In the
United States Court of Appeals
For the Seventh Circuit
Nos. 06‐3711, 06‐3821 & 07‐1071
LABORERS’ PENSION FUND, LABORERS’ WELFARE
FUND OF THE HEALTH AND WELFARE DEPARTMENT OF
THE CONSTRUCTION AND GENERAL LABORERS’
DISTRICT COUNCIL OF CHICAGO AND VICINITY, and
JAMES S. JORGENSEN, Administrator of the Funds,
Plaintiffs‐Appellees\Cross‐Appellants,
v.
LAY‐COM, INC., an Illinois Corporation, LORD & ESSEX,
INC., an Illinois Corporation, and JOHN J. POPP JR., as
Trustee of the IRREVOCABLE LAY TRUST DATED
DECEMBER 26, 1995,
Defendants‐Appellants,
and
JOHN J. POPP, JR., individually,
Defendant\Cross‐Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01‐C‐6855—Milton I. Shadur, Judge.
ARGUED MAY 8, 2009—DECIDED SEPTEMBER 2, 2009
2 Nos. 06‐3711, 06‐3821 & 07‐1071
Before CUDAHY, MANION and TINDER, Circuit Judges.
CUDAHY, Circuit Judge. The Laborers’ Pension funds won a
default judgment against M.A. King Construstion, Inc. and
King & Larsen Construction, Inc., as well as against Mike
King, a director and officer of both companies. Those
defendants were judgment proof, so the funds added new
defendants in an amended complaint. The district court
found some of the new defendants, Lay‐Com, Inc., Lord &
Essex, Inc. and the Lay Trust—but not John Popp Jr., an
individual—liable on a veil‐piercing theory, and granted
summary judgment to the funds and to Popp Jr. We affirm
the decision to pierce M.A. King’s veil to reach Lay‐Com
and Lord & Essex, and we affirm the dismissal of Popp Jr.
from suit. The Lay Trust, however, played no role in the
transactions that rendered Lay‐Com and Lord & Essex
liable, nor did it wield control over M.A. King. We therefore
reverse with respect to the Lay Trust and dismiss it from the
case.
I
The veil‐piercing question before us arises from the
close relationship among several construction companies
located just outside Chicago. Those companies included
King & Larsen, a unionized subcontractor that did ex‐
cavation work and poured foundations and driveways
for residential properties. Mike King was King & Larsen’s
sole shareholder and a director and officer. Lord & Essex is
a residential housing contractor that regularly hired King &
Larsen to work on its job sites. Lay‐Com is a developer of
commercial and residential real estate.
Nos. 06‐3711, 06‐3821 & 07‐1071 3
Lord & Essex and Lay‐Com are owned by the Popp
family. More precisely, Lord & Essex is owned by John
Popp Jr. and was previously owned by the Lay Trust. Lay‐
Com is still owned by the Lay Trust, which otherwise exists
for the benefit of the Popps. John Popp Sr. and his wife were
the trust’s primary beneficiaries; Popp Jr. and his sister are
secondary beneficiaries and, since Popp Sr.’s death in the
midst of this litigation, co‐trustees. Popp Sr. was the presi‐
dent and a director of both Lay‐Com and Lord & Essex.
Popp Jr. remains a director and officer in both companies.
In 1995, King & Larsen entered a collective bargaining
agreement that required it to make monthly benefits
contributions and payments of union dues to the funds. Late
in 2000, King & Larsen began missing payments.1 The
company was suffering financially, and Lord & Essex
and Lay‐Com began loaning it money and paying some
of its bills.2 Meanwhile, Popp Sr. and King began plans for a
new company called M.A. King Construction that would
take over King & Larsen’s business. Popp Sr.’s companies
were to provide new financing for M.A. King in exchange
for a first‐lien position on King & Larsen’s assets.
1
In February 2001, King & Larsen entered into an installment
note with the funds, requiring it to pay $50,000 between
March and August 2001, for contributions that had come due
between November 2000 and January 2001. Mike King personally
guaranteed the amounts due under this agreement.
2
It is unclear exactly how much money was sunk into King &
Larsen in late 2000 and early 2001. The evidence in the record
supports, at least, payments from Lay‐Com to King & Larsen and
its creditors totaling roughly $150,000, plus a $347,000 loan from
Lord & Essex to King & Larsen.
