Drake Manufacturing Company, Inc. v. Polyflow, Inc. 109 A.3d 250 (Pa.
Super. Ct. 2015)
In 2007, Drake Manufacturing Company, Inc. (“Drake”), a Delaware corporation, entered into an agreement to sell equipment to
Polyflow, Inc. (“Polyflow”). Drake shipped the equipment from its plant in Sheffield, Pennsylvania, to
Polyflow’s business establishment in Oaks, Pennsylvania, and other out-of-state destinations including
California, Holland, and Canada. The record includes approximately 75 bills from Drake to Polyflow for
equipment between August 2008 and April 2009.
In June 2009, Drake brought a civil complaint against Polyflow for breach of contract for failure to pay for the equipment delivered. In
August 2009, Polyflow answered the complaint and alleged that Drake was not authorized to bring a suit in
Pennsylvania as a foreign corporation. In a short nonjury trial in February 2014, Drake presented
evidence of Polyflow’s failure to pay. Polyflow’s only defense was that Drake lacked capacity to sue
because Drake failed to obtain a certificate of authority from the Department of State authorizing Drake to
do business in Pennsylvania as a foreign corporation.
Drake did not possess a certificate of authority at the time of trial, and Drake failed to apply for a certificate of authority until the day
of trial. At the close of trial, Polyflow moved for compulsory nonsuit due to Drake’s lack of capacity to sue
and its failure to submit a certificate of authority into evidence. The trial court denied Polyflow’s motion for
nonsuit and announced its verdict in favor of Drake in the amount of $291,766.61.
On March 5, 2014, Polyflow filed a post-trial motion seeking judgment notwithstanding the verdict (JNOV) due to Drake’s failure to
submit a certificate of authority into evidence. On March 17, 2014, the Department of State issued Drake a
certificate of authority to do business in Pennsylvania as a foreign corporation. On April 17, 2014, almost
two months after the verdict, Drake submitted its certificate of authority in response to Polyflow’s post-trial
motions.
On May 23, 2014, relying on Drake’s delinquent certificate of authority, the trial court denied Polyflow’s post-trial motions. Polyflow
thereupon filed an appeal from the money judgment entered in favor of Drake for breach of contract.
Additionally, Polyflow argued that the trial court erroneously denied its motion for JNOV because at the
time of trial, Drake was not registered to conduct business in Pennsylvania and thus lacked capacity to sue
under 15 Pa. Cons. Stat. §§ 4121, 4122, and 4141. 15 Pa. Cons. Stat. § 4121 provides:
A foreign business corporation, before doing business in this Commonwealth, shall procure a certificate of authority to do so from the Department of State,
in the manner provided in this subchapter. . . .
Section 4122(a) identifies activities which do not constitute “doing business,” either individually or collectively, and provides:
Without excluding other activities that may not constitute doing business in this Commonwealth, a foreign business corporation shall not be considered to be
doing business in this Commonwealth for the purposes of this subchapter by reason of carrying on in this
Commonwealth any one or more of the following acts:
(1) Maintaining or defending any action or administrative or arbitration proceeding or effecting the settlement thereof or the settlement of claims or disputes;
(2) Holding meetings of its directors or shareholders or carrying on other activities concerning its internal affairs;
(3) Maintaining bank accounts;
(4) Maintaining offices or agencies for the transfer, exchange and registration of its securities or appointing and maintaining trustees or depositaries with
relation to its securities; (5) Effecting sales through independent contractors; (6) Soliciting or procuring orders, whether by mail or through employees or
agents or otherwise, and maintaining offices therefor, where the orders require acceptance without this Commonwealth before becoming binding contracts;
(7) Creating as borrower or lender, acquiring or incurring, obligations or mortgages or other security interests in real or personal property; (8) Securing or
collecting debts or enforcing any rights in property securing them; (9) Transacting any business in interstate or foreign commerce; (10) Conducting an
isolated transaction completed within a period of 30 days and not in the course of a number of repeated transactions of like nature; (11) Inspecting,
appraising and acquiring real estate and mortgages and other liens thereon and personal property and security interests therein, and holding, leasing,
conveying and transferring them, as fiduciary or otherwise.
Section 4141(a) provides:
[A] nonqualified foreign business corporation
doing business in this Commonwealth within the
meaning of Subchapter B (relating to
qualification) shall not be permitted to maintain
any action or proceeding in any court of this
Commonwealth until the corporation has
obtained a certificate of authority.
The Superior Court first concluded that Polyflow appropriately
preserved for appeal the issue of Drake’s lack of capacity to sue.
The court then considered whether Polyflow was entitled to JNOV
due to Drake’s failure to submit a certificate of authority.
Jenkins, Judge
Applying section 4141(a), this Court has held that a foreign corporation that failed to obtain a certificate
of authority could not bring suit in Pennsylvania, because entry into contract with the defendant, a
Pennsylvania corporation, and its shipment of lighting fixtures to Pennsylvania on six occasions over
approximately six months constituted “doing business in this Commonwealth.” Leswat Lighting Systems,
Inc. v. Lehigh Valley Restaurant Group, Inc., 444 Pa. Super. 281, 663 A.2d 783, 785 (1995). The evidence
demonstrates that Drake failed to submit a certificate of authority into evidence prior to the verdict in
violation of 15 Pa.C.S. § 4121(a); therefore, the trial court should not have allowed Drake to prosecute its
action. 15 Pa.C.S. § 4141(a).
