THOMAS B. RUSSELL, Senior District Judge.
This matter is before the Court upon Defendants Midwest Propane and Refined Fuels LLC ("Midwest"), Innovative Energy Solutions, LLC ("Innovative"), and Grundy Electric Cooperative, Inc.'s ("Grundy") Motion to Dismiss Plaintiffs' Complaint for Lack of Personal Jurisdiction as to Grundy and Innovative. (Docket No. 33.) Plaintiffs have responded. (Docket No. 41.) Defendants have replied. (Docket No. 44.) This matter is now fully briefed and ripe for adjudication. For the following reasons, the Court will
The Court notes the facts in this case are lengthy and there is a voluminous record including deposition testimony. The Court has highlighted most of the pertinent background facts.
This action arises from an Asset Purchase Agreement ("APA") entered into by Defendant Midwest and Plaintiffs, under which the Plaintiffs essentially purchased Midwest's propane business — including assets, accounts receivables, and the Midwest name. (Docket No. 1, Page 4-5.) Plaintiffs allege that after the APA was executed they learned that a significant number of the propane tanks that were purchased "did not contain the requisite data plates and as a result contain no value," which was concealed and/or misrepresented by Defendants. Id. at 5. Plaintiffs also allege that Defendant knowingly provided inaccurate information regarding the receivables purchased and/or failed to provide accurate information after learning the information provided was incorrect. Id.
Plaintiffs bring claims for breach of contract, fraud, and an equitable action to pierce the veils of Innovative and Grundy. (Docket No. 1, Page 3.) They assert that jurisdictional discovery has revealed that Midwest was the "alter ego" of Innovative and Grundy. (Docket No. 41, Page 3.) Accordingly, Plaintiffs seek to hold Grundy and Innovative liable for the breach of contract and fraud claims. On the other hand, Defendants assert that this Court lacks personal jurisdiction over Grundy and Innovative.
The proceeds paid by Plaintiffs pursuant to the APA were distributed in the following
In the APA, Midwest, Grundy, and Innovative all agreed to a non-competition and non-solicitation clause for a period of ten years. (Docket No. 12-2, Page 26, Article 10.) The APA also contained a provision titled "Submission to Jurisdiction" in which "[t]he parties hereto irrevocably submit to the exclusive jurisdiction of the state courts of Kentucky ... or if jurisdiction exists to the United States District Court for the Western District of Kentucky over any dispute arising out of or relating to this Agreement." (Docket No. 12-2, Page 28, Article 12.10.) The parties do not appear to dispute that the "Submission to Jurisdiction" provision only applied to Midwest.
Grundy is a Missouri corporation and electric cooperative with its main office in Trenton, Missouri. (Docket No. 41, Page 2.) Innovative and Midwest are both Missouri LLCs also located in Trenton, Missouri. Innovative appears to have been primarily a holding company with no assets or employees. Midwest primarily sold propane and refined fuel. Grundy Electric is the sole owner of Innovative and Innovative is the sole owner of Midwest Propane and Refined Fuels LLC ("Midwest").
These Defendants entered into a Management and Service Agreement among themselves, whereby Grundy would provide operations and management service to Innovative and Midwest. This Management Service Agreement provided for payments from Midwest to Grundy in exchange for Grundy providing management services for Midwest. Notably, Grundy would "at times" give these payments back to Midwest due to its poor financial condition. (Docket No. 33-6, Page 63.)
Grundy Electric, Innovative, and Midwest all resided at the same business address of 4100 Oklahoma Avenue, although it appears they had separate entrances. (Docket No. 33-6, Page 10-12, 37-38.) Grundy' and Innovative have a common board of directors/ownership group, but the employees of Grundy and Midwest are not identical. (Docket No. 33-3, Number 35.) Innovative's ownership group governs
Midwest Propane was organized as an LLC in July 1999. It was created for the purpose of retail sale and delivery of propane. (Docket No. 33-3, Page 1.) After acquiring two existing propane companies in August 1999, Midwest was in continuous operation until January 28, 2011, when substantially all of its assets were sold to Plaintiffs, including its name and any variations thereof.
