While the power to pierce the corporate veil is to be exercised reluctantly and cautiously, the corporate entity can be disregarded if it is used to cover fraud or to work injustice, or if necessary to achieve equity.
Plaintiff was contracted by defendant corporation to sell cases of baklava over a period of one year, provided, defendant would be its only customer. The agreement contained a clause rendering that entitled plaintiff to liquidated damages should defendant refuse or repudiate delivery of the goods. The dispute arose when the checks paid by the defendant were dishonoured for insufficient funds. One of the principals of defendant, however, issued a personal check for the amount due. Plaintiff continued production and eventually stopped when the principal refused to purchase any more. Meanwhile, the principals formed another company. The plaintiff sued the defendant for damages. In addition, plaintiff sought to pierce the corporate veil by holding the principals and their other business ventures liable. The trial court ruled that plaintiff is not entitled to liquidated damages since it was unreasonable in light of his income before he entered in to the contract. The trial court, however, allowed plaintiff to pierce the corporation veil. Plaintiff seller appealed from the trial court's decision that the liquidated damages clause in the contract with defendants, purchasing corporation and corporate principals, was not enforceable, and that lost profits were not recoverable in the breach of contract action.
May a trial court weigh a plaintiff’s income in denying enforceability of a liquidated damages clause in a commercial?
The court held that the trial court improperly considered the seller's income when evaluating the liquidated damages claim. The applicable provision of the Uniform Commercial Code, Kan. Stat. Ann. § 84-2-718, measured only the reasonableness of the liquidated damages, and did not include the seller's income as a factor in that determination. The court reversed and remanded the matter for a decision based on the standards outlined in § 84-2-718. With regard to the seller's claim for lost profits, the court ruled that the trial court erred when it failed to apply the provision of Kan. Stat. Ann. § 84-2-708, and disallowed the claim for recovery of loss of profits on goods not yet manufactured. Further, damages were recoverable for the new business if proved with reasonable certainty. Finally, the trial court properly permitted the seller to pierce the corporate veil in order to obtain damages. The injustice that would result in this case is sufficient to support a determination to pierce the corporate veil.