(1) executed a promissory note to Casco Northern
Bank in the amount of $ 720,000 secured by a first mortgage on the
premises;
(2) assumed the $ 180,000 promissory note to the
Theberges, secured by a second mortgage on the premises;
(3) executed a promissory note to Casco Northern for $
120,000, secured by a third mortgage on the premises, with Albert as
co-maker; and
(4) executed a $ 20,000 note payable to the Worden
Group with Albert as co-maker.
Darbro guaranteed $ 450,000 and Albert guaranteed $
330,000 ... of the Casco Northern first mortgage. The Theborges
permitted Horton Street to assume the $180,000 note given by the Worden
Group, which remained primarily liable on the note.
As a result of the downturn in the real estate
market, the increase in vacancy rates ..., a flood that damaged one of
the buildings, and certain other unexpected repairs that were required
on the properties, Horton Street quickly began to lose money. To
compensate for these losses, Albert loaned money to Darbro which in turn
loaned the money to Horton Street.
In the spring of 1989, Horton Street sold two of the
seven buildings. As a result of these sales, pursuant to the terms of
the Theberge mortgage, the Theberges were paid to partially discharge
the second mortgage, and the third mortgage to Casco Northern was
retired. The net balance was applied to reduce the Casco Northern first
mortgage.
By May 1989, Darbro had loaned to Horton Street
approximately $ 225,000 and had received only "a couple small payments."
Albert then informed [his brother] Mitchell that Darbro would not loan
additional monies to Horton Street. Albert also advised the Theberges
that he could not make any further payments and that he wished to
negotiate "a solution."
[When these negotiations failed] the Theberges
[brought an action] against the Worden Group on the default of their
promissory note, [and] the court on May 22, 1991, issued a default
judgment against the third-party defendant Horton Street in favor of the
third-party plaintiff Worden Group.
In September 1991, the Theberges and the Worden Group
instituted the present action against Darbro, Inc., Albert Small and
Mitchell Small, seeking a judgment obligating them to pay the Worden
Group any amounts they were obligated to pay the Theberges by reason of
a default on the August 19, 1986, promissory note. By their complaint,
the plaintiffs allege, inter alia, that (1) Horton Street is the alter
ego of Darbro, Albert and Mitchell; (2) the sale to Horton Street was
based on representations made to the Worden Group that Albert would
"stand behind" the Theberge mortgage .....
[The trial] court specifically found that the
Theberges and the Worden Group had failed to establish that the
defendants acted illegally or fraudulently and also found that none of
the defendants had guaranteed the payment of the Theberge promissory
note. The court further found that the Theberges and the Worden Group
were sophisticated real estate investors ... and understood the
formalities, and the effect, of a personal guarantee in a real estate
transaction. The court also found that Horton Street had no separate
offices, utilities or employees; maintained no corporate records or
books; co-mingled its business with that of the other defendants; and
failed to conduct formal corporate meetings. Both Horton Street and
Darbro were, in essence, Albert, as evidenced by the fact that, when in
a financial crisis, Albert "unilaterally assumed full control of Horton
Street on his own initiative" and acted to the defendants' own benefit
and to the detriment of the plaintiffs.
Based on these findings, the court concluded that
"notions of equitable estoppel ought to preclude" the defendants from
asserting Horton Street's corporate status as a defense and that the
defendants were liable to the plaintiffs for the outstanding balance on
the Theberge promissory note. ...
The defendants contend that the trial court erred by
determining that their conduct justified piercing the corporate veil of
Horton Street. We agree. It is well established that "corporations are
separate legal entities with limited liability." ... LaBelle v. Crepeau,
593 A.2d 653, 655 (Me. 1991) (a principal benefit of the corporate form
"is limited liability for shareholders")..... Although the corporate
entity may be pierced if it is merely the alter ego of an individual or
other corporation, ... we will "disregard the legal entity of a
corporation . . . with caution and only when necessary in the interest
of Justice." When the plaintiff attempts, in the context of a
contractual dispute, to pierce the corporate veil, courts generally
apply "more stringent standards . . . because the party seeking relief
in a contract case is presumed to have voluntarily and knowingly entered
into an agreement with a corporate entity, and is expected to suffer the
consequences of the limited liability associated with the corporate
business form." Fletcher Cyc Corp § 41.85 (Perm Ed).
The plaintiffs contend, and the trial court
determined, that the oral representations that Albert was a person of
financial substance who would stand behind the obligations of Horton
Street, and the financial arrangement between Albert and Casco Northern,
effectively extinguishing the Theberge mortgage, justifies piercing the
corporate veil. We disagree. The court found, and the record supports,
that the defendants did not act illegally or fraudulently, but, rather
conducted themselves "shrewdly" and employed "sharp business practices."
The court determined that the defendants did not formally, personally
guarantee the transaction and that the plaintiffs were sophisticated
real estate professionals who understood the significance of a personal
guarantee. Indeed, the success of the Worden Group in securing Albert's
personal liability on the $ 20,000 note to them belies the contention of
a reasonable expectation that Albert would "stand behind" the Theberge
mortgage in the absence of a formal guarantee.
When the Theberges permitted the assumption by Horton
Street of their mortgage, they protected themselves by refusing to
release the Worden Group from liability. Casco Northern also protected
its interest in the loans to Horton Street by obtaining guarantees from
Darbro and Albert in amounts sufficient to cover the loan amounts. The
plaintiffs, by contrast, failed to obtain any such guarantee from any of
the defendants and instead opted to proceed with the transaction. We
decline to reconstruct the agreement negotiated between the parties to
effect a result beyond the plain meaning of that bargain.
Considering all the evidence in the instant case, we
determine that it is insufficient to justify piercing the corporate veil
of Horton Street. ...