All of the Midwest employees were paid by Midwest. Id. at 41. Midwest had an operating account that was separate from Grundy Electric and it had its own website separate from Grundy and Innovative. Midwest paid its own bills during its period of operation, including insurance coverage. All customer payments for the sale of propane were directly deposited into a Midwest bank account and records were kept as to these payments.
Midwest typically operated at a loss — it did not regularly make money. Id. at 42-43. Those losses were covered through loans, which Grundy guaranteed, from the National Cooperative Service Corporation ("NCSC"), a subsidiary of Cooperative Finance Corporation ("CFC"). Grundy also donated capital to cover these losses.
NCSC also loaned Midwest money for its startup costs. (Docket No. 33-5, Page 31-32.) Grundy guaranteed that loan.
Since its formation, Midwest has either held regular monthly meetings or reported in regular monthly meetings of Innovative. These regular monthly meetings were held separate from Grundy's meetings. At no time did Grundy refer to Midwest as its department or division. (Docket No. 33-3, Page 11, ¶ 80.)
Innovative is a not for profit LLC organized in June 1999 as a subsidiary of Grundy
Grundy Electric is a Missouri rural electric distribution cooperative incorporated in 1938 and was created by reason of the Rural Electrification Act of 1936 in order to bring electricity to rural communities. As a cooperative, it is owned by and is responsible to its members. The members elect an eight member board of directors. Grundy's board meets once a month and holds an annual membership meeting. By law, Grundy Electric can only serve its members with electric power and is not allowed to make a profit. Any profit is returned to its members. Because Grundy Electric is not required to file an income tax return, it does not receive any tax benefit from the operation of Midwest Propane. (Docket No. 33-3, Page 1.)
Scott Wilson served as a Manager for Grundy Electric, Innovative, and Midwest.
As the Court stated in its prior Order, (Docket No. 24, Page 3), the issue of personal jurisdiction largely turns on whether Midwest was the "alter ego" of Innovative and Grundy.
Velandra, 336 F.2d at 297. Plaintiffs do not assert the Court has personal jurisdiction over Innovative and Grundy merely because of their ownership of Midwest. On the contrary, they assert personal jurisdiction based on piercing of the corporate veil and alter ego doctrines. Essentially, they allege Grundy and Innovative exercise "undue control" or are the "alter egos" of Midwest. Accordingly, the above statement from Velandra does not resolve Plaintiffs' claims. However, another portion of the opinion is related:
Velandra, 336 F.2d 292, 296-97 (6th Cir. 1964) (emphasis added). Admittedly, although this Court would not do so, this portion of the opinion could be read to render the "alter ego" determination separate from the determination of whether the Court possesses personal jurisdiction over the parents whose veil was pierced. In fact, an unpublished Western District of Kentucky case, in dicta, appears to have interpreted this statement that way:
Martin ex rel. Estate of Martin v. S. Indiana Treatment Ctr., Inc., 2004 WL 2595946, at *3 n. 3 (W.D.Ky. May 27, 2004) (emphasis added). This Court would not read Velandra so broadly. It appears that Velandra may have merely been criticizing
This Court believes when the unique circumstances for a corporate veil piercing and/or alter ego determination are met the proper question is not whether the parent has minimum contacts with a jurisdiction. To the contrary, the proper question is whether the parent and/or the subsidiary have minimum contacts, because the parent is essentially one in the same with the subsidiary — it is its "alter ego." However, when the circumstances do not merit piercing of the corporate veil, it is well established that the question is whether the parent itself has the minimum contacts with the state. Velandra, 336 F.2d at 297. Ownership of the subsidiary — when there is no piercing of the corporate veil involved — is considered one contact in the analysis, but that relationship alone does not decide the personal jurisdiction question. Id. In any event, to the extent Martin or Velandra could be read to hold or imply otherwise, it is inconsistent with more recent precedent from the Sixth Circuit:
As one of our sister Circuits has explained:
Estate of Thomson ex rel. Estate of Rakestraw v. Toyota Motor Corp. Worldwide, 545 F.3d 357, 362 (6th Cir.2008) (emphasis added).