4 Nos. 06‐3711, 06‐3821 & 07‐1071
M.A. King was incorporated on March 19, 2001, with the
Popps and King as directors. The directors elected King
as president and treasurer, and King’s wife Gail as vice
president and secretary. The directors also resolved to issue
25,000 shares of stock to the GAK Irrevocable Living Trust
in exchange for a promissory note from the trust for $25,000.
Both sides agree, however, that the shares were never issued
and the capital contribution was never made. This turns out
to be critical. No other capital contributions were made to
M.A. King. To be sure, M.A. King did receive other types of
financing, but all of it was debt. On April 1, M.A. King
received a $250,000 loan from Lay‐Com, secured by M.A.
King’s assets and Mike King’s personal guaranty.3 Also on
April 1, M.A. King’s board (with Mike King abstaining)
entered into an employment agreement with King, setting
his salary and prohibiting him from spending more
than $2,500 on behalf of M.A. King (other than for taxes and
payroll) without Lay‐Com’s consent. King was authorized
to enter into banking relationships, but prohibited from
borrowing on the corporation’s behalf without Lay‐Com’s
written consent.
At the center of the plans of Popp Sr. and King for the
creation of M.A. King is a series of transactions (visually
represented by Chart 1) that circuitously transferred most of
King & Larsen’s assets to M.A. King. As described in detail
3
The district court found that no evidence supported the
existence of this loan. Yet the parties’ joint stipulation of facts
refers to (and the supporting exhibits contain) a note evidencing
such a loan, together with King’s personal guaranty and the
accompanying security agreement on M.A. King’s assets. This
is sufficient to show that the loan was made.
Nos. 06‐3711, 06‐3821 & 07‐1071 5
below, those assets traveled first through Lord & Essex and
Lay‐Com. The defendants have cast these transactions as a
service to Mike King, but Popp Sr. arranged the transfer of
assets through his companies so that Lay‐Com and Lord &
Essex could obtain first‐lien priority on them before they
were transferred on to M.A. King. Mike King agreed to the
transactions because Popp Sr. promised to release a junior
mortgage on the house of King’s mother, Doralee. The
defendants thus clearly believed they stood to benefit from
the deal.
Chart 1
The arrows show the movement of assets and
liabilities in the April–May 2001 transactions.
Popp Jr. Lay Trust
Lord & Essex Lay-Com
King & Larsen M.A. King
Turning to the series of transactions at the heart of the
case, the first occurred on April 24, when King & Larsen and
6 Nos. 06‐3711, 06‐3821 & 07‐1071
Lord & Essex executed an “Assignment of Collateral and
Satisfaction of Debt.” In this agreement, King & Larsen
assigned all of its assets to Lord & Essex, including $1.2
million in receivables, $80,000 in work in progress, $61,000
worth of shop materials, and perhaps $593,0004 worth of
vehicles and heavy equipment. In exchange, Lord & Essex
released King & Larsen from debts of about $423,000 and
assumed $1.1 million in accounts payable and $326,000 in
other notes owed by King & Larsen. As even the defendants
concede, “[n]otably, [Lord & Essex] declined to assume
King & Larsen’s tax liabilities and King & Larsen’s obliga‐
tions to the funds.” Those liabilities remained in King &
Larsen’s otherwise empty shell. King & Larsen dissolved on
July 2, 2001.
The second set of transactions also took place on April 24.
Lord & Essex borrowed from Lay‐Com to pay off the
outstanding debts it had acquired from King & Larsen,
observing corporate formalities when it did so
(the companies executed security agreements and promis‐
sory notes for the amounts borrowed). Lord & Essex
and Lay‐Com then executed their own assignment agree‐
4
The assignment to Lord & Essex does not indicate how much
King & Larsen’s vehicles and equipment were worth in April
2001. A liquidation appraisal performed for Lay‐Com in
June 2001, which included most of King & Larsen’s
vehicles plus several others, valued that equipment at approxi‐
mately $1‐to‐1.1 million. The defendants compared the assets
included in that appraisal with the schedule of vehicles
and equipment attached to the assignment to Lord & Essex to
produce the $593,000 figure, which the funds do not contradict.
Nos. 06‐3711, 06‐3821 & 07‐1071 7
ment, whereby Lord & Essex satisfied its nascent obligations
to Lay‐Com by transferring King & Larsen’s assets on to
Lay‐Com. Again the companies observed corporate formali‐
ties. Both sides agree that Lord & Essex “was merely a
conduit” between King & Larsen and Lay‐Com, which had
funded Lord & Essex’s acquisition from King & Larsen in
the first place.
