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A Better Partnership
May 09, 2015

COA: Res judicata need not bar piercing the corporate veil post-judgment

In Green v. Ziegelman, No. 318989, the Court of Appeals concluded that the doctrine of res judicata did not bar the trial court from disregarding Ziegelman Architects’ separate existence from its owner, Norman Ziegelman, and holding Ziegelman personally liable for an earlier judgment against Ziegelman Architects.  The Court also affirmed the trial court’s piercing of Ziegelman Architects’ corporate veil.
 
In 2003, Plaintiffs were looking for a prospective member who might serve as an architect and construction manager for a real estate project. They met with Ziegelman to discuss bringing him in as a member and using Ziegelman Architects as the project’s architectural firm.  After they entered into an agreement with Ziegelman Architects and Ziegelman acquired his membership interest, Ziegelman attempted to seize control of the project.  When he failed to do so, Ziegelman stopped meeting the required capital calls for members and caused Ziegelman Architects to stop performing under the agreement. 
 
After multiple lawsuits, Plaintiffs obtained a $156,313 judgment against Ziegelman Architects in 2006.  Plaintiffs compelled Ziegelman to appear for a creditor’s examination, from which they learned that Ziegelman Architects had no assets.  Ziegelman testified that, with the exception of a small project for a relative, Ziegelman Architects had not done any architectural work in so many years that he could not remember how long it had been.  Ziegelman also admitted he formed a new architectural entity ten days after the judgment to avoid paying it.  Plaintiffs then brought a second lawsuit and argued before the trial court that Ziegelman Architects was a sham corporation that existed solely to meet Ziegelman’s personal needs and shield him from liability.  The trial court ultimately held Ziegelman and Ziegelman Architects jointly and severally liable for the 2006 judgment of $156,313.  Ziegelman appealed.
 
The first issue on appeal was whether Plaintiffs should have claimed that Ziegelman was misusing the corporate form of Ziegelman Architects as part of the 2006 litigation to avoid res judicata.  The 2006 litigation primarily involved whether the individuals and entities at issue breached their contractual obligations. It was not until the creditor’s examination after the 2006 judgment against Ziegelman Architects that Plaintiffs had any basis for concluding that Ziegelman misused Ziegelman Architects in such a way as to warrant disregarding its separate existence. In addition, Ziegelman did not abandon Ziegelman Architects until after the 2006 litigation in an effort to avoid paying it.  As such, res judicata did not bar piercing the corporate veil post-judgment.
 
The Court of Appeals also concluded that the trial court did not err in disregarding Ziegelman Architects’ separate existence.  To justify piercing the corporate veil, a complainant must show that the entity was the mere instrumentality of the owner and that the owner used the entity to commit a fraud or wrong resulting in an unjust loss or injury.  First, the evidence adduced at trial amply supported the trial court’s determination that Ziegelman used Ziegelman Architects as his alter ego or as a mere instrumentality of his will. Ziegelman was the sole owner, director, officer, and staff-architect of Ziegelman Architects.  Ziegelman Architects was entirely dependent on Ziegelman for cash to pay its expenses because it had no operational revenues, and Ziegelman then used Ziegelman Architects to cover his personal expenses.  Further, Ziegelman had not properly maintained Ziegelman Architects’ corporate formalities over the years because he failed to formalize loan and leases between Ziegelman Architects and his other entities. Second, Ziegelman exercised his control over Ziegelman Architects in a manner that caused a fraud or wrong, as Ziegelman led Plaintiffs to believe that Ziegelman Architects was a going concern with numerous successful projects, and then formed a new entity to avoid Plaintiffs’ judgment against Ziegelman Architects. Finally, there was evidence to support the trial court’s determination that Plaintiffs suffered a loss as a result of the wrong caused by Ziegelman’s exercise of control over Ziegelman Architects.  The trial court reasonably concluded that Ziegelman himself regarded Ziegelman Architects as a sham entity that existed only to suit his personal needs and which could be discarded with impunity.

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