It is undisputed that this Court has personal jurisdiction over Midwest. Accordingly, if Midwest is the "alter ego" of Innovative and Grundy then the Court will have personal jurisdiction over Innovative and Grundy.
Defendants assert that Missouri law, as the state of incorporation of Grundy and Innovative, must be analyzed to determine if their veils should be pierced. (Docket No. 33, Page 16.) On other hand, Plaintiffs argue that Kentucky law applies. (Docket No. 41, Page 3.) In Plaintiffs' response they argue the Sixth Circuit has previously decided this issue:
Corrigan v. U.S. Steel Corp., 478 F.3d 718, 723 (6th Cir.2007) (citations omitted.) Defendants did not address this argument in their reply brief.
In this case, Plaintiffs have brought only state law claims under diversity jurisdiction and their success against some Defendants, Grundy Electric and Innovative, is dependent on piercing the corporate veil. Accordingly, the question of substantive law — specifically corporate veil piercing law — is governed by the law of the state in which this Court sits: Kentucky.
"A basic tenet of American corporate law is that the corporation and its shareholders are distinct entities." Dole Food Co. v. Patrickson, 538 U.S. 468, 474, 123 S.Ct. 1655, 155 L.Ed.2d 643 (2003). "A corporate parent which owns the shares of a subsidiary does not, for that reason alone, own or have legal title to the assets of the subsidiary; and, it follows with even greater force, the parent does not own or
U.S. v. Bestfoods, 524 U.S. 51, 61-62, 118 S.Ct. 1876, 141 L.Ed.2d 43 (1998). However,
Bestfoods, 524 U.S. at 62-63, 118 S.Ct. 1876.
"The burden of proof to demonstrate grounds for piercing the corporate veil is on the party seeking to impose liability on the parent corporation." Corrigan, 478 F.3d at 724. As discussed above, the substantive law governing corporate veil piercing/alter ego issues in this case is Kentucky's law. Recently, the Kentucky Supreme Court has explained the equitable doctrine of piercing the corporate veil:
Inter-Tel Technologies, Inc. v. Linn Station Props., LLC, 360 S.W.3d 152, 155 (Ky.2012). Thus, to pierce a corporate veil a court must find two separate elements: "(1) domination of the corporation resulting in a loss of corporate separateness and (2) circumstances under which continued recognition of the corporation would sanction fraud or promote injustice."
Inter-Tel, 360 S.W.3d at 163-64. The Court emphasized the most critical factors were "grossly inadequate capitalization, egregious failure to observe legal formalities and disregard of distinctions between parent and subsidiary, and a high degree of control by the parent over the subsidiary's operations and decisions, particularly those of a day-to-day nature." Id. at 164.
It appears Plaintiffs would concede that standing alone — without reference to Midwest — this Court would not have personal jurisdiction as to Innovative and Grundy Electric. Plaintiffs' entire basis for this Court to have personal jurisdiction over Innovative and Grundy is Midwest is their "alter ego." Defendants have stipulated that Midwest is subject to this Court's jurisdiction.
Defendants argue that all Plaintiffs allege is that there is unity of ownership and interest among Defendants, which isn't sufficient to result in corporate veil piercing and/or an identity of corporate interest. (Docket No. 33, Page 38.) Specifically, Defendants state that Plaintiffs' argument essentially amounts to the notion that because Grundy Electric was the sole member of Innovative and Innovative was the sole member of Midwest there must be something inherently wrong with that. Defendants argue they have not pled any kind of misconduct by either Grundy or Innovative or how they would be damaged because of this alleged improper corporate structure.
Because the record is long and the parties' have made numerous arguments, the Court will go through each of the individual factors from Inter-Tel, considering the relevant evidence in the record and addressing the parties' arguments. The Court reiterates that to pierce a corporate veil and/or find an entity is an alter ego
As previously stated, for a determination of whether there is a domination of the corporation resulting in a loss of corporate separateness, the Kentucky Supreme Court instructs courts to look at a list of eleven factors: (a) — (k). The Court will address each factor in turn.
