hours worked in excess of eight hours a day" and "for hours worked in excess of 40 hours a week."
The decisive issue is the date upon which Knowles's cause of action for unpaid overtime accrued. Because the term "accrue" is not defined in AWHA, and because AWHA calls for undefined terms to be construed in accordance with the federal Fair Labor Standards Act or regulations adopted under it,
The parties disputed whether the accounting on the projects underlying Knowles's bonus claims had been completed by January 19, 2003, two years prior to the filing of the complaint on January 19, 2005. The superior court reviewed the evidence submitted by the parties, including a November 2004 document, referring to "wages and/or bonus payments which are outstanding and currently owed by International Steel to Knowles," and according to which "the parties will determine at a later time the total amount which Knowles is owed." The superior court found that Knowles's bonus had not been determined by November 2004, and thus, the cause of action had not accrued as of January 19, 2003. The overtime claim was therefore timely filed.
As the superior court observed, had Brown told Knowles that International Steel owed no bonus, or owed a specific amount in bonus, then "that assertion would have triggered the running of the statutory period." But Brown made no such assertion:
Because the superior court's factual findings were not clearly erroneous and its legal interpretations were not error, we affirm its decision regarding the timeliness of Knowles's claims.
Brown argues that the superior court's award was based on improper interference. Brown argues that this was error "because it essentially asked the superior court to make new factual findings and engage in additur as to disputed facts." Brown also suggests that the jury's $62,311 bonus calculation may already have included "some sort of overtime calculation." We conclude that the superior court did not modify the jury's findings, and that Brown waived any right to a jury trial on the issues determined by the superior court post-verdict.
First, Brown's claims that the superior court's post-verdict determinations were a form of "additur," or "disturbed" the jury verdict, or "amend[ed] the jury verdict," are
Second, Brown's suggestion that the superior court's post-verdict determinations may have violated his right to a trial by jury under the Alaska Constitution is equally without merit. Article I, section 16 of the Alaska Constitution provides, "In civil cases where the amount in controversy exceeds two hundred fifty dollars, the right of trial by a jury of twelve is preserved to the same extent as it existed at common law." But Rule 39(a) of the Alaska Rules of Civil Procedure clarifies that the right to a jury trial in general does not preclude a litigant from waiving the right to a jury trial on a specific issue:
At trial, Brown's attorney consented to the trial of certain issues by the court sitting without a jury. The concession arose during a discussion of what questions to include in the jury instructions, while the superior court considered aloud how to calculate overtime on Knowles's bonus if the jury determined that he was entitled to one:
Brown's attorney not only explicitly invited the superior court to make the determination of how much overtime Knowles was owed on any unpaid bonus compensation found by the jury, he also explicitly agreed to submit to the jury, in relation to Knowles's bonus, only the two questions that were in fact submitted to the jury on that topic: Did International Steel owe Knowles additional bonus compensation? And, if so, how much? By limiting the jury's bonus questions to these two issues, Brown's attorney conceded that the superior court, and not the jury, would make any factual determinations not encompassed by these questions and necessary to determine Brown's liability as a result of the bonus, particularly in relation to overtime.
In addition, Brown's attorney agreed that if the parties could not agree "on what happens" as a consequence of the jury's bonus determination, the disputed issues should be resolved by the judge rather than a jury. As it happened, the parties could not agree on what happens under AWHA when an employer in International Steel's situation fails to pay part of the bonus of an employee in Knowles's situation. The superior court resolved the outstanding issues as "a judge question," precisely as the parties agreed.
Brown offers several arguments for the reversal of the superior court's fee award. Specifically, Brown argues that: (1) Knowles was not, in fact, the prevailing party in the case; (2) the superior court incorrectly awarded AWHA's penalty fees for legal work on Knowles's non-AWHA claims; and (3) Heidi should have received attorney's fees under Civil Rule 82.
Despite his appeal, Brown argues that he, and not Knowles, was the prevailing party in the litigation below, or at least that the litigation was a "wash" in which neither party prevailed.
We note at the outset that while "prevailing party" is the standard under Rule 82 for awarding attorney's fees, the superior court made clear that the vast majority of the fees it awarded to Knowles derived from AWHA's penalty provision, AS 23.10.110(e).
