Opinion
Civil Action 02-2062.
September 22, 2004
ORDER
AND NOW, this day of September, 2004, upon consideration of the Defendants' Motion for Partial Summary Judgment on Plaintiff's Claim Seeking to Pierce the Corporate Veil of Big Fights and Memorandum of Law in Further Support of Defendants' Motion (Document Nos. 86, 89) and Plaintiff's responses thereto (Document Nos. 87, 90) it is hereby ORDERED that Defendants' Motion is DENIED.
Via the present motion, Defendants again move for summary judgment on Plaintiff's claim seeking to pierce the corporate veil of Big Fights, Inc. Defendants contend that distribution of nearly all of the ESPN proceeds among William D. Cayton, Cayton's wife, and Lorraine Jacobs did not render Big Fights insolvent, and thus, this court should grant summary judgment in favor of William D. Cayton's estate on Plaintiff's piercing the corporate veil claim. As the parties are familiar with the facts, we will not recite them here.
A motion for summary judgment shall be granted where all of the evidence demonstrates that "there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A genuine issue of material fact exists "when a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding a motion for summary judgment, all facts must be viewed and all reasonable inferences must be drawn in favor of the non-moving party. See, e.g., Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
As stated in our previous order, the factors that are generally considered in determining whether to disregard the corporate entity include: failure to observe corporate formalities; non-payment of dividends; insolvency of the corporation; siphoning of corporate funds by the dominant shareholder; non-functioning of other officers or directors; absence of corporate records; and gross undercapitalization of the corporation. Kaplan v. First Options of Chicago Inc., 19 F.3d 1503, 1521 (3rd Cir. 1994); Jiffy Lube Int'l Inc. v. Jiffy Lube of Pennsylvania, Inc., 848 F.Supp. 569, 580 (E.D.Pa. 1994);see also Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 18 (2nd Cir. 1996); Forum Ins. Co. v. Texarkoma Transp. Co., 645 N.Y.S.2d 786, 787 (N.Y.App. Div. 1996). Furthermore, in deciding whether or not to pierce the corporate veil, Pennsylvania and New York courts alike are concerned with determining "if equity requires that the shareholders' traditional insulation from liability be disregarded." Village at Camelback Property Owners Assn., Inc. v. Carr, 538 A.2d 528, 533 (Pa.Super.Ct. 1988); see also Trustees of the Nat'l Elevator Indus. Pension, Health Benefit and Educ. Funds v. Lutyk, 332 F.3d 188, 194 (3rd Cir. 2003);Bridgestone/Firestone, Inc., 98 F.3d at 18 ("courts apply the preexisting and overarching principle that liability is imposed to reach an equitable result") (internal quotations omitted).
The Court is mindful that because no one of the above factors is necessarily dispositive, the decision of whether to pierce the corporate veil must be fact-specific. While the Third Circuit has not explicitly addressed the issue, this court has found that the "weight of authority" favors submitting the question of corporate disregard to the jury. Cantiere DiPortovenere Piesse S.P.A., 739 F. Supp. 231, 236 (E.D. Pa. 1990). See also FMC Finance Corp. v. Murphree, 632 F.2d 413, 421 (5th Cir. 1980) (holding that, as a matter of federal procedure in diversity cases, the issue of corporate entity disregard is one for the jury).
Plaintiff Peltz Boxing Promotions, Inc.'s veil-piercing claim focuses on a single allegation relating to the distribution of proceeds from the 1998 ESPN sale to William D. Cayton, Cayton's wife, and Lorraine Jacobs. Our prior Order established that this distribution was insufficient to ground a claim of undercapitalization, and identified as relevant the question of whether the distribution left Big Fights, Inc. insolvent. The Court intended by its Order to clarify any confusion resulting from the "substantial overlap" between the concepts of insolvency and undercapitalization. Lutyk, 332 F.3d at 196. In defending their February 26, 2004 Motion for Partial Summary Judgment on Plaintiff's corporate veil-piercing claim solely on solvency grounds, Defendants misconstrue both our prior Order and the relevant law. While the factual questions surrounding Big Fights, Inc.'s solvency were sufficient for disposal of the parties' earlier cross motions as to this issue, there exist alternative grounds for denying Defendant's current motion. Siphoning of corporate funds by the dominant shareholder, even while the corporation is solvent, can be an independent basis for piercing the corporate veil if equity so requires; Defendants have made no showing that they are entitled to judgment as a matter of law on this issue. The issue of Big Fights, Inc.'s solvency after distribution of the ESPN proceeds remains relevant inasmuch as a finding of insolvency would tend to bolster the siphoning claim.
Among the various grounds that lend support to claims that a corporate entity should be disregarded, "siphoning of corporate funds by the dominant shareholder" and "insolvency of the debtor corporation" are invariably cited as independent factors.Kaplan, 19 F.3d at 1521. While a finding of financial distress may help bolster a claim of siphoning or commingling of assets, as in Lutyk, 332 F.3d at 198, insolvency has never been a requirement as a matter of law. Our jurisprudence leaves ample room to consider a veilpiercing claim grounded in siphoning, independent of a finding of insolvency, regardless of how insolvency is defined. See Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1064 (3rd Cir. 1992) (distinguishing insolvency in the "bankruptcy sense" from insolvency in the "equity sense").
In this case, a lump sum payment of $44.6 million was made to Big Fights, Inc. by ESPN on May 6, 1998. Within two weeks of this payment, William D. Cayton, the corporation's sole shareholder, distributed nearly all of the proceeds to himself, his wife, and Lorraine Jacobs. Further, he diverted $11.7 million in payments due to Big Fights, Inc. on a Promissory Note executed by ESPN to an S-corporation under his control, Cayton Sports, Inc., leaving Big Fights with no source of income in 1999 and 2000. While disregarding the corporate entity simply because its shareholders routinely draw out a portion of its profits would indeed "render the corporate form useless," First Realvest, Inc. v. Avery Builders, Inc., 600 A.2d 601, 604 (Pa.Super.Ct. 1991), the distribution of nearly all of the proceeds from a $56.3 million corporate contract by its sole shareholder to primarily personal and family accounts — leaving less than $95,000 in corporate assets — suggests siphoning beyond the bounds of traditional shareholder activity. Particularly given that Plaintiff claims entitlement to a portion of these distributed proceeds, a reasonable jury could find that Cayton's siphoning of corporate funds presents elements of "injustice or fundamental unfairness,"Lutyk, 332 F.3d at 194, warranting disregard of the corporate entity.
In light of the above, we will DENY Defendants' Motion for Summary Judgment.