Find Legal Information

JUSTICE KAPALA delivered the opinion of the court:

Defendant-appellant and cross-appellee, Nicola DiCosola (DiCosola), appeals the$1,271,816.10 judgment entered against him personally in the circuit court of Du Page County aftera trial without a jury. DiCosola contends that the trial court erred when it pierced the corporate veilof defendant, TLD Builders, Inc. (TLD), and held him personally liable for the obligations of thecorporation. Plaintiffs-appellees and cross-appellants, Joseph L. Fontana and Angela D. Fontana(the Fontanas), cross-appeal, contending that the trial court erred in failing to grant their motion forattorney fees. For the reasons that follow, we reject DiCosola's appellate contentions and affirm thetrial court's judgment against DiCosola personally. In the cross-appeal, we reverse that portion ofthe trial court's order denying the Fontanas' request for attorney fees, and we remand the cause.

This lawsuit was originally filed on September 4, 2001, naming as defendants TLD⁽¹⁾ andarchitect Stanley L. Glodeck⁽²⁾. On July 16, 2003, the Fontanas were given leave to file an amendedcomplaint naming DiCosola as an additional defendant. In the amended complaint filed on July 30,2003, the Fontanas alleged that they owned a parcel of real property commonly known as 347 RubyStreet, Clarendon Hills, Illinois (the property). The Fontanas alleged further that on September 24,1999, they and TLD entered into a written construction contract in which TLD agreed to constructa single-family residence (the home) on the property for the sum of $1,475,800. In count I of theamended complaint, the Fontanas sought a declaration that they were excused from furtherperformance of their obligations under the construction contract, as a result of TLD's materialbreach of the construction contract. In count II of the amended complaint, the Fontanas alleged thatTLD breached the terms of the construction contract by failing to construct the home in accordancewith the construction contract and by abandoning all work on the home in February 2001, leavingthe home incomplete and uninhabitable. As a result of the breach, the Fontanas alleged, the costsand expenses necessary to correct the defects and deficiencies in the construction performed by TLD,and to complete the construction of the home, exceeded the fair market value of the home had it beencompleted in accordance with the architect's drawings. The Fontanas alleged further that, as ofSeptember 2002, the home had no value and could not be economically repaired or completed, soit was demolished in November 2002. As a result of the damages due to the breach, the Fontanasprayed for a judgment against TLD in an amount in excess of $2 million, and also prayed for interest,costs, and reasonable attorney fees.

In count III of the amended complaint, the Fontanas alleged that the architect breached theterms of the contract that he entered into with the Fontanas. In count IV of the amended complaint, titled "Piercing the Corporate Veil," the Fontanas alleged that DiCosola was the alter ego of TLDand is thereby liable for the damages sought from TLD in count II of the amended complaint. TheFontanas alleged further that since the commencement of the instant lawsuit against TLD, DiCosolahas caused TLD to cease its business operations such that the corporation has no funds or incomewith which to compensate them for the damages resulting from the breach of the constructioncontract. The Fontanas alleged that adherence to the fiction of the separate corporate existence ofTLD would promote injustice by denying them any recovery of the losses resulting from the directactions of DiCosola.

At the conclusion of the bench trial of this cause, the trial court held that TLD materiallybreached the construction contract and failed to cure the breach. The trial court also found that theevidence was sufficient to establish that the amount of money the Fontanas paid to TLD, togetherwith the cost to complete the unfinished home according to the plans and specifications referencedin the construction contract, would exceed the $2.2 million value of the home were it completedpursuant to the plans and specifications. As such, the trial court held that it was appropriate underthe circumstances to demolish the unfinished home, and it calculated the Fontanas' damages to be$1,271,816.10. The trial court entered judgment in that amount in favor of the Fontanas and againstTLD and DiCosola, jointly and severally.

The trial court's determination that TLD materially breached the construction contract andits calculation of the resulting damages have not been challenged on appeal. Instead, DiCosolacontends that the trial court erred in piercing the corporate veil and holding him personally liable forthe obligations of TLD. As such, we discuss only the evidence presented at trial that is necessaryto the disposition of DiCosola's appeal.

