Labor & Employment Law Daily Piercing of corporate veil not warranted; car dealership was not an ‘employer’ under Title VII
Monday, October 26, 2020

Piercing of corporate veil not warranted; car dealership was not an ‘employer’ under Title VII

By Wayne D. Garris Jr., J.D.

The car salesman had argued that he should be able to sue the network of car dealerships with which his employer was affiliated.

Affirming the district court’s grant of summary judgment in favor of a car dealership, the Seventh Circuit found there was insufficient evidence to pierce the corporate veil of a network of car dealerships and allow a former salesmen to sue his employer under Title VII. The car dealership for which the employee worked had less than 15 employees; however. it was part of a larger network of dealerships that shared a management company and website. Despite some overlapping functions, there was not enough evidence to support piercing the corporate veil of the dealership network and aggregating the employees, said the court, as the defendants had not neglected corporate forms or risked confusing creditors (Prince v. Appleton Auto, LLC, October 21, 2020, Flaum, J.).

The employee worked as a salesman at a Wisconsin car dealership that was affiliated with four other dealerships in the area. Each dealership was independently owned by a separate Wisconsin LLC. One individual owned a majority or outright share of each LLC.

Integrated functions. Each dealership received management services from the same company. The owner of the LLCs also owned the management company, which provided marketing, financial, accounting, visionary, and payroll services for each dealership. It also tracked shared dealership inventory, held personal employee records, and issued identical employee handbooks to each dealership. The management company’s operations manager hired, fired, and promoted each dealership’s general manager.

Separate functions. Although each dealership was featured on the same website, each was listed separately with its own name, address, and phone number. The management company billed each dealership separately and each dealership individually paid for the management company’s services as well as for use of the website. Each dealership had its own general manager, own bank accounts, and financial reports. The dealerships also filed and paid their own taxes, paid their own employees, issued their own W-2 forms, and entered into their own contracts.

Lawsuit. After the employee was terminated for poor performance, he filed suit alleging that he was terminated because of his race. A magistrate judge granted summary judgment for the dealership finding that it was not an “employer” under Title VII because it had fewer than 15 employees. The employee appealed.

Piercing the corporate veil. The parties agreed that the dealership where the employee worked did not have 15 employees. However, all four dealerships in the networked, combined, had more than 15 employees. At issue was whether the court should pierce the network’s corporate veil and aggregate the employees to make the dealership network the employer for purposes of Title VII.

Seventh Circuit precedent. On appeal, the court began by examining its own precedent on piercing the corporate veil. In Papa v. Katy Industries, Inc., the court identified three circumstances in which the existence of an affiliated company would result in potential liability under Title VII. The case here only implicated one of those situations: “If because of neglect of corporate formalities, or a holding out of the parent as the real party with whom a creditor nominally of a subsidiary is dealing, a parent (or other affiliate) would be liable for the torts or breaches of contract of its subsidiary, it ought equally to be liable for the statutory torts created by federal antidiscrimination law.” The court also noted that it made sense for small businesses to share some operational functions for efficiency purposes. Later in Bridge v. New Holland Logansport, Inc., the court reiterated the Papa standard and held the test for piercing the corporate veil is “not whether corporations are integrated, but rather whether the integration serves to manipulate creditors and thus warrant veil-piercing under relevant state law.”

State law. The court also examined whether Wisconsin law supported piercing the corporate veil. In Fontana Builders, Inc. v. Assurance Co. of Am, the Wisconsin Supreme Court held that piercing the corporate veil is appropriate only if “applying the corporate fiction would accomplish some fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable claim.”

Should the court pierce the veil? Turning to the facts of this case, the court held that it was legitimate for the dealership network to receive shared services from the management company and the fact one individual owned the management company and the dealerships did not require the court to pierce the corporate veil. State law did not require veil-piercing either. There was no evidence that the dealerships’ corporate form allowed them to accomplish “some fraudulent purpose.”

The employee, citing Seventh Circuit and Wisconsin Supreme Court case law argued that argued that his dealership failed to sufficiently separate itself from the other dealerships and that veil-piercing was warranted. The court concluded that the cited cases were inapplicable. In the Seventh Circuit case, no discovery had been undertaken, so the court merely found that the corporation had not met its burden to show no material question of fact. In the state case, the court found that there was “messy comingling” of personal and corporate funds which warranted veil-piercing. This was not the case here. Thus, the court affirmed summary judgment for the employer.

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