Tuesday, April 19, 2016

Veil Piercing or Alter Ego Doctrine in a Criminal Suit? No Thanks.

A recent Illinois case uniquely applied the alter ego doctrine in the context of a criminal case.  See People v. Abrams, 47 N.E.3d 295, ¶¶ 57-61, 399 Ill. Dec. 790 (2015) ( slip op. PDF here ).  In my view, not quite right, either.

In the case, the defendant (Abrams) stole $1.87 million from the victim (Lev), which led to a restitution order for that amount and a twelve-year prison sentence for Abrams.  The conviction was for a Class 1 felony, for the the theft of property exceeding $500,000.  Id.¶ 23 (citing 720 Ill. Comp. Stat. Ann. 5/16-1(a(2) (West 2012)).  The statute provides, "Theft of property exceeding $500,000 and not exceeding $1,000,000 in value is a Class 1 non-probationable felony." 720 Ill. Comp. Stat. Ann. 5/16-1(b)(6.2). 

On appeal, the defendant argued the indictment was wrong in that it stated the money was stolen from Lev, when most of the money actually belonged to Lev's company, The Fred Lev Company (presumably a corporation, but that is not stated expressly).   Abrams claimed: 

the State did not prove he obtained “unauthorized control” of more than $500,000 of Lev’s property. Abrams recognizes the evidence presented at trial established that over $1.8 million was taken. Abrams contests the finding that the entire amount was taken from Lev and not The Fred Lev Company. 

Abrams, 47 N.E.3d 295 ¶ 57.  The court countered: "This is a distinction without a difference. Two separate doctrines of law guide our decision." Id. Although I think the court is probably right on the outcome, one of the rationales is wrongly explained.

The court's first assertion is as follows: 

First, the alter ego doctrine of corporate law was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d 166, 173 (1994). “The doctrine fastens liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” Peetoom v. Swanson, 334 Ill. App. 3d 523, 527 (2002). In the context of “piercing the corporate veil,” an alter ego analysis starts with examining the factors which reveal how the corporation operates and the particular party’s relationship to that operation. A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 43. Generally, did the corporation function simply as a facade for the dominant shareholder? Id. Here, without question, the corporate entity, The Fred Lev Company, served as the alter ego or business conduit of Lev, and Abrams’ own testimony confirmed it. 

Id.¶ 58. This is an overreach, as far as I am concerned, and I don't like the ease with which the court uses veil piercing without a detailed analysis. I believe that veil piercing, if it is to be used, should have some consistency, though I know that's now how it tends to work (i.e., without consistency).  Here, would the court have pierced the veil if this were a creditor bringing suit directly against Lev because his corporation couldn't satisfy a judgment? I think it would be wrong to do so on similar facts, so I think it is careless to apply the alter ego doctrine in this manner here.  

The court continues:

Second, the indictments sufficiently apprised Abrams of the charges against him. See People v. Collins, 214 Ill. 2d 206, 219-20 (2005) (any variance was neither material nor prejudicial to defendant). We do not believe that the defendant was in any way prejudiced by the indictments at issue. 

Id.¶ 59. I totally and completely buy this.  And, in addition, the court noted:

Even more convincing is that in opening statements to the jury, defense counsel told the jury that the checking accounts “were not used solely for [Lev’s and Abrams’] corporate work. They didn’t separate the corporation from their personal lives and personal expenses. *** They were using everything that went into that corporate account and writing checks on it for their own personal private, for their own person use. There was a commingling.” Additionally, defense counsel referred to “Fred Lev and Company” as being both Abrams and Lev. In closing argument, defense counsel argued that the company was “a small-time operation” with “one corporate book” that both Lev and Abrams used as “their own personal piggybank.” 

Id.¶ 60.  In the trial, it was determined that the statutory felony monetary amount threshold was met.  And the defendant admitted that he considered the funds to be Lev's and that he (the defendant) disregarded the entity.  I see no notice problem as to the defendant, and I have no concern that a jury couldn't understand whether the theft occurred in the amount claimed. I can see an argument, perhaps, that the prosecution should still get it right as to whom the money actually belonged, but it seems to me correct to say the crime was properly analyzed and assessed as to the criminal elements, so the claim is harmless error in this instance. Lev would have been the one to assert the claim for the Company, so it is hard to see how Abrams was harmed. 

I will maintain, though, that the veil piercing rationale is unnecessary and overstated. (I might be comfortable if they used the analogy to explain harmless error, but the way it was done is too much for me.)  Furthermore, as to the judgment for restitution to Lev, it is wrong. That money (or some portion of it) belongs to The Fred Lev Company.  Suppose there are creditors out there who have gone unpaid.  Or they are unpaid down the road.  At a minimum, the funds stolen from the company should go back through the company so it could be clear what funds were there and should have been available. Thus, as to the charges, I think the court probably got it right.  But as to respecting the entity (and protecting creditors now, and in the future), this could have been handled better. 

H/T Prof. Gary Rosin

https://lawprofessors.typepad.com/business_law/2016/04/veil-piercing-or-alter-ego-doctrine-in-a-criminal-suit.html

Business Associations, Corporations, Joshua P. Fershee, White Collar Crime | Permalink

Comments

OK. So, without taking on a huge policy discussion on why veil piercing is not a fit here, I will simply agree with you. Thanks for highlighting this case.

Posted by: joanheminway | Apr 20, 2016 1:37:12 PM

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