Black v. Ronald D. Gigliotti & Christopher J. Gigliotti Grp. Corp.

514 B.R. 439

Daniel R. BLACK and Caryn Black, Appellants,

v.Ronald D. GIGLIOTTI and Christopher J. Gigliotti Group Corp., & the Paul Revere Insurance Co., Appellees.

Civil Action Nos. 14–2733, 14–2734.

Bankruptcy Nos. 11–18910, 12–11986.

Adversary Nos. 12–0449, 12–0471.

United States District Court, E.D. Pennsylvania.

Signed Aug. 6, 2014.

David F. Gould, III, Gould Law Associates, P.C., Doylestown, PA, for Appellants.

Aris J. Karalis, Robert W. Seitzer, Maschmeyer Karalis, P.C., Philadelphia, PA, for Appellees.

MEMORANDUM

BAYLSON, District Judge.

Plaintiffs appeal from the Bankruptcy Court of Eastern Pennsylvania's order granting Defendants summary judgment on their claims of piercing the corporate veil and nondischargeability of debt.

I. Factual Background & Procedural History

In 2003 Plaintiffs Daniel Black and Caryn Black signed an agreement of sale to purchase a home from a residential construction company, Gigliotti Avignon Associates, L.L.P. (Gigliotti Avignon), owned by three brothers, Defendant Ronald Gigliotti, Defendant John Gigliotti, and Christopher Gigliotti. Plaintiffs paid a $102,810 deposit to Gigliotti Avignon in June 2003. But after construction began, Plaintiffs decided to divorce and no longer wanted the home. Gigliotti Avignon orally agreed to modify the contract and agreed to return Plaintiff's deposit if they were able to sell the home at a profit.

On December 2, 2004, counsel for Gigliotti Avignon sent notice to Plaintiffs that they were in breach of the agreement by failing to purchase the property and that Gigliotti Avignon were retaining their deposit pursuant to the terms of the agreement.¹ On December 14, Gigliotti Avignon sold the home for $123,000 more than Plaintiffs had originally agreed to pay them.

In December 2005, Plaintiffs filed suit against Gigliotti Avignon for specific performance, breach of contract, fraud, and breach of the Pennsylvania Unfair Trade Practices & Consumer Protection Law. After a prolonged litigation, Plaintiffs were awarded $151,2756.62 in a bench trial in October 2010. Approximately three months later, Defendants notified Plaintiffs that Gigliotti Avignion was insolvent and could not pay the judgment.

Defendants John Gigliotti, and Ronald Gigliotti filed for Chapter 7 bankruptcy in November 2011. Bankruptcy Nos. 11–18910 & 12–11986. Plaintiffs filed an adversary complaint in John and Ronald Gigliotti's bankruptcies to pierce the corporate veil and asserted a number of state law tort and statutory claims against Defendants. Adversary Nos. 12–0449 & 12–0471. Defendants moved to dismiss the compliant based on the statute of limitations. The Bankruptcy Court granted Defendants' motion to dismiss, finding Plaintiffs had notice of their state law claims at the time they filed their lawsuit in 2005. Plaintiffs were granted leave to amend their complaint to allege only claims for piercing the corporate veil and nondischargeability of debt under 11 U.S.C. §§ 523(a)(2) and (a)(4).

In their amended complaint, Plaintiffs brought claims to pierce the corporate veil, nondischargeability of debt for defalcation, and nondischargeability of debt for fraudulent misrepresentation.

Defendants subsequently moved for summary judgment, and Plaintiffs cross-moved for summary judgment. Three months after Plaintiffs moved for summary judgment, and after the Bankruptcy Court heard oral argument on the cross motions, Plaintiffs filed a motion to compel production of all financial records tracing the funds Plaintiffs deposited, all financial records of Gigliotti Avignon from 2003 to 2011, and all documents showing Gigliotti Avignon set aside sufficient funds to satisfy liabilities to Plaintiffs as of December 2, 2004. Pl's Motion to Compel at 7–8.

The Bankruptcy Court denied the motion to compel for three reasons. First, the motion was filed four months after the discovery deadline and was untimely. Second, Plaintiffs did not articulate any reason why they failed to raise objections to the discovery responses at the time the inadequate responses were produced. Third, Plaintiffs moved for summary judgment on August 23, 2013, but did not move to compel production until November 22, 2013..