The trial court contends that Drake is exempt from the certificate of authority requirement because it
merely commenced suit in Pennsylvania to collect a debt, conduct that does not constitute “doing
business” under section 4122(a)(1) and (8). Drake did much more, however, than file a suit or attempt to
collect debt. Drake maintains an office in Pennsylvania to conduct local business, conduct which
“[typically] require[s] a certificate of authority.” 15 Pa.C.S. § 4122, Committee Comment. Drake also
entered into a contract with Polyflow, and, in dozens of occasions over an eight month period, shipped
equipment to Polyflow’s place of business in Pennsylvania—far more than the “isolated transaction”
exception under section 4122(a)(10) or the six shipments over a six-month period that the Court
previously held constituted “doing business.” See Leswat Lighting Systems, supra. In short, Drake’s
conduct was “more regular, systematic, [and] extensive than that described in [section 4122(a), [thus]
constitut[ing] the transaction of business and requir[ing] [Drake] to obtain a certificate of authority.” See
15 Pa.C.S. § 4122, Committee Comment.
We also hold that Drake needed a certificate of authority to sue Polyflow in Pennsylvania for Polyflow’s
failure to pay for out-of-state shipments in California, Canada, and Holland. A foreign corporation that
“does business” in Pennsylvania within the meaning of section 4122 must obtain a certificate in order to
prosecute a lawsuit in this Commonwealth, regardless of whether the lawsuit itself concerns in-state
conduct or out-of-state conduct. The trial court thus erred by denying Polyfow’s motion for judgment
n.o.v.
The trial court relied on Drake’s delinquent certificate of authority as its basis for denying Polyflow’s
post-trial motions; however, our Supreme Court’s decision in Claudio v. Dean Machine Co., 574 Pa. 359,
831 A.2d 140 (2003), prohibits Drake from submitting evidence in post-trial proceedings that it failed to
submit during trial due to its own lack of reasonable diligence. Drake had no right to submit the certificate
of authority into the record in the post-trial motion stage.
For the foregoing reasons, we hold that the trial court erred in denying Polyflow’s motion for judgment
n.o.v. We reverse the order denying Polyflow’s post-trial motions and remand for entry of judgment n.o.v.
in favor of Polyflow.
Judgment reversed. Case remanded for entry of judgment n.o.v. in favor of Polyflow.
Supply Chain Assocs., LLC v. ACT Electronics, Inc. 30 Mass. L.
Rep. 12 (Super. Ct. 2012)
Supply Chain Associates, LLC and Estream Solutions LLC are manufacturer’s representatives and brokers that assist in the sale of
electronic products. Their services were retained by ACT Electronics, Inc., a corporation specializing in manufacturing electronic
devices and components. ACT agreed to pay Supply Chain and Estream commissions of 4 percent to 5 percent on sales brokered by
them, including a sale to buyer Bloomberg LP. When ACT failed to pay the commissions, Supply Chain and Estream sued not only
ACT, but also other business entities affiliated with ACT: Sun Act LLC, Sun Capital Partners II LP, Sun Capital Advisors II LP, Sun
Capital Partners LLC, Sun Capital Partners Inc., Sun Capital Advisors Inc., and Sun Capital Partners Management LLC. In the trial
court, Supply Chain and Estream argued that the veils between ACT and the other businesses should be pierced to make them liable
for the commissions that ACT failed to pay.
ACT was a Delaware corporation based in Massachusetts. From its incorporation in 2002 to its bankruptcy in 2008, ACT employed
approximately 400 full-time and part-time employees who worked at one of its three manufacturing facilities.
Sun Act is a limited liability company and was ACT’s majority shareholder, owning 70 percent of ACT’s stock. It also held the only
voting shares of ACT.
Sun Capital Partners II, a Delaware limited partnership, is an investment firm that wholly owns Sun Act. Its limited partners include
approximately 70 private and public investors, including university endowments, pension funds, financial institutions, and
individuals. It provided Sun Act with capital to invest and obtain a majority shareholder interest in ACT.
Sun Capital Advisors II is the general partner of Sun Capital Partners II.
Sun Capital Partners, LLC, is the general partner of Sun Capital Advisors II.
Sun Capital Partners Inc., a Florida corporation, is also a private investment firm. Entities affiliated with Sun Capital Partners Inc.
raise funds to invest in underperforming or financially distressed companies. Supply Chain and Estream allege that Sun Capital
Partners Inc. is the de facto parent company of all the other defendants. The defendants counter that there is no direct or indirect
ownership or contractual relationship between Sun Capital Partners Inc. and any other defendant or between Sun Capital Partners
Inc. and ACT.
Sun Capital Advisors Inc. is a Florida corporation that also provides consulting and advisory services to companies. Sun Capital
Advisors Inc. entered into a Mastery Advisory Agreement with Sun Capital Management, contracting to provide its services to
various companies, including ACT.
Sun Capital Management, a Delaware limited liability company, provides consulting services to companies. On July 2, 2002, Sun
Capital Management and ACT entered into a Management Services Agreement (MSA) by which Sun Capital Management would
provide services to ACT’s senior corporate management in exchange for an annual fee equal to the greater of $300,000 or 8 percent
of ACT’s EBITDA, that is, earnings before interest, taxes, dividends, and amortization.
The Defendant shareholders and affiliates of ACT asked the court to grant them summary judgment on the grounds that ACT’s
corporate veil may not be pierced to make the Defendants liable for the commissions ACT failed to pay Supply Chain and Estream.
Kirpalani, Judge
There are 12 factors to consider in deciding whether to pierce the corporate veil:
(1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin
capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8)
insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10)
nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the
corporation in promoting fraud.
Each of these factors will be considered in turn.
(a) Common Ownership. In a veil-piercing case, courts first consider whether a corporation is operated as a separate
entity. The corporation is not operated as a separate entity where there is common control of a group of separate
corporations engaged in a single enterprise. Yet, common ownership of stock of two or more corporations together with
common management, standing alone, will not give rise to liability on the part of one corporation for the acts of another
corporation or its employees.
