The BUSKLAW February Newsletter: Two Recent Business Court Cases Offer Valuable Lessons for Michigan Companies

 

Continuing my quest to post about Michigan cases that are relevant to small(er) Michigan companies, there are two recent decisions from Kent County Business Court Judge Christopher Yates that business folks should keep firmly in mind. One case is obvious, the other less so, but let's have at it. 

The first case involves the piercing of the corporate veil. You do know about the corporate veil, right? You can set up a corporation to insulate your personal assets from liability, but you can lose that protection if you play games to your creditors' detriment. That was the scenario in V&B Properties v Account-Ability Tax & Accounting LLC, et al. Defendant Account-Ability signed a real estate lease with Plaintiff V&B and then failed to pay $6300 in rent. After attempting to work things out, Defendant's principal (call her "Mrs. J"), decided to bag it, pay nothing to the V&B, and simply, through her husband ("Mr. L"), start a new accounting company, Grandville Tax & Accounting, Inc. Mrs. J transferred Account-Ability's assets to Grandville Tax, and V&B received nothing. Nor was any attempt made to pay V&B from Grandville Tax's business operations. So V&B sued everyone involved in this ploy: Account-Ability, Mrs. J, her husband Mr. L, and the new entity, Grandville Tax & Accounting.  

No surprise: the Court did not let Defendants' corporate shell game succeed. Judge Yates found that since Grandville Tax was a "mere continuation or reincarnation" of Account-Ability, Grandville Tax was liable to V&B for the rent due. Further, because Mrs. J had repeatedly ignored the corporate formalities during Account-Ability's existence by, for example, routinely buying groceries, gas, and meals using the Company's bank account and making $17,000 never-repaid Company loans to her son, Judge Yates found that Account-Ability was a "mere instrumentality of" Mrs. J. Do you hear it? That's the sound of the corporate veil being shredded. Only Mr. L was let off the hook, the Court holding that since his only role was to form Grandville Tax and not being involved in that business, he could not be held personally liable to V&B. 

As a result of these misdeeds, the Court found that Mrs. L and Grandville Tax were jointly and severally liable to V&B for not only the unpaid rent but also interest, court costs, and reasonable actual attorneys' fees, a sum that will likely total in excess of $30K! Not to mention what Defendants owe their own attorney for defending the case  - how did it pass the "sniff test"? (Then again, as a young lawyer, I briefly worked for a guy - God rest his tricksy soul - who believed that any case passed the sniff test. Cue this commercial and especially note the end.)

Lesson #1: Observe corporate formalities! Don't commingle your personal assets with corporate assets! Lesson #2: Don't start a new corporation in the same business to avoid the old company's debts!

The second case is an enforcement of a non-compete covenant in an employment case. In Integrity Tree Services, LLC v Travis Marshall, Judge Yates reduced the scope of Integrity's non-compete covenant by allowing Mr. Marshall to work for an Integrity competitor as long as the job didn't involve any sales activity or participation in the bidding process for work. But the Court added a footnote in the last sentence of the Opinion that caught my attention:

The Court cautions any prospective employer that competes with Plaintiff Integrity and is contemplating hiring Defendant Marshall that, whenever non-restricted people or businesses act in concert with someone subject to restrictive covenants, "they are equally liable with him" for acts that violate any of the restrictive covenants. Owens v Hatler, 373 Mich 289, 292 (1964).

This never occurred to me, but it makes sense, right? The lesson for HR folks in hiring persons is to ask if they are under any obligation to their current or past employer for anything that could be construed as a restrictive employment covenant, including a non-compete provision, and if not, put the representation in a written employment agreement with the new hire. 

These two cases offer valuable lessons for Michigan businesses. Ignore them at your peril! 

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