Attorney for Appellants Attorney for Appellee
Nathaniel Ruff Leona Bonczek
Merrillville, Indiana James L. Clement, Jr.
Merrillville, Indiana
Attorney for Appellee
Donna Huddleston
James A. Greco
Merrillville, Indiana
____________________________________________________________________________
__
In the
Indiana Supreme Court
_________________________________
No. 45S03-0403-CV-123
Lydia Escobedo, et al.,
Appellants (Plaintiffs below),
v.
BHM Health Associates, Inc.,
AAA Home Care LLC/Rocky Mountain
Home Care, AAA Home Care LLC/Rocky
Mountain Home Care, d/b/a BHM Health
Associates, Inc., Leona Bonczek, Donna
Huddleston, and Lee Huddleston,
Appellees (Defendants below).
_________________________________
Appeal from the Lake Superior Court, No. 45D02-9703-CP-268
The Honorable William E. Davis, Judge
_________________________________
On Petition To Transfer from the Indiana Court of Appeals, No. 45A03-0211-
CV-383
_________________________________
December 7, 2004
Sullivan, Justice.
Employees of BHM Health Associates, Inc., a now-defunct corporation,
seek to “pierce the corporate veil” and recover two weeks’ unpaid wages
from BHM’s individual shareholders. We affirm the trial court’s judgment
that there is no basis under the law for “piercing the corporate veil” here
because the evidence does not meet the two-prong test that the corporate
form was so ignored, controlled, or manipulated that it was merely the
instrumentality of another and that the misuse of the corporate form would
constitute a fraud or promote injustice.
Background
BHM Health Associates, Inc. (“BHM”) was a home nursing care business,
clients of which were on Medicare. Defendants Bonczek and Huddleston were
50% equal shareholders, officers, and directors of BHM. BHM did not pay
the employees their wages for the last two weeks of January, 1997, nor did
it pay union dues for that time period. Plaintiffs, former employees of
BHM and the unions representing them, sued for the unpaid wages, statutory
penalties,[1] and union dues.
During its existence, BHM had struggled financially. The Internal
Revenue Service had threatened to close BHM because it had failed to
forward to the IRS past and present payroll tax obligations exceeding
$200,000.00. Bonczek and Huddleston had personally guaranteed the payment
of that arrearage in order to keep the business open. At the end of 1996,
Defendants negotiated the sale of BHM to Rocky Mountain Home Care and
executed an Asset Purchase Agreement on February 14, 1997, making it
effective as of February 1, 1997. It appears that Rocky Mountain Home Care
created AAA Home Care LLC (“AAA”),[2] an Indiana corporation, to purchase
BHM’s assets. In January, 1997, BHM made payroll payments for the work
performed from January 1 through 15, 1997, and also paid $70,000.00 to the
IRS. As noted above, the employees were not paid by BHM for the last two
weeks of January.
After acquiring the assets of BHM, AAA operated the business.
According to the trial court, “AAA treated the [p]laintiffs as new
employees in every way. AAA considered this a new business and one whose
employees were not represented by the [u]nion, as had been BHM. . . . AAA
decided to give the new employees a hiring bonus. AAA made it clear that
the bonus was strictly at its discretion. The bonus was meant to keep the
employees happy and from going elsewhere. The hiring bonus was equal to
70% of the wages that should have been paid [to] the [p]laintiffs at the
end of January, [1997,] but were not paid to them.” App. at 13.
