Under Illinois law, as interpreted by the Third Circuit’s understanding of Seventh Circuit authority, the failure to mount a stand-alone claim for unjust enrichment is not fatal to veil piercing based on unjust enrichment.
In a diversity suit, the Third Circuit reviewed the judgment of a district court entered in favor of a defendant after a bench trial. The May 6 opinion by Circuit Judge Julio M. Fuentes reversed and remanded for further fact findings on unjust enrichment. The opinion is not precedential under Third Circuit rules.
The plaintiff had a valid breach of contract claim for money damages against a company’s subsidiary. The subsidiary was out of business and judgment-proof, so the plaintiff mounted veil piercing and unjust enrichment claims against the parent. Judge Fuentes agreed that the plaintiff had failed to establish an unjust enrichment claim under Illinois law.
On the veil-piercing claim, Judge Fuentes relied on two Seventh Circuit decisions to rule that the district court misinterpreted Illinois law. There is confusion, he said, because Illinois incorporates unjust enrichment principles into the veil-piercing analysis.
To pierce the corporate veil, the plaintiff must first show a failure to respect corporate formalities. Then, the plaintiff must establish a “plus” factor proven by “some element of fraud or injustice.” According to Judge Fuentes, showing unjust enrichment supplies the required “plus” factor. Nonetheless, mere inability to collect a debt is not a sufficient showing of injustice.
The plaintiff “need only demonstrate” that failure to pierce the veil “would sanction fraud or promote injustice.” In turn, showing injustice can be “satisfied by proof of unjust enrichment, without proof of fraud.” Consequently, failure to prove fraud is not fatal to a veil-piercing claim.
To prove unjust enrichment, the plaintiff must show “improper manipulation of the corporate form.” More specifically, veil piercing requires proof that the parent corporation was unjustly enriched “by his intentional manipulation and diversion of funds from his corporate entities.” Nonetheless, Judge Fuentes cautioned that veil piercing must not be applied “mechanistically whenever certain technical conditions are satisfied.”
In summary, Judge Fuentes said that the plaintiff first must show unjust enrichment and then must prove the source of the enrichment, the amount of the enrichment in relation to the contract claim, and the “degree to which the unjust enrichment arises from, or is connected to, [the parent company’s] alleged abuses of the corporate form.”
Cutting through the legal mumbo-jumbo, unjust enrichment in the context of veil piercing seems to result when a parent corporation fails to respect corporate formalities, takes money out of a subsidiary, and in the process renders the subsidiary incapable of paying its debts. Presumably, paying legitimate debts owing to the parent does not qualify as “manipulation and diversion of funds.”