Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 2

FACTS Dog House Investments, LLC, operated a dog "camp" in Nashville, Tennessee. Dog House leased the property from Teal Properties, Inc., which was owned by Jerry Teal, its sole shareholder. Under the lease, the landlord promised to repair damage from fire or "other causes" that rendered the property "untenantable" (unusable). Following a flood, Dog House notified Jerry that the property was "untenantable." Jerry assured Dog House that the flood damage was covered by insurance but took no steps to restore the property. The parties then agreed that Dog House would undertake the repairs and be reimbursed by Teal Properties.
Dog House spent $39,000 to repair the damage and submitted invoices for reimbursement. Teal Properties recovered $40,000 from its insurance company but did not pay Dog House. Close to bankruptcy, Dog House filed a suit in a Tennessee state court against Teal Properties and Jerry. The court held Jerry personally liable for the repair costs. Jerry appealed.
ISSUE Should the court pierce the corporate veil of Teal Properties to accomplish justice for Dog House?
DECISION Yes. A state intermediate appellate court affirmed the lower court's decision. Dog House had not been reimbursed for the cost to repair the flood damage, as Jerry promised.
REASON When determining whether piercing a corporate veil is appropriate, the first consideration is whether the cor- poration has been used to perpetrate a fraud or otherwise commit an injustice. Factors that indicate a corporation is a "sham" or "dummy" corporation include (1) an investment of insufficient capital in the corporation, (2) the sole ownership of its stock by one individual, (3) its use as a conduit for the personal dealings of an individual, and (4) the failure of the owner to maintain an arms-length relationship with the corporation.
In this case, neither Teal Properties nor Jerry had repaid Dog House for the funds paid to repair the flood damage to the leased property. Jerry was the sole shareholder of Teal Properties, which had no purpose other than to collect the rent on properties that he owned. Teal Properties itself owned no property or other assets, and the cash it received from rent payments-and in this case, insurance proceeds-were disbursed immediately to meet Jerry's personal financial obligations. Thus, Jerry "did not maintain an arms-length relationship with the corporation," and was personally liable to Dog House for the cost of the property repairs.
FOR CRITICAL ANALY SIS-Ethical Consideration The failure of Teal Properties and Jerry to reimburse the tenant, Dog House, for the repair costs placed Dog House in a dire financial situation. Does this consequence make the landlord's conduct unethical? Discuss.