On May 1, the final transaction occurred. Lay‐Com and
M.A. King entered a “Master Lease and Assignment
Agreement,” in which Lay‐Com leased to M.A. King the
vehicles and equipment formerly owned by King &
Larsen (these are the assets the defendants valued at
$593,000, supra n.4) and assigned to M.A. King all of King &
Larsen’s other assets and liabilities. The assignment in‐
cluded the $1.2 million in King & Larsen receivables, the
$80,000 in work in progress and the $61,000 in shop materi‐
als, as well as the $1.1 million in accounts payable and the
$326,000 in other notes. In exchange, M.A. King agreed to
make monthly payments of $17,805.24 to Lay‐Com starting
June 1 and continuing through May 1, 2008. M.A. King also
agreed to pay an “operations fee” of 50% of its profits every
other month starting July 1, with 15% interest payable on
unpaid balances. The Master Lease and Assignment Agree‐
ment also contained a third‐party distribution restriction
(also incorporated in Mike King’s employment contract),
prohibiting M.A. King from making any payments (except
taxes and payroll) to third parties greater than $2,500
without Lay‐Com’s consent.
M.A. King never made any of the payments required
under the Master Lease and Assignment Agreement, nor
8 Nos. 06‐3711, 06‐3821 & 07‐1071
did it make payments on the April 1 $250,000 loan from
Lay‐Com. Lay‐Com nonetheless continued to loan M.A.
King money. Between April and October 2001, Lay‐Com
made another $268,000 in payments to M.A. King and its
creditors, all subject to Mike King’s guaranty and the
security agreement applicable to the April 1 loan. The Lay
Trust also issued five checks to M.A. King between
April and August 2001, totaling $277,000. There is no
corresponding note or other documentation covering
these Lay Trust payments to M.A. King in the record. (The
Lay Trust also issued a check to King & Larsen in
October 1999 for $40,000.) As further evidence of the various
companies’ interrelatedness, Lord & Essex made two
payments in August for prior King & Larsen services—due
to M.A. King under the Master Lease and Assignment
Agreement—not to M.A. King but instead to the Lay Trust.
Lay‐Com also made at least one payment to M.A. King for
work performed for Lord & Essex.
Throughout the summer of 2001, M.A. King operated in
King & Larsen’s stead, picking up its contracts and operat‐
ing out of the same yard and office, using the same fax
and telephone number, the same employees, the same
equipment. That summer Mike King also began making
payments to the funds for King & Larsen’s past‐due obliga‐
tions. (Recall that he had personally guaranteed an install‐
ment note for unpaid contributions in February 2001. See
supra, n.1.) But King made those payments, totaling
about $100,000, from M.A. King’s accounts, not from his
personal account or from any account of the defunct King
& Larsen. Moreover, King paid only a fraction of the
Nos. 06‐3711, 06‐3821 & 07‐1071 9
amount King & Larsen owed the funds at the time. In
August, the funds sued King & Larsen, M.A. King and
Mike King for the outstanding balance.
In September, Mike King entered a new collective bargain‐
ing agreement on M.A. King’s behalf, incurring new
obligations to the funds. The Popps viewed Mike King’s
payments to the funds and the new union contract as
violations of the third‐party distribution restriction in the
Master Lease and Assignment Agreement. As a result, the
Popps resigned from M.A. King’s board, and Lay‐Com
filed its own suit against Mike King and M.A. King, which
led to a default judgment that apparently remains unsatis‐
fied. M.A. King continued working for Lord & Essex until
December 2001. M.A. King was dissolved in early 2002.
The funds’ lawsuit resulted in two more default judg‐
ments, against King & Larsen, M.A. King and Mike King,
and the funds amended their complaint to add the
current defendants. (The funds also added Gail and Doralee
King as defendants, but they were voluntarily dismissed
after the district court ruled on the parties’ summary
judgment motions.) On cross‐motions for summary judg‐
ment, the district court found Lay‐Com, Lord & Essex and
the Lay Trust liable on a veil‐piercing theory for
$2,487,723.62, the amount that the district court found
that M.A. King and King & Larsen collectively owed the
funds. The district court found that Popp Jr. was not
individually liable and dismissed him from the suit. This
appeal followed.
