7th Circuit Pierces Veil in $34M Fraudulent Transfer Case

On March 22, 2016, the United States Court of Appeals for the Seventh Circuit issued its ruling in the case of Continental Casualty Company v. Alan Symons et al., Nos. 14-2665, 14-2671 & 15-1061 (7th Cir. 2016).  The case is particularly novel for its use of the alter ego doctrine to pierce the veil of limited liability, holding shareholders and officers of a company liable under the UFTA for fraudulent transfers committed by a family-owned business.

While the facts of this case are particularly egregious, they are paralleled in scale by the grievous error made by the Seventh Circuit:  Instead of certifying a novel issue of accessory liability under the UFTA to the Indiana Supreme Court, the Seventh Circuit relies on a 1937 pre-UFTA Second Circuit case to equate “fraudulent transfers” with common law “fraud.” Yes, you read that correctly:  The Seventh Circuit just committed the fundamental error that drove the Uniform Law Committee to rename the UFTA the “Uniform Voidable Transactions Act.”  Read on to see just how wrong the Seventh Circuit was…

Facts

Gordon Symons (Lord of Whitehouses, Nottinghamshire, U.K.) founded a family insurance business in the 1970s, which was later run by his two sons, Alan and Doug.  The Symons family owned 50.4% of a company called Goran which, in turn, owned 73.1% of a publicly-traded company called Symons International.  Goran also owned all the shares of a reinsurance company, Granite Re, which existed to reinsure contracts from other Symons subsidiaries as well as third parties. Symons International, for its part, owned 100% of IGF Holdings, Inc., which in turn owned all of IGF.

In 1998, IGF Insurance Company purchased a crop insurance business from Continental Casualty Company. In 2002, IGF resold the business to Acceptance Insurance Company for about $40 million, while still owing Continental $25 million from the original purchase.

Rather than repaying Continental, the family that controlled IGF – Gordon, Alan, and Doug Symons—structured the sale so as to cause $24 million of the $40 million sales proceeds to flow into other Symons-controlled companies.  This was done by having the other Symons-controlled companies enter into “sham” noncompetition agreements and a “superfluous and overpriced” reinsurance treaty.

IGF was ultimately rendered insolvent and unable to repay Continental the amount due under the 1998 purchase agreement. When IGF later sued, claiming breach of representations concerning the profitability of the crop insurance business, Continental counterclaimed for breach of contract and fraudulent transfer.  Doug filed for bankruptcy while the suit was ongoing, and Gordon passed away, leaving his estate entangled in the litigation.

Lower Court Proceedings

In a bench trial, the district court ruled in favor of Continental.  In a bold move, the district court pierced the corporate veil of limited liability to impose liability under the UFTA, charging several controlling companies and individuals with liability for the unpaid debts of IGF.  Continental’s damages totaled $34.2 million, which were entered jointly and severally against IGF, the three Symons-controlled companies, and Gordon and Alan Symons (Doug Symons filed for bankruptcy).

Issues on Appeal

The Seventh Circuit outlined the issues on appeal as follows:

  1. Is Symons International (one of the Symons-controlled companies) liable to Continental for breach of the 1998 sale agreement?
  2. Are the Symons-controlled companies, and Gordon and Alan Symons, liable as transferees under the Indiana Uniform False Transfer Act (“IUFTA”)?
  3. Are Alan Symons and Gordon Symons liable under an alter ego theory?

The Seventh Circuit’s Opinion

The Symons Family and Their Companies

The court observed that Alan and Doug Symons controlled Goran, Symons International, and their subsidiaries almost exclusively.   Moreover, the constellation of Symons-controlled companies were undercapitalized, with Goran and Symons International “balance sheet insolvent” in 1999, 2000, 2001, and 2002. While IGF managed to stay afloat, it was also technically insolvent once the debt to Continental was factored in.

While their companies were struggling financially, members of the Symons family were collecting generous salaries and consulting fees. Also, Gordon and his two sons borrowed large sums of money unsecured and interest-free from the family companies, with total debt outstanding ballooning from $2 million to almost $13 million between 1999 and 2002. Meanwhile, the businesses guaranteed third party loans made to Symons family members.  In one example, Symons International pledged some preferred shares in Granite Re to Huntington Bank to secure $2.5 million in loans to Alan and Doug.