The Fontanas called Theresa DiCosola, who testified that she believed that she and DiCosola,her husband, were equal owners of TLD until she learned that a corporation's president is not equalto a corporation's director. When asked if she was the incorporator of TLD, Theresa said,"[w]hatever my lawyer did." Theresa did not recall the date that TLD was incorporated, how manyshares TLD issued, or the amount paid for the shares. After reviewing the articles of incorporation,Theresa recalled that she incorporated TLD and that 1,000 shares were issued to her at a price of $1per share. Theresa agreed that on January 26, 2004, the date she gave her deposition in the instantcase, she did not know that she was the sole shareholder of TLD. When asked if she wrote a $1,000check to TLD for the 1,000 shares of TLD stock, the following exchange ensued:

"[THERESA]: I did check that with my lawyer and he did say that a thousand dollarswas for a thousand shares.

[PLAINTIFFS' COUNSEL]: Did you write a check to TLD Enterprises for a thousanddollars?

[THERESA]: From what I understand, a thousand dollars went in the company tostart it.

[PLAINTIFFS' COUNSEL]: That's not my question.

[THERESA]: Well, the money was taken from our personal account.

[PLAINTIFFS' COUNSEL]: The question is, did you write a check to TLDEnterprises-

[THERESA]: Well, I am going to say yes.

[PLAINTIFFS' COUNSEL]: Okay. Fine. Do you have the check?

[THERESA]: I have moved three or four times. I really don't--I didn't realize I hadto save all of these personal checks from my personal account, so I am going to say no.

[PLAINTIFFS' COUNSEL]: Well, when is it that you remembered that you wrote acheck to TLD Enterprises?

[THERESA]: Actually, I talked to my lawyer after the deposition, Bob Borla, becauseI did not--I remember signing papers, but it wasn't as though I remembered how it cameabout.

[PLAINTIFFS' COUNSEL]: Well, during your deposition, you didn't rememberwhether you wrote a check for a thousand dollars; and you said you would have to checkyour checkbook and find out. Did you check your checkbook?

[THERESA]: I told you, I don't have any--do not have any of the return[ed] checks.

[PLAINTIFFS' COUNSEL]: So the only knowledge you have about paying for thestock of the company is what your lawyer told you?

[THERESA]: Yes.

[PLAINTIFFS' COUNSEL]: And who is that lawyer?

[THERESA]: Robert Borla. He said we did it in the office."

Theresa also testified that she signed the annual corporate minutes of TLD as soleshareholder and director, but she said that DiCosola handled all the financial matters related to TLD. Theresa said that she and DiCosola loaned money to TLD in the past, including 13 loans in 1999. She did not know how the money was transferred into the company because she did not handle thefinancial end of the operation. Theresa testified that she did not know that TLD owed her $572,000as of December 31, 2002, but she testified that the $572,000 loaned to TLD came from her andDiCosola's personal account. At the time of her deposition, Theresa did not know that TLD was a"sub-chapter S corporation," what a K-1 form was, or whether she ever received a paycheck fromTLD. Theresa said that she has never received a dividend from TLD and did not know if TLD hadprofits or losses in the years 1998, 1999, 2000, 2001, and 2002. However, Theresa did sign TLD'sincome tax returns for those years. Theresa admitted that TLD reported $1,818, 213 in assets as ofJanuary 1, 2002, and zero assets as of December 31, 2002. Theresa did not know where the assetswent.

Theresa testified further that she, DiCosola, and their lawyer decided who the officers of TLDwould be. It was a running joke in her family that she owned the company, that "mom was the boss." Theresa said that she and DiCosola decided together what properties to purchase to build speculative(spec) homes on, and that she relied on her husband to determine the sale prices. Theresaacknowledged that resolutions of the board of directors of TLD, of which she is the only director,showed that TLD sold seven properties for prices totaling $3,234,000 between October 29, 2001,and February 4, 2002, but that she did not participate in deciding the selling prices of thoseproperties and did not know the amounts TLD received for the properties. Theresa denied payingher and DiCosola's personal bills through TLD, and then the following exchange ensued:

"[PLAINTIFFS' COUNSEL]: Let me ask you, if you were asked this question andgave this answer at your deposition on page 7 starting at line three:

'Do you receive a paycheck from any business?

Answer: Do I receive a paycheck? I didn't receive--we pay our bills that way throughthe business, but I never--there was never a paycheck in my name.'

Were you asked the question and did you give that answer?

[THERESA]: You asked the question and I answered it. I was very nervous.

[PLAINTIFFS' COUNSEL]: As a matter of fact, Mrs. DiCosola, you don't know howfunds are deposited in your joint checking account; do you?

[THERESA]: No.

[PLAINTIFFS' COUNSEL]: You don't know where the money comes from?

