Chapel Ridge Investments LLC v. Petland Leaseholding Company Inc et al
Filing
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OPINION AND ORDER DENYING 12 MOTION to Dismiss for Failure to State a Claim by Defendant Petland Inc; GRANTING 30 MOTION to Amend/Correct Complaint filed by Plaintiff Chapel Ridge Investments LLC. Plaintiff ORDERED to file its corrected Amended Complaint. Defendant ORDERED to answer the Amended Complaint within 14 days after it is served on them. Signed by Chief Judge Philip P Simon on 12/4/13. (cer)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
FORT WAYNE DIVISION
CHAPEL RIDGE INVESTMENTS, L.L.C., )
)
Plaintiff,
)
)
vs.
)
)
PETLAND LEASEHOLDING COMPANY,)
INC., an Ohio Corporation, THE
)
UNKNOWN OFFICERS, DIRECTORS
)
AND SHAREHOLDERS OF PETLAND )
LEASEHOLDING COMPANY, INC.,
)
an Ohio Corporation, and PETLAND INC., )
an Ohio Corporation,
)
)
Defendants.
)
1:13-cv-00146-PPS
OPINION AND ORDER
GRANTING MOTION TO AMEND AND DENYING MOTION TO DISMISS
This case involves an alleged breach of a lease agreement. One defendant, Petland, Inc.,
seeks dismissal for failure to state a claim. Plaintiff Chapel Ridge Investments sought leave to
file an amended complaint to cure some of the deficiencies that Petland pointed out, but Petland
says that it is pointless to allow Chapel Ridge to amend the complaint because the amended
complaint that they propose is also subject to dismissal. Because the Proposed Amended
Complaint states plausible claims for relief, the amendment isn’t futile. I will therefore GRANT
Chapel Ridge’s Motion for Leave to File Amended Complaint (DE 30), and DENY Petland’s
Motion to Dismiss for Failure to State a Claim (DE 12).
Factual Background
Plaintiff Chapel Ridge Investments owns a shopping center in Fort Wayne. In 2009 it
agreed to lease to Petland Leaseholding Company, Inc. a portion of the shopping center. The
lease was for a ten year term. Petland, Inc., whose name is not on the lease, is the sole
shareholder of Petland Leaseholding. To distinguish between Petland Leaseholding on the one
hand, and Petland, Inc. on the other, I will refer to the former in this opinion as “PLC” and the
latter as simply “Petland.” Even though the lease was signed by PLC, Petland is the entity that
actually operated the store in the space rented from Chapel Ridge, and Petland is the entity that
paid the rent each month. At the end of 2012, however, the rent payments stopped, and Petland
moved out shortly thereafter.
In its proposed amended complaint, Chapel Ridge sues PLC for damages, seeks to
disregard the corporate entity to hold Petland liable for PLC’s debt, and alleges assignment of
the lease from PLC to Petland, either formally or equitably. To support piercing the corporate
veil and a finding that PLC was merely the alter ego of Petland, Chapel Ridge alleges that
Petland and PLC knew when PLC entered the lease that PLC had no assets, no inventory, was
insolvent, was unable to meet its financial obligations, operated no business other than holding
leases, and never filed its own income tax returns, but did not disclose any of this to Chapel
Ridge. As noted, Petland made the rent payments, not PLC, even though Petland wasn’t a party
to the lease; and Petland, not PLC, conducted business out of the leased premises. (DE 30-1 at 2,
6.)
PLC has answered the Complaint and asserted affirmative defenses, but Petland has
moved to dismiss claiming that Chapel Ridge has failed to state a claim against it. After the
motion to dismiss was fully briefed, I asked the parties for additional briefing on the question of
whether Indiana or Ohio law applies to the issue of piercing the corporate veil to hold Petland
liable for PLC’s debt. The shopping center is in Indiana and the lease has a choice of law
provision in favor of Indiana law, but the defendants are incorporated in Ohio. The parties
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submitted additional briefing, and on the same day they did that, Chapel Ridge filed a Motion for
Leave to File Amended Complaint. Petland opposes the amendment, claiming the proposed
changes are futile.