Plaintiffs sued BHM, AAA Home Care LLC/Rocky Mountain Home Care, AAA
Home Care LLC/Rocky Mountain Home Care, d/b/a BHM, Lee and Donna
Huddleston, and Leona Bonczek, seeking unpaid wages, statutory penalties,
and unpaid union dues.[3] The trial court entered judgment against BHM for
unpaid wages, statutory penalties, and union dues, but it dismissed all
claims against Bonczek, Huddleston, and AAA Home Care LLC/Rocky Mountain
Home Care. Plaintiffs appealed and the Court of Appeals reversed part of
the trial court’s judgment and held Bonczek and Huddleston individually
liable on the judgment. Escobedo v. BHM Health Associates, Inc., 798
N.E.2d 220, 224 (Ind. Ct. App. 2003). Bonczek and Huddleston sought
transfer to this Court. We previously granted transfer, 812 N.E.2d 798
(2004), and now affirm the judgment of the trial court.[4]
Discussion
I
In this case, the plaintiffs’ sole theory of recovery against Bonczek
and Huddleston[5] is that they are entitled by law to “pierce the corporate
veil” of BHM and hold its shareholders, Bonczek and Huddleston, personally
responsible for BHM’s failure to pay the employees’ wages for the last two
weeks of January, 1997. In Aronson v. Price, this Court discussed the
rationale for and history of the general rule that individual shareholders
of a corporation are not personally responsible for the obligations of the
corporation. 644 N.E.2d 864, 867 (Ind. 1994). In particular, we pointed
out that “the fundamental principle of American corporate law [is] that
corporate shareholders sustain liability for corporate acts only to the
extent of their investment and are not held personally liable for the acts
attributable to the corporation.” Id. This principle has been codified by
the Legislature in our State’s corporate code. Ind. Code § 23-1-26-3(b)
(2004).[6]
Because of the bedrock nature of the principle of limited shareholder
liability, the burden on a party seeking to “pierce the corporate veil” is
severe. Such a party may only recover from a shareholder if the party
proves by a preponderance of the evidence “that the corporate form was so
ignored, controlled or manipulated that it was merely the instrumentality
of another and that the misuse of the corporate form would constitute a
fraud or promote injustice.” Aronson, 644 N.E.2d at 867 (citing Winkler v.
V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1232 (Ind. 1994) (citing in turn
Hinds v. McNair,129 N.E.2d 553, 559 (Ind. 1955); Gurnik v. Lee, 587 N.E.2d
706, 710 (Ind. Ct. App. 1992)). Caselaw sets forth certain guideposts for
helping make this determination: (1) undercapitalization; (2) absence of
corporate records; (3) fraudulent representation by corporation
shareholders or directors; (4) use of the corporation to promote fraud,
injustice, or illegal activities; (5) payment by the corporation of
individual obligations; (6) commingling of assets and affairs; (7) failure
to observe required corporate formalities; or (8) other shareholder acts or
conduct ignoring, controlling, or manipulating the corporate form.
Aronson, 644 N.E.2d at 867 (citations omitted).
This case was tried to the court, and in such a circumstance, we defer
to the trial court’s findings of fact and will reverse only if clearly
erroneous. Ind. Trial Rule 52(A) (“On appeal of claims tried by the court
without a jury . . . the court on appeal shall not set aside the findings
or judgment unless clearly erroneous . . . .”); Yanoff v. Munch, 688 N.E.2d
1259, 1262 (Ind. 1997); Estate of Reasor v. Putnam County, 635 N.E.2d 153,
158 (Ind. 1994).
Two trial court findings of fact are important to this issue:
9. For a couple of years, BHM had been in serious financial
trouble, and the Internal Revenue Service (IRS) had threatened to
close BHM due to past and present payroll tax obligations which
exceeded $200,000.00. In order to continue the operation of BHM,
Bonczek and Huddleston were required to personally guaranty [sic] the
payment of the arrearage, and BHM had been making monthly payments of
$30,000.00 towards said arrearage.
15. In anticipation of the sale, Bonczek and Huddleston paid
on debts of BHM that Rocky Mountain would not assume instead of paying
the Plaintiffs their wages. The debts that they paid included some
$70,000.00 to the IRS for employee withholding taxes for which Bonczek
and Huddleston had agreed they would be personally responsible. BHM
had no assets left after the sale to AAA Health Care/Rocky Mountain
Home Care.
App. at 11, 13.
