Question

Smith Services, Inc., was a trucking company established in 2000 and owned by Tony Smith as the sole shareholder. Smith Services, Inc., had an account with Laker Express, a fuel provider, and often would charge fuel purchases for the company trucks to that account. Smith’s employees would fuel their vehicles and sign the account slip with a notation that the purchase was for Smith Services, Inc. Laker Express would bill Smith Services regularly for the charges on the account. After several months of low business, Smith Services ceased doing business and was dissolved in 2013, with its assets being distributed to creditors. Laker Express only recovered a small part of the amount owed by Smith Services, Inc. Tony Smith then opened up a new trucking service business as a sole proprietor. Laker Express sought to recover Smith Services' unpaid fuel charges, which amounted to about $35,000, from Smith. He argued that he was not personally liable for a corporate debt. Should a court hold Tony Smith personally liable?
Assume that in addition to the facts given, that evidence was presented to the court that Smith, his wife, and their kids regularly used the account at Laker Express to fill up their personal vehicles. Does this change the outcome?

1. Given this new evidence, a court likely (would, would not) find that Laker Express was tricked or misled into dealing with the corporation rather than the individual.
2. The court likely (would, would not) find that the corporation was undercapitalized.
3. The court likely (would, would not) find that the corporation was created to evade an existing legal obligation.
4. The court likely (would, would not) find that the corporation failed to comply with the required corporate formalities and meetings.
5. The court likely (would, would not) find that the personal and corporate interests were commingled to such an extent that the corporation had no separate identity with regard to the relationship with Laker Express.
6. Because of these findings, the court likely (would, would not) pierce the corporate veil and hold Tony Smith personally responsible for the debt to Laker Express.

Answer 1

Answer:

Smith Services, Inc. and Laker Express

a. A court should not hold Tony Smith personally liable for the corporate debt of Smith Services, Inc to the tune of $35,000 representing unpaid fuel charges to Laker Express.  This decision is given based on the facts presented in the case, so far.

b. Assuming that in addition to the given facts, evidence was presented to the court that Smith, his wife, and their kids regularly used the account at Laker Express to fill up their personal vehicles, then this evidence changes the outcome.  Smith Service, Inc. has met one of the conditions for piercing the corporate veil.  This condition is commingling the corporate account with personal expenses and use of corporate assets.  This may also question if proper accounting records were being kept at the Smith Services.

c. Therefore,

1. Given this new evidence, a court likely (would, would not) find that Laker Express was tricked or misled into dealing with the corporation rather than the individual.

2. The court likely (would, would not) find that the corporation was undercapitalized.

3. The court likely (would, would not) find that the corporation was created to evade an existing legal obligation.

4. The court likely (would, would not) find that the corporation failed to comply with the required corporate formalities and meetings.

5. The court likely (would, would not) find that the personal and corporate interests were commingled to such an extent that the corporation had no separate identity with regard to the relationship with Laker Express.

6. Because of these findings, the court likely (would, would not) pierce the corporate veil and hold Tony Smith personally responsible for the debt to Laker Express.

Explanation:

To protect the legal status of corporations like Smith Services Inc. as limited liability entities, State courts reluctantly pierce the corporate veil, unless the requirements, which vary from state to state, are met.  If Tony Smith does not the court to pierce the corporate veil of Smith Services, Inc., his former company should have used corporate assets only for corporate purposes.   Based on the unpaid fuel charges, Tony Smith did not maintain the separation of ownership from his Smith Services, Inc. since he, his wife, their kids, and apparently the employees fuelled their personal cars on fuel charge to Laker Express for Smith Services, Inc. to offset.