Because the two pending motions are so closely intertwined, I am addressing them both
in this Order.
Choice of Law
Because this is a case invoking diversity jurisdiction, my first task is to determine what
law applies. In doing so, I must separately determine what law applies to each of the contractual
and veil piercing issues. In doing so, I apply the conflict-of-laws rules of Indiana, the state in
which I sit. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941).
The lease states that it “shall be governed by the laws of the state in which the Premises
are located,” meaning Indiana. This choice of law provision appears valid, and where the parties
have bargained for the application of a particular state’s laws, Indiana substantive law generally
respects that bargain. Allen v. Great Am. Reserve Ins. Co., 766 N.E.2d 1157, 1162 (Ind. 2002). I
see no reason not to adhere to that practice here, so Indiana law will govern my analysis of the
contract, and its breach.
Veil piercing is a different kettle of fish because it doesn’t depend on the contract.
Instead, it depends on an entirely separate equitable doctrine. So the Indiana choice-of-law
clause in the contract is not controlling. The lease’s subject matter is in Indiana, Chapel Ridge is
an Indiana company, and PLC and Petland are incorporated in Ohio, so both Indiana and Ohio
may have an interest in having their state law apply.
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Neither the parties nor I found a statement of settled law in Indiana directly addressing
which state’s law applies when the corporate veil is at risk of being pierced, so a little more
legwork is required. To begin with, there is a basic rule – known as the internal affairs doctrine –
which stands for the proposition that “a firm’s state of incorporation [is] the source of rules about
whether investors are liable for its debts.” Whitely v. Moravec, 635 F.3d 308, 310 (7th Cir. 2011)
(citing Restatement (Second) of Conflict of Laws § 307; Ind. Code § 23-1-49-5).
It is for this reason that the Seventh Circuit has said that “in the vast majority of
situations, the law of the state of incorporation governs attempts to disregard the corporate
entity.” Secon Serv. Sys. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 413 (7th Cir. 1988)
(characterizing the import of Philip I. Blumberg, The Law of Corporate Groups: Tort, Contract,
and other Common Law Problems in the Substantive Law of Parent and Subsidiary
Corporations § 26.02 (1987)). So in the absence of governing state opinions, a trial court should
“proceed from general principles if those principles are nearly universal, as here.” Secon Serv.
Sys., 855 F.2d at 413 (citing Havoco of America, Ltd. v. Hilco, Inc., 799 F.2d 349, 352-53 (7th
Cir. 1986).
This is entirely sensible. After all, Ohio is the state that granted both Petland and PLC
corporate status. The issue to be decided on the veil piercing claim is whether that corporate
form should be disregarded. Ohio certainly has more of an interest in that determination than
Indiana does. When it comes to the issue of whether the corporate form should be disregarded, it
seems clear that the state of incorporation has the most interest in that determination. See PNC
Bank v. Hall, No. 1:07-cv-992, 2010 U.S. Dist. LEXIS 107628, at *10 (S.D. Ind. Oct. 7, 2010)
(“To determine whether the corporate veil should be pierced, a court must look to the law of the
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state of the company’s organization.”) (citing RSR Corp. v. Avanti Devel. Inc., No. IP 95-1359,
2000 U.S. Dist. LEXIS 14210, at *42 n.10 (S.D. Ind. Mar. 31, 2000)).
So Indiana law will apply to analysis of the contract and the alleged breach, but Ohio law
will apply to the question of whether the corporate form may be disregarded here to allow
liability to reach Petland.
Motion to Amend
First up for consideration is Chapel Ridge’s Motion to Amend. “[L]eave to amend a
complaint should be freely granted when justice so requires, see Fed. R. Civ. P. 15(a), [although]
the district court need not allow an amendment when there is undue delay, bad faith, dilatory
motive, undue prejudice to the opposing party, or when the amendment would be futile.”
Bethany Pharmacal Co. v. QVC, Inc., 241 F.3d 854, 860-61 (7th Cir. 2001) (citations omitted).