10 Nos. 06‐3711, 06‐3821 & 07‐1071
II
The only issue here is whether it was appropriate to pierce
M.A. King’s veil to reach each of the defendants.5 Veil‐
piercing is an equitable remedy governed by state law,
here the law of Illinois because that is where all of the
corporations at issue were incorporated. We have juris‐
diction by virtue of the funds’ original claim for relief under
ERISA, 29 U.S.C. §§ 1132(e)(1) and 1145. See 28 U.S.C.
§ 1331; 28 U.S.C. § 1291. Because this is an appeal from
a grant of summary judgment, our review is de novo. Sea‐
Land Servs., Inc. v. The Pepper Source, 941 F.2d 519, 521
(7th Cir. 1991). And though the decision whether to dis‐
regard the corporate form to impose liability is fact‐inten‐
sive, see Freeland v. Enodis Corp., 540 F.3d 721, 739 (7th Cir.
2008), here the material facts are not in dispute, making
resolution on summary judgment appropriate.
A corporation exists separately from its shareholders,
officers, directors and related corporations, and those
individuals and entities ordinarily are not subject to corpo‐
rate liabilities. See Fontana v. TLD Builders, Inc., 840 N.E.2d
767, 775 (Ill. App. Ct. 2005). Indeed, one of the primary
purposes of incorporation is to limit liability and thereby
encourage investment. An exception exists when an
“individual or entity uses a corporation merely as an
instrumentality to conduct that person’s or entity’s busi‐
ness.” Id. at 775–76. Then a court may pierce the corporate
5
The defendants do not challenge the district court’s finding that
M.A. King was King & Larsen’s successor, and therefore liable for
King & Larsen’s obligations to the funds.
Nos. 06‐3711, 06‐3821 & 07‐1071 11
veil, and the individual or entity may be charged for
the underlying cause of action. See id. at 776; Sea‐Land,
941 F.2d at 520; Van Dorn Co. v. Future Chem. and Oil Corp.,
753 F.2d 565, 569–70 (7th Cir. 1985). The point is to
prevent those who disregard the corporate form from
then relying on it to avoid liability for their wrongdoing.
The standard test for piercing the corporate veil is two‐
pronged. The plaintiff must demonstrate both that there
is “ ‘such unity of interest and ownership’ ” between the
individual or entity and the corporation “ ‘that the separate
personalities of the corporation and the individual [or
entity] no longer exist,’ ” and that “ ‘adherence to the
fiction of separate corporate existence would sanction a
fraud or promote injustice.’ ” Hystro Prods., Inc. v. MNP
Corp., 18 F.3d 1384, 1388–89 (7th Cir. 1994) (quoting Van
Dorn, 753 F.2d at 569–70).
Courts consider a laundry list of factors to determine
whether there is a “unity of interest” between two corpora‐
tions (or between a corporation and a controlling share‐
holder or other dominant personality), e.g., Fontana, 840
N.E.2d at 778, but the focus is on whether the corpora‐
tions have respected corporate formalities—respected
their separateness from each other—or whether one was
a sham acting at the whim of the other. See Judson
Atkinson Candies, Inc. v. Latini‐Hohberger Dhimantec, 529
F.3d 371, 379 (7th Cir. 2008).
Likewise, the rule for determining when respecting the
corporate form would sanction fraud or promote
injustice is not clearcut, see Hystro, 18 F.3d at 1390 (dis‐
cussing Sea‐Land, 941 F.2d 519, and Van Dorn, 753 F.2d 565),
12 Nos. 06‐3711, 06‐3821 & 07‐1071
but “ ‘[i]f a corporation is organized and carries on
business without substantial capital in such a way that
the corporation is likely to have no sufficient assets avail‐
able to meet its debts,’ ” that is sufficient, because
“ ‘it is inequitable that shareholders set up such a flimsy
organization to escape personal liability.’ ” Hystro, 18 F.3d
at 1391 (quoting Stap v. Chicago Aces Tennis Team, Inc., 379
N.E.2d 1298, 1302 (Ill. App. Ct. 1978), further quoting
Ballantine on Corporations 302–03 (rev. ed. 1946)).
Taking the defendants here one at a time, we find that
Lay‐Com controlled M.A. King’s purse strings, if not its
operations, and that it did so at least in part to avoid M.A.
