Fifth Circuit Court of Appeals Declines to Pierce The Corporate Veil When Fraud Not Adequately Plead By Plaintiff

In Shandong Yinguang Chemical Industries Joint Stock Company, Ltd. v. Potter, the Fifth Circuit Court of Appeals upheld the District Court's decision dismissing the Plaintiff-Appellant's complaint for failure to adequately plead its common law fraud and fraudulent inducement claims against the individual owner of a corporation. No. 09-20268-CV (5th Cir. May 27, 2010).

In Shandong, the Plaintiff, Shandong, had entered into a series of contracts with Beston Chemical Corporation, a company wholly-owned by the Defendant-Appellee Potter. Although Beston made regular (albeit untimely) payments on the first six (6) contracts, Beston made no regular payments on the companies' final two (2) contracts and ultimately filed for Chapter 11 bankruptcy, leaving Shandong with an unpaid claim of USD 2,198,644.80.

Following Beston's bankruptcy filing, Shandong sued Potter personally in the Southern District of Texas, claiming that Potter committed fraud and fraudulent inducement by lying to Shandong's president to entice Shandong to enter into the final two (2) contracts. Specifically, Shandong claimed that Potter fraudulently represented that Beston was in "sound financial condition" and that it would make regular payments on its purchases. Shandong also claimed that Potter had committed fraud by omission for failing to tell Shandong that Beston had been unprofitable in 2003. Finally, Shandong sought to impose Beston's contract liability on Potter by piercing the corporate veil, arguing that Potter had used Beston to perpetrate a fraud. The District Court granted Potter's motion to dismiss for failure to state a claim, and Shandong appealed.

On appeal, the Fifth Circuit found that Shandong had failed to plead that Potter presented any detailed, corroborating information, facts or figures to support his statement concerning the company's financial condition which might entice a reasonable person to attach importance to the statement. The Court further found that Shandong had failed to sufficiently allege that the statement was false at the time it was made. Finally, the Court concluded that Shandong's pleadings concerning circumstantial evidence of fraud were merely a conclusory description. The Court similarly rejected Shandong's arguments of fraud by omission. Because of the Court's conclusion that Shandong had failed to allege an actual fraud, the Fifth Circuit held that there was no basis for piercing the corporate veil and holding Potter personally liable for the final two (2) contracts.

To read a copy of the Fifth Circuit's decision, click here.

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