The amendment would be futile if it “fails to cure the deficiencies in the original pleading, or
could not survive a second motion to dismiss.” Crestview Vill. Apts. v. HUD, 383 F.3d 552, 558
(7th Cir. 2004) (quoting Perkins v. Silverstein, 939 F.2d 463, 472 (7th Cir. 1991)).
None of the factors favoring denying leave to amend are evident here. In its opposition to
amendment, Petland argues only that the changes are futile, in effect saying that the Proposed
Amended Complaint could not survive a motion to dismiss. I disagree, as I explain more fully
below. I find that the proposed amended complaint does state a claim for which relief may be
granted. Furthermore, the proposed amended complaint provides additional notice of the
specifics of the claims to the defendants beyond the original complaint, which promotes the
interests of justice.
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I will note, however, for future clarity in this case, that “piercing the corporate veil,” the
title of the second cause of action in the Proposed Amended Complaint, is not actually a claim
under Ohio law, but “a remedy encompassed within a claim.” RCO Int’l Corp. v. Clevenger, 180
Ohio App. 3d 211, 214 (2008) (citing Geier v. Natl. GG Industries, Inc., Lake App. No.
98-L-172, 1999 Ohio App. LEXIS 6263 (Dec. 23, 1999)). Here, the claim is breach of contract
as alleged against PLC in the first cause of action. In other words, veil piercing is a way to reach
through the corporate form to impose liability on Petland for the breach, although Petland was
not a party to the lease.
I also view the claim of “Assignment” – the third cause of action in the proposed
amended complaint – the same way. It is a method of recovery for the underlying claim of
breach of contract. It is another means of transferring liability from PLC to Petland, except
instead of transferring liability for nonpayment after the fact, the assignment theory transfers to
Petland the underlying obligation to pay rent, making Petland directly liable for nonpayment.
Under the lease terms, of course, assignment without the requisite permissions may be a separate
breach, but it remains a claim for breach of contract.
Motion to Dismiss
In order to survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, “a complaint must contain sufficient factual matter, accepted as true, to state a claim
to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal
quotation marks and citation omitted); accord Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007). I must accept all factual allegations as true and draw all reasonable inferences in the
complainant’s favor, but I don’t need to accept threadbare legal conclusions supported by purely
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conclusory statements. See Iqbal, 556 U.S. at 678. The first step in my analysis is to identify and
disregard all “allegations in the complaint that are not entitled to the assumption of truth,”
especially including any legal conclusions. Id. at 680-81. Then I must look at the remaining
allegations to determine whether they plausibly – and not merely possibly or conceivably –
suggest an entitlement to relief. Id. at 681, 683. This task invariably requires me to draw on my
judicial experience and common sense. Id. at 679.
PLC has answered the Complaint, so the first claim, for breach of lease by PLC, is not at
issue in this Motion. What is at issue is Petland’s request for dismissal of the second and third
claims brought against it. But to repeat, the underlying claim for each is still breach of contract,
and the Motion to Dismiss is really directed at Chapel Ridge’s theories for recovery from
Petland.
A.
Cause of Action Number 2 – Piercing the Corporate Veil
As discussed above, Ohio substantive law applies to the veil-piercing claim because the
defendants are incorporated in Ohio. Ohio’s Supreme Court has established a test for piercing
the corporate veil, which is narrower than that recognized by Indiana courts.1 Under Ohio law
“[t]he corporate form may be disregarded and individual shareholders held liable for wrongs
committed by the corporation when (1) control over the corporation by those to be held liable
was so complete that the corporation has no separate mind, will, or existence of its own, (2)
control over the corporation by those to be held liable was exercised in such a manner as to
commit fraud or an illegal act against the person seeking to disregard the corporate entity, and
1
Under Indiana law, “[t]he party seeking to pierce the corporate veil bears the burden of establishing that:
(1) the corporate form was ‘so ignored, controlled or manipulated that it was the mere instrumentality of another’
and (2) ‘that the misuse of the corporate form would constitute a fraud or promote injustice.’” CBR Event
Decorators, Inc. v. Gates, 962 N.E.2d 1276, 1282-83 (Ind. Ct. App. 2012) (quoting Escobedo v. BHM Health
Assocs., Inc., 818 N.E.2d 930, 933 (Ind. 2004)).
