Default Judgment Against an Insolvent Company may be Enforced Against its Owners

Andrew J. Vandiver – Adams, Stepner, Woltermann & Dusing, PLLC Covington, KY
The Kentucky Supreme Court recently issued a groundbreaking opinion in Inter-Tel Techs., Inc. v. Linn Station Props., LLC with regard to the issue of piercing the corporate veil. While the opinion mostly focused on the elements of veil-piercing, including clarifying those enumerated in Kentucky’s leading veil-piercing case, White v. Winchester Land Development Corp., the Court also discussed the implications of a default judgment being entered against an insolvent company under circumstances in which veil-piercing is merited.
The Plaintiff in Inter-Tel Techs., Inc., after unsuccessfully attempting to collect from an insolvent company subject to a default judgment, filed a subsequent lawsuit to pierce the corporate veil as to the insolvent company’s grandparent and parent companies. After successfully piercing the corporate veil, the grandparent and parent companies were held liable for the default judgment entered against their subsidiary.
The grandparent and parent companies raised numerous objections to the trial court’s decision on appeal. Two of the objections pertained to procedural issues. First, the companies argued that it was inappropriate for the Plaintiff to proceed first to secure a judgment against the insolvent subsidiary company as opposed to naming the parent and grandparent companies in the original lawsuit. Second, the parent and grandparent companies argued that the default judgment could not be enforced against them because they were “not before the court” when the judgment was entered.
As to the first argument, the Court found that there was nothing inappropriate about proceeding first to secure judgment as to the actual debtor. In reaching this conclusion, the Court recognized that there are often cases in which a creditor will not know about the company’s insolvency and its owner’s fraudulent conduct until after the initial lawsuit has concluded.
As to the second argument, the Court likewise upheld the trial court’s judgment that the parent and grandparent companies were liable for the default judgment taken against the insolvent subsidiary. In doing so, the Court reasoned that for all intents and purposes, the parent and grandparent companies were before the court in the original debt collection case. They were simply there in the guise of the subsidiary which had been rendered insolvent by their fraudulent actions. In fact, the Court was rather dismissive of the argument, stating that it was “a bit like the defendant who, having killed his parents, throws himself on the court’s mercy because he is an orphan.”
The Court’s resolution of the second argument will have a major impact on a creditor’s strategy in a case involving an insolvent company. A practitioner who obtains a default judgment against a business debtor will almost certainly conduct post-judgment discovery. If discovery reveals that the company’s principal was engaging in conduct which merits piercing the corporate veil, such as the commingling of funds, it can file a subsequent lawsuit based on the issue of whether the debtor was simply a shell for the principal’s wrongful conduct. If the creditor succeeds in proving that veil-piercing is warranted, the principal will be held liable for the default judgment taken against the company without the need to litigate the merits of the underlying case.
A prudent attorney with business clients will advise them of the dangers of engaging in conduct which may lead to the piercing of the corporate veil. In a perfect world, clients would follow such advice. However, in reality, attorneys often find themselves in situations in which they are defending a client who has raided the assets of his or her company under the false assumption that nothing can be done about it. In fact, I once obtained a default judgment against a corporate debtor whose owner proudly stated that the judgment was worth nothing more than the paper it was printed on because all of the company’s assets had been moved. Fortunately, based on the precedent set forth in Inter-Tel, creditors in these types of cases will likely be the ones who have the last laugh.
Both creditors’ and debtors’ attorneys should review the Inter-Tel decision closely because it may affect their strategy when faced with similar circumstances. An attorney representing the owner of an insolvent company should advise his client that the proceeding against his or her company may be the one and only opportunity to defend the case on the merits in the event that a subsequent lawsuit is filed requesting that the corporate veil be pierced. On the other side, an attorney representing a creditor should not lose hope if a judgment debtor turns out to be insolvent because there is an opportunity to hold the company’s principal liable if post-judgment discovery reveals wrongful conduct with regard to the company’s assets.

Andrew J. Vandiver
Adams, Stepner, Woltermann & Dusing, PLLC
40 West Pike Street
Covington, KY 41011

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