Law School Case Brief
Theberge v. Darbro, Inc. - 684 A.2d 1298 (Me. 1996)
Although the corporate entity may be pierced if it is merely the alter ego of an individual or other corporation, courts will disregard the legal entity of a corporation with caution and only when necessary in the interest of justice and only in exceptional circumstances. When a plaintiff attempts, in the context of a contractual dispute, to pierce the corporate veil, courts apply more stringent standards.
Plaintiffs Michael and Thomas Theberge owned several properties, who sold seven rental buildings to the Worden Group (mortgagor) for $900,000, which was secured by a mortgage on the property (Theberge promissory note). Later, Defendants Darbro, Inc., Albert Small and Mitchell Small, entered into an agreement with the Worden Group for the sale of the properties for $970,000. Prior to the closing, the Worden Group was informed that Horton Street Associates, a newly formed corporation, and not Darbro, was to be the purchaser of the properties. To finance the purchase of the seven buildings, Horton Street (1) executed a promissory note in the amount of $720,000 secured by a first mortgage on the premises;(2) assumed the promissory note to the Theberges, secured by a second mortgage on the premises; (3) executed a promissory note secured by a third mortgage on the premises, with Albert L. Small as co-maker; and (4) executed a $20,000 note payable to the Worden Group with Albert L. Small as co-maker.
Plaintiffs Theberges (mortgagees) and the Worden Group brought an action against defendants Darbro, Inc., Albert L. Small and Mitchell Small, which alleged that Darbro and the Smalls were guarantors of the notes, and sought to pierce the corporate veil to collect its debt from the officers. Following a five-day trial, the court specifically found that the Theberges and the Worden Group had failed to establish that the defendants acted illegally or fraudulently and also found that none of the defendants had guaranteed the payment of the Theberge promissory note. However, the trial court also found that Horton Street, which, inter alia, had no separate offices, maintained no corporate records or books; co-mingled its business with Darbro and the Smalls; was, in essence, Albert Small. Furthermore, when in a financial crisis, Albert "unilaterally assumed full control of Horton Street on his own initiative" and acted to the defendants' own benefit and to the detriment of the plaintiffs. The trial court held that defendants could not assert Horton Street's corporate status as a defense and that the defendants were liable to the plaintiffs for the outstanding balance on the Theberge promissory note. Defendants appealed, arguing that the trial court erred by determining that their conduct justified piercing the corporate veil of Horton Street.
Should the court pierce the corporate veil to allow the mortgagee to collect a debt from the corporation’s officers?
The appellate court vacated the judgment and remanded to the trial court for the entry of a judgment in favor of the defendants, Darbro, Inc., Albert L. Small and Mitchell Smal, concluding that found that plaintiffs failed to establish that Darbro had guaranteed the loan or that it acted illegally. The representations that Albert would stand behind the deal was insufficient evidence of fraud, but was merely shrewd business dealings between knowledgeable parties. The Worden Group entered into the transaction at issue fully aware that the documents neither released them from liability on, nor personally obligated the Smalls for the payment of the mortgage.
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