[THERESA]: I know that we cut a check from the business."

Theresa testified further that TLD has never had any employees and does not pay a salary to anyone. Theresa and DiCosola have no sources of income other than TLD, and DiCosola has workedexclusively for TLD since 1998. When asked where she and her husband got money to live on ifthey did not draw salaries or wages from TLD and the company had net losses in excess of $1million from 1998 through 2002, Theresa said they lived off the proceeds of the sales of two personalhomes that they "did very well on."

During questioning by counsel for DiCosola, Theresa said that her duties with respect to TLDwere office work, filing, answering the telephone, babysitting children when they would come intothe office, cleaning, and doing all the "spec work." By "spec work" Theresa meant selecting thewindows, roofs, brick, cabinetry, floors, paint, moldings, lighting, and appliances for the spec homesthat TLD built. Theresa testified that TLD is still in existence. Theresa explained that TLD neverpaid her and DiCosola's personal mortgage, electric bill, or gas bill but, rather, they have always paidthose bills through their personal account and never through the business.

The Fontanas also called DiCosola, who testified that he is the president of TLD. Heacknowledged that TLD has never had an employee. He said that TLD is in the business of buildinghomes as a general contractor. TLD was the general contractor on the Fontana home at 347 RubyStreet in Clarendon Hills. DiCosola said that he has never had a written contract with asubcontractor and never takes bids from subcontractors. DiCosola agreed that he never issueswritten change orders to his subcontractors and does not keep written work schedules for projectsbecause "the job pretty much tells itself how to run it." TLD keeps no financial records for anypayments that it makes except for draw schedules filed with title companies. DiCosola kept nowritten records of the changes the Fontanas requested to be made to the home. DiCosola explainedthat there was no need to keep records of the changes because none of the money went through TLD. DiCosola testified that he has no record of the cash the Fontanas paid to him for changes made tothe home, and no records of any payments made to any subcontractors performing the work on thechanges. DiCosola explained that any money given to him by the Fontanas for changes wasforwarded to the subcontractors who performed the work. DiCosola admitted that he has anothercompany, NTK Enterprises. NTK has built two spec homes since the instant lawsuit was filed; onehas been sold. DiCosola admitted that TLD went from approximately $1.8 million in assets onJanuary 1, 2002, to zero assets on December 31, 2002. When asked where the $1.8 million went,DiCosola said that it went to pay down the money borrowed on the line of credit to build theproperties that were sold. DiCosola related that TLD's 2002 federal income tax return showed$1,472,388 in liabilities in the form of mortgages, notes, bonds, and payables; $388,157 in otherliabilities; and $663,989 in liabilities in the form of loans from shareholders.

The Fontanas successfully moved into evidence TLD's filings with the Illinois Secretary ofState's Office and TLD's stock certificate. These documents indicated that TLD was incorporatedon November 10, 1998, and that Theresa was the sole shareholder. Other documents admitted intoevidence showed shareholder action appointing DiCosola as president and secretary of TLD. Thetax returns of TLD showed a loss of $182 in 1998, a loss of $203,403 in 1999, a profit of $139,765in 2000, a loss of $451,997 in 2001, and a loss of $254,042 in 2002.

After considering all the evidence, and finding the breach of contract and resulting damagesin the amount mentioned above, the trial court held that DiCosola's status as a nonshareholder ofTLD did not preclude holding him liable for the obligations of TLD pursuant to the equitable remedyof "piercing of the corporate veil." The trial court found this court's decision in Macaluso v. Jenkins, 95 Ill. App. 3d 461 (1981), instructive on the issue. The trial court noted that in Macaluso this courtaffirmed a personal judgment against the chairman of the board of a not-for-profit corporation eventhough not-for-profit corporations do not have shareholders. With respect to the factors used todetermine whether piercing the corporate veil is appropriate, the trial court found that the followingfactors weighed in favor of piercing the corporate veil: inadequate capitalization of TLD (the trialcourt determined that Theresa's testimony regarding the $1,000 check "cast doubt" on whether anyinitial capitalization occurred), failure to observe certain corporate formalities, failure to paydividends, operation of the corporation without a profit, commingling of corporate and personalassets, a non-functioning officer or director in Theresa, insolvency of the corporation, and absenceof corporate records. The trial court found that the actual issuance of stock was the only factor thatweighed in favor of not piercing the corporate veil. Based on the foregoing, the trial court ruled asfollows:

"I think that all of these factors taken together are clear and convincing that Mr.DiCosola is the dominant force behind this corporation, that the corporation is little morethan a shell which was established to shield him from liability. I think the fact that he signedthe contract with his own individual signature in two places, while it is certainly notdispositive, its just one more indication that this business is Mr. DiCosola and that thecorporation in the words of the Macaluso case should be disregarded and the veil of limitedliability pierced because it would be an obstacle to the protection of private rights andbecause the corporation is merely the alter ego or business conduit of Mr. DiCosola who isthe governing and dominating personality in this business enterprise.

