Court allows defrauded creditors to "pierce the corporate veil;" collect from successor
Robert and Harriet Kitchen were defrauded by George D. Newpower; in 2009, they secured a judgment for more than three-quarters of a million dollars against Newpower and a judgment against his company, Lakes of the North Real Estate, Inc. Newpower had embezzled from the Kitchens while he served as Chief Executive Officer of the Association and the sole shareholder of the Realty Corporation. Newpower allegedly diverted money from the Realty Corporation to support the Lakes of the North Association, and then used money from the Association to re-pay selected debts of Realty.
The Kitchens and their company, New Properties, Inc., attempted to collect part of what they were owed from the Association, arguing that it was the "alter-ego" or successor of Newpower's Realty Corporation. After a bench trial, the Antrim County Circuit Judge ruled against the Kitchens, holding that they could not "pierce the corporate veil" that rendered the Association an entity independent from the Realty Corporation.
On appeal, the Court of Appeals disagreed. It cited the standard legal test: "In order for a court to order a corporate veil to be pierced, the corporate entityu (1) must be a mere instrumentality of another individual or entity, (2) must have been used to commit a wrong or fraud, and (3) there must have been an unjust injury or loss to the plaintiff." After reviewing the testimony, the Court concluded that Realty was not independent of the Association, and that the Association had effectively kept and profited from a share of the profits of Newpower's embezzlement from Kitchens.
In a side argument, the Association argued that the Kitchens had already recovered more damages than they originally lost to Newpower, and therefore should not be allowed to obtain a judgment for even more money. [It is likely that this more-than-adequate recovery from FMB Northwester Bank and a woman named Muriel Hart, influenced the lower court's decision.] The Court of Appeals pointed out that as an alter ego or "instrumentality" of Newpower, the Realty Corp could be forced to pay the Kitchens three times their loss in punitive damages.