It appears that Defendants had some common control of ACT. For example, Sun Act owned 70% of ACT’s shares. Yet, Sun
Act was not in complete control of ACT; it still had a fiduciary duty to the nonvoting stockholders who held 30% of the
shares. ACT had to deliver value to the buyers for which it manufactured products. In addition, Congress Financial, ACT’s
independent lender, approved ACT’s dividend declaration. This suggests the entity that shared common control of ACT
operated at arm’s length with ACT.
Supply Chain and Estream allege there was common control of ACT because some of the same people who served on ACT’s
Board were employed by Sun Capital or one of its related entities. Of particular importance to Supply Chain and Estream
is that when John M. Pino, Jr. [an ACT vice president] informed Edward Duffy [the managing member of Estream] that
ACT would not pay the commissions, Mr. Terry and Rick Walter were Directors of ACT. Terry and Walter were also
employees of one of the related entities. Since the parties agree that Sun Act, Sun Capital Partners II, Sun Capital Advisors
II, Sun Capital Partners, LLC, Sun Capital Partners, Inc., and Sun Capital Management do not have employees, the only
Sun Capital entity that could have employed Terry and Walter at that time was Sun Capital Advisors, Inc. Directors and
officers, not employees, control companies. Terry and Walter, as Sun Capital Advisor, Inc., employees, could not have
controlled Sun Capital Advisors, Inc., and there was thus no common control between Sun Capital Advisors, Inc., and ACT
when ACT refused to pay the commissions.
(b) Pervasive Control. A court will find that a corporation has been pervasively controlled when one corporation is
carrying out tasks pursuant to another corporation’s command, or when one corporation seeks permission from another
before taking action on its own behalf. Courts consider whether the controlled corporation had a separate mind, will, or
existence of its own.
There is no evidence that Defendants ran ACT as its own candy store. ACT maintained its own headquarters, minute books,
accounting records, bank accounts, and budgets separate from Defendants. It also filed its own tax returns. There is
evidence that at one point, on January 22, 2003, John M. Pino, Sr., [an ACT board member] and Joseph Driscoll [an ACT
officer] listed their addresses in Florida at the same business address as the Defendants. Other than this one incident in
2003, ACT and its Board members listed their addresses in Hudson, Massachusetts where ACT was located. In addition,
the MSA does not show that Sun Capital Management pervasively controlled ACT. While Steven Liff [a vice president of
both ACT and Sun Capital Management and an employee of Sun Capital Advisors, Inc.] might have been on both sides of
the Management Sales Agreement [between ACT and Sun Capital Management], this was a conventional management
sales agreement, and was approved by Congress Financial, an independent third-party lender.
(c) Confused Intermingling of Business Activity Assets, or Management. With respect to this factor, courts
consider whether a business was clearly defined or whether there is a confused intermingling of activity of two or more
corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities.
See, e.g., George Hyman Const. Co. v. Gateman, 16 F. Supp. 2d 129, 151 (1st Cir. 1998) (company engaged in confused
intermingling where used letterhead of one corporation in correspondence involving activity of another corporation and
where vendors were confused about which company they were dealing with). ACT maintained separate headquarters,
minute books, accounting records, bank accounts, and budgets from Defendants, and ACT also filed its own tax returns. It
is true that on January 22, 2003, ACT’s Board Meeting Minutes reveal that Pino, Sr. and Driscoll listed their addresses in
Florida, at the same business address as the Defendants. Supply Chain and Estream do not claim that they, or vendors,
were ever confused about with whom they were dealing when they contracted with ACT. In fact, Sun Capital Partners, Inc.,
used Sun Capital Partner, Inc.’s letterhead in its dealings with Bloomberg. ACT used its own letterhead in its dealings with
Bloomberg. Bloomberg also demanded buffer inventory from ACT; this shows Bloomberg understood that ACT, and not
Sun Capital Partners, Inc., would be held liable for ACT’s actions if it breached the contract with Bloomberg.
(d) Thin Capitalization. This factor focuses on whether the initial capitalization of the company was too thin. The Court
considers the initial needs of the company, whether the company was given the up-front financing needed to perform its
work, and whether, during its active corporate life, the company wanted for assets.
In this case, ACT was initially capitalized with over $7 million in equity and debt. ACT operated for six years after its initial
capitalization, employing 400 full-time and part-time employees working at one of its three different manufacturing
facilities. These factors tend to show that, based on the needs of the company, the initial capitalization was sufficient.
Evans v. Multicon Const. Corp., 30 Mass. App. Ct. [728,] at 734 [(1991)] ($500 was “unquestionably thin” but it was not
“too thin” based on the needs of the company); George Hyman Constr. Co., [v. Gateman] 16 F. Supp. 2d at [129,] 153 [(1st
Cir. 1998)] ($28,000 capitalization in loan “was thin, but not anorexic” and was “not indicative of a company set up for
financial failure”).
(e) Nonobservance of Corporate Formalities. ACT took care to observe the corporate formalities. Separate tax
returns were meticulously filed. In addition, throughout its years of activity in Massachusetts, ACT made routine filings
with the Secretary of the Commonwealth.
(f) Absence of Corporate Records. ACT maintained its own corporate records, separate and apart from any of the
Defendants’ corporate records. Nothing in the record suggests that ACT’s corporate records were ever either missing or
fudged.
(g) No Payment of Dividends. Corporations in the normal course should be paying dividends, or at a minimum making
conscious decisions not to do so. In this case, ACT declared a dividend to its shareholders, which resulted in Sun Act’s
acquiring $1.86 million and ACT’s other non-Defendant shareholders acquiring $1.14 million. There is nothing unusual
about the payment of dividends, especially where, as here, ACT retained in excess of $1 million in cash, in addition to lines
of credit, accounts receivable, and inventory. In addition, Congress Financial, ACT’s independent lender, approved this
distribution.
