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Bankruptcy and Virginia Corporate Law

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In re Cummings; Case No. 07-13758-SSM; April 10th, 2008

Lawsuit brought in bankruptcy case highlights core aspects of Virginia corporate law

Individual debtor filed a Chapter 11 under the bankruptcy code to reorganize her debts. The debtor then brought an action for breach of contract arising from the sale of a business, a declaratory judgment that salary repayment and non-compete provisions in an employment agreement she signed are unenforceable, and damages for breach of fiduciary duty.

The court restated the standard for summary judgment that it was going to use. Importantly, the court noted that “the Supreme Court has held that a plaintiff need not plead evidence sufficient to establish a prima facia case in order to survive a motion to dismiss, but under Rule 8(a), need only give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.” Swierkiewicz v. Sorena NA, 534 U.S. 506, 512 (2002). At the same time, the plaintiff must provide grounds for entitlement to relief, which requires more than labels and conclusions or a formulaic recitation of the elements of a cause of action. Bell Atlantic Corp. v. Twombly, — U.S. __ (2007).

The court went on to discuss the various Count alleged in the Complaint. The Court summarily dealt with a few of the Counts based on the inclusion of an improper party in certain claims. The court did spend some time addressing the veil piercing doctrine in Virginia and proper pleading of the same. The court noted “the veil piercing doctrine has its origins in the “desire of courts to not permit investors to manipulate the statutory privilege of limited liability to the knowing disadvantage of those who deal with the corporation.” AE Restaurants Associates, LLC v. Giampietro (In re Giampietro), 317 B.R. 841 (Bankr.D. Nev. 2004)(citing Robert B. Thompson, Piercing the Corporate Veil § 1:3(2004)).

Judge Mitchell goes on to articulate several different tests used by courts around to country to determine if the corporate veil should be disregarded. Virginia’s veil piercing test is essentially an amalgamation of these [] tests, keeping as its principal focus the equitable considerations that undergird the veil piercing doctrine. See C.F. Trust, Inc. v. First Flight Ltd Partnership, 266 Va. 3, 10 (2003)(stating that the corporate entity will be disregarded and the veil pierced only if the shareholder sought to be held personally liable has controlled or used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit and injustice, or to gain an unfair advantage and when the unity of interest and ownership is such that the separate personalities of the corporation and the individual no longer exist and to adhere to that separateness would work and injustice.) The court decided that there was enough facts set forth in the complaint with sufficient particularity to survive a motion to dismiss.

The court then addressed the count alleging breach of fiduciary duty. The court points out that Virginia does not recognize an individual shareholder’s right to claim damages for an officer or director’s breach of fiduciary duty, rather that right belongs to the corporation itself, on behalf of the entire shareholder body. Simmons v. Miller, 261 Va. 561 (2001). The court then notes that, at the very least, the individual shareholder needs to make demand on its board of directors and have them refuse to prosecute the claim, or prove that demand would be futile. Virginia Passenger & Power Co. v. Fisher, 104 Va. 121 (1905). Then, and only then, may a shareholder bring a derivative action on behalf of the corporation.

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