The appeals court also noted that the Symons businesses observed corporate formalities “only in their most basic sense.” While each company was incorporated, and had its own board of directors and bank account, all mail went to a single location.  Also, board meetings were typically concurrent, especially between Goran and Symons International.

The 1998 Sale by Continental to IGF

In 1998, Continental entered into a strategic alliance with IGF whereby it sold its crop insurance business to IGF for a price to be determined under a complex put-call arrangement.  Until the price was finalized, IGF was obliged to share profits of the business with Continental.

In 2001, Continental exercised its option to finalize the sales price at $25.4 million.  At the time, IGF also owed Continental $4 million as its share of profits from the crop insurance business.

Shortly before Continental made its decision to finalize the sale, IGF had already scouted out potential buyers for the crop insurance business, soliciting offers from Acceptance Insurance, Archer Daniels Midland, and the Westfield Group.  The Westfield Group offered IGF $40 million cash for the business, but Alan Symons insisted on breaking up the payment into separate payments to various Symons-controlled entities.  Archer Daniels and Acceptance also came in with $40 million offers, but Acceptance was the only suitor willing to go along with Alan’s unusual payment structure:  $9 million to Symons International and Goran for noncompetition agreements; $15 million to Granite Re for a reinsurance treaty; and the remaining $16.5 million to IGF directly.

The Noncompete Agreements

The appeals court quickly set aside the noncompete agreements as sham arrangements, noting that neither Symons International nor Goran actually provided crop insurance. Most of the IGF employees who could compete were retained by Acceptance.  Compared to the $9 million paid to Symons International and Goran, Acceptance paid only $1.4 million to neutralize the competitive threat posed by IGF employees with expertise in crop insurance.

The Reinsurance Treaty

Alan engineered the reinsurance treaty, setting the terms of an agreement calling for Acceptance to pay Granite Re $6 million immediately and then $9 million over the next three years for “stop-loss” insurance.  At trial, Continental provided the testimony of an expert witness, a crop insurance underwriter with the Federal Crop Insurance Corporation.  Despite spending a lifetime employed as a crop insurance underwriter or actuary, the Symons attacked the credentials of the expert.  The trial court did not take the bait, finding the expert well qualified and the conclusions reasonable:  That the reinsurance treaty vastly overpriced the risk being assumed by Granite Re.

Fraudulent Transfer Analysis

The appeals court set out to determine whether IGF’s sale of the crop-insurance business was designed to fraudulently transfer assets and avoid paying Continental.  For this, the court turned to the actual intent test for fraudulent transfers under IUFTA § 14, and the constructive test for fraudulent transfers under IUFTA § 15.

On both points, the appeals court upheld the findings of the trial judge that the transfers had been fraudulent.  On the constructive fraudulent transfer analysis, the court observed that IGF had sold a $40 million business and received only $16.5 million in return, which did not represent “reasonably equivalent value” in the exchange.  As to the actual intent analysis, the court cited the trial judge’s findings of several “badges of fraud”:

Applying these factors here, the judge found a valid inference of fraudulent intent based on the following factors:

  • Badge 1 (“transfer of property by a debtor during the pendency of a suit”): Continental had made it clear that legal action would follow if the contractual dispute, initiated in March 2001, was not resolved. Indeed, Continental filed suit for breach of contract on June 6, 2001, and the sale to Acceptance closed later that same day.
  • Badge 2 (“transfer of property that renders the debtor insolvent or greatly reduces his estate”): IGF and Symons International were insolvent.
  • Badge 3 (“a series of contemporaneous transactions which strip a debtor of all property available for exe- cution”): In just this one transaction, IGF received less than half the value of its business, leaving it unable to satisfy any execution of its debt to Continental.
  • Badge 5 (“any transaction conducted in a manner dif- fering from customary methods”): The transaction differed from customary methods by transferring purchase-price consideration to unjustified noncom- petes and reinsurance. (More on this later.)
  • Badge 7 (“little or no consideration in return for the transfer”): IGF received inadequate consideration in the transfer (less than 50% of the going market price).
  • Badge 8 (“a transfer of property between family members”): The transfer was essentially between family members.