Brown emphasizes on appeal the value of the claims on which Knowles did not prevail. But "[f]ailure to recover the full measure of relief sought or to prevail on all the issues raised does not necessarily preclude that party from `prevailing party' status, provided that he is successful with regard to the `main issue in the action.'"
Against the superior court's calculation of attorney's fees for Knowles, Brown argues that the superior court abused its discretion by placing too much weight on Knowles's overtime claim under AWHA. Brown argues that Knowles's claim for his unpaid bonus was primarily a contract claim, and thus should have made Knowles eligible only for Rule 82 fees. In addition, Brown defeated Knowles's most significant AWHA claim, which asserted unpaid wages based on a claimed raise.
As the superior court noted, AWHA's fee award "is intended to provide a very significant disincentive to employers who might be pondering short changing an employee her wages or not settling a lawsuit making that claim." On its face, AWHA simply awards "reasonable" attorney's fees to prevailing plaintiffs,
Brown argues that Heidi is entitled to Rule 82 attorney's fees as a prevailing party against Knowles, based on Knowles joining Heidi as a defendant in his Second Amended Complaint, deposing her, then dismissing her with prejudice at the commencement of the trial. At that time, Heidi then dismissed her counterclaims against Knowles. Knowles suggests that he tried to dismiss Heidi at the close of discovery, at the time he filed his Third Amended Complaint, but that she "declined to sign Knowles's proposed stipulations for dismissal, although she did not object to dismissal."
On February 12, 2009, the superior court declared itself as yet unwilling to determine whether Heidi or Knowles was the prevailing party as between themselves, and requested further briefing. After review of the subsequent briefing, the superior court found that neither Heidi nor Knowles was a prevailing party as between each other, and thus denied Heidi's motion for attorney's fees.
Heidi seeks attorney's fees under Civil Rule 82. Rule 82(b)(2) states: "In cases in which the prevailing party recovers no money judgment, the court ... shall award the prevailing party in a case resolved without trial 20 percent of its actual attorney's fees which were necessarily incurred." As the superior court recognized, the dispositive issue is who, if anyone, between Heidi and Knowles, was the prevailing party.
Though the superior court's April 27, 2009 order denying Heidi's motion was apparently accompanied by no memorandum laying out the order's rationale,
For the foregoing reasons, we AFFIRM the superior court's decision in all respects.
FABE, Justice, dissenting.
Because I am convinced that allowing Knowles's claims to proceed outside of bankruptcy would subvert the purposes of the Bankruptcy Code by dissipating the property of the debtor and giving priority to Knowles's claim over the claims of other creditors, I respectfully dissent. In my view, Knowles's veil-piercing claim against Brown was property of the bankruptcy estate. The estate therefore had exclusive standing to bring that claim in bankruptcy court. Knowles's lack of standing was made permanent after the bankruptcy court confirmed the reorganization plan. I therefore conclude that Knowles did not have standing to assert his
A Chapter 11 bankruptcy trustee is the representative of the bankrupt estate and has the capacity to sue and be sued.
"When the trustee does have standing to assert a debtor's claim, that standing is exclusive and divests all creditors of the power to bring the claim."
The United States Supreme Court held in Butner v. United States that the scope of property rights held by a bankruptcy trustee, like the scope of all property rights, is a question of state law:
The court today apparently agrees that "which legal claims are property of the estate
"Standing is a rule of judicial self-restraint based on the principle that courts should not resolve abstract questions or issue advisory opinions."
In a single sentence discussing Alaska standing doctrine, the court concludes that International Steel did not have standing to bring a veil-piercing claim in bankruptcy court because "[i]n Alaska if a plaintiff fails to assert a legal injury entitling the plaintiff to relief, the plaintiff has no legal claim and the suit must be dismissed."
To support its statement, the court cites three Alaska cases: Neese v. Lithia Chrysler Jeep of Anchorage, Inc.
Instead of relying on Alaska law, the court cites federal cases for support, many of which interpret California law.
