After being widely lambasted for its heavy-handed and ethically ambiguous (challenged?) BitTorrent litigation tactics over the past few years, an incarnation of the infamous Prenda law firm was recently hit with a piercing the corporate veil judgment by a Minnesota state court.
In Guava, LLC v. Merkel, 2015 WL 4877851 (Minn. 2015), the plaintiff pornographic film producer, represented by the Alpha, LLC law firm (“Alpha”), filed a civil conspiracy suit and state wiretapping claim against various defendants whom plaintiff claimed illegally downloaded adult films owned by the plaintiff.
Alpha’s lone member is Minnesota attorney and Prenda alum Paul Hansmeier, who has garnered some negative press of his own both for his copyright trolling efforts and his more recent ADA violation suits against small businesses. In October 2015, the Supreme Court of Minnesota instituted formal disciplinary proceedings against Hansmeier for various lawyer misconduct charges.
The Alpha firm’s litigation strategy in the Guava case followed the familiar script of issuing a subpoena blitz against some 300 internet service providers (ISPs) to learn the identity of the movie downloaders. Many of the ISP customers fought back with motions to quash the subpoenas.
After assessing monetary sanctions against Alpha for bad faith conduct – trying to extract settlements from the ISP customers with no real intent to litigate – the trial court entered a money judgment against Alpha for the subpoena respondents and John Doe defendants.
Through post-judgment discovery, the subpoena defendants learned that Hansmeier had transferred over $150,000 from Alpha, defunding it in the process.
The judgment creditor defendants then moved to amend the judgment to add Hansmeier individually under a piercing the corporate veil theory. After the trial court granted the motion, Alpha and Hansmeier appealed.
In Minnesota, a district court has jurisdiction to take actions to enforce a judgment when the judgment is uncollectable and where refusing to amend a judgment would be inequitable.
A classic example of an equitable remedy that a court can apply to amend an unsatisfied money judgment is piercing the corporate veil. A Minnesota court will pierce the corporate veil where (1) a judgment debtor is the alter ego of another person or entity and (2) where there is fraud.
The alter ego analysis looks at a medley of factors including, among others, whether the judgment debtor was sufficiently capitalized, whether corporate formalities were followed, payment or nonpayment of dividends, and whether the dominant shareholder siphoned funds from an entity to avoid paying the entity’s debts.
The fraud piercing factor considers whether an individual has used the corporate form to gain an undeserved advantage. The party trying to pierce the corporate veil doesn’t have to show actual (read: intentional) fraud but must instead show the corporate entity operated as a constructive fraud on the judgment creditor.
Here, the defendants established both piercing prongs. The evidence clearly showed Alpha was used to further Hansmeier’s personal purposes, there was a disregard for basic corporate formalities and the firm was insufficiently and deliberately undercapitalized.
The court also found that it would be fundamentally unfair for Hansmeier to escape judgment here; noting that Hansmeier emptied Alpha’s bank accounts after it became clear that defendants were trying to enforce the money judgment against the Alpha firm.
While a Minnesota state court ruling won’t bind other jurisdictions, the case is post-worthy The case lesson is clear: if a court (at least in Minnesota) sees suspicious emptying of corporate assets when it’s about to enter a money judgment, it has equitable authority to modify a judgment so that it binds any individual who is siphoning the corporate assets.
The case is also significant because it breaks from states like Illinois that specify that piercing the corporate veil is not available in post-judgment proceedings. In Illinois and other states, a judgment creditor like the Guava defendants would have to file a separate lawsuit to pierce the corporate veil. This obviously would entail spending time and money trying to attach assets that likely would be dissipated by case’s end. The court here avoided what it viewed as an unfair result simply by amending the money judgment to add Hansmeier as a judgment debtor even though he was never a party to the lawsuit.