Accessory Liability Under the IUFTA

Having found that IGF had engaged in a fraudulent transfer under both the actual intent test of IUFTA § 14 and the constructive test of IUFTA § 15, the Seventh Circuit was then asked to evaluate who should be held liable under the IUFTA.  While Continental sought to hold Alan and Gordon Symons personally liable, the Symons family resisted, raising two points:

  1. Alan and Gordon Symons could not be held liable as transferees solely on the basis that they were mere participants in the deal.
  2. The money paid by Acceptance to Symons International, Goran, and Granite Re is not an “asset” transferable under the statute.

The appeals court noted that the issue of transferee liability was a case of first impression in Indiana.  The court turned to Indiana’s version of § 8 of the Uniform Fraudulent Transfer Act, providing that a defrauded creditor can avoid a transfer or recover a judgment from liable parties, including:

(1) the first transferee of the asset or the person for whose benefit the transfer was made; or (2) any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee.

Ind. Code § 32-18- 2-18(b).

The appeals court acknowledged that Alan and Gordon were not direct beneficiaries of the transfers.  For their part, the Symons family argued that the IUFTA did not incorporate the  accessory “participation” theory of liability, citing APS Sports Collectibles, Inc. v. Sports Time, Inc., 299 F.3d 624, 630 (7th Cir. 2002), in which the Seventh Circuit found no legal authority for the proposition that an “insider” could be liable under the Illinois version of the UFTA.  They also cited Baker O’Neal Holdings, Inc. v. Ernst & Young LLP, No. 1:03-CV-0132-DFH, 2004 WL 771230, at *14 (S.D. Ind. Mar. 24, 2004) (Hamilton, J.) for the proposition that the IUFTA lacks accessory liability, and Shi v. Yi, 921 N.E.2d 31, 38 (Ind. Ct. App. 2010), which held that common-law fraud remedies cannot be imported into an IUFTA action.

The Seventh Circuit turned to DFS Secured Healthcare Receivables Trust v. Caregivers Great Lakes, Inc., 384 F.3d 338, 347 (7th Cir. 2004), which held that there was no basis to preclude veil piercing in UFTA cases.  The rationale in DFS was that holding officers and shareholders of a company liable under the UFTA for fraudulent transfers was a form of veil piercing, and not an extension of liability under the UFTA to accessories.   Acknowledging that the issue in DFS had been settled before the Indiana Supreme Court had a chance to rule on the certified issue of accessory liability, the appeals court nevertheless concluded that veil piercing can be applied to hold officers and directors liable under the UFTA, without the need to extend the definition of a “transferee” under the UFTA.

The appeals court dismissed the Symons family’s second argument – that the money paid by Acceptance was not an “asset” for purposes of the UFTA – by explaining:

This argument is creative but fundamentally misunderstands a basic precept of fraudulent-transfer doctrine: substance trumps form. As we have frequently noted in an analogous context, “fraudulent conveyance doctrine … is a flexible principle that looks to substance, rather than form.” * * * The IUFTA incorporates this principle in another part of the definition of “transfer” that the defendants conveniently ignore: a transfer is “disposing of or parting with an asset or an interest in an asset, whether the mode is direct or indirect.” Ind. Code § 32-18-2-10 (emphasis added) * * *.  Here the deal between IGF and Acceptance was structured to keep more than half the purchase price away from IGF and in the hands of the Symonses. The sleight of hand on which the defendants now rely was the very means of the fraud. If anything, this is a textbook example of why the law of fraudulent transfer privileges substance over form.

Veil Piercing

Finding that veil piercing can be applied under the UFTA to hold shareholders and directors liability for fraudulent transfers committed by companies under their control, the Seventh Circuit then proceeded to apply the veil piercing doctrine to the facts of the case.  The appeals court explained that alter ego analysis under Indiana state law utilizes the “Aronson factors,” which include:

  1. Undercapitalization;
  2. Absence of corporate records;
  3. Fraudulent representation by corporation shareholders or directors;
  4. Use of the corporation to promote fraud, injustice or illegal activities;
  5. Payment by the corporation of individual obligations;
  6. Commingling of assets and affairs;
  7. Failure to observe required corporate formalities; or
  8. Other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form.

Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994).  Where the court is asked to analyze multiple companies with overlapping owners and management, the court explained that the analysis considers additional factors beyond the Aronson factors, including:

  1. Whether similar corporate names are used;
  2. Whether there are common principal corporate officers, directors, and employees;
  3. Whether the business purposes of the corporations are similar; and
  4. Whether the corporations are located in the same offices and used the same telephone numbers and business cards.

The Symons family argued that Continental was a sophisticated party capable of ascertaining who it was dealing with.  However, the appeals court pointed out that the subterfuge of the deal the Symonses concluded with Acceptance Insurance was committed after Continental had already struck their deal with IGF.  As the court noted, “Continental had reason to believe that IGF wouldn’t dump the crop-insurance business for less than half its value. We think this constitutes injustice to a third party.”  Upholding the trial judge’s finding that the alter ego doctrine should apply, the court emphasized the following factors as giving rise to shareholder/director liability:

  • Undercapitalization. The judge did not find the companies undercapitalized for the purposes of the Aronson test because “[t]he adequacy of capital is to be measured as of the time of a corporation’s formation.” * * * Nevertheless, the judge noted that the fact that almost all of the Symons companies were undercapitalized as of 1999 “cannot be ignored.”
  • Fraudulent representation by corporation shareholders or directors. The judge found that the Symons family and the corporate counterclaim defendants had made fraudulent representations to regulatory agencies and the general public, in particular misrepresentations to the Federal Crop Insurance Corporation.
  • Corporate formalities. The judge found that corporate formalities maintained by the Symons-controlled companies were “entirely ‘cosmetic.’” The Goran and Symons International boards met at the same time and place on 18 separate occasions between March 1997 and May 2001. IGF and Superior held coterminous board meetings three times. Lastly, Alan Symons was the principal representative of IGF, IGF Holdings, Symons International, Goran, and Granite Re during negotiations with Acceptance.
  • Commingling Assets. The companies all made extensive use of intercompany loans, purchases, sales, securities, real estate, mortgages, and other investments. There was vertical overlap between IGF and IGF Holdings in their payroll. In 2001 IGF, Superior, and Pafco were all incurring significant operating losses while their holding companies made over $40 million from the operating companies in management and service agreements.
  • Common Address. Goran, Symons International, IGF, IGF Holdings, Pafco, and Superior all shared a business address in Indianapolis.

The Symons family raised a host of objections, including the argument that the Symons-family empire does not satisfy the “single business enterprise” rule for veil piercing.  They contended that each company had a different name, board of directors and slate of officers, business purpose, and location.  The appeals court disagreed, explaining that the Symons family was only citing one part of the rule from an earlier case:

In fuller context Smith said,

[W]e have previously noted that other jurisdictions have disregarded the separateness of affiliated corporations when the corporations are not operated as separate entities but are manipulated or controlled as one enterprise through their interrelationship to cause illegality, fraud, or injustice or to permit one economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise.

744 N.E.2d at 463 (emphases added).

The appeals court concluded that “IGF conducted an operation for the benefit of the Goran empire that was controlled as one enterprise by the Symons family.”

The Symons family also argued that veil piercing should not apply to publicly-traded companies or regulated insurance companies.  The Seventh Circuit disagreed, finding that “other courts have not ruled out piercing the veil of public companies. See Birbara v. Locke, 99 F.3d 1233, 1237– 38 (1st Cir. 1996) * * *.”  Likewise, the court disagreed with exempting regulated companies from the veil piercing doctrine “[u]nless the defendants can show that regulatory requirements prevented the Symonses from manipulating their companies (and they can’t) * * *.”

Our Analysis:  Certify the Issue to the Indiana Supreme Court

The most significant aspect of the Seventh Circuit’s holding is the decision to apply the veil piercing doctrine as a means to hold shareholders and officers liable under Indiana’s version of the UFTA.  In our opinion, this is a bold and controversial step taken by the Seventh Circuit in applying Indiana state law.  The appeals court acknowledges that this is an issue “of first impression” on which the Indiana Supreme Court has not opined.