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(3) injury or unjust loss resulted to the plaintiff from such control and wrong.” Dombroski v.
Wellpoint, Inc., 119 Ohio St. 3d 506, 510-11, 2008-Ohio-4827, 895 N.E.2d 538 (Ohio 2008)
(quoting Belvedere Condo. Unit Owners’ Assn. v. R.E. Roark Cos., Inc., 67 Ohio St. 3d 274,
288-89, 1993-Ohio-119, 617 N.E.2d 1075 (1993)). Under this Belvedere test, as modified by
Dombroski, the second prong requires demonstration of “fraud, an illegal act, or a similarly
unlawful act,” bearing in mind that the corporate veil may only be pierced “in instances of
extreme shareholder misconduct.” Dombroski, 119 Ohio St. 3d at 513. The Ohio Supreme Court
chose a slightly narrower standard of misconduct than Indiana courts have for veil piercing:
merely unjust or inequitable acts don’t qualify in Ohio because Ohio courts worry that veil
piercing could happen every time a corporation is sued, since “nearly every lawsuit sets forth a
form of unjust or inequitable action.” Dombroski, 119 Ohio St. 3d at 513.
In support of the first prong, Petland’s control over PLC, Chapel Ridge alleges: “Petland
is the sole shareholder of PLC” and “Petland exercised complete control over and dictated the
actions of PLC”; PLC has never been capitalized or owned assets, is insolvent, and has never
filed tax returns; the principal corporate offices of the defendants are at the same address; and
“the officers and directors of PLC and Petland are the same or substantially similar . . . .” (DE
30-1 at ¶¶ 3, 4, 5, 6 and 9.) This is more than adequate to satisfy the first prong.
As for the third prong – whether Chapel Ridge sustained injury as a result of Petland’s
control of PLC and the wrong done – it is easily met here. PLC welched on the lease it signed
with more than six years left on it. Petland and PLC didn’t even pay for all of the time they used
the property before they vacated. Because Petland kept PLC insolvent, Chapel Ridge has no
recourse without reaching past PLC to Petland. (DE 30-1 at ¶¶ 11, 14, 18, 19 and 22.) Chapel
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Ridge is out a lot of money, and its lack of recourse against PLC is the result of Petland’s alleged
deliberate misuse of the corporate form in contracting with Chapel Ridge.
The second prong – a showing of fraud, an illegal act, or a similarly unlawful act – is
more complicated. Taking Chapel Ridge’s allegations as true, here is the plausible story that
Chapel Ridge proffers in its Proposed Amended Complaint with respect to fraud or an unlawful
act: PLC entered the lease, under Petland’s control and at its direction, with no intention of ever
having anything to do with the property, neither partaking in the benefits of the lease nor
meeting its obligations. In my view, this provides a basis for meeting the second prong of the
Belvedere test as modified by Dombroski under the fraud designation, or perhaps as one of the
egregious acts Ohio’s Supreme Court referenced. This case isn’t about simple breach of contract
or true inability to pay – something was rotten before the lease was even signed, or at least that’s
what Chapel Ridge alleges.
I see at least two separate wrongs potentially committed against Chapel Ridge that might
qualify as unlawful and/or egregious, pending the presentation of facts, of course: (1) Petland
structured the deal and used PLC to allow it a unilateral, cost-free, early exit from the lease; and
(2) Petland caused PLC to enter the contract intending from the start to violate it by having an
entity other than the lessor pay the bills and use the space. Both plausibly may satisfy the second
Belvedere-Dombrowski prong.
