Reference no: EM132201534

FACTS Integrated Telecom Services Corp. (ITS) was acquired by and became a wholly-owned subsidiary of Inter–Tel Technologies, Inc. (Technologies), which in turn is a wholly-owned subsidiary of Inter–Tel, Inc. (Inter–Tel). Inter–Tel designs, manufactures, sells, and services telecommunications systems through its subsidiaries and affiliates. Technologies is the retail division of Inter–Tel. ITS was the company’s first retail branch in Kentucky, selling Inter– Tel’s telecommunications products from an office building it leased from Linn Station Properties, LLC (Linn Station).

After ITS was acquired by Technologies, ITS was not permitted to maintain a bank account, hold any funds, or pay any bills. All of ITS’s regional offices were transformed from independent deal- ers of communications equipment into direct sales “branches” of Inter–Tel. ITS employees became employees of Inter–Tel and were paid by Inter–Tel. When a customer purchased a telecom- munications system from ITS the payment went directly into a de- pository account controlled by Inter–Tel. Inter–Tel paid all the vendors who provided ITS with goods and services. All of ITS’s inventory was provided by another Inter–Tel subsidiary. Inter–Tel paid ITS’s rent for the Linn Station Road property from the time Technologies acquired ITS until ITS abandoned the premises in 2002. Inter–Tel and Technologies were the named insureds listed on the property damage insurance for ITS’s premises on Linn Sta- tion Road.

ITS did not hold an annual board of directors or shareholders meeting from 1999 through 2002. Nor did Technologies hold an an- nual board of directors or shareholders meeting from 1998 through 2002. During the four-year period from 1999 through 2002, ITS and Technologies had identical boards of directors and the Presi- dent and CEO of Inter–Tel served on the boards of ITS, Technolo- gies and Inter–Tel. Although all Inter–Tel business conducted in Kentucky since 2001 was performed by ITS in its own name, Inter– Tel, Technologies, and another Inter–Tel subsidiary filed sales and use tax returns with the Kentucky in 2001, 2002, and 2003.

On June 19, 2002, Linn Station filed suit against ITS, seeking damages for failure to repair and maintain the premises and for unpaid rent. ITS failed to respond, and on August 12, 2002, a default judgment was entered against ITS for $332,900.00 plus in- terest. After repeated, unsuccessful attempts to satisfy the judg- ment against ITS, on June 20, 2003 Linn Station sued ITS, Technologies and Inter–Tel to pierce the corporate veil and estab- lish Inter–Tel and Technologies’ liability for the judgment against ITS. The trial court granted summary judgment to Linn Station, and the Court of Appeals affirmed. Technologies and Inter–Tel appealed.

DECISION The decision of the Court of Appeals is affirmed, and the case is remanded to the trial court for entry of judgment against Inter–Tel and Technologies.

OPINION Piercing the corporate veil is an equitable doctrine invoked by courts to allow a creditor recourse against the share- holders of a corporation. In short, the limited liability, which is the hallmark of a corporation, is disregarded and the debt of the pierced entity becomes enforceable against those who have exer- cised dominion over the corporation to the point that it has no real separate existence. A successful veil-piercing claim requires both (1) the element of domination and (2) circumstances in which continued recognition of the corporation as a separate en- tity would sanction a fraud or promote injustice. This two-part test is referred to as “alter ego” test. This case involves applying the piercing the corporate veil doctrine in the context of an increasingly common scenario: a creditor’s attempt to collect on debt incurred by a wholly-owned subsidiary where the subsidiary has been deprived of all income and rendered asset-less by the acts of its parent (and in this case also grandparent) corporation.

The following factors are considered in applying the alter ego test: (1) inadequate capitalization, (2) failure to issue stock, (3) fail- ure to observe corporate formalities, (4) nonpayment of dividends, (5) insolvency of the debtor corporation, (6) nonfunctioning of the other officers or directors, (7) absence of corporate records, (8) commingling of funds, (9) diversion of assets from the corporation by or to a stockholder or other person or entity to the detriment of

creditors, (10) failure to maintain arm’s-length relationships among related entities, and (11) whether the corporation is a mere facade for the operation of the dominant stockholders.

The alter ego test language employed by most jurisdictions expressly refers to “promoting injustice” and, indeed, piercing should not be limited to instances where all the elements of a common law fraud claim can be established. The injustice, how- ever, must be something beyond the mere inability to collect a debt from the corporation.

The trial court and Court of Appeals were correct in conclud- ing the undisputed facts of this case justified piercing ITS’s corpo- rate veil. ITS lost all semblance of separate corporate existence and through the joint acts of Technologies and Inter–Tel was rendered income-less and asset-less. Their diversion of ITS’s corporate income and transfer of ITS’s corporate assets for their own benefit provides the extra “injustice,” something more than simply a cred- itor’s inability to collect a debt from ITS. The alter ego test is thus satisfied.

Technologies was 100% owned and controlled by Inter–Tel and the two corporations acted completely in concert in dominat- ing ITS and extracting anything of value from ITS. It is entirely appropriate to look at the larger picture of the conduct of Inter–Tel and Technologies as opposed to only the individual actions of the parent entity. To do otherwise would render the equitable piercing doctrine hopelessly inadequate, if not

meaningless in some cases, based on the sheer number of busi- ness entities involved.

ITS had grossly inadequate capital for day-to-day operations because it had no funds at all, literally nothing of its own. Inter–Tel paid the employees’ salaries and other expenses of ITS. ITS had no assets of its own. ITS simply had no indepen- dent financial existence. Both Technologies and Inter–Tel used the Linn Station lease premises and any other assets previously held by ITS solely for the benefit of Inter–Tel, not for ITS’s ben- efit. Finally, the formal legal requirements of ITS were not observed. This case is clearly within the boundaries of proper application of the equitable doctrine of piercing the corporate veil. Thus, the trial court and Court of Appeals did not err in piercing ITS’s veil to hold Inter–Tel and Technologies responsi- ble for ITS’s debt to Linn Station.

INTERPRETATION A court will disregard the limited liability of a corporation when (1) its owners exercise complete control and dominion to the point that it has no real separate existence and (2) circumstances in which continued recognition of the cor- poration as a separate entity would sanction a fraud or promote injustice.

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