Theberge v. Darbro, Inc.

Supreme Judicial Court of Maine · 1996 · Corporations

CorporationsPiercing the corporate veilLimited liabilityContract creditorsalter egoveil piercinglimited liabilitycontract dispute

Facts

The Theberges sold seven rental properties to the Worden Group, which gave the Theberges a $180,000 promissory note secured by a mortgage. The Worden Group then sold the properties to Horton Street Associates, a newly formed corporation, which assumed the Theberge note; although Darbro and Albert guaranteed part of Casco Northern's first mortgage debt and Albert co-signed a separate $20,000 note to the Worden Group, no defendant formally guaranteed the Theberge note. Horton Street later lost money, Darbro loaned it substantial sums, and after default Casco Northern assigned the first mortgage note to Darbro, which foreclosed and extinguished the Theberge second mortgage. The trial court found Horton Street lacked corporate formalities and was effectively controlled by Albert, but also found no illegality, no fraud, and no personal guarantee of the Theberge note.

Issue

Whether the evidence justified piercing Horton Street Associates' corporate veil and holding Darbro, Albert Small, and Mitchell Small personally liable on the Theberge promissory note in this contractual dispute. More specifically, the question was whether the corporation's lack of formal separateness, combined with statements that Albert would 'stand behind' the deal and the later financing arrangement with Casco Northern, created sufficient equitable grounds to disregard limited liability.

Rule

Corporations are separate legal entities with limited liability, and courts will disregard the corporate entity only with caution and only when necessary in the interest of justice. In contractual disputes, veil piercing is subject to more stringent standards because the party seeking relief is presumed to have knowingly dealt with a corporate entity and to have accepted the risk of limited liability. Absent compelling equitable considerations, courts should not rewrite the parties' bargain or disturb the allocation of risk they chose.

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In Portland, Maine, Lena Ortiz sold a small apartment building to Bayside Elm LLC, a newly formed corporation. During negotiations, Bayside's controller, Victor Sloan, repeatedly said that the company's owner, Martin Keene, was wealthy and would "stand behind the deal," but Lena never obtained Martin's personal guarantee even though she had required guarantees in prior real estate transactions.

After Bayside defaults, Lena sues Martin personally and asks the court to pierce the corporate veil. There is strong evidence that Bayside observed few corporate formalities, but no finding of fraud or illegality. Which result is most consistent with the governing rule?

Explanation. Corporations are separate legal entities, and veil piercing is used cautiously and only when necessary in the interest of justice. In a contractual dispute, the standard is more stringent because the claimant is presumed to have knowingly dealt with a corporation and accepted limited liability. Under the majority's reasoning, lack of formalities and vague statements that an owner would stand behind the deal are insufficient without stronger equitable grounds such as fraud, illegality, or a formal guarantee. (Derived from Theberge v. Darbro, Inc. (n.d.).)