For that reason, I will find that Mr. DiCosola is the alter ego of the business, thatTLD Enterprises is a business conduit of his dominating personality so that the judgment willenter against Mr. DiCosola personally and against the corporation jointly and severally in theamount that I set forth before and that will be a final order."

DiCosola timely appeals and the Fontanas cross-appeal. TLD has not appealed.

A corporation is a legal entity that exists separately and distinctly from its shareholders,officers, and directors, who generally are not liable for the corporation's debts. Peetoom v.Swanson, 334 Ill. App. 3d 523, 526 (2002). A primary purpose of doing business as a corporationis to insulate stockholders from unlimited liability for corporate activity. Peetoom, 334 Ill. App. 3dat 526. Limited liability will ordinarily exist even when the corporation is closely held or has asingle shareholder. Peetoom, 334 Ill. App. 3d at 526. "However, a court may disregard a corporateentity and pierce the veil of limited liability where the corporation is merely the alter ego or businessconduit of another person or entity." Peetoom, 334 Ill. App. 3d at 527. This doctrine imposesliability on the individual or entity that uses a corporation merely as an instrumentality to conductthat person's or entity's business. Peetoom, 334 Ill. App. 3d at 527. "Such liability arises from fraudor injustice perpetrated not on the corporation but on third persons dealing with the corporation." Peetoom, 334 Ill. App. 3d at 527. "The doctrine of piercing the corporate veil is an equitableremedy; it is not itself a cause of action but rather is a means of imposing liability on an underlyingcause of action, such as a tort or breach of contract." Peetoom, 334 Ill. App. 3d at 527.

"A party seeking to pierce the corporate veil has the burden of making 'a substantial showingthat one corporation is really a dummy or sham for another' [citation], and courts will pierce thecorporate veil only reluctantly [citation]." In re Estate of Wallen, 262 Ill. App. 3d 61, 68 (1994). We employ a two-prong test in order to determine whether to pierce the corporate veil: (1) theremust be such unity of interest and ownership that the separate personalities of the corporation andthe individual no longer exist; and (2) circumstances must exist such that adherence to the fictionof a separate corporate existence would sanction a fraud, promote injustice, or promote inequitableconsequences. People ex rel. Scott v. Pintozzi, 50 Ill. 2d 115, 128- 29 (1971); Wallen, 262 Ill. App.3d at 68-69. A reviewing court will not reverse the finding of the trial court regarding piercing thecorporate veil unless it is against the manifest weight of the evidence. Wallen, 262 Ill. App. 3d at68; Ted Harrison Oil Co. v. Dokka, 247 Ill. App. 3d 791, 796 (1993).

DiCosola's first appellate contention is that the trial court erred in finding him personallyliable under a veil-piercing theory because no Illinois authority allows piercing the corporate veil toimpose liability on a nonshareholder. Because he was never a shareholder in TLD, DiCosolamaintains, the "unity of interest and ownership" element of piercing the corporate veil was notsatisfied. We reject this contention.

In Macaluso, this court rejected the argument that because the defendant, who was thechairman of the board and treasurer of a not-for-profit corporation, did not and could not own sharesin the not-for-profit corporation, he could not be held liable for the corporation's debt. Macaluso,95 Ill. App. 3d at 465. We noted that the "unity of interest and ownership" requirement of piercingthe corporate veil could not technically be met. Macaluso, 95 Ill. App. 3d at 465. However, afternoting further that the equitable remedy of piercing the corporate veil looks to substance rather thanform (Macaluso, 95 Ill. App. 3d at 465), we concluded that "even though [the defendant] did not andcould not own shares of [the not-for-profit corporation], he did exercise ownership control over thecorporation to such a degree that separate personalities of [the corporation and the defendant] didnot exist, and that [the corporation] was a business conduit of [the defendant]." Macaluso, 95 Ill.App. 3d at 466. Contrary to DiCosola's contention, Macaluso is Illinois authority for holding anonshareholder liable for a corporation's debts through the equitable remedy of piercing the corporateveil.

