Sea-Land Services, Inc. v. Pepper Source
941 F.2d 519 (7th Cir. 1991).

Facts:
Sea-Land services shipped peppers for Pepper Source, and Pepper Source never paid the freight bill. In the initial lawsuit, the district court entered a default judgment in favor of Sea-Land in the amount of $86,767.70.

However, Pepper Source had already been dissolved, and even if they hadn’t, they were judgment proof (no assets). That led to the current suit:

  • Sea-Land tried to hold Gerald Marchese (owner of Pepper Source and five other business) personally liable.
  • This is known as “piecing the corporate veil” and, more specifically, in this case, “reverse piercing.”

History:
The district court ruled in favor of Sea-Land and held the defendants jointly liable.

In doing so, the court relied on a two-part test in determining when to disregard a corporate entity and pierce the veil of limited liability:

(1) There must be such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] no longer exist; and
(2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

As for determining whether a corporation is so controlled by another to justify disregarding their separate identities, the court focused on four factors:

(1) the failure to maintain adequate corporate records or to comply with corporate formalities,
(2) the commingling of funds or assets,
(3) undercapitalization, and
(4) one corporation treating the assets of another corporation as its own.

Issue:
Can Sea-Land pierce the corporate veil and get to Marchese personally? Are the aforementioned tests satisfied?

Holding:
No. Case reversed.

Reasoning:
(1) As to the first part of the test, the circuit court held that there was no doubt about shared control/unity of interest and ownership:

  • Corporate records and formalities were not been maintained.
  • Funds and assets were commingled with abandon.
  • PS, the offending corporation, and perhaps others have been undercapitalized.
  • Corporate assets have been moved and tapped and borrowed without regard to their source.

The court said noted that these businesses were “little but Marchese’s playthings.”

(2) However, the court held that the second part of the test (sanctioning a fraud or promoting injustice) failed:

The lower court held that being denied a judicially-imposed recovery was enough to prove the “promoting injustice” element, but this court disagreed:

  • “If an unsatisfied judgment is enough for the promote injustice feature of the test, then every plaintiff will pass on that score, and [the test] collapses into a one-step unity of interest and ownership test.”
  • Thus, Sea-Land needed to show something more, or more “wrong”, so to speak. For example: Marchese using these corporate fronts to avoid its responsibilities to creditors, or that Pepper Source, Marchese, or one of the other corporations will be unjustly enriched unless liability is shared by all.