On the first point, the allegations plausibly permit the inference that PLC was created
specifically to allow Petland to enter into a ten-year lease, but to have an easy, unilateral escape
from the contract if the store failed and Petland didn’t want it for the full ten years. Petland
makes almost this very argument in its Motion to Dismiss, when it says that “payments were
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made under the lease for several years” until “the store later failed and the space vacated,”
pointing out that corporate entities exist to shield shareholders from liability. (DE 13 at 6.) But
this doesn’t mean that parties should be able to create corporate entities to avoid paying rent if
business is bad and they no longer feel inclined to do so; if Petland didn’t want the risk of a tenyear lease, it didn’t have to enter one, and if it didn’t want to operate the store at a loss it had the
right under the lease to find a subletter for the remainder of the ten years. (DE 30-1 at § 10.2)
As for the second point, the lease allowed subletting, but only with either the landlord’s
consent (for third-party subletters) or after submitting financial statements and a personal
guarantee on the lease (for subletters affiliated with PLC). Id. The latter situation would likely
have been applicable, but obviously Petland’s signing a guarantee on the lease would have
locked Petland’s escape hatch, defeating the purpose of using PLC. So Petland and PLC went
ahead, PLC signed the lease, and Petland reaped the benefits and paid the rent for as long as
there were benefits to reap, thereby denying Chapel Ridge the benefit of its bargain, which
included the right to choose its tenant. Collins v. McKinney, 871 N.E.2d 363, 371 (Ind. Ct. App.
2007) (“[T]he Indiana Supreme Court3 recognized long ago that the purpose of a covenant
against assigning and subletting in a lease is ‘to reserve to the lessor the right to say who should
occupy the premises.’”) (quoting Indianapolis Mfg. & Carpenters’ Union v. The Cleveland, C.,
C., & I. Ry. Co., 45 Ind. 281, 288 (1873)).
2
I am permitted to consider the lease at this stage because it is attached as an exhibit to the complaint and
proposed amended complaint and incorporated therein by reference. See Mace v. Van Ru Credit Corp., 109 F.3d
338, 346 (7th Cir. 1997) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)) (“Federal courts in diversity actions
apply state substantive law and federal procedural law.”); Fed. R. Civ. P. 10(c); Beanstalk Grp. v. Am Gen. Corp.,
283 F.3d 856, 858 (7th Cir. 2002).
3
We’re back to Indiana law here when we talk about bases for a claim of breach of contract.
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Petland argues that, if pleading fraud as the basis for piercing the corporate veil, Chapel
Ridge must plead with particularity under Fed. R. Civ. P. 9(b), offering the who, what, when,
where and how of the fraud allegations. For pleading standards we turn to Seventh Circuit
procedural law applying the Federal Rules of Civil Procedure. Unfortunately, the Seventh Circuit
hasn’t opined on the appropriate pleading standard for veil piercing when fraud allegations are in
play. And other courts are all over the board on the issue. Some courts have applied the Rule
9(b) particularity requirements to fraud-based veil piercing arguments. See, e.g., Southeast Tex.
Inns, Inc. v. Prime Hospitality Corp., 462 F.3d 666, 672 (6th Cir. 2006) (citing Bd. of Trustees of
Teamsters Local v. Foodtown, Inc., 296 F.3d 164, 173 n.10 (3d Cir. 2002)); EEOC v. Global
Horizons, Inc., 2012 U.S. Dist. LEXIS 146968, at *16-17 (D. Haw. Oct. 9, 2012) (“Despite
[defendant’s] claim that ‘[c]ourts regularly impose Rule 9(b)’s heightened pleading standard
upon fraud-based attempts to disregard the corporate form,’ [] there is no general consensus as to
whether veil piercing claims premised upon fraud must be pled with particularity pursuant to
Rule 9(b). The Ninth Circuit has not addressed this question . . . .”); RAM Constr. Servs. of Mich.
v. TH Restoration, Inc., 2012 U.S. Dist. LEXIS 70255, at *8 (N.D. Ohio May 21, 2012); Schwan
v. CNH Am. LLC, 2006 U.S. Dist. LEXIS 28516, at *64-65 (D. Neb. May 4, 2006); Golding v.
Imperial Sterling, 2001 U.S. Dist. LEXIS 25226, at *11-12 (S.D. Fla. June 28, 2001).
Other courts have applied only the lower, notice requirements of Fed. R. Civ. P. 8(a).