Defendants argued this factor does not apply as there is no stock issued by the entities. (See Docket No. 44, Page 9.) However, the Court notes it is undisputed that Grundy is the sole owner of Innovative and Innovative is the sole owner of Midwest. Therefore, applying a similar rationale that is inherent in (a) — the notion that sole ownership is in favor of finding domination — this sole ownership by Grundy supports a finding of domination of the corporation resulting in a loss of corporate separateness. Courts treat limited liability companies the same as corporations for purposes of liability analysis. See, e.g., Dzurilla v. All Am. Homes, LLC, 2010 WL 55923, at *3 (E.D.Ky. Jan. 4, 2010). Accordingly, the Court finds this factor is in favor of finding domination of the corporation resulting in a loss of corporate separateness.
The entities have at least one common officer — manager Scott Wilson. It also appears the board of directors/ownership groups are the same for Grundy, Innovative, and Midwest.
While admittedly Midwest adhered to corporate formalities in that it paid its own bills, maintained its own bank accounts, and held its own assets — apart from the real estate owned by Grundy — the Court finds it is apparent that Grundy essentially financed Midwest's operation. Grundy guaranteed the loan which was used to
Grundy received nothing in return for guaranteeing these loans or donating capital. Although Defendants appear to argue there was some notion that this capital would be paid back when/if Midwest became profitable, there was nothing recorded that indicated a payment schedule, the date at which payment could be expected, or the interest that would accrue on the "debt." Grundy also guaranteed Midwest's trade debts, with one example being a guarantee to SemStream. Grundy would also often pay back to Midwest the management fees Midwest would pay to Grundy under the Management and Services Agreement. Finally, Grundy owned real estate on which Midwest operated. Therefore, this factor is in favor of finding domination of Midwest resulting in a loss of corporate separateness.
Defendant argues this factor does not apply as there is no stock issued by the entities. (See Docket No. 44, Page 9.) However, the Court notes Grundy guaranteed the loan which covered the startup costs for Midwest. Therefore, Grundy would have "caused its incorporation." Accordingly, the Court finds that this factor supports a finding of domination of the corporation resulting in a loss of corporate separateness.
The Court notes this is one of the most critical factors. Inter-Tel, 360 S.W.3d at 164. The Inter-Tel Court stated the "consideration of the adequacy of capitalization concerns the financing of the corporation, not its condition at the time of the events complained of or thereafter." Id. at 167 (citing Anderson v. Abbott, 321 U.S. 349, 362, 64 S.Ct. 531, 88 L.Ed. 793 (1944)). Thus, the undercapitalization inquiry focuses on whether or not Midwest was undercapitalized at the time of the initial financing.
The Court notes the parties dispute whether Midwest's initial capitalization was adequate. Defendants argue that Midwest was adequately capitalized because at its inception it received loans totaling $3.7 million dollars from NCSC to acquire two ongoing propane businesses. (Docket No. 44, Defendants' Reply Brief, Page 4.) Defendants state that:
(Docket No. 44, Defendant's Reply Brief, Page 4-5.) On the other hand, Plaintiffs argue Midwest was inadequately capitalized by pointing out that Midwest was not profitable, Grundy guaranteed loans to Midwest during its operation, and Grundy donated capital to Midwest during its operation. However, none of these facts are
"Subsequent economic developments that weaken the debtor's financial condition, even those leading to insolvency, are irrelevant for [the determination of whether undercapitalization exists] if the corporation was adequately financed at the outset." Inter-Tel, 360 S.W.3d at 167. Defendant has alleged that market conditions occurring shortly after the purchase of two propane businesses created an unfavorable market climate from which Midwest could never recover. (Docket No. 44, Page 4.) Essentially, Defendants assert that the initial capitalization was adequate, notwithstanding subsequent events and "contributions/financing" by Grundy. Plaintiffs have focused solely on the subsequent need of capital Midwest required. Inter-Tel makes clear these subsequent events are not determinative. Inter-Tel, 360 S.W.3d at 167. Accordingly, given the lack of any evidence indicating the initial capitalization was inadequate — the Court finds that the initial capitalization of Midwest appears to have been adequate. The fact that subsequent events caused Midwest to be unprofitable, requiring additional contributions/guarantees by Grundy, is not determinative as to the initial adequacy of the capitalization.