King’s (and King & Larsen’s) pension benefit and union
dues obligations, and therefore that it was appropriate to
pierce M.A. King’s veil in order to hold Lay‐Com liable
for those obligations. The Master Lease and Assignment
Agreement explicitly restricted M.A. King from entering
any material transactions with third parties without Lay‐
Com’s consent. Likewise, Mike King’s employment agree‐
ment prohibited him from entering into such transac‐
tions on behalf of the company without written consent
from Lay‐Com. The kind of control exerted by Lay‐Com
over M.A. King is what is meant when the cases talk
about a “dominating personality,” Fontana, 840 N.E.2d
at 775, that directs another entity at its whim.
To be sure, M.A. King is not the clearest case of a “sham”
corporation that one might conceive. Sham corporations
can be mere figments, little more than corporate names
held up like picket signs by an individual who is individu‐
ally responsible for the putative corporation’s actions. In
Nos. 06‐3711, 06‐3821 & 07‐1071 13
Fontana, for instance, TLD Builders, Inc. was just a cloak
for Nicola DiCosola, the husband of the nominal sole
shareholder. DiCosola testified that TLD had never had
an employee and that he had never kept records of his
dealings with subcontractors. 840 N.E.2d at 774. At the
time of suit, DiCosola had poured all of TLD’s profits
into another company. Id. Any capital that had been con‐
tributed to TLD in the first place (which, at most, was
$1,000) had come from the DiCosolas’ personal bank
accounts. Id. By contrast, when the funds here filed suit
in August 2001, M.A. King was a functioning corporation,
performing jobs for Lord & Essex. It had assets and em‐
ployees and contracts.
But M.A. King never operated separately and
independently from Lay‐Com. The Popps were on M.A.
King’s board; the Master Lease and Assignment Agree‐
ment prevented M.A. King from entering material trans‐
actions without Lay‐Com’s consent; and no stock in M.A.
King was ever issued. Likewise these companies did not
engage in arm’s‐length relations. M.A. King never made
its required payments on the April 1 $250,000 loan or
under the Master Lease and Assignment Agreement, but
Lay‐Com continued to extend it credit anyway. In a very
real sense, then, M.A. King was completely subject to Lay‐
Com’s control and to no other. We agree with
the district court that Lay‐Com was M.A. King’s de facto
principal.
Aside from these indicia of corporate form and control,
undercapitalization is the single most important factor
in the veil‐piercing analysis. See William P. Hackney &
Tracey G. Benson, Shareholder Liability for Inadequate
14 Nos. 06‐3711, 06‐3821 & 07‐1071
Capital, 43 U. Pitt. L. Rev. 837, 854, 885–86 (1982). Assessing
whether a corporation is adequately capitalized is delicate
business. The legal test—whether the corporation has
so little money that it cannot operate its business on its
own, see Judson Atkinson Candies, 529 F.3d at 379; Browning‐
Ferris Indus. of Ill., Inc. v. Ter Maat, 195 F.3d 953, 961 (7th
Cir. 1999)—provides little in the way of specifics. What does
it mean for a corporation to operate “on its own”? Very
generally, it means that the corporation has adequate
equity (usually in addition to debt), though how much
equity depends on the facts of the case.6 This makes
sense—a software designer has different equity needs
than a car manufacturer—and in the right case a fight
about undercapitalization could easily preclude sum‐
mary judgment. What is clear, though, is that there must
be some equity. Shareholders are generally expected to
invest some money, that is, if they want the benefit of
limited liability. See Fontana, 840 N.E.2d at 779 (“[S]hare‐
holders should in good faith put at the risk of the business
unencumbered capital reasonably adequate for the corpora‐
tion’s prospective liabilities.”) (citing Fiumetto v. Garrett
Enters., Inc., 749 N.E.2d 992, 1005–06 (Ill. App. Ct.
2001) (emphasis added)).
6
See, e.g., Frank H. Easterbrook & Daniel R. Fischel, Limited
Liability and the Corporation, 52 U. Chi. L. Rev. 89, 113 (1985) (“By
‘adequately’ capitalized we mean an amount of equity that is
within the ordinary range for the business in question. Both
the absolute level of equity investment and the debt‐equity
ratio will depend on the kind of business on which the firm is
embarked.”).