The Bankruptcy Court held Plaintiffs failed to meet the standard for piercing the corporate veil because there was no evidence Gigliotti Avignon was under-capitalized, or that Defendants siphoned any corporate funds or impermissibly comingled company assets.²In re Gigliotti, 507 B.R. 826, 836 (Bankr.E.D.Pa.2014). The Bankruptcy Court further held that Plaintiffs could not bring claims under the participation theory that Defendants participated in the torts committed against them because those claims were not alleged in the complaint, Plaintiffs presented no evidence of tortious conduct, and their claims for the underlying torts were previously dismissed as untimely. Id. at 837–38. Finally, the Bankruptcy Court held because the Plaintiffs did not have sufficient evidence to pierce the corporate veil, they could not show nondischargeability of debt because the debt was only attributable to the corporate entity and not owed by the debtors themselves. Id. at 840. The Bankruptcy Court denied Plaintiffs' motion for summary judgment and granted Defendants' motion for summary judgment, from which Plaintiffs appeal. Id.

II. The Issues on Appeal and the Parties' Arguments

1. Plaintiffs argue the Bankruptcy Court erred by denying their claim to pierce the corporate veil because it applied the wrong test to determine whether Defendants created the corporate entity as a sham to evade personal liability. Plaintiffs contend that their evidence showed Defendants siphoned their deposit funds because the money was removed from the escrow account and Defendants had exclusive control over Gigliotti Avignon. Plaintiffs argue that they presented sufficient circumstantial evidence under the doctrine of res ipsa loquitur because Defendants had exclusive control over the corporation that was the instrumentality of their injury. Defendants respond that the Bankruptcy Court properly applied the Third Circuit standard for piercing the corporate veil.

2. Plaintiffs contend the Bankruptcy Court erred in denying their claims under the participation theory because they produced evidence that their deposit was withdrawn from the escrow account, and that Defendants were the officers of Gigliotti Avignon. Defendants respond that the Bankruptcy Court applied the standard articulated by the Pennsylvania Supreme Court when “the record establishes the individual's participation in in the tortious activity” and Plaintiffs did not produce any evidence of tortious activity.

3. Plaintiffs challenge that the Bankruptcy Court erred in denying their motion to compel production of financial records. Defendants respond that the Bankruptcy Court correctly denied the motion based on its filing beyond the discovery deadline and after Plaintiffs had moved for summary judgment.

III. Jurisdiction and Standard of Review

This Court has jurisdiction over appeals from final judgments, orders and decrees of the Bankruptcy Courts under 28 U.S.C. § 158(a)(1). This appeal is from an order granting summary judgment to Defendants, and is a final order.

This Court reviews “the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof.” In re Trans World Airlines, Inc., 145 F.3d 124, 131 (3d Cir.1998).

IV. Analysis

A. Piercing the Corporate Veil

“The ‘classical’ piercing of the corporate veil is an equitable remedy whereby a court disregards the existence of the corporation to make the corporation's individual principals and their personal assets liable for the debts of the corporation.” In re Blatstein, 192 F.3d 88, 100 (3d Cir.1999) (citation omitted); see also Ashley v. Ashley, 482 Pa. 228, 393 A.2d 637, 641 (1978) (“[W]henever one in control of a corporation uses that control, or uses the corporate assets, to further his or her own personal interests, the fiction of the separate corporate identity may properly be disregarded.”). “This legal fiction of a separate corporate entity was designed to serve convenience and justice, and will be disregarded whenever justice or public policy demand and when the rights of innocent parties are not prejudiced nor the theory of the corporate entity rendered useless.” Ashley, 393 A.2d at 641 (internal citations omitted). There is a strong presumption against piercing the corporate veil in Pennsylvania, and it is only to be granted in limited circumstances. Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir.1967) (“[A]ny court must start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception.”).

The Third Circuit looks to the following factors to determine whether a corporate entity is merely an alter ego of the controlling shareholder: “gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate records, and whether the corporation is merely a facade for the operations of the dominant stockholder.” Pearson v. Component Tech. Corp., 247 F.3d 471, 484–85 (3d Cir.2001). “The test, ... is demonstrably an inquiry into whether the debtor corporation is little more than a legal fiction. Such a burden is notoriously difficult for plaintiffs to meet.” Id. at 485 (“For instance, courts have refused to pierce the veil even when subsidiary corporations use the trade name of the parent, accept administrative support from the parent, and have a significant economic relationship with the parent.”).

Plaintiffs contend the Bankruptcy Court erred in adopting this multi-factor test articulated in Pearson and many other Third Circuit cases. See, e.g., Trustees of Nat....