(h) Insolvency at the Time of the Litigated Transaction. The test for insolvency is whether the corporation, at any
time while it was active, experienced difficulty in paying debts as they became due. The time considered for the test of
insolvency is not a single point in time but rather the duration of the contested transactions between the parties. In this
case, the time period considered for this factor begins on January 14, 2003, when Supply Chain entered into a Sales
Representative Agreement with ACT. During ACT’s first year of existence, ACT repaid all subordinated promissory notes
outstanding to ACT’s investors in the amount of $3 million plus accrued interest. Congress Financial approved ACT’s
repayment of these loans. There is no evidence on the record, other than the extrajudicial statements Bloomberg and the
ACT’s vendors made to Duffy, that ACT experienced difficulty in paying debts as they became due.
(i) Siphoning Away of Corporate Assets by the Dominant Shareholders. To show that there was siphoning away
of corporate assets, there must be credible evidence of subterfuge or channeling excessive payments. This can be shown
through, for example, payments or dividends to officers, directors or stockholders or the Internal Revenue Service
challenging payments to officers or directors.
Here, it is undisputed that, after the dividend payment, ACT retained in excess of $1 million in cash in addition to lines of
credit, accounts receivable, and inventory, and that Congress Financial, ACT’s independent lender, was aware of, and
approved, ACT’s dividend payment. In addition, it is undisputed that the payment of management fees made pursuant to
the MSA were also approved by Congress Financial, and that these types of agreements are common in the private equity
industry. The IRS never challenged any of these payments.
(j) Non-functioning of Officers and Directors. This factor asks the court to consider whether the officers and
directors functioned actively. There is nothing in the summary judgment record to support that ACT’s officers and
directors were non-functioning.
(k) Use of the Corporation for Transactions of the Dominant Shareholders. The test here is whether the
Defendants used the corporation in aid of transactions in which they had substantial interest. ACT’s one and only dividend
distribution was recorded in the corporate records. The other transaction that Supply Chain and Estream consider to be
evidence of abuse of the corporate form was the payment of management fees. These fees are not extravagant beyond any
reasonable business usage, and, indeed, were approved by Congress Financial, ACT’s third-party lender. Contra, George
Hyman Constr. Co., 16 F. Supp. 2d at 157 (transaction extravagant where shareholders purchased Ferrari and Mercedes
for their own use through corporation).
(l) Use of the Corporation in Promoting Fraud. Finally, the court considers whether there is any basis upon which to
conclude that the corporation was used to perpetrate a fraud. There is no such basis here. The record contains no evidence
warranting a finding that ACT was established or operated so as to misrepresent or divert assets. The facts that in the six
years that it operated, ACT employed 400 full-time and part-time employees located at one of its three manufacturing
facilities, and that ACT delivered value to its customers, suggest that ACT was established to manufacture products, not to
swindle sales representatives, like Supply Chain and Estream, out of money.
When determining whether to pierce the corporate veil, one examines the twelve factors to form an opinion whether the
over-all structure and operation misleads. There is present in the cases which have looked through the corporate form an
element of dubious manipulation and contrivance, finagling, such that corporate identities are confused and third parties
cannot be quite certain with what they are dealing.
Here, although Sun Act was a controlling shareholder of ACT, it did not own all of ACT’s stock. It supplied ACT with some
operating funds. ACT conducted some business that benefited the Defendants. But here, separate corporate boundaries
were maintained, and third parties did not think of themselves as dealing with Sun Capital directly. Supply Chain and
Estream in this case entered into a conventional brokering sales arrangement with ACT, and were not misled into doing so
on the belief it was doing business with one of the Defendants.
In order to hold the Defendants liable for ACT’s conduct, ACT’s corporate veil must be pierced. Defendants have shown that,
as a matter of law, Supply Chain and Estream cannot establish that the corporate veil should be pierced in this case, and
therefore, the Defendants are entitled to summary judgment.
Summary judgment entered for the Defendants.
How to Write a “Brief”
Use the following “IRAC” (Issue Rule Application Conclusion) format:
Issue: What question must be answered in order to reach a conclusion in the case? The Issue
must be expressed in the form of a legal question which, when answered, gives the result in the
case. Make it specific (e.g. “Has there been a false imprisonment if the plaintiff was asleep at
the time of ‘confinement’?”) rather than general (e.g. Did the defendant owe a duty of care to the
plaintiff when the plaintiff was trespassing on the defendant’s property?). Some cases present
more than one issue; if there is more than one issue, it is OK to write more than one, but be
sure to list the principal one and focus on that.
Rule: The Rule is the law that applies to the principal issue. It should be stated as a general
principal, (e.g. A duty of care is owed whenever the defendant should anticipate that her
conduct could create a risk of harm to the plaintiff.) not a conclusion to the case being briefed,
(e.g. “The plaintiff was negligent.”). Typically, the Rule can be expressed in one or two
sentences.
Application: The Application is a discussion of how the Rule applies to the facts of the case.
Essentially, the Application section is a description of the relevant facts, the parties’ arguments
and positions in the case, and the court’s thought process by which it answered the Issue and
established the Rule. While the Issue and Rule are normally only one or two sentences each,
the Application section of a brief should be two to four paragraphs long. It should be a written
debate, not simply a statement of the Conclusion. Whenever possible, present both sides of any
issue. Do not begin with your Conclusion. The Application section shows how you can track the
court’s reasoning on paper and is the most difficult skill you will learn. It is also permissible to
put the relevant facts of the case in a separate section of the Brief.
Conclusion: What was the result of the case? Did the appellate or supreme court affirm,
reverse or reverse and remand the lower court’s decision?
The case gives you a background of the facts along with the judge’s reasoning and
conclusion. When you brief cases, you are summarizing the judge’s opinion. Briefs should not
have to exceed more than two pages in length.