Nos. 06‐3711, 06‐3821 & 07‐1071 15
The defendants argue that it is impossible to tell from
this record whether M.A. King had enough capital to meet
its prospective liabilities, because nothing shows its day‐to‐
day cash needs or obligations. Yet this argument confuses
M.A. King’s working capital (that portion of a firm’s
assets that are in relatively liquid form, such as cash,
accounts receivable and inventory) with its equity capital
(the excess of total assets over total liabilities—what is
called “unencumbered capital” in Fontana). Undercapitali‐
zation is primarily concerned with unencumbered or
equity capital, see Lifschultz Fast Freight v. Salson Express
Co., Inc., 132 F.3d 339, 351 (7th Cir. 1997), also called “paid‐
in” capital, describing the investment made by the share‐
holders at the establishment of a corporation, Fentress
v. Triple Mining, Inc., 635 N.E.2d 102, 108 (Ill. App. Ct.
1994). Again, this is because veil‐piercing is an exception
to limited liability, and, under the doctrine of limited
liability, shareholders only risk the equity capital that they
invest. See Frank H. Easterbrook & Daniel R. Fischel, Limited
Liability and the Corporation, 52 U. Chi. L. Rev. 89, 89–90
(1985). If the shareholders do not invest enough equity,
such that the corporation is undercapitalized, there is no
basis for rewarding them by limiting their liability, and,
in fact, doing so would only encourage risky behavior. See
id. at 114. Whatever else might be said about how much
equity capital is enough, here it is clear that M.A. King
had no equity capital at all. It was unquestionably under‐
capitalized.
The GAK Trust never made its promised $25,000 con‐
tribution, and there was no other stockholder contribu‐
tion. To the extent Lay‐Com was an investor in M.A. King,
16 Nos. 06‐3711, 06‐3821 & 07‐1071
its investments were, at least nominally, loans meant to be
repaid, not unencumbered contributions available to
creditors of the corporation. Even adding the value of all
of the King & Larsen assets that were assigned to M.A.
King (about $1.3 million7) to all of the cash loans from Lay‐
Com ($518,000) and all of the undocumented payments
from the Lay Trust ($277,000), M.A. King’s total assets
still amounted to less than $2.2 million. That is
significantly less than M.A. King’s total liabilities, which,
conservatively, came to almost $2.8 million. Included
in this calculation of M.A. King’s liabilities are King &
Larsen’s accounts payable and the notes on which King
& Larsen was still obligated ($1.5 million), taxes ($500,000),
and pension and union obligations ($800,000).8 Not in‐
cluded are any of the amounts owing to Lay‐Com under the
Master Lease and Assignment Agreement or under the
April 1 loan. Indeed, the April 1 $250,000 loan is treated
as an asset. Even treating M.A. King’s loans from the
7
This amount does not include any value that might be assigned
to King & Larsen’s vehicles and equipment, because those assets
were leased, not assigned, to M.A. King under the Master Lease
and Assignment Agreement. However, even adding an addi‐
tional $593,000 (the value the defendants placed on King &
Larsen’s vehicles and equipment) to the asset side of M.A. King’s
balance sheet does not tip the scales—its overall liabilities still
exceed its overall assets, if only barely.
8
The taxes and union obligations are included here because
it is undisputed that M.A. King is King & Larsen’s successor
and therefore liable for its debts.
Nos. 06‐3711, 06‐3821 & 07‐1071 17
defendants as investments,9 the defendants still have
not shown that M.A. King had enough money to operate
on its own—it was not capitalized in an ordinary sense
at all.
Indeed, M.A. King fits a “typical pattern” among under‐
capitalized corporations in which the controlling share‐
holder takes profits out of the corporation as a manage‐
ment fee. Hackney & Benson, 43 U. Pitt. L. Rev. at 886.
M.A. King’s controlling “shareholder” was Lay‐Com, and
M.A. King was so badly off from the start that it never
made a single payment on Lay‐Com’s hefty operations
fee, which was to be 50% of M.A. King’s profits every
two months. In the end, then, we could treat the
fictional $25,000 capital contribution from the GAK Trust
as real, and it would make no difference:
$2.2 million + $25,000 < $2.8 million.
9
Treating debt as an investment is not unheard of, but it is
unfavored by courts because by doing so, the lenders cum
investors (here, the defendants) “give up nothing by way of
profits if the corporation succeeds, but have assured themselves
the preferred status of creditors if it fails, thus shifting to the
legitimate creditors of the corporation a part of the risk that
in fairness should be borne by the proprietary interest.” In re
Mader’s Store for Men, Inc., 254 N.W.2d 171, 187 (Wis. 1977).
