Question

Jim Halter, the majority shareholder of J-Mart Jewelry Outlets, Inc., was aware that J-Mart was in financial trouble. Before J-Mart went out of business, Halter paid off his personal credit cards using corporate funds. There was specific evidence that the $6, 902.87 balance on Halter’s American Express personal account was paid by J-Mart, eight days before it ceased doing business. The check was marked “PAYMENT IN FULL – JIM’S PERSONAL”. There was also evidence that J-Mart, knowing that it would soon cease doing business, purchased a new Cadillac for Halter’s use. J-Mart then made three (3) payments on the vehicle before transferring it to Halter for $1.00 and allowing him to assume the remaining payments.

After J-Mart ceased operations, four (4) of its creditors brought suit against Halter in an attempt to recover amounts they were owed. The jury at the trial court level pierced the corporate veil and held Halter personally responsible for the debts. Halter appealed and the appellate court affirmed the ruling of the trial court.

Given what you know of the facts of the case, could Halter have provided any information that would lead you to believe he was not responsible for the debts? What would it be?

Answer 1

Yes, Halter can provide information that would show that he has not misused his shareholder privileges to make personal benefit. A shareholders financial interest in the corporation is determined by the percentage of the shares they hold and possess the rights to protect their investment. Corporate veil is established when the shareholder involves in fraud or wrongful acts for the personal benefit of the shareholder. Courts require establishing the misuse of corporate privileges by the shareholders and misrepresentation or fraud before piercing corporate veil. Hence Halter needs to prove that he has not misused his power to avail benefits from the corporation that exceeds his percentage of shares in the business. Jim Halter can prove that he has followed the formalities in all his engagement with the corporation and recorded every transaction with the corporation as a responsible shareholder with the documents available with him. He can also claim that as he is the major shareholder his support was critical for the company in the period when company suffered loss and the benefits he availed through Cadillac and payment of balance on Halter’s American Express personal account were given by the company to ensure his continued support. He has acted upon the promise and continued his support till J-Mart stopped doing business.