We would like to think that the Seventh Circuit would be a bit more patient and certify the issue to the Indiana Supreme Court before stepping into the breach and creating state law on its own.  Last year, the Fifth Circuit likewise availed itself to decide a case of first impression involving a novel theory of liability under the Texas version of the UFTA in Golf Channel v. Janvey, 780 F.3d 641 (5th Cir. 2015).  The controversial decision of the Fifth Circuit to hold the Golf Channel liable in that case was subsequently set aside on rehearing and the issue certified to the Texas Supreme Court, which ended up denying liability altogether.  See Golf Channel v. Janvey, Case No. 150489 (Texas April 1, 2016) (http://www.txcourts.gov/media/1337813/150489.pdf).

While the facts of Continental Casualty draw far less sympathy for the plight of the debtors, it is nevertheless fundamental to the interplay between the federal and state courts that the federal courts defer to the state courts on important issues of state law.  Where a case of first impression has not been resolved, but which can substantially affect the potential liability of countless business owners and managers in the State of Indiana, it is only fair play to insist that the Seventh Circuit give the State of Indiana the opportunity to decide on its own whether to apply veil piercing to UFTA liability.

Notably, the Seventh Circuit failed to undertake a review under Craig v. FedEx Ground Package System, Inc., 686 F.3d 423 (7th Cir. 2012) and American Safety Casualty Insurance Co. v. City of Waukegan, 678 F.3d 475 (7th Cir. 2012), concerning the factors that the Seventh Circuit normally evaluates to decide whether to certify a state law question.  Perhaps this was because the Symons family attorney failed to request certification?  No indication is offered in the Seventh Circuit’s ruling as to whether certification had ever been requested, and the appeals court cites its own 2004 opinion in DFS to find that “[t]he idea that veil-piercing principles can apply in this context is sound.”  However, in DFS, the Seventh Circuit in fact certified a question of interpretation under the Indiana version of the UFTA to the Indiana Supreme Court.

The DFS Opinion – Equating a “Fraudulent Transfer” with “Fraud”

The DFS case is a bit more controversial than the Seventh Circuit’s Continental Casualty decision would have you believe.  In DFS, a company officer was charged with personal liability under the Indiana version of the UFTA through veil piercing.  The Seventh Circuit at the time concluded that the issue of veil piercing under the UFTA was not the only means by which an officer of an Indiana company could be held liable, and that other methods of officer liability could apply in cases of common law fraud.  DFS, citing:  State Civil Rights Comm’n v. County Line Park, Inc., 738 N.E.2d 1044, 1050 (Ind.2000) (citing Gable v. Curtis, 673 N.E.2d 805, 809 (Ind.Ct.App.1996) (“It is well-settled that a corporate officer cannot escape liability for fraud by claiming that he acted on behalf of the corporation when that corporate officer personally participated in the fraud.”)); Ind.Code § 23-1-26-3(b) (Business Corporations Act) (“Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that the shareholder may become personally liable by reason of the shareholder’s own acts or conduct.“) (emphasis added); Ind. Enc. Corporations § 120.   The DFS decision contended further that officer liability could extend beyond common law fraud claims to include “other statutory and common law causes.” DFS, citing Roake v. Christensen, 528 N.E.2d 789, 791 (Ind.Ct.App.1988) (finding defendant individually liable for fraud in connection with his criminal conversion in violation of Ind.Code § 35-43-4-3); Berghoff v. McDonald, 87 Ind. 549 (Ind.1882) (holding an agent personally liable in an action of replevin for the unlawful taking or detention); American Indep. Mgmt. Sys. v. McDaniel, 443 N.E.2d 98, 103 (Ind.Ct.App.1982); Stoutco, Inc. v. AMMA, Inc., 620 F.Supp. 657, 661 (D.Ind.1985) (“In Indiana, the law is also clear that a corporate officer or shareholder is not shielded from liability on the basis of his representative capacity when he participates in a tort because an agent is liable for his own torts.”); In re Mills, 111 B.R. 186, 195 (Bankr.N.D.Ind.1988) (“[W]hen a personal debtor who, as an officer of a corporation, actually participates in the conversion of property which is subject matter to the security interest of a third party, he is personally liable to said party and thus the debt is nondischargeable pursuant to § 523(a)(6).”).

