Question

1. Dr. Steven A. Pottschmidt was employed by Dr. Thomas J. Klosterman, who was doing business as a corporation named Thomas J. Klosterman, M.D., Inc. Once Pottschmidt's original employment agreement ended, he decided to bring a breach of contract suit against Klosterman alleging that he, Pottschmidt, had not been paid the amount that was actually owed him under the agreement. Within two months of the lawsuit, Klosterman created a new corporation, called Klosterman Family Practice, Inc. Klosterman Family Practice, however, did not employ anyone other than the staff of the first corporation, Thomas J. Klosterman, M.D., Inc. In addition, the second corporation had not moved from the original office, had not changed its phone number, had not purchased new equipment or new furniture, and had not taken on any new patients. For a while, the two corporations held separate accounts at one bank. Eventually, however, the first company's bank account was terminated, and income for bills sent out by the first company were placed in the account of the second company. Pottschmidt wants the court to permit him to pierce the corporate veil of both Thomas J. Klosterman, M.D., Inc., and Klosterman Family Practice, Inc., to hold Dr. Klosterman directly liable for the money owed to him. Is there enough evidence here to permit the veil piercing requested by the plaintiff? Explain. [See: Pottschmidt v. Thomas J. Klosterman, M.D., Inc., 169 Ohio App.3d 824 (Court of Appeals of Ohio, Ninth District, Medina County).]

Answer 1

The doctrine of successor liability holds that:

The buyer corporation is not liable for the seller corporation's tortious conduct unless one of the following four exceptions applies:

(1) The buyer expressly or impliedly agrees to assume such liability;

(2) The transaction amounts to a de facto consolidation or merger;

(3) The buyer corporation is merely a continuation of the seller corporation; or

(4) The transaction is entered into fraudulently for the purpose of escaping liability.

Mere change of name of the corporation does not exclude the previous corporations liability and that the new corporation was formed to escape liability. The new corporation was formed approximately one month after Dr. Pottschmidt filed suit.

It is found there to be a de facto merger between the original corporation and the new corporation.(1) the original corporation has not been dissolved, (2) there was no transfer of assets from the original corporation to the new corporation, (3) Dr. Klosterman personally assumed the liabilities of the original corporation, (4) the debts of the original corporation slightly exceeded its value, (5) as of September 2004, patients were billed by the new corporation, and (6) receivables were deposited into the new corporation's bank account as of October 1, 2004.

The continuation theory applies when "one corporation sells its assets to another corporation with the same people owning both corporations. Thus, the acquiring corporation is just a new hat for, or reincarnation of, the acquired corporation.". When a buyer and seller share significant features such as the same employees, a common name, or the same management, the buyer can be construed to be a mere continuation of the seller. As previously discussed, both corporations were owned and operated by Dr. Klosterman utilizing the same employees, in the same building, to serve substantially the same patients.

Hence this can be the enough evidence here to permit the veil piercing requested by the plaintiff.