1. What did the court mean when it ruled that Shelby was the defendants’ “alter-ego”? How did that determination impact the court’s decision?

2. If Essad had not committed the fraudulent bank transaction, would the court have allowed the veil to be pierced? Why or why not?

3. What steps could Shelby’s principals have taken to help prevent any piercing of their corporate veil?

Shelby Property Investors (Shelby) was a company engaged in developing and selling residential real estate that was chiefly managed by Essad, one of three principals in the entity. Florence Cement Company (Florence) contracted with Shelby to perform concrete and asphalt work at one of Shelby’s properties. Ultimately, Shelby’s real estate venture did not yield a profit, but Shelby was able to pay all subcontractors on the job except one—Florence. When Florence sued to recover $114,557 it was owed, Shelby was without assets. Florence sought to pierce Shelby’s corporate veil and hold the principals personally liable. Florence argued that the evidence suggested that Shelby (1) was not an authentic business entity because of the principals’ mixing of personal and business transactions and (2) had engaged in fraud by misrepresenting facts to its bank concerning a loan used to pay subcontractors. The trial court ruled that piercing the corporate veil was not warranted. 

The Court of Appeals of Michigan reversed the trial court’s decision and ruled in favor of Florence on the issue of piercing the corporate veil. The court pointed to Shelby’s company history, which indicated that the principals treated their own liabilities as Shelby’s liabilities and vice versa and intentionally under capitalized Shelby, causing Shelby to be continuously insolvent, including at the time it contracted with Florence. Essad also falsified the sworn statement in the final loan draw request to the bank, and this constituted use of Shelby for fraudulent purposes. Therefore, Florence satisfied the elements for piercing the corporate veil. 

“Shelby was defendants’ alter ego. [The principals] made no distinction between their own debts and Shelby’s debts. [The principals] did not treat Shelby as a separate entity. Such a failure is a hallmark of a claim for piercing the corporate veil. Essentially, where members do not treat an artificial entity as separate from themselves, neither will this Court.

“The facts of this case further show that defendants used Shelby to commit a wrong or fraud. Essad falsified the sworn statement that he submit-ted to [the bank] for the final draw of the remaining loan proceeds. It is undisputed that the request for the draw stated that Shelby “OWES NO MONEY FOR THE IMPROVEMENT OTHER THAN AS SET FORTH ABOVE.” However, Essad knew that Shelby owed Florence more than the $142,000 indicated on this request for the draw because Essad had signed the contract with Florence on behalf of Shelby. Thus, the evidence overwhelmingly shows that Essad knowingly falsified the request for the draw, which amounted to fraud. And, as such, Essad clearly used Shelby to commit a wrong or fraud.”