One company executive is breathing a sigh of relief following a recent decision by the Appellate Division of the Superior Court of New Jersey in New Jersey Department of Environmental Protection v. Navillus Group,No. A-4726-13T3, 2016 N.J. Super. Unpub. LEXIS 77 (N.J. Super. Ct. App. Div. Jan. 14, 2016). The Appellate Division in Navillus Grouprefused to pierce the corporate veil and hold the principal of a family-owned company personally liable for a judgment of $2 million under New Jersey’s Spill Compensation and Control Act, N.J.S.A. §§ 58:10-23.11 to 58:10-23.24. While the principal escaped personal liability for cleanup costs under the particular facts of the case, the ruling underscores the importance of observing corporate separateness requirements and taking precautions to avoid imposition of personal liability on officers, directors, shareholders, and members of a corporate entity.
From about 1987 to 1994, Accutherm, Inc., manufactured laboratory-grade thermometers in Franklin Township, New Jersey. Mercury was discharged at the site during that time, resulting in contamination of the site’s building, soil, and groundwater with mercury, tetrachloroethene, selenium, and other hazardous substances. Accutherm filed a petition for Chapter 11 bankruptcy protection in 1994.
In 1999, the Navillus Group, a general partnership formed for the purpose of holding the assets of James Sullivan, Jr., and distributing them to his children, purchased tax sale certificates for the Accutherm site. Navillus purchased the certificates using a check written from an account in the name of Jim Sullivan, Inc., a separate corporation in which the Sullivan siblings were shareholders and employees. Navillus subsequently foreclosed on the tax certificates and then conveyed the property to Jim Sullivan, Inc., for $1.00.
The New Jersey Department of Environmental Protection and the administrator of the New Jersey Spill Compensation Fund brought an action against Navillus, Jim Sullivan, Inc., James Sullivan, Jr., and the Sullivan siblings, alleging liability under the New Jersey Spill Act and on a theory of unjust enrichment for costs relating to remediation of the Accutherm site. The trial court granted summary judgment for the plaintiffs on all claims, holding Navillus, Jim Sullivan, Inc., and the Sullivan siblings as general partners of Navillus liable for cleanup costs under the Spill Act and for unjust enrichment. The trial court also pierced the corporate veil of Jim Sullivan, Inc., and held James Sullivan, Jr., the principal of the company, personally liable. In reaching its conclusion on the veil-piercing issue, the trial court accepted the plaintiffs’ arguments that (1) “the Sullivan Defendants disregarded corporate formalities and mingled assets by having Jim Sullivan, Inc. write the checks that purchased the tax certificates for Navillus”; (2) “Navillus then transferred the [site] to Jim Sullivan, Inc. a year later for one dollar, at a time when both parties knew, or should have known, that the Property was contaminated”; and (3) Jim Sullivan, Inc., later disbursed a number of other assets to the individual Sullivan defendants. The defendants appealed.
The Appellate Division’s Ruling on Piercing the Corporate Veil
In holding that the trial court erred in imposing personal liability on James Sullivan, Jr., by piercing the corporate veil of Jim Sullivan, Inc., the Appellate Division in Navillus Groupbegan with the “fundamental proposition” articulated by the New Jersey Supreme Court inState, Department of Environmental Protection v. Ventron Corp., 94 N.J. 473 (N.J. 1983), “that a corporation is a separate entity from its shareholders, and that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.” The Appellate Division further recognized that “[t]he purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice to perpetrate fraud, to accomplish a crime, or otherwise to evade the law,” or when an “individual . . . was using the corporation as his alter ego and abusing the corporate form in order to advance his personal interests.”
The Appellate Division in Navillus Group concluded that the evidence on which the plaintiffs based their assertion that Jim Sullivan, Inc., commingled assets by writing checks for the tax certificates that Navillus purchased was based on nothing more than an assumption. Indeed, there was no specific evidence that a Jim Sullivan, Inc., check was even used to purchase the tax certificates. A mere assumption, the Appellate Division emphasized, is entirely insufficient to justify piercing a corporate veil.
The Appellate Division further reasoned that even if Jim Sullivan, Inc., wrote the check used to purchase the tax certificates, there was no evidence demonstrating whether the check was written for a legitimate business purpose or some other (i.e., fraudulent or illegitimate) reason. The Appellate Division stated that “[w]riting a check for another entity on one occasion, during the more than twenty-year existence of Jim Sullivan, Inc., hardly demonstrates a pattern of comingling assets that might serve as a foundation for piercing the veil.”
In addition, the Appellate Division reasoned that Jim Sullivan, Inc.’s purchase of the Accutherm site for $1.00 and disbursement of assets to the Sullivan siblings did not warrant piercing the corporate veil and imposing personal liability on James Sullivan, Jr., without some evidence of the reason for the transfers or the circumstances under which the transfers were made. Therefore, the Appellate Division in Navillus Group reversed the trial court’s summary judgment for the plaintiffs under the Spill Act as to James Sullivan, Jr., based on piercing Jim Sullivan, Inc.’s corporate veil. The Appellate Division, however, affirmed the trial court’s summary judgment in favor of the plaintiffs under the Spill Act as to Jim Sullivan, Inc., Navillus, and the Sullivan siblings as general partners of Navillus, and reversed the trial court’s decision based on the doctrine of unjust enrichment.
Navillus Group highlights the highly fact-intensive inquiry to pierce a corporate veil and find individual liability as to officers, directors, shareholders, and members of a company. The decision also serves as a reminder of the need to take certain precautions to reduce the likelihood that the corporate veil will be pierced. Environmental cleanups are costly, and imposing personal liability for cleanup costs on a business owner could have a devastating financial impact on that individual.
Below is a non-exhaustive list of ways that a business owner or executive can minimize the risk of corporate veil piercing and insulate himself or herself from the company’s environmental liabilities:
1. Adequately capitalize the company. Maintain sufficient capital at all times. Account for any capital contributed.
2. Do not commingle personal and corporate assets. Maintain separate bank accounts, and do not divert corporate assets for personal use.
3. Observe corporate and organizational formalities such as the following:
a. Adopting bylaws;
b. Making corporate and regulatory filings;
c. Filing tax returns;
d. Holding regular meetings of the board of directors and shareholders;
e. Keeping accurate minutes of those meetings;
f. Formally approving or documenting transactions between the company and shareholders or members;
g. Issuing stock for the company; and
h. Paying dividends to shareholders.
4. Maintain proper corporate and financial records. Keep those records separate from personal records.
5. Ensure that all officers and directors have functioning roles.
6. Refrain from guaranteeing an individual’s loan or paying off an individual’s debt.
7. If a company lends money to a shareholder or executive, ensure that the individual pays back the loan with interest and that the loan is documented with a promissory note.
8. Ensure that a shareholder or executive does not assure creditors that he or she will personally assume the company’s obligations if the company is unable to do so.
9. To state the obvious, do not use the company for fraudulent or unlawful purposes. This includes creating a corporate entity solely to avoid personal obligations.
These measures, which are fairly simple and easy to implement, will go a long way toward proving that the owners and executives of a company treat it as a separate, distinct entity and toward ultimately protecting those individuals from personal liability, including for expensive environmental cleanup obligations.
Keywords: environmental litigation, piercing the corporate veil, New Jersey Spill Compensation and Control Act
John J. DiChello is a partner with Blank Rome in Philadelphia, Pennsylvania.
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