The trial court concluded:
Plaintiffs failed to present evidence which allows the Court to
engage in a careful review of the relationship to determine whether
undercapitalization existed; whether there was an absence of corporate
records; whether there were fraudulent representations; whether the
corporations were used to promote fraud and injustice or illegal
activities; whether there was payment by the corporation of individual
obligations; whether there was commingling of assets and affairs;
whether there was a failure to observe required corporate formalities;
and whether there were any other acts or conduct which ignored
controlled or manipulated the corporate form. As to BHM there is only
evidence that an overpayment on payroll tax arrearage was made while
the January 16 through January 31 payroll was not. This payment was
not on Huddleston and Bonczek’s personal taxes, but on the corporate
payroll taxes that were due and owing. The fact that this payment
benefited Huddleston and Bonczek as they were guarantors on this debt
does not change the nature of the obligation from a corporate one to
an individual one.
App. at 17.
The Court of Appeals, however, found it appropriate to impose
liability on Bonczek and Huddleston personally. Its reasoning was as
follows:
Bonczek and Huddleston were the sole shareholders of BHM and
designated $100,000 salaries for themselves. It is abundantly clear
that these salaries were subsidized by their decisions to forego BHM’s
tax obligations. As such, there is a direct nexus between Bonczek and
Huddleston’s salaries and their personal guarantee of BHM’s tax
arrearages.
Because Bonczek and Huddleston effectively absconded with BHM
employee wages to pay off the arrearage—a debt that arose at least in
part from their efforts to subsidize larger salaries for themselves—it
would promote substantial justice to deny them the protection of BHM’s
corporate status. Accordingly, we reverse the decision of the trial
court and extend the trial court’s finding of BHM’s liability to
Bonczek and Huddleston, personally, jointly, and severally.
Escobedo v. BHM Health Associates, Inc., 798 N.E.2d 220, 223 (Ind. Ct. App.
2003) (footnote omitted).
We conclude that the Court of Appeals was wrong both as to procedure
and law.
In reaching the conclusion that it did, the Court of Appeals appears
to have disregarded the trial court’s findings in favor of findings of its
own. A trial court’s findings of fact should be set aside only if clearly
erroneous, “when the record contains no facts to support them either
directly or by inference.” Estate of Reasor, 635 N.E.2d at 158. The trial
court made no findings that the salaries of Bonczek and Huddleston “were
subsidized by their decisions to forego BHM’s tax obligations” and the
record contains evidence that Bonczek and Huddleston did not always draw
their salary. Tr. at 60; Huddleston Dep. at 27. Huddleston said she
mortgaged her home to pay the rest of the tax liability and, to the best of
her knowledge, no company money was used to pay the loan from February,
1996, to February, 1997. Given these facts in the record, and in the
absence of any trial court findings on the subject, the standard of
appellate review does not permit us to find that Bonczek and Huddleston
failed to pay tax withholdings to subsidize their salaries.
Even if such a finding were permissible, it would not, standing alone,
justify “piercing the corporate veil.” As set forth above, corporate law
permits the corporate form to be disregarded and personal liability imposed
only where (1) the corporate form is so ignored, controlled, or manipulated
that it is merely the instrumentality of another, and (2) the misuse of the
corporate form constitutes a fraud or promotes injustice. Aronson v.
Price, 644 N.E.2d 864, 867 (Ind. 1994). The Court of Appeals did not use
this two-prong standard. It held merely that the law permitted the
corporate form to be disregarded to “promote substantial justice.”
Escobedo, 798 N.E.2d at 223. This is not the same as misuse of the
corporate form to promote injustice. And there is nothing in either the
findings of the trial court or the Court of Appeals that would support a
conclusion that Bonczek and Huddleston so ignored, controlled, or
manipulated the corporate form that it was merely their instrumentality.
The tax arrearage was a corporate debt; the personal guaranty of Bonczek
and Huddleston did not change the debt from a corporate to an individual
one. And the fact that BHM paid more than the usual monthly payment to the
IRS at the end of January, 1997, is an inadequate reason to disturb the
trial court’s findings.
