Here is What Happens When Corporate Shenanigans Meet a Contractor with Resources

One of the primary benefits of conducting business through a corporation or limited liability company is the limitation of personal liability.  Shareholders or members are not generally liable for the debts of the entities that they own.  The corporate structure, however, can be abused by shareholders in order to defraud creditors from recovering on debts owed by the corporation.  As you will read below, shareholders may transfer a corporation’s assets into the hands of another of the shareholder’s business entities to shield those assets from creditors.

The legal doctrine of “piercing the corporate veil” provides some relief to creditors encountering a business entity that has been purposefully “gutted” of all of its assets.  Under the doctrine of “piercing the corporate veil,” Washington courts will disregard a corporate entity and assess liability against the individual shareholders when (1) the shareholder used the corporation to intentionally violate or evade a duty owed to another, and (2) the shareholders’ conduct resulted in an unjustifiable loss to a creditor.  Typically, the court must find instances of fraud, misrepresentation, or some form of manipulation of the corporate form.

Recently, Division I of the Washington Court of Appeals pierced the corporate veil and looked past the limited liability generally afforded to corporate shareholders in order to void a transfer of the corporation’s assets intended to defraud a subcontractor.  In Northwest Cascade, Inc. v. Unique Construction, Inc., Bill Rehe, an attorney, and his wife formed Unique Construction, Inc. (“Unique”).[i]  During its existence, Unique consistently disregarded standard corporate accounting principles.  Bill Rehe admitted that he treated his corporate and personal assets as one and the same, comingling the assets because, in his mind, all of the assets belonged to him.

In 2004 and 2005, Unique acquired several lots for the development of a residential real estate project in Tacoma.  In March 2006, Unique entered into a contract with Northwest Cascade, Inc. (“NWC”) to build the infrastructure for its development.  By August 2007, Unique stopped paying NWC’s invoices and NWC filed suit.

After being served with NWC’s lawsuit, Unique entered into a series of suspect transactions.  First, it transferred its “38th Street Property” to Black Point Management LLC (“Black Point”), which then transferred the property to Winnemucca Enterprises LLC (“Winnemucca”).  Next, Unique transferred its “89th Street Property” to Black Point Management LLC, which then transferred the property to Sahara Enterprises LLC (“Sahara”).  Since no consideration was paid for these transfers, Unique subsequently became insolvent.

The sole purpose for making these transfers was to shield Unique’s assets from NWC’s claim for damages.  Winnemucca (which now owned the 38th Street Property) was formed at the direction of Bill Rehe and was controlled by the Rehes and the William K. and Marion L. LLLP.  Similarly, Sahara (which now owned the 89th Street Property) was controlled by William K. and Marion L. LLLP for the Rehes’ benefit.  Throughout the lawsuit, the Rehes resided at the 89th Street Property and paid no rent.

After realizing that Unique was transferring all of its assets to other business entities, NWC amended its lawsuit to include a claim under the Uniform Fraudulent Transfer Act to void the transfer of the 89th Street Property, and a claim to pierce the corporate veil and hold the Rehes personally liable for Unique’s debts.

At the conclusion of trial, the jury returned a verdict in favor of NWC, and the court entered judgment against Unique in the amount of $512,322.73, plus $270,654.90 in attorneys’ fees.  The court also voided the transfer of the 89th Street Property, leaving Unique with a single asset.  On the veil piercing claim, however, the trial court found in favor of the Rehes, concluding that “[p]iercing of the corporate veil is not necessary to prevent an unjustifiable loss to NWC” and awarding the Rehes $85,000 in attorneys’ fees spent on the veil piercing claim.

On appeal, NWC challenged the trial court’s dismissal of the veil piercing claim and the award of attorneys’ fees.  The Washington Court of Appeals agreed with NWC and found that the trial court erred by failing to pierce the corporate veil.[ii]  The Court of Appeals considered the transfer of the 38th Street Property (valued at approximately $250,000) as evidence of corporate “gutting,” which showing manipulation of the corporate structure to NWC’s detriment.  It was undisputed that after this lawsuit was filed against Unique, the 38th Street Property was transferred to an entity controlled by the Rehes for no consideration.  This transfer gutted Unique of sufficient assets to pay NWC’s claim.  Thus, the trial court was required to consider the post-lawsuit transfer of the 38th Street Property as an independent basis for disregard of the corporate form.

The Court of Appeals also reversed the trial court’s finding that evidence of the comingling of personal and corporate funds was not sufficient to justify veil piercing.  The corporate veil will be pierced where the shareholders disregard the corporate formality.  Here, the court found that at least $177,000 of Unique’s funds was diverted by the Rehes for personal expenses while Unique was indebted to NWC, depriving Unique of its ability to honor its obligations to NWC.  Under such circumstances, piercing the corporate veil was warranted.

Comment:  The mechanics of shielding a corporation’s assets from a debtor can be intricate and complex.  Getting to the bottom of the corporate structure and asset transfers takes a great deal of time and sophistication.  At first glance, a potential debtor may appear to have no assets, making a lawsuit pointless.  As this case illustrates, however, resources expended to fully investigate a potential debtor can be well spent.

[i] 2014 WL 1289586 (March 31, 2014) (Unpublished opinion).

[ii] Congratulations to Northwest Cascade, Inc. – a member of the National Utility Contractors Association (“NUCA”) and the Associated General Contractors (“AGC”) – for this favorable verdict!  NWC stood tall against the corporate shenanigans of the Rehes and, as a result, can recover its jury award not only from Unique (which is insolvent), but also from the Rehes themselves.

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