As I discussed in a previous blog-post (DON’T PIERCE THE CORPORATE VEIL – 11 mistakes to avoid for small-businesses), piercing the corporate veil is an equitable remedy and a means to impose liability from an underlying claim. It is not a stand-alone cause of action; it must be merged with an underlying claim/cause of action.
A party can pierce the corporate veil as part of the underlying case, allege facts to support an alter-ego theory, and impose liability on the individual or entity attempting to be shielded by the corporate liability limits. However, in some cases a litigant may not have the facts necessary to allege an alter-ego theory until after final judgment before learning that the judgment debtor is unable to satisfy the judgement.
So, how can a creditor pierce the corporate veil after a final judgment against a debtor corporation?
In many cases, after a judgement is entered, supplementary proceedings may be commenced to collect on the judgment, including the filing of a citation to discover assets. (735 ILCS 5/2-1402). Language in 1402(c)(3), permits a judgement creditor to:
“Compel any person cited, other than the judgment debtor, to deliver up any assets so discovered, to be applied in satisfaction of the judgment, in whole or in part, when those assets are held under such circumstances that in an action by the judgment debtor he or she could recover them in specie or obtain a judgment for the proceeds or value thereof as for conversion or embezzlement. A judgment creditor may recover a corporate judgment debtor’s property on behalf of the judgment debtor for use of the judgment creditor by filing an appropriate petition within the citation proceedings.”
This section permits a judgment creditor to determine whether a third-party is holding assets of the judgment debtor, BUT cannot be used to pierce the corporate veil and find the third-party personally liable. Psyhos v. Heart-Land Development Co.
In Pyshos, the creditor secured a judgment in the underlying case and attempted to pierce the corporate veil in a supplementary proceeding. The appellate court found this improper. The court reasoned that the allegations in a supplementary proceeding are limited to considering the allegation that the third-party is holding assets of the judgment debtor, but a supplementary proceeding may not determine personal liability against those shareholder and directors. The Pyshos court outlined two approaches a judgment creditor may take to recovery against a third-party: (1) supplementary proceedings, alleging the third-party is in possession of assets of the judgment debtor, or (2) initiating a new proceeding to pierce the corporate veil.
(1) Supplementary Proceedings – to obtain assets of the judgment debtor, held by a third-party. A supplementary proceeding, can determine whether a third-party is in possession of assets of the judgment debtor. Those assets may be used to satisfy the judgment.
A supplementary proceeding can determine whether a judgment debtor transferred assets to a third-party in violation of the Illinois Uniform Fraudulent Transfer Act (UFTA). (740 ILCS 160), which conforms with Pyshos and precedential interpretation of 1402(c)(3). If the UFTA has been violated, the judgment creditor may be able to avoid the transfer to satisfy the underlying debt, or seek an attachment or other provisional remedy against the transferred asset or other property of the transferee. (740 ILCS 160/8).
While a violation of the UFTA permits some relief pertaining to the assets held by a third-party, it does not provide for personal liability against that third-party.
(2) Initiating a new proceeding to pierce the corporate veil. “A new proceeding is proper because, where a party obtains a judgment against another party, the underlying claim merges with the judgment and the judgment becomes a new and distinct obligation of the [judgment debtor] which differs in nature and essence from the original claim.” Pyshos.
We can look at the case of Buckley v. Abuzir. The Plaintiffs in Buckley obtained a default judgment against a corporation, for violation of the Illinois Trade Secrets Act. Unable to recover from the corporation, the Plaintiffs sought to recover from an individual, in a separate chancery action, under a alter-ego theory. The Plaintiffs incorporated the underlying judgement as part-of the suit to pierce the corporate veil and alleged facts to support an alter-ego theory; thereby merging the judgement with a separate suit. The relief sought was equitable, the legal relief had already been obtained in the underlying case. The filing of the second case was a means to attach liability to the individual for the underlying debt of the corporation.
*Starting a business or running a closely held business in Illinois? Contact Attorney Christian Blume at 773-706-7514 or christian@attorneyblume.com.
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