Purchase answer to see full
attachment
Super. Ct. 2015)
In 2007, Drake Manufacturing Company, Inc. (“Drake”), a Delaware corporation, entered into an agreement to sell equipment to
Polyflow, Inc. (“Polyflow”). Drake shipped the equipment from its plant in Sheffield, Pennsylvania, to
Polyflow’s business establishment in Oaks, Pennsylvania, and other out-of-state destinations including
California, Holland, and Canada. The record includes approximately 75 bills from Drake to Polyflow for
equipment between August 2008 and April 2009.
In June 2009, Drake brought a civil complaint against Polyflow for breach of contract for failure to pay for the equipment delivered. In
August 2009, Polyflow answered the complaint and alleged that Drake was not authorized to bring a suit in
Pennsylvania as a foreign corporation. In a short nonjury trial in February 2014, Drake presented
evidence of Polyflow’s failure to pay. Polyflow’s only defense was that Drake lacked capacity to sue
because Drake failed to obtain a certificate of authority from the Department of State authorizing Drake to
do business in Pennsylvania as a foreign corporation.
Drake did not possess a certificate of authority at the time of trial, and Drake failed to apply for a certificate of authority until the day
of trial. At the close of trial, Polyflow moved for compulsory nonsuit due to Drake’s lack of capacity to sue
and its failure to submit a certificate of authority into evidence. The trial court denied Polyflow’s motion for
nonsuit and announced its verdict in favor of Drake in the amount of $291,766.61.
On March 5, 2014, Polyflow filed a post-trial motion seeking judgment notwithstanding the verdict (JNOV) due to Drake’s failure to
submit a certificate of authority into evidence. On March 17, 2014, the Department of State issued Drake a
certificate of authority to do business in Pennsylvania as a foreign corporation. On April 17, 2014, almost
two months after the verdict, Drake submitted its certificate of authority in response to Polyflow’s post-trial
motions.
On May 23, 2014, relying on Drake’s delinquent certificate of authority, the trial court denied Polyflow’s post-trial motions. Polyflow
thereupon filed an appeal from the money judgment entered in favor of Drake for breach of contract.
Additionally, Polyflow argued that the trial court erroneously denied its motion for JNOV because at the
time of trial, Drake was not registered to conduct business in Pennsylvania and thus lacked capacity to sue
under 15 Pa. Cons. Stat. §§ 4121, 4122, and 4141. 15 Pa. Cons. Stat. § 4121 provides:
A foreign business corporation, before doing business in this Commonwealth, shall procure a certificate of authority to do so from the Department of State,
in the manner provided in this subchapter. . . .
Section 4122(a) identifies activities which do not constitute “doing business,” either individually or collectively, and provides:
Without excluding other activities that may not constitute doing business in this Commonwealth, a foreign business corporation shall not be considered to be
doing business in this Commonwealth for the purposes of this subchapter by reason of carrying on in this
Commonwealth any one or more of the following acts:
(1) Maintaining or defending any action or administrative or arbitration proceeding or effecting the settlement thereof or the settlement of claims or disputes;
(2) Holding meetings of its directors or shareholders or carrying on other activities concerning its internal affairs;
(3) Maintaining bank accounts;
(4) Maintaining offices or agencies for the transfer, exchange and registration of its securities or appointing and maintaining trustees or depositaries with
relation to its securities; (5) Effecting sales through independent contractors; (6) Soliciting or procuring orders, whether by mail or through employees or
agents or otherwise, and maintaining offices therefor, where the orders require acceptance without this Commonwealth before becoming binding contracts;
(7) Creating as borrower or lender, acquiring or incurring, obligations or mortgages or other security interests in real or personal property; (8) Securing or
collecting debts or enforcing any rights in property securing them; (9) Transacting any business in interstate or foreign commerce; (10) Conducting an
isolated transaction completed within a period of 30 days and not in the course of a number of repeated transactions of like nature; (11) Inspecting,
appraising and acquiring real estate and mortgages and other liens thereon and personal property and security interests therein, and holding, leasing,
conveying and transferring them, as fiduciary or otherwise.
Section 4141(a) provides:
[A] nonqualified foreign business corporation
doing business in this Commonwealth within the
meaning of Subchapter B (relating to
qualification) shall not be permitted to maintain
any action or proceeding in any court of this
Commonwealth until the corporation has
obtained a certificate of authority.
The Superior Court first concluded that Polyflow appropriately
preserved for appeal the issue of Drake’s lack of capacity to sue.
The court then considered whether Polyflow was entitled to JNOV
due to Drake’s failure to submit a certificate of authority.
Jenkins, Judge
Applying section 4141(a), this Court has held that a foreign corporation that failed to obtain a certificate
of authority could not bring suit in Pennsylvania, because entry into contract with the defendant, a
Pennsylvania corporation, and its shipment of lighting fixtures to Pennsylvania on six occasions over
approximately six months constituted “doing business in this Commonwealth.” Leswat Lighting Systems,
Inc. v. Lehigh Valley Restaurant Group, Inc., 444 Pa. Super. 281, 663 A.2d 783, 785 (1995). The evidence
demonstrates that Drake failed to submit a certificate of authority into evidence prior to the verdict in
violation of 15 Pa.C.S. § 4121(a); therefore, the trial court should not have allowed Drake to prosecute its
action. 15 Pa.C.S. § 4141(a).