This is a primary basis for equitable subordination of shareholder
claims in bankruptcy. It is also another sign of
undercapitalization. For the need for a shareholder loan at
the outset of a new business signals that the initial equity
was insufficient. Here that was clearly the case—again, there was
no initial equity invested in M.A. King at all.
18 Nos. 06‐3711, 06‐3821 & 07‐1071
Further, M.A. King’s failure to meet its debts—M.A. King
failed to make payments to both the funds and to Lay‐
Com—was additional evidence that it could not pay its
debts and was therefore undercapitalized.
The defendants argue that if M.A. King had operated the
way it was contractually obligated to operate under the
Master Lease and Assignment Agreement, i.e., if Mike
King had refrained from making unauthorized payments
to the funds and from taking on King & Larsen’s pension
and union obligations, then the company would have
been able to meet its obligations—in other words, it
would have been adequately capitalized. But again, the
defendants have conceded that M.A. King was King &
Larsen’s successor and therefore liable for its union ob‐
ligations. M.A. King was not permitted to abandon those
obligations, either by entering into a contract not to pay
them or otherwise.10
Undercapitalization is almost never the only factor in
a decision to pierce the corporate veil. See Browning‐
Ferris, 195 F.3d at 961. Indeed, this case illustrates how
undercapitalization tends to go hand in hand with the
“control” factor discussed above. Lay‐Com kept M.A. King
undercapitalized as one mechanism of its control over
the company. The defendants ignore the interaction
between these two factors, and in doing so they make
10
In any event, Lay‐Com was entitled to, and did, obtain its own
judgment against M.A. King for breach of that contract. But it
cannot also use M.A. King’s breach as a defense to a veil‐piercing
claim.
Nos. 06‐3711, 06‐3821 & 07‐1071 19
contradictory arguments. They argue that they had no
control over M.A. King, as shown by Mike King’s pay‐
ments to the funds and his unilateral agreement with the
union in September 2001. But they also argue that M.A.
King was not undercapitalized because Mike King was not
supposed to make such payments—the third‐party distribu‐
tion restriction was meant to keep him hemmed in. They
cannot have it both ways.
All of this discussion risks ignoring the forest for the trees.
M.A. King shut down less than a year after it set up shop,
following a series of transactions that, admittedly,
avoided King & Larsen’s union obligations and attempted
to keep Mike King on a short leash. Right off the bat, M.A.
King needed a steady influx of cash loans from the de‐
fendants to keep going. These are all marks of an under‐
capitalized corporation, propped up by its parent or
shareholders. The parties argue about whether the defen‐
dants reaped more value from M.A. King than they sowed,
but this is beside the point. Also irrelevant is the defen‐
dants’ contention that the funds would have been in the
same or a worse position regardless of the defendants’
actions because King & Larsen was failing before the
defendants stepped in to create M.A. King and it would
have been unable to pay the funds in any event.11 What
11
There is no authority for the defendants’ position that a
plaintiff’s “windfall” defeats its veil‐piercing claim (though we
agree in principle that a windfall to the plaintiff could defeat the
“promoting injustice” prong in the right case), but even if there
were, the funds received no windfall here. Aside from the
(continued...)
20 Nos. 06‐3711, 06‐3821 & 07‐1071
is clear is that the failure to pierce M.A. King’s veil to
reach Lay‐Com would “uphold a corporate arrangement
to keep assets in a liability‐free corporation while placing
liabilities on an asset‐free corporation.” Hystro, 18 F.3d
at 1390 (discussing Sea‐Land, 941 F.2d at 524, further dis‐
cussing Van Dorn, 753 F.2d at 569). M.A. King was the
(relatively) liability‐free corporation and King & Larsen
was the asset‐free corporation. The defendants arranged
things this way. They cannot avoid liability by hiding
behind such an arrangement.
Lord & Essex presents a more difficult case. It was not a
party to the Master Lease and Assignment Agreement,
and therefore it did not exert the same level of control over
M.A. King as did Lay‐Com. Moreover, there is no conten‐
tion that Lay‐Com and Lord & Essex were in fact a single
entity, or that Lay‐Com’s veil should be pierced to reach
Lord & Essex. Nevertheless, Lord & Essex was an integral
part of the scheme of transactions that stripped King &
(...continued)
roughly $100,000 in payments they received from M.A. King (a
fraction of what the funds were owed), the defendants’ scheme of
transactions prevented the funds from recovering anything from
King & Larsen. If not for the scheme of transactions—and the
first‐lien position that the defendants obtained on M.A. King’s
assets—the funds might have been able to satisfy their entire
judgment by collecting against King & Larsen. This is because, as
the defendants have argued strenuously, King & Larsen’s assets
had value—on our rough calculation, about $2.2 million in
value—far in excess of the roughly $800,000 King & Larsen
originally owed to the funds and therefore sufficient to pay King
and Larsen’s initial debt.