I would look instead to the equities of the case. Piercing the corporate veil is an equitable exercise, and therefore whether a particular party has an interest in making such a claim is an equitable question.
In this case, Knowles attempted to circumvent the protections of the Bankruptcy Code by trying to achieve in state court what he had been denied in bankruptcy court. Particularly troubling is the prospect that each of International Steel's creditors could bring a similar state-court veil-piercing claim against Brown. The facts that Knowles alleged to justify piercing the corporate veil were not particular to him or his injury. Knowles alleged generally that Brown had taken "actions in disregard of the corporate entity" and that "International Steel was a mere instrumentality or alter ego of Edward Brown." But those same facts could be alleged to hold Brown personally liable to every other creditor of International Steel.
I agree with those courts that have found that allowing such claims to be brought outside of bankruptcy court would subvert the purposes of the Bankruptcy Code.
The court's decision to allow veil-piercing claims to be brought by individual creditors outside of bankruptcy also threatens to deprive small business owners of the protections of the bankruptcy code. Today the court reaffirms its allegiance to a permissive disjunctive test for piercing the corporate veil. Under this test, the shareholders of a corporation may be held personally liable for the corporation's debts without a showing of fraud or misconduct merely for exerting improper control over the corporation. Exposing the owners of small "Mom and Pop" businesses to personal liability outside of bankruptcy will allow creditors to reach their personal assets to satisfy corporate debts without affording the business owners the protections of bankruptcy proceedings.
I note that we have never before held that a corporation may pierce its own veil under Alaska law. In Roberts v. State, Department of Revenue, we held that self-piercing was impermissible where a corporation's majority shareholder attempted to disavow the corporate form for his own benefit.
We have stated that we are strongly disposed against disregarding the corporate form and will only allow the corporate veil to be pierced in exceptional circumstances.
Having concluded that the estate had exclusive standing to bring a veil-piercing claim, it is necessary to examine whether the bankruptcy court's dismissal of the case revested standing in International Steel's creditors. I conclude that dismissal of the case had no effect on the debtor-in-possession's exclusive standing to bring claims belonging to the debtor.
Citing 11 U.S.C. § 349(b)(3), which, upon dismissal of a bankruptcy case, revests the property of the estate in the entity who owned it immediately prior to the commencement of the case, Knowles contends that upon dismissal of the case, "the Corporation and its creditors returned to their prepetition status."
But courts have generally concluded that § 349 applies only where a bankruptcy case is dismissed before approval of the reorganization plan.
In my view, the court's decision today undermines the policies of the Bankruptcy Code protecting similarly situated creditors by allowing creditors to circumvent the bankruptcy process by bringing veil-piercing claims in state court. But this decision is made even more troubling by the court's reaffirmation of a permissive disjunctive test for piercing the corporate veil in Alaska.
The adoption of the disjunctive test makes Alaska a significant outlier from the overwhelming majority rule.
Further, under the disjunctive standard it seems that abuse of the corporate form alone, without any indicia that the shareholder to be targeted had any control over the corporation, would be sufficient to pierce the corporate veil and hold that shareholder liable. If this were true, then a small shareholder of a large corporation could theoretically be liable for corporate misconduct that the shareholder had no part in and likely did not even know about. I therefore believe Alaska should join its sister states by adopting a conjunctive test for piercing the corporate veil that would require a showing of both control and misconduct.
Because I believe Knowles lacked standing to assert his claim in state court, I respectfully dissent.
Of course, for such a claim to be viable, applicable state law must allow a corporation to pierce its own veil. States are split on this issue. Compare In re S.I. Acquisition, 817 F.2d at 1152-53 (determining that Texas law would allow a corporation to pierce its own veil), with In re Ozark Rest. Equip. Co., 816 F.2d 1222, 1225-26 (8th Cir.1987) (determining that Arkansas law would not allow a corporation to pierce its own veil). See In re Icarus Holding, LLC, 391 F.3d 1315, 1321 (11th Cir.2004) certified question answered sub nom. Baillie Lumber Co. v. Thompson, 279 Ga. 288, 612 S.E.2d 296 (2005) ("Like many courts that have addressed this issue, we hold that in order to bring an exclusive alter ego action under section 541, a bankruptcy trustee's claim should (1) be a general claim that is common to all creditors and (2) be allowed by state law.").