The trial court contends that Drake is exempt from the certificate of authority requirement because it
merely commenced suit in Pennsylvania to collect a debt, conduct that does not constitute “doing
business” under section 4122(a)(1) and (8). Drake did much more, however, than file a suit or attempt to
collect debt. Drake maintains an office in Pennsylvania to conduct local business, conduct which
“[typically] require[s] a certificate of authority.” 15 Pa.C.S. § 4122, Committee Comment. Drake also
entered into a contract with Polyflow, and, in dozens of occasions over an eight month period, shipped
equipment to Polyflow’s place of business in Pennsylvania—far more than the “isolated transaction”
exception under section 4122(a)(10) or the six shipments over a six-month period that the Court
previously held constituted “doing business.” See Leswat Lighting Systems, supra. In short, Drake’s
conduct was “more regular, systematic, [and] extensive than that described in [section 4122(a), [thus]
constitut[ing] the transaction of business and requir[ing] [Drake] to obtain a certificate of authority.” See
15 Pa.C.S. § 4122, Committee Comment.
We also hold that Drake needed a certificate of authority to sue Polyflow in Pennsylvania for Polyflow’s
failure to pay for out-of-state shipments in California, Canada, and Holland. A foreign corporation that
“does business” in Pennsylvania within the meaning of section 4122 must obtain a certificate in order to
prosecute a lawsuit in this Commonwealth, regardless of whether the lawsuit itself concerns in-state
conduct or out-of-state conduct. The trial court thus erred by denying Polyfow’s motion for judgment
n.o.v.
The trial court relied on Drake’s delinquent certificate of authority as its basis for denying Polyflow’s
post-trial motions; however, our Supreme Court’s decision in Claudio v. Dean Machine Co., 574 Pa. 359,
831 A.2d 140 (2003), prohibits Drake from submitting evidence in post-trial proceedings that it failed to
submit during trial due to its own lack of reasonable diligence. Drake had no right to submit the certificate
of authority into the record in the post-trial motion stage.
For the foregoing reasons, we hold that the trial court erred in denying Polyflow’s motion for judgment
n.o.v. We reverse the order denying Polyflow’s post-trial motions and remand for entry of judgment n.o.v.
in favor of Polyflow.
Judgment reversed. Case remanded for entry of judgment n.o.v. in favor of Polyflow.
Supply Chain Assocs., LLC v. ACT Electronics, Inc. 30 Mass. L.
Rep. 12 (Super. Ct. 2012)
Supply Chain Associates, LLC and Estream Solutions LLC are manufacturer’s representatives and brokers that assist in the sale of
electronic products. Their services were retained by ACT Electronics, Inc., a corporation specializing in manufacturing electronic
devices and components. ACT agreed to pay Supply Chain and Estream commissions of 4 percent to 5 percent on sales brokered by
them, including a sale to buyer Bloomberg LP. When ACT failed to pay the commissions, Supply Chain and Estream sued not only
ACT, but also other business entities affiliated with ACT: Sun Act LLC, Sun Capital Partners II LP, Sun Capital Advisors II LP, Sun
Capital Partners LLC, Sun Capital Partners Inc., Sun Capital Advisors Inc., and Sun Capital Partners Management LLC. In the trial
court, Supply Chain and Estream argued that the veils between ACT and the other businesses should be pierced to make them liable
for the commissions that ACT failed to pay.
ACT was a Delaware corporation based in Massachusetts. From its incorporation in 2002 to its bankruptcy in 2008, ACT employed
approximately 400 full-time and part-time employees who worked at one of its three manufacturing facilities.
Sun Act is a limited liability company and was ACT’s majority shareholder, owning 70 percent of ACT’s stock. It also held the only
voting shares of ACT.
Sun Capital Partners II, a Delaware limited partnership, is an investment firm that wholly owns Sun Act. Its limited partners include
approximately 70 private and public investors, including university endowments, pension funds, financial institutions, and
individuals. It provided Sun Act with capital to invest and obtain a majority shareholder interest in ACT.
Sun Capital Advisors II is the general partner of Sun Capital Partners II.
Sun Capital Partners, LLC, is the general partner of Sun Capital Advisors II.
Sun Capital Partners Inc., a Florida corporation, is also a private investment firm. Entities affiliated with Sun Capital Partners Inc.
raise funds to invest in underperforming or financially distressed companies. Supply Chain and Estream allege that Sun Capital
Partners Inc. is the de facto parent company of all the other defendants. The defendants counter that there is no direct or indirect
ownership or contractual relationship between Sun Capital Partners Inc. and any other defendant or between Sun Capital Partners
Inc. and ACT.
Sun Capital Advisors Inc. is a Florida corporation that also provides consulting and advisory services to companies. Sun Capital
Advisors Inc. entered into a Mastery Advisory Agreement with Sun Capital Management, contracting to provide its services to
various companies, including ACT.
Sun Capital Management, a Delaware limited liability company, provides consulting services to companies. On July 2, 2002, Sun
Capital Management and ACT entered into a Management Services Agreement (MSA) by which Sun Capital Management would
provide services to ACT’s senior corporate management in exchange for an annual fee equal to the greater of $300,000 or 8 percent
of ACT’s EBITDA, that is, earnings before interest, taxes, dividends, and amortization.
The Defendant shareholders and affiliates of ACT asked the court to grant them summary judgment on the grounds that ACT’s
corporate veil may not be pierced to make the Defendants liable for the commissions ACT failed to pay Supply Chain and Estream.
Kirpalani, Judge
There are 12 factors to consider in deciding whether to pierce the corporate veil:
(1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin
capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8)
insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10)
nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the
corporation in promoting fraud.
Each of these factors will be considered in turn.
(a) Common Ownership. In a veil-piercing case, courts first consider whether a corporation is operated as a separate
entity. The corporation is not operated as a separate entity where there is common control of a group of separate
corporations engaged in a single enterprise. Yet, common ownership of stock of two or more corporations together with
common management, standing alone, will not give rise to liability on the part of one corporation for the acts of another
corporation or its employees.
