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7th Circuit upholds brother’s liability for $7 million judgment

August 6, 2018

A caustic business dispute between brothers has resulted in one brother being held personally liable for a $7 million judgment after the 7th Court of Appeals found his conduct supported a piercing the corporate veil judgment against him.

Brothers Lester and William Lee created Lees Inns of America, Inc. in 1974 as a public company in the hotel business. William’s sons, Robert and Donald Lee, joined the business a decade later.

Lester eventually owned 516 shares to William’s 484 shares in the company. William created the William R. Lee Irrevocable Trust and transferred his LIA shares to it, with Robert and Donald serving as trustees.

In 1995, Lester ran into financial difficulties with another company he owned, and proposed merging it with LIA. When William rejected the idea, Lester made moves to take control over LIA, and a nasty dispute between the brothers began.

Then in 2000, as majority shareholder of LIA and sole shareholder of LLL Acquisition Corporation, Lester approved a merger of the two companies. The trust dissented from the merger, but LIA was merged into LLL in June 2000, terminating the trust’s shareholder status in LIA.

After the merger, Lester allegedly gutted LIA to prevent the trust from collecting the value of its LIA shares, then dissolved the company altogether in November 2008. He also perpetrated a collusive lawsuit, but the Jennings Circuit Court entered a $7.5 million judgment for the trust against LIA in the dissenters’ rights action, which the Indiana Court of Appeals upheld in 2010.

Lester petitioned for Chapter 7 bankruptcy in 2012, while the trust initiated an adversary proceeding in 2013 to pierce LIA’s corporate veil and hold Lester personally liable for the $7.5 million judgment. The trust moved for summary judgment, and a bankruptcy judge ruled in its favor.

“…(T)he bankruptcy court held that his post-merger conduct could, and did, satisfy the veil-piercing requirements under Indiana law: Lester ‘has exhibited a clear pattern of conduct and fraudulent intent that allows the Court to conclude as a matter of law that (he) manipulated LIA post-merger to promote an injustice against the Trust such that piercing the corporate veil is warranted,” Judge Daniel Manion wrote Friday in In Re: Lester L. Lee, The William R. Lee Irrevocable Trust, et al. v. Lester L. Lee, 17-1582.

On appeal, Lester argued that because Indiana’s Dissenters’ Rights Statute provides an exclusive remedy, the Indiana Southern District Court erred by allowing the trust to pierce the corporate veil and hold him personally liable.

However, the appellate court found that Lester’s proposed immunity argument “makes no sense.” The Dissenters’ Rights Statute, Indiana Code section 23-1-44-8(c) (1987), “stops a dissenting shareholder from challenging the corporate action creating its entitlement,” but the trust was not challenging the merger, Manion said.

Further, the court pointed out Lester was the one who attempted to evade the exclusive remedy by stripping LIA of its assets after the merger.

“Lester’s proposed immunity would encourage and reward post-merger ‘trickery, evasion, procrastination, spoliation, botheration,’ shell games, and fourberies. Lester’s proposed immunity makes no sense,” Manion wrote. “As the bankruptcy court concluded, Lester acted with ‘fraudulent intent’ and ‘manipulated LIA post-merger to promote an injustice against the Trust such that piercing the corporate veil is warranted.”

Lester also contended the district court erred by allowing piercing in favor of the trust, which is only a minority shareholder and not a third party. But the appellate court found Lester forfeited this argument by failing to raise it in response to summary judgment before the bankruptcy court.

“[E]ven absent forfeiture, this argument fails because once the Trust was ‘merged out,’ it ceased being a shareholder and became a third-party creditor of the corporation,” the panel found. “Lester admitted as much.”

Finally, Lester argued on appeal that the involvement of complex economic questions and allegations of fraud make the decision to pierce a corporate veil ordinarily inappropriate for summary judgment, but the appellate panel disagreed.

It concluded Lester failed to present any genuine issue of material fact, failed to include a Statement of Material Facts in Dispute in his summary judgment response brief and did not properly present any conflicting inferences in court.

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