Lees Inns of America (LIA) was a public company that built and operated hotels. Lester Lee (Lester) and his brother William each owned 25 percent of LIA. In 1994, LIA went private and Lester became the majority shareholder and chairman of the board. The balance of shares were held by a trust (the Trust) created by William with his two sons as co-trustees. In 1998, a falling out occurred between Lester and his nephews. LIA’s board removed them as directors, stripping the Trust of representation on the board.
In 2000, Lester acquired sole ownership of LIA by a squeeze-out merger. The Trust dissented and demanded appraisal and payment for the value of its shares under Indiana’s Dissenter’s Rights Statute.[1] During a 12-day trial in 2008, the Trust offered evidence of Lester’s fraud and breach of fiduciary duty to the corporation and to the Trust.[2] The Indiana circuit court entered judgment for the Trust for $7.5 million, and the Indiana Court of Appeals affirmed.[3]
Meanwhile, after the merger, Lester engaged in various transactions with LIA that depleted LIA’s value for his benefit. He caused LIA to sell real property to him for less than market value, which he later sold to third parties for a profit. He caused LIA to transfer stock of its subsidiaries for no consideration to an LLC he controlled. In a spectacularly collusive transaction, he and several corporations he controlled sued LIA on notes LIA had issued secured by LIA’s property. On behalf of parties on both sides of the litigation, Lester executed an agreement for judgment against LIA for $7.8 million. Shortly thereafter, Lester filed articles of dissolution for LIA. The Trust discovered the dissolution and Lester’s self-serving post-merger transactions in supplemental proceedings to enforce its judgment under the Dissenter’s Rights Statute.[4]
In 2012, Lester filed a chapter 7 petition.[5] The Trust filed a claim and brought an adversary proceeding to pierce LIA’s corporate veil based on Lester’s pre-merger and post-merger conduct. The bankruptcy court held in favor of Lester that Indiana’s Dissenters’ Rights Statute provided the Trust’s exclusive remedy based on Lester’s pre-merger conduct. However, it granted the Trust’s motion to pierce LIA’s corporate veil based on Lester’s post-merger conduct.[6]
The Seventh Circuit affirmed.[7] Lester had relied on an Indiana Supreme Court decision, Fleming v. Int’l Pizza Supply Corp.,[8] in which a dissenting shareholder sought both an appraisal and damages against the majority shareholder for breach of fiduciary duty and fraud. The court held for the defendant on the breach of fiduciary duty and fraud claims on grounds that the dissenter’s appraisal right was its exclusive remedy.[9] The Seventh Circuit distinguished Fleming. The Trust’s action in Lester’s bankruptcy case was not a challenge to the merger. It sought only to enforce its judgment against Lester by piercing the veil of the corporation that Lester looted after the merger.[10]
Apart from the lesson on the interplay between statutory dissenters’ rights and creditors’ rights, the facts of the case are compelling reading. For lawyers whose job is to protect shareholders’ limited liability, the case is an epic tale of misuse of corporate form as a weapon in a family vendetta. Judge Manion could not resist a reference to Charles Dickens’ novel Bleak House. Any other outcome would reward post-merger “trickery, evasion, procrastination, spoliation, botheration, shell games, and fourberies.”[11]
For those who dream of piercing a corporate veil like a hot knife through butter, the case is a rare example of veil-piercing on summary judgment.[12] Lester did not dispute the allegations of his pre- or post-merger conduct. Indeed, he testified that he intended to strip LIA of assets after the merger to defraud the Trust.[13]
[1] Ind. Code § 23-1-44-1, et seq. The statute protects a minority shareholder who dissents to a merger by permitting the dissenter to compel the corporation to buy his shares. If the dissenter and the corporation fail to agree on a price, the court sets a price via an appraisal proceeding, which is the dissenter’s exclusive remedy against the corporation. Ind. Code § 23-1-44-8(c).
[2] William R. Lee Irrevocable Trust v. Lee (In re Lee), 2015 Bankr. LEXIS 4547 (Bankr. S.D. Ind. 2015). The circuit court found that Lester packed the board of LIA with his relatives, who did his bidding without question, including approval of an executive compensation agreement with Lester without notice to the Trust and with the intent to reduce the value of LIA in preparation for the squeeze-out merger. Id. at *8-10.
[3] Lees Inns of Am. Inc. v. William R. Lee Irrevocable Trust, 924 N.E.2d 143 (Ind. App. 2010).
[4] In re Lee, 2015 Bankr. LEXIS 4547 at *12-15.
[5] Lester waived his chapter 7 discharge. Id. at *17.
[6] Id. at *30.
[7] William R. Lee Irrevocable Trust v. Lee, 898 F.3d 768, 773 (7th Cir. 2018).
[8] 676 N.E.2d 1051 (Ind. 1997).
[9] Id. at 1058.
[10] Id. at 773 (“The statute supplies no shield to prevent piercing LIA’s corporate veil based on post-merger conduct.”).
[11] 898 F.3d at 774 (citing Charles Dickens, Bleak House, Chapter 1 (www.gutenberg.org/files/1023/1023-h/1023-h.htm, Donald Lainson, 1997) (1853)).
[12] Id. at 775.
[13] Id. at 771 (noting that Lester testified before the bankruptcy court that he transferred LIA’s assets to keep the Trust from reaching them and he “clearly appreciated that in so doing, he would render futile the Dissenters’ Rights Action; that was his stated intent.”).