The DFS opinion unfortunately made the erroneous conclusion that a “fraudulent transfer” under Indiana’s UFTA is the same as a “fraud” under Indiana common law doctrines.  The Seventh Circuit cited two opinions in support of this erroneous conclusion, as well as misinterpreted the UFTA:

No court has yet considered whether this Indiana common law rule can be applied to the IUFTA.  There is good reason to believe it would apply, however. First, Indiana seems to treat claims under the IUFTA as a type of fraud claim. See, e.g., Fire Police City County Federal Credit Union v. Eagle, 771 N.E.2d 1188, 1191 (Ind.Ct.App.2002) (treating a claim under Ind.Code § 32-2-7-15 as a fraud claim); Bruce Markell, The Indiana Uniform Fradulent Transfer Act Introduction, 28 Ind. L.Rev. 1195, 1200 (1995) (“Indiana statutes require a finding that fraud existed in connection with a transaction challenged as a fraudulent transfer.”). Second, the IUFTA itself expressly incorporates principles of common law fraud by reference. Ind.Code § 32-18-2-20. Finally, at least one other court has applied similar common law to find the president of a corporation personally liable under another state’s version of the UFTA, despite the fact that he was not a “first transferee.” See Firstar Bank, N.A. v. Faul, No. 00-C-4061, 2001 WL 1636430, at *7 (N.D.Ill. Dec.20, 2001).

At least one state with a similar common law rule, however, has declined to hold an officer who personally participated in fraud liable under the UFTA. See Kondracky v. Crystal Restoration, Inc., 791 A.2d 482, 483 (R.I.2002). While Kondracky did not specifically discuss or necessarily consider what effect Rhode Island’s common law “personal participation” rule would have on the UFTA, a Rhode Island district court later felt constrained by Kondracky and held that the common law would not expand liability under the UFTA. See Rohm and Haas Co. v. Capuano, 301 F.Supp.2d 156, 160-61 (D.R.I.2004) (criticizing Firstar). The court in Rohm also noted that “most courts have been reluctant to extend the reach of fraudulent conveyance actions as to include parties that are only participants in a fraudulent transfer.” Id. at 161 (compiling cases)

We do not share the concerns of the Rhode Island District Court, at least with respect to this case. The cases upon which it relies do not involve officers, directors or shareholders of the “first transferee,” who personally participated in the fraud. Instead, they involve novel claims of accessory, conspiracy or aiding and abetting liability under the UFTA. See Lowell Staats Mining Co. v. Phila. Elec. Co., 878 F.2d 1271, 1276 n. 1 (10th Cir.1989) (declining to extend UFTA to find “aiding and abetting” liability against an agent of the corporation, where it seems the agent was not an officer, director or shareholder); Mack v. Newton, 737 F.2d 1343, 1361 (5th Cir.1984) (declining to extend UFTA to individuals who participated in a conspiracy to commit a fraudulent transfer); Thompson Kernaghan & Co. v. Global Intellicom, Inc., No. 99 CIV. 3005(DLC), 1999 WL 717250, at *2 (S.D.N.Y. Sept.14, 1999) (declining to apply an accessory liability theory to a lawyer of “first transferee” who helped set up the corporation involved). Therefore, these cases are not on point.

In contrast, we are aware of no case suggesting that “veil piercing” is impermissible under the UFTA.  Liability for officers or shareholders of a “first transferee” who personally participated in the fraud is a substitute for “veil piercing,” not an extension of who can be a “transferee” under the UFTA. Moreover, the reasoning behind the general rule that courts should avoid extending the parties who can be a “transferee” under the UFTA appears to be based, at least in part, on the difficulty of proving damages. See Duell v. Brewer, 92 F.2d 59, 61 (2d Cir.1937) (“[C]ourts have generally held as to fraudulent conveyances that a person who assists another to procure one, is not liable in tort to the insolvent’s creditors…. The reasons ordinarily given are the impossibility of proving any damages, which scarcely seems sufficient; but the result is settled, at least for us.”) (cited by Lowell Staats Mining Co., 878 F.2d at 1276). We do not believe that there would be any such difficulty here, where joint and several liability would clearly be appropriate.