It appears that Defendants had some common control of ACT. For example, Sun Act owned 70% of ACT’s shares. Yet, Sun
Act was not in complete control of ACT; it still had a fiduciary duty to the nonvoting stockholders who held 30% of the
shares. ACT had to deliver value to the buyers for which it manufactured products. In addition, Congress Financial, ACT’s
independent lender, approved ACT’s dividend declaration. This suggests the entity that shared common control of ACT
operated at arm’s length with ACT.
Supply Chain and Estream allege there was common control of ACT because some of the same people who served on ACT’s
Board were employed by Sun Capital or one of its related entities. Of particular importance to Supply Chain and Estream
is that when John M. Pino, Jr. [an ACT vice president] informed Edward Duffy [the managing member of Estream] that
ACT would not pay the commissions, Mr. Terry and Rick Walter were Directors of ACT. Terry and Walter were also
employees of one of the related entities. Since the parties agree that Sun Act, Sun Capital Partners II, Sun Capital Advisors
II, Sun Capital Partners, LLC, Sun Capital Partners, Inc., and Sun Capital Management do not have employees, the only
Sun Capital entity that could have employed Terry and Walter at that time was Sun Capital Advisors, Inc. Directors and
officers, not employees, control companies. Terry and Walter, as Sun Capital Advisor, Inc., employees, could not have
controlled Sun Capital Advisors, Inc., and there was thus no common control between Sun Capital Advisors, Inc., and ACT
when ACT refused to pay the commissions.
(b) Pervasive Control. A court will find that a corporation has been pervasively controlled when one corporation is
carrying out tasks pursuant to another corporation’s command, or when one corporation seeks permission from another
before taking action on its own behalf. Courts consider whether the controlled corporation had a separate mind, will, or
existence of its own.
There is no evidence that Defendants ran ACT as its own candy store. ACT maintained its own headquarters, minute books,
accounting records, bank accounts, and budgets separate from Defendants. It also filed its own tax returns. There is
evidence that at one point, on January 22, 2003, John M. Pino, Sr., [an ACT board member] and Joseph Driscoll [an ACT
officer] listed their addresses in Florida at the same business address as the Defendants. Other than this one incident in
2003, ACT and its Board members listed their addresses in Hudson, Massachusetts where ACT was located. In addition,
the MSA does not show that Sun Capital Management pervasively controlled ACT. While Steven Liff [a vice president of
both ACT and Sun Capital Management and an employee of Sun Capital Advisors, Inc.] might have been on both sides of
the Management Sales Agreement [between ACT and Sun Capital Management], this was a conventional management
sales agreement, and was approved by Congress Financial, an independent third-party lender.
(c) Confused Intermingling of Business Activity Assets, or Management. With respect to this factor, courts
consider whether a business was clearly defined or whether there is a confused intermingling of activity of two or more
corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities.
See, e.g., George Hyman Const. Co. v. Gateman, 16 F. Supp. 2d 129, 151 (1st Cir. 1998) (company engaged in confused
intermingling where used letterhead of one corporation in correspondence involving activity of another corporation and
where vendors were confused about which company they were dealing with). ACT maintained separate headquarters,
minute books, accounting records, bank accounts, and budgets from Defendants, and ACT also filed its own tax returns. It
is true that on January 22, 2003, ACT’s Board Meeting Minutes reveal that Pino, Sr. and Driscoll listed their addresses in
Florida, at the same business address as the Defendants. Supply Chain and Estream do not claim that they, or vendors,
were ever confused about with whom they were dealing when they contracted with ACT. In fact, Sun Capital Partners, Inc.,
used Sun Capital Partner, Inc.’s letterhead in its dealings with Bloomberg. ACT used its own letterhead in its dealings with
Bloomberg. Bloomberg also demanded buffer inventory from ACT; this shows Bloomberg understood that ACT, and not
Sun Capital Partners, Inc., would be held liable for ACT’s actions if it breached the contract with Bloomberg.
(d) Thin Capitalization. This factor focuses on whether the initial capitalization of the company was too thin. The Court
considers the initial needs of the company, whether the company was given the up-front financing needed to perform its
work, and whether, during its active corporate life, the company wanted for assets.
In this case, ACT was initially capitalized with over $7 million in equity and debt. ACT operated for six years after its initial
capitalization, employing 400 full-time and part-time employees working at one of its three different manufacturing
facilities. These factors tend to show that, based on the needs of the company, the initial capitalization was sufficient.
Evans v. Multicon Const. Corp., 30 Mass. App. Ct. [728,] at 734 [(1991)] ($500 was “unquestionably thin” but it was not
“too thin” based on the needs of the company); George Hyman Constr. Co., [v. Gateman] 16 F. Supp. 2d at [129,] 153 [(1st
Cir. 1998)] ($28,000 capitalization in loan “was thin, but not anorexic” and was “not indicative of a company set up for
financial failure”).
(e) Nonobservance of Corporate Formalities. ACT took care to observe the corporate formalities. Separate tax
returns were meticulously filed. In addition, throughout its years of activity in Massachusetts, ACT made routine filings
with the Secretary of the Commonwealth.
(f) Absence of Corporate Records. ACT maintained its own corporate records, separate and apart from any of the
Defendants’ corporate records. Nothing in the record suggests that ACT’s corporate records were ever either missing or
fudged.
(g) No Payment of Dividends. Corporations in the normal course should be paying dividends, or at a minimum making
conscious decisions not to do so. In this case, ACT declared a dividend to its shareholders, which resulted in Sun Act’s
acquiring $1.86 million and ACT’s other non-Defendant shareholders acquiring $1.14 million. There is nothing unusual
about the payment of dividends, especially where, as here, ACT retained in excess of $1 million in cash, in addition to lines
of credit, accounts receivable, and inventory. In addition, Congress Financial, ACT’s independent lender, approved this
distribution.