But it is not necessary to reach this issue here, because the veil-piercing claim was not property of the bankruptcy estate, as shown below.
The dissent suggests that "an alter-ego's control of a corporation constitutes a legal injury entitling the corporation to relief." But "[a] claim based on the alter ego theory is not in itself a claim for substantive relief, but rather is procedural. A finding of fact of alter ego, standing alone, creates no cause of action.... An attempt to pierce the corporate veil is a means of imposing liability on an underlying cause of action such as a tort or breach of contract." 1 FLETCHER, CYCLOPEDIA OF PRIVATE CORPORATIONS § 41.10 (2006) (citations omitted).
For cases allowing the action to proceed during the stay, see Ahcom, Ltd. v. Smeding, 623 F.3d 1248, 1252 (9th Cir.2010) (holding that because creditor's claims were personal, creditor could pursue claims despite corporation's bankruptcy filing); Harman v. Harper, Nos. 86-2916, 87-1531, 914 F.2d 262, ___ & n. 1, 1990 WL 121073, at *1 & n. 1 (9th Cir. Aug. 21, 1990) (holding that district court's entry of judgment against alter egos did not violate automatic stay because judgment did not run against the debtor corporation); Hamilton v. Am. Corrective Counseling Servs., Inc., No. 3:05-CV-434-RM, 2009 WL 973447, at *4 (N.D.Ind. Apr. 8, 2009) (holding that when the injury is directly against the creditor, "the injured creditor must sue the corporation's alter ego outside of bankruptcy") (citations omitted); Konczyk v. Fillmyer, Civ. A. Nos. 84-2912, 84-5039, 85-0911, 1986 WL 3078, at *2 (E.D.Pa. Mar. 5, 1986) ("The fact that plaintiffs' claim against a defendant who is in bankruptcy proceedings is stayed should not frustrate plaintiffs' [veil-piercing] claims against principals of the bankrupt."); see also 8A C.J.S. Bankruptcy § 477 ("Where estate property is not involved, the automatic stay generally does not protect persons other than the debtor or their property.") (footnotes omitted).
For cases allowing the action to proceed following the discharge injunction, see E. Minerals & Chem. Co. v. Mahan, 225 F.3d 330, 332-34 (3d Cir.2000) (holding that creditor's alter-ego claim was not barred by the chapter 11 discharge of corporation's debts and remanding for creditor's alter-ego claim to proceed in the district court); Plastipak Packaging, Inc. v. DePasquale, 75 Fed. Appx. 86, 87-88, 94 (3d Cir.2003) (affirming the district court's decision to pierce the corporate veil after the corporation's debts were discharged in the corporation's chapter 11 bankruptcy case); Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir.1994) (holding that where the claim belonged to the creditors personally, the creditors "can sue [the alter-egos] directly, outside of bankruptcy") (citations omitted); Urbanco, Inc. v. Urban Sys. Streetscape, Inc., 111 B.R. 134, 135-37 (W.D.Mich. 1990) (refusing to reopen corporation's bankruptcy case and allowing creditor's veil-piercing claim to proceed in state court); Tactical Aerospace Corp. v. Reiner, No. B 172367, 2005 WL 479029, at *1-2 (Cal.App. Mar. 2, 2005) (corporation's debts were discharged in its chapter 11 bankruptcy case on May 14, 1999, and state court pierced corporate veil on January 18, 2001); see also Reiner v. Rowen, No. B148774, 2003 WL 1880150, at *1-3, 6 (Cal. App. Apr. 16, 2003) (affirming trial court's imposition of alter-ego liability after the corporation's debts were discharged in the corporation's chapter 11 bankruptcy case); Seminole Boatyard, Inc. v. Christoph, 715 So.2d 987, 990 (Fla.Dist.App. 1998) (holding that creditor could pierce corporate veil after the close of the corporation's bankruptcy case because the alter-ego claim belonged to the creditor personally, and the defendant's purchase of the estate's claims against him did not preclude the creditor from bringing its personal claim against him).