If you did not follow the Seventh Circuit’s logic in DFS, here is a summary:

  1. Let’s misinterpret the UFTA and confuse the concept of a “fraudulent transfer” with common law “fraud.”
  2. Rhode Island has looked at this issue, and they tell us that we’re wrong.
  3. We don’t agree with Rhode Island.  Their cases don’t involve persons who personally participated in the fraud, but instead involve novel claims of accessory liability under the UFTA.  This isn’t an accessory liability case.
  4. There’s no reason why we cannot impose veil piercing under the UFTA.  As authority, let’s cite a 1937 case arising out of the Second Circuit, even though Indiana’s UFTA only dates back to 1994.  After all, state law in old line Eastern states such as New York is identical to what you find in Indiana, isn’t it?  (Don’t New York and Indiana vote the same way in every Presidential election???)

Worse, the Seventh Circuit actively disregarded an Indiana state appellate court ruling directly on point and contrary to Seventh Circuit’s holding in DFS:  Shi v. Yi, 921 N.E.2d 31, 38 (Ind. Ct. App. 2010).  In that case, the state appeals court rejected an argument to impute common law fraud liability under the Indiana UFTA.

Would the Indiana Supreme Court necessarily follow a 1937 Second Circuit case to impose veil piercing under the UFTA?  Is the “fraud” involved in a fraudulent transfer the same as the “fraud” giving rise to common law liability in a number of states?  Again, the facts of Continental Casualty do not elicit a whole lot of sympathy from lawyers, much less judges, but the issue still persists:  Was it right for the Seventh Circuit to not certify the issue of veil piercing under the UFTA to the Indiana Supreme Court?

Liability Under the UVTA

Recent efforts by the Uniform Law Committee have led to the renaming of the UFTA as the “Uniform Voidable Transactions Act” in order to help clear the fog around the distinction between “fraudulent transfers” and “fraud.”  Had the UVTA been in place in Indiana, more likely one would argue that veil piercing should not apply to hold officers and shareholders liable.  Instead, the creditor would need to bring direct actions against those officers and shareholders for the funds they received as “voidable transactions.”

Veil Piercing and the “Intrinsic Factors” Rule

Last month, Wyoming amended its LLC Act to stem the rising tide of veil piercing cases in the courts of Wyoming.  Reversing the Wyoming Supreme Court’s decision in GreenHunter Energy, Inc. v. Western Ecosystems Technology, Inc., 2014 Wy 144 (Wyo. November 7, 2014), new § 17-29-304 introduces an “intrinsic factors” rule.  Under this important legal development, veil piercing cannot be applied in respect of those factors which are intrinsic to the form of business of a limited liability company.  The statute provides a non-exclusive list of four factors as intrinsic (and to be disregarded for veil piercing purposes):

  1. Passthrough tax status of the entity;
  2. Flexible operations and organization, including the failure to observe formalities relating to the exercise of the company’s powers or management of its activities;
  3. The exercise of ownership, influence, and governance by a member or manager of the LLC;
  4. The protection of members’ and managers’ personal assets from the debts and obligations of the LLC.

Had the Symons family chosen to use Wyoming LLCs in lieu of Indiana corporations, would the outcome of the base been any different?  Almost all of the factors cited by the judge in support of veil piercing would likely have been regarded as “intrinsic factors” under the Wyoming statute, thus precluding liability for the members and managers of any LLCs involved in the transactions.

Moreover, we believe that most states would find that the UFTA does not accommodate veil piercing to impose accessory liability.  In Wyoming, no such case springs to mind.

Conclusion

Indiana may be a bad place in which to do business, but – more likely – we think the Seventh Circuit made a fundamental error in jurisprudence.  The issue of veil piercing under the Indiana UFTA should have been certified to the Indiana Supreme Court.  Instead, the Seventh Circuit ultimately availed itself of a 1937 pre-UFTA Second Circuit case to conclude that “fraudulent transfers” under the UFTA are no different than common law “frauds” in Indiana.  This is the fundamental error that drove the Uniform Law Committee to rename the UFTA in its entirety.  We might as well call this case “Golf Channel II,” but without the happy ending.

Counsel for the Symons family should request a rehearing and ask that the issue be certified to the Indiana Supreme Court for further consideration.  In the meantime, even officers and directors of publicly-traded companies are on notice that Indiana – and the Seventh Circuit – may not be the safest jurisdiction in which to operate a holding company.  Wyoming offers a better solution.

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