We disagree with DiCosola's characterization of our holding in Macaluso as applying anexception to the rule of stock ownership because the plaintiffs sought the piercing of a not-for-profitcorporation's veil as opposed to an ordinary corporation's veil. The bases of our holding in Macalusofor imposing the liability of the corporation upon the nonshareholder defendant were his exerciseof ownership control over the corporation such that their separate personalities did not exist and thatthe corporation was a business conduit of the defendant. Macaluso, 95 Ill. App. 3d at 465-66.

Our holding in Macaluso is consistent with the decisions of courts in other jurisdictions that have considered the issue and have concluded that equitable ownership in a corporation,demonstrated by control exercised by an individual sought to be held liable for corporate debts, maysatisfy the "unity of interest and ownership" element of piercing the corporate veil. See Freemanv. Complex Computing Co., 119 F.3d 1044, 1051 (2d Cir. 1997) (applying New York law, held that"New York courts have recognized for veil-piercing purposes the doctrine of equitable ownership,under which an individual who exercises sufficient control over the corporation may be deemed an'equitable owner', notwithstanding the fact that the individual is not a shareholder of thecorporation"); Lally v. Catskill Airways, Inc., 198 A.D.2d 643, 645, 603 N.Y.S.2d 619, 621 (3d Dep't1993) (nonshareholder defendant may be, "in reality," the equitable owner of a corporation wherethe nonshareholder defendant "exercise[s] considerable authority over [the corporation] ... to thepoint of completely disregarding the corporate form and acting as though [its] assets [are] his aloneto manage and distribute"); In re MacDonald, 114 B.R. 326, 332-33 (D. Mass. 1990) (piercing thecorporate veil in bankruptcy case to establish debtor as the equitable owner of corporate stock thatostensibly was owned by debtor's father, and therefore finding stock subject to turnover order); Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 556-57, 447 A.2d 406,412 (1982) ("[S]tock ownership, while important, is not a prerequisite to piercing the corporate veilbut is merely one factor to be considered in evaluating the entire situation. Similarly, we have neverrequired that an individual be an officer or director of the pierced corporation in order to hold himliable for the debts of the corporation. It is clear that the key factor in any decision to disregard theseparate corporate entity is the element of control or influence exercised by the individual sought tobe held liable over corporate affairs. [Citations.] Thus, while the usual case does involve a director,officer or shareholder of a corporation, the lack thereof, in an unusual case such as this, would notprevent us from imposing liability upon an individual by piercing the corporate veil if the evidencedemonstrated the requisite level of control and otherwise satisfied the instrumentality or otherapplicable test"); Establissement Tomis v. Shearson Hayden Stone, Inc., 459 F. Supp. 1355, 1366,n.13 (S.D. N.Y. 1978) (declining to find that under no set of circumstances could defendant husbandbe shown to be an alter ego of corporation simply because 100% of the corporation's stock was heldin his wife's name instead of his).

The only case law DiCosola cites in support of his argument that he cannot be held liableunder a veil-piercing theory because he is not a shareholder is Hystro Products, Inc. v. MNP Corp.,18 F.3d 1384, 1388-89 (7th Cir. 1994). Hystro Products does not so hold. In Hystro Products, thecreditor of a subsidiary corporation sought to pierce the corporate veil of the subsidiary corporationand hold the parent corporation liable for the debt of its subsidiary corporation. Hystro Products, 18F.3d at 1386. In discussing the "unity of interest and ownership" element of piercing the corporateveil, the court in Hystro Products wrote: "Stock control and the existence of common officers anddirectors are generally prerequisites to the piercing of the corporate veil although these factors alonewill not suffice." (Emphasis added.) Hystro Products, 18 F.3d at 1389. The foregoing is arecognition that where the alleged alter ego of a parent corporation is the subsidiary corporation,stock ownership by the parent is ordinarily one of the elements that is required to show unity ofinterest and ownership. However, Hystro Products is not authority for the proposition that the alterego of a corporation can never be a nonshareholder. Cases involving parent and subsidiarycorporations will not address the issue of whether actual stock ownership is always required to meetthe "unity of interest and ownership" element of piercing the corporate veil. This is because, bydefinition, a parent corporation is a corporation that has working control of the subsidiarycorporation through stock ownership. See 18 Am. Jur. 2d Corporations