However, there are two exceptions delineated in Inter-Tel to the general rule that the capitalization at the inception is what controls. First, "[w]hen the inadequacy of capitalization arises after commencement of the business, as a result of capital transfers to the controlling shareholder, it may be taken into account; the withdrawal renders the initial inadequacy irrelevant." Inter-Tel, 360 S.W.3d at 167. Second, "when the corporation substantially expands its size or the nature of its business, its capital requirements change, and there may be undercapitalization of the new business despite any additional infusion of capital." Id. There is no indication that the second exception would be applicable under these circumstances. However, the Court finds the first exception is applicable.
The Court notes Plaintiffs did not explicitly discuss the first exception, as it was first mentioned in Defendants' reply brief. (Docket No. 44, Page 5.) However, implicitly Plaintiffs argued for such an exception by emphasizing that the "proceeds of the sale of Midwest went directly into Grundy's financial account." (Docket No. 41, Page 8.) While Defendants argue there "have been NO capital transfers from Midwest Propane to Grundy Electric," the proceeds of the asset purchase being transferred to Grundy's accounts, rather than Midwest's, is such a transfer.
Grundy does not directly pay the salaries and other expenses/losses of Midwest. Midwest hires its own employees and paid their salaries and benefits on its own. Grundy did not directly pay for Midwest's insurance, propane inventory, taxes, or other expenses. Nor did Grundy authorize these payments by Midwest. Therefore, this factor is not in favor of finding domination and a lack of corporate separateness
Midwest purchased its own equipment to operate its business. It did not lease or purchase assets from Grundy. While it appears that Grundy permitted Midwest to use two parcels of Grundy's real estate for their operations, there is no indication these parcels were ever conveyed to Midwest. Most of Midwest's business was with entities other than Grundy. Therefore, this factor is either neutral or marginally in favor of not finding domination and a lack of corporate separateness.
Defendants contend they have never referred to Midwest as a department or division of Grundy or Innovative. Plaintiffs have not disputed this contention. Therefore, this factor is in favor of not finding domination and a lack of corporate separateness.
It appears assets of Midwest were used in the operation of its propane business and not utilized by Grundy electric. Therefore, this factor is in favor of not finding domination and a lack of corporate separateness.
Grundy owns all of the ownership in Innovative. Grundy's board of directors also serves as Innovative's "ownership group." Midwest is governed by Innovative's ownership group, which are the same individuals that serve on Grundy's board of directors. This conceivably could form the basis for the claim that the "directors" of Midwest fail to act independently in the interest of Midwest or that they take orders from Grundy Electric.
The choice to transfer all proceeds from Plaintiffs' pursuant to the APA to Grundy would not be in Midwest's interest and be entirely in Grundy's interest. Paired with the control Grundy possesses over Midwest through Innovative's ownership group — who are the same individuals serving on Grundy's board of directors — demonstrates a failure of Midwest to act independently in its own interest. Accordingly, this factor is in favor of finding domination and a lack of corporate separateness.
It appears the formal legal requirements of Midwest are observed, including monthly operational meetings, maintenance of operation and financial records, and filing of their own taxes. Therefore, this factor weighs against finding domination and lack of corporate separateness.
The Inter-Tel Court emphasized the most critical factors in analyzing the first element — domination and lack of corporate separateness — were "(1) grossly inadequate capitalization; (2) egregious failure to observe legal formalities and disregard of distinctions between parent and subsidiary; and (3) a high degree of control by the parent over the subsidiary's operations and decisions, particularly those of a day-to-day nature." Id. at 164; see also Tully v. Eaton Corp., 2013 WL 4460272, at *5-6 (E.D.Ky. Aug. 16, 2013).