II
In their brief filed in the Court of Appeals, plaintiffs raise an
argument captioned, “The Bonus Paid by AAA Did Not Constitute Payment of
Back Wages.” Br. of Appellants at 18. The Court of Appeals did not
address this argument and the plaintiffs renew it in their Brief in
Response to Appellees’ Petitions to Transfer.[7] To the extent we
understand plaintiffs’ contention on this point, it is that (1) the trial
court concluded that AAA paid the plaintiffs 70% of their unpaid wages,
thereby reducing the total obligation of the defendants by that amount, and
(2) that this conclusion was erroneous because the 70% payments were
“hiring bonuses,” not back wages. In fact, the trial court did not hold
that the 70% payments were back wages; it held, as plaintiffs argue should
be the case, that the 70% payments constituted hiring bonuses with respect
to which BHM (the only defendant with liability) was not entitled to
credit. This can be seen most clearly by comparing the schedule setting
forth the amounts held by the trial court to be owed by BHM to the
employees with the schedule setting forth the amounts plaintiffs claim they
are owed. The two schedules are identical.
Conclusion
Having previously granted transfer, we summarily affirm the opinion of
the Court of Appeals as to the issue discussed in footnote 4 and affirm the
judgment of the trial court.
Shepard, C.J., and Dickson, J., concur. Boehm, J., concurs with separate
opinion. Rucker, J., concurs in result.
Boehm, J., concurring.
I concur in the majority’s holding that facts sufficient to pierce the
corporate veil are not established. The Court of Appeals reversed the
trial court on the basis that it would be inequitable to permit the
corporate officers to escape liability for discharging a liability they had
guaranteed as individuals, if it had the effect of diverting limited assets
otherwise available for other creditors, including the plaintiffs. I agree
that the facts as found by the trial court would support such a theory of
recovery except for one point. The debt discharged was to the Internal
Revenue Service for past payroll taxes. If the nature of that obligation
rendered the IRS a preferred creditor vis-à-vis claims for wages for the
period immediately preceding collapse of the corporation, the plaintiffs
here suffered no loss by the payment of the debt to the IRS. Perhaps this
was the reason no theory of self dealing by corporate officers or
directors, breach of fiduciary duty, fraudulent transfer or fraud on
creditors was advanced. In any event, the facts are sufficiently murky
that I concur in affirming the trial court.
-----------------------
[1] The Indiana Code provides that an employer that fails to pay wages to
an employee when due is subject to liquidated damages for each day the
amount remains unpaid equal to 10% of the amount due, not to exceed double
the amount of wage due. Ind. Code §22-2-5-2 (2004).
[2] Plaintiffs initially brought suit against AAA Health Care, but that was
a mistake, and the parties stipulated that the proper name is AAA Home Care
LLC.
[3] Lee Huddleston was dismissed as a defendant.
[4] As noted in the text, the trial court dismissed plaintiffs’ claims
against AAA. Plaintiffs appealed this determination, but the Court of
Appeals affirmed the judgment of the trial court. Escobedo, 798 N.E.2d at
223. Plaintiffs did not challenge this determination by means of a
Petition to Transfer. Nevertheless, once transfer is granted, this Court
has jurisdiction over all issues in the appeal as if it was initially filed
in this Court. Ind. Appellate Rule 58(A). In this case, we dispose of
this claim by summarily affirming the opinion of the Court of Appeals on
this issue. See App. R. 58(A)(2).
[5] As such, we express no opinion about any other theory of liability on
the part of Bonczek and Huddleston that might have been available to the
plaintiffs.
[6] Different considerations apply in the context of tax law where
exceptions to the doctrine of separate corporate identity more often arise.
See Indiana Dep’t of State Revenue v. Safayan, 654 N.E.2d 270 (Ind. 1995).
Whether a corporation is a separate taxable entity from the individual who
created it is not the same question as whether the corporation is the
individual’s alter ego for purposes of “piercing the corporate veil” to
hold the individual liable for the corporation’s taxes. Harris v. United
States, 764 F.2d 1126, 1128 (5th Cir. 1985).
[7] Because under Indiana Appellate Rule 58(A), once transfer is granted,
this court has jurisdiction over all issues in the appeal as if it was
initially filed in this court, the procedure used here by the plaintiffs to
raise this issue is appropriate as a matter of appellate procedure.
Escobedo v. BHM Health Associates, Inc.
Combined Opinion