Pub. 13 2016 Issue 2

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S 18 Piercing the Corporate Veil - Proximate Cause Morrissey v. Krystopowicz BY LEE HUNT, ATTORNEY AT LAW This case deals with the often-occurring issue of underfunded and shell corpora- tions. Particularly in the nursing home context, a common occurrence is trying to find the correct entities and find where the actual money lies. The New Mexico Court of Appeals issued a strong decision that lowered the proximate cause hurdle for plaintiffs to pierce the corporate veil. The central holding is that if a plaintiff is unable to collect a judgment, then harm has been suffered opening the door to piercing the corporation. In 2003 Krystopowicz became the owner of ten limited liability companies that pur- chased ten nursing homes throughout New Mexico. Krystopowicz was a 50 percent owner with Brian Davidson. Davidson was barred from acquiring or operating nursing homes himself because of pending bank- ruptcy proceedings, tax issues and other legal problems. Despite the knowledge that Davidson was precluded from entering into a partnership for owning nursing homes, Krystopowicz agreed to be the front man for the enterprise. One of the nursing homes that was pur- chased by the enterprise was Silver Stone Health Care of Raton. Ms. Frances Fer- nandez was a resident at the Raton nursing center and died as a result of negligent care. Suit was filed in March 2009 and six differ- ent corporate entities were named, along with Krystopowicz. The district court held a two day hearing and awarded $4,828,300.00 in damages. Krystopowicz was a witness at the trial and the plaintiff argued that the corporate veil should be pierced to hold Krystopowicz personally liable and that Krystopowicz was engaged in a civil conspiracy with the defunct defendants and that he should be held personally liable for the negligence of the co conspirators. The district court de- clined to find that the corporate veil should be pierced and therefore held that Krysto- powicz was not liable. The Court of Appeals reversed the district court's decision and found that the corpo- rate veil should be pierced as to Krystopo- wicz. The court analyzed the three factors for determining whether to pierce the cor- porate veil. "The three requirements for piercing the corporate veil are: (1) instru- mentality or domination; (2) improper pur- pose; and (3) proximate cause.” The Court of Appeals did not address either the first factor of whether or not Krystopowicz improperly dominated and controlled the subservient corporations for the benefit of another dominant party. The district court found that Krystopowicz had taken money from the Raton nursing cen- ter and the other nine nursing centers in New Mexico. The court also found that the companies were set up for an improper pur- pose, including the fact that Davidson was not permitted to operate nursing homes. As such, the Court of Appeals accepted as fact that the first two requirements for piercing the corporate veil were established. Often, the most difficult prong of piercing the corporate veil is proving that the mis- use by the individual of the corporate form caused injury to the plaintiff. In this case, the plaintiff had not present- ed direct evidence that the nursing home was under-funded, under-staffed or that the improper distribution of funds had led to improper care. In other words, the Court of Appeals found that there was not a direct causal link between wrongful acts of Krys- topowicz the death of Ms. Fernandez. The significant holding of this case is that the court took the proximate cause prong of the corporate veil analysis a step further. The district court had entered a judgment against the defunct corporate defendants of $4,828,300.00. Because these corpora- tions either did not have insurance or were now no longer in operation, the plaintiff was unable to collect on the judgment. The Court of Appeals found that " Krystopowicz' abuse of the corporate form resulted in a sham corporation leading to plaintiff's in- ability to recover for her injury." The court found that the inability to recover damages was "itself a harm caused by Krystopowicz' misuse and abuse of the corporate form." The significance of the Court of Appeal's decision is that a plaintiff no longer has to prove that the actual injury was caused by the misuse of the corporate form, if the plaintiff is unable to collect on a judgment against shell corporations. Although in this case the plaintiff had an actual judgment, the analysis would likely apply even if a judgment was not obtained. If the plaintiff could demonstrate that the corporations in existence at the time were no longer in exis- tence or were underfunded and uninsured, then the plaintiff could demonstrate that she is unable to collect on any judgment. As such, the corporate veil should be pierced ahead of an actual judgment. By lower- ing the bar for proving proximate cause as against an individual, the Krystopowicz decision is significant in the development of piercing the corporate veil law. The de- cision was entered on August 31, 2015 and the Supreme Court has accepted certiorari. LeeHunt isapersonal injuryandmedicalmalpracticeattorney. He earned his bachelors’ degree fromWestern Kentucky University and his law degree from the University of Kentucky. He has been practic- ing law since 2003. This article was reprinted with the premission of the NewMexico Trial Lawyers Association and Mr. Hunt.