For the reasons discussed above, the Court finds that this critical factor is in favor of finding a lack of corporate separateness because of the domination of Midwest.
In some instances legal formalities were not observed and distinctions between the entities were disregarded: Grundy permitted Midwest to use two parcels of real estate apparently for free and not pursuant to an agreement, Scott Wilson was the manager for all entities, the board of directors/ownership groups for all entities was the same, and all the entities resided at the same address. However, other than these instances, it appears Midwest and Grundy Electric observed legal formalities and distinctions between the entities were not disregarded. Accordingly, the Court finds this critical factor weighs slightly against a finding domination and a lack of corporate separateness.
Grundy owns all of the ownership in Innovative. Grundy's board of directors also serves as Innovative's "ownership group." Midwest is governed by Innovative's ownership group, which are the same individuals that serve on Grundy's board of directors. At the very least, this creates the possibility of a high degree of control by Grundy exists as to Midwest.
Notably, the 1999 Amended Operating Agreement of Midwest requires that "any extraordinary, unusual or other decisions concerning the business affairs of the company" are made my Midwest, "subject, however, to the obtaining of the advice and consent of the Board of Directors of Grundy Electric Cooperative, Inc." (Docket No. 42-5.) However, "ordinary and usual decisions concerning the daily business affairs" are still made by Midwest. Id. Although, Scott Wilson testified that the operation of Midwest did not reflect the terms of the operating agreement in that the advice and consent of the board of directors of Grundy was not sought with respect to extraordinary and unusual business decisions, the document does reflect an intention that Grundy maintain significant control over Midwest. Scott Wilson also testified that Midwest's management decisions were actually governed by Innovative's owner group — who were the very same people who acted as Grundy's board of directors. Furthermore, the decision to transfer all of the proceeds from the APA to Grundy could only logically have been a result of the high degree of control exerted by Grundy over Midwest. Accordingly, the Court finds that Grundy was exercising a high degree of control over Midwest.
Admittedly, this is a closer case than Inter-Tel which was "a clear example of circumstances under which entitlement to the privilege of separate corporate existence should be forfeited." Inter-Tel, 360 S.W.3d at 152. In that case, all delineated factors except one cut in favor of finding a lack of corporate separateness. Distinct from Inter-Tel, in this case it appears that Midwest, Grundy, and Innovative observed many standard corporate formalities and processes. However, that alone is not determinative. Here a corporation possessed great — if not total — control over an entity, guaranteed all loans to said entity, regularly donated capital to the entity, permitted the entity to use its real estate, and had the entity transfer all of its remaining capital it received as a result of a sale of its assets — leaving it grossly undercapitalized. Notably, "it strains credibility to suggest an independently-operated corporation would have made the kind of deal
In making this finding, the Court notes that two of the three "critical" factors are in favor of such a finding. Furthermore, a majority of all of the factors are in favor of this finding. However, this finding alone is not determinative as to whether a corporate veil piercing or alter ego determination is appropriate as it only demonstrates the first element has been shown. The second element — whether circumstances exist under which continued recognition of the corporation would sanction a fraud or promote injustice — is also required.
With respect to the second element, the Kentucky Supreme Court in Inter-Tel adopted the analysis from the Seventh Circuit in Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir.1991):
Inter-Tel, 360 S.W.3d 152, 164-65 (Ky. 2012) (emphasis added). Specifically, with respect to what would "promote an injustice" the Seventh Circuit in Sea-Land stated:
Sea-Land, 941 F.2d 519, 522-24 (7th Cir. 1991) (emphasis added).
The Court agrees with Plaintiffs that the failure to exercise jurisdiction over Innovative and Grundy would at the very least promote an injustice-this situation involves more than "the mere inability to collect a debt from a corporation." Inter-Tel, 360 S.W.3d 152, 165 (Ky.2012). As demonstrated above, Grundy had the ability to exercise total control over Midwest. Since Midwest sold all of its assets, pursuant to the 1999 Amended Operating Agreement, such action would have required the "advice and consent" of Grundy's board of directors.
