Filed: October 28, 2011
Opinion by: Judge Albert J. Matricciani, Jr.Held: A corporate veil may only be pierced to prevent fraud or to enforce a paramount equity. Without precedent from the Court of Appeals, the Court of Special Appeals declines to guess what a paramount equity may be. In addition, a "forward triangular merger," by which an acquiring company secures the benefit of limited liability for a target company's debts, is not fraudulent so as to create grounds for piercing the corporate veil.
Facts: The plaintiff was hired by a company to negotiate a billing dispute among the company and and its telephone service provider. Before the plaintiff could collect his fee, the company that hired him (the "Dissolved Company") merged with another company (the "Surviving Company") and was dissolved. The Surviving Company was wholly owned by a parent (the "Parent"), and had been formed for the purpose of merging with the Dissolved Company.
Neither the Surviving Company nor the Parent paid the plaintiff's fee. The plaintiff sued them both - the Surviving Company as the successor to the Dissolved Company, and the Parent as an entity responsible for the debts of the Surviving Company. The Circuit Court granted the Parent's motion for summary judgment. After a trial of the claim against the Surviving Company, the Court granted a motion for judgment in favor of the Surviving Company on the ground that a transaction disclosure agreement stated the terms by which the plaintiff was to be paid, and the plaintiff was not entitled pursuant to those terms. The plaintiff appealed.
Summary Judgment for the Parent: The plaintiff argued that the Parent exercised sufficient control over the Surviving Company to justify piercing the corporate veil. Referencing the Court of Appeals' decision in Bart Aconti & Sons, Inc. v. Ames-Ennis, Inc., the Court affirmed the black-letter principle that it may pierce the corporate veil only based on proof of fraud or necessity to enforce a paramount equity.
In response to the plaintiff's argument that his claim was a paramount equity, the Court noted that "notwithstanding its hint that enforcing a paramount equity might suffice . . ., the Court of Appeals has not elaborated upon the meaning of this phrase or applied it in any case of which we are aware." Accordingly, "with no precedent approving this extraordinary remedy," the Court declined to pierce the corporate veil on that ground. Regarding alleged fraud, the Court rejected the contention that the merger scheme (a "forward triangular merger") was a fraudulent action.
Judgment for the Surviving Company: The Plaintiff argued that the Dissolved Company owed him money based on the benefit he provided in negotiating its dispute. In addition, if the Dissolved Company owed him money, then after the merger, the obligation to pay became the Surviving Company's obligation.
The Court discussed in detail the case law and statutory law providing that, when there is a merger, "the successor is liable for all the debts and obligations of each non-surviving corporation." Accordingly, any obligation of the Dissolved Company to pay the plaintiff was an obligation of the Surviving Company. The question remained, what was that obligation?
Regarding the obligation, the Court found that both sides presented conflicting evidence concerning the terms of the oral agreement to pay. In addition, there was additional evidence to be adduced during the defendant's case. The Court held that, even though it was a bench trial, it was a mistake for the trial court to rely upon the transaction's disclosure statement as dispositive of the disputed oral agreement. In doing that, the trial court disregarded substantial evidence that the statement was not an accurate representation of the agreement.
Accordingly, the Court vacated the judgment in favor of the Surviving Company and remanded for the trial court to receive all the evidence and determine the terms of the agreement.
The full opinion is available in .pdf.