See, e.g., Burford v. Acc’tg Practice Sales, Inc., 2013 U.S. Dist. LEXIS 66827, at *10 (S.D. Ill.
May 10, 2013) (“[A]llegations to support piercing the corporate veil need not be pled with the
specificity required by Federal Rule of Civil Procedure 9(b); mere notice pleading under Rule
8(a) is sufficient.”) (citing Flentye v. Kathrein, 485 F. Supp. 2d 903, 912-13 (N.D. Ill. 2007));
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Time Warner Cable, Inc. v. Networks Grp., LLC, 2010 U.S. Dist. LEXIS 93855, at *12-13
(S.D.N.Y. Sept. 9, 2010) (“The defendants argue that to the extent the plaintiff alleges fraud,
Rule 9(b) applies. . . . Several district courts in this district have applied Rule 9(b) to claims to
pierce the corporate veil that are based on a defendant’s fraudulent conduct. See, e.g., DirecTV
Latin America LLC v. Park, 610 LLC, 691 F. Supp. 2d 405, 432 (S.D.N.Y. 2010); In re
Currency Conversion Antitrust Litig., 265 F. Supp. 2d 385, 425 (S.D.N.Y. 2003). Until the Court
of Appeals revisits its holding in [Int’l Controls Corp. v. Vesco, 490 F.2d 1334, 1351 (2d Cir.
1973)], however, Rule 8 is the appropriate standard to weigh the sufficiency of the plaintiff’s
allegations to pierce the corporate veil.”); Taurus IP, LLC v. DaimlerChrysler Corp., 519 F.
Supp. 2d 905, 925 (W.D. Wis. 2007), aff’d, Taurus IP, LLC v. DaimlerChrysler Corp., 2013
U.S. App. LEXIS 16507 (Fed. Cir., Aug. 9, 2013) (piercing the corporate veil is an equitable
remedy, not a claim, and Rules 8 and 9 require litigants to plead claims, not remedies); Montoya
v. Richesin, 2007 Bankr. LEXIS 3391, at *23 (Bankr. D.N.M. Oct. 3, 2007); Wiebe v. Benefits
Mgmt. Corp., 1993 U.S. Dist. LEXIS 9706, at *3-4 (D. Kan. June 17, 1993) (collecting cases)).
I don’t need to take a side here because I find that, even under the heightened pleading
standards, Chapel Ridge meets its pleading burden on this Motion to Dismiss. I don’t see a
particularity problem under Rule 9(b) with the Amended Complaint, to which the lease is
attached and incorporated by reference. Here’s the fraud as Chapel Ridge presents it: (a) PLC
represented in the lease that it was going to be Chapel Ridge’s tenant; (b) the identity of one’s
counter-party/tenant is a material term in a contract; (c) PLC and Petland knew all along that
PLC had no business to put in the space or money to pay rent, and no intention to ever do either;
(d) PLC and Petland intended for Chapel Ridge to rely upon the misrepresentation to induce it to
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sign the lease; (e) which Chapel Ridge reasonably did; and (f) Chapel Ridge has been left high
and dry with several years left on a lease, with its only recourse the non-existent bank account of
a non-operating company, and furthermore Chapel Ridge was denied the benefit of choosing its
tenant. Collins v. McKinney, 871 N.E.2d 363, 371 (Ind. Ct. App. 2007) (an unapproved sublease
flouting a contractual restriction and the resulting loss of ability to “assess and control . . .
potential liabilities” qualifies as damage for the purposes of stating a claim for breach of
contract). The particulars not stated in the proposed amended complaint are contained in the
signed lease, attached as an exhibit.
An Ohio district court addressing a motion to dismiss in a case with similar
circumstances also found no particularity problem under Rule 9(b) with an attempt to pierce the
corporate veil via a fraud allegation. In Ruffing v. Masterbuilt Tool & Die, LLC, Ruffing sued
Masterbuilt and its parent and sister companies for Masterbuilt’s alleged breach of contract
under a veil-piercing theory. Hawthorn Manufacturing Corporation bought Red Rock Stamping,
LLC, where Ruffing worked. As part of the purchase, Hawthorn allegedly agreed to offer
Ruffing a job. It didn’t, but its subsidiary Masterbuilt did. The court described Masterbuilt as a
“peculiar entity, as it ‘was not capitalized, had no banking or checking account, had no assets,
and had no employees other than Ruffing.’” Ruffing v. Masterbuilt Tool & Die, LLC, 2009 U.S.