Plaintiffs have alleged fraud and breach of contract with respect to the asset purchase. The proceeds of this purchase were transferred to Grundy for nothing in return, leaving Midwest without any assets. Therefore, assuming Plaintiff is able to prevail on these claims, a parent corporation that caused a subsidiary's liabilities and its inability to pay for them would escape those liabilities and/or there arguably exists an intentional scheme to squirrel assets into a liability-free corporation while heaping liabilities upon an asset-free corporation would be successful. Sea-Land, 941 F.2d 519, 522-24 (7th Cir.1991). As a result, Plaintiff's claims involve more than "the mere inability to collect a debt from a corporation." Inter-Tel, 360 S.W.3d 152, 165 (Ky.2012). Accordingly, the Court finds circumstances exist under which continued recognition of the corporation would sanction fraud or promote injustice.
Defendants argue that the fact the "sale proceeds benefitted Grundy Electric" is merely a red herring. (Docket No. 44, Page 12.) In support, Defendants assert that Scott Wilson's testimony and answer to interrogatory number six establish that the proceeds from the APA were booked separately and are still being used to make payments on Midwest Propane's loan at CoBank lender.
Having found the two elements met, the Court finds that Midwest is the "alter ego" of Grundy and Innovative and/or will pierce the corporate veil of Grundy/Innovative. Accordingly, the Court does not lack person jurisdiction over Defendants Grundy and Innovative. The Court will
IT IS SO ORDERED.
However, the parties did not argue these concepts as separate and distinct and the case law often conflates the two concepts. In fact, in 2012 the Kentucky Supreme Court arguably held that there is no distinction between the two concepts, or at the very least no meaningful distinction:
Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152, 155, 163 (Ky.2012). In any event, a finding that Midwest is the "alter ego" of Grundy and Innovative would be sufficient for purposes of finding personal jurisdiction.
Tyson, 918 F.Supp.2d 835, 854 (N.D.Iowa 2013) (citations omitted)(emphasis added). Otherwise, entities would be free to "use the dissolution process as an end around to divert what company funds were available to themselves and other entities of which they were part owners." Id.
There are similar rationales upon which the same result could be reached. "The separate entity concept of an entity may be disregarded where the entity is a mere shell serving no legitimate business purpose, and is used as an intermediary to perpetuate fraud on the creditors." Tyson, 918 F.Supp.2d 835, 854 (N.D.Iowa 2013) (citing Christian v. Smith, 276 Neb. 867, 759 N.W.2d 447, 463 (2008)). Additionally, "the general rule holds that that if a shareholder receives property from a dissolved corporation, that shareholder is liable to any unpaid creditors of the dissolved corporation to the extent of the property received." Bear, Inc. v. Smith, 303 S.W.3d 137, 146 (Ky.Ct.App.2010).
Surprisingly, it does not appear Kentucky courts have squarely addressed the issue of the impact the use of the dissolution process to arguably divert funds to owners of the entity has on the first prong of the inquiry-whether the domination of the corporation resulted in a loss of corporate separateness. See Morgan v. O'Neil, 652 S.W.2d 83, 85 (Ky. 1983). Morgan involved a similar situation with a sole shareholder who decided to dissolve a corporation with knowledge of Plaintiffs' claim. However, in that case, the Kentucky Supreme Court did not actually address the issue, instead finding Plaintiff failed to specifically state a piercing claim in his complaint. Notably, Inter-Tel referred to such acts by the sole shareholder as "questionable." Inter-Tel, 360 S.W.3d at 162.
In any event, it appears in this case the transfer of assets to Grundy occurred prior to the actual dissolution of Midwest. To stay consistent with the framework established by the Kentucky Supreme Court in Inter-Tel and not unnecessarily complicate matters, the Court will view the transfer of all of the proceeds from the Asset Purchase Agreement to Grundy as fitting within the first exception to the general rule that capitalization at inception is what controls, despite the fact the Midwest subsequently dissolved.