Nos. 06‐3711, 06‐3821 & 07‐1071 21
Larsen of its assets and left it with nothing but its tax
and union liabilities. Lord & Essex also extended credit
to King & Larsen (the $347,000 loan) when King & Larsen
was struggling financially, suggesting that Lord & Essex
did not maintain an arm’s length relationship with King &
Larsen and, hence, with M.A. King. The district court
also points out that twice Lord & Essex made payments
to the Lay Trust that should have gone instead to M.A.
King for King & Larsen’s prior work, showing a lack of
corporate formality. It is a closer case, but we agree that
it was appropriate to pierce M.A. King’s veil to reach
Lord & Essex. If not for its role in the scheme of transac‐
tions, however, Lord & Essex would have escaped
liability, for its disregard of corporate formalities was not
enough, on its own, to warrant piercing the veil.
That leads us to the Lay Trust. Unlike the other two
corporate defendants, the Lay Trust played no role in
the scheme of transactions at issue. The district court
relies on a “plus factor”: that the Lay Trust made several
undocumented payments to M.A. King in the summer
of 2001. But this is not really a plus factor if it is not
coupled with something else supporting the theory that
the Lay Trust, too, controlled M.A. King, disregarded its
corporate form, and kept it undercapitalized.12 No other
facts, other than the trust’s association with the other
12
The payments from the Lay Trust are themselves (more)
evidence of M.A. King’s undercapitalization because they too
show that M.A. King lacked sufficient equity from the start
to operate its business without such help. But courts will not
pierce the corporate veil based on undercapitalization
alone. Browning‐Ferris, 195 F.3d at 961.
22 Nos. 06‐3711, 06‐3821 & 07‐1071
defendants—not in itself a sufficient basis for piercing
the veil—are in this record. To be sure, the district court
assigned only contingent liability to the Lay Trust (the
trust was to be held liable only if the other two corporate
defendants were unable to satisfy the judgment), but we
find no basis for any liability. A court may not make up
for a lack of evidence by assigning only contingent lia‐
bility to an otherwise blameless defendant. The lack of
evidence here means the Lay Trust must be dismissed
from the suit.
Likewise, the district court correctly dismissed Popp Jr.
from the suit, as he played no role in the events at issue
other than in his capacity as an officer and director of
Lord & Essex, Lay‐Com and M.A. King. He did not use
M.A. King for his personal benefit, or commingle
personal funds with funds in M.A. King’s accounts, or do
anything else to suggest that he personally was a
“dominant personality” deserving of individual liability.
We therefore affirm the dismissal of Popp Jr. from suit.
One detail remains: the award of attorneys’ fees to the
funds. We review a district court’s decision to award
attorneys’ fees for an abuse of discretion. See Senese v.
Chicago Area Int’l Bhd. of Teamsters Pension Fund, 237 F.3d
819, 826 (7th Cir. 2001); 29 U.S.C. § 1132(g)(1). “There is a
‘modest presumption’ in favor of awarding fees to the
prevailing party, but that presumption may be rebut‐
ted.” Senese, 237 F.3d at 826 (quoting Harris Trust & Sav.
Bank v. Provident Life & Accident Ins. Co., 57 F.3d 608, 617
(7th Cir. 1995)). The defendants have not rebutted the
presumption. Rather, they have argued that if we
reversed, we should also reverse the fee award. We are
Nos. 06‐3711, 06‐3821 & 07‐1071 23
reversing in part, but the funds may still be found to be
“prevailing parties,” see J.B. Esker & Sons, Inc. v. Cle‐Pa’s
P’ship, 757 N.E.2d 1271, 1276 (Ill. App. Ct. 2001) (“The
fact that the court ruled in plaintiff’s favor on some
issues does not create a basis for a reduction in the award
of attorney fees.”). We find no abuse of discretion in
the district court’s fee award, nor do we find a require‐
ment for reversing it in light of our modification of the
merits.
III
The decision of the district court is therefore
AFFIRMED in part and REVERSED in part.
9‐2‐09