Dist. LEXIS 4754, at *5 (N.D. Ohio Jan. 23, 2009). Red Rock, rather than Masterbuilt, paid
Ruffing’s salary, and Ruffing did work for other Hawthorn subsidiaries, but none for
Masterbuilt, which seemed not to conduct any business, generate any revenues, and have no
liabilities other than Ruffing’s contract. Id. Applying Ohio veil-piercing law and Fed. R. Civ. P.
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9(b), the court held that the plaintiff had pled fraud sufficiently to continue with his veil piercing
argument:
The Court takes note of Ruffing’s specific allegations that despite having a
contract that was ostensibly with Masterbuilt, Ruffing was always paid by Red
Rock, that Masterbuilt (the company with whom he signed a contract) was not
“real,” and that various aspects of the contract appear to be fraudulent to the
extent that Masterbuilt was a company with no assets, liabilities, products, or
employees (other than Ruffing). This is more than enough particularity to satisfy
the heightened pleading requirements for a claim of fraud.
Id. at 18-19, 46, 51.
B.
Cause of Action Number 3 - Assignment of the Lease
In reviewing the third cause of action, newly added in the Proposed Amended Complaint,
alleging assignment of the lease, we switch from Ohio law back to Indiana law as we deal with
the lease and performance under it rather than veil piercing. Chapel Ridge alleges that PLC was
allowed to assign the lease, and it did so to its parent Petland, either directly or equitably, as
evidenced by the fact that Petland controlled the leased premises and took responsibility for
PLC’s obligations under the lease (until it ceased taking responsibility). (DE 30-1 at ¶ 32.) At
this stage, Chapel Ridge need not plead detailed facts, and indeed it cannot be expected to know,
before conducting discovery, the details of the corporate relationship between Petland and PLC
(e.g., whether there was some formal assignment of the lease between the two related entities
that was not shared with their landlord) or what other indicia of control of the premises (e.g.,
insurance policies) might show. At this point, Chapel Ridge can plead both actual assignment
and equitable assignment as alternatives.
Indiana courts have long recognized the theory of equitable transfer of a lease. In
determining whether there has been an assignment in the absence of a written agreement, the
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Indiana Court of Appeals has considered whether the assignee or assignor was in primary control
of the premises; which party was responsible for the lease obligations, had possession of the
property, and paid rent; and whether there was some relationship other than assignee/assignor
that explained the situation (like a management agreement). Collins v. McKinney, 871 N.E.2d
363, 373-74 (Ind. Ct. App. 2007) (holding that a jury could have found that the arrangement in
question constituted an equitable assignment of the sublease) (citing Indianapolis Mfg. &
Carpenters’ Union v. The Cleveland, C., C., & I. Ry. Co., 45 Ind. 281, 288 (1873)). Taking
Chapel Ridge’s allegations as true, there may have been an equitable assignment of the lease
from PLC to Petland. The proof of the pudding will be in its taste, and that is what discovery is
for. The allegations are certainly sufficient to survive a Motion to Dismiss.
Conclusion
For the foregoing reasons, plaintiff Chapel Ridge Investments, LLC’s Motion for Leave
to File Amended Complaint (DE 30) is GRANTED, and Petland’s Motion to Dismiss for Failure
to State a Claim (DE 12) is DENIED. Chapel Ridge is ORDERED to file its corrected amended
complaint and Defendants are ORDERED to answer the amended complaint within 14
(fourteen) days after it is served on them, pursuant to Fed. R. Civ. P. 15(a)(3).
SO ORDERED.
ENTERED: December 4, 2013
/s/ Philip P. Simon
Philip P. Simon, Chief Judge
United States District Court
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