Civilized Proceedings, Minding My Own Business

Always Timley Pay Your Employees–and Taxes

Since the last post already gave away the end of the story, I thought I’d go back to the beginning and try to fill the blanks. As you may recall, I was describing a win I had recently that was somewhat surprising. My client had sued his foSp Page Bckgrdrmer employer and business partner and won via summary judgment. Really isn’t anything too unusual or exciting about that, except the way the judge crafted the relief in the Order exactly the way I wanted–and then some!

So, first I’ll let the court explain the basic facts for the employment claim (although my client wanted me to use the real names, they have been changed to protect the guilty):

EMPLOYMENT CLAIM 

Fisher was employed by Mountain Const. Inc. as the site superintendent for a restaurant Project from October 8, 2012 through February 5, 2013 at a rate of $1,750 per week. Fisher was not compensated for seven weeks and two days of work, for which Fischer is owed $12,950.00. Mountain Const. Inc. is liable for this debt as Fisher’s employer. Fisher also claims that Mountain Const. Inc.’s owner, TJ, should be held personally liable by piercing the corporate veil of Mountain Const. Inc.

Knowing that the company was defunct with no assets, and after hearing numerous threats of bankruptcy, I thought I would take a long shot and try to hold the owner personally liable for the unpaid wages. The main reason I tried was because of how often TJ kept throwing around the “B” word (Bankruptcy) throughout the case–including during his deposition–smugly. I knew it was less likely fUnited_States_Bankruptcy_Court_Sealor TJ to file bankruptcy personally, at least not until absolutely necessary. We proved TJ took money from the Project and used it personally to buy a house and flip it. It is much easier to buy real estate if you don’t have a bankruptcy on your credit report. 

After Fisher was fired, he provided the statutorily required written demand (Minn.Stat. § 181.13(a)) on his employer. After 24 hours passed, with his wages remaining unpaid, the statutory penalty of an extra day’s pay was added on for each day he went unpaid (up to 15 days). The Court also ordered the employer to pay for Fischer’s attorney’s fees and expenses (Minn.Stat. § 181.171). Piece of advice: Pay your employees on time in Minnesota.

Before and during the case, Fisher was accused of being the reason there was no profit from the Project and told he would never be paid. In essence, he was accused of being a traitor due to working with the General Contractor to finish the Project (TJ walked off the job); accused of being a forger for trying, unsuccessfully, to sign his own name to a lien waiver for work that was paid for; and a conspirator, for helping turn documents in so the Project could be closed out and everyone could be paid–even TJ and Mountain Const. Inc.!  For doing all that he was fired and told he didn’t deserve to be paid for ovepuzzler two weeks of work.

As the litigation progressed, we could tell we would not be getting any useful documents from TJ or Mountain Const. Inc. We decided to change course and serve subpoenas on the company’s credit union and see what we could uncover. My client had done some (a lot) of the bookkeeping for the Project but TJ said he had not completed a final accounting yet because he was broke. With the subpoenas, Fisher’s understanding of the Project’s finances and some help from the General Contractor, we were able to piece together a puzzle that only formed one picture when the pieces fit and locked together: TJ took all the money from the Project and the business’s bank accounts and kept it for himself.

Here’s what the Court did with that:

A. The Victoria-Elevator Test Favors Piercing the Corporate Veil 

In the usual case, an individual shareholder is not liable for the debts and obligations of the corporation. To

By Leaflet (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

By Leaflet (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)%5D, via Wikimedia Commons

determine the appropriateness of disregarding the corporate entity in this case, however, the Court applies a two-pronged test considering: (1) whether TJ has sufficiently established MCI as a separate entity and; (2) whether the failure to impose personal liability on TJ would work an injustice or be fundamentally unfair to Fisher. Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn. 1979). Here, “courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.” Id. at 512 (citing DeWitt Truck Brokers, Inc. v. W. Ray Flemming

Fruit Co., 540 F.2d 681, 684-87 (4th Cir. 1976)). That can be determined by an analysis of the following factors: 

insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings. 

Id. Not all but “a number of” these factors need to be present to satisfy the first prong of this test. 

The Court applies these factors to our case’s facts and here is the lesson that can be learned from this. If you want to flat-27287_150maintain the liability protection you gain from doing business as a corporation or a limited liability company (LLC), you need to follow corporate formalities, keep your business and personal finances separated and keep current and accurate records. And pay your employees, your taxes and don’t lie in a deposition.

In this case TJ did not treat MCI as a separate entity and failed to distinguish between property owned by him and property owned by the corporation. The Court has no evidence that TJ observed any of the corporate formalities necessary to distinguish MCI as an entity separate from himself. TJ was the sole shareholder of MCI. He admits that no taxes have been paid by the corporation and, according to him, he no longer possesses the corporation’s financial documents.

TJ claims that he did not pay himself a regular salary as CEO of MCI. He treated MCI’s bank account, however, as his personal account. Depo. at 42. He wrote checks from MCI’s account at the Credit Union and deposited ?them into his personal account at his Bank without recording transactions. The amounts of these transactions varied from $6,000 to $40,000. TJ also claims that he cannot remember why he transferred that money. Id.

*****[numerous self serving transactions deleted]****

TJ claims to not remember any of the above transactions or their purpose. Furthermore, the only records of the transactions were kept by the bank and credit union. The Court can only conclude that TJ was using MCI to support himself and his other businesses and investments. Based upon the evidence in this case, TJ did not distinguish between his own assets and those of MCI.

Under the first prong of the Victoria-Elevator test, TJ’s failure to observe corporate formalities, the absence of corporate records, and the evidence that the existence of the corporation is merely a facade for individual dealings, all support the piercing of MCI’s corporate veil.

Stay tuned. The next post will address the second prong’s analysis of the injustice and unfairness of allowing the corporate entity to shield the owner from liability. Now isn’t legal geeking fun! Oh yeah, and please pay your employees and taxes.

Thank you.

MKT

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