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June 12, 2016

COA holds that no additional cause of action is needed to impose after-the-fact individual liability on a shareholder of a judgement-debtor corporation

In Gallagher v Persha, No. 325471 the Michigan Court of Appeals held that a claim to pierce the corporate veil of a single-shareholder corporation could proceed despite there being no underlying cause of action.  Even though piercing the corporate veil is a remedy and not a cause of action, because Plaintiffs already had obtained a judgment against the defendant corporation, the Court of Appeals held that an additional cause of action was not needed to impose liability against a shareholder if the necessary facts for piercing the corporate veil were present.  Accordingly, the Court of Appeals remanded the case for further proceedings to determine whether those facts were present.
 
Kathleen Persha is the sole shareholder of Kaper Properties, Inc. The Gallaghers, Plaintiffs in this case, sold their home with two mortgages to Kaper. As part of the sale the Gallaghers paid Kaper $37,000 to make up the difference between the purchase price and the amount owed on the mortgages—which exceeded the value of the home. In return Kaper promised to pay off the existing mortgages and release the Gallaghers from their debt obligations. The Gallaghers paid Kaper and transferred title to the home, but Kaper failed to pay off the mortgages. In 2012 the Gallaghers sued Kaper for breach of contract and were awarded a judgment of $283,110.88.  Claims of fraud and misrepresentation and “piercing the corporate veil” were dismissed without prejudice in that case, but brought later by the Gallaghers in a separate 2014 case. The trial court granted Kaper’s motion for summary disposition on the fraud and misrepresentation claim, and dismissed the “piercing the corporate veil” claim because it was no longer supported by an underlying cause of action after the summary disposition.
 
The Court of Appeals held that the trial court erred in dismissing the 2014 case. While the Court of Appeals agreed with the trial court that “piercing the corporate veil” is not a stand-alone action, it held that it is an appropriate remedy when a defendant uses her individually owned corporation to avoid paying legal obligations. The Court held that “when a judgment already exists against a corporate entity, an additional cause of action is not needed to impose liability against a shareholder or officer if a court finds the necessary facts to pierce the corporate veil.” The Court remanded to determine whether those facts could be proven and Persha held individually liable for the judgment against Kaper. 

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