Here’s a simple case that could happen to any business with any responsibility. Mike Schlueter formed a Texas corporation, Entertainment Properties, Inc., with himself as the sole shareholder, sole director, sole everything. Entertainment Properties, Inc., leased some space in a retail strip center on Lancaster Boulevard in Fort Worth, just across from a local police headquarters. Entertainment Properties, Inc., then subleased this space by the night to different charities, who would actually run the bingo games.
Billie Jean Carey, a woman in her 50s, tried her luck at this bingo parlor one evening. And no matter how bruising the game may have been, it couldn’t compare to the bruises and breaks she sustained from the speed bump she tripped over as she meandered out to her car. Could this have possibly been her fault? Could anyone reasonably expect a parking lot to have speed bumps? Perhaps she just didn’t see them on the way in. Well, in any event some of the light fixtures on the building were not working, and so there was “fault” which produced injury Turns out, the responsibility for maintaining the lights fell on Entertainment Properties, Inc., per the terms of its lease.
We must assume liability here, for the trial court imposed it. On a short digression, this is, in and of itself, a great reason why businesses should be incorporated. I frequently am asked “should I form a business entity for my business?” And I nearly always answer “yes” because, in part, there are so many unexpected, hidden liabilities just waiting to happen, particularly in this “somebody owes me” lawsuit lottery society we have created. This case is a great example of unforeseen liabilities. Few lawyers could ever have seen this one coming.
And fewer still could have predicted what else happened in this case. I was able to speak with Carl Wilkerson, the attorney for Mike Schlueter (Bush & Motes, PC, Arlington, Texas), trying to make some sense out of the court’s opinion. But I ended up shaking my head in disbelief that much more. Keep reading as we head for the Twilight Zone.
Ms. Carey hired a lawyer who didn’t do much on it, other than filing a lawsuit against Mike Schlueter individually. This lawyer eventually sent the case to another plaintiff’s lawyer. This second plaintiff’s lawyer totally dropped the ball in terms of getting the case ready for trial. The case was even dismissed for failure to prosecute. It just laid there pretty much dead.
But then the original plaintiff’s lawyer took it back, and began to get it ready for trial. It was reinstated and came back to life like Lazarus, only with much worse effect. The plaintiff’s lawyer finally figured out that the bingo charity didn’t lease the space from Mike Schlueter, but rather from Entertainment Properties, Inc. Now, this was not a secret, nor did anyone try to cover it up. But a very difficult dilemma arose for Ms. Carey and her lawyer, because by now the statute of limitations had run, preventing her from adding Entertainment Properties, Inc., to the lawsuit.
And so she did the next best thing. She sued “Mike Schlueter d/b/a Lancaster Bingo, a/k/a Lancaster Bingo, Inc.” She sued “Mike Schlueter, individually, and d/b/a Entertainment Properties, Inc. a/k/a Entertainment Properties, Inc.” And if that wasn’t enough overkill, she added “Mike Schlueter, individually, and d/b/a Lancaster Bingo a/k/a Lancaster Bingo, Inc.” Got all that? Do you even know who the defendant is anymore? When you can’t do anything else, confuse the enemy and, in this case, the court, and take your chances.
Surprisingly, it worked. And yet the story only gets stranger. When the parties showed up for trial in April of 2001, which was to the court and not to a jury (another fact that makes no sense to me–another ball dropped by the plaintiff?), the issue of the lease, and Entertainment Properties’ insurance coverage, came up right off the bat. The judge stopped the trial, and suggested to the plaintiff’s lawyer that he should try to pierce the corporate veil! I rarely write with exclamation points but that last fact is a doozie and there’s just no other way to say it. Then, the judge recessed the trial, giving the plaintiff’s lawyer time to conduct more discovery, and decide whether or not to add a claim to pierce the corporate veil. Wanna guess what they did?
The court reconvened the case on August 6 of 2001, and that very same day the plaintiff filed an amended petition alleging Mr. Schlueter used the corporation as a “sham to perpetuate a fraud.” Ms. Carey’s lawyer did not claim that the corporation was the “alter ego” of Mr. Schlueter. Yet the trial court found that the corporation was the “alter ego” of Mr. Schlueter, did not find any sham to perpetuate a fraud, and pierced the veil. As best I can tell, the court apparently felt sorry for Ms. Carey and wanted to see that she was taken care of.
There are only two facts the court mentioned in its opinion to support its “alter ego” conclusion, allowing it to pierce the corporate veil. First, Mike Schlueter filed an assumed name certificate showing that he, individually, was doing business as “Lancaster Bingo.” And second, while testifying at trial, Schlueter often referred to himself and Entertainment Properties, Inc., interchangeably. In my opinion, this is much ado about nothing, obviously a predetermined answer in search of the question. Witnesses cannot be held to a standard of perfection, of dealing in specifics as easily as lawyers. The court even acknowledged that Entertainment Properties, Inc., was the entity that collected rent from the bingo operators, that Schlueter didn’t commingle any personal assets with business assets. It specifically did not find that Entertainment Properties, Inc. was undercapitalized.
And here’s the kernel of truth that makes this whole case bizarre. If Ms. Carey had EVER sued the corporation Entertainment Properties, Inc., in time before the statute of limitations expired, there would have been insurance coverage for her injuries. The fact that her lawyer dropped the ball and just didn’t get things done in time–and they had two years’ worth of time here–put everyone in a bad position.
In any event, the trial court pierced the corporate veil, and imposed personal liability on Mr. Schlueter for Ms. Carey’s injuries. The tab was around $20,000. Mr. Schlueter does not have the ability to turn this in to his insurer. A case like this, which is so bizarre it could not have been foreseen by any reasonable attorney, is “Exhibit A” for business owners who are thinking about personal asset protection planning in addition to using a business entity to conduct business operations.
Well, having lost in the trial court, Mr. Schlueter appealed the case to the Fort Worth Court of Appeals, and that opinion is “tortured” to say the least, meaning its logic isn’t very obvious, and it relies on some very technical rules in order to sustain the trial judge’s decision.
The corporate veil is, by definition, the corporation’s. We don’t call it a “shareholder’s veil”. It comes into existence when a corporate charter is issued by the Secretary of State, upon the filing of articles of incorporation. A shareholder doesn’t “own” the veil. It was pierced without the corporation even being at trial to defend it. Entertainment Properties, Inc., was basically tried in the court, even though it wasn’t a party.
The court simply stated “Schlueter was Entertainment Properties’ alter ego; therefore, Schlueter was liable to Carey for any breach of the legal duty that Entertainment Properties owed her.” How do you establish or defend that duty if Entertainment Properties isn’t even a party to the lawsuit?
From bad facts comes bad law, and this case is no exception to that rule. And the parties must have settled this case before it was appealed to the Texas Supreme Court, so we are stuck with bad law.
This case is a lesson for business owners about the unforseen risks we face any given day. No one can list every reason you may need some asset protection planning in addition to putting your separate business operations in separate business entities. Crazy things can happen that’ll make you wish you had some. If you don’t do it before you need it, it’ll be too late.
Schlueter v. Carey, 112 S.W.3d 164 (Tex. App.–Fort Worth 2003)