strengthen the defendants' litigating position.
But the second part of the Van Dorn test is as important as the first. The conditions I have described are, after all, typical of start-up companies. They often are scantily capitalized. Their staffs are small and do not have time for elaborate bookkeeping and minute-keeping. ITC had only one employee -- Rivera. He worked out of his home. It was natural if somewhat irregular for Caldwell to finance the operations of the fledgling enterprise out of the assets of his other corporations without creating a meticulous paper record of intercorporate transfers. You can get into trouble with the Internal Revenue Service for such casualness, United States v. Mews, 923 F.2d 67, 67 A.F.T.R.2d (P-H) 529 (7th Cir. 1991), but it would be an undue burden on entrepreneurship to decree a forfeiture of the invaluable privilege of limited liability, without which much entrepreneurship would be too risky to undertake, merely for what the law of Illinois is pleased to describe as abuse of the corporate form but recognizes is not alone a sufficient basis for such a forfeiture. So I must go on and consider the meaning of the second half of the test, the "fraud or injustice" requirement.
When the creditor seeking to pierce the corporate veil is a tort creditor, that is, an involuntary creditor, the court is faced with the difficult problem of balancing the interest in facilitating risk-taking by allowing entrepreneurs to limit their liability with the interest in preventing enterprises from externalizing the costs of their activities. The clash of values is less acute in a case, such as this, where the creditor (Torco) is a voluntary one, a contract creditor. If you decide to risk selling to or (as here) buying from a corporation that may not have sufficient assets to satisfy a claim arising from its breach of the sales contract, you can hardly complain if the risk materializes and your judgment against the other party cannot be satisfied. On the other hand, if the other party, or persons associated with it, deceive you into thinking that you are dealing with a substantial enterprise, and not a mere shell, then the fiction of separate corporate existence does become an engine of fraud, and you can pierce the veil. Since fraud is independently actionable, one may question the need for a doctrine of piercing the corporate veil in contract cases. But that is a question for the courts of Illinois. For present purposes it is enough to note that if there was evidence from which a reasonable jury could infer that the defendants and their agents engaged in a scheme to defraud Torco concerning the substantiality of ITC, the Van Dorn test was satisfied and the motion for judgment notwithstanding the verdict must be denied. Satisfied, indeed, in spades, since Van Dorn emphasized that the test is " either the sanctioning of a fraud (intentional wrongdoing) or the promotion of injustice." 753 F.2d at 570 (emphasis in original). See also Koch Refining v. Farmers Union Central Exchange, Inc., supra, 831 F.2d at 1345. I am not myself happy with this formulation, and hope it is not a canonical statement of the Illinois position, because it places limited liability too much at the mercy of juries. In this case, though, there was evidence of intent to defraud.
Granted, it's a close call. Torco asked Rivera for financial information concerning ITC. Rivera responded with nothing about ITC, but instead with financial statements of Caldwell Aircraft and Charlotte Aircraft. Torco asked for a bank reference for ITC and Rivera gave it the bank where H. Jenks Caldwell and his corporations, but not ITC, do their banking. I permitted over the defendants' vigorous objection testimony concerning an abortive deal between ITC and another company in which Rivera furnished the other company with a document that could be read to imply that the Caldwell corporations were backers or guarantors of ITC. I allowed in this evidence to establish a pattern of fraudulent dealing by Rivera, acting on behalf of Caldwell and his corporations. Fed. R. Evid. 404(b). Torco naturally was interested in the financial solidity of the firm with which it was about to sign a multimillion dollar contract upon which Torco's ability to comply with its own multimillion dollar contract, with LTV, hinged. Torco was in fact sued by LTV when the ITC contract fell through, and settled for a substantial sum. Little did Torco know it was dealing with a company that, at the time, had one employee, no office except that employee's home, no experience in the business in which it was engaging, zero assets, and a negative net worth because it owed money to Caldwell Aircraft and Charlotte Aircraft. Maybe Torco should have done more to investigate the financial condition of its contract partner, but a reasonable jury could infer from the conduct of Rivera in response to Torco's request for financial information that the defendants deliberately created an appearance either that ITC was a firm commensurate in financial responsibility with Caldwell Aircraft and Charlotte Aircraft or that those corporations were guaranteeing ITC's ability to finance the purchase of gas necessary to honor its contract to sell gas to Torco. If there was fraud, Torco's contributory negligence would not be a defense, A M-PAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1041 (7th Cir. 1990), and piercing the corporate veil and reaching the assets of those corporations would be, as the jury found, an appropriate remedy.
The defendants did not and do not argue that the "fraud or injustice" that must be shown to pierce the corporate veil must be proved by clear and convincing evidence. As I have said, maybe the separate doctrine of piercing the veil should be dropped in contract cases and the prevention of the sort of misconduct alleged in this case left to the common law of fraud, and in that event Torco might lose because I do not think it proved fraud by clear and convincing evidence. But that is a decision for the Illinois courts, not the federal courts, to make.
The defendants' motions are denied, and final judgment for the plaintiff will be entered in accordance with the jury's verdict.
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