(h) Insolvency at the Time of the Litigated Transaction. The test for insolvency is whether the corporation, at any
time while it was active, experienced difficulty in paying debts as they became due. The time considered for the test of
insolvency is not a single point in time but rather the duration of the contested transactions between the parties. In this
case, the time period considered for this factor begins on January 14, 2003, when Supply Chain entered into a Sales
Representative Agreement with ACT. During ACT’s first year of existence, ACT repaid all subordinated promissory notes
outstanding to ACT’s investors in the amount of $3 million plus accrued interest. Congress Financial approved ACT’s
repayment of these loans. There is no evidence on the record, other than the extrajudicial statements Bloomberg and the
ACT’s vendors made to Duffy, that ACT experienced difficulty in paying debts as they became due.
(i) Siphoning Away of Corporate Assets by the Dominant Shareholders. To show that there was siphoning away
of corporate assets, there must be credible evidence of subterfuge or channeling excessive payments. This can be shown
through, for example, payments or dividends to officers, directors or stockholders or the Internal Revenue Service
challenging payments to officers or directors.
Here, it is undisputed that, after the dividend payment, ACT retained in excess of $1 million in cash in addition to lines of
credit, accounts receivable, and inventory, and that Congress Financial, ACT’s independent lender, was aware of, and
approved, ACT’s dividend payment. In addition, it is undisputed that the payment of management fees made pursuant to
the MSA were also approved by Congress Financial, and that these types of agreements are common in the private equity
industry. The IRS never challenged any of these payments.
(j) Non-functioning of Officers and Directors. This factor asks the court to consider whether the officers and
directors functioned actively. There is nothing in the summary judgment record to support that ACT’s officers and
directors were non-functioning.
(k) Use of the Corporation for Transactions of the Dominant Shareholders. The test here is whether the
Defendants used the corporation in aid of transactions in which they had substantial interest. ACT’s one and only dividend
distribution was recorded in the corporate records. The other transaction that Supply Chain and Estream consider to be
evidence of abuse of the corporate form was the payment of management fees. These fees are not extravagant beyond any
reasonable business usage, and, indeed, were approved by Congress Financial, ACT’s third-party lender. Contra, George
Hyman Constr. Co., 16 F. Supp. 2d at 157 (transaction extravagant where shareholders purchased Ferrari and Mercedes
for their own use through corporation).
(l) Use of the Corporation in Promoting Fraud. Finally, the court considers whether there is any basis upon which to
conclude that the corporation was used to perpetrate a fraud. There is no such basis here. The record contains no evidence
warranting a finding that ACT was established or operated so as to misrepresent or divert assets. The facts that in the six
years that it operated, ACT employed 400 full-time and part-time employees located at one of its three manufacturing
facilities, and that ACT delivered value to its customers, suggest that ACT was established to manufacture products, not to
swindle sales representatives, like Supply Chain and Estream, out of money.
When determining whether to pierce the corporate veil, one examines the twelve factors to form an opinion whether the
over-all structure and operation misleads. There is present in the cases which have looked through the corporate form an
element of dubious manipulation and contrivance, finagling, such that corporate identities are confused and third parties
cannot be quite certain with what they are dealing.
Here, although Sun Act was a controlling shareholder of ACT, it did not own all of ACT’s stock. It supplied ACT with some
operating funds. ACT conducted some business that benefited the Defendants. But here, separate corporate boundaries
were maintained, and third parties did not think of themselves as dealing with Sun Capital directly. Supply Chain and
Estream in this case entered into a conventional brokering sales arrangement with ACT, and were not misled into doing so
on the belief it was doing business with one of the Defendants.
In order to hold the Defendants liable for ACT’s conduct, ACT’s corporate veil must be pierced. Defendants have shown that,
as a matter of law, Supply Chain and Estream cannot establish that the corporate veil should be pierced in this case, and
therefore, the Defendants are entitled to summary judgment.
Summary judgment entered for the Defendants.
How to Write a “Brief”
Use the following “IRAC” (Issue Rule Application Conclusion) format:
Issue: What question must be answered in order to reach a conclusion in the case? The Issue
must be expressed in the form of a legal question which, when answered, gives the result in the
case. Make it specific (e.g. “Has there been a false imprisonment if the plaintiff was asleep at
the time of ‘confinement’?”) rather than general (e.g. Did the defendant owe a duty of care to the
plaintiff when the plaintiff was trespassing on the defendant’s property?). Some cases present
more than one issue; if there is more than one issue, it is OK to write more than one, but be
sure to list the principal one and focus on that.
Rule: The Rule is the law that applies to the principal issue. It should be stated as a general
principal, (e.g. A duty of care is owed whenever the defendant should anticipate that her
conduct could create a risk of harm to the plaintiff.) not a conclusion to the case being briefed,
(e.g. “The plaintiff was negligent.”). Typically, the Rule can be expressed in one or two
sentences.
Application: The Application is a discussion of how the Rule applies to the facts of the case.
Essentially, the Application section is a description of the relevant facts, the parties’ arguments
and positions in the case, and the court’s thought process by which it answered the Issue and
established the Rule. While the Issue and Rule are normally only one or two sentences each,
the Application section of a brief should be two to four paragraphs long. It should be a written
debate, not simply a statement of the Conclusion. Whenever possible, present both sides of any
issue. Do not begin with your Conclusion. The Application section shows how you can track the
court’s reasoning on paper and is the most difficult skill you will learn. It is also permissible to
put the relevant facts of the case in a separate section of the Brief.
Conclusion: What was the result of the case? Did the appellate or supreme court affirm,
reverse or reverse and remand the lower court’s decision?
The case gives you a background of the facts along with the judge’s reasoning and
conclusion. When you brief cases, you are summarizing the judge’s opinion. Briefs should not
have to exceed more than two pages in length.
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