Friday, March 23, 2012

Sea-Land Services, Inc. v. Pepper Source case brief

Sea-Land Services, Inc. v. Pepper Source (7th Cir. 1991)

This case is an instance of “reverse piercing”
Sea-Land shipped goods on behalf of Pepper Source and then was stiffed on its
freight bill. The owner of Pepper Source also owned four other business entities
which conducted substantially the same work. Sea-Land sought to hold both the
owner and his other companies liable.

A corporate entity will be disregarded when two requirements are met:
o Such unity of interest and ownership that the separate personalities of corp.
and owner no longer exist.
o Adherence to fiction of separate corporate existence would sanction a fraud or
promote injustice.

Four factor test for determining unity of ownership:
o Failure to maintain adequate corporate records and formalities
o Commingling of funds or assets
o Undercapitalization
o One corporation treating the assets of another as its own.
Standard of “promoting injustice” looser than affirmative fraud.
Note that Pepper Source is a very uncommon example of recovery against
shareholders in the case of contract.


Defendant individual debtor and his corporations appealed a summary judgment from the United States District Court for the Northern District of Illinois, Eastern Division, for plaintiff judgment creditor, which held defendant jointly liable for plaintiff's $ 87,000 judgment and post-judgment interest in its suit to pierce the corporate veil and find alter-ego status.

The court found the record insufficient to uphold the summary judgment. The court applied the Van Dorn test to determine whether a corporation was so controlled by another to justify disregarding their separate entities. Although the shared unity of interest and ownership part was met, the judgment creditor failed to show that honoring the corporate separate existences would sanction a fraud or promote injustice. The judgment creditor alleged the individual debtor intentionally shifted assets and liability among his corporations, but failed to produce evidence similar to the wrongs found in other cases where the court properly pierced the corporate veil to avoid promoting injustice. On remand, the judgment creditor could try to show the individual debtor used corporate facades to avoid responsibility to creditors or one corporation would be enriched unless liability was shared by all.

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